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

Audit Report – CA Inter Audit MCQ

Question 1.
A statement as to auditor’s believing that the audit evidence, we have obtained is sufficient and appropriate to provide a basis for their opinion is mentioned in which section of the auditor’s report?
(a) Opinion
(b) Basis for Opinion
(c) Management’s responsibility
(d) Auditor’s responsibility
Answer:
(b) Basis for Opinion

Question 2.
As per Standards on Auditing, the auditor shall date the report no earlier than the date:
(a) the audit opinion is submitted for issue among stakeholders
(b) the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements
(c) the opinion is presented to management
(d) that management takes responsibility for the financial statements
Answer:
(b) the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements

Question 3.
In an auditor’s report on financial statements an unmodified opinion is issued when the auditor is satisfied in all material respects that:
(a) the view presented by the financial information as a whole is consistent with the auditor’s knowledge of the business of the entity
(b) there are no disagreements with management
(c) the audit has been conducted in accordance with Standards on Auditing
(d) internal controls are consistent in design and op-eration
Answer:
(b) there are no disagreements with management

Question 4.
Which of the following topics are not covered in the ‘Auditor Responsibilities’ paragraphs?
(a) a statement that the standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
(b) wording indicating that the audit evidence is sufficient to provide the basis for the audit opinion
(c) reference to the financial accounting standards followed in conducting the audit
(d) a statement that the standards require that the auditor comply with ethical requirements
Answer:
(c) reference to the financial accounting standards followed in conducting the audit

Question 5.
Based on SA 700, there are at least two circumstances where the auditor may not be able to express an unmodified opinion:
(a) limitation of scope and fraud
(b) disagreement with management or inconsistent application of accounting standards
(c) disagreement with management and limitation of scope
(d) disagreement with management and fraud
Answer:
(c) disagreement with management and limitation of scope

Question 6.
Which of the following is not a section of the SA 700 auditor’s unmodified (unqualified) opinion?
(a) Management’s responsibility for the financial statements
(b) Opinion
(c) Report on other audit activities
(d) Auditor’s responsibility
Answer:
(c) Report on other audit activities

Question 7.
In audit report, a description that audit was per-formed in accordance with Standards on Auditing is given in which section?
(a) Management’s responsibility
(b) Opinion
(c) Basis for Opinion Section
(d) Auditor’s responsibility
Answer:
(c) Basis for Opinion Section

Question 8.
As per SA 700 “Forming an Opinion and Reporting on Financial Statements” when expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use which of the following phrase:
(a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework].
(b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].
(c) In our opinion, the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework].
(d) Either (a) or (b).
Answer:
(d) Either (a) or (b).

Question 9.
As per SA 700 “Forming an Opinion and Reporting on Financial Statements” when expressing an unmodified opinion on financial statements prepared in accordance with a Compliance framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use which of the followingphrase:
(a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework].
(b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].
(c) In our opinion, the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework],
(d) Either (a) or (b).
Answer:
(c) In our opinion, the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework],

Question 10.
As per SA 700 “Formingan Opinion and Reporting on Financial Statements”, the description of the auditor’s responsibilities for the audit of the financial statements shall be included:
(a) Within the body of the auditor’s report.
(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall include a reference to the location of the appendix.
(c) By a specific reference within the auditor’s report to the location of such a description on a website of an appropriate authority, where law, regulation or the national auditing standards expressly permit the auditor to do so.
(d) Any of the above.
Answer:
(d) Any of the above.

Question 11.
Communicating key audit matters in the auditor’s report is
(a) not a substitute for disclosures in the financial statements that the applicable FRF requires man-agement to make, or that are otherwise necessary to achieve fair presentation.
(b) a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705.
(c) a substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
(d) a separate opinion on individual matters.
Answer:
(a) not a substitute for disclosures in the financial statements that the applicable FRF requires man-agement to make, or that are otherwise necessary to achieve fair presentation.

Question 12.
Key Audit Matters are to be communicated in Auditor’s Report
(a) as a substitute for disclosure’s in the Financial Statement
(b) as substitute for Auditor Expressing a modified opinion in the Financial Statement
(c) as a separate opinion on Individual Matters
(d) when auditor is required by law or regulation to communicate key audit matters in the auditor’s Report
Answer:
(d) when auditor is required by law or regulation to communicate key audit matters in the auditor’s Report

Question 13.
When auditor is unable to obtain sufficient and appropriate audit evidence that financial statement on which to base the opinion and the auditor concludes that possible effects of the financial statement can be both Material and Pervasive. Then the Key Matters to be included in the Auditor’s Report should
(a) disclose that no sufficient & appropriate evidence is obtained
(b) auditor is prohibited in communicating key audit matters in the auditor’s report i.e., no disclosure is required
(c) disclose that financial statement doesn’t present a true and fair view
(d) both (a) & (c)
Answer:
(b) auditor is prohibited in communicating key audit matters in the auditor’s report i.e., no disclosure is required

Question 14.
As per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” communicating key audit matters in the auditor’s report is in the context of the auditor having formed an opinion on the financial statements as a whole Communicating key audit matters in the auditor’s report can be considered as a substitute for
(a) disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation
(b) the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised]
(c) reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern
(d) none of the above
Answer:
(d) none of the above

Question 15.
A matter giving rise to a modified opinion in accordance with SA 705 (Revised), or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570 (Revised), are by their nature key audit matters.
In relation to this statement, select the appropriate answer:
(a) Such matters shall not be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 do not apply
(b) Such matters shall only be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 shall apply
(c) Such matters shall be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 shall apply in addition to the requirements of SA 570 or SA 705, as the case may be
(d) Such Matters shall be described in Emphasis of matter Para
Answer:
(a) Such matters shall not be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 do not apply

Question 16.
As per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report’’ Key audit matters are
(a) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the prior period. Key audit matters are selected from matters communicated with those charged with governance
(b) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with Central Government
(c) Those matters that, in the management judgment, were of most significance in the audit of the financial statements ofthe current period. Key audit matters are selected from matters communicated with those charged with governance
(d) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with governance
Answer:
(d) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with governance

Question 17.
As per SA 701 “Communicating Key AuditMatters in the Independent Auditor’s Report”, the auditor shall describe each key audit matter in the auditor’s report. However, in some situations, such matters need not be communicated. Identify the situation:
(a) Law or regulation precludes public disclosure about the matter.
(b) TCWG has not given their consent for public disclosure.
(c) Management is not willing for public disclosure of the matters.
(d) Both (a) and (b).
Answer:
(a) Law or regulation precludes public disclosure about the matter.

Question 18.
As per SA 701 “Communicating Key AuditMatters in the Independent Auditor’s Report”, the auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall take into account:
(a) Areas of lower assessed risk of material misstatement
(b) significant risks identified during the audit of previous year
(c) Significant auditor judgments relating to areas in the business operations that involved significant management judgment
(d) effect on the audit of significant events or transactions that occurred during the period
Answer:
(d) effect on the audit of significant events or transactions that occurred during the period

Question 19.
If the auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate or that the only key audit matters communicated are those matters that give rise to modified opinion, the auditor shall include a statement to this effect in a separate section of the auditor’s report under the heading “Key Audit Matters”. In which of the circumstance, the requirement so mentioned above will apply:
(a) the auditor determines that there are no key audit matters
(b) the auditor determines in accordance with SA 701 that a key audit matter will not be communicated in the auditor’s report and no other matters have been determined to be key audit matters
(c) the only matters determined to be key audit matters are those communicated in accordance SA 570 or SA 705
(d) all of the above
Answer:
(d) all of the above

Question 20.
Which of the following is not a type of audit opinion?
(a) Disclaimer
(b) Adverse
(c) Reserved
(d) Qualified
Answer:
(c) Reserved

Question 21.
What type of opinion is issued when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements?
(a) Qualified
(b) Reserved
(c) Disclaimer
(d) Adverse
Answer:
(d) Adverse

Question 22.
When an auditor expresses an adverse opinion, the opinion paragraph should include
(a) A direct reference to a separate paragraph disclosing the basis for the opinion
(b) The substantive reasons for the financial statements being misleading
(c) The principal effects of the departure from generally accepted accounting principles
(d) A description of the uncertainty or scope limitation that prevents an unmodified opinion
Answer:
(a) A direct reference to a separate paragraph disclosing the basis for the opinion

Question 23.
The auditor shall disclaim an opinion when the following conditions occur except:
(a) it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements
(b) the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive
(c) the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive
(d) the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion
Answer:
(b) the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive

Question 24.
When the auditor modifies the opinion on the financial statements, the auditor shall include a paragraph in the auditor’s report. All of the following are true of this paragraph except:
(a) it should draw the financial statement users’ attention to matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements
(b) the auditor shall place this paragraph immediately after the opinion paragraph in the auditor’s report
(c) the paragraph should provide a description of the matter giving rise to the modification
(d) the auditor shall use the heading ‘basis for qualified opinion,’ ‘basis for adverse opinion’ or ‘basis for disclaimer of Opinion,’ as appropriate
Answer:
(a) it should draw the financial statement users’ attention to matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements

Question 25.
XYZ Limited received a grant of ₹ 25 lakhs under the Government’s Subsidy Scheme, for acquiring an imported machinery for setting up new plant. The entire grant received is credited to Profit and Loss Account. While preparing the audit report, the auditor needs to:
(a) qualify the report stating the fact that the income has been overstated to the extent of the amount of grant net of proportionate credit that would have been worked out
(b) qualify the report stating the fact that the income has been understated to the extent of the amount of grant net of proportionate debit that would have been worked out
(c) express unmodified opinion as Accounting Standard-12 allow the recognition of grant received as income
(d) None of the above
Answer:
(a) qualify the report stating the fact that the income has been overstated to the extent of the amount of grant net of proportionate credit that would have been worked out

Question 26.
An auditor concludes that a client’s illegal act, which has a material effect on the financial state-ments, has not been properly accounted for or dis-closed. Depending on the materiality of the effect on the financial statements, the auditor should express either
(a) Unqualified opinion with a separate explanatory paragraph or a qualified opinion
(b) Adverse opinion or a disclaimer of opinion
(c) Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph
(d) Qualified opinion or an adverse opinion
Answer:
(d) Qualified opinion or an adverse opinion

Question 27.
When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a basis for qualification paragraph and modify the

Introductory paragraph	Auditor re­sponsibility paragraphs	Opinion paragraph
(a) No	No	Yes
(b) Yes	No	No
(c) Yes	Yes	No
(d) No	Yes	Yes

Answer:
(a)

Question 28.
Wipro Ltd. has branches all over the India. Suddenly due to floods in Kerala, all the Records of Wipro Ltd. at its Kerala branch were destroyed due to Floods. No documents were made available. The turnover of Wipro Ltd. (all over India) was ₹ 100 Crore. If turnover from Kerala Branch alone was ? 2 5 Lakhs and the Company does not disclose the same in Financial Statements. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro what would be your opinion on the Financial Statements
(a) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed
(b) Modified Opinion – Adverse Opinion
(c) Modified Opinion – Disclaimer of Opinion
(d) Modified Opinion – Qualified Opinion
Answer:
(d) Modified Opinion – Qualified Opinion

Question 29.
Wipro Ltd. has branches all over the India. Suddenly due to floods in Kerala, all the Records of Wipro Ltd. at its Kerala branch were destroyed due to Floods. No documents were made available. The turnover of Wipro Ltd. (all over India) was ? 100 Crore. If turnover from Kerala Branch alone was ? 60 Crores and the Company has disclosed the same in Financial Statements as notes to accounts. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro what would be your opinion on the Financial Statements
(a) Unmodified Opinion with EOM that the books of the Kerala Branch have been destroyed
(b) Adverse Opinion
(c) Disclaimer of Opinion
(d) Qualified Opinion
Answer:
(c) Disclaimer of Opinion

Question 30.
Ordinarily, an auditor may include an emphasis of a matter paragraph:
(a) when limitation in scope is not so material as to re-quire an adverse opinion or a disclaimer of opinion
(b) to highlight an immaterial matter regarding a going concern problem
(c) when the effect of a disagreement with management is material and pervasive to the financial statements
(d) if there is a significant uncertainty, the resolution of which is dependent upon future events
Answer:
(d) if there is a significant uncertainty, the resolution of which is dependent upon future events

Question 31.
Wipro Ltd. has branches all over the India. : Suddenly due to floods in Kerala, all the Records of Wipro Ltd. at its Kerala branch were destroyed due to Floods. No documents were made available. The turnover of Wipro Ltd. (all over India) was ₹ 100 Crore. If turnover from Kerala Branch alone was ₹ 2 5 Lakhs and the Company has disclosed the same in Financial Statements as notes to accounts. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro what would be your opinion on the Financial Statements
(a) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed
(b) Modified Opinion – Adverse Opinion
(c) Modified Opinion – Disclaimer of Opinion
(d) Modified Opinion – Qualified Opinion
Answer:
(a) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed

Question 32.
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report” Emphasis of Matter paragraph may be defined as:
(a) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the director’s report that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements
(b) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ under-standing of the audit, the auditor’s responsibilities or the auditor’s report
(c) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the auditor’s report
(d) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements
Answer:
(d) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements

Question 33.
Which of the following is not an example of uncertainties that might be emphasised in an emphasis of a matter paragraph?
(a) Matters affecting the comparability of financial statements with those of previous years
(b) The existence of related party transactions
(c) Important accounting matters occurring subsequent to the balance sheet date
(d) Internal control deficiencies
Answer:
(d) Internal control deficiencies

Question 34.
An auditor would express an unmodified opinion and add an emphasis-of-matter paragraph for and Other Matter Paragraphs in the Independen t Auditor’s Report” Other Matter Para may be defined as:

	an unjustified ac­counting change	a material weakness in the internal control
(a)	No	Yes
(b)	Yes	No
(c)	Yes	Yes
(d)	No	No

Answer:
(a)

Question 35.
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independen t Auditor’s Report” Other Matter Para may be defined as:
(a) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements
(b) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report
(c) A paragraph included in the auditor’s report that refers to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report
(d) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the financial statements
Answer:
(b) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report

Question 36.
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report” an Emphasis of Matter paragraph is a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by the circumstances of a specific audit engagement;
(b) Disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation; or
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern
(d) None of the above
Answer:
(d) None of the above

Question 37.
If the prior period financial statements were not audited, the auditor shall state in the auditor’s report thatthe corresponding figures are unaudited. Such statement is incorporated in:
(a) Basis for Opinion Section
(b) Key Audit Matter
(c) Other Matter Paragraph
(d) Emphasis of Matter Paragraph
Answer:
(c) Other Matter Paragraph

Question 38.
Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in revelation to the amounts and other disclosures relating to the current period is known as:
(a) Comparative financial information
(b) Corresponding Figures
(c) Comparative financial statements
(d) Common Size financial statements
Answer:
(b) Corresponding Figures

Question 39.
If the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements on which an unmodified opinion has been previously issued, the auditor shall verify whether the misstatement has been dealt with as required under the applicable financial reporting framework and, if that is not the case, the auditor shall
(a) express an unmodified opinion in the auditor’s report on the current period financial statements
(b) express a qualified opinion in the auditor’s report on the currentperiod financial statements, modified with respect to the corresponding figures included therein
(c) express an adverse opinion in the auditor’s report on the currentperiod financial statements, modified with respect to the corresponding figures included therein
(d) express a qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified with respect to the corresponding figures included therein
Answer:
(d) express a qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified with respect to the corresponding figures included therein

Question 40.
If the prior period financial statements were not audited; the auditor shall state in _____ in the auditor’s report that the corresponding figures are unaudited
(a) Key Audit Matter
(b) Emphasis of Matter paragraph
(c) Other Matter Paragraph
(d) Basis for Opinion Section
Answer:
(c) Other Matter Paragraph

Question 41.
A company did not disclose accounting policies required to be disclosed under Schedule III or any other provisions of the Companies Act, 2013, the auditor should issue-
(a) a qualified opinion
(b) an adverse opinion
(c) a disclaimer of opinion
(d) emphasis of matter paragraph.
Answer:
(a) a qualified opinion

Question 42.
An Audit report is:
(a) an opinion drawn on the entity’s financial statements to make sure that the records are true and correct representation of the transactions they claim to represent.
(b) an opinion drawn on the entity’s books of account to make sure that the records are true and fair representation of the transactions they claim to represent.
(c) an opinion drawn on the entity’s financial statements to make sure that the records are true and fair representation of the transactions they claim to represent.
(d) an opinion drawn on the entity’s books of account to make sure that the records are true and correct representation of the transactions they claim to represent.
Answer:
(c) an opinion drawn on the entity’s financial statements to make sure that the records are true and fair representation of the transactions they claim to represent.

Question 43.
Which of the following is not a Specific Evaluations by the Auditor?
(a) The financial statements adequately disclose the significant accounting policies selected and applied.
(b) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate.
(c) The accounting estimates made by management are reasonable.
(d) The sufficient appropriate audit evidence has been obtained.
Answer:
(d) The sufficient appropriate audit evidence has been obtained.

Question 44.
Which of the following is correct?
(a) The auditor shall express a qualified opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(b) The auditor shall express a disclaimer opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(c) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(d) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements.
Answer:
(c) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Question 45.
Which of the following is correct?
(a) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor need not disclose the substantive reasons for the different opinion.
(b) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph in accordance with
(c) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an emphasis of Matter paragraph in accordance with SA 706.
(d) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph or emphasis of matter paragraph in accordance with SA 706.
Answer:
(b) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph in accordance with

Question 46.
Which of the following is incorrect?
(a) Communicating key audit matters in the auditor’s report is not a substitute for disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation.
(b) Communicating key audit matters in the auditor’s report is not a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised],
(c) Communicating key audit matters in the auditor’s report is not a substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
(d) Communicating key audit matters in the auditor’s report is a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised],
Answer:
(d) Communicating key audit matters in the auditor’s report is a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised],

Question 47.
CA. Goofy has been appointed as an auditor for audit of a complete set of financial statements of Dippy Ltd., a listed company. The financial statements of the company are prepared by the management in accordance with the Accounting Standards prescribed under section 133 of the Companies Act, 2013. However, the inventories are misstated which is deemed to be materia! but not pervasive to the financial statements, Based on the audit evidences obtained, CA. Goofy has concluded that a material uncertainty does not exist related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570. Further, CA. Goofy is also aware of the fact that a qualified opinion would be appropriate due to a material misstatement of the Financial Statements. State what phrases should the auditor use while drafting such opinion paragraph?
(a) In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
(b) In our opinion and to the best of our information and according to the explanations given to us, with the foregoing explanation, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
(c) In our opinion and to the best of our information and according to the explanations given to us, subject to the misstatement regarding inventories, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
(d) In our opinion and to the best of our information and according to the explanations given to us, with the explanation described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
Answer:
(a) In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.

Question 48.
Which of the following is not correct:
(a) SA 700- Forming an Opinion and Reporting on Financial Statements
(b) SA 705- Modified Opinion
(c) SA 701- Communicating Key Audit Matters
(d) SA 706-ComparatiVe Information
Answer:
(d) SA 706-ComparatiVe Information

Buyback of Securities and Equity Shares with Differential Rights – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Buyback of Securities and Equity Shares with Differential Rights – CA Inter Advanced Accounting Study Material

Theory Questions

Question 1.
State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies. (Nov. 2012) (4 Marks)
Answer:
A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:
(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting.

(ii) the resolution specifies the number of shares, current market price, the consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued.

(iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was entitled to commence business.

(iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf. But in the case of company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.

Question 2.
Give four conditions to be fulfilled by a Joint Stock Company to buy back its equity Shares. (May 2014) (4 Marks)
Answer:
As per section 77A of the Companies Act, 1956, a joint stock company has to fulfil the following conditions to buy back its own equity shares:

1. Buy back is authorized by its articles.
2. A special resolution has been passed in general meeting of the shareholders of the company, authorizing the buy back.
3. The buy back does not exceed 25% of the total paid up capital and free reserves of the company.
4. All the shares proposed for buy back are fully paid up.
5. The ratio of the debts owed by the Company is not more than twice the capital and its free reserves after such buy back.
6. The buy back of listed shares is in accordance with the regulation of SEBI.
7. The buy back is made out of free reserves (which includes securities premium) or out of the proceeds of a fresh issue of any shares or other specified securities.
8. The buy back is completed within 12 months of the passing of the special resolution or resolution passed by the Board.
9. Before making such buy back, a listed company has to the with the Registrar of the Companies and SEBI a declaration of solvency in the prescribed form.

Questions Without 3 Test

Question 3.
U Ltd. (a listed company) resolves to buy back 4 lakhs of its fully paid equity shares of ₹ 10 each at ₹ 22 per share from the open market. For the purpose, it issues 1 lakh 11% preference shares of ₹ 10 each at par, the entire amount being payable with applications. The company uses ₹ 16 lakhs of its balance in Securities Premium Account apart from its adequate balance in General Reserve to fulfil the legal requirements regarding buy-back. Give necessary journal entries to record the above transactions.
Answer:
Journal Entries (In the Books of U Ltd.)

Working Note:
Amount to be transferred to Capital Redemption Reserve account (CRR)

	₹
Face value of shares bought back (4,00,000 shares × ₹ 10)	40,00,000
Less: Nominal value of Preference Shares issued for such buy-back (1,00,000 shares × ₹ 10)	(10,00,000)
Amount transferred to Capital Redemption Reserve Account	30,00,000

Question 4.
A Limited furnishes the following summarized Balance Sheet as at 31st March, 2017:

On 1st April, 2017, the company announced the buy back of 25% of its equity shares @ ₹ 15 per share. For this purpose, it sold all of its investments for ₹ 150 lakhs.

On 5th April, 2017, the company achieved the target of buy back.
You are required to:
(1) Pass necessary journal entries for the buy-back.
(2) Prepare Balance Sheet of A Limited after buy-back of the shares.
Answer:
Journal Entries
(In the books of A Limited)

Balance Sheet (After buy back)

Notes to Accounts

4. Cash at bank after buy-back

Question 5.
Dee Limited furnishes the following Balance Sheet as at 31st March,

The company passed a resolution to buy back 20% of its equity capital @ ₹ 50 per share. For this purpose, it sold all of its investment for ₹ 22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet. (Nov. 2009) (8 Marks)
Answer:
Journal Entries
(In the books of A Limited)

Balance Sheet of Dee Limited as on 1st April, 2008
(After buy back of shares)

Question 6.
Following is the summarized Balance Sheet of C Ltd. as on 31st March, 2016:

The Company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed by the Company towards this. The buy-back of shares by the Company is also within the provisions of the Companies Act, 2013. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets.

You are required to prepare the necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.
Answer:
Journal Entries for buy-back of shares (In the books of C Ltd.)

Balance Sheet of C Ltd. as on 1st April, 2016

Notes to Accounts

Question 7.
The following summarized Balance Sheet P Limited (a non-listed company) furnishes as at 31st March, 2017:


On 1st April, 2017, the company passed a resolution to buy back 20% of its equity capital @ ₹ 60 per share. For this purpose, it sold all of its investment for ₹ 25,00,000.
The company achieved its target of buy-back. You are required to:
(a) Give necessary journal entries and
(b) Give the Balance Sheet of the company after buy back of shares. (RTP)
Answer:
Journal Entries
(In the books of P Limited)

Balance Sheet of P Limited as on 1st April, 2017(After buy back of shares)

Notes to Accounts

Question 8.
Following is the summarized Balance Sheet of C Ltd. as on 31st March, 2016 :

The Company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed by the Company towards this. The buy-back of shares by the Company is also within the provisions of the Companies Act, 2013. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets.

You are required to prepare the necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.
Answer:
Journal Entries for buy-back of shares
(In the books of C Ltd.)

Balance Sheet of C Ltd. as on 1st April, 2016

Notes to Accounts

Questions With 3 Test

Question 9.
Following Is the summarized Balance Sheet of Complicated Ltd. as on 31st March, 2016:

The Company wants to buy back 25000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorised by Its Articles and necessary resolution has been passed by the Company towards this. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Curreni Assets.

Comment with your calculations, whether buy back of shares by the Company is within the provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares. (May 2016) (12 Marks)
Answer:
(a) Determination of Buy back of maximum No. of shares as per the Companies Act, 2013
TEST 1. Shares Outstanding Test

Particulars	(Shares)
Number of shares outstanding (₹ 12,50,000 + ₹ 1,00,000)/₹ 10	1,35,000
25% of the shares outstanding	33,750

TEST 2. Resources Test: (Maximum permitted limit 25% of Equity paid up capital + Free Reserves)

TEST 3. Debt Equity Ratio Test: (Loans cannot be in excess of twice the Equity Funds post Buy Back)

*Note: Section 68(2)(d) of the Companies Act, 2013

The ratio of debt owed by the company should not be more than twice the capital and its free reserves after such buy-back.

Section 69(1)
On buy-back of shares out of free reserves a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR).

Section 69(2)
Utilization of CRR is restricted to fully paying up unissued shares of the Company which are to be issued as fully paid-up bonus shares only. It means CRR is not available for distribution as dividend. Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves, amount transferred to CRR on buy-back has to be excluded from the present equity.

Working Note:
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method.

Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
(₹ 32,25,000 – x) – ₹ 24,12,500 = y ………………… (1)
(\(\frac{y}{20}\) × 10) = x
Or 2x = y …………………. (2)
by solving the above equation we get x = ₹ 2,70,833 and y = ₹ 5,41,667

Statement showing maximum number of shares to be bought back

Particulars	Number of shares
Shares Outstanding Test	33,750
Resources Test	40,312
Debt Equity Ratio Test	27,083
Maximum number of shares that can be bought back [least of the above]	27,083

Company qualifies all tests for buy-back of shares and conclusion is that it can buy maximum 27,083 shares on 1st April, 2016.

However, company wants to buy-back only 25,000 equity shares @ ₹ 20. Therefore, buy-back of 25,000 shares, as desired by the company is within the provisions of the Companies Act, 2013.
Journal Entries for buy-back of shares

Balance Sheet of Complicated Ltd. as on 1st April, 2016

Particulars	Note No.	Amount ₹
EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital	1	11,00,000
(b) Reserves and Surplus	2	22,25,000
2. Non-current liabilities
(a) Long-term borrowings	3	28,75,000
3. Current liabilities
(a) Other current liabilities	4	19,50,000
Total		81,50,000
ASSETS
1. Non-current assets
(a) Fixed assets		46,50,000
2. Current assets (40,00,000 – 5,00,000)		35,00,000
Total		81,50,000

Notes to Accounts

Question 10.
SMMLtd. has the following capital structure as on 31st March, 2017: ₹ in crore

The company has offered buy back price of ₹ 30 per equity share. You are required to calculate maximum permissible number of equity shares that can be bought back in both situations and also required to pass necessary Journal Entries. (May 2017) – (8 Marks)
Answer:
Statement showing maximum number of shares to be bought back

Journal Entries for the Buy Back
(applicable only when loan fund is ₹ 3,200 crores)

Working Notes:
TEST 1. Shares Outstanding Test

Particulars	(Shares in crores)
Number of shares outstanding	120
25% of the shares outstanding	30

TEST 2. Resources Test

TEST 3. Debt Equity Ratio Test: (Loans cannot be in excess of twice the Equity Funds post Buy Back)

Mix Questions (Buy Back; Redemption 0f Preference Shares; Redemption 0f Debentures; Esop’s; Bonus)

Question 11.
The following was the balance sheet of M Ltd. as on 31 st March, 2016

On 1st April, 2016 the Company redeemed all its Preference Shares at a Premium of 10% and bought back 25% of its Equity Shares at ₹ 20 per Share. In order to make Cash available, the Company sold all the Investments for ₹ 25,200 Lakhs and raised a Bank Loan amounting to ₹ 16,000 lakh on the Security of the Company’s Plant.

Give the necessary Journal Entries considering that the buy back is authorised by the articles of company and necessary resolution is passed by the company for this. The amount of Securities premium will be utilized to the maximum extents allowed by law.
Answer:
Journal entries
(In the books of M Ltd.)

Question 12.
The following is the Summarized Balance Sheet of M/s. Vriddhi Infra Ltd. as on 31st March, 2016:

On 21st April, 2016 the Company announced the buy back of 25,000 of its equity shares @ ₹ 15 per share. For this purpose, it sold all its investment for ₹ 2.50 lakhs.

On 25th April, 2016, the company achieved the target of buy back. On 1st May, 2016 the company issued one fully paid up share of ? 10 each by way of bonus for every five equity shares held by the equity shareholders.

You are requested to pass necessary Journal Entries for the above transactions. All necessary workings should form part of your answer. (Nov. 2016) (6 Marks)
Answer:
In the books of Vriddhi Infra Ltd.
Journal Entries

* It is assumed that, there is bank overdraft amounting ₹ 85,000 [(40,000 + 2,50,000) less ₹ 3,75,000]

Question 13.
Alpha Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2017:

1. On 1st April, 2017, the company announced buy-back of 25% of its equity shares @ ₹ 5 per share. For this purpose, it sold all its investment for ₹ 150 lakhs.
2. On 10th April, 2017 the company achieved the target of buy-back.
3. On 30th April, 2017, the company issued one fully paid up equity share of ₹ 10 each by way of bonus for every four equity shares held by the equity shareholders by capitalization of Capital Redemption Reserve.

You are required to pass necessary journal entries and prepare the Balance Sheet of Alpha Ltd. after bonus issue. (May 2018 – New Course) (10 Marks)
Answer:
Journal Entries
(In the books of Alpha Limited)

Note : For transferring amount equal to nominal value of buy back shares from free reserves to capital redemption reserve account, the amount of ₹ 340 lakhs from P & L A/c and the balance from general reserve may also be utilized. The combination of different set of amounts (from General Reserve and Profit and Loss Account) aggregating ₹ 600 lakhs may also be considered for the purpose of transfer to CRR.

Balance Sheet (After buy back and issue of bonus shares)

Notes to Accounts

3. Cash at bank after issue of bonus shares

Equity Shares With Differential Rights

Theory Questions

Question 14.
Explain the meaning of equity shares with differential rights. Can preference shares be also issued with differential rights?
Answer:
Equity shares with Differential Rights means the share with dissimilar rights as to dividend, voting or otherwise. No; the preference shares cannot be issued with differential rights.

Question 15.
Explain the conditions under Companies (Share Capital and Debentures) Rules, 2014, to deal with equity shares with differential rights.
Answer:
In exercise of th e power conferred under Section 43 (a)(ii), the Central Government announced Rule 4 under Companies (Share Capital and Debentures) Rules, 2014, to deal with equity shares with differential rights.
The rules lay down the following conditions to be compulsorily complied with:
(a) The articles of association of the company authorizes the issue of shares with differential rights;

(b) The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders:
Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot;

(c) The shares with differential rights shall not exceed twenty-six per cent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;

(d) The company having consistent track record of distributable profits for the last three years;

(e) The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;

(f) The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;

(g) The company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;

(h) The company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

Practical Question

Question 16.
E, F, G and H hold Equity Capital in Alpha Co. in the proportion of 30:30:20:20. S, T, U and V hold preference share capital in the proportion of 40:30:10:20. If the paid up capital of the company is ₹ 120 Lakh and Preference share capital is ₹ 60 Lakh. You are required to calculate their voting rights in case of resolution of winding up of the company.
Answer:
E, F, G and H hold Equity capital is held by in the proportion of 30:30:20:20 and S, T, U and V hold preference share capital in the proportion of 40:30:10:20. As the paid up equity share capital of the company is ₹ 120 Lakhs and Preference share capital is ₹ 60 Lakhs & (2:1), then relative weights in the voting right of equity shareholders and preference shareholders will be 2/3 and 1/3. The respective voting right of various shareholders will be
E = = 2/3 × 30/100 = = 3/15
F = = 2/3 × 30/100 = = 3/15
G = = 2/3 × 20/100 = = 2/15
H = = 2/3 × 20/100 = = 2/15
S = = 1/3 × 40/100 = = 2/15
T = = 1/3 × 30/100 = = 1/10
U = = 1/3 × 10/100 = = 1/30
V = = 1/3 × 20/100 = = 1/15

Students should practice these The Company Audit – CA Inter Audit MCQ based on the latest syllabus.

The Company Audit – CA Inter Audit MCQ

Question 1.
Auditor appointed at AGM shall hold the office from the conclusion of that AGM till the conclusion of
(a) Sixth AGM
(b) Next AGM
(c) Fifth AGM
(d) Tenth AGM
Answer:
(a) Sixth AGM

Question 2.
An Individual auditor of a Listed company who has completed his term shall not be eligible for re-appointment as auditor in the same company for years from the conclusion of his term
(a) 2
(b) 3
(c) 5
(d) 10
Answer:
(c) 5

Question 3.
Which of the following company shall notappoint an audit firm as auditor for more than two terms of five consecutive years:
(a) Unlisted Public company having Turnover of ₹ 10 Cr. or more
(b) Unlisted Public company having Turnover of ₹ 2 0 Cr. or more
(c) Unlisted Public company having Paid up share capital of ₹ 10 Cr. or more
(d) Unlisted Public company having Paid up share Capital of ₹ 20 Cr. or more
Answer:
(c) Unlisted Public company having Paid up share capital of ₹ 10 Cr. or more

Question 4.
Subsequent auditor in case of Government Company shall be appointed within from the commencement of the financial year
(a) 30 days
(b) 90 days
(c) 120 days
(d) 180 days
Answer:
(d) 180 days

Question 5.
First auditor shall hold office till conclusion of
(a) First AGM
(b) Sixth AGM
(c) Next AGM
(d) Second AGM
Answer:
(a) First AGM

Question 6.
Casual vacancy in the office of an auditor, shall be filled by the Board of Directors within
(a) 30 days
(b) 60 days
(c) 90 days
(d) 120 days
Answer:
(a) 30 days

Question 7.
Which of the following statement is correct?
(a) Casual Vacancy in case of resignation of auditor shall be filled by Board of Directors within 90 days
(b) Casual Vacancy in case of Government company shall be filled by Central Govt, within 90 days
(c) Casual Vacancy means a vacancy arises after com-pletion of the tenure
(d) None of the Above
Answer:
(d) None of the Above

Question 8.
Which of the following statement is correct?
(a) Where at any AGM, no auditor is appointed or re-appointed, it amounts to casual vacancy and will be filled by Board of Directors
(b) Where at any AGM, no auditor is appointed or re-appointed, it amounts to casual vacancy and will be filled by Central Government
(c) Where at any AGM, no auditor is appointed or re-appointed, it amounts to casual vacancy and will be filled by members in EGM
(d) None of the above
Answer:
(d) None of the above

Question 9.
The Auditor appointed under section 139 of Companies Act, 2013 may be removed from his office before the expiry of his term by
(a) Ordinary Resolution
(b) Special Resolution
(c) Board Resolution
(d) None of the Above
Answer:
(b) Special Resolution

Question 10.
The application for removal of auditor before expiry of his term shall be made to Central Govt, within 30 days of
(a) Ordinary Resolution
(b) Special Resolution
(c) Board Resolution
(d) None of the Above
Answer:
(c) Board Resolution

Question 11.
In case of removal of auditor before expiry of his term, the company shall hold the within 60 days of receipt of approval of the Central Government for passing the
(a) General Meeting, Ordinary Resolution
(b) Board Meeting, Special Resolution
(c) General Meeting, Special Resolution
(d) Board Meeting, Board Resolution
Answer:
(c) General Meeting, Special Resolution

Question 12.
The auditor who has resigned from the company shall file within a period of from the date of resignation, a statement in the Form
(a) 30 days, ADT-1
(b) 30 Days, ADT-3
(c) 60 days, ADT-1
(d) 60 days, ADT-3
Answer:
(b) 30 Days, ADT-3

Question 13.
To appoint as auditor, a person other than a retiring auditor, who is eligible for reappointment, ______ is required
(a) Approval of Central Government
(b) Special Notice
(c) Approval of CAG
(d) Ordinary Resolution
Answer:
(b) Special Notice

Question 14.
Which of the following is qualified to be appointed as auditor of the company?
(a) A person whose relative is holding security of the company of face value exceeding ₹ 1 Lac
(b) A person whose relative is holding security of the company of market value exceeding ₹ 1 Lac
(c) A person whose relative is holding security of the company of face value not exceeding ₹ 1 Lac
(d) A person whose relative is holding security of the company of market value not exceeding ₹ 1 Lac
Answer:
(c) A person whose relative is holding security of the company of face value not exceeding ₹ 1 Lac

Question 15.
A person is disqualified to be appointed as auditor of the company if he himself or his relative or partner is indebted to the company for an amount exceeding ?
(a) One Lac
(b) Two Lacs
(c) Five Lacs
(d) Ten Lacs
Answer:
(c) Five Lacs

Question 16.
A person is disqualified to be appointed as auditor of the company if he himself or his relative or partner has given any guarantee in connection with the indebtedness of any third person to the company for an amount exceeding ?
(a) One Lac
(b) Two Lacs
(c) Five Lacs
(d) Ten Lacs
Answer:
(a) One Lac

Question 17.
A person is disqualified to be appointed as auditor of a company if he has been convicted by a court of an offence involving fraud and a period of ______ years has not elapsed from the date of such conviction
(a) 2 Years
(b) 5 Years
(c) 7 Years
(d) 10 Years
Answer:
(d) 10 Years

Question 18.
A person is disqualified to be appointed as auditor of a company if such person as at date of such appointment holding appointment of more than ______ companies
(a) 10
(b) 15
(c) 20
(d) 30
Answer:
(c) 20

Question 19.
The remuneration of first auditor appointed by members of the company shall be fixed by
(a) Company
(b) Board of Directors
(c) Central Government
(d) CAG
Answer:
(a) Company

Question 20.
Which of the following is correct?
(a) Remuneration of auditor shall in addition to the fees payable include expenses, if any incurred by the auditor in connection with the audit of the company
(b) Remuneration does not include any remuneration paid to auditor for any other service rendered by him at the request of the company
(c) Both of the Above
(d) None of the Above
Answer:
(c) Both of the Above

Question 21.
In addition to listed companies, which of the following companies are required to constitute audit committee:
(a) Public Companies with a paid-up capital of ₹ 10 Cr. or more
(b) Private Companies with a paid-up capital of ₹ 20 Cr. or more
(c) Both of the Above
(d) None of the Above
Answer:
(a) Public Companies with a paid-up capital of ₹ 10 Cr. or more

Question 22.
In which of the following cases, appointment of auditor shall be made after taking into account the recommendations of audit committee:
(a) Appointment of Subsequent Auditor
(b) Filling of Casual vacancies
(c) Re-Appointment of Retiring Auditor
(d) All of the above
Answer:
(d) All of the above

Question 23.
Every auditor of a company shall have a right of access at all times to of the company whether kept at the registered office of the company or at any other place
(a) Books and Account
(b) Books and Papers
(c) Books of Account and Vouchers
(d) Statutory registers
Answer:
(c) Books of Account and Vouchers

Question 24.
Auditor is required to inquire which of the following matters under Section 143(1):
(a) Sale of Shares and debentures at a price less than purchase amount by a banking company
(b) Sale of Shares and debentures at a price less than purchase amount by an investment company
(c) Sale of Fixed Assets and Inventory at a price less than purchase amount by a non-banking company
(d) Sale of Shares and debentures at a price less than purchase amount by a non-banking company
Answer:
(d) Sale of Shares and debentures at a price less than purchase amount by a non-banking company

Question 25.
Auditor is required to inquire which of the following matters under Section 143(1):
(a) Charging of personal expenses to revenue account
(b) Charging of capital expenses to revenue account
(c) Charging of Provisions to revenue account
(d) Charging of Depreciation to revenue account
Answer:
(a) Charging of personal expenses to revenue account

Question 26.
Which of the following statements is correct?
(a) Reporting on propriety matters u/s 143(1) is required if the auditor finds answer to any of the matters in positive
(b) Reporting on propriety matters u/s 143(1) is required if the auditor finds answer to any of the matters in negative
(c) Reporting on propriety matters u/s 143(1) is required in every case irrespective of auditor’s observations
(d) Reporting on propriety matters u/s 143(1) is not the duty of auditor, it is the duty of management
Answer:
(b) Reporting on propriety matters u/s 143(1) is required if the auditor finds answer to any of the matters in negative

Question 27.
Under Section 143(2) auditor is required to make a report to the members of the company on the following:
(a) Accounts Examined by him
(b) Financial statement laid before the company in general Meeting
(c) Both of the above
(d) None of the Above
Answer:
(c) Both of the above

Question 28.
Under Section 143(3), auditor is required to report on following
1. Whether loans and advances made by the company have been shown as deposits
2. Whether transactions represented by book entries are prejudicial
3. Whether any director is disqualified from being appointed as director u/s 164(2)
4. Whether financial statements comply with the accounting Standards Correct answer is:
(a) 1 & 2
(b) 3 & 4
(c) 1 & 3
(d) 1,2, 3 & 4
Answer:
(d) 1,2, 3 & 4

Question 29.
CAG shall within from the date of receipt of the audit report have a right to conduct a supplementary audit
(a) 30 days
(b) 45 days
(c) 60 days
(d) 90 days
Answer:
(c) 60 days

Question 30.
As per Sec. 143(9) of Companies Act, 2013, every auditor shall comply with
(a) Accounting Standards
(b) Auditing Standards
(c) Engagement Standards
(d) Accounting and Auditing Standards
Answer:
(b) Auditing Standards

Question 31.
Under Section 143(12) of Companies Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the ______ he shall immediately report the matter to the
(a) company by officers or employees of the company; Registrar of Companies
(b) officers or employees of the company by directors; Central Government
(c) company by officers or employees of the company; Central Government
(d) officers or employees of the company by directors; Registrar of Companies
Answer:
(c) company by officers or employees of the company; Central Government

Question 32.
If the auditor does not report u/s 143(2) with respect to fraud, he shall be punishable with fine ranging from:
(a) ₹ 1 Lac to ₹ 10 Lacs
(b) ₹ 1 Lac to ₹ 25 Lacs
(c) ₹ 5 Lacs to ₹ 10 Lacs
(d) ₹ 5 Lacs to ₹ 25 Lacs
Answer:
(b) ₹ 1 Lac to ₹ 25 Lacs

Question 33.
Report u/s 143(12) with respect to fraud shall be sent to
(a) Registrar of Companies
(b) National Company Law Tribunal
(c) Secretary, Ministry of Home affairs
(d) None of the above
Answer:
(d) None of the above

Question 34.
The Audit Committee or the Board of Directors, are required to give their reply over the report of auditor in relation to fraud noticed by the auditor, within
(a) 15 days
(b) 30 days
(c) 45 days
(d) 60 days
Answer:
(c) 45 days

Question 35.
Report u/s 143(12) shall be in the form of a statement as specified in
(a) ADT-1
(b) ADT-2
(c) ADT-3
(d) ADT-4
Answer:
(d) ADT-4

Question 36.
An auditor appointed under Companies Act, 2013, shall provide only such other services as are approved by
(a) Board of Directors
(b) Central Government
(c) Board of Directors or the Audit Committee
(d) Registrar of Companies
Answer:
(c) Board of Directors or the Audit Committee

Question 37.
Auditor appointed under Companies Act, 2013 cannot render which of the following services:
(a) Actuarial Services
(b) Tax Audit
(c) Review of Interim Financial Statements
(d) Examination of Prospective Financial Statements
Answer:
(a) Actuarial Services

Question 38.
Which of the following statement is correct?
(a) Communication relating to General meeting need not be forwarded to the auditor of the company
(b) Auditor has discretion to attend the general meeting
(c) Auditor shall have a right to be heard at general meeting
(d) None of the above
Answer:
(c) Auditor shall have a right to be heard at general meeting

Question 39.
The auditor shall attend ______ any general meeting
(a) himself
(b) through his authorised representative
(c) either by himself or through his authorised representative
(d) at his discretion
Answer:
(c) either by himself or through his authorised representative

Question 40.
Right of Lien refers to
(a) Right for lawful possession of somebody’s else property
(b) Right of access to records of the company
(c) Right to obtain necessary information and explanation
(d) Right of access to records of subsidiary companies
Answer:
(a) Right for lawful possession of somebody’s else property

Question 41.
RightofIiencanbeexercisedfor
(a) Non-payment of statutory dues
(b) Non-payment of fees by the client
(c) Both of the above
(d) None of the above
Answer:
(b) Non-payment of fees by the client

Question 42.
CA. X is a partner in M/s AB & Associates and M/s MN & Associates simultaneously. M/s AB & Associates has completed its tenure of 10 years as an auditor in XYZ Ltd. immediately preceding the current financial year, it may be noted that the provisions for applicability of rotation of auditors are applicable to XYZ Ltd. Now, the company wants to appoint M/s MN & Associates as auditor for 5 years.
(a) M/S MN & Associates cannot be appointed as auditor being not eligible u/s 141(3) of Companies Act, 2013
(b) M/S MN & Associates cannot be appointed as auditor being not eligible as per Rule 6 of Companies (Audit & Auditor’s) Rules, 2014
(c) M/S MN & Associates cannot be appointed as auditor being not eligible as per proviso to Sec. 139(2) of Companies Act, 2013
(d) M/S MN & Associates cannot be appointed as auditor being not eligible u/s 141(1) of Companies Act, 2013
Answer:
(c) M/S MN & Associates cannot be appointed as auditor being not eligible as per proviso to Sec. 139(2) of Companies Act, 2013

Question 43.
ABC Pvt. Ltd., a new company, incorporated on 01.07.2018 is engaged in the manufacturing business. On 30.07.2018, the Managing Director of ABC Pvt. Ltd. himself appointed CA Mohan, as the first auditor of the company.
(a) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by members of the company as per Sec. 139(6) ofCompanies Act, 2013
(b) Appointment of Mr. Mohan is invalid as first auditor of a company canbe appointed by Board of Directors as per Sec. 139(6) of Companies Act, 2013
(c) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by members of the company asperSec. 139(1) of Companies Act, 2013
(d) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by Board of Directors as per Sec. 139(1) ofCompanies Act, 2013
Answer:
(b) Appointment of Mr. Mohan is invalid as first auditor of a company canbe appointed by Board of Directors as per Sec. 139(6) of Companies Act, 2013

Question 44.
KM Pvt. Ltd., engaged in the manufacturing business of Silk Shirts, is a newly incorporated company dated 01.09.2018. On 28.09.2018, the members of KM Pvt. Ltd. themselves appointed CA Raj, a renowned practitioner, as the first auditor of the company opposing that Board is not authorised to appoint the auditor.
(a) Appointment of CA. Raj is valid as first auditor of a company can be appointed by members of the company as per Sec. 139(6) ofCompanies Act, 2013
(b) Appointment of CA. Raj is invalid as first auditor of a company within 30 days of incorporation of company can be appointed by CAG as per Sec. 139(6) of Companies Act, 201.3
(c) Appointment of CA. Raj is valid as first auditor of a company can be appointed by members of the company as per Sec. 139(1) of Companies Act, 2013
(d) Appointment of CA. Raj is invalid as first auditor of a company within 30 days of incorporation of company can be appointed by Board of Directors as per Sec.-139(6) of Companies Act, 2013
Answer:
(d) Appointment of CA. Raj is invalid as first auditor of a company within 30 days of incorporation of company can be appointed by Board of Directors as per Sec.-139(6) of Companies Act, 2013

Question 45.
KM Ltd., a Government company is incorporated on 01.09.2018.0n 28.09.2018, the Board of Directors themselves appointed CA Raj, a renowned practitioner, as the first auditor of the company.
(a) Appointment of CA. Raj is invalid as first auditor of a government company within 30 days of incorporation of company can be appointed by Central Government as per Sec. 139(7) of Companies Act, 2013.
(b) Appointment of CA. Raj is invalid as first auditor of a government company within 60 days of incorporation of company can be appointed by Central Government as per Sec. 139(7) ofCompanies Act, 2013.
(c) Appointment of CA. Raj is invalid as first auditor of a government company within 3 0 days of incorporation of company can be appointed by CAG as per Sec. 139(7) ofCompanies Act, 2013.
(d) Appointment of CA. Raj is invalid as first auditor of a government company within 60 days of incorporation of company can be appointed by CAG as per Sec. 139(7) of Companies Act, 2013.
Answer:
(d) Appointment of CA. Raj is invalid as first auditor of a government company within 60 days of incorporation of company can be appointed by CAG as per Sec. 139(7) of Companies Act, 2013.

Question 46.
PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of Directors for his removal without obtaining prior approval from the Central Government.
(a) Removal is valid as approval of Central Government is not required in case of first auditor.
(b) Removal is not valid as approval of Central Government is not obtained.
(c) Removal is not valid as first auditor of a company cannot be removed.
(d) Removal is not valid as first auditor can be removed by Audit Committee.
Answer:
(b) Removal is not valid as approval of Central Government is not obtained.

Question 47.
“Mr. A”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of ₹ 90000. XYZ Ltd. wants to appoint Mr. B, partner of Mr. Aas itsauditor. Mr. B does not hold any securities in the company.
(a) Mr. B is not eligible for appointment as an Auditor of “XYZ Ltd” as his partner holds securities of the company.
(b) Mr. B is eligible for appointment as an Auditor of “XYZ Ltd” as the value of securities hold by his partner is less than ₹ 1 Lac.
(c) Mr. B is eligible for appointment as an Auditor of “XYZ Ltd” as he do not hold any securities of the company.
(d) Mr. B not eligible for appointment as an Auditor of “XYZ Ltd.” as his partner holds securities of the company exceeding ₹ 1,000.
Answer:
(a) Mr. B is not eligible for appointment as an Auditor of “XYZ Ltd” as his partner holds securities of the company.

Question 48.
Mr. B, a partner of Mr. A held shares of face value of ₹ 1,05,000 in DEF Ltd., the holding company of ABC Ltd. Mr. B has sold the securities after a period of 45 days from the date of appointment of Mr. A as an auditor of ABC Ltd.
(a) Appointment of Mr. Ain ABC Ltd. as auditor is valid as his partner Mr. B sold the securities within 60 days of appointment of Mr. A.
(b) Appointment of Mr. A in ABC Ltd. as auditor is valid as shareholding of Mr. B in the holding company of ABC Ltd. is of no relevance.
(c) Appointment of Mr. A in ABC Ltd. as auditor is invalid as his partner Mr. B hold shares in the holding company of ABC Ltd. at the time of appointment.
(d) Appointment of Mr. A in ABC Ltd. as auditor is invalid as his partner Mr. B hold shares in the holding company of ABC Ltd. in excess of ₹ 1 Lac.
Answer:
(c) Appointment of Mr. A in ABC Ltd. as auditor is invalid as his partner Mr. B hold shares in the holding company of ABC Ltd. at the time of appointment.

Question 49.
Mrs. A, wife of Mr. A had given a financial guarantee for the principal amount of a debt owed by Mr. X to ABC Ltd. for ₹ 6 lakhs. Mr. X has repaid ₹ 5 lakhs to ABC Ltd. 2 days before the date of appointment of Mr. A as an auditor of the company.
(a) Appointment of Mr. A in ABC Ltd. is not valid as his wife has given guarantee to ABC Ltd. for an amount in excess of ₹ 1 Lac.
(b) Appointment of Mr. A in ABC Ltd. is not valid as his wife has given guarantee to ABC Ltd. for an amount in excess of ₹ 5 Lac.
(c) Appointment of Mr. A in ABC Ltd. is valid as the outstanding amount of guarantee given by his wife at the time of appointment does not exceed ₹ 1 Lac.
(d) Appointment of Mr. A in ABC Ltd. is valid as guarantee given by the relative of the auditor is of no relevance.
Answer:
(c) Appointment of Mr. A in ABC Ltd. is valid as the outstanding amount of guarantee given by his wife at the time of appointment does not exceed ₹ 1 Lac.

Question 50.
As per Sec. 141 (3) (g) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty (20) Companies, other than one-person company, dormant companies, small companies and private companies having paid up capital
(a) ₹ 100 Crores, which has not committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar.
(b) less than ₹ 100 Crores, which has not committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar.
(c) less than ₹ 100 Crores, which has not committed default in filing its financial statements under section 92 or annual return under section 137 of the Companies Act with the Registrar.
(d) ₹ 100 Crores, which has not committed default in filing its financial statements under section 92 or annual return under section 13 7 of the Companies Act with the Registrar.
Answer:
(b) less than ₹ 100 Crores, which has not committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar.

Question 51.
Which of the following is true?
(a) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue be the auditor of the company.
(b) If the auditor appointed at the AGM refuses to accept the same, the Company can appoint another person by holding General Meeting.
(c) If appointment of a person as an auditor is void-ab-initio, it should be treated as a casual vacancy.
(d) An auditor can be appointed as first auditor of a newly formed company simply because his name has been stated in the Articles of Association.
Answer:
(a) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue be the auditor of the company

Question 52.
As per proviso to Sec. 140(5) of Companies Act, 2013, if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within ______ of receipt of such application, make an order that he shall not function as an auditor and the ______ may appoint another auditor in his place.
(a) 15 days, Tribunal
(b) 15 days, Central Government
(c) 30 days, Tribunal
(d) 30 days, Central Government
Answer:
(b) 15 days, Central Government

Question 53.
As per proviso to Sec. 140(5) of Companies Act, 2013, an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of ______ for a period
of from the date of passing of the order.
(a) any company, 5 years
(b) same company, 5 years
(c) any company, 10 years
(d) same company, 10 years
Answer:
(a) any company, 5 years

Question 54.
Sec. 143(3)(i) of Companies Act, 2013 requires the auditor to report, whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. This reporting is not required in case of private companies:
(a) which is a one person company or a small company
(b) which has turnover less than ₹ 50 crores as perlatest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.
(c) which has turnover less than ₹ 25 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr.
(d) which has turnover less than ₹ 100 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr.
Answer:
(a) which is a one person company or a small company

Question 55.
Sec. 143(3)(i) of Companies Act, 2013 requires the auditor to report, whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. This reporting is not required in case of private companies:
(a) which has turnover less than ₹ 50 crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.
(.b) which has turnover less than ₹ 25 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr.
(c) which has turnover less than ₹ 100 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr,
(d) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.
Answer:
(d) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.

Question 56.
As per Sec. 143(6) of Companies Act, 2013, the Comptroller and Auditor General of India shall within ______ days from the date of receipt of the audit report have a right to, conduct a ______ of the ______ of the company by such person or persons as he may authorise in this behalf.
(a) 60 days, Supplementary Audit, books of account
(b) 60 days, Supplementary Audit, financial statements
(c) 60 days, Test Audit, books of accounts
(d) 90 days, Test Audit, financial statements
Answer:
(b) 60 days, Supplementary Audit, financial statements

Question 57.
As per Sec. 143(8) of Companies Act, 2013, where the branch office of a company is situated in a country outside India, the accounts of the branch office shall be audited
(a) only by the company’s auditor
(b) only by a person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country
(c) either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country
(d) either by the company’s auditor or by a cost accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country
Answer:
(c) either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country

Question 58.
As per Sec. 143(12) of Companies Act, 2013, 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. The amount prescribed for purpose is
(a) Individually ₹ 1 Cr. or above
(b) Individually above ₹ 1 Cr.
(c) ₹ 1 Cr. or above in aggregate
(d) above ₹ 1 Cr. in aggregate
Answer:
(a) Individually ₹ 1 Cr. or above

Question 59.
Reporting of fraud to Central Government required under Section 143(12) of Companies Act, 2013 read with Rule 13 ofCompanies (Audit & Audi-tor’s) Rules, 2014 shall be in the form of a statement as specified in and sent to
(a) Form ADT-3; Secretary, Institute of Chartered Accountants of India
(b) FormADT-4; Secretary, Ministry of Corporate Affairs
(c) Form ADT-4; Secretary, Ministry of Law and Justice
(d) Form ADT-3; Secretary, Indian Institute of Corporate Affairs
Answer:
(b) FormADT-4; Secretary, Ministry of Corporate Affairs

Question 60.
As per Sec. 143(15) of Companies Act, 2013, if any auditor, cost accountant or company secretary in practice do not comply with the provisions of Sec. 143 (12), he shall be punishable with fine which shall not be less than ______ but which may extend to ______
(a) ₹ 1 lac; ₹ 25 Lacs
(b) ₹ 5 lac; ₹ 25 Lacs
(c) ₹ 1 lac; ₹ 5 Lacs
(d) ₹ 1 lac; ₹ 10 Lacs
Answer:
(a) ₹ 1 lac; ₹ 25 Lacs

Question 61.
As per Section 144 of the Companies Act, 2013, auditor appointed under this Act cannot render certain services to the company. Which of the following service is not covered in the services prescribed u/s 144?
(a) Investment Banking Services
(b) Investment Advisory Services
(c) Design and implementation of any Operational information system
(d) rendering of outsourced financial services
Answer:
(c) Design and implementation of any Operational information system

Question 62.
As per Section 144 of the Companies Act, 2013, auditor appointed under this Act cannot render certain services to the company, whether such services are rendered directly or indirectly. For the purposes of this section, the term “directly or indirectly” shall include rendering of services by the auditor, in case of auditor being an individual, either himself or through
(a) his partner or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual
(b) his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual
(c) his relative or any other person connected or associated with such individual or through any other entity whatsoever, in which such individual may or may not have significant influence or control, or whose name or trade mark or brand is used by such individual
(d) his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand may or may not use by such individual
Answer:
(b) his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual

Question 63.
AsperSection 144 of the Companies Act, 2013, auditor appointed under this Act cannot render certain services to the company or its
(a) holding company or subsidiary company
(b) holding company, subsidiary company or associate company
(c) holding company, subsidiary company, associate company or another subsidiary of holding company
(d) holding company, subsidiary company, associate company, another subsidiary of holding company or subsidiary of associate company
Answer:
(a) holding company or subsidiary company

Question 64.
As per Sec. 147 of the Companies Act, 2013, if any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than ______ but which may extend to ______
(a) ₹ 25,000; ₹ 5 Lacs
(b) ₹ 10,000; ₹ 1 Lac
(c) ₹ 50,000; ₹ 25 Lacs
(d) ₹25,000; ₹ 1 Lac
Answer:
(a) ₹ 25,000; ₹ 5 Lacs

Question 65.
As per Sec. 147 of the Companies Act, 2013, if any of the provisions of sections 139 to 146 (both inclusive) is contravened, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to ______ or with fine which shall not be less than ______ but which may extend to ______ or with both
(a) 1 year; ₹ 25,000; ₹ 5 Lacs
(b) 1 year; ₹ 10,000; ₹ 1 Lac
(c) 3 years; ₹ 25,000; ₹ 5 Lacs
(d) 3 years; ₹ 10,000; ₹ 1 Lac
Answer:
(b) 1 year; ₹ 10,000; ₹ 1 Lac

Question 66.
As per Sec. 147 of the Companies Act, 2013, if an auditor of a company contravenes any of the provisions of Sec. 139, Sec. 143, Sec. 144 or Sec. 145, the auditor shall be punishable with fine which shall not be less than but which may extend to
(a) ₹ 25,000; ₹ 5 Lacs or five times the remuneration of auditor whichever is less
(b) ₹ 25,000; ₹ 5 Lacs or five times the remuneration of auditor whichever is more
(c) ₹ 25,000; ₹ 5 Lacs or four times the remuneration of auditor whichever is less
(d) ₹ 25,000; ₹ 5 Lacs or four times the remuneration of auditor whichever is more
Answer:
(c) ₹ 25,000; ₹ 5 Lacs or four times the remuneration of auditor whichever is less

Question 67.
For the purposes of Section 148(1) of the Companies Act, 2013, the specified class of companies, including foreign companies, engaged in the production of the goods or providing services, having an overall turnover from all its products and services of ______ , shall include cost records for such products or services in their books of account
(a) ₹ 35 Cr. or more during the immediately preceding financial year
(b) ₹ 35 Cr. or more during the financial year
(c) More than ₹ 3 5 Cr. during the immediately preceding financial year
(d) More than ₹ 35 Cr. during the financial year
Answer:
(a) ₹ 35 Cr. or more during the immediately preceding financial year

Question 68.
Sec. 143 (1) of Companies Act, 2013 requires the auditor to inquire into certain matters of propriety matters. Which ofthe following matter is not covered in Sec. 143(1)?
(a) Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members.
(b) Whether loans and advances made by the company have been shown as deposits.
(c) Whether the company has granted any loans, secured or unsecured to companies, firms, LLPs or other parties covered in the register maintained under section 189 of the Act. If so, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular.
(d) Where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment.
Answer:
(c) Whether the company has granted any loans, secured or unsecured to companies, firms, LLPs or other parties covered in the register maintained under section 189 of the Act. If so, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular.

Question 69.
As per Sec. 143(3) of Companies Act, 2013, the auditor report shall also state certain matters. Which of the following is not covered in reporting u/s 143(3)?
(a) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164.
(b) whether maintenance of cost records has been specified by the Central Government u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.
(c) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns.
(d) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls.
Answer:
(b) whether maintenance of cost records has been specified by the Central Government u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.

Question 70.
As per Rule 11 of Companies (Audit & Auditor’s) Rules, 2014, the auditor’s report shall also include auditor’s views and comments on certain matters. Which of the following is covered in Rule 11?
(a) Whether moneys raised by way of initial public offer or further public offer (including debt instruments) and term loans were applied for the purposes for which those are raised
(b) Whether any fraud by the company or any fraud on the Company by its officers/employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated
(c) Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with
(d) Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company
Answer:
(d) Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company

Question 71.
ABC & Co. is a firm of Chartered Accountants has three partners, A, B & C. The firm is holding audit of 55 companies which include 10 small companies, 5 government public companies, 5 listed companies, 5 OPC, 15 public companies and 15 private companies having paid up capital more than ₹ 100 crores. Firm has been offered the appointment as auditors of 30 companies. Of the 30 companies, 5 are private companies having paid up capital of each company is below ₹ 100 crores and the remaining 25 companies are public companies.
(a) Firm can accept audit of all 30 companies.
(b) Firm can accept audit of 25 companies including 5 private companies.
(c) Firm can accept audit of 20 companies including 5 private companies.
(d) Firm can accept audit of 15 companies including 5 private companies.
Answer:
(b) Firm can accept audit of 25 companies including 5 private companies.

Question 72.
As per Sec. 143(3)(i) of Companies Act, 2013, auditor’s report shall also state “the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company”. The word “observations or comments” as used in the clause (i) refers to:
(a) EOM Paragraphs and the situations leading to modification in the auditor’s report.
(b) Key Audit matters communicated in the audit report.
(c) Matters covered under Sec. 143(1) relating to propriety aspects.
(d) Material uncertainty as to going concern which requires a separate section in the audit report titled “Material uncertainty relating to Going concern”.
Answer:
(a) EOM Paragraphs and the situations leading to modification in the auditor’s report.

Question 73.
If the auditor has contravenes provisions of Sec. 139,143,144 or 145, knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, the auditor shall be punishable with imprisonment which may extend to and with fine ranging from
(a) one years; ₹ 25,000 – ₹ 5,00,000
(b) five years; ₹ 1,00,000 to lower of ₹ 25,00,000 or 8 times of remuneration
(c) one years; ₹ 50,000 to lower of ₹ 25,00,000 or 8 times of remuneration
(d) five years; ₹ 50,000 – ₹ 25,00,000
Answer:
(a) five years; ₹ 1,00,000 to lower of ₹ 25,00,000 or 8 times of remuneration

Question 74.
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. If the auditor does not comply with requirement of Sec. 140(2), he or it shall be punishable with fine of
(a) ₹ 50,000 or the remuneration ofthe auditor, whichever is less, but it may extend to ₹ 5 Lacs
(b) ₹ 50,000 or the remuneration ofthe auditor, whichever is higher, but it may extend to ₹ 5 Lacs
(c) ₹ 50,000 or two times of the remuneration of the auditor, whichever is less, but it may extend to ₹ 5 Lacs
(d) ₹ 50,000 or two times of the remuneration of the auditor, whichever is higher, but it may extend to ₹ 5 Lacs
Answer:
(a) ₹ 50,000 or the remuneration ofthe auditor, whichever is less, but it may extend to ₹ 5 Lacs

Question 75.
As per Sec. 143(12) of Companies Act, 2013, 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 matterto the Central Government within such time and in such manner as may be prescribed. The amount so prescribed is
(a) ₹ 1 Cr. or above, individually as per Rule 13 of Companies (Audit and Auditor’s) Rules, 2014
(b) ₹ 1 Cr. or above, in aggregate as per Rule 13 of Companies (Audit and Auditor’s) Rules, 2014
(c) ₹ 1 Cr. or above, individually as per Rule 13 of Companies (Accounts) Rules, 2014
(d) ₹ 1 Cr. or above, in aggregate as per Rule 13 of Companies (Accounts) Rules, 2014
Answer:
(a) ₹ 1 Cr. or above, individually as per Rule 13 of Companies (Audit and Auditor’s) Rules, 2014

Question 76.
As per Sec. 146 of Companies Act, 2013, ______ mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company
(a) the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company
(b) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith
(c) any operating effectiveness of internal financial controls with reference to financial statements
(d) director’s disqualifications u/s 164(2) ofCompanies Act, 2013
Answer:
(a) the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company

Question 77.
The turnover criteria for applicability of Companies (Cost Records and Audit) Rules, 2014 is
(a) at the end of immediately preceding financial year
(b) at the end of the financial year
(c) average of 3 preceding financial year
(d) when the company achieves the turnover during the current financial year
Answer:
(a) at the end of immediately preceding financial year

Question 78.
A cost auditor submits his report to
(a) Government
(b) Shareholders
(c) Statutory Auditor
(d) Board of Directors
Answer:
(d) Board of Directors

Question 79.
CA Mr. X was indebted to ABC Ltd. for a sum of ₹ 5,.10,000 as on 01.04.2018. However, Mr. X having come to knowr that he might be appointed as auditor of the company, he squared up the amount on 10.7.2018. Later on, he was appointed as an auditor of the company for the year ended 31.3.2019 at the Annual General Meeting held on 16.07.2018. Subsequently, one of the shareholders complains that the appointment of Mr. X as an auditor is invalid because he incurred disqualification under section 141 of the Companies Act, 2013
(a) Appointment of Mr. X is not valid as he is disqualified u/s 141(3) as at the beginning of the year for which he was appointed as auditor
(b) Appointment ofMr.X is not valid as he is disqualified u/s 143(3) of Companies Act, 2013
(c) Appointment of Mr. X is valid as he settles his in-debtedness before the appointment
(d) Appointment of Mr. X will be treated as valid only when special resolution was passed in this regard
Answer:
(c) Appointment of Mr. X is valid as he settles his in-debtedness before the appointment

Question 80.
Clause (i) of Sec. 143(3) shall not apply to a private company:
(a) which has turnover less than ₹ 50 crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr
(b) which has turnover less than ₹ 25 crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr
(c) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial 1 institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr
(d) which has turnover less than ₹ 25 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr
Answer:
(c) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial 1 institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr

Question 81.
In which of the following companies, auditor is not required to report on matters specified under CARO, 2020:
(a) private limited company, which is a subsidiary company of a public company having a paid-up capital and reserves and surplus not more than rupees one crore as on the balance sheet date
(b) private limited company, which is a holding company of a public company, which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year
(c) Both (a) and (b)
(d) None of the above
Answer:
(d) None of the above

Question 82.
In which of the following companies, auditor is required to report on matters specified under CARO, 2020:
(a) Foreign company
(b) Small Company
(c) One Person company
(d) None of the above
Answer:
(a) Foreign company

Question 83.
A private limited company, in order to be covered under CARO, 2020, must satisfy which of the following conditions:
(a) total borrowings exceeding rupees ten crores from any bank or financial institution at any point of time during the financial year.
(b) total borrowings exceeding rupees one crore from any bank or financial institution as on the balance sheet date.
(c) total borrowings exceeding rupees ten crores from any bank or financial institution as on balance sheet date.
(d) total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year.
Answer:
(d) total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year.

Question 84.
Astha Pvt. Ltd. which is a subsidiary company of Kiran Pvt. Ltd., has fully paid capital of ₹ 40 lakh. During the year, the company had borrowed ₹ 55 lakh each from a bank and a financial institution independently. It has the turnover of ₹ 175 lakhs.
(a) CARO is not applicable as Astha Pvt. Ltd. is a Small Company.
(b) CARO is applicable as total borrowings exceeds ₹ 1 Cr.
(c) CARO is not applicable as Astha Pvt. Ltd. is a sub-sidiary company of another Pvt. Ltd
(d) CARO is applicable as turnover exceeds ₹ 1 Cr.
Answer:
(b) CARO is applicable as total borrowings exceeds ₹ 1 Cr.

Question 85.
CARO, 2020 is applicable over a private limited company, having paid up capital and reserves and surplus is ₹ 1 crore or more as on the balance sheet date. For this purpose,
(a) Paid-up share capital would include equity share capital only
(b) Amount of calls unpaid should be added to the figure of paid-up capital
(c) Amount originally paid-up on forfeited shares should be added to the figure of paid-up capital
(d) Share application money received should be considered as part of the paid-up capital
Answer:
(c) Amount originally paid-up on forfeited shares should be added to the figure of paid-up capital

Question 86.
Para 3 (vi) of CARO, 2020 requires the auditor to report whether maintenance of cost records has been specified by the C.G. u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so madeand maintained. For thispurpose, auditor should:
(a) a detailed examination of such records
(b) conduct a general review of the cost records
(c) rely only on written representation received from the management stating that cost records are being made and maintained
(d) any of the above
Answer:
(b) conduct a general review of the cost records

Question 87.
Para 3(xi) of CARO, 2020 requires the auditor to report on various fraud noticed or reported during the year. Which of the following frauds are covered in Para 3(xi)
(a) fraud on the company by its officers/employees (h) fraud on the company by its vendors/suppliers
(c) fraud on the company by its associate companies
(d) All of the above
Answer:
(d) All of the above

Question 88.
When reporting under CARO, 2020, auditor is required to state in case of Nidhi Companies, whether the Nidhi company has complied with:
(a) Net Owned funds to total debts in the ratio of 1:20
(b) Net Owned funds to deposits in the ratio of 1:20
(c) Net Owned funds to total debts in the ratio of 1:10
(d) Net Owned funds to deposits in the ratio of 1:10
Answer:
(b) Net Owned funds to deposits in the ratio of 1:20

Question 89.
Auditor’s report under CARO, 2020 in terms of Para 3(xvi) shall incorporate:
(a) Registration number of company under Companies Act, 2013
(b) Registration number of company allotted by RBI
(c) Both of the above
(d) None of the above
Answer:
(d) None of the above

Question 90.
As per Clause (0(a) of Paragraph 3 of the CARO, 2020, the auditor is required to report on:
(a) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof.
(b) whether physical verification of inventory has been conducted at reasonable intervals by the manage-ment; and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account.
(c) whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.
(d) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of property, plant and equipment.
Answer:
(d) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of property, plant and equipment.

Question 91.
Which of the following dues are required to be reported under Clause (vii) of Paragraph 3 of CARO, 2016:
(a) amount payable to creditors for purchase of goods
(b) annual performance bonus payable to employees
(c) state government taxes
(d) none of the above
Answer:
(c) state government taxes

Question 92.
If a company is not regular in deposit of statutory dues to the appropriate authorities, auditor need to report on arrears of outstanding dues as at the last day of the financial year concerned for a period of:
(a) more than 90 days from the date they became payable
(b) more than 6 months from the date they became payable
(c) more than 90 days from the reporting date
(d) more than 6 months from the reporting date
Answer:
(b) more than 6 months from the date they became payable

Question 93.
A company has not deposited the employees provident fund with the authorities due to existence of some dispute. Dispute is pending in Court of Law. Non-payment of employees provident fund due to dispute is required to be reported by the auditor:
(a) under Clause (vii)(a) of Para 3 of CARO, 2020
(b) under Clause (vii)(b) of Para 3 of CARO, 2020
(c) under Clause (viii) of Para 3 of CARO, 2020
(d) None of the above
Answer:
(b) under Clause (vii)(b) of Para 3 of CARO, 2020

Question 94.
Acompany has defaulted in repayment of loansor borrowings to a NBFC. Auditor is required to report the period and amount of the default:
(a) under Clause (vii)(a) of Para 3 of CARO, 2020
(b) under Clause (vii)(b) of Para 3 of CARO, 2020
(c) under Clause (ix) of Para 3 of CARO, 2020
(d) no reporting required, as default of dues of NBFC are not covered in CARO, 2020
Answer:
(c) under Clause (ix) of Para 3 of CARO, 2020

Question 95.
Under Clause (x) of Paragraph 3 of CARO, 2020, auditor is required to report the application of money raised through for the purposes for which those are raised
(a) Initial Public Offer or Further Public Offer (excluding debt instruments) only
(b) Initial Public Offer or Further Public Offer (including debt instruments) and term loans
(c) Initial Public Offer or Further Public Offer (excluding debt instruments) and term loans
(d) Initial Public Offer or Further Public Offer (including debt instruments) and working capital loans
Answer:
(b) Initial Public Offer or Further Public Offer (including debt instruments) and term loans

Question 96.
While reporting under Clause (xi) of Para 3 of CARO, 2016, with respect to fraud, auditor is required to report on:
(a) fraud noticed and reported u/s 143(12) of Companies Act, 2013
(b) fraud suspected and reported u/s 143(12) of Companies Act, 2013
(c) fraud committed on the company by the vendors | of the company
(d) Both (a) and (c)
Answer:
(a) fraud noticed and reported u/s 143(12) of Companies Act, 2013

Question 97.
As per Clause (xiii) of Paragraph 3 of the CARO, 2020, the auditor is required to report on:
(a) Whether all transactions with the related parties are in compliance with Sections 177 and 188 of Companies Act, 2013 where applicable
(b) Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review
(c) Whether the company has entered in to any non-cash ( transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with
(d) None of the above
Answer:
(a) Whether all transactions with the related parties are in compliance with Sections 177 and 188 of Companies Act, 2013 where applicable

Question 98.
As per Clause (x) of Paragraph 3 of the CARO, 2020, the auditor is required to report on:
(a) Whether all transactions with the related parties are in compliance with Sections 177 and 188 of g Companies Act, 2013 where applicable.
(b) Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of Sec. 42 of the Companies Act, 2013 have been complied.
(c) Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with.
(d) None of the above.
Answer:
(b) Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of Sec. 42 of the Companies Act, 2013 have been complied.

Question 99.
Which clause of CARO, 2020 requires the auditor to report whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934. If so, whether the registration has been obtained
(a) Under Clause (xi) of paragraph 3 of the CARO, 2020.
(b) Under Clause (xvi) of paragraph 3 of the CARO, 2020.
(c) Under Clause (xv) of paragraph 3 of the CARO, 2020.
(d) Under Clause (xiv) of paragraph 3 of the CARO, 2020.
Answer:
(b) Under Clause (xvi) of paragraph 3 of the CARO, 2020.

Question 100.
While carrying out audit of ABC ltd, auditor observed that a term loan was obtained by the company from a bank for ? 75 lakhs for acquiring R&D equipment, out of which ? 12 lakhs were used to buy a car for use of the concerned director, who was overlooking the R&D activities. Auditor is required to report the matter:
(a) Under Clause(vii)of paragraph 3 of the CARO,2020.
(b) Under Clause (viii) of paragraph 3 of the CARO, 2020.
(c) Under Clause(ix)ofparagraph3 of the CARO,2020.
(d) No reporting required under the requirements of CARO, 2020.
Answer:
(c) Under Clause(ix)ofparagraph3 of the CARO,2020.

Question 101.
While carrying out audit of ABC Ltd, auditor observed that the company has taken a term loan from a nationalized bank in 2016 for ? 200 lakhs repayable in five equal instalments off 40 lakhs from 31st March, 2017 onwards. It had repaid the loans ® due in 2017 & 2018, but defaulted in 2019, 2020 & 2021. Auditor is required to report the matter:
(a) UnderClause(vii)of paragraph 3 of the CARO,2020.
(b) Under Clause (viii) of paragraph 3 of the CARO, 2020.
(c) Under Clause (ix) of paragraph 3 of the CARO, 2020.
(d) Both (b) and (c).
Answer:
(c) Under Clause (ix) of paragraph 3 of the CARO, 2020.

Question 102.
Big and Small Ltd. received a show cause notice from central excise department intending to levy a demand of f 25 lakhs in December, 2020. The company replied to the above notice in January, 2021 contending that it is not liable for the levy. No further action was initiated by the central excise department upto the finalization of the audit for the ! year ended on 31st March, 2 021. Auditor is required to report the matter:
(a) Under Clause (vi) of paragraph 3 ofthe CARO, 2020.
(b) Under Clause(vii)of paragraph3 of the CARO,2020.
(c) Under Clause (viii) of paragraph 3 of the CARO, 2020.
(d) No reporting required under the requirements of CARO, 2020.
Answer:
(b) Under Clause(vii)of paragraph3 of the CARO,2020.

Question 103.
Reporting under CARO, 2020 will be required in case of which companies:
(a) X Pvt. Ltd. which is a subsidiary of ABC Ltd. a listed company
(b) X Pvt. Ltd. which is a One-person company, having paid up capital off 105 Lacs
(c) X Pvt. Ltd. which is a Small Company, having out-standing borrowings from banks in excess of ₹ 1 Cr
(d) All of the above
Answer:
(a) X Pvt. Ltd. which is a subsidiary of ABC Ltd. a listed company

Question 104.
In which of the following companies, auditor is required to report on matters specified under CARO, 2020:
(a) private limited company, which is a holding company of a public company having a paid-up capital and reserves and surplus not more than rupees one crore as on the balance sheet date
(b) private limited company, which is a subsidiary company of a public company, which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year
(c) Both (a) and (b)
(d) None of the above
Answer:
(c) Both (a) and (b)

Question 105.
Which clause of CARO, 2020 requires the auditor to report whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of Sec. 197 read with schedule V to the Companies Act?
(a) Clause (xi) of Para 3
(b) Clause (xii) of Para 3
(c) Clause (xv) of Para 3
(d) NO Reporting required under CARO
Answer:
(d) NO Reporting required under CARO

Question 106.
UnderClause (x) of Paragraph 3 of CARO, 2020, auditor is required to report the application of money raised through Initial Public Offer or Further Public Offer (including debt instruments) and term loans for the purposes for which those are raised. Term loans for this purpose includes:
(a) Term loans obtained from banks and financial institutions
(b) Term loans obtained from entities/person other than banks and financial institutions
(c) Term loans obtained from Scheduled banks only
(d) Term loans obtained from banks and financial institutions as well as from entities/person other than banks and financial institutions
Answer:
(d) Term loans obtained from banks and financial institutions as well as from entities/person other than banks and financial institutions

Question 107.
Para 3 (xi) of CARO, 2020, required the auditor to report the nature and amount of fraud in relation to:
(a) any fraud by the company and any fraud on the Company by its officers/employees suspected and reported during the year
(b) any fraud by the company and any fraud on the Company by its officers/employees noticed or reported during the year
(c) any fraud on the company and any fraud by the Company suspected and reported during the year
(d) any fraud on the company and any fraud by the Company noticed or reported during the year
Answer:
(d) any fraud on the company and any fraud by the Company noticed or reported during the year

Question 108.
While carrying out audit of ABC Ltd, auditor observed that the company had obtained a term loan of? 300 lakhs from a bank for the construction of a factory. Since there was a delay in the construction activities, the said funds were temporarily invested in short term deposits. Auditor is required to report the matter:
(a) Under clause (vii) of paragraph 3 of the CARO, 2020
(b) Under clause (viii) of paragraph 3 of the CARO, 2020
(c) Under clause (ix) of paragraph 3 of the CARO, 2020
(d) No reporting required under the requirements of CARO, 2020
Answer:
(c) Under clause (ix) of paragraph 3 of the CARO, 2020

Question 109.
Company auditor is required to report “Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of 1:20 to meet out the liability and whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability”. This reporting requirement is prescribed by:
(a) Sec. 143(1) of Companies Act, 2013
(b) Para 3 of NBFC Auditor’s Report (Reserve Bank) Directions, 2016
(c) Para 3 (xii) of Companies (Auditor’s Report) Order, 2020
(d) Para 3 (xvii) of Companies (Auditor’s Report) Order, 2020
Answer:
(c) Para 3 (xii) of Companies (Auditor’s Report) Order, 2020

Question 110.
H Ltd, granted unsecured loan of ₹ 1 crore @ 15% p.a. to two of its subsidiaries during the Financial Year 2020-21. Before the year end both the companies repaid the loan. The management of H Ltd. is of the opinion that since no balance is outstanding as on 31st March 2021, these loans are not required to be reported in CARO 2020. Auditor is required to report the matter:
(a) Under clause (iii) of paragraph 3 of the CARO, 2020
(b) Under clause (iv) of paragraph 3 of the CARO, 2020
(c) Under clause (vi) of paragraph 3 of the CARO, 2020
(d) No reporting required under the requirements of CARO, 2020
Answer:
(a) Under clause (iii) of paragraph 3 of the CARO, 2020

Question 111.
Which of the following is not an objective of SA 299?
(a) To lay down broad principles for the joint auditors in conducting the joint audit
(b) To mandate the requirement of joint audit in case of listed entities
(c) To identify the distinct areas of work and coverage thereof by each joint auditor
(d) To identify individual responsibility and joint responsibility of the joint auditors in relation to audit
Answer:
(b) To mandate the requirement of joint audit in case of listed entities

Question 112.
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct auditing for the financial year 2017-18. For the valuation of gratuity scheme of the company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently, major difference was found in the actuary reports. However, Mr. X agreed to Mr, Y’s actuary report, though, Mr. Z did not. Mr. X contends that Mr. Y’sactuary reportshali be considered in auditreport due to majority of votes. Now, Mr. Z is in dilemma
(a) Contention of Mr. X is correct as SA 299 requires a single report based on majority
(b) Contention of Mr. X may be considered as SA 299 does not provide any provision in relation to such situations
(c) Contention of Mr. X is not acceptable as SA 299 requires separate reports in a situation where opinion of joint auditors differs
(d) None of the above
Answer:
(c) Contention of Mr. X is not acceptable as SA 299 requires separate reports in a situation where opinion of joint auditors differs

Question 113.
Which ofthe following is correct?
(a) All the joint auditors are responsible in respect of the appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed upon among them and their proper execution
(b) Appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed among joint auditors and proper execution of these audit procedures is the individual responsibility of the concerned joint auditor
(c) All the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed upon among them, proper execution of these audit procedures is the individual responsibility of the joint auditor concerned
(d) Appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed among joint auditors is the individual responsibility of the concerned joint auditor whereas, proper execution of these audit procedures is the joint responsibility of all the joint auditors
Answer:
(c) All the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed upon among them, proper execution of these audit procedures is the individual responsibility of the joint auditor concerned

Question 114.
ABC & Co. and DEF & Co. Chartered Accountant firms were appointed as joint auditors of Good Health Care Ltd. for 2017-18. An investigation was conducted under Companies Act, 2013 during March 2019 and observed gross understatement of Revenue. The revenue aspects were looked after by DEF & Co, but there was no documentation for the division of work between the joint auditors
(a) Liability for negligence will arise only on DEF & Co
(b) Liability for negligence will arise only ABC & Co
(c) Both Joint auditors are jointly and severally responsible
(d) No liability arises on joint auditors as company was liable to maintain documentation for the division of the work between the joint auditors
Answer:
(c) Both Joint auditors are jointly and severally responsible

Question 115.
The jointauditorsare required to issuecommon audit report, however, where the joint auditors are in disagreement with regard to the opinion or any matters to be covered by the audit report, they shall express their opinion in a separate audit report. In such cases, separate audit report issued by the joint auditor shall make reference to the audit report issued by other joint auditors under the heading
(a) “Other Matter Paragraph” as per SA 706
(b) “Key Audit Matters” as per SA 701
(c) “Other Information” as per SA 720
(d) “Emphasis of Matter Paragraph” as per SA 706
Answer:
(a) “Other Matter Paragraph” as per SA 706

Question 116.
SA 600 deals with:
(a) Situations where an auditor reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more components included in the financial information of the entity.
(b) Situations where two or more auditors are appointed as joint auditors.
(c) The auditor’s relationship with a predecessor auditor.
(d) All of the above.
Answer:
(a) Situations where an auditor reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more components included in the financial information of the entity.

Question 117.
The principal auditor, if decides to use the work of auditor of component in relation to audit of consolidated financial statements, he should comply with requirements of:
(a) SA 600 “Using the work of Another Auditor”
(b) SA 299 “joint Audit of Financial Statements”
(c) SA 720 “The Auditor’s Responsibilities Relating to Other Information”
(d) SRS 4410 “Compilation Engagements”
Answer:
(a) SA 600 “Using the work of Another Auditor”

Question 118.
If auditor of parent company is also the auditor of all of the components, this association requires the auditor:
(a) to apply the procedures of SA 600 while auditing the consolidated financial statements.
(b) to report whether principles and procedures for preparation and presentation of consolidated F.S. as laid down in the relevant AS(s) have been followed.
(c) to incorporate emphasis of matter paragraph in the audit report to state his association with the component.
(d) both (a) and (b) above.
Answer:
(b) to report whether principles and procedures for preparation and presentation of consolidated F.S. as laid down in the relevant AS(s) have been followed.

Question 119.
If auditor of parent company is not the auditor of the components, the auditor of parent company while auditing the consolidated financial statements is required to:
(a) apply the procedures of SA 600 while auditing the consolidated financial statements.
(b) to incorporate Emphasis of Matter Paragraph in the audit report as per requirement of SA 706.
(c) to incorporate Other Matter Paragraph in the audit report as per requirement of SA 706.
(d) both (a) and (c) above.
Answer:
(d) both (a) and (c) above.

Question 120.
When planning to use the work of another auditor, the principal auditor need not to consider the professional competence of the other auditor in the context of specific assignment if the other auditor is:
(a) a member of the Institute of Chartered Accountants of India.
(b) not a member of the Institute of Chartered Accountants of India.
(c) a member of foreign professional accounting body.
(d) a state certified auditor.
Answer:
(a) a member of the Institute of Chartered Accountants of India.

Question 121.
In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, ______ , 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.
(a) the Board
(b) any Director
(c) Managing Director
(d) Whole time director
Answer:
(a) the Board

Question 122.
Under sub-section (3) of section 141 along with Rule 10 ofthe Companies (Auditand Auditors) Rules, 2014 (hereinafter referred as CAAR), the following persons shall not be eligible for appointment as an auditor of a company, namely
(i) a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
(ii) an officer or employee of the company;
(iii) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(iv) a person who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company. It may be noted that the relative may hold security or interest in the company of face value not exceeding ₹ 1,00,000.
Which of the above is incorrect?
(a) All statements are incorrect.
(b) (i)and(ii)
(c) (i) only
(d) (iv) only
Answer:
(c) (i) only

Question 123.
Which ofthe following is notan advantage of Joint Audit?
(a) Sharing of expertise.
(b) General superiority complexes of some auditors.
(c) Lower workload.
(d) Displacement of the auditor of the company taken over in a take over often obviated.
Answer:
(b) General superiority complexes of some auditors.

Question 124.
Which of the following is correct as per section 143(10) of the Companies Act, 2013?
(a) IFAC may prescribe the standards of auditing as recommended by the Institute of Chartered Ac-countants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
(b) the International Auditing Standards Board may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
(c) the MCA may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
(d) the Central Government may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
Answer:
(d) the Central Government may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

Question 125.
Which of the following is not a duty of auditor to report under section 143(1)?
(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests ofthe company or its members;
(d) whether transactions of the company which are represented merely by book entries are prejudicial to the interests ofthe company;
(c) where the company not being an investment com-pany or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
(d) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditors has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
Answer:
(d) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditors has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

Question 126.
Which of the following is correct?
(a) Under section 128 of the Act, books of account of a company must be kept at the registered office.
(b) Under section 128 of the Act, books of account of a company must be kept at the corporate office.
(c) Under section 128 of the Act, books of account of a company must be kept at the Head office of the company.
(d) Under section 128 of the Act, books of account of a company must be kept at the usual place of business.
Answer:
(a) Under section 128 of the Act, books of account of a company must be kept at the registered office.

Question 127.
Section 139(7) provides that in the case of a ® Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and | partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India ______ from the date of registration of the company.
(a) within 60 days
(b) within 30 days
(c) within 90 days
(d) within 45 days
Answer:
(a) within 60 days

Question 128.
As per Section 139(8), any casual vacancy in the ) office of an auditor shall in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India,
(a) be filled by the Audit committee within 60 days.
(b) be filled by the Audit committee within 30 days.
(c) be filled by the Board of Directors within 60 days,
(d) be filled by the Board of Directors within 30 days.
Answer:
(d) be filled by the Board of Directors within 30 days.

Question 129.
As per section 140(2) the auditor who has resigned from the company shall
(a) file within a period of 60 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company and the Registrar
(b) file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company and the Registrar
(c) file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company.
(d) file within a period of 60 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company.
Answer:
(b) file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company and the Registrar

Question 130.
Which of the following is correct?
(a) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.
(b) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general meeting.
(c) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its extra-ordinary general meeting.
(d) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its Board meeting or in such manner as may be determined therein.
Answer:
(a) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.

Question 131.
In case of a fraud involving less than ₹ 1 crore, the auditor 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 Board within such time and in such manner as prescribed.
(d) 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.
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.

Question 132.
Which of the following is incorrect?
(a) According to Section 140(1),theauditorappointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR, 2014.
(b) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.
(c) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.
(d) The company shall hold the general meeting within 30 days of receipt of approval of the Central Government for passing the special resolution.
Answer:
(d) The company shall hold the general meeting within 30 days of receipt of approval of the Central Government for passing the special resolution.

Question 133.
Which of the following is correct?
(a) A firm whereof all the partners practising anywhere are qualified for appointment may be appointed by its firm name to be auditor of a company.
(b) A firm whereof majority of partners practising anywhere are qualified for appointment may be appointed by its firm name to be auditor of a company.
(c) A firm whereof all the partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.
(d) A firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.
Answer:
(d) A firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.

Question 134.
As per Section 139(6), the first auditor of a company, other than a Government company, shall be appointed
(a) by the Board of Directors within 30 days from the date of registration of the company.
(b) by the audit committee within 30 days from the date of registration of the company.
(c) by the Managing Director within 30 days from the date of registration of the company.
(d) by the shareholders within 30 days from the date of registration of the company.
Answer:
(a) by the Board of Directors within 30 days from the date of registration of the company.

Question 135.
Where a company is required to constitute an Audit Committee under section 177,
(a) all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
(b) all appointments, excluding the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
(c) appointment of first auditors shall be made after taking into account the recommendations of such committee.
(d) appointment of subsequent auditors shall be made after taking into account the recommendations of j such committee.
Answer:
(a) all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.

Question 136.
Which of the following is incorrect?
(a) In terms of the general principles of law, any person having the lawful possession of somebody else’s property, on which he has worked, may retain the property for non-payment of his dues on account of the work done on the property
(b) Under section 128 of the Act, books of account of a company must be kept at the registered office. These provisions ordinarily make it impracticable for the auditor to have possession of the books and documents.
(c) The company provides reasonable facility to auditor for inspection of the books of account by directors and others authorised to inspect under the Act.
(d) Working papers not being his own property auditor can exercise lien on working papers.
Answer:
(d) Working papers not being his own property auditor can exercise lien on working papers.

Question 137.
Springfield Hospital located in the rural area of Lonawala region is a government hospital run by the local doctors who are appointed by the government. The hospital was registered on 1st October 2018. Which of the following is correct in respect of the appointment of the first auditor for Springfield Hospital?
(a) The Board of Directors of the hospital have appointed the first auditor on 5th November 2018.
(b) The Comptroller Auditor-General of India appointed the first auditor on 15th December 2018.
(c) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director appointed the first auditor on 15th December 2018.
(d) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director appointed the first auditor on 10th November 2018.
Answer:
(c) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director appointed the first auditor on 15th December 2018.

Question 138.
Eeyore Pvt. Ltd. is incorporated on 1st July, 2017. During the Financial Year ending on 31st March, 2018, the company did not opt for any borrowing at any point of time and have a total revenue of ₹ 60 Lakh. At the year end, it provides the following information regarding its paid-up capital and reserve & surplus

Particulars	Amount (in ₹)
Paid-up Capital
– Consideration received in cash for equity shares (including unpaid calls of ₹ 5,00,000)	40,00,000
– Consideration received in cash for preference shares	25,00,000
– Bonus shares allotted	7,00,000
– Share application money re­ceived pending allotment	10,00,000
Sub-Total	82,00,000
Reserve & Surplus
– Balance in Statement of Profit and Loss	15,00,000
– Capital Reserves	10,00,000
Sub-Total	25,00,000
GRAND TOTAL	1,07,00,000

You are provided with the provisions regarding applicability of Companies (Auditor’s Report) Order, @ 2020, (CARO, 2020) issued under section 143(11) of the Companies Act, 2013 to a private limited company that it specifically exempts a private limited company having a paid up capital and reserves and surplus not more than ₹ 1 crore as on the Balance Sheet date and which does not have total borrowings exceeding ₹ 1 crore from any bank at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 exceeding ₹ 10 crore during the financial year.
Considering the information given above, which of the following shall be considered as a reason regard- ingapplicability or non-applicability ofCARO, 2020?
(a) Reporting under CARO, 2020 shall be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 1.07 crore i.e. more than ₹ 1 crore as on the Balance Sheet date.
(d) Reporting under CARO, 2020 shall be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 1.02 crore i.e. more than ₹ 1 crore as on the Balance Sheet date.
(c) Reporting under CARO, 2020 shall not be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 0.92 crore i.e. not more than ₹ 1 crore as on the Balance Sheet date.
(d) Reporting under CARO, 2020 shall not be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 0.82 crore i.e. not more than ₹ 1 crore as on the Balance Sheet date.
Answer:
(c) Reporting under CARO, 2020 shall not be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 0.92 crore i.e. not more than ₹ 1 crore as on the Balance Sheet date.

Question 139.
CA. Daffy is the auditor of x Bose Ltd. for the previous 2 years. However, due to certain unavoidable circumstances, no Annual General Meeting (AGM) was held for the current Financial Year ending on 31st March, 2018 within every possible time limit and thus, the ratification procedure for her appointment in the AGM could not be performed. Whether she may continue to hold the office of the auditor?
(a) CA. Daffy may continue to hold the office of the auditor for the current Financial Year only and thereafter shall resign herself as the ratification procedure could not be completed.
(b) CA. Daffy shall continue to hold the office of the auditor and ask the Board to re-appoint her in a private meeting.
(c) CA. Daffy shall continue to hold the office of the auditor as no such ratification provisions for ap-pointment by members at every AGM exist.
(d) CA. Daffy shall not continue to hold office of the auditor as the ratification procedure could not be completed as per proviso to section 139(1) of the Companies Act, 2013.
Answer:
(c) CA. Daffy shall continue to hold the office of the auditor as no such ratification provisions for ap-pointment by members at every AGM exist.

Question 140.
With respect to the forms specified by Companies (Cost Records & Audit) Rule 2014, which of the following is incorrect combination:
(a) Form CRA 1 – Maintenance of cost records by the Company.
(b) Form CRA 2 – Intimation of appointment of another cost auditor to Central Government.
(c) Form CRA 3 – Submission of Cost Audit Report to the Board of Directors of the company.
(d) Form CRA 4 – Submission of Cost Audit Report by the company to the Registrar.
Answer:
(d) Form CRA 4 – Submission of Cost Audit Report by the company to the Registrar.

Question 141.
Statement I: A firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.
Statement II: Where a firm including a limited liability partnership is appointed as an auditor of a company, all the partners shall be authorised to act and sign on behalf of the firm.
(a) Only Statement I is correct (,b) Only Statement II is correct
(c) Both statements are correct
(d) Both Statements are incorrect
Answer:
(a) Only Statement I is correct (,b) Only Statement II is correct

CA Inter Advanced Accounts Paper Nov 2020 – Advanced Accounts CA Inter Study Material is designed strictly as per the latest syllabus and exam pattern.

CA Inter Advanced Accounting Question Paper Nov 2020

Question 1.
(a) Rajendra undertook a contract for ₹ 20,00,000 on an arrangement that 80% of the value of work done as certified by the architech of the contractee, should be paid immediately and that the remaining 20% be retained until the contract was completed.

In year 1, the amounts expended were ₹ 8,60,000, the work was certified for ₹ 8,00,000 and 80% of this was paid as agreed. It was estimated that future expenditure to complete the contract would be ₹ 10,00,000.

In year 2, the amounts expended were ₹ 4,75,000. Three-fourths of the Contract was certified as done by December 31 st and 80% of this was received accordingly. It was estimated that future expenditure to complete the Contract would be ₹ 4,00,000.

In year 3, the amounts expended were ₹ 3,10,000 and on June 30th, the whole contract was completed.
Show how Contract revenue would be recognized in the P&L A/c of Mr. Rajendra each year.
Answer:
Computation of Expected Profit/Loss:

Particulars	Year 1	Year 2	Year 3
Contract Revenue (A)	20,00,000	20,00,000	20,00,000
Contract Cost:
Incurred	8,60,000	13,35,000(8,60,000 + 4,75,000)	16,45,000 (13,35,000 + 3,10,000)
Estimated further cost	10,00,000	4,00,000	Nil
Total Cost (B)	18,60,000	17,35,000	16,65,000
Contract Profit (A – B)	1,40,000	2,65,000	3,35,000

Particulars	Year 1	Year 2	Year 3
Degree of completion Cost incurred as a % of total cost	46.24%	76.95%	100%
Contract Revenue to be re-cognized for the given year	9,24,800 (20 lacs × 46.24%)	6,14,200 (20 lacs × 76.95%	4,61,000 (20 lacs – 15,39,000)

(b) Swift Limited acquired patent rights to manufactured Solar Roof Top Panels at a cost of ₹ 600 lacs. The Product life cycle has been estimated to be 5 years and the amortization was decided in the ratio of future cash flows which are estimated as under:

Year	1	2	3	4	5
Cash Flows (₹ in lacs)	300	300	300	150	150

After 3rd year, it was estimated that the patents would have an estimated balance future life of 3 year and Swift Ltd. expected the estimated cash flow after 5th year to be ₹ 75 Lacs. Determine the amortization cost of the patent for each of the above years as per Accounting Standard 26.
Answer:
Same as May 2018 Examination question (Figures X W) – Page 9.111 [Que. 15]

(c) The accountant of Parag Limited has furnished you with the following data related to its Business Divisions :

You are requested to indentify the reportable segment in accordance with the criteria laid down in AS 17.
Answer:
Quantitative thresholds Test:

Segments	A	B	C	D
% segment revenue to total revenue % segment profit to total profits (See Working Note below)	10%	30%	20%	40%
% segment assets to total assets	26%	34%	32%	8%

Based on:
(A) Revenue Test – All segments are reportable.
(B) Asset Test – A, B and C are reportable.

Working Note – Profit/Loss Test:

In compliance with AS 17, the segment profit/loss of respective segment will be compared with the greater of the following:

1. All segments in profit, Le., A and C – Total profit ₹ 125 lacs.
2. All segments in loss, Le., B and D – Total loss ₹ 80 lacs.
   Greater of the above – ₹ 125 lacs.

Based on the above, reportable segments will be determined as follows:

Segment	Profit/ (Loss)	Absolute Profit/Loss as a % of 125	Reportable Segment
A	45	36%	Yes
B	(70)	56%	Yes
C	80	64%	Yes
D	(10)	8%	No
Total	45

Final Conclusion:
All segments are reportable.

(d) From the following details of Aditya Limited for accounting year ended on 31st March, 2020 :

Particulars	₹
Accounting profit	15,00,000
Book profit as per MAT	7,50,000
Profit as per Income tax Act	2,50,000
Tax Rate	20%
MAT Rate	7.5%

Calculated has deferred tax asset/liability as per AS 22 and amount of tax to be debited to the profit and loss account for the year.

Question 2.
(a) H Limited acquired 64000 Equity Shares of ₹ 10 each in S Ltd. as on 1 st October, 2019. The Balance Sheets of the two companies as on 31 st March, 2020 were as under :

Additional Information

(1) The Profit & Loss Account of S Ltd. showed a balance of ₹ 1,20,000 on 1st April, 2019. S Ltd. paid a dividend of 10% out of the same on 1st November, 2019 for the year 2018-19. The dividend was correctly accounted for by H Ltd.

(2) The Plant & Machinery of S Ltd. which stood at ₹ 6,00,000 on 1st April, 2019 was considered worth ₹ 5,20,000 on the date of acquisition by H Ltd. S Ltd. charges depreciation @ 10% per annum on Plant & Machinery.
Prepare consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2020 as per Schedule III of the Companies Act, 2013.
Answer:

Step 1: Date of Acquisition:

1st October, 2019

Step 2: % of Holding:

Step 3: Analysis of Profit (AOP):

Particulars	Pre-acquisition profits Pre 1st October, 2019	Post-Acquisition profits 1st October, 2019 to 31st March, 2020
General Reserve	4,20,000 Balance on 1st April, 2019
Surplus in P&L	40,000 Balance on 1st April, 2019 Still available (1,20,000 – 10% of 8 lacs)
Increase in Surplus in P&L Le. Profit for the year = 1,44,000 (3,28,000-40,000) In time ratio – 6 months : 6 months	1,44,000	1,44,000
Preliminary Expenses	(20,000) Balance on 1st April, 2019
Revaluation of P&M – Loss (See Working note below) [5,20,000 – 5,70,000]	(50,000)
Excess Depreciation [5,20,000 × 10% × 6/12 vs 6,00,000 × 1096 × 6/12]		4,000
Total	5,34,000	1,48,000
Holding company’s share (80%)	4,27,200	1,18,400
Minority’s share (20%)	1,06,800	29,600

Working Note:

Let us calculate the Book Value on date of acquisition ie. 1st October, 2019: For this purpose, we need depreciation rate;
Book Value on 1st April, 2019 = 6,00,000.
Depreciation rate is 10%.
Thus, Book Value on 1 st October, 2019 = 6,00,000 -10% of 6,00,000 for 6 months = 5,70,000.

Step 4: Minority Interest:

Particulars	Amount
Paid up share capital (8,00,000 X 20%)	1,60,000
Pre-acquisition profits (Step 3)	1,06,800
Post-acquisition profits (Step 3)	29,600
Total	2,96,400

Step 5: Cost of Control:

Particulars	Amount	Amount
Cost of shares		12,27,200
Paid up share capital (8,00,000 × 80%)	6,40,000
Pre-acquisition profits (Step 3)	4.27.200	10,67,200
Goodwill		1,60,000

Step 6: Special Issues:

1. Revaluation of P&M already taken care in AOR

Consolidated Balance Sheet Of H Ltd. And Its Subsidiary S Ltd.
As at 31st March, 2020

Notes to Accounts

(b) PGL Finance Ltd. is a non-banking financial company. The following information is provided by the company regarding its outstanding amounts, ₹ 600 Lakhs, of which instalments are overdue on 300 accounts for last two months (amount overdue ₹ 150 Lakhs), on 48 accounts for three months (amount overdue ₹ 64 Lakhs), on 20 accounts for more than 30 months (amount overdue ₹ 120 Lakhs) and in 4 accounts for more than three years (amount overdue ₹ 60 Lakhs – already identified as sub-standard asset) and one account of ₹ 40 Lakhs which has been indentified as non-recoverablc by the management. Out of 20 accounts overdue for more than 30 months, 16 accounts are already indentified as sub-standard (amount ₹ 28 Lakhs) for more than fourteen months and others are identified as sub-standard asset for a period of less than fourteen months.
Classify the assets of the company in line with Non-Banking Financial Company – Systematically Important Non-Deposit Taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

Question 3.
(a) High Ltd. and Low Ltd. were amalgamated on and from 1st April, 2020. A new company little Ltd. was formed to take over the business of the existing Companies. The Balance sheets of High Ltd. and Low Ltd. as on 31st March, 2020 are as under :

Other information :

1. 13% Debenture holders of High Ltd. & Low Ltd. are discharged by Little Ltd. by issuing such number of its 15% Debentures of ₹ 100 each so as to maintain the same amount of interest.
2. Preference shareholders of the two companies are issued equivalent number of 15% Preference share of Little Ltd. at a price of ₹ 125 per share (Face Value ₹ 100)
3. Little Ltd. will issue 4 Equity shares for each Equity share of High Ltd. & 3 equity shares for each Equity Share of Low Ltd. The share are to be issued ₹ 35 each having a face value of ₹ 10 per share.
4. Investment Allowance Reserve is to be maintained for two more years. Prepare the Balance Sheet of Little Ltd. as on 1st April, 2020 after the amalgamation has been carried out in basis of in the nature of purchase.

(b) In a winding up of a company creditors remain unpaid. The following persons has transferred their holdings before winding up.

The shares were of Rs. 100 each, Rs. 80 being called up and paid up on the date of transfers.

1. A member G, who holds 200 shares died on 28th Feb., 2019 when the amount due to creditors was Rs. 16000. His shares were transmitted to his Son X.
2. R was the transferee of shares held by J.R paid Rs. 20 per shares as calls in advance immediately on becoming a member.
3. The liquidation of the company commenced on 1st February, 2020. When the liquidator made a call on the present and past contributories to pay the amount.

You are required to quantify the maximum liability of the transferors of shares mentioned in the above the table.
Answer:
Who is not part of List B contributories:
D will not be liable since he transferred his shares prior to one year preceding the date of winding up.
R since he paid calls in advance on becoming a member.
Computation of Liability of List B contributories:

Question 4.
(a) Mohan and Sohan were carrying business in partnership, sharing profit and losses equally. The Balance Sheet of the firm as on 31st March, 2019 stood as under:

The business was carried on till 30th September, 2019. The partners withdrew the amounts equal to half the amount of profit made during the period of six months ended on 30th September, 2019 equally. The profit was calculated after charging depreciation @ 5% per annum on Leasehold premises and 10% per annum on Plant & Machinery.

In the half year, the amounts of Bank Overdraft and Trade Payables stood reduced by Rs. 18,000 and Rs. 12,000 respectively. On 30th September, 2019, the inventories were valued at Rs. 90,000 and Trade Receivables at Rs. 72,000. The Joint Life Policy had been surrendered for Rs. 10,800 before 30th September, 2019 and all other terms remained the same as at 31st March, 2019.

On 30th September, 2019, the firm sold off its business to PKR Limited. The value of Goodwill was fixed at Rs. 1,20,000 and the rest of the assets and liabilities were valued on the basis of their book values as at 30th September, 2019. PKR Ltd. paid the purchase consideration in equity shares of Rs. 10 each.

You are requested to prepare the following:

1. Balance Sheet of the Firm as at 30th September, 2019;
2. Realisation Account;
3. Partners’ Capital Account showing the final settlement between them.

(b) Vikas Finance Ltd. is a Non-Banking Finance Company. The extract of its Balance Sheet are as under:

You are requested to compute the “Net Owned Funds” of Vikas Finance Ltd. as per Non-Banking Finance Company – Systematically Important Non-Deposit taking company and Deposit taking company (Reserve Bank) Direction, 2016.

Question 5.
(a) Sun Ltd. grants 100 stock options to each of its 1200 employees on 01-04-2016 for Rs. 30, depending upon the employees at the time of vesting of options. Options would be exercisable within a year it is vested. The market price of the share is Rs. 60 each. These options will vest at the end of the year 1 if the earning of Sun Ltd. is 16% or it will vest at end of year 2 if the average earning of two years in 13%, or lastly it will vest at the end of the third year, if the average earning of 3 years is 10%. 6000 unvested options lapsed on 31-3-2017, 5000 unvested options lapsed on 31-03-2018 and finally 4000 unvested options lapsed on 31-03-2019.

The earnings of Sun Ltd. for the three financial years ended on 31 st March, 2017,2018 and 2019 are 15%, 10% and 6%, respectively. 1000 employees exercised their vested options within a year and remaining options were unexercised at the end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the statement showing compensation expenses to be recognized at the end of the year.

(b) Vasu Commercial Bank has the following capital funds an assets. Segregate the capital funds into Tier I and Tire II capitals. Find out the risk adjusted asset and risk weighted assets ratio.

Question 6.
Answer any four of the following:
(a) Under what circumstances an LLP can be wound up by the tribunal?

(b) Beekey Limited is being wound up by the tribunal. All the assets of the company have been charged to the company’ bankers to whom the company owes Rs. 2.50 crores. The company owes following amounts to other:

Dues to workers	– Rs. 62,50,000
Taxes payable to Government	-Rs. 15,00,000
Unsecured creditors	– Rs. 30,00,000

You are required to compute with reference to the provision of the Companies Act, 2013, the amount each kind of creditors is likely to get if the amount realized by the official liquidator from the secured assets and available for distribution among creditors is only Rs. 2,00,00,000.

(c) M/s. Pasa Ltd. is developing a new production process. During the financial year ended 31st March, 2019, the total expenditure incurred on the process was Rs. 80 lakhs. The production process met the criteria for recognition as an intangible asset on 1st November, 2018. Expenditure incurred till this date was Rs. 42 lakhs.

Further expenditure incurred on the process for the financial year ending 31 st March, 2020 was Rs. 90 lakhs. As on 31 -03-2020, the recoverable amount of know how embodied in the process is estimated to be Rs. 82 lakhs. This included estimates of future cash outflows and inflows.

You are required to work out:

1. What is the expenditure to be charged to Profit and Loss Account for the year ended 31st March, 2019?
2. What is the carrying amount of the intangible asset as on 31st March, 2019?
3. What is the expenditure to be charged to Profit and Loss Account for the year ended 31st March, 2020?
   What is the carrying amount of the intangible asset as on 31st March, 2020?

(d) A, B, C and D hold Equity Share Capital in the proportion of 40:30:20:10 and P, Q, R and S hold Preference Share Capital in the proportion of 30:40:20:10 in Alpha Ltd. If the paid up Equity Share Capital of Alpha Ltd. is Rs. 75 lacs and the Preference Share Capital is Rs. 25 lacs, find their voting rights in the case of resolution of winding up of the company.

(e) With reference to AS 29, how would you deal with the following in the Annual Accounts of the company at the Balance Sheet date:

(i) The company operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. Eighty five per cent of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, and fifteen per cent arise through the extraction of oil. At the balance sheet date, rig has been constructed but no oil has been extracted.

(ii) The Government introduces a number of changes to the taxation laws. As a result of these changes, the company will need to train a large proportion of its accounting and legal workforce in order to ensure continued compliances with tax law regulations. At the balance sheet date, no retraining of staff has taken place.
Answer:
Part (i)

Present obligation as a result of a past obligating event – The construction of the oil rig creates an obligation under the terms of the licence to remove the rig and restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no obligation to rectify the damage that will be caused by extraction of the oil.

An outflow of resources embodying economic benefits in settlement – Probable.

Conclusion – A provision is recognised for the best estimate of 85% of the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it (see paragraph 14). These costs are included as part of the cost of the oil rig. The 15% of costs that arise through the extraction of oil are recognised as a liability when the oil is extracted.

Part (ii)
Present obligation as a result of a past obligating event – There is no obligation because no obligating event (retraining) has taken place.
Conclusion – No provision is recognised (see paragraphs 14 and 16-18)

Standards on Auditing – CA Inter Auditing Notes is designed strictly as per the latest syllabus and exam pattern.

Standards on Auditing – CA Inter Auditing Notes

Question 1.
Comment on the following in relation to SAs: “Management is responsible for compliance with Laws and Regulations”. [May 11 (5 Marks)]
Answer:
Management Responsibility for compliance with laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” states that it is the responsibility of management, with the oversight of TCWG, to ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulations.
For this purpose, management may apply the following procedures:
(a) Monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements.
(b) Instituting and operating appropriate systems of internal control.
(c) Developing, publicising and following a code of conduct.
(d) Ensuring employees are properly trained and understand the code of conduct.
(e) Monitoring compliance with the code of conduct and acting appropriately to discipline employees who fail to comply with it.
(f) Engaging legal advisors to assist in monitoring legal requirements.
(g) Maintaining a register of significant laws and regulations with which the entity has to comply within its particular industry and a record of complaints.

Question 2
What are the roles and responsibilities of the statutory auditor in relation to compliance with the laws and regulations by the entity?
Answer:
Role & Responsibilities of Statutory Auditor in relation to compliance of Laws and Regulations:
The auditor shall obtain a general understanding of:
(a) The legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates; and
(b) How the entity is complying with that framework?

The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements.

The auditor shall perform the following audit procedures to identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements:
(a) Inquiring of management; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.

During the audit, the auditor shall remain alert to the possibility that other audit procedures applied may bring instances of non-compliance or suspected non-compliance with laws and regulations to the auditor’s attention.

Obtain written representation that all known instances of non-compliance or suspected non¬compliance with laws and regulations have been disclosed to the auditor.

Question 3.
State briefly the reporting requirements as per SA 250 on non-compliance with laws and regulations.
Answer:
Reporting requirements as per SA 250 on Non-Compliance with laws and regulations:
(a) Reporting to TCWG:

• The auditor shall communicate with TCWG matters involving non-compliance with laws and regulations that come to the auditor’s attention.
• If in the auditor’s judgment, the non-compliance is believed to be intentional and material, the auditor shall communicate the matter to TCWG as soon as practicable.
• If the auditor suspects that management or TCWG are involved in non-compliance, the auditor shall communicate the matter to the next higher level of authority at the entity, if it exists, such as an audit committee or supervisory board. Where no higher authority exists, the auditor shall consider the need to obtain legal advice.

(b) Reporting in Auditor’s Report:

• If the auditor concludes that the non-compliance has a material effect on the financial statements and has not been adequately reflected in the financial statements, the auditor shall, express a qualified or adverse opinion on the financial statements.
• If the auditor is precluded by management or TCWG from obtaining sufficient appropriate audit evidence, the auditor shall express a qualified opinion or disclaim an opinion.
• If the auditor is unable to determine whether non-compliance has occurred because of limitations imposed by the circumstances rather than by management or TCWG, the auditor shall evaluate the effect on the auditor’s opinion.

(c) Reporting to regulatory and Enforcement Authorities:
If the auditor has identified or suspects non-compliance with laws and regulations, the auditor shall determine whether the auditor has a responsibility to report the identified or suspected non-compliance to parties outside the entity.

Question 4.
With reference to SA 250 give some example or matters indicating to the auditor about non-compliance of laws and regulations by management. [Nov. 13 (8 Marks)]
Or
As an auditor what are the indicators you would consider while verifying compliance with laws and regulations?
Answer:
Indicators to be considered for verifying compliance with laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” deals with the auditor’s responsibilities to consider laws and regulations when performing an audit. To verify the compliance of laws and regulations, auditor is required to consider the following indicators:

• Investigation by regulatory organisations Government departments or payment of fines, additional taxes or penalties.
• Payments for unspecified services or loans to consultants related parties or employees.
• Sales commission or agents fees that appear excessive in relation to those ordinarily paid by the entity or in its industry or to the services actually received.
• Purchases at prices significantly above or below market price.
• Unusual payments in cash.
• Unusual payments towards legal and retainership fees.
• Unusual transactions with companies registered in tax havens.
• Payments for goods or services made other than to the country from which the goods or services originated.
• Payments without proper exchange control documentation.
• Existence of an information system which fails to provide an adequate audit trail.
• Unauthorised transactions or improperly recorded transactions.
• Adverse media comment.

Question 5.
Compare and explain the following: Reporting to Shareholders vs. Reporting to TCWG.
Answer:
Reporting to Shareholders vs. Reporting to those charged with Governance:

Reporting to Shareholders	Reporting to TCWG
1. SA 700, 705 & 706 and Sec. 143 of the Companies Act, 2013 deals with the provisions relating to reporting to Shareholders.	1. SA 260 deals with the provisions relating to reporting to those charged with Governance.
2. Reporting to shareholder generally focuses on true and fair view of financial statements.	2. Reporting to TCWG generally includes auditor’s responsibilities, planned scope and timing of audit, significant findings from the audit and independence.
3. Reporting to shareholders is an external report and issued in public domain.	3. Reporting to TCWG is an internal report and not issued in public domain.

Question 6.
Explain the various matters that are required to be communicated by the auditor to TCWG.
Answer:
Matters to be communicated to TCWG:
SA-260 “Communication with Those Charged with Governance” provides that the auditor shall communicate with TCWG the followings:

(a) Auditor’s Responsibilities in relation to the Financial Statement Audit: The auditor shall communicate with TCWG that:

• The auditor is responsible for forming and expressing an opinion on the F.S.; and
• The audit of the F.S, does not relieve management or TCWG of their responsibilities.

(b) Planned Scope and timing of Audit: It may include:
How the auditor proposes to address the significant risks of material misstatements, whether due to fraud or error?

• How the auditor plans to address areas of higher assessed RMM?
• Auditor’s approach to internal control.
• Application of concept of materiality.

(c) Significant Findings from the audit: The auditor shall communicate with TCWG:
The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and F.S. disclosures.

• Significant difficulties, if any, encountered during the audit;
• Circumstances that affect the form and content of the auditor’s report, if any; and
• Any other significant matter that in the auditor’s professional judgment, are significant to the oversight of the financial reporting process.

(d) Auditor’s Independence: required in case of listed entities.

Question 7.
The auditor evaluated, in respect of T Ltd., whether the financial statements are prepared in accor¬dance with the requirements of the applicable financial reporting framework.
Auditor’s evaluation included consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments.
Advise the qualitative aspects of the entity’s accounting practices. [MTP-MarcK 18, RTP-May 18, MTP-March 19]
Answer:
Qualitative Aspects of entity’s accounting practices:
SA 260 “Communication with those charged with Governance” requires the auditor to communicate with the TCWG various matters, including therein is the auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and F.S. disclosures. In this reference, SA 260 explains the following:

• When applicable, the auditor shall explain to TCWG why the auditor considers a significant accounting practice, that is acceptable under the applicable FRF, not to be most appropriate to the particular circumstances of the entity.
• FRF ordinarily allow the entity to make accounting estimates, and judgments about accounting policies and financial statement disclosures, for example, in relation to the use of key assumptions in the development of accounting estimates for which there is significant measurement uncertainty.
• In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware of possible bias in management’s judgments.
• The auditor may conclude that lack of neutrality together with uncorrected misstatements causes the financial statements to be materially misstated. Indicators of a lack of neutrality include the following:
  • The selective correction of misstatements brought to management’s attention during the audit
  • Possible management bias in the making of accounting estimates.
    SA 540 addresses possible management bias in making accounting estimates. Indicators of possible management bias do not constitute misstatements for purposes of drawing conclusions on the reasonableness of individual accounting estimates. They may, however, affect the auditor’s evaluation of whether the financial statements as a whole are free from material misstatement.

Question 8.
In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware of possible bias in management’s judgments. The auditor may conclude that lack of neutrality together with uncorrected misstatements causes the financial statements to be materially misstated. Explain and analyse the indicators of lack of neutrality with examples, wherever required. [RTP-May 20]
Answer:
Qualitative Aspects of entity’s accounting practices:
In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware of possible bias in management’s judgments. The auditor may conclude that lack of neutrality together with uncorrected misstatements causes the financial statements to be materially misstated. Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s attention during the audit.
Example
(a) Correcting misstatements with the effect of increasing reported earnings, but not correcting misstatements that have the effect of decreasing reported earnings.
(b) The combination of several deficiencies affecting the same significant account or disclosure (or the same internal control component) could amount to a significant deficiency (or material weakness if required to be communicated in the jurisdiction). This evaluation requires judgment and involvement of audit executives.

(ii) Possible management bias in the making of accounting estimates.

Question 9.
Discuss with reference to SAs: The auditor shall communicate all significant findings with those charged with Governance. [May 13 (5 Marks)]
Answer:
Communicating Significant Finding to TCWG:
SA 260 “Communication with those charged with Governance” deals with auditor’s responsibilities to communicate with TCWG in an audit of financial statements.
As per SA 260, auditor should communicate all significant findings with the TCWG, stated as below:

• The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures.
• Significant difficulties, if any, encountered during the audit;
• Unless all of those charged with governance are involved in managing the entity:
  • Significant matters, arising from the audit that were discussed, or subject to correspondence with management; and
  • Written representations the auditor is requesting;
• Circumstances that affect the form and content of the auditor’s report, if any; and
• Any other significant matter that in the auditor’s professional judgment, are significant to the oversight of the financial reporting process.

Question 10.
State the significant difficulties encountered during audit with reference to SA 260. [May 15 (6 Marks)]
Answer:
Significant difficulties encountered during audit:
SA 260 “Communication with those charged with Governance” deals with auditor’s responsibilities to communicate with TCWG in an audit of financial statements.
As per SA 260 among other things auditor should communicate significant difficulties to the TCWG. Examples of significant difficulties to be communicated are:

• Significant delays in management providing required information.
• An unnecessarily brief time within which to complete the audit.
• Extensive unexpected effort required to obtain SAAE.
• Unavailability of expected information.
• Restrictions imposed on the auditor by management.
• Scope limitation that leads to modification of auditor’s opinion.

Question 11.
Write short note on: Factors governing modes of communication of auditor with those charged with governance. [Nov. 10 (4 Marks)]
Or
“As per SA 260, auditor is required to communicate with TCWG various matters significant to audit1’. In this reference explain various forms of communication and factors affecting mode of communication.
Answer:
Forms of Communication and Factors governing mode of communication:
SA 260 deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of financial statements. Accordingly, various forms of communication may be classified as:

• Oral or written;
• Detail or summarized;
• Structured or unstructured.

The auditor shall communicate in writing with TCWG regarding significant matters, from the audit when, in the auditor’s professional judgment, oral communication would not be adequate.

Factors affecting mode of Communication:

• Whether a discussion of the matter will be included in the auditor’s report e.g. Key Audit matters?
• Whether management has previously communicated the matter?
• The size, operating structure, control environment, and legal structure of the entity.
• In the case of an audit of special purpose F.S., whether the auditor also audits the entity’s general purpose F.S.
• Legal requirements. In some jurisdictions, a written communication with TCWG is required in a prescribed form by local law.
• The expectations of TCWG, including arrangements made for periodic meetings or communications with the auditor.
• The amount of ongoing contact and dialogue the auditor has with TCWG.
• Whether there have been significant changes in the membership of a governing body?

Question 12.
What do you mean by deficiencies in Internal Control? Explain various indicators of Significant deficiencies.
Answer:
Deficiencies in Internal Control:
SA 265 “Communicating Deficiencies in internal control to those charged with Governance and Management” states that deficiency in internal control exists when:
(a) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis; or
(b) A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing.

Indicators of Significant Deficiencies:

• Evidence of ineffective aspects of control environment,
• Entity’s Risk assessment process – Absent/ineffective.
• Ineffective response to identified significant Risks.
• Correction of prior period misstatements arising due to fraud/error.
• Management inability’ to oversee RS. preparation.
• Misstatements detected by the auditor’s procedures were not prevented, or detected and corrected by the entity internal control.

Question 13.
Write short note on: Written communication in respect of deficiencies of internal control. [Nov. 16 (4 Marks)]
Answer:
Written communication in respect of deficiencies of internal control:
The auditor shall communicate material weaknesses in internal control identified during the audit on a timely basis to management at an appropriate level of responsibility, and, as required by SA 260 “Communication with those charged with Governance”. This communication should be, preferably, in writing through a letter of weakness. Important points with regard to such a letter are as follows:
(a) It lists down the area of weaknesses in the internal control system and recommends suggestions for improvement.
(b) It should clearly indicate that this letter covers only weaknesses which have come to the attention of the auditor during his evaluation of internal control for the purpose of determining nature, timing and extent of further audit procedures.
(c) Letter should dearly indicate that his examination of internal control has not been designed to determine the adequacy of internal control for management.
(d) This letter serves as a significant means for management and governing body for the purpose of improving the system and its strict implementation.
(e) The letter may also serve to minimize legal liability in the event of a major defalcation or other loss resulting from a weakness in internal control.

Question 14.
“As per SA 402, the user auditor shall obtain an understanding of how user entity uses the services of a service organization in the user entity operations”. Explain the various matters of which understanding is required.
Answer:
Matters of which understanding is required by user auditor w.r.t. services of a services organization:
As per SA 402 “Audit Considerations relating to an entity using service organization” the user auditor is required to obtain an understanding of how user entity uses the services of a service organization in the user entity operation, including:
(a) Nature of service provided by the service organization and the significance of those services to the user entity.
(b) The nature and materiality of the transactions processed or financial reporting processes affected by service organizations.
(c) The degree of interaction between activities of service organizations and those of the user entity,
(d) The nature of relationship between user entity and the service organization.

Question 15.
In the course of audit of R Ltd. the audit manager of ABC & Co. observed that R Ltd. has outsourced certain activities to an outsourcing agency. As the engagement partner guide the audit manager in the assessment of services provided by the outsourcing agency in relation to the audit.
Answer:
Assessment of services provided by the outsourcing Agencies:
SA 402 “Audit Considerations relating to an entity using service organization”deals with the user auditor’s responsibility to obtain sufficient appropriate audit evidence when a user entity uses the services of one or more service organisations. The auditor responsibility in this regard as per SA 402 includes the following:
1. Evaluate the design and implementation of relevant controls of user entity that relate to the services provided by service organization.

2. Determine whether a sufficient understanding of nature and significance of services provided by service organization and their effect on the user entity internal control relevant to the audit has been obtained, to provide basis for identification and assessment of risk of Material Misstatement.

3. If user auditor is unable to obtain a sufficient understanding from the user entity, the user auditor shall obtain that understanding from one or more of following procedures:
(a) Obtaining a Type 1 or Type 2 Report, if available.
(b) Contacting the service organization, through the user entity, to obtain the sufficient information.
(c) Visiting the service organization.
(d) Using another auditor to perform procedures that will provide the necessary information about the relevant controls at the service organization.

Question 16.
Explain the various causes of misstatement.
or
In the course of audit of T Ltd., the audit team is not sure of the possible source of misstatements in the financial statements. As the audit manager identify the sources of misstatements.
Answer:
Causes of Misstatement:
SA 450 “Evaluation of Misstatements identified during the Audit” deals with the auditor’s responsibilities to evaluate the effect of identified misstatements on the audit.

Misstatement may be defined as a difference between the amounts, 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. Misstatements can arise from error or fraud.

Causes of Misstatement: Misstatements may result from:

• An inaccuracy in gathering or processing data from which the financial statements are prepared;
• An omission of an amount or disclosure;
• An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts; and
• Judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection and application of accounting policies that the auditor considers inappropriate.

Question 17.
Discuss the impact of uncorrected misstatements identified during the audit and the auditor’s response to the same
Answer:
Impact of uncorrected misstatements identified during the audit:
SA 450 “Evaluation of Misstatements identified during the audit” deals with the auditor’s responsibility to evaluate the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements.

In accordance with SA 450, the auditor shall determine whether uncorrected misstatements are material, individually or in aggregate. In making this determination, the auditor shall consider the size and nature of the misstatements, both in relation to particular classes of transactions, account balances or disclosures and the financial statements as a whole.

The auditor shall request the management that uncorrected misstatements be corrected. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor shall obtain an understanding of management’s reasons for not making the corrections.

Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality determined in accordance with SA 320, to confirm whether it remains appropriate in the context of the entity’s actual financial results.

The auditor shall communicate with TCWG, uncorrected misstatements and the effect that they, individually or in aggregate, may have on the opinion in the auditor’s report.

The auditor shall request a written representation from management and, where appropriate, those charged with governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole.

Question 18.
What are accounting estimates according to SA 540? Give Examples.
Or
“Accounting estimate means an approximation of a monetary amount in the absence of a precise means of measurement”. Discuss explaining the accounting estimates according to SA-540.
Answer:
Accounting Estimates:
SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and related disclosures” defines an accounting estimate as “an approximation of a monetary amount in the absence of a precise means of measurement”. This term is used for an amount measured at fair value where there is estimation uncertainty. The degree of estimation uncertainty affects the risks of material misstatement of accounting estimates.

Examples of Accounting Estimates:

• Allowance for doubtful accounts.
• Inventory obsolescence.
• Warranty obligations.
• Depreciation method or asset useful life.
• Provision against the carrying amount of an investment.
• Outcome of long term contracts.
• Financial Obligations/ Costs arising from litigation settlements and judgments.

Examples of Fair Value Accounting Estimates:

• Complex financial instruments, which are not traded in an active and open market.
• Share-based payments.
• Property or equipment held for disposal.
• Certain assets or liabilities acquired in a business combination, including good will and intangible assets.
• Transactions involving the exchange of assets or liabilities between independent parties without monetary consideration.

Question 19.
“Some accounting estimates involve relatively low estimation uncertainty and may give rise to lower risks of material misstatements whereas for some accounting estimates there may be rela¬tively high estimation uncertainty particularly where they are based on significant assumptions”. Explain by giving examples.
Or
With reference to the Standards on Auditing state the example of accounting estimates that may have a high estimation uncertainty.
Answer:
Examples of Accounting estimates having high estimation uncertainty:
SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and related disclosures” defines an accounting estimate as “an approximation of a monetary amount in the absence of a precise means of measurement”. This term is used for an amount measured at fair value where there is estimation uncertainty. The degree of estimation uncertainty affects the risks of material misstatement of accounting estimates.

Some accounting estimates involve relatively low estimation uncertainty and may give rise to lower risks of material misstatements. For some accounting estimates, however, there maybe relatively high estimation uncertainty, particularly where they are based on significant assumptions, for example:

• Accounting estimates relating to the outcome of litigation.
• Fair value accounting estimates for derivative financial instruments not publicly traded.
• Fair value accounting estimates for which a highly specialised entity-developed model is used or for which there are assumptions or inputs that cannot be observed in the marketplace.

Additional Examples of Fair Value Accounting Estimates are:

• Complex financial instruments, which are not traded in an active and open market.
• Share-based payments.
• Property or equipment held for disposal.
• Certain assets or liabilities acquired in a business combination, including good will and intangible assets.
• Transactions involving the exchange of assets or liabilities between independent parties without monetary consideration.

Question 20.
While auditing X Ltd, you observe certain material financial statement assertions have been based on estimates made by the management. As an auditor how do you identify and assess risk of material misstatement?
Answer:
Identification and assessment of Risk of Material Misstatement when financial statement assertions are based on estimates made by management:

SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and related disclosures deals with auditor’s responsibilities regarding accounting estimates.

In order to identify and assess risk of material misstatements for accounting estimates, the auditor
shall obtain an understanding of the following:

(a) The requirements of the applicable financial reporting framework.

(b) How management identifies those transactions, events and conditions that may give rise to the need for accounting estimates?
In obtaining this understanding, the auditor shall make inquiries of management about changes in circumstances that may give rise to new, or the need to revise existing, accounting estimates.

(c) The estimation making process adopted by the management including:

• The method, including where applicable the model used in making the accounting estimates.
• Relevant controls
• Where management has used an expert?
• Where there has been or ought to have been a change from the prior period in the methods for making the accounting estimates, and if so why? and
• Whether and if so, how the management has assessed the effect of estimation uncertainty?

(d) The auditor shall review the outcome of accounting estimates included in the prior period financial statements.

Question 21.
What are the factors that may influence the degree of estimation uncertainty associated with an accounting estimate?
Answer:
Factors Influencing Degree of Estimation Uncertainty:
SA 540 “Auditing Accounting Estimates, including Fair Value Accounting Estimates and related disclosures deals with auditor’s responsibilities regarding accounting estimates. Accordingly. The degree of estimation uncertainty associated with an accounting estimate may be influenced by factors such as-

• The extent to which the accounting estimate depends on judgment.
• The sensitivity of the accounting estimate to changes in assumptions.
• The existence of recognised measurement techniques that may mitigate the estimation uncertainty [though the subjectivity of the assumptions used as inputs may nevertheless give rise to estimation uncertainty).
• The length of the forecast period, and the relevance of data drawn from past events to forecast future events.
• The availability of reliable data from external sources.
• The extent to which the accounting estimate is based on observable or unobservable inputs.

Question 22.
Discuss the following: Relationship between Statutory Auditor and Internal Auditor. [Nov. 16 (4 Marks)]
Answer:
Relationship between Statutory Auditor and Internal Auditor:
SA 610 “Using the work of Internal auditors” deals with the external auditor’s responsibilities regarding the work of internal auditors when the external auditor has determined, in accordance with SA 315 that the internal audit function is likely to be relevant to the audit.
With respect to relationship between statutory auditor and internal auditor, SA 610 provides the following:

(a) The role and objectives of the internal audit function are determined by management and, where applicable, those charged with governance. While the objectives of the internal audit function and the external auditor are different, some of the ways in which the internal audit function and the external auditor achieve their respective objectives may be similar.

(b) Irrespective of the degree of autonomy and objectivity of the internal audit function, such function is not independent of the entity as is required of the external auditor when expressing an opinion on financial statements.

(c) Therefore, the external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor’s use of the work of the internal auditors.

Question 23.
Explain the activities of Internal Audit Function,
Answer:
Activities of Internal Audit Function:
As per SA 610 “Using the work of Internal Auditor” the activities of the internal audit function may
include one or more of the following:
1. Activities Relating to Governance: Internal audit function may assess the governance process in its accomplishment of objectives on ethics and values, accountability and communicating risk to appropriate areas of the organization.

2. Activities Relating to Risk Management: Internal audit function may assist the entity by identifying and evaluating significant exposures to risk and contributing to the improvement of risk management and internal control (including effectiveness of the financial reporting process).

3. Evaluation of internal control: Internal audit function may be assigned specific responsibility for reviewing controls, evaluating their operation and recommending improvements thereto.

4. Examination of financial and operating information: Internal audit function maybe assigned to review the means used to identify, recognize, measure, classify and report financial and operating information, and to make specific inquiry into individual items, including detailed testing of transactions, balances and procedures.

5. Review of operating activities: The internal audit function may be assigned to review the economy, efficiency and effectiveness of operating activities, including non-financial activities of an entity.

6. Review of compliance with laws and regulations: Internal audit function may be assigned to review compliance with laws, regulations and other external requirements, and with management policies and directives and other internal requirements.

Question 24.
You have been appointed auditor of a large Industrial Company which has an established Internal Audit Department. You are required to state the main aspects that would be considered to find out effectiveness of the department.
or
Can the external auditor rely on the work of internal auditor?
or
Discuss with reference to SAs: “The degree of reliance that a Statutory Auditor can place on the work of the Internal Auditor is a matter of individual judgment”. [Nov. 14 (8 Marks)]
Answer:
Aspects to be considered to evaluate the effectiveness of Internal Audit Department:
SA 610 ” Using the work of Internal auditors” deals with the external auditor’s responsibilities regarding the work of internal auditors when the external auditor has determined, in accordance with SA 315 that the internal audit function is likely to be relevant to the audit.
For this purpose, external auditor is required to evaluate the following:

(a) Objectivity of Internal Auditor: Objectivity refers to the ability to perform without allowing bias to override professional judgments. Factors that may affect the external auditor’s evaluation include the following:

• Organizational status of the internal audit function;
• Conflicting responsibilities.
• Oversight functions of TCWG w.r.t. employment decisions related to the internal audit function.
• Constraints or restrictions placed on the internal audit function by management or TCWG.

(b) Level of Competency: Competence of the internal audit function refers to the attainment of knowledge and skills to enable assigned tasks to be performed diligently. Factors that may affect the external auditor’s determination include the following:

• Policies for hiring, training and assigning internal auditors to internal audit engagements.
• Adequate of technical training and proficiency in auditing of internal auditors,
• Knowledge of internal auditors w.r.t. entity’s financial reporting and the applicable FRF.
• Membership of relevant professional bodies that oblige internal auditors to comply with the relevant professional standards.

(c) Systematic and Disciplined Approach: Factors that may affect the external auditor’s determination of whether the internal audit function applies a systematic and disciplined approach include the following:

• Existence, adequacy and use of documented internal audit procedures.
• Existence of appropriate quality control policies and procedures for internal audit function.
  The degree of reliance that a statutory auditor can place on the work done by the internal auditor is a matter of individual judgment in a given set of circumstances. The ultimate responsibility for reporting on the financial statements is that of the statutory auditor. It must be clearly understood that the statutory auditor’s responsibility is absolute and any reliance he places upon the internal audit system is part of his audit approach or technique and does not reduce his sole responsibility.

Question 25.
Mr. A was appointed as statutory auditor of X Ltd. X Ltd. has an internal audit system and Mr. A is of the opinion that internal auditors can be used to provide direct assistance for the purpose of statutory audit. Advise Mr. A whether he can take direct assistance of internal auditor and if yes, what are the precautions he need to take.
Answer:
Using direct assistance of internal auditor:
As per SA 610 “Using the Work of Internal Auditor” statutory auditor can take direct assistance of internal auditor subject to following conditions:

• The external auditor is not prohibited by law or regulation from obtaining direct assistance from internal auditors.
• There are no significant threats to the objectivity of the internal auditor.
• The internal auditor is sufficient competent to perform the proposed work.

Precautions to be taken while using direct assistance:
1. The external auditor shall not use internal auditors to provide direct assistance to perform procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement;
(c) Relate to work with which the internal auditors have been involved; or
(d) Relate to decisions the external auditor makes in accordance with this SA regarding the internal audit function and the use of its work or direct assistance.

2. Prior to using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall:
(a) Obtain written agreement from an authorized representative of the entity that the internal auditors will be allowed to follow the external auditor’s instructions, and that the entity will not intervene in the work the internal auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that they will keep confidential specific matters as instructed by the external auditor and inform the external auditor of any threat to their objectivity.

3. The external auditor shall direct, supervise and review the work performed by internal auditors on the engagement in accordance with SA 220.

Question 26.
While doing audit, Ram, the Auditor requires reports from experts for the purpose of audit evi¬dence. What types of reports/opinions he can obtain and to what extent he can rely upon the same?
Or
List the matters in respect of which auditor’s can use the work of auditor’s expert.
Answer:
Matters where auditor can use the work of Auditor’s Expert:
SA 620 “Using the work of an Auditor’s Expert” the matters where the auditor can use the expert work are listed below:
(a) The valuation of complex financial instruments, land and buildings, plant and machinery, jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in business combinations and assets that may have been impaired.
(b) The actuarial calculation of liabilities associated with insurance contracts or employee benefit plans.
(c) The estimation of oil and gas reserves.
(d) The valuation of environmental liabilities, and site clean-up costs.
(e) The interpretation of contracts, laws and regulations.
(f) The analysis of complex or unusual tax compliance issues.

Extent to which Expert work can be relied upon:
When the auditor intends to use the work of an expert, he shall evaluate the adequacy of the auditor’s expert’s work, w.r.t. the following:

• Findings and Conclusions: To ensure the evaluate the relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence.
• Significant Assumptions and Methods: If the expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods should be evaluated.
• Source Data used: Auditor is required to evaluate the relevance, completeness, and accuracy of that source data.

If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes, he shall agree with that expert on the nature and extent of further work to be performed by that expert; or perform further audit procedures appropriate to the circumstances.

Question 27.
What are the factors that may influence the auditor’s decision on whether to use an auditor’s expert, when management has used a management’s expert in preparing the financial statements?
Answer:
Factors influencing the auditor’s decision w.r.t. use of AE when management had used a management expert:

SA 620 “Using the work of Auditor’s Expert” deals with the auditor’s responsibilities regarding the
use of an auditor’s expert. Accordingly, factors influencing the auditor’s decision w.r.t. use of AE
when management had used a management expert are:

• The nature, scope and objectives of the management’s expert’s work.
• Whether the management’s expert is employed by the entity, or is a party engaged by it to provide relevant services?
• The extent to which management can exercise control or influence over the work of the management’s expert.
• The management’s expert’s competence and capabilities,
• Whether the management’s expert is subject to technical performance standards or other professional or industry requirements.
• Any controls within the entity over the management’s expert’s work.

Question 28.
What are the procedures to be followed by a statutory auditor for verifying the provisions for accrued liability for retirement benefits which is based on a certificate of a reputed actuary engaged by the auditor for the purpose?
Or
Explain the procedures to be performed for evaluating the work of auditor’s expert.
Answer:
Procedures to be followed for evaluating the work of Auditor’s Expert:
SA 620 “Using the work of Auditor’s Expert” deals with the auditor’s responsibilities regarding the use of an auditor’s expert, The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including:
(a) The relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence;
(b) If that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods in the circumstances; and
(c] If that expert’s work involves the use of source data that is significant to that expert’s work, the relevance, completeness, and accuracy of that source data.

Procedures to evaluate the adequacy of the auditor’s expert’s work:
(a) Inquiries of the auditor’s expert.
(b) Reviewing the auditor’s expert’s working papers and reports.
(c) Corroborative procedures, such as:

• Observing the auditor’s expert’s work;
• Examining published data, such as statistical reports from reputable, authoritative sources;
• Confirming relevant matters with third parties;
• Performing detailed analytical procedures; and
• Re-performing calculations.

(d) Discussion with another expert with relevant expertise when, for example, the findings or conclusions of the auditor’s expert are not consistent with other audit evidence.
(e) Discussing the auditor’s expert’s report with management.

Question 29.
State your views on reference to an expert in the Auditor’s report.
Answer:
Reference of Expert in Auditor’s Report:
(a) SA 620 “Using the work of an Auditor’s Expert” deals with the auditor’s responsibilities regarding the use of an individual or organisation’s work in a field of expertise other than accounting or auditing, when that work is used to assist the auditor in obtaining sufficient appropriate audit evidence.

(b) With respect to reference of Expert in Auditor’s Report, SA 620 provides the following:

• The auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing an unmodified opinion unless required by law or regulation to do so.
• If such reference is required by law or regulation, the auditor shall indicate in the auditor’s report that the reference does not reduce the auditor’s responsibility for the audit opinion.

(c) If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion.

Question 30.
SA 720 requires the auditor to read and consider the other information because other information that is materially inconsistent with the F.S. or the auditor’s knowledge obtained in the audit may indicate that there is a material misstatement of the F.S. or that a material misstatement of the other information exists, either of which may undermine the credibility of the F.S. and the auditor’s report thereon. Explain the meaning of the term Other Information and state the requirements of SA 720 as to obtaining and considering the other information.
Answer:
Other Information and Requirements of SA 720:
SA 720 “The Auditor’s Responsibilities relating to Other Information” deals with the auditor’s responsibilities relating to Other Information, whether financial or non-financial information included in an entity’s annual report. SA 720 defines the term other information as Financial or non-financial information (other than F.S. and the auditor’s report thereon) included in an entity’s annual report.

Requirements of SA 720 as to obtaining the other information:
The auditor shall:
(a) Determine, through discussion with management, which documents comprises the annual report, and the entity’s planned manner and timing of the issuance of such documents;

(b) Make appropriate arrangements with management to obtain in a timely manner and, if possible, prior to the date of the auditor’s report, the final version of the documents comprising the annual report; and

(c) When some or all of the documents determined above will not be available until after the date of the auditor’s report, request management to provide a written representation that the final version of the documents will be provided to the auditor when available, and prior to its issuance by the entity, such that the auditor can complete the procedures required by this SA.

Requirements of SA 720 as to considering the Other information:
The auditor shall read the other information and, in doing so shall:
(a) Consider whether there is a material inconsistency between the other information and the financial statements. As the basis for this consideration, the auditor shall, to evaluate their consistency, compare selected amounts or other items in the other information (that are intended to be the same as, to summarize, or to provide greater detail about, the amounts or other items in the financial statements) with such amounts or other items in the financial statements; and

(b) Consider whether there is a material inconsistency between the other information and the auditor’s knowledge obtained in the audit, in the context of audit evidence obtained and conclusions reached in the audit.
While reading the other information, the auditor shall remain alert for indications that the other information not related to the financial statements or the auditor’s knowledge obtained in the audit appears to be materially misstated.

Question 31.
Comment on the following: While reading the other information, auditor finds certain misstatement of other information. Explain the requirement of relevant SA w.r.t. Auditor’s responses in such a situation.
Answer:
Auditor’s responses on a material misstatement in the Other Information:
SA 720 “The Auditor’s Responsibilities relating to Other Information” deals with the auditor’s responsibilities relating to Other Information, whether financial or non-financial information included in an entity’s annual report.

If the auditor concludes that a material misstatement of the other information exists, the auditor shall request management to correct the other information. If management:
(a) Agrees to make the correction, the auditor shall determine that the correction has been made; or
(b) Refuses to make the correction, the auditor shall communicate the matter with TCWG and request that the correction be made.

If the auditor concludes that a material misstatement exists in other information obtained prior to the date of the auditor’s report, and the other information is not corrected after communicating with TCWG, the auditor shall take appropriate action, including:
(a] Considering the implications for the auditor’s report and communicating with TCWG about how the auditor plans to address the material misstatement in the auditor’s report,
(b) Withdrawing from the engagement, where withdrawal is possible under applicable law or regulation.

If the auditor concludes that a material misstatement exists in other information obtained after the date of the auditor’s report, the auditor shall:
(a) If the other information is corrected, perform the procedures necessary in the circumstances; or
(b) If the other information is not corrected after communicating with TCWG, take appropriate action considering the auditor’s legal rights and obligations, to seek to have the uncorrected material misstatement appropriately broughtto the attention ofusers for whom the auditor’s report is prepared.

Objective Questions (Correct/Incorrect – True/False)

Question 1.
The scope of work of an internal auditor may extend even beyond the financial accounting.
Answer:
Statement is correct.
As per SA 610 “Using the Work of Internal Auditor” the scope of internal audit function may include:

• Monitoring of internal control
• Examination of financial & operating information
• Review of operating activities
• Review of compliance with laws & regulations
• Risk management
• Governance

Question 2.
AAS-24 (SA 402) deals with responsibility of the auditor of the service organisation. [May 08 (2 Marks)]
Answer:
Statement is Incorrect, SA402 “Audit Considerations relating to an entity using Service Organisation” deals with the user auditor’s responsibility to obtain sufficient appropriate audit evidence when a user entity uses the services of one or more service organisations.

Question 3.
An expert for the purpose of AAS-9 (SA 620) is a person, firm or association of persons possessing special skill, knowledge and experience in auditing. [May 08 (2 Marks)]
Answer:
Statement is incorrect, an expert for the purpose of SA 620 “Using the work of Auditor’s Expert” an expert is an individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

Question 4.
AAS-9 (SA 620) is applicable when an auditor seeks legal opinion from an advocate. [Nov. 07 (2 Marks)]
Answer:
Statement is correct, SA 62 0 “Using the work of Auditor’s Expert” deals with the auditor’s responsibilities regarding the use of an individual or organisation’s work in a field of expertise other than accounting or auditing, when that work is used to assist the auditor in obtaining sufficient appropriate audit evidence.

Question 5.
The auditor, in the interest of the users, while explaining the nature of his reservation, can describe the work of the expert with his name, in the audit report without obtaining prior consent of the expert. [Nov. 09(2 Marks)]
Answer:
Statement is incorrect.
As per SA 620 “Using the work of Auditor’s Expert” it maybe appropriate in some circumstances to refer to the auditor’s expert in an auditor’s report containing a modified opinion, to explain the nature of the modification. In such circumstances, the auditor may need the permission of the auditor’s expert before making such a reference.

Question 6.
An Auditor’s external expert is not subjected to quality control policies and procedures of an audit firm. [Nov. 14 (2 Marks)]
Answer:
Statement is correct.
SA 620 “Using the work of an Auditor’s expert” states that an auditor’s external expert is not a member of the engagement team and is not subject to quality control policies and procedures.

Amalgamation of Companies – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Amalgamation of Companies – CA Inter Advanced Accounting Study Material

Computation of Purchase Consideration

Question 1.
N Ltd. and G Ltd. amalgamated to form a new company on 1.04.20X1 Following is the Draft Balance Sheet of N Ltd. and G Ltd. as at 31.3.20X1:

Following are the additional information:

1. The authorised capital of the new company will be ₹ 25,00,000 divided into 1,00,000 equity shares of ₹ 25 each.
2. Liabilities of N Ltd. includes ₹ 50,000 due to G Ltd. for the purchases made. G Ltd. made a profit of 20% on sale to N Ltd.
3. N Ltd. had purchased goods costing ₹ 10,000 from G Ltd. All these goods are included in the current asset of N Ltd. as at 31st March, 20X1.
4. The assets of N Ltd. and G Ltd. are to be revalued as under:
   
5. The purchase consideration is to be discharged as under:
   (a) Issue 24,000 equity shares of ₹ 25 each fully paid up in the pro-portion of their profitability in the preceding 2 years.
   (b) Profits for the preceding 2 years are given below:
   
   (c) Issue 12% preference shares of ₹ 10 each fully paid up at par to provide income equivalent to 8% return on net assets in the business as on 31.3.20X1 after revaluation of assets of N Ltd. and G Ltd. respectively.

You are required to compute the

1. 1. equity and preference shares issued to N Ltd. and G Ltd.
   2. Purchase consideration.

Answer:
(i) Computation of equity shares to he issued to NLtd. and G Ltd.

No. of shares to be issued = 24,000 equity shares in the proportion of the preceding 2 years’ profitability

Computation of 12% Preference shares to be issued to NLtd. and G Ltd.

(ii) Computation of Purchase Consideration

Working Note:
Calculation of Net assets as on 31.3.20X1

Question 2.
A Ltd. is absorbed by S Ltd.; the consideration being the takeover of liabilities, the payment of cost of absorption not exceeding ₹ 10,000 (actual cost ₹ 9,000); the payment of the 9% debentures of ₹ 50,000 at a premium of 20% in form of 8% debentures issued at a premium of 25% at face value and the payment of ₹ 15 per share in cash and allotment of three 11% preference share of ₹ 10 each at a discount of 10% and four equity share of ₹ 10 each at a premium of 20% fully paid for every five shares in A Ltd. The number of shares of the vendor company are 1,50,000 of ₹ 10 each fully paid.
Calculate purchase consideration as per Accounting Standard 14.
Answer:
Computation of Purchase Consideration

Question 3.
On 1st April, 2018, Tina Lid. takeover the business of Rina Ltd. and discharged purchase consideration as follows:

1. Issued 50,000 fully paid Equity shares of ₹ 10 each at a premium of ₹ 5 per share to the equity shareholders of Rina Ltd.
2. Cash payment of ₹ 50,000 was made to equity shareholders of Rina Ltd.
3. Issued 2,000 fully paid 12% Preference shares of ₹ 100 each at par to discharge the preference shareholders of Rina Ltd.
4. Debentures of Rina Ltd. 20,000 will he converted into equal number and amount of 10% debentures of Tina Ltd.

Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry relating to discharge of purchase consideration in the books of Tina Ltd. (November 2018 – New Course) (5 Marks)
Answer:
Computation of Purchase Consideration

Journal Etitry (in the books of Tina Ltd.)

Simple Problems – Merger

Question 4.
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a new company named Super Fast Express Ltd. The summarized balance sheets of both the companies were as under:
Super Express Ltd. Balance Sheet as at 31st December, 20X1

Fast Express Ltd.
Balance Sheet as at 31st December, 20X1

The assets and liabilities of both the companies were taken over by the new company at their book values. The companies were allotted equity shares of ₹ 100 each in lieu of purchase consideration amounting to ₹ 30,000 (20,000 for Super Fast Express Ltd. and 10,000 for Fast Express Ltd.).

Prepare opening balance sheet of Super Fast Express Ltd. considering pooling method.
Answer:
Balance Sheet of Super Fast Express Ltd.
as at 1st Jan., 20X2

Notes to accounts

Question 5.
The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31-3-20X1:


All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

On 1st April 20X1, P Ltd. took over V Ltd. in an amalgamation in the nature of merger. It was agreed that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares of ₹ 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.

Details of trade receivables and trade payables as under:

Expenses of amalgamation amounting to ₹ 1 lakh were borne by P Ltd. You are required to:
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet ini mediately after the merger considering that the cost of issue of dehentures shown in the balance sheet of the V Ltd. company is 1101 transferred to the P Ltd. company.
Answer:
Books of P Ltd. Journal Entries

Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Notes to accounts

Computation of purchase consideration :
The purchase consideration was discharged in the form of three equity shares of P Ltd. for every two equity shares held in V Ltd.
Purchase consideration = ₹ 6,000 lacs × \(\frac{3}{2}\) = ₹ 9,000 lacs.
* Cost of issue of debenture adjusted against P & L Account of V Ltd.

Advanced Problems – Merger

Question 6.
The following are the Balance Sheets of M Ltd. and N Ltd. as at 31st March, 2009:

A new Company MN Ltd. was incorporated with an authorised capital of ₹ 15,000 lakhs divided into shares of ₹ 10 each. For the purpose of amalgamation in the nature of merger, M Ltd. and N Ltd. were merged into MN Ltd. on the following terms:

1. Purchase consideration for M Ltd.’s business is to be discharged by issue of 120 lakhs fully paid 11% preference shares and 720 lakhs fully paid equity shares of MN Ltd. to the preference and equity shareholders of M Ltd. in full satisfaction of their claims.
2. To discharge purchase consideration for N Ltd.’s business, MN Ltd. to allot 90 lakhs fully paid up equity shares to shareholders of N Ltd. in full satisfaction of their claims.
3. Expenses on the liquidation of M Ltd. and N Ltd. amounting to ₹ 6 lakhs are to be borne by MN Ltd.
4. 8% redeemable debentures of N Ltd. to be converted into 8.5% redeemable debentures of MN Ltd.
5. Expenses on incorporation of MN Ltd. were ₹ 15 lakhs. You are requested to:

Pass necessary Journal Entries in the books of MN Ltd. to record above transactions, and (Adapted Nov 2009) (16 Marks)
Answer:
Journal Entries

Question 7.
The following was the Balance Sheet of V Ltd. as on 31 st March, 2012:

Notes:

On 1st April, 2012, P Ltd. took over the entire business of V Ltd. on the following terms:

V Ltd.’s equity shareholders would receive 4 fully paid equity shares of P Ltd. of ₹ 10 each issued at a premium of ₹ 2.50 each for every five shares held by them in V Ltd.

Preference shareholders of V Ltd. would get 35 lakh 13% Cumulative Preference Shares of ₹ 10 each fully paid up in P Ltd., in lieu of their present holding.

All the debentures of V Ltd. would be converted into equal number of 10.5% Secured Cumulative Debentures of ₹ 100 each, fully paid up after the takeover by P Ltd., which would also pay outstanding debenture interest in cash.

Expenses of amalgamation would be borne by P Ltd. Expenses came to be ₹ 2 lakhs. P Ltd. discovered that its creditors included ₹ 7 lakhs due to V Ltd. for goods purchased.

Also P Ltd.’s stock included goods of the invoice price of ₹ 5 lakhs earlier purchased from V Ltd., which had charged profit @ 20% of the invoice price.
You are required to:
(i) Prepare Realisation A/c in the books of V Ltd.
(ii) Pass journal entries in the books of P Ltd. assuming it to be an amal-gamation in the nature of merger. (Nov 2012) – (16 Marks)
Answer:
(i) In the books of V Ltd.
Realisation Account

(ii)
In the books of P Ltd.
Journal Entries

Working Note:
Calculation of Purchase Consideration payable by P Ltd.

Simple Problems – Purchase

Question 8.
The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31st March, 20X1 was as under:

H Ltd. absorbs V Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of H Ltd.
(b) Goodwill of V Ltd. is valued at ₹ 50,000, Buildings are valued at ₹ 1,50,000 and the Machinery at ₹ 1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of V Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of V Ltd. and show the acquisition entries in the books of H Ltd. Also draft the Balance Sheet after absorption as at 31st March, 20X1.
Answer:
In the Books of VLtd. Realisation Account

Equity Shareholders Account

Prefetettce Shareholders Account

Hari Ltd. Account

In the Books of H Ltd.
Journal Entries

Balance Sheet of H Ltd. (after absorption) as at 31st March, 20X1

Notes to accounts

Working Notes:
Computation of Purchase Consideration:

Question 9.
A Limited was wound up on 31.3.2014 and its draft Balance Sheet as on that date was given below:
Balance Sheet of A Limited as on 31.3.2014

Details of Trade receivables and Trade payables:

B Limied took over the following assets at values shown as under:
Fixed assets ₹ 6,40,000, Inventory ₹ 3,85,000 and Bills Receivable ₹ 15,000.
Purchase consideration was settled by B Limited: ₹ 2,55,000 of the consideration was satisfied by the allotment of fully paid 10% Preference shares of ₹ 100 each. The balance was settled by issuing equity shares of ₹ 10 each at ₹ 8 per share paid up.

Sundry debtors realised ₹ 75,000. Bills payable was settled for ₹ 19,000. Income tax authorities fixed the taxation liability at ₹ 1,11,000.

Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to ₹ 4,000.
You are required to:

1. Calculate the number of equity shares and preference shares to be allotted by B Limited in discharge of purchase consideration.
2. Prepare the Realisation account, Cash/Bank account, Equity share-holders account and B Limited account in the books of A Limited.
3. Pass journal entries in the books of B Limited.

Answer:
(i) Computation of purchase consideration

Discharge of purchase consideration
Amount discharged by issue of preference shares = ₹ 2,55,000 = 2,550 shares
No. of preference shares to be allotted = \(\frac{2,55,000}{100}\)
Amount discharged by allotment of equity shares = ₹ 10,40,000 – ₹ 2,o5,000
= ₹ 7,85,000
Paid up value of equity share = ₹ 8
Hence, number of equity shares to be issued = \(\frac{7,85,000}{8}\)
= 98,125 shares

(ii) In the books of Alia Ltd.
Realisation Account

Cash/Bank Account

Equity Shareholders Account

B Limited Account

(iii) Journal Entries in the books of B Ltd.

Question 10.
The Balance Sheet of Reckless Ltd. as on 31st March, 2008 is as follows:

Careful Ltd. decided to takeover Reckless Ltd. from 31st March, 2008 with the following assets at value noted against them:

1/4 of the consideration was satisfied by the allotment of fully paid preference shares of ₹ 100 each at par which carried 13% dividend on cumulative basis. The balance was paid in the form of Careful Ltd.’s equity shares of ₹ 10 each, ₹ 8 paid up.

Sundry Debtors realised ₹ 79,500. Acceptances were settled for ₹ 19,000. Income-tax authorities fixed the taxation liability at ₹ 1,11,600. Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to ? 4,000.
You are required to:

1. Calculate the number of equity shares and preference shares to be allotted by Careful Ltd. in discharge of consideration.
2. Prepare the important ledger accounts in the books of Reckless Ltd.; and
3. Pass journal entries in the books of Careful Ltd. with narration. (May 2010)

Answer:

Discharge of purchase consideration:
1. Amount paid by allotment of 13% preference shares
= ₹ 10,00,000 × \(\frac{1}{4}\)
= ₹ 2,50,000
Number of 13% preference shares of ₹ 100 each
= ₹ \(\frac{2,50,000}{100}\)
= 2,500 preference shares

2. Amount paid by allotment of equity shares
= ₹ 10,00,000 – ₹ 2,50,000 = ₹ 7,50,000
Paid up value of one equity share = ₹ 8 each
Hence, the number of equity shares allotted
= ₹ \(\frac{7,50,000}{100}\)
= 93,750 equity shares

(ii) Ledger accounts in the books of Reckless Ltd.
Realisation Account

Cash and Bank Account

Equity Shareholders Account

Careful Ltd. Account

(iii) Journal Entries in the books of Careful Ltd.

Question 11.
The Balance Sheet of Mars Limited as on 31st March, 2011 was as follow:

On 1st April, 2011, Jupiter Limited agreed to absorb Mars Limited on the following terms and conditions:

1. Jupiter Limited will takeover the assets at the following values:
   
2. Purchase consideration will be settled by Jupiter Ltd. as under:
   4,100 fully paid 10% preference shares of ₹ 100 will be issued and the balance will be settled by issuing equity shares of ₹ 10 each at ₹ 8 paid up.
3. Liquidation expenses are to be reimbursed by Jupiter Ltd. to the extent of ₹ 5,000.
4. Sundry debtors realized ₹ 1,50,000. Bills payable were settled for ₹ 38,000. Income tax authorities fixed the taxation liability at ₹ 2,22,000 and the same was paid.
5. Creditors were finally settled with cash remaining after meeting liquidation expenses amounting to ₹ 8,000

You are required to:

1. Calculate the number of equity shares and preference shares to be allotted by Jupiter Limited in discharge of purchase consideration.
2. Prepare the Realisation account, Bank account. Equity shareholders account and Jupiter Limited’s account in the books of Mars Ltd. (May 2011) (16 Marks)

Answer:
(i) Computation of purchase consideration

(ii) Ledger Accounts in the books of Mars Limited
Realization Account

Bank Account

Equity Shareholders Account

Jupiter Limited Account

Question 12.
The summarized Balance Sheet of Srishti Ltd. as on 31st March, 2014 was as follows:

ANU Ltd. agreed to absorb the business of SRISHTI Ltd. with effect from 1st April, 2014.
(a) The purchase consideration settled by ANU Ltd. as agreed:
(i) 4,50,000 equity Shares of ₹ 10 each issued by ANU Ltd. by valuing its share @ ₹ 15 per share.
(ii) Cash payment equivalent to ₹ 2.50 for every share in SRISHTI Ltd.

(b) The issue of such an amount of fully paid 8% Debentures in ANU Ltd. at 96% as is sufficient to discharge 9% Debentures in SRISHTI Ltd, at a premium of 20%.

(c) ANU Ltd. will takeover the Tangible Fixed Assets at 100% more than the book value, Stock at ₹ 7,10,000 and Debtors at their face value subject to a provision of 5% for doubtful Debts.

(d) The actual cost of liquidation of SRISHTI Ltd. was ₹ 75,000. Liquidation cost of SRISHTI Ltd. is to be reimbursed by ANU Ltd. to the extent of ₹ 50,000.

(e) Statutory Reserves are to be maintained for 1 more year. You are required to:
(i) Close the books of SRISHTI Ltd. by preparing Realisation Account, ANU Ltd. Account, Shareholders Account and Debenture Account, and
(ii) Pass Journal Entries in the books of ANU Ltd. regarding acquisition of business. (May 2014) – (16 Marks)
Answer:

In the books of Srishti Ltd. REALISATION ACCOUNT

Equity Shareholders A/c

(ii) Journal Entries in the books of Anu Ltd.

Question 13.
L Ltd. and S Ltd. were amalgamated on and from 1st April, 2014. A new company M Ltd. was formed to takeover the businesses of the existing companies. The summarized balance sheets of L Ltd. and S Ltd. as on 31st March, 2014 are given below: (₹ in lakhs)

Other information

1. 13% Debenture holders of L Ltd. and S Ltd. are discharged by M Ltd. by issuing such number of its 15% Debentures of ₹ 100 each so as to maintain the same amount of interest.
2. Preference Shareholders of the two companies are issued equivalent number of 15% preference shares of M Ltd. at a price of ₹ 125 per share (face value ? 100)
3. M Ltd. will issue 4 equity shares for each equity share of L Ltd. and 3 equity shares for each equity share of S Ltd. The shares are to be issued @ ₹ 35 each, having a face value of ₹ 10 per share.
4. Investment allowance reserve is to be maintained for two more years.

Prepare the balance sheet of M Ltd. as on 1 st April, 2014 after the amalgamation has been carried out if amalgamation is in the nature of purchase.
Answer:
Computation of Purchase consideration (Payment Net Method)

Amalgamation in the nature of Purchase:
Balance Sheet of M Ltd. As on 1st April, 2014

Notes to Accounts

Working Note 1:

Question 14.
P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings of the two companies in exchange for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and 0 Ltd. as on 31st March, 2017 (the date of amalgamation) are given below:
Summarized balance sheets as at 31-3-2017

The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of net profits for the three years ended 31st March, 2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.

The profit had been:
2014-15 ₹ 3,00,000; 2015-16 ₹ 5,25,000 and 2016-17 ₹ 6,30,000.

The shares of PQ Ltd. were to be issued to P Ltd. and 0 Ltd. at a premium and in proportion to the agreed net assets value of these companies.

In order to raise working capital, PQ Ltd. proceeded to issue 72,000 shares of ₹ 10 each at the same rate of premium as issued for discharging purchase consideration to P Ltd. and Q. Ltd.

You are required to:

1. Calculate the number of shares issued to P Ltd. and 0 Ltd; and
2. Give required journal entries in the books of PQ Ltd.; and
3. Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal entries.

Answer:
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:

(iii) Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Notes to accounts

Working Notes:
1. Calculation of goodwill of P Ltd.

Question 15.
The financial position of two companies A Ltd. and B Ltd. as on 31st March, 2017 was as under:

B Ltd. is absorbed by A Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 8% Preference Shares of A Ltd.
(b) Goodwill of B Ltd. is valued at ₹ 1,40,000, Buildings are valued at ₹ 4,20,000 and the Machinery at ₹ 4,48,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of B Ltd. will be issued Equity Shares of A Ltd. @ 5% premium.
You are required to:
(a) Prepare necessary Ledger Accounts to close the books of B Ltd.
(b) Show the acquisition entries in the books of A Ltd.
(c) Also draft the Balance Sheet after absorption as at 31st March, 2017.
Answer:
(a) In the Books of B Ltd.
Realisation Account

Preference Shareholders Account

(b) In the Books of A Ltd.
Journal Entries

(c) Balance Sheet of A Ltd. (after absorption) as at 31st March, 2017

Notes to accounts

Working Notes:

Question 16.
Following is the Balance Sheet of Y Ltd., as at 31st March, 2010:

X Ltd. decided to absorb the business of Y Ltd., at the respective book value of assets and trade liabilities except building which was valued at ₹ 12,00,000 and plant & machinery at ₹ 1,00,000.
Working Notes:
The purchase consideration was payable as follows:
(i) Payment of liquidation expenses ₹ 5,000 and workmen’s profit sharing fund at 10% premium;
(ii) Issue of equity share of ₹ 10 each fully paid at ₹ 11 per share for every preference share and every equity share of Y Ltd., and a payment of ₹ 4 per equity share in cash.
Calculate the purchase consideration, show the necessary ledger accounts in the books of Y Ltd., and opening journal entries in the books of X Ltd. (Nov 2010) (16 Marks)
Answer:
(i) Computation of purchase consideration

* Question has stated explicitly to consider it as a part of P.C. otherwise it is not a part of P.C.

(ii) In the books of YLtd. Realisation A/c

Bank A/c

Equity shares in X Ltd. A/c

Question 17.
Given below balance sheet of Vasudha Ltd. Vaishali Ltd. as at 31st March, 2012.

Goodwill of the Companies Vasudha Ltd. and Vaishali Ltd. is to be valued at ₹ 75,000 and ₹ 50,000 respectively. Factory Building of Vasudha Ltd. is worth ₹ 1,95,000 and of Vaishali Ltd. ₹ 1,75,000. Stock of Vaishali Ltd. has been shown at 10% above of its cost.

It is decided that Vasudha Ltd. will absorb Vaishali Ltd. without liquidating later, by taking over its entire business by issue of shares at the Intrinsic Value

You are required to draft the balance sheet of the two companies after putting through the scheme. (May 2012) (16 Marks)
Answer:
Balance Sheet of Vasudha Ltd. as on 31st March, 2012

Working Note:
1. Computation of shares issued on the basis of intrinsic values

Hence, Vasudha Ltd. will give its 40,330 shares of ₹ 10 each @ ₹ 13 each to Vaishali Ltd.

Discharge of Purchase consideration

Question 18.
The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on 31.03.2014 were is as under:

M/s. A Ltd. and M/s. B Ltd. carry on business of similar nature and they agreed to amalgamate. A new Company, M/s. AB Ltd. is formed to take over the Assets and Liabilities of M/s. A Ltd. and M/s. B Ltd. on the following basis:

Assets and Liabilities are to be taken at Book Value, with the following exceptions:
(a) Goodwill of M/s. A Ltd. and M/s. B Ltd. is to be valued at ₹ 1,40,000 and ₹ 40,000 respectively.
(b) Plant & Machinery of M/s. A Ltd. are to be valued at ₹ 1,00,000.
(c) The Debentures of M/s. B Ltd. are to be discharged, by the issue of 6% Debentures of M/s. AB Ltd., at a premium of 5%.

You are required to:
(i) Compute the basis on which shares in M/s. AB Ltd. will be issued to Shareholders of the existing Companies assuming nominal value of each share of M/s. AB Ltd. is ₹ 10.
(ii) Draw up a Balance Sheet of M/s. AB Ltd. as on 1st April, 2014, when Amalgamation is completed.
(iii) Pass Journal entries in the Books of M/s. AB Ltd. for acquisition of M/s. A Ltd. and M/s. B Ltd. (May 2015) (16 Marks)
Answer:
Computation of Purchase consideration

Balance Sheet AB Ltd. as at 1st April, 2014

Notes to accounts

Journal Entries In the books of AB Ltd.

Assumptions:

1. Nominal value of debentures of B Ltd. is ₹ 100 each.
2. 6% Debentures of M/s B Ltd. are discharged at premium of 5% by issue of 6% Debentures of M/s AB Ltd. At par.

Question 19.
Sun and Neptune had been carrying on business independently. They agreed to amalgamate and form a new company Jupiter Ltd. with an authorised share capital of ₹ 4,00,000 divided into 80,000 equity shares of ₹ 5 each. On 31st March, 2018 the respective Summarised Balance Sheets of Sun and Neptune were as follow:

Additional Information:
(a) Revalued figures of Fixed and Current assets were as follows:

(b) The debtors and creditors include ₹ 43,350 owed by Sun to Neptune. The purchase consideration is satisfied by issue of the following shares and debentures.
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the profitability of their respective business based on the average net profit during the last three years which were as follows:

(ii) 15% debenture in Jupiter Ltd. at par to provide an income equivalent to 8% return business as on capital employed in their respective business as on 31st March, 2018 after revaluation of assets.

You are required to:
(1) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after amalgamation. (May 2018) (16 Marks)
Answer:
(1) Computation of Amount of Debentures and Shares to be issued:

Sun: 33,000 × \(\frac{100}{15}\) = 2,20,000
Neptune: 29,400 × \(\frac{100}{15}\) = 1,96,000

(2) Balance Sheet of Jupiter Ltd. As at 31st March 2018 (after amalgamation)

Notes to Accounts

* 1,57,750 – 43,350 = 1,14,400
** 5,97,000 – 43,350 = 5,53,650

Question 20.
The financial position of two companies A Ltd. and B Ltd. as on 31st March, 2017 was as under:

B Ltd. is absorbed by A Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 8% Preference Shares of A Ltd.
(b) Goodwill of B Ltd. is valued at ₹ 1,40,000, Buildings are valued at ₹ 4,20,000 and the Machinery at ₹ 4,48,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of B Ltd. will be issued Equity Shares of A Ltd. @ 5% premium.

You are required to:
(a) Prepare necessary Ledger Accounts to close the books of B Ltd.
(b) Prepare the acquisition entries in the books of A Ltd.
(c) Also prepare the Balance Sheet after absorption as at 31 st March, 2017. Internal Reconstruction of a Company
Answer:
(a) In the Books of B Ltd.
Realisation Account

A Ltd. Account

(c) Balance Sheet of A Ltd. (after absorption) as at 31st March, 2017

Notes to accounts:

Computation of: Purchase Consideration:

Question 21.
P Ltd. and 0 Ltd. decided to amalgamate as on 01.04.2016. Their summarized Balance Sheets as on 31.03.2016 were as follows:

From the following information, you are required to prepare the Balance Sheet as on 01.04.2016 of a new company, R Ltd., which was formed to takeover the business of both the companies and took over all the assets and liabilities:

1. 50% Debenture are to be converted into Equity Shares of the New Company.
2. Investments are non-current in nature.
3. Fixed Assets of P Ltd. were valued at 10% above cost and that of 0 Ltd. at 5% above cost.
4. 10% of trade receivables were doubtful for both the companies. Inventories to be carried at cost.
5. Preference shareholders were discharged by issuing equal number of 9% preference shares at par.
6. Equity shareholders of both the transferor companies are to be dis-charged by issuing Equity shares of ₹ 10 each of the new company at a premium of ₹ 5 per share.

Give your answer on the basis that amalgamation is in the nature of purchase.
Answer:
M/s R Ltd.
Balance Sheet as at 1.4.2016

Notes to accounts

Working Notes:
1. Computation of purchase consideration

Advanced Problems – Purchase

Question 22.
K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two companies on the date of amalgamation was as under:

The terms of amalgamation are as under:
(A) (1) The assumption of liabilities of both the Companies.
(2) Issue of 5 Preference shares of ₹ 20 each in LK Ltd. @ ₹ 18 paid up at premium of ₹ 4 per share for each preference share held in both the Companies.

(3) Issue of 6 Equity shares of ₹ 20 each in LK Ltd. @ ₹ 18 paid up at a premium of ₹ 4 per share for each equity share held in both the Companies. In addition, necessary cash should be paid to the Equity Shareholders of both the Companies as is required to adjust the rights of shareholders of both the Companies in accordance with the intrinsic value of the shares of both the Companies.

(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5% debentures in K Ltd. at a discount of 5% after takeover.

(B) (1) The assets and liabilities are to be taken at book values inventory and
trade receivables for which provisions at 2% and 2 1/2% respectively to be raised.
(2) The trade receivables of K Ltd. include ₹ 20,000 due from L Ltd.

(C) The LK Ltd. is to issue 15,000 new equity shares of ₹ 20 each, ₹ 18 paid up at premium of ₹ 4 per share so as to have sufficient working capital. Prepare ledger accounts in the books of K Ltd. and L Ltd. to close their books.
Answer:
Books of K Ltd. Realisation Account

7% Preference Shareholders Account

LK Ltd. Account

Equity Shareholders Account

Computation and discharge of purchase consideration

Question 23.
The financial position of two companies M/s. Abhay Ltd. and M/s. Asha Ltd. as on 31-3-2015 is as follows:
Balance Sheet as on 31-3-2015

They decided to merge and form a new company M/s. Abhilasha Ltd. as on 1-4-2015 on the following terms:
(1) Goodwill to be valued at 2 years purchase of the super profits. The normal rate of return is 10% of the combined share capital and general reserve. All other reserves are to be ignored for the purpose of goodwill. Average profits of M/s. Abhay Ltd. is ₹ 2,75,000 and M/s. Asha Ltd. is ₹ 1,75,000.

(2) Land and Buildings, Plant and machinery and Inventory of both companies to be valued at 10% above book value and a provision of 10% to be provided on Sundry Debtors.

(3) 12% debentures to be redeemed by the issue of 12% preference shares of M/s. Abhilasha Ltd. (face value of ₹ 100) at a premium of 10%.

(4) Sundry creditor to be taken over at book value. There is an unrecorded liability of ₹ 15,500 of M/s. Asha Ltd. as on 1-4-2015.

(5) The bank balance of both companies to be taken over by M/s. Abhilasha Ltd. after deducting liquidation expenses of ₹ 60,000 to be borne by M/s. Abhay Ltd. and M/s. Asha Ltd. in the ratio of 2:1.

You are required to:
(i) Compute the basis on which shares of M/s. Abhilasha Ltd. are to be issued to the shareholders of the existing company assuming that the nominal value of per share of M/s. Abhilasha Ltd. is ₹ 100.
(n) Draw Balance Sheet of M/s. Abhilasha Ltd. as on 1 4-2015 after the amalgamation. (May 2015) (16 Marks)
Answer:
(i) Computation of Purchase consideration

(ii) Balance Sheet of Abhilasha Ltd. (After Amalgamation) as on 1-4-2015

Notes to accounts

Question 24.
Given below are the Balance Sheet of two companies as on 31st December, 2015.
A Limited

It has been agreed that both these companies should be wound up and a new company AB Ltd. should be formed to acquire the assets of both the companies on the following terms and conditions:

(i) AB Ltd. is to have an authorized capital of ₹ 36,00,000 divided into 60,000, 8% cumulative preference shares of ₹ 10 each and 3,00,000 equity shares of ₹ 10 each.

(ii) AB Ltd. to purchase the whole of the assets of A Ltd. (except cash and Bank balances) for ₹ 28,25,000 to be settled as to ₹ 5,75,000 in cash and as to the balance by issue of 1,80,000 equity shares, credited as fully paid, to be treated as valued at ₹ 12.50 each.

(iii) AB Ltd. is to purchase the whole of the assets of B Ltd. (except cash and bank balances) for ₹ 4,91,000 to be settled as to ₹ 16,000 in cash and as to the balance by issue of 38,000 equity shares, credited as fully paid, to be treated as valued at ₹ 12.50 each.

(iv) A Ltd. and B Ltd. both are to be wound up, the two liquidators distributing the shares in AB Ltd. in kind among the equity shareholders of the respective companies.

(v) The liquidator of A Ltd. is to pay the preference shareholders 12 in cash for every share held in full satisfaction of their claims.

(vi) AB Ltd. is to make a public issue of 60,000, 8% cumulative preference shares at a premium of 10% and 30,000 equity shares at the issue price of ₹ 12.50 per share, all amount payable in full on application.

It is estimated that the cost of liquidation (including the liquidators’ remuneration) will be ₹ 10,000 in case of A Ltd. and ₹ 5,000 in case of B Ltd. and that the preliminary expenses of AB Ltd. will amount to ₹ 24,000- exclusive of the underwriting commission of ₹ 38,900 payable on the public issue.

You are required to prepare the initial Balance Sheet of AB Ltd. on the basis that all assets other than goodwill are taken over at the book value. (May 2016) (16 Marks)
Answer:
Balance Sheet of AB Ltd.

Notes of accounts

Working Notes:
1. Computation of Purchase consideration of A Ltd.

4. Calculation of goodwill/capital reserve of A Ltd. & B Ltd.

Notes:

1. As per the information given in the question, only the assets of A Ltd. and B Ltd. are taken over by AB Ltd. Thus the creditors are considered to be paid by the liquidators of the respective companies and hence being not taken over by AB Ltd.
2. As per the information given in the second last para of the question, it is stated that the preliminary expenses of AB Ltd. will amount to ₹ 24,000 exclusive of the underwriting commission of ₹ 38,900 payable on the public issue. It has been assumed that ₹ 24,000 has been paid and underwriting commission is still payable in the balance sheet of the amalgamated company.
3. Preliminary expenses and underwriting commission have been written off as per the provisions of Accounting standards.

Question 25.
P Ltd. and 0 Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized balance sheets of both the companies on the date of amalgamation stood as below:

PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provision @ 5% on Stock and Debtors respectively and depreciating Furniture & Fittings by @ 10%, Plant and Machinery by @ 10%. The debtors of P Ltd. include ₹ 25,000 due from 0 Ltd.

PQ Ltd. will issue:

1. 5 Pref. shares of ₹ 20 each @ ₹ 18 paid up at a premium of ₹ 4 per share for each pref. share held in both the companies.
2. 6 Equity shares of ₹ 20 each @ ₹ 18 paid up a premium of ₹ 4 per share for each equity share held in both the companies.
3. 6% Debentures to discharge the 8% debentures of both the companies,
4. 20,000 new equity shares of ₹ 20 each for cash @ ₹ 18 paid up at a premium of ₹ 4 per share.

PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the intrinsic value of the shares of both the companies.

Prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books. (May 2017) (16 Marks)
Answer:
Books of P Ltd. Realization Account

9% Preference Shareholders Account

PQ Ltd. Account

Books of Q Ltd.
Realization Account

9% Preference Shareholders Account

PQ Ltd. Account

W. Note : Value of Net Assets

Note: This cash is paid to equity shareholders of both the companies for adjustment of their rights as per intrinsic value of both companies.

Question 26.
Following are the Balance Sheet of companies as at 31.12.2003:

D Ltd. took over V Ltd. on the basis of the respective shares value, adjusting wherever necessary, the book values of assets and liabilities on the basis of the following information:
(i) Investment Allowance Reserve was in respect of addition made to fixed assets by V Ltd. in the year 1997-2002 on which income tax relief has been obtained. In terms of the Income Tax Act, 1961, the company has to carry forward till 2006 reserve of ₹ 2,00,000 for utilization.
(ii) Investments of V Ltd. included 1,000 shares in D Ltd. acquired at cost of ₹ 150 per share. The other investments of V Ltd. have a market value of ₹ 1,92,500.
(iii) The market value of investments of D Ltd. are to be taken at ₹ 1,00,000.
(iv) Goodwill of DLtd. and V Ltd. are to be taken at ₹ 5,00,000and ₹ 1,00,000 respectively.
(v) Fixed assets of D Ltd. and V Ltd. are valued at ₹ 6,00,000 and ₹ 8,50,000 respectively.
(vi) Current assets of D Ltd. included ₹ 80,000 of stock in trade received from V Ltd. at cost plus 25%.

The above scheme has been duty adopted. Pass necessary Journal Entries in the books of D Ltd. and prepare Balance Sheet of D Ltd. after taking over the business of V Ltd. Fractional share to be settled in cash, rest in shares of D Ltd. Calculation shall be made to the nearest multiple of a rupee. (May 2004) (16 Marks)
Answer:
Journal Entries in the Books of D Ltd.

Balance Sheet of D Ltd. as on 31st December, 2003

Notes to accounts

Working Notes:
1. Calculation of net asset value of shares

Discharge of Purchase Consideration

Question 27.
The following is the summarized Balance Sheet of A Ltd. as at 31st March, 2006:

B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

1. B Ltd. would takeover alt assets, except bank balance at their book values less 10%. Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the normal rate of return be 8% on the combined amount of share capital and general reserve.
2. B Ltd. is to takeover creditors at book value.
3. The purchase consideration is to be paid in cash to the extent of ₹ 6,00,000 and the balance in fully paid equity shares of ₹ 100 each at ₹ 125 per share.
4. The average profit is ₹ 1,24,400. The liquidation expenses amounted to ₹ 16,000. B Ltd. sold prior to 31st March, 2006 goods costing ₹ 1,20,000 to A Ltd. for ₹ 1,60,000. ₹ 1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2006. Creditors of A Ltd. include ₹ 40,000 stilt due to B Ltd.
5. Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance Sheet of B Ltd. as at 1st April, 2006 after the takeover. (November 2006) (20 Marks)

Answer:
Books of A Limited Realisation Account

Loan from A Account

Equity Shares in B Ltd. Account

B Ltd.
Balance Sheet as on 1st April, 2006 (extract) ‘

Notes to accounts

Working Notes:

Out of this ₹ 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000) ₹ 6,10,000 in shares of ₹ 125. Thus, the number of shares to be allotted 6,10,000/125 = 4,880 shares.

3. Unrealised Profit on Stock

Question 28.
P Ltd. and 0 Ltd. decided to amalgamate as on 01.04.2018 Their summarized Balance Sheets as on 31.03.2018 were as follows:

From the following information, you are required to prepare the Balance Sheet as on 01.04.2018 of a new company, R Ltd., which was formed to takeover the business of both the companies and took over all the assets and liabilities:

1. 50% Debenture are to be converted into Equity Shares of the New Company.
2. Investments are non- current in nature.
3. Fixed Assets of P Ltd. were valued at 10% above cost and that of 0 Ltd. at 5% above cost.
4. 10 % of trade receivables were doubtful for both the companies. Inventories to be carried at cost.
5. Preference shareholders were discharged by issuing equal number of 9% preference shares at par.
6. Equity shareholders of both the transferor companies are to be discharged by issuing Equity shares of ₹ 10 each of the new company at a premium of ₹ 5 per share.

Give your answer on the basis that amalgamation is in the nature of purchase.
Answer:
M/s. R Ltd.
Balance Sheet as at 1.4.2018

Notes to accounts

Working Notes:
1. Calculation of value of equity shares issued to transferor companies

2. Number of shares issued to equity shareholders, debenture holders and preference shareholders

* Cash paid for fraction of shares = ₹ 3,97,000 less ₹ 3,96,990 = ₹ 10
** Cash paid for fraction of shares = ₹ 50,000 less ₹ 49,980 = ₹ 20

Question 29.
Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2009. A new company Star Ltd. was formed to takeover the business of the existing companies. The Balance Sheets of Sun Ltd. and Moon Ltd. as at 31st March, 2009 are given below:

Additional information:
(a) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares for each equity share of Moon Ltd. The shares are to be issued @ ₹ 30 each, having a face value of ₹ 10 per share.
(b) Preference shareholders of the two companies are issued equivalent number of 15% preference shares of Star Ltd. at a price of ₹ 150 per share (face value ₹ 100).
(c) 10% Debenture holders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing such number of its 15% Debentures of ₹ 100 each so as to maintain the same amount of interest.
(d) Investment allowance reserve is to be maintained for 4 more years.
(e) Liquidation expenses are:
Sun Ltd. ₹ 2,00,000
Moon Ltd. ₹ 1,00,000
It was decided that these expenses would be borne by Star Ltd.
(f) All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value.
(g) Authorised equity share capital of Star Ltd. is ₹ 5,00,00,000, divided into equity shares of ₹ 10 each. After issuing required number of shares to the Liquidators of Sun Ltd. and Moon Ltd., Star Ltd. issued balance shares to Public. The issue was fully subscribed.

Required:
Prepare the Balance Sheet of Star Ltd. as at 1 st April, 2009 after amalgamation has been carried out on the basis of Amalgamation in the nature of purchase (Nov. 2009) (16 Marks)
Answer:
Balance Sheet of Star Ltd. as at 1st April, 2009

Working Notes:

4. Liquidation expenses of Sun Ltd. and Moon Ltd., ₹ 2 lakhs and ₹ 1 lakhs respectively will be debited to Goodwill account in the books of Star Ltd.

Question 30.
P Ltd. and 0 Ltd. were carrying on the business of manufacturing of auto components. Both the companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorized Capital of ₹ 10,00,000 divided into 1,00,000 equity shares of ₹ 10 each. The Balance Sheet of the companies as on 31.03.2014 were as under:
P Limited Balance Sheet as at 31.03.2014

Q Limited
Balance Sheet as at 31.03.2014

The assets and liabilities of the existing companies are to be transferred at book value with the exception of some items detailed below:

1. Goodwill of P Ltd. was worth ₹ 50,000 and of 0 Ltd. was worth ₹ 1,50,000.
2. Furniture & Fixture of Q Ltd. was valued at ₹ 35,000.
3. The debtors of P Ltd. are realized fully and bank balance of P Ltd. are to be retained by the liquidator and the sundry creditors are to be paid out of the proceeds thereof.
4. The debentures of P Ltd. are to be discharged by issue of 8% debentures of PQ Ltd. at a premium of 10%.

You are required to:
(/) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of the existing companies.
(ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation,
(iii) Write up journal entries including bank entries for closing the books of P Ltd. (May 2014) (16 Marks)
Answer:
Computation of Purchase Consideration

PQ Limited Balance Sheet as at 1st April, 2014

Notes to Accounts:

Working Note:
Computation of Securities Premium
Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 1 CPo premium.
Securities Premium = ₹ 1,10,000 × 10% = ₹ 11,000.

In the books of P Ltd. (Journal Entries)

Question 31.
P Ltd. and 0 Ltd. agreed to amalgamate their business. The scheme envisaged a share capital equal to the combined capital of P Ltd. and 0 Ltd. for the purpose of acquiring the assets, liabilities and undertakings of the two companies in exchange for share in PQ Ltd.

The Balance Sheets of P Ltd. and 0 Ltd. as on 31st March, 2017 (the date of amalgamation) are given below:
Summarised balance sheet as at 31-03-2017

The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of net profits for the three years ended 31st March, 2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.

The profit had been:
2014-15 ₹ 3,00,000; 2015-16 ₹ 5,25,000 and 2016-17 ₹ 6,30,000.

The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed net assets value of these companies.

In order to raise working capital, PQ Ltd. increased its authorized capital by ₹ 12,00,000 and proceeded to issue 72,000 shares of ? 10 each at the same rate of premium as issued for discharging purchase consideration to P Ltd. and Q Ltd.

You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd.; and
(ii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording its journal entries. (May 2017) (16 Marks)
Answer:
(i) Computation of number of shares issued to P Ltd. and Q Ltd.:
Amoutn of Share Capital as per balance sheet
P Ltd. = ₹ 6,00,000
Q Ltd. = ₹ 8.40.000
= 14.40.000
Share of P Ltd. = ₹ 14,40,000 × [21,60,000/(21,60,000 + 14,40,000)]
= ₹ 8,64,000 or 86,400 shares
Securities premium = ₹ 21,60,000 – ₹ 8,64,000 = ₹ 12,96,000
Premium per share = ₹ 12,96,000/₹ 86,400 = ₹ 15
Issued 86,400 shares @ ₹ 10 each at a premium of ₹ 15 per share
Share of Q Ltd. = ₹ 14,40,000 × [14,40,000/(21,60,000 + 14,40,000)]
= ₹ 5,76,000 or 57,600 shares
Securities premium = ₹ 14,40,000 – ₹ 5,76,000 = ₹ 8,64,000
Premium per share = ₹ 8,64,000/₹ 57,600 = ₹ 15
Issued 57,600 shares @ ₹ 10 each at a premium of ₹ 15 per share

(ii) Journal Entries in the books of PQ Ltd.

Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Notes to accounts

Working Notes:
1. Calculation of goodwill

Question 32.
The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:

X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of preceding three financial years (2016-17: ₹ 90,000; 2015-16: ₹ 78,000 and 2014-15: ₹ 72,000). The profits of 2014 -15 included credit of an insurance claim of ₹ 25,000 (fire occurred in 201314 and loss by fire ₹ 30,000 was booked in Profit and Loss Account of that year). In the year 2015-16, there was an embezzlement of cash by an employee amounting to ₹ 10,000.
(iii) Land & Buildings are valued at ₹ 5,00,000 and the Plant & Machinery at ₹ 4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts is to be created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to ₹ 15,000 and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included ₹ 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.

You are required to :
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March, 2018. (May 2018 – New Course) (20 Marks)
Answer:
In the Books of Y Ltd. Realisation Account

In the Books of X Ltd. Journal Entries

Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018

Notes to accounts

Working Notes:
1. Computation of goodwill

Goodwill to be valued at 2 times of average profits = ₹ 75,000 × 2 = ₹ 1,50,000

2.

Mix Problems – Merger And Purchase

Question 33.
H Ltd. and N Ltd. are to be amalgamated into H N Ltd. The new company is to takeover all the assets and liabilities of the amalgamating companies.

Assets and Liabilities of H Ltd. are to be taken over at book values in exchange of shares in H N Ltd. Three shares in the new company are to be issued at a premium of 20% for every two shares of H Ltd.
The approved scheme for N Ltd. is as follows:

1. 10% Preference shareholders are to be allowed two 15% Preference shares of ₹ 100 each in H N Ltd. for three Preference shares held in N Ltd.
2. The Debentures of N Ltd. are to be paid off at 5% discount by the issue of debentures of H N Ltd. at par.
3. The Equity shareholders of NT Ltd. are to be allowed as many shares at par in H N Ltd. as will cover the balance on their account and for this purpose, plant and machinery is to be valued less by 15% and obsolete stock forming 10% of the overall stock value is to be treated as worthless.

The summarised Balance Sheets of the two companies prior to amalgamation are as follows:

You are required to show the Journal Entries and the Balance Sheet of the amalgamated company immediately after amalgamation.
Answer:
In the books of H N Ltd. (Amalgamated Company)
Journal Entries

Balance Sheet of H NLtd. after amalgamation

Notes to Accounts

Computation of Purchase Consideration
1. For HLtd.
Number of shares to be issued by H N Ltd. for H Ltd.’s shareholders
= 64.0 × 3/2 = 96,000 shares.
Since, the issue price is ₹ 12 per share, the Purchase Consideration is
= 96,000 × 12 = ₹ 11,52,000.

2. For N Ltd.

Inter Company Holdings

Question 34.
The following are the summarised Balance Sheets of Y Ltd. and N Ltd. as on 31st October, 20X1:

On that day Y Ltd. absorbed N Ltd. The members of N Ltd. are to get one equity share of Y Ltd. issued at a premium of ₹ 2 per share for every five equity shares held by them in N Ltd. The necessary approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the above.
Answer:
Journal Entries in the books of N Ltd.

Working Note:

Question 35.
X Ltd. and Y Ltd. were carrying on same business independently. The companies agreed to amalgamate on and from 1-4-2011 and formed a new company Z Ltd. to takeover the assets and liabilities of the existing companies. The Balance Sheets of two companies as on 31-3-2011 are as follows:

Following are the additional information:

1. For the purpose of amalgamation, the shares of the existing companies are to be valued as under:
   X Ltd. = ₹ 18 per share Y Ltd. = ₹ 20 per share.
2. A contingent liability of X Ltd. of ₹ 1,80,000 is to be treated as actual existing liability.
3. The shareholders of X Ltd. and Y Ltd. are to be paid by issuing sufficient number of shares of Z Ltd. at a premium of ₹ 6 per share.
4. The face value of shares of Z Ltd. is to be of ₹ 10 each.

You are required to:
(i) Calculate the purchase consideration (i.e. the number of shares to be issued to X Ltd. and Y Ltd.)
(ii) Prepare Realisation Account and Shareholders Account in the books of X Ltd. & Y Ltd.
(iii) Prepare the Balance Sheet of Z Ltd. after amalgamation. (Nov 2011) (16 Marks)
Answer:
(i) Computation of Purchase Consideration

(ii) (a) In the books of X Ltd.
Realization Account

(b) In the books of YLtd.
Realization Account

(iii) Balance Sheet of Z Ltd. (After Amalgamation) as on 1st April, 2011

Working Note:
Calculation of Goodwill/(Capital Reserve)

Audit Strategy, Audit Planning and Audit Programme – CA Inter Audit Notes is designed strictly as per the latest syllabus and exam pattern.

Audit Strategy, Audit Planning and Audit Programme – CA Inter Auditing Notes

Question 1.
“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business” Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-March 18, March 19]
Or
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-Oct. 18]
Or
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business. Explain. [RTP-Nov. 18]
Or
Plans should be made to cover acquiring knowledge of the client’s accounting systems, policies and internal control procedures. Explain. [RTP-Nov. 19]
Answer:
Points to be covered in framing audit plan:

• Planning in auditing encompasses developing an overall plan for the expected scope and conduct of the audit and developing an audit programme showing the nature, timing and extent (NTE) of audit procedures.
• The audit planning is necessary to conduct an effective audit in an efficient and timely manner.
• SA 300 “Planning an Audit of Financial Statements” deals with the auditor’s responsibility to plan an audit of financial statements.
• Plans should be made to cover, among other things:
  (a) acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
  (b) establishing the expected degree of reliance to be placed on internal control;
  (c) determining and programming the nature, timing, and extent of the audit procedures to be performed;
  (d) coordinating the work to be performed.

Question 2.
Write short note on: Usefulness of careful and adequate audit planning.
Or
Surya and Chand Ltd is a manufacturing company engaged in the production of miscellaneous electrical goods. Trilochan and Co. has been appointed as the auditors to carry out its audit. Au¬ditor thinks that Planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Adequate planning benefits the audit of financial statements in several ways. Analyse and Advise explaining the benefits of adequate planning. [RTP-May 18]
Or
“An adequate planning benefits the audit of financial statements.” Discuss. [Nov. 18 (5 Marks)]
Or
Explain the benefits of planning in the audit of financial statements. [RTP-May 19]
Or
Engagement partner of Audit Firm MKC AND COMPANY thinks that Planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Ade¬quate planning would benefit the audit of financial statements in several ways. Analyse explaining the benefits of adequate planning. [RTP-Nov. 19]
Answer:
Usefulness of Careful and Adequate Audit Planning:

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

Question 3.
In performing an audit of financial statements, the auditor shall have or obtain knowledge of the business. Explain in the light of SA 315. [May 04 (8 Marks), MTP-Oct. 19]
Or
State the matters to be considered for acquiring knowledge of the business of the client by the auditor. [May 05 (6 Marks)]
Or
Write short note on: Knowledge of Client’s Business. [May 09 (5 Marks)]
Or
‘Knowledge of Client business’ is one of the important principles in developing an overall audit plan. Explain. [Nov. 17 {6 Marks)]
Answer:
Knowledge of Client’s Business:
Knowledge of client’s business is one of the important principles in developing an overall audit plan. In fact, without adequate knowledge of client’s business, a proper audit is not possible.
As per SA 315 “Identifying and Assessing the Risk of Material Misstatements through understanding the entity and its environment” auditor is required to obtain an understating of following as a part of risk assessment procedures:
(a) Industry, regulatory, and other external factors including applicable financial reporting framework,

(b) The nature of the entity, including:

• its operations;
• its ownership and governance structures;
• the types of investments that the entity is making and plan to make; &
• the way that the entity is structured and how it is financed;

(c) The entity’s selection and application of accounting policies, including the reasons for changes thereto.

(d) The entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement.

(e) The measurement and review of the entity’s financial performance.

Question 4.
Knowledge of the Client’s business is one of the important principles in developing an overall audit plan. In fact without adequate knowledge of client’s business, a proper audit is not possible. As per SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its Environment”, the auditor shall obtain an understanding of the relevant industry, regulatory and other external factors including the applicable financial reporting framework. Substantiate with the help of examples. [RTP-May 20]
Answer:
Examples of industry, regulatory and other external factors including the applicable FRF:

• The competitive environment, including demand, capacity, product and price competition as well as cyclical or seasonal activity.
• Supplier and customer relationships, such as types of suppliers and customers (e.g., related parties, unified buying groups) and the related contracts with those entities.
• Technological developments, such as those related to the entity’s products, energy supply and cost.
• The effect of regulation on entity operations.

Question 5.
“The Nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors.” Explain.
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. Explain the factors due to which above varies. [MTP-May 20, RTP-Nov. 20]
Answer:
Planning the Direction and Supervision of Engagement Team:
As per SA 300 “Planning an Audit of Financial Statements” the auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work.

The nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors, including:
(a) The size and complexity of the entity.
(b) The area of the audit.
(c) The assessed risks of material misstatement (for example, an increase in the assessed risk of material misstatement for a given area of the audit ordinarily requires a corresponding increase in the extent and timeliness of direction and supervision of engagement team members, and a more detailed review of their work],
(d) The capabilities and competence of the individual team members performing the audit work.

Question 6.
“Planning is not a discrete phase of an audit, butrather a continual and iterative process”. Discuss.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. Analyse and Explain. [RTP-Nov. 19]
Answer:
Planning – a continuous process:
Planning is not a discrete phase of an audit but rather a continuous process. It often begins shortly after (or in connection with] the completion of the previous audit and continues until the completion of the current audit engagement.

Planning, however, includes consideration of the timing of certain activities and audit procedures that need to be completed prior to the performance of further audit procedures. For example, planning includes the need to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such matters as:

• The analytical procedures to be applied as risk assessment procedures.
• Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
• The determination of materiality.
• The involvement of experts.
• The performance of other risk assessment procedures.

Question 7.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. Explain. [RTP-Nov. 18]
Or
As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit plan. Explain. [RTP-Nov. 19]
Or
Plans should be further developed and revised as necessary during the course edit. Explain. [RTP-May 20]
Answer:
Changes to Planning decisions:
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. The auditor may need to modify the overall audit strategy and audit plan as a result of:

• unexpected events,
• changes in conditions, or
• the audit evidence obtained from the results of audit procedures.

Based on the revised consideration of assessed risks, auditor need to modify the nature, timing and extent of further audit procedures. This may be the case when information comes to the auditor’s attention that differs significantly from the information available when the auditor planned the audit procedures. For example, audit evidence obtained through the performance of substantive procedures may contradict the audit evidence obtained through tests of controls.

Question 8.
The auditor shall document the overall audit strategy, the audit plan, and any significant changes i made during the audit engagement to the overall audit strategy or the audit plan, and the reasons [ for such changes. Explain, [MTP-Aug. 18, RTP-Nov. 18, Nov. 20]
Answer:
Documentation of Audit Plan:
The auditor shall document:
[a] The overall audit strategy;
[b] The audit plan; and
[c] Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

Documentation of the overall audit strategy is a record ofthe key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team.

Documentation ofthe audit plan is a record oftheplanned NTRofRAPsand FAPs at the assertion level in response to the assessed risks. It also serves as a record of the proper planning ofthe audit procedures that can be reviewed and approved prior to their performance.

Record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to the planned NTE of audit procedures, explains why the significant changes were made, and the overall strategy and audit plan finally adopted for the audit.
Examples of Audit Documentation:
(a) Summary of discussions with the entity’s key decision makers.
(b) Documentation of audit committee pre-approval of services, where required.
(c) Audit documentation access letters.
(d) Other communications or agreements with management or TCWG regarding the scope, or changes in scope, of services.
(e) Auditor’s report on the entity’s financial statements.
(f) Other reports as specified in the engagement agreement.

Question 9.
Write short note on: Factors to be considered in the development of overall audit plan.
Or
A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be considered in the development of overall audit plan?
Or
M & Co. was appointed as auditor of IGI Ltd. As an auditor what are the factors that would be con¬sidered in the development of overall audit plan? [May 18 (5 Marks), MTP-April 19]
Or
Your firm has been appointed as an auditor to audit the accounts of an auto parts manufacturer, ABC Ltd. Elucidate the matters to be considered by an auditor in developing his overall plan for the expected scope and conduct of audit. [MTP-Oct. 20]
Answer:
Factors to be considered in development of overall Plan:

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

Question 10.
The process of establishing the overall audit strategy assists the auditor to determine certain mat¬ters with respect of team resource. Explain those matters.
Or
Auditor of ABC Ltd. is worried as to management of key resources to be employed to conduct audit. How the audit strategy would be helpful to the auditor?
Or
The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants appointed as auditor of Fabric India Ltd is considering as to management of key resources to be employed to conduct audit. Discuss how overall audit strategy would assist the auditor. [MTP-March 18]
Or
Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his human resources. [May 19 [4 Marks)]
Or
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. The process of establishing the overall audit strategy assists the auditor to determine such matters as for example – the resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters. Explain the other three such matters. [RTP-May 20J
Answer:
Benefits of Audit Strategy:

• Employment of Qualitative Resources:
  Audit strategy helps in deploying the appropriate resources for specific audit areas, such as the use of experienced team members for high risk areas or the involvement of experts on complex matters.
• Allocation of Quantity of Resources:
  Audit strategy helps in allocating the appropriate number of resources to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas.
• Timing of Deployment of Resources:
  Audit strategy helps in determining the timing of deploying the resources, such as whether at an interim audit stage or at key cut-off dates.
• Management of Resources:
  Audit strategy helps in managing, directing, supervising the resources, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place [for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 11.
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.
Discuss stating the process of establishing the overall audit strategy that would assist the auditor to determine key matters. [RTP-Nov. 18]
Answer:
Process of establishing the overall audit strategy:
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.

The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, such matters as:

• The resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters;
• The amount of resources to allocate to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas;
• When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates; and
• How such resources are managed, directed and supervised, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 12.
Comment on the following in relation to SAs: Auditor shall establish an overall strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. [May 11 (5 Marks)]
Or
Discuss the factors the auditor will consider while establishing the overall strategy.
Answer:
Establishment of Audit Strategy:
(a) SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an
overall audit strategy that sets the scope, timing and direction of the audit, and that guides the
development of the audit plan.

(b) In establishing the overall audit strategy, the auditor shall;

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

Question 13.
Discuss the relationship between overall audit strategy and audit plan.
Or
“Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy”. Discuss.
Or
The establishment of the overall audit strategy and the detailed audit plan are closely inter-related. Explain. [MTP-March 19]
Answer:
Relationship between the Overall Audit Strategy and the Audit Plan:

• Audit strategy and audit plan are interrelated to each other because change in one would result into change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
• The audit strategy provides the guidelines for developing the audit plan. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy.
• Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for developing a detailed audit plan.
• Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain sufficient appropriate audit evidence.

Question 14.
In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. Elucidate those cases by which auditor can ascertain the reporting objectives of the engagement. [Nov. 19 (4 Marks)]
Answer:
Cases by which by which auditor can ascertain the reporting objectives of the engagement:
As per SA 300 “Planning an Audit of Financial Statements” the auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. In establishing the overall audit strategy, the auditor shall, among other ascertain the reporting objectives of the engagement to plan the timing of the audit. Various cases through which auditor can ascertain the reporting objectives of the engagement are:

• The entity’s timetable for reporting, such as at interim and final stages.
• The organization of meetings with management and those charged with
• Governance to discuss the nature, timing and extent of the audit work.
• The discussion with management and those charged with governance regarding the expected type and timing of reports to be issued and other communications, both written and oral, including the auditor’s report, management letters and communications to those charged with governance.
• The discussion with management regarding the expected communications on the status of audit work throughout the engagement.

Question 15.
Write short note on: Audit Programme. [Nov. 06 (4 Marks)]
Or
“An audit programme is a detailed plan of applying the audit procedure in the given circumstance for accomplishing the audit objectives”. Discuss.
Answer:
Audit Programme:

• An Audit programme is a detailed plan of work, prepared by the auditor for carrying out an audit.
• It is comprised of a set of techniques and procedures, which the auditor plans to apply in the given audit for forming an opinion about the client’s statement of account.
• It not only constitutes the plan of the work but also provides a basis for the supervision and control of the audit work.
• The programme may also contain the audit objectives for each audit step.
• It should be sufficient in detail to serve as a set of instructions to the audit staff involved in the audit and also as a means to control the proper execution of the work.

Advantages of Audit Programme:

• It provides guidance and instructions on the work to be carried out e.g. manner of picking up transactions for sample test.
• It provides a clear record of the work to be carried out by the individual staff assigned on the audit.
• The progress of audit work can be reviewed by the audit managers or the partners.
• Chances of duplication of work are eliminated.
• Chances of overlooking the important areas of audit are also eliminated.
• Evidence of work done is available when the auditor is to defend his performance against charge of negligence.
• It serves as a guide for audits to be carried out in the succeeding year.

Question 16.
Explain the significant points auditor would consider while developing an audit programme. [RTP-May 19]
Or
List out the points that should be kept in mind by the auditor for the purpose of constructing an audit programme. [May 19 (3 Marks)]
Or
Discuss the points to be considered by auditor for the purpose of constructing an audit programme. [Nov. 19 (4 Marks)]
Answer:
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:

• Be within the scope and limitation of the assignment.
• Determine the evidence reasonably available and identify the best evidence for deriving the necessary assurance.
• Only those techniques and procedures which are useful in accomplishing the verification purpose should be applied.
• Consideration of all possibilities of errors and fraud.
• Co-ordinate the procedures to be applied to related items.

Question 17.
Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques.
Analyse and explain with the help of example of evidence in respect of Sales. [RTP-May 20]
Answer:
Audit Programme-Designed to provide Audit Evidence:

• Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques.
• Whatisbestevidencefortestingtheaccuracyofanyassertionisamatterofexpertknowledgeand experience. This is the primary task before the auditor when he draws up the audit programme.
• Transactions are varied in nature and impact; procedures to be prescribed depend on prior knowledge of what evidence is reasonably available in respect of each transaction.
• Example, sales are evidenced by:
  • invoices raised by the client;
  • price list;
  • forwarding notes to client;
  • inventory-issue records;
  • sales managers’ advice to the inventory section;
  • acknowledgements of the receipt of goods by the customers; and collection of money against sales by the client.

Question 18.
Discuss the following: Despite of several disadvantages, audit programme is required to start an audit. [Nov. 13 (5 Marks)]
Or
How does an audit programme help to plan and perform the audit?
Answer:
Requirement of Audit Programme:
The audit programme is required to start an audit due to the following considerations:

• The audit programme lists down areas of audit before commencement.
• Audit programme covers the audit timings and hence it becomes a schedule of audit plan.
• Audit programme allocates the work among the staff members and thereby fixes a responsibility over them.
• It specifies the procedures to be performed during the audit.
• Audit programme acts as a check list during the performance of audit.
• The working papers of the audit staff can be reviewed against the audit programme to evaluate the performance before reporting on the financial statements.
• It also works as a basis for billing the clients for the time and manpower involved in the audit.

Question 19.
Arpana Hospitals Ltd having Gross Professional Charges of ? 50 crores is engaged in providing healthcare services. STP & Co., a firm of auditors is appointed as its auditors.
Advise what special points to be kept in mind for the purpose of construction of an Audit programme. Explain. [RTP-May 18]
Answer:
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:

• Be within the scope and limitation of the assignment.
• Determine the evidence reasonably available and identify the best evidence for deriving the necessary assurance.
• Only those techniques and procedures which are useful in accomplishing the verification purpose should be applied.
• Consideration of all possibilities of errors and fraud.
• Co-ordinate the procedures to be applied to related items.

Question 20.
“The utility of the audit programme can be retained and enhanced only by keeping the programme sand also the Client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed”. Explain. [RTP-May 19]
Answer:
Periodic Review of The Audit Programme
Periodic review of the audit programme is required to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. If periodic review is not done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences.

It was held in the case of Pacific Acceptance Corporation Ltd. v. Forsyth and Others, that if the audit programme for the audit of a branch of a financing house, drawn up a number of years ago, fails to take into consideration that the previous policy of financing of a vehicle has been changed to financing of real estate acquisition, the whole audit conducted thereunder would be entirely misdirected and may even result into nothing more than a farce.

The utility of the audit programme can be retained and enhanced only by keeping the programme as also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme maybe removed. However, as a basic feature, audit programme not only lists the tasks to be carried out but also contains a few relevant instructions, like the extent of checking, the sampling plan, etc.

Question 21.
What are the disadvantages of the use of an Audit Programme. [May 07 (4 Marks)]
Or
Write short note on: Disadvantages of the use of an Audit Programme. [May 12 (4 Marks)]
Answer:
Disadvantages of Audit Programme:
(a) The audit work tends to become mechanical and monotonous, unless the audit objectives for each step are clear to the person/staff deployed.
(b) The audit work may be partially accomplished but may give an impression that the audit has been fully done if the programme does not record evidence of performing the work.
(c) If the client’s system of business line has changed but the programme has not been tailored to the changes, it may fail to serve the intended purpose and an audit failure may result.
(d) The initiative of the audit staff is dampened if the programme is to be rigidly followed.
(e) The clients staff may become aware of the scope of audit as per programme and this may provide them an opportunity for manipulation of records or for committing fraud since they become aware about the auditor’s approach.

Question 22.
Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable. Explain [RTP-May 18, May 19, Nov. 20]
Answer:
Uniform Audit Programme applicable to all audit assignments:
Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable due to following reasons:

• Businesses vary in nature, size and composition;
• Work which is suitable to one business may not be suitable to others;
• Efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor differs from assignment to assignment.

However, it is an essential requirement that audit programme, specify in detail, the nature of work to be done so that no time will be wasted on matters not pertinent to the engagement and any special matter or any specific situation can be taken care of.

Question 23.
Explain concept of materiality and factors which act as guiding factors to this concept. [Nov. 09 (6 Marks)]
Or
State the factors which are to be considered in determining materiality. [Nov. 15 (4 Marks)]
Answer:
Concept of Materiality:

• SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality and its relationship with audit risk. As per SA 320 information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information.
• The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in conformity with recognised accounting policies and practices.
• The auditor considers materiality at both the overall financial information level and in relation to individual account balances and classes of transactions. The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in conformity with recognised accounting policies and practices.

Factors influencing materiality: Materiality may be influenced by

• Legal and regulatory requirements, non-compliance of which may have a significant bearing on the financial information, and
• Considerations which may have a significant bearing on the financial information, and
• Considerations relating to individual account balances and relationships. These factors may result in different levels of materiality depending on the matter being audited.

Question 24.
State the factors which are to be considered in determining materiality. [Nov. 15 (4 Marks)]
Answer:
Factors influencing materiality:

• Legal and regulatory requirements, non-compliance of which may have a significant bearing on the financial information, and
• Considerations which may have a significant bearing on the financial information, and
• Considerations relating to individual account balances and relationships.
  These factors may result in different levels of materiality depending on the matter being audited.

Question 25.
Write short note on: Materiality and Audit Risk. [Nov. 14 (4 Marks)]
Answer:
Materiality and Audit Risk:
SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality and its relationship with audit risk. Accordingly,

• In conducting an audit of financial statements, the overall objectives of the auditor are 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; and to report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
• The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
• Audit riskis the riskthatthe auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit risk is a function of the risks of material misstatement and detection risk. Materiality and audit risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report

Question 26.
Write short note on: Factors affecting the identification of an appropriate benchmark in determining materiality.
Or
Mr. X was appointed as the auditor of M/s Easy Go Ltd. and intends to apply the concept of materi¬ality for the financial statements as a whole. Please guide him as to the factors that may affect the identification of an appropriate benchmark for this purpose.
“Determining materiality involves the exercise of professional judgment”. Discuss stating the factors that may affect the identification of an appropriate benchmark. Also give examples. [RTP-May 18]
Or
With reference to SA 320 indicate the factors which may affect the identification of an appropriate benchmark in determining materiality for the financial statements as a whole. [Nov. 15 (5 Marks)]
Or
With reference to SA 320 “Materiality in planning and performing an audit” Indicate the factors
which may effect the identification of an appropriate benchmark while determining materiality for the financial statements as a whole. [Nov. 20 (4 Marks)]
Answer:
Factors affecting identification of appropriate benchmark as per SA 320:
Determining materiality involves the exercise of professional judgment. Apercentage is often applied
to a chosen benchmark as a starting point in determining materiality for the financial statements as a
whole. Factors that may affect the identification of an appropriate benchmark include the following:

• The elements of the financial statements [for example, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused [for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;
• The entity’s ownership structure and the way it is financed [for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
• The relative volatility of the benchmark.

Question 27.
As an auditor of RST Ltd. Mr. P applied the concept of materiality for the financial statements as a whole. On the basis of obtaining additional information of significant contractual arrangements that draw attention to a particular aspect of a company’s business, he wants to re-evaluate the materiality concept. Please guide him.
Or
Materiality for the financial statements as a whole may need to be revised as a result of a change in circumstances that occurred during the audit. Explain with the help of example. [MTP-Olt. 19]
Answer:
Revision as the Audit Progresses

• SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality.
• As per SA 320, auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.
• If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.

Example: If during the audit it appears as though actual financial results are likely to be substantially different from the anticipated period end financial results that were used initially to determine materiality for the financial statements as a whole, the auditor revises that materiality.

• Materiality is an important consideration for an auditor to evaluate whether the financial statements reflect a true or fair view or not. SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor should consider materiality and its relationship with audit risk while conducting an audit.
• When planning the audit, the auditor considers what would make the financial information materially misstated. The auditor’s preliminary assessment of materiality related to specific account balances and classes of transactions helps the auditor decide such questions as what items to examine and whether to use sampling and analytical procedures.
• This enables the auditor to select audit procedures that, in combination, can be expected to support the audit opinion at an acceptably low degree of audit risk.
• It may be noted that the auditor’s assessment of materiality and audit risk may be different at the time of initially planning of the audit than at the time of evaluating the results of audit procedures.

Objective Type Questions (Correct/Incorrect)

Question 1.
SA 315 has a purpose to establish standards to form procedures to be followed to have an understanding of the entity and its environment.
Answer:
Statement is correct.
SA 315 “Identifying and Assessing the Risk of Material Misstatements through Understanding the Entity and its Environment” deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements, through understanding the entity and its environment, including the entity’s internal control.

Question 2.
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.
Answer:
Statement is correct.

• Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
• 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.
Establishing an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is prerogative of the management.
Answer:
Statement is incorrect.
As per SA 3 0 0 “Planning an Audit of Financial Statements” to establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is the part of audit planning activities.

Question 4.
Planning is a discrete phase of an audit.
Answer:
Statement is incorrect.
As per SA 300 “Planning an Audit of Financial Statements” planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Question 5.
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures)does not need any revision.
Answer:
Statement is incorrect.
As per SA 320 “Materiality in Planning and Performing an Audit” materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures] may need to be revised as a result of

• a change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of the entity’s business],
• new information, or
• a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures.

Question 6.
There is direct relationship between materiality and the degree of audit risk. [RTP-May 18]
Answer:
Statement is incorrect.

• As per SA 3 2 0 “Materiality in Planning and Performing an Audit” there is an inverse relationship between materiality and the degree of audit risk.
• The higher the materiality level, the lower the audit risk and vice versa. For example, the risk that a particular account balance or class of transactions could be misstated by an extremely large amount might be very low but the risk that it could be misstated by an extremely small amount might be very high.

Question 7.
There is no relation between Audit Plans and knowledge of the client’s business. [RTP-May 19]
Answer:
Statement is incorrect.

• The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner.
• Plans should be based on knowledge of the client’s business

Question 8.
Planning is not a discrete phase of an audit, but rather a continual and iterative process. [RTP-May 19]
Answer:
Statement is correct.

• As per SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete phase of an audit, but rather a continual and iterative process.
• Planning often begins shortly after (or in connection with] the completion of the previous audit and continues until the completion of the current audit engagement.

Question 9.
A well designed and drafted audit plan and audit strategy which takes care of all the uncertainties and conditions, need not be changed during the course of audit. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit.

The auditor may need to modify the overall audit strategy and audit plan as a result of:

• unexpected events,
• changes in conditions, or
• the audit evidence obtained from the results of audit procedures.
• Planning, however, includes consideration of the timing of certain activities and audit procedures that need to be completed prior to the performance of further audit procedures.

Question 10.
The auditor need not discuss elements of planning with the entity’s management in any case. [RTP-Nov. 19]
Answer:
Statements is incorrect.
The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement.

Question 11.
Planning is a discrete phase of an audit. [RTP-Nov. 19]
Answer:
Statement is incorrect.

• As per SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete phase of an audit, but rather a continual and iterative process.
• Planning often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Question 12.
Under a properly framed audit programme by the auditor, the danger is significantly less and audit can proceed systematically. [Nov. 19 (2 Marks)]
Answer:
Statement is correct.

• Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records.
• Under a properly framed programme, the danger is significantly less and the audit can proceed systematically.

Question 13.
In the planning stage, analytical procedures would not in any way assist the auditor. [RTP-May 20]
Answer:
Statement is incorrect.

• In the planning stage, analytical procedures assist the auditor in understanding the client’s business and in identifying areas of potential risk by indicating aspects of and developments in the entity’s business of which he was previously unaware.
• This information will assist the auditor in determining the nature, timing and extent of his other audit procedures.
• Analytical procedures in planning the audit use both financial data and non-financial information, such as number of employees, square feet of selling space, volume of goods produced and similar information.

Question 14.
A detailed Audit Programme once prepared for a business can be used for all business under all circumstances. [MTP-Oct. 20]
Answer:
Statement is incorrect.

• Evolving one audit programme applicable to all business under all circumstances is not practicable as businesses vary in nature, size and composition, work which is suitable to one business may not be suitable to others.
• Efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the other factors that vary from engagement to engagement.

Question 15.
Overall audit plan sets the scope, timing and direction of the audit, and guides the development of the more detailed audit strategy. [RTP-Nov. 20]
Answer:
Statement is incorrect.
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.

Question 16.
It is not necessary for the auditor to periodically review the audit programme. [Nov. 20 (2 Marks)]
Answer:
Statement is incorrect.

• There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions.
• Unless this is done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences.

Question 17.
The audit plan is more detailed than the overall audit strategy. [Nov. 20 (2 Marks)]
Answer:
Statement is correct.

• Audit strategy and audit plan are inter-related to each other because change in one would result into change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
• The audit strategy provides the guidelines for developing the audit plan. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy.

Nature, Objective and Scope of Audit – CA Inter Audit Notes is designed strictly as per the latest syllabus and exam pattern.

Nature, Objective and Scope of Audit – CA Inter Auditing Notes

Question 1.
“An auditis independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.”
Explain stating clearly how the person conducting this task should take care to ensure that financial statements would not mislead anybody. [MTP-Oct. 19]
Or
The person conducting audit should take care to ensure thatfinancial statements would notmislead anybody. Explain stating clearly the meaning of Auditing. [RTP-May 20]
Answer:
Meaning of Audit:
“An audit is independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.” From this definition, following main points emerge:

• Audit is Independent examination of Financial information.
• Audit may be carried out of all entities, may be profit oriented or not and irrespective of its size or legal form. For example, listed company engaged in business and Sec. 8 company which is a non-profit organisation, both are required to get the accounts audited under Companies Act, 2013.
• The objective of the audit is to express an opinion on the financial statements.

Points to be ensured that F.S. not misled anybody:
Auditor engaged to perform the task of performing audit need to ensure the following:
(a) Ledger balances agree with the entries made in the book of account.
(b) Sufficient and Appropriate evidences are available for entries made in books of account.
(c) All transactions are being recorded in books of account, i.e. there is no omission.
(d) Information contained in the financial statements is clear and unambiguous.
(e) Amounts shown in financial statements are properly classified, described and disclosures are made in conformity with applicable Accounting Standards.
(f) Financial statements reflect true and fair view of financial results and financial position.

Question 2.
The objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements.
Or
State the objectives of Audit according to SA 200 [RTP-May 20J
Answer:
Objectives of Audit:
(a) The objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements.
(b) The auditor’s opinion helps determination of the true and fair view of the financial position and operating results of an enterprise.
(c) The user, however, should not assume that the auditor’s opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.
(d) Auditor should review and assess the conclusions drawn from the audit evidence obtained and from his knowledge of business of the entity as the basis for the expression of his opinion on the financial information.

Question 3.
List the points that merit consideration in regard to scope of audit.
Answer:
Points to be considered in determining Scope of Audit:

1. Audit should cover the examination of all aspects of an entity relevant to financial statements.
2. Auditor should assess the sufficiency and appropriateness of the information contained in the accounting records and other source data. For this purpose, auditor should
   • evaluate accounting systems and internal controls.
   • perform necessary tests, enquiries and other verification procedure of accounting transactions and account balances.
3. To determine whether the information is properly disclosed in the financial statements, audit may involve
   (a) comparing the financial statements with the underlying records.
   (b) considering the judgments used by management in preparing the financial statements.
4. Auditor is not expected to perform duties which fall outside the scope of his competence.
5. Limitations, if any, on the scope of audit that impair the auditor’s ability to express an unmodified opinion should be set out in his report.

Question 4.
State briefly six important aspects to be considered by an auditor while conducting an audit.
State the matters which the statutory auditor should look into before framing an opinion on accounts on finalisation of audit of accounts. Discuss overall audit approach.
Or
State the principal aspects to be covered in an audit concerning financial statement of account.
[Nov. 15 (5 Marks)]
Or
GST & Co., a firm of Chartered Accountants has been appointed to audit the accounts of XYZ Ltd. The partner wanted to cover principal aspects while conducting its audit of financial statements. Advise those principal aspects.
Or
Discuss: Principal aspects to be considered by an auditor while conductingan audit of final statements of accounts. [May 18 (5 Marks)]
Or
SWM is proprietorship firm engaged in the manufacturing of different kind of yarns. It sells its finished products both in the domestic as well as in the international market. The company is making total turnover of ₹ 3 0 crores. It has also availed cash credit limit of ₹ 3 crores from Dena Bank. In the year 2020-21. Proprietor of the firm is worried about the financial position of the company and is under the impression that since he is out of India, therefore firm might not run well. He approaches an Internal Auditor about as to what would be covered in Audit. Advise regarding principal aspects (any four) to be covered in getting accounts audited. [MTP-March 19]
Answer:
Aspects to be covered in Audit:
1. Examination of Accounting System & Internal Control

• To ascertain whether it is appropriate for the business and helps in proper recording of all the transactions.
• To determine the Nature, Timing and Extent (NTE) of Audit Procedures to be performed.

2. Reviewing the system & procedures
To find out whether they are adequate and comprehensive.

3. Vouching of the transactions

• To ensure authenticity and validity of transactions.
• To check the arithmetical accuracy of the books of account.
• To ascertain proper distinction into capital and revenue items.

4. Verification of Assets & Liabilities
To ensure existence and valuation of the assets and liabilities appearing in the balance sheet.

5. Statutory Compliances
In case of entities governed by some law, rules or regulations, for example in case of audit of a company incorporated under Companies Act, 2013.

6. Expression of Opinion

• On true and fair view of state of Affairs as reflected by Balance Sheet.
• On true and fair view of Financial Results as reflected by Statement of Profit and Loss.
• On true and fair view of Cash Flows as reflected by Cash Flow Statement.

7. Reporting on Other matters
As required by the law governing the entity.

Question 5.
The duties of the auditor are limited to verification of the arithmetical accuracy of the books of the accounts. Comment.
Answer:
Auditor’s Duties:
Statement that duties of the auditor are limited to verification of the arithmetical accuracy of the books of the accounts is not correct, as besides ensuring the arithmetical accuracy of the books of the accounts, auditor is also supposed to cover a number of other aspects in the audit.

Aspects to be covered in the audit in addition to verification of arithmetical accuracy:
1. Examination of Accounting System & Internal Control

• To ascertain whether it is appropriate for the business and helps in proper recording of all the transactions.
• To determine the Nature, Timing and Extent (NTE) of Audit Procedures to be performed.

2. Reviewing the system & procedures
To find out whether they are adequate and comprehensive.

3. Vouching of the transactions

• To ensure authenticity and validity of transactions.
• To check the arithmetical accuracy of the books of account.
• To ascertain proper distinction into capital and revenue items.

4. Verification of Assets & Liabilities
To ensure existence and valuation of the assets and liabilities appearing in the balance sheet.

5. Statutory Compliances
In case of entities governed by some law, rules or regulations, for example in case of audit of a company incorporated under Companies Act, 2013.

6. Expression of Opinion

• On true and fair view of state of Affairs as reflected by Balance Sheet.
• On true and fair view of Financial Results as reflected by Statement of Profit and Loss.
• On true and fair view of Cash Flows as reflected by Cash Flow Statement.

7. Reporting on Other matters
As required by the law governing the entity.

Question 6.
Discuss the types of audits required under law. [Nov. 11 (5 Marks)]
Answer:
Audit required under law:
(a) Companies governed by the Companies Act, 2013;
(b) Banking companies governed by the Banking Regulation Act, 1949;
(c) Electricity supply companies governed by the Electricity Supply Act, 1948;
(d) Co-operative societies registered under the Co-operative Societies Act, 1912;
(e) Public and charitable trusts registered under various Religious and Endowment Acts;
(f) Corporations set up under an Act of Parliament or State Legislature such as the LIC of India.
(g) Specified entities under various sections of the Income-tax Act, 1961.

Question 7.
What is the importance of having the accounts audited by independent professional auditors? [May 01 (8 Marks)]
Or
What are the advantages of Independent audit. [May 12 (8 Marks)]
Or
Discuss the following: Advantages of Independent Auditor. [May 15(5 Marks)]
Or
RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its finished products both in the domestic as well as in the international market. The company is making total turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year 2020-21, proprietor of the firm is worried about the financial position of the company and is under the impression that since he is out of India, therefore firm might run into losses. He approaches a CA about advantages of getting his accounts audited throughout the year so that he may not suffer due to accounting weaknesses. Advise regarding advantages of getting accounts audited. [MTP-March 18, Oct. 18]
Or
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of considerable value even to those enterprises and organisations where audit is not compulsory. Explain. [RTP-Nov. 18]
Answer:
Advantage of Audit of Financial Statement:
1. Protect the interest of fund providers: It safeguards the financial interests of persons who are not associated with the management of the organisation e.g. partners or shareholders.
2. Moral check on employees: It acts as a moral check on employees from committing defalcations or embezzlement.
3. Settlement of Taxes, etc: Auditing statements of accounts are helpful in settling of taxes, negotiating loans and for determining the purchase consideration for a business.
4. Settlement of Trade Disputes: Audited statements are useful for settling trade disputes for higher wages or bonus.
5. Detection of Wastages: Audited statements also help in detection of wastages and losses and shows the different ways by which these might be checked especially those that occurred due to absence or inadequacy of internal checks or internal control measures.
6. Proper maintenance of books of account: Independent audit ascertains whether the necessary books of account and allied records have been properly kept and helps the client in making good deficiencies or inadequacies in this respect.
7. Appraisal of controls: As an appraisal function, audit reviews the existence and operations of various controls in the organisations and reports weaknesses, inadequacies etc.
8. Admission/retirement of Partner: Audited accounts are of great help in the settlement of accounts at the time of admission or death of the partner.
9. Grant of License: Government may require audited and certified statements before it gives assistance or issues the license for a particular trade.

Question 8.
Discuss Limitations of audit. [May 11 (8 Marks)]
Or
“The process of auditing is such that it suffers from certain limitations”. Discuss.
Or
ABC Ltd. Requested the auditor to provide for absolute assurance in respect of its ten branches scattered in Mumbai and confirm that financial statements are free from material misstatements due to fraud or error. Advise.
Or
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit. Explain. [RTP-Nov. 18]
Answer:
Inherent Limitations of Audit:
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with Standards on Auditing” the auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

The inherent limitations of an audit arise from:
1. The Nature of Financial Reporting
The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable FRF to the facts and circumstances of the entity. Consequently, some financial statement items are subject to an inherent level of variability which cannot be eliminated by the application of additional auditing procedures.

2. Nature of Audit Procedures
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example:

• Management & others do not provide complete information intentionally/unintentionally.
• Audit procedures used to gather audit evidence may be ineffective against fraud detection.
• Audit is not an official investigation into alleged wrongdoings.

3. Timeliness of Financial Reporting & the Balance between Benefit & Cost

• User expectation that the auditor will form an opinion on the F. S. within a reasonable period of time and at a reasonable cost.
• It results into use of Test checking and putting most of efforts over the areas having risk of material misstatement with corresponding less efforts in other areas.

4. Other Matters that Affect the Limitations of an Audit
In the case of certain assertions or subject matters, the potential effects of the limitations on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters include:
(a) Fraud, particularly fraud involving senior management or collusion.
(b) The existence and completeness of related party relationships and transactions.
(c) The occurrence of non-compliance with laws and regulations.
(d) Future events or conditions that may cause an entity to cease to continue as a going concern.

Question 9.
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with examples. [RTP-May 20, MTP-Oct. 20]
Answer:
Audit limitations as to the nature of audit procedures:
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally or unintentionally, the complete information that is relevant to the preparation and presentation of the financial statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation.

Question 10.
In case of certain subject matters,limitations on the auditor’s ability to detect material misstatements | are particularly significant. Explain such assertions or subject matters. [RTP-May 20]
Answer:
Other Matters that Affect the Limitations of an Audit
In the case of certain assertions or subject matters, the potential effects of the limitations on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters include:
(a) Fraud, particularly fraud involving senior management or collusion.
(b) The existence and completeness of related party relationships and transactions.
(c) The occurrence of non-compliance with laws and regulations.
(d) Future events or conditions that may cause an entity to cease to continue as a going concern.

Question 11.
DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for the fi¬nancial year 2020-21. After the completion of the audit, there were found material misstatements due to fraud in the financial statements which were not noticed and reported by the auditor. Man¬agement alleges that it is failure on the part of auditor. Comment. [MTP-Oct. 20]
Answer:
Management allegation as to auditor’s failure to detect material misstatements:
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with Standards on Auditing’’ the auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

As per SA – 240, the responsibility for the prevention and detection of fraud and error rests with management through the implementation of an adequate system of internal control. Such a system reduces but does not eliminate the possibility of fraud and error. Auditor’s responsibility for failure to detect fraud and error can arise only due to proven negligence.

The relevant provisions in this regard are:
(a) In forming his opinion, the auditor carries out procedures designed to obtain evidence that will provide reasonable assurance that the financial information is properly stated in all material respects.
(b) Due to the inherent limitations of an audit there is a possibility that material misstatements of the financial information resulting from fraud or error may not be detected. An auditor cannot be charged for non-adherence of basic principles in the following circumstances:

• subsequent discovery of material misstatement of the financial information resulting from fraud or error;
• failure to disclose the affairs of the company kept out of books and concealed from him.

Unless it is proved that procedures undertaken by auditor in the circumstances are inadequate and improper.
Thus, if any misstatement has been detected after the completion of the audit, the same by itself cannot mean that the auditor did not perform his duty properly.
If the auditor can prove with the help of his papers (documentation] that he has followed adequate procedures necessary for the proper conduct of an audit, he cannot be held responsible for the same.

Question 12.
The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Explain. [RTP-May 18]
Answer:
Omission of Audit procedure due to difficulty, time or cost constraint:

• The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.
• Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost.
• There is an expectation by users of financial statements that the auditor will form an opinion on the financial statements within a reasonable period of time and at a reasonable cost, recognising that it is impracticable to address all information that may exist or to pursue every matter exhaustively on the assumption that information is in error or fraudulent until proved otherwise.

Question 13.
The relationship between auditing and law is very close one. Discuss. [MTP – Oct. 19]
Answer:
Relationship of Auditing and Law:

• Auditing involves examination of various transactions from the view point of whether or not these have been properly entered into as per the requirements of law, in particular, when an entity is governed by any law, for example companies.
• It necessitates that an auditor should have a good knowledge of business and corporate laws affecting the entity. He should be familiar with the law of contracts, negotiable instruments, etc.
• In analysing the impact of various transactions particularly from the accounting aspect, an auditor ought to have good knowledge about the direct as well as indirect tax laws.

Question 14.
Discuss the following: The discipline of behavioural science is closely linked with the subject of auditing. [Nov. 13 (5 Marks)]
Answer:
Relationship of Auditing with behavioural science:
The discipline of behavioural science is closely linked with the subject of auditing. The knowledge of human behaviour is indeed very essential for an auditor so as to effectively discharge his duties, because of below mentioned aspects:

• While performing audit, auditor is required to interact with a lot of people in the organisation.
• Management auditor is expected to deal with human beings rather than financial figures.
• One of the basic elements in designing the internal control system is personnel.
• Internal control system in an organisation cannot work until and unless the people who are working in the organisation are competent and honest.

Question 15.
“Discipline of Statistics and Mathematics has come closer quite to auditing”. Explain.
Answer:
Relationship of Auditing with Statistics and Mathematics:

• While performing audit, auditor examines the transaction on test checking basis, wherein auditor is required to select the samples.
• Discipline of statistics plays an important role as the auditor is also expected to have the knowledge of statistical sampling so as to arrive at meaningful conclusions.
• The knowledge of mathematics is also required on the part of auditor particularly at the time of verification of inventories.

Question 16.
Both accounting and auditing are closely related with each other. Explain. [RTP-Nov. 20]
Answer:
Relationship between accounting and auditing:

• Accounting and auditing are closely related with each other as auditing reviews the financial statements which are nothing but a result of the overall accounting process.
• Auditing begins when accounting ends.
• It requires that the auditor must have a thorough and sound knowledge of generally accepted principles of accounting before he can review the financial statements.

Question 17.
The objective of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. State how this objective is achieved. [MTP-March 18, March 19]
Or
The IAASB functions as an independent standard-setting body under the auspices of IFAC. Explain stating the objective of IAASB and also how it achieves those objectives. [RTP-May 19]
Answer:
Role of International Auditing & Assurance Standard Board (IAASB)
The IAASB functions as an independent standard-setting body under the auspices of IFAC. The objective of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. The IAASB achieves this objective by:
(a) Establishing high quality auditing standards and guidance for financial statement audits that are generally accepted and recognized by investors, auditors, governments, banking regulators, securities regulators and other key stakeholders across the world;
(b) Establishing high quality standards and guidance for other types of assurance services on both financial and non-financial matters;
(c) Establishing high quality standards and guidance for other related services;
(d) Establishing high quality standards for quality control covering the scope of services addressed by the IAASB; and
(e) Publishing other pronouncements on auditing and assurance matters, thereby advancing public understanding of the roles and responsibility of professional auditors and assurance service providers.

Question 18.
Explain the Auditing Standard setting process of AASB of ICAI.
Answer:
Auditing Standards Setting Process:
The Auditing and Assurance Standards Board (AASB) of the Institute formulates the auditing standards. The steps followed in formulating auditing standards are:

• AASB identifies the areas where auditing standards need to be formulated and the priority in regard to their selection.
• In the preparation of the auditing standards, the Board is normally, assisted by study groups comprising of a cross section of members of the Institute.
• On the basis of the work of the study groups, an Exposure Draft of the proposed auditing standard is prepared by the Board and issued for comments of the members.
• After taking into the comments received, the draft of the proposed auditing standard is finalised by the Board and submitted to the Council of the Institute.
• The Council considers the final draft of the proposed auditing standard and, if necessary, modifies the same in consultation with the Board. The auditing standard is then issued under the authority of the Council.
• While formulating the auditing standards, the Board also takes into consideration the applicable laws, customs, usages and business environment in the country.

Question 19.
What are the objectives and functions of Auditing and Assurance Standard Board (AASB)? Explain. [May 15 (6 Marks)]
Answer:
Objectives and Functions of AASB:

• To review the existing and emerging auditing practices worldwide and identify areas in which Standards on Quality Control, Engagement Standards and Statements on Auditing need to be developed.
• To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these may be issued under the authority of the Council of the Institute.
• To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions and to undertake their revision, if necessary.
• To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific industry or on generic issues, so that those may be issued under the authority of the Council of the Institute.
• To review the existing Guidance Notes to assess their relevance in the changed circumstances and to undertake their revision, if necessary.
• To formulate General Clarifications, where necessary, on issues arising from Standards.
• To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority for guidance of professional accountants in the cases felt appropriate by the Board.

Question 20.
Discuss the following: Standards collectively known as the Engagement Standards issued by AASB under the authority of Council of ICAI. [May 12 (5 Marks)]
Or
State the Standards issued by AASB which are collectively known as engagement standards. [Nov. 15 (4 Marks)]
Answer:
Engagement Standards issued by AASB:
Preface to Standards on Quality Control, Auditing, Review, Other Assurance and Related Service categorises the Standards based on the nature of service being provided by a member. It, therefore, introduces an umbrella concept of Engagement Standards.

The term “Engagement Standards” comprises the following Standards:

• Standards on Auditing (SAs): These standards are to be applied in the audit of historical financial information.
• Standards on Review Engagements (SREs): These standards are to be applied in the review of historical financial information.
• Standards on Assurance Engagements (SAEs): These standards are to be applied in assurance engagements, engagements dealing with subject matter other than historical financial information.
• Standards on Related Services (SRRs): These standards are to be applied to engagements involving application of agreed upon procedures to information and other related services such as compilation engagements.

Question 21.
Mention any ten title of standards on auditing and the date from which it comes into force.
Answer:
Title of Standards of Auditing and their effective date:

Number of Stan­dards	Name of Standard of Auditing	Effective Date
SA 200 (Revised)	Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing	01.04.2010
SA 210 (Revised)	Agreeing the Terms of Audit Engagements	01.04.2010
SA 220 (Revised)	Quality Control for an Audit of Financial Statements	01.04.2010
SA 230 (Revised)	Audit Documentation	01.04.2009
SA 240 (Revised)	The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements	01.04.2009
SA 300 (Revised)	Planning an Audit of Financial Statements	01.04.2008
SA 315	Identifying and Assessing the Risk of material Misstate­ments through understating the Entity and its Environ­ment	01.04.2008
SA 500 (Revised)	Audit Evidence	01.04.2009
SA 501 (Revised)	Audit Evidence – Specific Considerations for Selected Items	01.04.2010
SA 505 (Revised)	External Confirmations	01.04.2010
SA 510 (Revised)	Initial Audit Engagements – Opening balances	01.04.2010
SA 520 (Revised)	Analytical Procedures	01.04.2010
SA 610 (Revised)	Using the work of Internal Auditors	01.04.2016
SA 620 (Revised)	Using the Work of an Auditor’s Expert	01.04.2010

Question 22.
Discuss the following: “Statements” and “Guidance Notes” of ICAI Whether mandatory or recommandatory. [May 14 (5 Marks)]
Answer:
Statement and Guidance Notes – Level of authority and degree of compliance:

Statements		Guidance Notes
Purpose	Statements are issued with a view to securing compliance by members on matters which in the opinion of the council of the institute are critical for the proper discharge of their functions.	Guidance Notes are designed to provide guidance to members on matters which may arise in the course of their profes­sional work and on which they may desire assistance.
Compli­ance	Compliance is Mandatory in Nature.	Compliance is recommendatory in nature, except a few guidance notes in case of which the Council has specifically stated that they should be considered as manda­tory on members while discharging their attest function.
Examples	Preface on Standards on Quality Control. Auditing, Review, Other Assurance and related Services.	Guidance Note on Audit of Invento­ries. Guidance Note on Audit of Invest­ments.
Level of Authority/ Duties of Members	Examine whether ‘Statements’ relating to accounting matters are complied with in the presentation of F.S. In the event of any deviation from such ‘Statements’, to make adequate disclosures in their audit reports so that the users of F.S. may be aware of such deviations. Ensure that the ‘Statements’ relating to auditing matters, are followed in the audit of financial information covered by their audit reports. If, for any reason, a member, has not been able to perform an audit in accordance with such ‘Statements’ his report should draw attention to the material departures there from.	Examine whether the recommen­dations in a guidance note relating to an accounting matter have been followed or not. If the same have not been followed, consider whether keeping in view the circumstances of the case, a disclosure in his report is necessary. Follow recommendations in a guidance note relating to auditing except where he is satisfied that in the circumstances ofthe case, it may not be necessary to do so.

Question 23.
State briefly the Qualities of Auditors. [Nov. 04 (4 Marks)]
Or
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. Explain stating also the qualities of Auditor. [RTP-May 19]
Answer:
Qualities of Auditor
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He said, “an auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true”.

(A) Technical Qualities: Auditor must have sound knowledge of followings:

• Accountancy – its principles, procedures, techniques and standards (AS).
• Auditing – its principles, procedures, techniques and standards (SA).
• Direct and Indirect Taxation Laws.
• General Principles of Law of contracts and partnership.
• Corporate Laws.
• Client Nature of Business.

(B) Personal Qualities: Apart from the technical qualities, the auditor should also possess certain personal qualities mentioned below:

• Objectivity, Integrity and Independence.
• Confidentiality of client information.
• Effective Communication skills.
• Tactful approach in dealing with clients.
• Clear-headedness and commonsense.
• Reliability and trust.

Question 24.
The firm’s system of quality control should include policies and procedures addressing each element. Explain. [RTF-Nov. 18, MTP – Oct. 19]
Answer:
Elements of a System of Quality Control:
As per SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial Information/and Other Assurance and Related Services Engagements”, the firm’s system of quality control should include policies and procedures addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
(g) The quality control policies and procedures should be documented and communicated to the firm’s personnel.

Question 25.
As per SA 22 0, the engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is assigned. While taking responsibility for the overall quality on each audit engagement, analyse and explain the emphasis of the actions of the engagement partner and appropriate messages to the other members of the engagement team. Also define engagement partner. [MTP-Aug. 18]
Or
The engagement partner shall take the responsibility for the overall quality on each audit engage¬ment to which that partner is assigned. Discuss with reference to SA 220 “Quality Control for an audit of financial statement”. [Nov. 19 (3 Marks)]
Or
As per SA 220 “Quality Control for an Audit of Financial Statements”, the engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is .assigned. Explain clearly stating the meaning of engagement partner and also the actions of the engagement partner and appropriate messages to the other members of the engagement team, in taking responsibility for the overall quality on each audit engagement. [RTP-Nov. 20]
Answer:
Leadership Responsibilities for Quality on Audits:
As per SA 220 “Quality Control for an Audit of Financial Statements” the engagement partner shall take responsibility for the overall quality on each audit engagement to which that partner is assigned.

As a part of this responsibility Engagement Partner should emphasizes the following to the Engagement Team (ET):

• Compliance with professional Standards and legal requirements.
• Compliance with firm’s Quality Control Policies and procedures as applicable.
• Issuance of appropriate audit report.
• Ability to raise concerns without fear.
• Quality is essential & indispensable in engagement performance.

Meaning of Engagement Partner:
The partner or other person in the firm who is a member of the Institute of Chartered Accountants of India and is in full time practice and is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.

Question 26.
Comment as an auditor on the following situations: Mr. X, a partner in X & Co., a firm of a Chartered Accountants, died on 31-3-2020 after completing routine audit work of XYZ Company Ltd. Mr. Y another partner of the firm of Chartered Accountants signed the financial statements of XYZ Com¬pany Ltd., without reviewing the finalization work done by the assistants. [Nov. 10 (5 Marks)]
Answer:
Review of Work performed by others:
As per SA 220, “Quality Control for an Audit of Financial Statements”, The engagement partner shall take responsibility for reviews being performed in accordance with the firm’s review policies and procedures.

Review procedures consists of the considerations, whether,

• the work has been performed in accordance with professional standards and regulatory and legal requirements;
• significant matters have been raised for further consideration;
• appropriate consultations have taken place and the resulting conclusions have been documented and implemented;
• the work performed supports the conclusions reached and is appropriately documented;
• the evidence obtained is sufficient and appropriate to support the auditor’s report; and
• the objectives of the engagement procedures have been achieved.

When the auditor delegates work to assistants or uses work performed by other auditors/ experts he will continue to be responsible for forming and expressing his opinion on the financial statements. However, he will be entitled to rely on the work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied.

The auditor should carefully direct, supervise and review work delegated to assistants. He should obtain reasonable assurance that work performed by other auditors/experts and assistants is adequate for his purpose.

In the instant case, Mr. X, a partner of the firm had completed routine audit work and died on 31 March, 2018. Mr. Y another partner of the firm has signed the financial statement of XYZ Company Ltd., without reviewing the finalization work done by the assistants. Mr. Y will be fully responsible for negligence, he cannot take the shelter that Mr. X had done the work.
Conclusion: Mr. Y has negligently performed his duties.

Question 27.
Mention any four information which assists the auditor in accepting and continuing of relationship with the client as per SA 220. [May 15 (5 Marks)]
Or
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should obtain information considered necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement and when considering acceptance of a new engagement with an existing client. Explain [RTP-May 18]
Or
CA Raj, an engagement partner wants to take decision, regarding acceptance and continuance of an audit engagement. Which information, he should obtain before accepting an engagement? [May 19 (3 Marks)]
Answer:
Information assisting auditor in accepting and continuing of relationship with the client:
As per SA 220 “Quality Control for an Audit of F.S.” the information which assists the auditor in accepting and continuing of relationship with the client may include the following:

• The Integrity of the principal owners, key management and TCWG of the entity;
• Competency of engagement team to perform the audit engagement and availability of necessary capabilities, including time and resources;
• Compliance with relevant ethical requirements by firm and the engagement team; and
• Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship.

Question 28.
The firm should establish policies and procedures designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice. Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements. Explain in the above context the purpose of monitoring compliance with quality control policies and procedures. [RTP-Nov. 19, Nov. 20]
Answer:
Purpose of monitoring compliance with quality control policies and procedures

• As per SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements”, the firm should establish policies and procedures designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, operating effectively and complied with in practice.
• Such policies and procedures should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements.

The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal requirements;
(b) Whether the quality control system has been appropriately designed and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners are appropriate in the circumstances.

Question 29.
“Independence of auditors must not only exist in fact, but should also appear to exist to all reason¬able persons”. Discuss highlighting the advantages of an independent audit.
Answer:
Concept of Independent Audit:
As per Guidance Note of the ICAI on “Independence of Auditors” independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him. “Independence of auditors must not only exist in fact, but should also appear to exist to all reasonable persons”. The auditor has to conduct himself in such a way that no reasonable person, can doubt his objectivity and integrity. In fact, the word independent as a prefix in audit proposition in itself enshrines the concept of independence of an auditor and it is thus, considered fundamental concept in the theory of auditing. The relationship between the auditor and the client should be such that firstly, he himself is satisfied about his client and then it is understood by others that the independence of the auditor is not affected.

Advantages of Independent Audit:

• Protect the interest of fund providers: It safeguards the financial interests of persons who are not associated with the management of the organisation e.g. partners or shareholders.
• Moral check on employees: It acts as a moral check on employees from committing defalcations or embezzlement.
• Settlement of Taxes, etc: Auditing statements of accounts are helpful in settling of taxes, negotiating loans and for determining the purchase consideration for a business.
• Settlement of Trade Disputes: Audited statements are useful for settling trade disputes for higher wages or bonus.
• Detection of Wastages: Audited statements also help in detection of wastages and losses and shows the different ways by which these might be checked especially those that occurred due to absence or inadequacy of internal checks or internal control measures.
• Proper maintenance of books of account: Independent audit ascertains whether the necessary books of account and allied records have been properly kept and helps the client in making good deficiencies or inadequacies in this respect.
• Appraisal of controls: As an appraisal function, audit reviews the existence and operations of various controls in the organisations and reports weaknesses, inadequacies etc.
• Admission/retirement of Partner: Audited accounts are of great help in the settlement of accounts at the time of admission or death of the partner.
• Grant of License: Government may require audited and certified statements before it gives assistance or issues the license for a particular trade.

Question 30.
Write short note on: Auditor’s Independence. [May 07 (4 Marks)]
Answer:
As per Guidance Note of the ICAI on “Independence of Auditors” independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him. “Independence of auditors must not only exist in fact, but should also appear to exist to all reasonable persons”. The auditor has to conduct himself in such a way that no reasonable person, can doubt his objectivity and integrity. In fact, the word independent as a prefix in audit proposition in itself enshrines the concept of independence of an auditor and it is thus, considered fundamental concept in the theory of auditing. The relationship between the auditor and the client should be such that firstly, he himself is satisfied about his client and then it is understood by others that the independence of the auditor is not affected.

Question 31.
The Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants (IFAC) identifies five types of threats. Explain.
Or
The auditor should be straightforward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded as being incompatible with integrity and objectivity. Many different circumstances, or combination of circumstances, may be relevant and accordingly it is impossible to define every situation that creates threats to independence and specify the appropriate mitigating action that should be taken.
In addition, the nature of assurance engagements may differ and consequently different threats may exist requiring the application of different safeguards.
Explain stating clearly the five types of threats as contained in Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants (IFAC). [MTP-Oct. 18]
Answer:
Threats to Independence:
1. Self-interest threats
It may occur as a result of the financial or other interests of a professional accountant or of a relative. Examples are:

• direct or indirect financial interest in a client,
• loan or guarantee to or from the concerned client,
• undue dependence on a client’s fees,
• close business relationship with an audit client,
• potential employment with the client, and
• contingent fees for the audit engagement.

2. Self-review threats
It may occur when a previous judgment needs to be re-evaluated by the professional accountant responsible for that judgment. Instances, where such threats may arise, are:
(a) when an auditor having recently been a director or senior officer of the company, and
(b) when auditors perform services that are themselves subject matters of audit.

3. Advocacy threats
It may occur when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised.
For example, an auditor dealing with shares or securities of the audited company, or becomes the client’s advocate in litigation and third-party disputes.

4. Familiarity threats
It may occur when, because of a relationship, a professional accountant becomes too sympathetic to the interests of others. This can occur in many ways:

• close relative of the audit team working in a senior position in the client company,
• former partner of the audit firm being a director or senior employee of the client,
• long association between specific auditors and their specific client counterparts, and
• acceptance of significant gifts or hospitality from the client company, its directors or employees.

5. Intimidation threats
It may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived.

Question 32.
Write a note on “Self-review threats”. [RTP-Nov. 19]
Answer:
Self Review Threats:
It may occur when a previous judgment needs to be re-evaluated by the professional accountant responsible for that judgment. Instances where such threats may arise are:
(a) when an auditor having recently been a director or senior officer of the company, and
(b) when auditors perform services that are themselves subject matters of audit.

Question 33.
Familiarity threats are self-evident, and occur when auditors form relationships with the client where they end up being too sympathetic to the client’s interests. Explain. [MTP-April 19]
Answer:
Familiarity threats
It may occur when, because of a relationship, a professional accountant becomes too sympathetic to the interests of others. This can occur in many ways:

• close relative of the audit team working in a senior position in the client company,
• former partner of the audit firm being a director or senior employee of the client,
• long association between specific auditors and their specific client counterparts, and
• acceptance of significant gifts or hospitality from the client company, its directors or employees.

Question 34.
The Chartered Accountant has a responsibility to remain independent by taking into account the context in which they practice, the threats to independence and the safeguards available to elimi¬nate the threats. State the guiding principles in this regard. [RTP-Nov. 19, MTP-May20]
Or
Describe the guiding principles which the auditor should take into account which serves as the safeguards to eliminate the threats to independence. [Nov. 20 (4 Marks)]
Answer:
Safeguards to Independence
(a) Auditors should always be and appears to be independent of the entities that they are auditing.
(b) Auditor should abide himself with the key fundamental principles are integrity, objectivity and professional scepticism.
(c) Auditor should consider threats to independence before accepting any audit assignment.
(d) In case of existence of any threats to independence, auditor should not accept the engagement or put in place safeguards that eliminate them.
(e) If necessary safeguards cannot be put in place due to circumstances, auditor should withdraw.

Question 35.
Explain the Overall Objectives of Independent auditor. [RTP-May 19]
Answer:
Overall Objectives Independent Auditor:
SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with SAs” states that in conducting an audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the F. S. 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 F.S. are prepared, in all material respects, in accordance with an applicable FRF, and
(b) To report on the F.S. and communicate as required by the SAs, in accordance with the auditor’s findings.
(c) In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor’s report is insufficient, the SAs require that the auditor disclaim an opinion or withdraw from the engagement.

Question 36.
Comment on the following: “The Auditor shall comply with relevant ethical requirements including independence”. [MTP-April 19]
Or
Discuss prerequisites and fundamental principles to be possessed by an auditor. [May 11 (8 Marks)]
Or
Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants related to an audit of financial statements. Discuss with reference to those fundamental principles of professional ethics. [RTP-May 19]
Or
The auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants (1ESBA Code) related to an audit of financial statements. The Code establishes the fundamental principles of professional ethics relevant to the auditor when conducting an audit of financial statements. Explain.
[MTP-May 20]
Answer:
Compliance of Ethical requirements:
(a) As per SA 200 “Overall Objectives ofthe Independent Auditor and Conduct of Auditin accordance with SAs” the auditor shall comply with relevant ethical requirements, including independence.

(b) Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI. The fundamental principles are:

• Integrity;
• Objectivity;
• Professional competence and due care;
• Confidentiality; and
• Professional behaviour.

(c) Independence comprises both independence of mind and independence of appearance.

(d Independence enhances the auditor’s ability to act with integrity to be objective and to maintain an attitude of professional skepticism.

Question 37.
SA 200 requires that the auditor shall and perform an audit with professional skepticism. Explain the statement.
Or
Discuss with reference to SAs: The auditor is responsible for maintainingan attitude of professional skepticism throughout the audit. Do you agree with the statement. [May 14 (6 Marks)]
Or
The auditor shall plan and perform an audit with professional skepticism recognizing that circum¬stances may exist that cause the financial statement to be materially misstated. Discuss any four examples of professional skepticism. [Nov. 19 (4 Marks)]
Or
Professional skepticism refers to an attitude that includes a questioning mind, being alert to con¬ditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. The auditor shall plan and perform an audit with professional skepticism recog¬nising that circumstances may exist that cause the financial statements to be materially misstated. Explain giving examples. [RTP-Nov. 20]
Answer:
Professional Skepticism:
(a) SA200 “Overall Objectives ofthe Independent Auditor and Conduct of Audit in accordance with SAs” requires that the auditor shall plan and perform an audit with professional skepticism.

(b) Meaning of Professional Skepticism: An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

(c) Professional Skepticism Reduces risk of:

• Overlooking unusual circumstances,
• Over generalising when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining N, T, E of audit procedures & evaluating the results thereof.

(d) Professional skepticism includes being alter to:

• Contradictory audit evidence.
• Questions on reliability of documents.
• Conditions indicating possible frauds.
• Circumstances suggesting need for audit procedures in addition to those suggested in SAs.

Question 38.
Comment on the following: “The auditor shall exercise professional judgment in planning and performing an audit of financial statements.
Or
“Professional judgment is essential to the proper conduct of an audit.” Discuss. [Nov. 18 (5 Marks)]
Answer:
Professional Judgment:
(a) SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with SAs” requires that the auditor shall exercise professional judgment in planning and performing an audit of financial statements.
(b) Meaning of Professional Judgment: The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
(c) Exercise of professional judgment depends on facts & circumstances known to the auditor.
(d) Professional Judgment is to be exercised throughout the audit and to be appropriately documented.
(e) Professional Judgment is important when deciding about:

• Materiality & audit risk.
• NTE of audit procedures.
• Evaluating sufficiency & appropriateness of audit procedures.
• Evaluating management judgment in applying applicable FRF.
• Drawing conclusions based on audit evidence.

Question 39.
“Independence of mind and independence in appearance are interlinked perspectives of Indepen¬dence of auditors.” Explain. [May 19 (3 Marks)]
Or
There are two interlinked perspectives of independence of auditors, one, independence of mind; and two, independence in appearance. Explain. [MTP-Oct. 20]
Answer:
Independence of Auditors:

• As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with SAs” the auditor shall comply with relevant ethical requirements, including independence.
• Independence comprises both independence of mind and independence of appearance.
• In the case of an audit engagement it is in the public interest and, therefore, required by the Code of Ethics, that the auditor be independent of the entity subject to the audit. The Code describes independence as comprising both independence of mind and independence in appearance.
• The auditor’s independence from the entity safeguards the auditor’s ability to form an audit opinion without being affected by influences that might compromise that opinion.
• Independence of mind implies the state of mind that permits the provision of an opinion without being affected by influences allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
• Independence in appearance implies the avoidance of facts and circumstances that are so significant that a third party would reasonably conclude an auditor’s integrity, objectivity or professional skepticism had been compromised.
• Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an attitude of professional skepticism.

Question 40.
What is an audit engagement letter? What are the principal contents of audit engagement letter.
Or
What is the purpose of a Letter of Engagement? What are the important contents of a Letter of Engagement? [May 17 (6 Marks)]
Answer:
Purposes of letter of engagement:
SA 210 “Agreeing the terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and TCWG.

The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include:

• The objective and scope of the audit of the F.S.;
• The responsibilities of the auditor;
• The responsibilities of management;
• Identification of the applicable FRF for the preparation of the F.S.; and
• Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content.

So the main purpose of letter of engagement is to ensure a common understanding of the terms of audit engagement between the auditor and management and TCWG.

Question 41.
Write short note on: Preconditions of an audit.
Answer:
Preconditions for an Audit:
As per SA 210 “Agreeing the terms of Audit Engagement” before accepting an audit engagement auditor is required to ensure existence of preconditions.
Accordingly, Pre-conditions to be examined are:
(a) Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable; and

(b) Obtain the agreement of management that it acknowledges and understands its responsibilities for followings:

• the preparation of the F.S. in accordance with the applicable FRF.
• exercising necessary internal control to enable the preparation of F.S. that are free from material misstatement, whether due to fraud or error.
• to provide the auditor with:
  (a) Access to all relevant information such as records, documentation and other matters;
  (b) Additional information that the auditor may request from management for the purpose of the audit; and
  (c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Question 42.
Comment on the following: “It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes mandatory to send new letter.” Explain those situations where new engagement letter is to be sent. [Nov. 11 [5 Marks}]
Or
indicate the factors which make it appropriate for an auditor to send a new engagement letter for a recurring audit. [Nov. 14 (5 Marks}!
Or
‘P’ an auditor decides not to send a new engagement letter to G Ltd. every year. Whether he is right in his approach. State the circumstances where sendingnew engagement letter, would be appropriate [NOV. 15 (5 Marks}]
Answer:
Engagement Letter in case of Recurring Audit:
SA 210 “Agreeing the Terms of Audit Engagement” provides that in case of recurring audits, the auditor shall assess whether circumstances require revision in terms of the audit engagement and whether there is a need to remind the entity of the existing terms of the audit engagement.

The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms:

• Any indication that the entity misunderstands the objective and scope of the audit.
• Any revised or special terms of the audit engagement.
• A recent change of senior management.
• A significant change in ownership.
• A significant change in nature or size of the entity’s business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework adopted in the preparation of the F.S.
• A change in other reporting requirements.

Question 43.
X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He seht his letter of engagement to the Board of Directors, which was accepted by the Company. In the course of audit of the company, the auditor was unable to obtain appropriate sufficient audit evidence regarding receivables. The client requested for a change in the terms of engagement. Offer your comments in this regard. [Nov. 09 (5 Marks)]
Or
“An auditor who before the completion of the engagement is requested to change the engagement to one which provides a lower level of assurance should consider the appropriateness of doing so.” Discuss.
Answer:
Acceptance of Changes in terms of engagement:
SA 210 “Agreeingthe terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management and TCWG.
(a) The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so.

(b) If prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing so.

(c) If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement.

(d) If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, the auditor shall:

• Withdraw from the audit engagement where possible under applicable law or regulation; and
• Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties, such as TCWG, owners or regulators.

Question 44.
An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should consider the appropriateness of doing so. Explain stating the factors based on which client can request the auditor to change the engagement. [RTP-Nov. 19]
Answer:
Factors based on which client can request the auditor to change the engagement:
SA 210 “Agreeing the terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and TCWG. Accordingly.

• A request from the entity for the auditor to change the terms of the audit engagement may result from
  (a) a change in circumstances affecting the need for the service,
  (b) a misunderstanding as to the nature of an audit as originally requested or
  (c) a restriction on the scope of the audit engagement, whether imposed by management or caused by other circumstances.
• The auditor, considers the justification given for the request, particularly the implications of a restriction on the scope of the audit engagement.
• If the auditor concludes that there is reasonable justification to change the audit engagement to a review or a related service, the audit work performed to the date of change may be relevant to the changed engagement; however, the work required to be performed and the report to be issued would be those appropriate to the revised engagement.

Objective Type Questions (True/False, Correct/Incorrect)

Question 1.
Auditing implies systematic, critical and special examination of the records of a business for a specific purpose.
Answer:
Statement is False.

• Auditing involves examination of financial information contained in financial statements to express an opinion on their true and fair view.
• Systematic, Critical and Special examination of the records of a business for a specific purpose is termed as investigation.

Question 2.
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
Answer:
Statement is correct.

• As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
• This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

Question 3.
Auditing is legally obligatory for all types of business organisations.
Answer:
Statement is False.

• Auditing is not legally obligatory for all types of business organisations.
• Examples of such organisations are Proprietorship entities, Partnership Firms, HUF.

Question 4.
Auditor’s Opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.
Answer:
Statement is False.

• SA 200 “Overall Objectives of an Independent Auditor and Conduct of an Audit in accordance with Standards on Auditing” specifically provides that the auditors opinion cannot be assumed as an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.
• The objective of an audit of financial statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements.

Question 5.
To maintain an adequate accounting system incorporating various controls is the responsibility of Management.
Answer:
Statement is True.

• SA 200 “Overall Objectives of an Independent Auditor and Conduct of an Audit in accordance with Standards on Auditing” specifically provides that the management and, where appropriate, TCWG have responsibility for the preparation and presentation of the F.S. in accordance with the applicable FRF;
• This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of F.S. that are free from material misstatement, whether due to fraud or error.

Question 6.
The term independence implies that the auditor should respect the confidentiality of client infor¬mation.
Answer:
Statement is False.

• To respect the confidentiality of client information is one of the ethical requirements an auditor must possess in terms of SA 200.
• The term independence implies that the auditor must be and appear to be free of any interest which is incompatible with his integrity.

Question 7.
Auditor is able to obtain only reasonable assurance due to inherent limitation of audit.
Answer:
Statement is True, auditor is able to obtain reasonable assurance only due to following limitations of audit;

• Use of Judgment.
• Use of Test Checking.
• Inherent Limitations of internal control.
• Persuasive nature of audit evidence.

Question 8.
An unqualified opinion in audit report is a guarantee as to the future viability of the company.
Answer:
Statement is false.

• SA 200 “Overall Objectives of an Independent Auditor and Conduct of an Audit in accordance with Standards on Auditing” specifically provides that the auditors opinion cannot be assumed as an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.
• An unqualified opinion implies that based on the audit evidence collected, auditor is reasonable assured that financial statements are free from material misstatements.

Question 9.
The audit engagement letter is sent by the client to auditor, [MTP-Oct. 20]
Answer:
Statement is incorrect.
As per SA 210 “Agreeing the Terms of Audit Engagements”, the Audit engagement letter is sent by the auditor to his client.

Question 10.
Guidance Notes are mandatory in Nature.
Answer:
Statement is incorrect.

• Guidance notes are designed to provide guidance to members on matters which may arise in the course of their professional work and on which they may desire assistance.
• Guidance Notes are recommendatory in nature.

Question 11.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error.
Answer:
Statement is correct.

• As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, the auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error.
• This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

Question 12.
The Auditor compares the entries in the hooks of account with vouchers and if two agrees, his work is done. [May 10 (2 Marks]]
Answer:
Statement is incorrect.
Auditor responsibility is not restricted to comparing the books of account with vouchers only, but also to determine reliability of annual statement of accounts along with the truth and fairness.

Question 13.
The primary objective of an audit is to detect fraud and error in the financial statements. [Nov. 14 (2 Marks)]
Answer:
Statement is incorrect.

• Primary objective of an audit is to express an opinion on true and fair view of financial statements.
• Prevention and detection of fraud is primarily the responsibility of the management.

Question 14.
The basic objective of audit does not change with reference to nature, size or form of the entity. [May 15, Nov. 17 (2 Marks)]
Answer:
Statement is correct.

• Basic objective of auditing is to express an opinion on true and fair view of financial statements.
• Any change in the nature, size or form of an entity does not change the basic objective of the audit.

Question 15.
An auditor has nothing to do with prudence or profitability of a company. [May 16 (2 Marks)]
Answer:
Statement is correct.
As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with SAs” the auditor’s opinion does not assure, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity.

Question 16.
Engagement letter need not be entered for each year of the period of auditor’s appointment. [Nov. 17 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 210 “Agreeing the Terms of Audit Engagement” in case of recurring audits, the auditor shall assess whether circumstances require revision in terms of the audit engagement and whether there is a need to remind the entity of the existing terms of the audit engagement.
• The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, certain factors like change in law, nature of business of client, management etc. may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms.

Question 17.
The objective of audit is to obtain absolute assurance and to report on the financial statements. [RTP-May 18, MTP-April 19]
Answer:
Statement is incorrect.
Objective of audit is to express an opinion on true and fair view of the financial statements. In this reference. SA-200 “Overall Objectives of the Independent Auditor and conduct of audit in accordance with Standards on Auditing” provides that in conducting an audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement; and
(b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.

Question 18.
An Auditor is considered to lack independence if the partner of the audit firm deals with shares and securities of the audited entity. [May 18(2 Marks)]
Answer:
Statement is correct.

• As per SA 200 “Overall objectives of the Independent Auditor and Conduct of an Audit in accordance with standards on Auditing” auditor is required to comply with ethical requirements including independence. Independence comprises both independence of mind and independence of appearance.
• Self-interest threat to independence may occur if auditor or his relative is having any financial or other interests in the entity.

Question 19.
The preparation of financial statements does not involve judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. [RTP-Nov. 18, May 19]
Answer:
Statement is incorrect.

• The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity.
• In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made.

Question 20.
Audit procedures used to gather audit evidence may be effective for detecting an intentional mis¬statement. [RTP-Nov. 18, May 19]
Answer:
Statement is incorrect.

• Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not.
• The auditor is neither trained as nor expected to be an expert in the authentication of documents.

Question 21.
An audit is an official investigation into alleged wrongdoing. [RTP-Nov. 18, May 19]
Answer:
Statement is incorrect.

• An audit is not an official investigation into alleged wrongdoing.
• Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation.

Question 22.
The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. [RTP-Nov. 18, May 19]
Answer:
Statement is incorrect.

• The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
• Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost.

Question 23.
Judgmental matters are transactions that are unusual due to either its size or nature and that therefore occur infrequently. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.

• Judgment in the context of audit is the application of relevanttraining, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
• Significant risks often relate to significant non-routine transactions or judgmental matters. Non¬routine transactions are transactions that are unusual, due to either size or nature, and that therefore occur infrequently. Judgmental matters may include the development of accounting estimates for which there is significant measurement uncertainty. Thus judgmental matters are not always unusual due to their size or nature.

Question 24.
Management of the organisation is solely responsible for the compliance of auditing standards while preparing financial statements. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.

• Responsibility for the compliance of Auditing Standards is of Auditor. While carrying out the audit, auditor is required to ensure that audit is been performed in accordance with Standards on Auditing and appropriate Report is issued.
• Management is responsible for the compliance of Accounting Standards.

Question 25.
Engagement partner refers to the partner or other person in the firm who is responsible for the audit engagement. [MTP-April 19]
Answer:
Statement is correct.
As per SA 220 “Quality control for an Audit of Financial Statements”, Engagement partner refers to the partner or other person in the firm who is responsible for the audit engagement and its performance, and for the auditor’s report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.

Question 26.
There is no need to put the nature of engagement to writing. [MTP-April 19]
Answer:
Statement is incorrect.

• As required by SA 210, terms of audit engagement need to be recorded in writing.
• It is important, both for the auditor and client, that each party should be clear about the nature of the engagement. It must be reduced to writing and should exactly specify the scope of the work.

Question 27.
Preconditions foranaudit have notbeen defined in SA 210 “Agreeing the Terms of AuditEngagements.” [RTP-Nov. 19]
Answer:
Statement is incorrect.
As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit may be defined as the use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of managementand, where appropriate, those charged with governance to the premise on which an audit is conducted.

Question 28.
SA 210 does not require the auditor to agree management’s responsibilities in an engagement letter or other suitable form of written agreement. [RTP-May 20]
Answer:
Statement is incorrect.
SA 210 requires the auditor to agree management’s responsibilities in an engagement letter or other suitable form of written agreement.

Question 29.
The auditor is expected to and can reduce audit risk to zero. [MTP-May 20]
Answer:
Statement is incorrect.

• As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, the auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error.
• This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

Question 30.
It is important for the auditor that each party should be clear about the nature of the engagement. [MTP-May 20]
Answer:
Statement is incorrect.

• It is important, both for the auditor and client, that each party should be clear about the nature of the engagement.
• It must be reduced to writing and should exactly specify the scope of the work.

Question 31.
Even if law or regulation prescribes sufficient details of the terms of the audit engagement the auditor should record them in a written agreement. [Nov. 20 (2 Marks)]
Answer:
Statement is incorrect.
If law or regulation prescribes in sufficient detail the terms of the audit engagement referred above, 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.

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

Audit of Items of Financial Statements – CA Inter Audit MCQ

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CA Inter Advanced Accounts Paper Nov 2019 – Advanced Accounts CA Inter Study Material is designed strictly as per the latest syllabus and exam pattern.

CA Inter Advanced Accounting Question Paper Nov 2019

Question 1.
(a) A Ltd. provides after sales warranty for two years to its customers.
Based on past experience, the company has the following policy for making provision for warranties on the invoice amount, on the remaining balance warranty period.
Less than 1 year: 2% provision
More than 1 year: 3% provision The company has raised invoices as under:

Calculate the provision to be made for warranty under AS-29 as at 31st March, 2018 and 31st March, 2019. Also compute amount to be debited to P & L account for the year ended 31st March, 2019. [5 Marks]
Answer:
31st March, 2018 = 1,00,000 × 2% = 2,000
31st March, 2019 = 40,000 × 2% + 1,35,000 × 3% = 4,850

(b) As per provision of AS-26, how would you deal to the following situations:

(1) ₹ 23,00,000 paid by a manufacturing company to the legal advisor de-fending the patent of a product is treated as a capital expenditure.

(2) During the year 2018-19, a company spent ₹ 7,00,000 for publicity and research expenses on one of its new consumer product which was marketed in the same accounting year but proved to be a failure.

(3) A company spent ₹ 25,00,000 in the past three years to develop a product, these expenses were charged to profit and loss account since they did not meet AS-26 criteria for capitalization. In the current year approval of the concerned authority has been received. The company wishes to capitalize ₹ 25,00,000 by disclosing it as a prior period item.

(4) A company with a turnover of ₹ 200 crores and an annual advertising budget of ₹ 50,00,000 had taken up for the marketing of a new product by a company. It was estimated that the company would have a turnover of ₹ 20 crore from the new product. The company had debited to its Profit & Loss Account the total expenditure of ₹ 50,00,000 incurred on extensive special initial advertisement campaign for the new product. [5 Marks]
Answer:
(1) Revenue
(2) Revenue
(3) Incorrect
(4) Correct

(c) Indicate in each case whether revenue can be recognized and when it will be recognized as per AS-9.
(1) Trade discount and volume rebate received.
(2) Where goods are sold to distributor or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-3-2019 cloths worth ₹ 50,000 were sold to X mart, but due to re-furbishing of their showroom being underway, on their request cloths were delivered on 12-4-2019. [5 Marks]
Answer:
(1) Deducted from sales
(2) When ultimate sale is made (However depends upon terms of agreement)
(3) Not a sale (Financing arrangement)
(4) Policy is reversed
(5) Revenue for FY 2018-19

(d) Following information is supplied by K Ltd.
Number of shares outstanding prior to right issue – 2,50,000 shares.
Right issue – two new share for each 5 outstanding shares (i.e. 1,00,000 new shares)
Right issue price – ₹ 98
Last date of exercising rights – 30-6-2018.
Fair value of one equity share immediately prior to exercise of right on 30-6-2018 is ₹ 102.
Net Profit to equity shareholders:
2017- 18 – ₹ 50,00,000
2018- 19 – ₹ 75,00,000
You are required to calculate the basic earnings per share as per AS-20 Earning per Share. [5 Marks]
Answer:
Step 1: Theoretical Ex Right FV per share
= \(\frac{250000 \times 102+100000 \times 98}{350000}\)
= 100.86
Step 2: Adjustment Factor
= \(\frac{102}{100.86}\) = 1.011 100.86
Step 3: EPS Computation

Question 2.
(a) X Ltd. furnishes the following summarized Balance Sheet as at 31-3-2018:

The shareholders adopted the resolution on the date of the abovementioned Balance Sheet to:

(1) Buy back 25% of the paid up capital and it was decided to offer a price of 20% over market price. The prevailing market value of the company’s share is ₹ 30 per share.

(2) To finance the buy back of share company:
(a) Issue 3000, 14% debenture of ₹ 100 each at a premium of 20%.
(b) Issue 2500, 10% preference share of ₹ 100 each

(3) Sell investment worth ₹ 1,00,000 for ₹ 1,50,000.
(4) Maintain a balance of ₹ 2,00,000 in Revenue Reserve.

(5) Later the company issue three fully paid up equity share of ₹ 20 each by way of bonus share for every 15 equity share held by the equity shareholder.
You are required to pass the necessary journal entries to record the above transactions and prepare Balance Sheet after buy back. [15 Marks]
Answer:

2 VIEW POINTS

Accordingly amount of journal entries will charge.

(b) On 1st April, 2018, XYZ Ltd., offered 150 shares to each of its 750 employees at ₹ 60 per share. The employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in period on transfer for three years from the grant date. The market price of shares of the company on the grant date is ₹ 72 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 67 per share.

On 31st March, 2019, 600 employees accepted the offer and paid ₹ 60 per share purchased. Nominal value of each share is ₹ 10.
You are required to record the issue of shares in the books of the XYZ Ltd., under the aforesaid plan. [5 Marks]
Answer:

Question 3.
(a) Following is the summarized Balance Sheet of Fortunate Ltd. as on 31st March, 2019.

(Note: Preference shares dividend is in arrear for last five years).

The Company is running with the shortage of working capital and not earn-ings profits. A scheme of reconstruction has been approved by both the classes of shareholders. The summarized scheme of reconstruction is as follows:

(i) The equity shareholders have agreed that their ₹ 50 shares should be reduced to ₹ 5 by cancellation of ₹ 45.00 per share. They have also agreed to subscribe for three new equity shares of ₹ 5.00 each for each equity share held.

(ii) The preference shareholders have agreed to forego the arrears of dividends and to accept for each ₹ 50 preference share, 4 new 6% preference shares of ₹ 10 each, plus 3 new equity shares of ₹ 5.00 each, all credited as fully paid.

(iii) Lenders to the company for ₹ 1,87,500 have agreed to convert their loan into shares and for this purpose they will be allotted 15,000 new preference shares of ₹ 10 each and 7,500 new equity shares of ₹ 5.00 each.

(iv) The directors have agreed to subscribe in cash for 25,000 new equity shares of ₹ 5.00 each in addition to any shares to be subscribed by them under (i) above.

(v) Of the cash received by the issue of new shares, ₹ 2,50,000 is to be used to reduce the loan due by the company.

(vi) The equity share capital cancelled is to be applied :
(a) To write off the debit balance in the Profit and Loss A/c, and
(b) To write off ₹ 43,750 from the value of plant.

Any balance remaining is to be used to write down the value of trade-marks and goodwill. The nominal capital as reduced is to be increased to ₹ 8,12,500 for preference share capital and t 9,37,500 for equity share capital.

You are required to pass journal entries to show the effect of above scheme and prepare the Balance Sheet of the Company after recon-struction. [15 Marks]
Answer:
Journal Entries

(b) A liquidator is entitled to receive remuneration at 5%, of the assets realised and 8% of the amount distributed among the unsecured creditors. The assets realised ₹ 13,75,000. Payment was made from realised amount as follows:

Liquidation expenses ₹ 13,000
Preferential creditors (treated as unsecured creditors) ₹ 88,500
Secured creditors ₹ 1,00,000
You are required to calculate remuneration payable to the liquidator. [5 Marks]
Answer:
5% of 1375000 + 8% of (1375000 – 13000 – 88500 – 100000) = 162630

Question 4.
(a) From the following information, you are required to prepare Profit and Loss Account of Simple Bank for the year ended as on 31st March, 2019:

2017-18 (₹ in ‘000)	Item	2018-19 (₹ in ‘000)
71,35	Interest and Discount	1,02,25
5,70	Income from investment	5,60
7,75	Interest on Balances with RBI	8,85
36,10	Commission, Exchange and Brokerage	35,60
60	Profit on sale of investments	6,10
30,60	Interest on Deposits	41,10
6,35	Interest to RBI	7,35
36,35	Payment to and provision for employees	42,75
7,90	Rent, taxes and lighting	8,95
7,35	Printing and Stationery	10,60
5,60	Advertising and publicity	4,90
4,90	Depreciation	4,90
7,40	Director’s fees	10,60
5,50	Auditor’s fees	5,50
2,50	Law Charges	7,60
2,40	Postage, telegrams and telephones	3,10
2,10	Insurance	2,60
2,85	Repair and maintenance	3,30

Other Information:

(i) The following items are alreadv adjusted with Interest and Discount (Cr.)
Tax Provision (₹ ‘000) 7,40
Provision for Doubtful Debts (₹ ‘000) 4,60
Loss on sale of investments (₹ ‘000) 60
Rebate on Bills discounted (₹ ‘000) 2,75

(ii) Appropriations:
25% of profit is transferred to Statutory Reserves.
5% of profit is transferred to Revenue Reserve
You are required to give necessary Schedules also.

(b) The investment portfolio of a mutual fund scheme includes 4,000 shares of P Ltd. and 3,200 shares of Q Ltd. acquired on 31-12-2017. The cost of P Ltd.’s share is ₹ 50 and Q Ltd.’s share is ₹ 75. The market value of these shares at the end of 2017-18 were ₹ 47 and ₹ 80 respectively. On 30th June, 2018 shares of both companies were disposed of realising:
P Ltd.’s share at ₹ 40 and
Q Ltd.’s share at ₹ 82
Show important accounting entries in the books of the fund for the accounting years 2017-18 and 2018-19. [5 Marks]
Answer:
Chapter deleted from course

(c) The following information is furnished by ALFA Bank Ltd.

Margins held against letter of credit	₹ in Lakhs 200
Recurring accounts deposits	100
Current accounts deposits	375
Demand deposit	125
Unclaimed deposit	75
Gold deposit	235
Demand liabilities portion of saving bank deposit	1325
Time liabilities portion of saving bank deposit	722

Explain CRR and you are required to calculate the amount of Cash Reserve Ratio (CRR) as per the direction of Reserve Bank of India. [5 Marks]

Question 5.
(a) Consider the following summarized Balance Sheets of subsidiary MNT Ltd.:

Liabilities	2017-18 Amount in ₹	2018-19 Amount in ₹
Share Capital
Issued and subscribed 7500 Equity Shares of ₹ 100 each	7,50,000	7,50,000
Reserve and Surplus
Revenue Reserve	2,14,000	5,05,000
Securities Premium	72,000	2,07,000
Current Liabilities and Provisions
Trade Payables	2,90,000	2,46,000
Bank Overdraft	—	1,70,000
Provision for Taxation	2,62,000	4,30,000
	15,88,000	23,08,000

Liabilities	2017-18 Amount in ₹	2018-19 Amount in ₹
Assets
Fixed Assets (Cost)	9,20,000	9,20,000
Less: Accumulated Depreciation	(1,70,000)	(2,82,500)
	7,50,000	6,37,500
Investment at Cost	—	5,30,000
Current Assets
Inventory	4,12,300	6,90,000
Trade Receivable	2,95,000	3,43,000
Prepaid expenses	78,000	65,000
Cash at Bank	52,700	42,500
	15,88,000	23,08,000

Other Information :

1. MNT Ltd. is a subsidiary of LTC Ltd.
2. LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring MNT Ltd.’s inventories values in line with those of LTC Ltd., its value of inventory is required to be reduced by ₹ 5,000 at the end of 2017-2018 and increased by ₹ 12,000 at the end of 2018-2019. (Inventory of 2017-18 has been sold out during the year 2018-19)
3. MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful debts.
4. Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward of ₹ 25,000 in 2017-18 and ₹ 12,500 in 2018-19 being part of initial Sales Promotion expenditure of ₹ 37,500 in 2017-18, which is being written off over three years. Similar nature of Sales Promotion expenditure of LTC Ltd. has been fully written off in 2017-18.

Restate the balance sheet of MNT Ltd. as on 31st March, 2019 after consider-ing the above information for the purpose of consolidation. Such restatement is necessary to make the accounting policies adopted by LTC Ltd. and MNT Ltd. uniform. [10 Marks]

Answer:

Balance Sheet (Extract)
[only changes have been reflected]

(b) On the basis of the following information, calculate the value of goodwill of Star Ltd. at, 5 years’ purchase of super profits, if any, earned by the com-pany in the previous three completed accounting years.
Summarised Balance Sheet of Star Ltd. as at 31st March, 2019

	₹ in Lakhs
Liabilities
Share Capital
Issued and subscribed
3 Crore Equity Shares of ₹ 10 each, fully paid up	3,000
Capital Reserve	200
General Reserve	5,293
Profit & Loss Account	517
Trade Payables	522
Provision for Taxation (net)	68
	9,600
Assets
Goodwill	510
Land & Building	1,650
Plant & Machinery	2,715
Furniture & Fixtures	2,062
Patent and Trade Marks	30
Investments	800
Inventory	673
Trade Receivables	546
Cash and Cash equivalents	614
	9,600

The profits before tax of three years are as follows:

Year ended 31st March	Profit before tax in lakhs of (₹)	Weights
2015-16	1,910	1
2016-17	2,050	3
2017-18	2,950	5

Other information:

1. Assume that the rate of income tax for all the year is 35%,
2. In the accounting year 2015-16 the company sold its land at a profit of ₹ 75.2 Lakhs, which is included in the profits of the same year.
3. In December, 2016 there was a fire occurred in factory due to which the company lost property worth of ₹ 25 lakhs and the loss was not covered under the insurance policy.
4. In November, 2017 the company earned an extraordinary income of ₹ 48.88 Lakhs due to a special contract.
5. 40% of total investments were, 8% Non-trading investments (Purchased at par on 1st April, 2014).
6. Company values inventory on FIFO basis. On 31 st March, 2018 inventory was undervalued by ₹ 6 Lakhs inventory of 2017-18 sold during the year 2018-19)
7. Future maintainable profits to be ascertained considering weighted average.
8. The normal rate of return for the industry in which company is engaged is 15%.
9. Capital employed as on 31st March, 2018 was ₹ 5,820 Lakhs.
10. In Shareholders’ general meeting a resolution was passed to sanction the directors additional remuneration of ₹ 15 lakhs every year beginning from the accounting year 2018-19. [10 Marks]

Answer:
Step 1: Average Capital Employed

Step 2:

Note:
Current year profits are missing. Thus, FMP has been computed on the basis of past 3 years profits.

Future Maintainable Profits

Step 3

NRR= 15%

Goodwill
= 1583.075 – 7000 × 15% × 5 = 2665.375

Question 6.
Answer any four of the following:
(a) X Ltd. is a group engaged in manufacture and sale of industrial and FMCG products. One of their division also deals in Leasing of proper-ties – Mobile Towers. The accountant showed the rent arising from the leasing of such properties as other income in the Statement of Profit and Loss.
Comment whether the classification of the rent income made by the accountant is correct or not in the light of Schedule III to the Companies Act, 2013. [5 Marks]
Answer:
Incorrect

(b) Darshan Ltd. incorporated on 1st January, 2018 issued a prospectus in-viting application for 40,000 Equity Shares of ₹ 10 each. The whole issue was fully underwritten by Arun, Babu and Chandran as follows:
Arun 20,000 shares
Babu 12,000 shares
Chandran 8,000 shares
Applications were received for 32,000 shares, of which marked applications were as follows:
Arun 16,000 shares
Babu 5,700 shares
Chandran 8,300 shares
You are required to find out the liabilities of individual underwriters viz. Arun, Babu & Chandran. [5 Marks]
Answer:
Statement Showing Net Liability of Underwriters

	A	B	C
Gross Liability	20000	12000	8000
Marked Application	16000	5700	8300
Unmarked Application [2000]	1000	600	400
	3000	5700	(700)
Surplus Transferred (2012)	(438)	(262)	700
Net Liability	2562	5438	Nil

(c) From the following data determine in each case:

[5 Marks]
Answer:
Minority Interest

Case	Subsidiary Company	% of Share Owned	Cost	Date of Acquisition 01-01-2018		Consolidation date 31-12-2018
				Share Capital	Profit and Loss a/c	Share Capital	Profit and Loss a/c
				7	7	7	7
Case-A	X	90%	2,00,000	1,50,000	75,000	1,50,000	85,000
Case-B	Y	75%	1,75,000	1,40,000	60,000	1,40,000	20,000
Case-C	Z	70%	98,000	40,000	20,000	40,000	20,000
Case-D	M	95%	75,000	60,000	35,000	60,000	55,000
Case-E	N	100%	1,00,000	40,000	40,000	40,000	65,000

(d) Explain the criterion of income recognition in the case of Non Banking Financial Companies [5 Marks]

(e) Classify the following into either operating lease or finance lease with rea-son:
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at the end of lease term.
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease term.
(3) Lease payments should be recognized as an expense in the statement of Profit & Loss of a lessee.
(4) Present Value (PV) of Minimum Lease Payment (MLP) = “X”. Fair value of the asset is “Y”. And X = Y.
(5) Economic life of the asset is 5 years, lease term is 2 years, but the asset is of special nature and has been procured only for use of the lessee. [5 Marks]
Answer:
(1) Finance lease
(2) Finance lease
(3) Operating lease
(4) Finance lease
(5) Finance lease

Students should practice these Analytical Procedures – CA Inter Audit MCQ based on the latest syllabus.

Analytical Procedures – CA Inter Audit MCQ

Question 1.
What are analytical procedures?
(a) Substantive tests designed to assess control risk
(b) Substantive tests designed to evaluate the validity of management’s representation letter
(c) Substantive tests designed to study relationships between financial and non-financial information
(d) All of the above
Answer:
(c) Substantive tests designed to study relationships between financial and non-financial information

Question 2.
Which of the following is not an analytical procedure?
(a) Tracing of purchases recorded in the purchase book to purchase invoices
(b) Comparing aggregate wages paid to number of employees
(c) Comparing the actual costs with standard costs
(d) All of them are analytical procedures
Answer:
(a) Tracing of purchases recorded in the purchase book to purchase invoices

Question 3.
Analytical procedures issued in the planning stage of an audit, generally:
(a) helps to determine the nature, timing and extent of other audit procedures
(b) directs attention to potential risk areas
(c) indicates important aspects of business
(d) all of the above
Answer:
(d) all of the above

Question 4.
The basic assumption underlying the use of analytical procedures is:
(a) It helps the auditor to study relationship among elements of financial information
(b) Relationship among data exist and continue in the absence of known condition to the contrary
(c) Analytical procedures will not be able to detect unusual relationships
(d) None of the above
Answer:
(b) Relationship among data exist and continue in the absence of known condition to the contrary

Question 5.
What is the primary objective of analytical procedures used in the overall review stage of an audit?
(a) To help to corroborate the conclusions drawn from individual components of financial statements
(b) To reduce specific detection risk
(c) To direct attention to potential risk areas
(d) To satisfy doubts when questions arise about a client’s ability to continue
Answer:
(a) To help to corroborate the conclusions drawn from individual components of financial statements

Question 6.
Which of the following is true?
(a) Substantive Analytical Procedures are generally more applicable to large volume of transactions that tend to be more predictable over time.
(b) Different types of analytical procedures provide same levels of assurance.
(c) Determination of suitability of Substantive Analytical procedures is not influenced by the nature of assertion
(d) All of the above
Answer:
(a) Substantive Analytical Procedures are generally more applicable to large volume of transactions that tend to be more predictable over time.

Question 7.
Analytical procedures compare one result to another. These comparisons may be with all the following except:
(a) Similar information about top-performing subsidiaries
(b) Anticipated results (such as budgets and forecasts, or auditor expectations)
(c) Comparable information for prior periods
(d) Non-financial information
Answer:
(a) Similar information about top-performing subsidiaries

Question 8.
Performing analytical procedures may be thought of as a four-phase process. The first phase is:
(a) compare the expected value to the recorded amount
(b) formulate expectations
(c) evaluate the impact of the differences between expectation and recorded amounts on the audit | and the financial statements
(d) investigate possible explanations for a difference between expected and recorded values
Answer:
(b) formulate expectations

Question 9.
Which of the following is correct:
(a) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of financial data.
(b) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of non-financial data.
(c) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
(d) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through ratio analysis
Answer:
(c) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Question 10.
Which of the following statement is correct:
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time
(b) Substantive analytical procedures are generally less applicable to large volumes of transactions that tend to be predictable over time
(c) Substantive analytical procedures are generally more applicable to small volumes of transactions that tend to be predictable over time
(d) All statements are correct
Answer:
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time

Question 11.
A basic premise of using analytical procedures is that:
(a) there exist plausible relationships among data that is highly accurate
(b) there exist plausible relationships among data that can reasonably be expected to continue
(c) they are a good indicator of fraud and error
(d) they are essential in the planning process
Answer:
(b) there exist plausible relationships among data that can reasonably be expected to continue

Question 12.
Trend analysis is:
(a) the analysis of account balances or changes in account balances within an accounting period in terms of their reasonableness
(b) the analysis of changes in an account balance over time
(c) use of sophisticated statistical analysis, including artificial intelligence techniques, to examine large volumes of data with the objective of indicating hidden or unexpected information or patterns
(d) the comparison of relationships between firms in an industry
Answer:
(b) the analysis of changes in an account balance over time

Question 13.
Expectations are developed by identifying plausible relationships that are reasonably expected to exist based on the auditor’s understanding of the client and of the industry. These relationships may be determined by comparisons with the following sources:
(a) Data from various company divisions
(b) Non-financial information
(c) Data from national cross-industry surveys
(d) Comparable information for future periods
Answer:
(b) Non-financial information

Question 14.
Which of the following statements is not true of analytical procedures as substantive tests?
(a) are used as a confirmation of an account
(b) include tests of details (either of balances or of transactions) and analytical procedures
(c) identify situations that require increased use of other procedures (i.e. tests of control, substantive audit procedures),but seldom to reduce audit effort
(d) are designed to reduce detection risk relating to specific financial statement assertions
Answer:
(a) are used as a confirmation of an account

Question 15.
Substantive analytical procedures have certain advantages. Which of the following is an advantage of substantive analytical procedures?
(a) analytical procedures are effective when applied to the financial statements of the entity as a whole rather than when applied to financial statements of components of a diversified entity
(b) obtaining data used to develop an expectation and ensuring the reliability of that data at an appropriate level of disaggregation can account for a substantial amount of the time
(c) substantive analytical procedures deliver the desired results every year
(d) substantive analytical procedures often enable auditors to focus on a few key factors that affect the account balance
Answer:
(d) substantive analytical procedures often enable auditors to focus on a few key factors that affect the account balance

Question 16.
Which of the following would NOT be considered an analytical procedure?
(a) Computing accounts receivable turnover by dividing credit sales by the average net receivables
(b) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked
(c) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics
(d) Developing the expected current year sales based on the sales trend of the prior 5 years
Answer:
(c) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

Question 17.
For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

	In the plan­ning stage	As a substan­tive test	In the review stage
(a)	No	Yes	Yes
(b)	No	Yes	No
(c)	Yes	No	Yes
(d)	Yes	No	No

Answer:
(c)

Question 18.
Which of the following procedures do general analytical procedures not include?
(a) Sequence tests
(b) Trend analysis
(c) Statistical analysis
(d) Reasonableness tests
Answer:
(a) Sequence tests

Question 19.
Of the following types of analytical procedure, which one uses the most variables?
(a) Reasonableness test
(b) Trend analysis
(c) Ratio analysis
(d) Data mining
Answer:
(d) Data mining

Question 20.
Which of the following statement is correct?
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time.
(b) Substantive analytical procedures are generally less applicable to large volumes of transactions that tend to be predictable over time.
(c) Substantive analytical procedures are generally more applicable to small volumes of transactions that tend to be predictable over time.
(d) None of the above.
Answer:
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time.

Question 21.
Which of the following is not an analytical procedure?
(a) Tracing of purchases recurred in the purchase book to purchase invoices.
(b) Comparing aggregate wages paid to number of employees
(c) Comparing the actual costs with standard costs
(d) All of them are analytical procedures
Answer:
(a) Tracing of purchases recurred in the purchase book to purchase invoices.

Question 22.
Which of the following is correct?
(a) Different types of analytical procedures provide different levels of assurance.
(b) Different types of analytical procedures provide similar levels of assurance.
(c) Similar type of analytical procedures provides different levels of assurance.
(d) All are correct
Answer:
(a) Different types of analytical procedures provide different levels of assurance.

Question 23.
Statement I: As per the Standard on Auditing (SA) 520 “Analytical Procedures”, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among financial data.
Statement II: Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
(a) Only Statement I is correct
(b) Only Statement II is correct
(c) Both statements are correct
(d) Both Statements are incorrect
Answer:
(b) Only Statement II is correct

Question 24.
Which of the following is not an example of Analytical Procedures having consideration of comparisons of the entity’s financial information:
(a) Comparable information for prior periods.
(b) Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.
(c) Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.
(d) Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.
Answer:
(d) Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.

Question 25.
Auditor Compares Gross Profit Ratio with that of Previous year and it is discovered that there has been a fall in the ratio. This is an example of:
(a) Analytical Procedure
(b) Test of Controls
(c) Walk-Through Test
(d) Audit Sampling
Answer:
(a) Analytical Procedure