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)

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

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

Audit Sampling – CA Inter Audit MCQ

Question 1.
Which of the following is more scientific?
(a) Statistical
(b) Non-statistical
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Statistical

Question 2.
Which of the following is source of Non-Sampling risk?
(a) Human Mistakes
(b) Applying audit procedures not appropriate to the objectives of audit
(c) Misinterpreting the sample results
(d) All of the above
Answer:
(d) All of the above

Question 3.
The main advantage of using statistical sampling techniques is that such techniques:
(a) Mathematically measure risk
(b) Eliminate the need for judgmental sampling
(c) Defines the values of tolerable error
(d) all of the them
Answer:
(a) Mathematically measure risk

Question 4.
A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population is known as:
(a) Tolerable Misstatement
(b) Tolerable Rate of Deviation
(c) Performance Materiality
(d) Value Weighted Selection
Answer:
(a) Tolerable Misstatement

Question 5.
As per the requirement of SA 530, if the audit procedure is not applicable to the selected item, the auditor
(a) shall perform the procedure on a replacement item
(b) shall treat that item as a deviation from the prescribed control, in the case of tests of controls
(c) shall treat that item as a misstatement, in the case of tests of details
(d) none of the above
Answer:
(a) shall perform the procedure on a replacement item

Question 6.
As per the requirement of SA 530, if the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected item, the auditor
(a) shall treat that item as a deviation from the prescribed control, in the case of tests of details, or a misstatement, in the case of tests of controls.
(fa) shall treat that item as a deviation from the prescribed control/in the case of tests of controls and tests of details.
(c) shall treat that item as a misstatement in the case of tests of controls and tests of details.
(d) shall treat that item as a deviation from the pre¬scribed control, in the case of tests of controls, or a misstatement, in the case of tests of details
Answer:
(d) shall treat that item as a deviation from the pre¬scribed control, in the case of tests of controls, or a misstatement, in the case of tests of details

Question 7.
Which of the following factors is (are) considered in determining the sample size for tests of control?
(a) Projected error
(b) Tolerable error
(c) Expected error
(d) Both (b) and (c)
Answer:
(d) Both (b) and (c)

Question 8.
In the case of tests of details
(a) the projected misstatement plus anomalous mis¬statement, if any, is the auditor’s best estimate of misstatement in the population.
(b) the projected misstatement is the auditor’s best estimate of misstatement in the population.
(c) the anomalous misstatement is the auditor’s best estimate of misstatement in the population.
(d) the projected misstatement plus anomalous misstatement, if any, cannot be the auditor’s best estimate of misstatement in the population.
Answer:
(a) the projected misstatement plus anomalous mis¬statement, if any, is the auditor’s best estimate of misstatement in the population.

Question 9.
Which of the following is correct:
(a) When the projected misstatement exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
(b) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
(c) When the anomalous misstatement exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
(d) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample provides a reasonable basis for conclusions about the population that has been tested.
Answer:
(b) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.

Question 10.
Value-weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts, is known as:
(a) Haphazard sampling
(b) Monetary Unit Sampling
(c) Stratified Sampling
(d) Interval sampling
Answer:
(b) Monetary Unit Sampling

Question 11.
Tolerable error, is the maximum monetary error that the auditor is prepared to accept in the population and still conclude that audit objective has been achieved, is directly related to
(a) Sample size
(b) Audit risk
(c) Materiality
(d) Expected error
Answer:
(c) Materiality

Question 12.
While determining the sample size for tests of controls, an increase in the auditor’s desired level of assurance that the tolerable rate of deviation is not exceeded by the actual rate of deviation in the population will:
(a) require the auditor to increase the sample size
(b) allow the auditor to decrease the sample size
(c) have negligible effect
(d) none of the above
Answer:
(a) require the auditor to increase the sample size

Question 13.
Which of the following is false?
(a) Audit sampling can be applied using either non-statistical or statistical sampling approaches.
(b) The level of sampling risk that the auditor is willing to accept affects the sample size required
(c) Example of sampling risk include use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognise a misstatement.
(d) All of the above
Answer:
(c) Example of sampling risk include use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognise a misstatement.

Question 14.
While auditing TEN Ltd., CA. Porky divided the whole population of trade receivables balances to be tested in a few separate groups called ‘strata’ and started taking a sample from each of them. He treated each stratum as if it was a separate population. He divided the trade receivables balances of TEN Ltd. for the Financial Year 2017-18 into groups on the basis of personal judgment as follows:

S. No.	Particulars
1	Balances in excess of ₹ 10,00,000
2	Balances in the range of ₹ 7,75,001 to ₹ 10,00,000
3	Balances in the range of ₹ 5,50,001 to ₹ 7,75,000
4	Balances in the range of ₹ 2,25,001 to ₹ 5,50,000
5	Balances ₹ 2,25,000 and below

From the above mentioned groups, CA. Porky picked up different percentage of items for examination from each of the groups, for example, from the top group i.e. balances in excess of ₹ 10,00,000, he selected all the items to be examined; from the second group, he opted for 25% of the items to be examined; from the lowest group, he selected 2% of the items for examination; and so on from rest of the groups. Which one of the following methods of sample selection is he following?
(a) Systematic sampling.
(b) Stratified sampling.
(c) Section sampling.
(d) Selection sampling
Answer:
(b) Stratified sampling.

Question 15.
While determining the sample size for tests of details, an increase in the auditor’s assessment of the risk of material misstatement will:
(a) require the auditor to increase the sample size
(b) allow the auditor to decrease the sample size
(c) have negligible effect
(d) none of the above
Answer:
(a) require the auditor to increase the sample size

Question 16.
Which among the following will have negligible effect on determination of sample size in case of tests of details?
(a) The number of sampling units in the population
(b) Stratification of the population when appropriate
(c) An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population
(d) An increase in the use of other substantive procedures directed at the same assertion
Answer:
(a) The number of sampling units in the population

Question 17.
Which among the following will have effect of decrease in sample size in case of tests of details?
(a) The number of sampling units in the population
(b) Stratification of the population when appropriate
(c) An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population
(d) An increase in the use of other substantive procedures directed at the same assertion
Answer:
(b) Stratification of the population when appropriate

Students should practice these Audit in an Automated Environment – CA Inter Audit MCQ based on the latest syllabus.

Audit in an Automated Environment – CA Inter Audit MCQ

Question 1.
Type of automated environment in which business operations and transactions are initiated, processed and recorded immediately on their occurrence
(a) Real Time processing
(b) Batch processing
(c) Time Sharing processing
(d) Service Bureau processing
Answer:
(a) Real Time processing

Question 2.
As required by SA 315, auditor is required to obtain an understanding of the entity and its environment as a part of Risk Assessment procedure to identify and assess Risk of Material Misstatements. Given below is list of certain areas for which auditor generally required understanding:
(i) Applications being used by the entity.
(ii) IT infrastructure components for each of the application.
(iii) Organisation structure and governance.
(iv) Policies, procedures and processes followed,
(v) IT risks and controls.
In an automated environment, auditor is required to obtain an understating of:
(a) (i), (ii) and (v)
(b) (iii) and (iv)
(c) (i) (ii) (iii) and (v)
(d) (i) (ii) (iii) (iv) and (v)
Answer:
(d) (i) (ii) (iii) (iv) and (v)

Question 3.
Which of the following are not general IT controls?
(a) Controls over data centre and network operations
(b) Back-up and recovery
(c) Edit checks of input data
(d) System software acquisition
Answer:
(c) Edit checks of input data

Question 4.
Which of the following are not application controls?
(a) Access security
(b) Numerical sequence checks
(c) Edit Checks of Input Data
(d) Reasonable Checks
Answer:
(a) Access security

Question 5.
Policies and procedures that relate to many applications and support the effective functioning of application controls are known as
(a) General IT Controls
(b) Application Controls
(c) IT Dependent Controls
(d) None of the above
Answer:
(a) General IT Controls

Question 6.
Which of the following is a General IT control?
(a) IT Environment
(b) Application Control
(c) Access Security
(d) IT Dependent Control
Answer:
(c) Access Security

Question 7.
Which of the following is an automated control?
(a) Program change
(b) System-generated report
(c) Application control
(d) Configurations
Answer:
(d) Configurations

Question 8.
Application controls are that typically operate at a business process level and apply to the processing of individual applications
(a) Manual procedures
(b) Automated procedures
(c) Manual or Automated procedures
(d) None of the above
Answer:
(c) Manual or Automated procedures

Question 9.
Manual controls that make use of some form of data or information or report produced from IT systems and applications are known as:
(a) General IT Controls
(b) Automated Application Controls
(c) IT Dependent Controls
(d) None of the above
Answer:
(c) IT Dependent Controls

Question 10.
Identify the automated controls from below mentioned cases:
(a) All changes to the credit limit are approved manually by sales manager
(b) Price master configured in the sales master can only be edited by authorised personnel in the system
(c) Inventory ageing report is pulled out from the system based on which provisioning is calculated after analysing the future demand by the inventory personnel and approved by the controller
(d) All invoices are signed by warehouse personnel before the goods are dispatched to the customer
Answer:
(b) Price master configured in the sales master can only be edited by authorised personnel in the system

Question 11.
Identify the IT Dependent controls:
1. Price master configured in the sales master can only be edited by authorised personnel in the system
2. Invoice can not be booked in SAP in case Purchase orders are not approved
3. All invoices are signed by warehouse personnel before the goods are dispatched to the customer
4. Inventory ageing report is pulled out from the system based on which provisioning is calculated after analysing the future demand by the inventory personnel and approved by the controller
5. Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit configured in the system
6. Ageing report is pulled out from SAP based on which provisioning is calculated by accounting personnel and approved by financial controller
Correct Answer is:
(a) 1, 2, 3 and 4
(b) 2, 3 and 4
(c) 4 and 6
(d) 4, 5 and 6
Answer:
(c) 4 and 6

Question 12.
Identify the Automated controls:
1. Price master configured in the sales master can only be edited by authorised personnel in the system
2. Invoice cannotbe booked in SAP in case Purchase orders are not approved
3. Inventory ageing report is pulled out from the system based on which provisioning is calcu-lated after analysing the future demand by
the inventory personnel and approved by the controller
4. All invoices are signed by warehouse personnel before the goods are dispatched to the customer
5. Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit configured in the system
6. All changes to the credit limit are approved manually by sales manager
Correct Answer is:
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 1, 2 and 5
(d) 1, 2 and 6
Answer:
(c) 1, 2 and 5

Question 13.
Which controls help ensure that transactions occurred are authorised and are completely and accurately recorded and processed?
(a) General IT Controls
(b) Application Controls
(c) IT Dependent Controls
(d) None of the above
Answer:
(b) Application Controls

Question 14.
IT dependent controls are:
(a) Manual Controls
(b) Automated Controls
(c) Manual or Automated Controls
(d) None of the above
Answer:
(a) Manual Controls

Question 15.
Examples of Application controls include the following:
1. Edit checks and Validation of input data
2. Sequence Number checks
3. Limit Checks
4. Access security
5. Application system acquisition, development, and maintenance
Correct Answer is:
(a) 1, 2 and 3
(b) 1, 2, 3 and 4
(c) 4 and 5
(d) 1,2, 3 and 5
Answer:
(a) 1, 2 and 3

Question 16.
Examples of General IT controls include the following:
1. Edit checks and Validation of input data
2. Sequence Number checks
3. Limit Checks
4. Access security
5. Application system acquisition, development, and maintenance
Correct Answer is:
(a) 1,2 and 3
(b) 1, 2, 3 and 4
(c) 4 and 5
(d) 1, 2, 3 and 5
Answer:
(c) 4 and 5

Question 17.
Who is mainly responsible for implementation of internal financial controls in a company?
(a) Auditors
(b) Directors
(c) Employees
(d) Regulators
Answer:
(b) Directors

Question 18.
Analytical process by which meaning information is generated and prepared from raw system data using processes, tools and techniques is known as:
(a) Substantive Analytical Procedures
(b) Data Analytics
(c) Data Monitoring
(d) Modelling tool
Answer:
(b) Data Analytics

Question 19.
The data analytics methods used in an audit are known as
(o) Test Data
(b) Integrated Test Facility
(c) Computer Assisted Auditing Techniques or CAATs
(d) Data Base Management System
Answer:
(c) Computer Assisted Auditing Techniques or CAATs

Question 20.
Arrange the steps involved in using Data Analytics:

Arrange the steps involved in using Data Analytics:
A	Document the results &Report the conclu­sions.	E	Understand Business Environment includ­ing IT.
B	Apply Criteria on data extracted.	F	Extract Data
C	Validate and Confirm results	G	Identify Source and Format of Data
D	Verily, Completeness, accuracy and Validity of extracted Data	H	Defines the Objectives and Criteria against which subject matter will be evaluated.

(a) E, H, F, G, B, D, A and C
(b) E, H,G, F, D, B.C and A
(c) H, G, F, B, E, D, A and C
(d) H, G, F, B, E, D, C and A
Answer:
(b) E, H,G, F, D, B.C and A

Accounting for Employee Stock Option Plans – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Accounting for Employee Stock Option Plans – CA Inter Advanced Accounting Study Material

Theory Questions

Question 1.
Explain ‘Employee’s stock option plan. (Nov. 2009) (2 Marks)
Answer:
‘Employee Stock Option Plan’ is a plan in which option is given for a specified period, to employees of a company, which gives such directors, officers or employees the right, but not the obligation, to purchase or subscribe, the shares of the enterprise at a fixed or determinable price.

Basic Questions On Esop – Expense Computation

Question 2.
PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1-4-2015, conditional upon the employee remaining in the company for 2 years. The fair value of the option is ₹ 18 on the grant date and the exercise price is ₹ 55 per share. The other information is given as under:

1. Number of employees expected to satisfy service condition are 930 in the 1st year and 850 in the 2nd year.
2. 40 employees left the company in the 1st year of service and 880 employees have actually completed 2 year vesting period.

You are required to compute ESOP cost to be amortized by PQ Ltd. in the years 2015-2016 and 2016-2017.
Answer:
Calculation of ESOP cost to be amortized

Question 3.
At the beginning of year 1, the enterprise grants 1,000 stock options to each member of its sales team, conditional upon the employees remaining in the employment of the enterprise for three years, and the team selling more than 50,000 units of a particular product over the three-year period. The fair value of the stock options is ₹ 15 per option at the date of grant.

During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of year 3, the enterprise has sold 55,000 units, and the stock options do not vest.

Twelve members of the sales team have remained in service for the three-year period. You are required to examine and give comment in light of the relevant Guidance Note that whether the company should recognise the expenses on the base of options granted or not.

Also state will your answer differ if, instead of modifying the performance target, the enterprise had increased the number of years of service required for the stock options to vest from three years to ten years.
Answer:
Paragraph 19 of the Guidance Note on Share Based Payments

Analysis:
For a performance condition that is not a market condition, the en-terprise to recognize the services received during the vesting period based on the best available estimate of the number of shares or stock options expected to vest and to revise that estimate, if necessary, if subsequent information indicates that the number of shares or stock options expected to vest differs from previous estimates. On vesting date, the enterprise revises the estimate to equal the number of instruments that ultimately vested.

However, paragraph 24 of the Guidance Note requires, irrespective of any modifications to the terms and conditions on which the instruments were granted, or a cancellation or settlement of that grant of instruments, the enterprise to recognize, as a minimum, the services received, measured at the grant date fair value of the instruments granted, unless those instruments do not vest because of failure to satisfy a vesting condition (other than a market condition) that was specified at grant date.

Furthermore, paragraph 26(c) of the Guidance Note
If the enterprise modifies the vesting conditions in a manner that is not beneficial to the employee, the enterprise does not take the modified vesting conditions into account when applying the requirements for treatment of vesting conditions as specified in Guidance Note.

Conclusion:
Therefore, because the modification to the performance condition made it less likely that the stock options will vest, which was not beneficial to the employee, the enterprise takes no account of the modified performance condition when recognizing the services received. Instead, it continues to recognize the services received over the three-year period based on the original vesting conditions. Hence, the enterprise ultimately recognizes cumulative remuneration expense of ₹ 1,80,000 over the three-year period (12 employees × 1,000 options × ₹ 15).

The same result would have occurred if, instead of modifying the performance target, the enterprise had increased the number of years of service required for the stock options to vest from three years to ten years.

Because such a modification would make it less likely that the options will vest, which would not be beneficial to the employees, the enterprise would take no account of the modified service condition when recognizing the services received. Instead, it would recognize the services received from the twelve employees who remained in service over the original three-year vesting period.

Basic Questions on Esop – Journal Entries

Question 4.
X Co. Ltd. has its share capital divided into equity shares of ₹ 10 each. On 1.1.20X1 it granted 20,000 employees’ stock option at ₹ 50 per share when the market price was ₹ 120 per share. The options were to be exercised between 15th March, 20X2 and 31st March, 20X2. The employees exercised their options for 16,000 shares only and the remaining options lapsed. The company closes its books on 31st March every year. Show Journal entries (with narration) as would appear in the books of the company up to 31st March, 20X2.
Answer:
In the books of X Co. Ltd. Journal Entries

Working Notes:

1. No entry is passed when Stock Options are granted to employees. Hence, no entry will be passed on 1st April 20X1;
2. Market Price = ₹ 120 per share whereas stock option price = ₹ 50, Hence, the difference ₹ 120 . ₹ 50 = ₹ 70 per share is equivalent to employee cost or employee compensation expense and will be charged to P/L Account as such for the number of options exercised i.e., 16,000 shares.

Question 5.
On 1st April, 20X1, a company offered 100 shares to each of its 500 employees at ₹ 50 per share. The employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in on transfer for three years from the grant date. The market price of shares of the company on the pant date is ₹ 60 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 56 per share.

On 31st March, 20X2, 400 employees accepted the offer and paid ₹ 50 per share purchased. Nominal value of each share is ₹ 10.
Record the issue of share in the books of the company under the aforesaid plan.
Answer:
Fair value of an option = ₹ 56 – ₹ 50 = ₹ 6
Number of shares issued = 400 employees × 100 shares/employee = 40,000 shares
Fair value of ESOP = 40,000 shares × ₹ 6 = ₹ 2,40,000
Vesting period = 1 month
Expenses recognized in 20X1 – X2 = ₹ 2,40,000

Question 6.
A company has its share capital divided into shares of ₹ 10 each. On 1-1-20X1, it granted 5,000 employees stock options at ₹ 50, when the market price was ₹ 140. The options were to be exercised between 1-3-20X2 to 31-03- 20X2. The employees exercised their options for 4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year ended 31-3- 20X2, with regard to employees’ stock options.
Answer:

Working Note:

1. Employee Compensation Expenses = Discount between Market Price and option price = ₹ 140 – ₹ 50 = ₹ 90 per share = ₹ 90 × 4,800 = ₹ 4,32,000 in total.
2. Securities Premium Account = ₹ 50 – ₹ 10 = ₹ 40 per share + ₹ 90 per share on account of discount of option price over market price = ₹ 130 per share = ₹ 130 × 4,800 = ₹ 6,24,000 in total.

Question 7.
A Company has its share capital divided into shares of ₹ 70 each. On 1st April 2010, it granted 20,000 employees’ stock options at ₹ 40, when the market price was ₹ 730. The options were to be exercised between 1st January 2011 to 15th March 2011. The employees exercised their options for 18,000 shares only; the remaining options lapsed. The company closes its books on 31st March every year. Pass Journal entries with regard to employees’ stock options. (May 2011) (5 Marks)
Answer:
Journal Entries

Question 8.
A company has its share capital divided into shares of ₹ 10 each. On 1-4-2010, it granted 5,000 employees stock option at ? 50, when the market price was ₹ 140. The options were to be exercised between 1-12-2010 to 28-22011. The employees exercised their options for 4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year ended 31-3-2011, with regard to employees’ stock option. (Nov. 2011) (4 Marks)
Answer:
In the books of Company Journal Entries

Question 9.
On 1st April, 2012, a company offered 100 shares to each of its 400 employees at ₹ 25 per share. The employees are given a month to accept the shares. The shares issued under the plan shall be subject to lock-in to transfer for three years from the grant date i.e. 30th April, 2012. The market price of shares of the company on the grant date is ₹ 30 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 28 per share. (May 2012) (4 Marks)
Answer:
Fair value of an option = ₹ 28 – ₹ 25 = ₹ 3
Number of employees accepting the offer = 400 employees × 50% = 200 employees
Number of shares issued = 200 employees × 100 shares/employee = 20,000 shares
Fair value of ESPP = 20,000 shares × ₹ 3 = ₹ 60,000
Expenses recognized in 2012-13 = ₹ 60,000
Journal Entry

Question 10.
Arihant Limited has its share capital divided into equity shares of ₹ 10 each. On 1-10-2012, it granted 20,000 employees stock option at ₹ 50 per share, when the market price was ₹ 120 per share. The options were to be exercised between 10th December, 2012 and 31st March, 2013. The employees exercised their options for 16,000 shares only and the remaining options lapsed. The company closes its books on 31st March every year. Show Journal Entries (with narration) as would appear in the books of the company upto 31st March, 2013. (May 2013) (4 Marks)
Answer:
Journal Entries in the books of Arihant Ltd.

Question 11.
J Ltd. has its share capital divided into equity shares of ₹ 10 each. On 1.1.2018 it granted 5,000 employee stock options at ₹ 30 per share, when the market price was ₹ 50 per share. The options were to be exercised between 15th March, 2018 and 31st March, 2018. The employees exercised their options for 3,600 shares only and the remaining options lapsed. The company closes its books on 31st March every year. You are required to prepare journal entries (with narration) as would appear in the books of the company up to 31st March, 2018.
Answer:
Journal Entries in the books of J Ltd.

Working Notes:

1. No entry is passed when stock options are granted to employees. Hence, no entry will be passed on 1st January 2018;
2. Market Price = ₹ 50 per share and stock option price = ₹ 30, Hence, the difference ₹ 50 – ₹ 30 = ₹ 20 per share is equivalent to employee cost or employee compensation expense and will be charged to P&L Account as such for the number of options exercised i.c. 3,600 shares.

Question 12.
Suvidhi Ltd. offered 50 shares to each of its 1500 employees on 1st April 2017 for ₹ 30. Option would be exercisable within a year it is vested. The shares issued under the plan shall be subject to lock-in on transfer for three years from the grant date. The market price of shares of the company is ₹ 50 per share on grant date. Due to post vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 38 per share.

On 31st March, 2018, 1200 employees accepted the offer and paid ₹ 30 per share purchased. Nominal value of each share is ₹ 10.
Record the issue of shares in the books of the company under the aforesaid plan. (May 2018 – New Course) (5 Marks)
Answer:
Journal Entries in the books of Suvidhi Ltd.

Working Note:
Fair value of an option = ₹ 38 – ₹ 30 = ₹ 8
Number of shares issued = 1,200 employees × 50 shares/employee = 60,000 shares
Fair value of ESOP which will be recognized as expenses in the year 2017-2018
= 60,000 shares × ₹ 8 = ₹ 4,80,000
Vesting period = 1 year
Expenses recognized in 2017-2018 = ₹ 4,80,000

Question 13.
A company has its share capital divided into shares of ₹ 10 each. On 1-1-20X1, it granted 5,000 employees stock options at ₹ 50, when the market price was ₹ 140. The options were to be exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their options for 4,800 shares only; remaining options lapsed. You are required to prepare the necessary journal entries for the year ended 31-3-20X2, with regard to employees’ stock options.
Answer:
In the books of Company Journal Entries

Working Note:

1. Employee Compensation Expenses = Discount between Market Price and option price = ₹ 140 – ₹ 50 = ₹ 90 per share = ₹ 90 × 4,800 = ₹ 4,32,000 in total.
2. Securities Premium Account = ₹ 50 – ₹ 10 = ₹ 40 per share + ₹ 90 per share on account of discount of option price over market price = ₹ 130 per share = ₹ 130 × 4,800 = ₹ 6,24,000 in total.

Question 14.
A company has its share capital divided into shares of ₹ 10 each. On 1-1-20X1, it granted 5,000 employees stock options at ₹ 50, when the market price was ₹ 140. The options were to be exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their options for 4,800 shares only; remaining options lapsed. Pass the necessary journal entries for the year ended 31-3-20X2, with regard to employees’ stock options.
Answer:
Journal Entries in the books of company

Working Note:

1. Employee Compensation Expenses = Discount between Market Price and option price = ₹ 140 – ₹ 50 = ₹ 90 per share = ₹ 90 × 4,800 = ₹ 4,32,000/- in total.
2. Securities Premium Account = ₹ 50 – ₹ 10 = ₹ 40 per share + ₹ 90 per share on account of discount of option price over market price = ₹ 130 per share = ₹ 130 × 4,800 = ₹ 6,24,000/- in total.

Question 15.
Lucky Ltd. grants 100 stock options to each of its 1,500 employees on 1-4-2014 for ₹ 40, 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 ₹? 70 each. These options will vest at the end of year 1 if the earning of Lucky Ltd. is 15%, or it will vest at the end of the year 2 if the average earning of two years is 13% or lastly it will vest at the end of the third year if the average earning of 3 years will be 10% 8,000, unvested options lapsed on 31-3-2015. 6,000 unvested options lapsed on 31-3-2016 and finally 4,000 unvested options lapsed on 31-3-2017.

The earnings of Lucky Ltd. for the three financial years ended on 31st March, 2015; 2016 and 2017 are 14%, 10% and 8% respectively.

1,250 employees exercised their vested options within a year and remaining options were unexercised at the end of the contractual life.

You are required to give the necessary journal entries for the above and also prepare the statement showing compensation expense to be recognized at the end of each year. (November 2018 – New Course) (10 Marks)
Answer:

Working Note:
Statement showing compensation expense to be recognized at the end of:

*It is assumed that each share is of ₹ 10 each and Lucky Ltd. expects all the options to be vested after deducting actual lapses during the year.

Questions On Espp

Question 16.
On 1st April, 2013, a company offered 100 shares to each of its 500 employees at ₹ 50 per share. The employees are given a month to accept the offer. The shares issued under the plan shall be subject to lock-in on transfer for three years from the grant date. The market price of shares of the company on the grant date is ₹ 60 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 56 per share. On 30th April, 2013,400 employees accepted the offer and paid ₹ 50 per share purchased. Nominal value of each share is ₹ 10.

Record the issue of shares in the books of the company under the aforesaid plan.
Answer:
Fair value of an option = ₹ 56 – ₹ 50 = ₹ 6
Number of shares issued = 400 employees × 100 shares/employee = 40,000 shares
Fair value of ESPP = 40,000 shares × ₹ 6 = ₹ 2,40,000
Vesting period = 1 month
Expenses recognized in 2013-14 = ₹ 2,40,000

Advanced Questions on Esop

Question 17.
The following particulars in respect of stock options granted by a company are available:

Grant date	April 1,2008
Number of employees covered	300
Vesting condition: Continuous employment upto 31/03/11	100
Nominal value per share (₹)	10
Exercise price per share (₹)	40
Fair value of option per share on grant date (₹)	20
Exercise date	July 31, 2011

The number of options to vest per employee shall depend on company’s average annual earning after tax during vesting period as per the table below:

Average annual earning after tax	Number of options per employee
Less than ₹ 100 crores	Nil
₹ 100 crores to less than ? 120 crores	30
₹ 120 crores to less than ? 150 crores	45
Above ₹ 150 crores	60

Position on 31/03/09
(a) The company expects to earn ₹ 115 crores after tax on an average per year during vesting period.
(b) Number of employees expected to be entitled to option = 280
Position on 31 /03/10
(a) The company expects to earn ₹ 130 crores after tax on an average per year during vesting period.
(b) Number of employees expected to be entitled to option = 270
Position on 31 /03/11
(a) The company earned ₹ 128 crores after tax on an average per year during vesting period.
(b) Number of employees entitled to option = 275
Position on July 31, 2011
Number of employees exercising option = 265
Compute expenses to be recognised in each year and value of options forfeited.
Answer:
(A) Computation of expenses to be recognized in each year

Year	Calculation	Expense for Period (₹)	Cumulative expense (₹)
2008-09	(280 × 30) options × ₹ 20 × 1/3	56,000	56,000
2009-10	[(270 × 45) options × ₹ 20 × 2/3] – 56,000	1,06,000	1,62,000
2010-11	[(275 × 45) options × ₹ 20 × 3/3] – 1,62,000	85,500	2,47,500

(B) Value of option forfeited as on July 31, 2011
Fair value of option per share = ₹ 20
Number of shares not subscribed = (275 – 265) × 45 = 450
Value of options forfeited = 450 × ₹ 20 = ₹ 9,000.

Question 18.
The following particulars in respect of stock options granted by a company are available:
tableee
The options will vest to employees serving continuously for 3 years from vesting date, provided the share price is ₹ 70 or above at the end of 2013-14.

The estimates of number of employees satisfying the condition of continuous employment were 48 on 31 /03/12,47 on 31 / 03/13. The number of employees actually satisfying the condition of continuous employment was 45.

The share price at the end of 2013-14 was ₹ 68.

Compute expenses to recognise in each year and show important accounts in books of the company.
Answer:
The vesting of options is subject to satisfaction of two conditions viz. service condition of continuous employment for 3 years and market condition that the share price at the end of 2013-14 is not less than ₹ 70. Since the share price on 31 /03 /14 was ₹ 68, the actual vesting shall be nil. Despite this, the company should recognise value of option over 3-vear vesting period from 2011-12 to 2013-14.

Year 2011-12
Fair value of option per share = ₹ 9
Number of shares expected to vest under the scheme = 48 × 1,000 = 48,000
Fair value = 48,000 × ₹ 9 = ₹ 4,32,000
Expected vesting period = 3 years
Value of option recognised as expense in 2011-12 = ₹ 4,32,000/3 = ₹ 1,44,000

Year 2012-13
Fair value of option per share = ₹ 9
Number of shares expected to vest under the scheme = 47 × 1,000 = 47,000
Fair value = 47,000 × ₹ 9 = 2 4,23,000 Expected vesting period = 3 years
Cumulative value of option to recognise as expense in 2011-12 and 2012-13 = (₹ 4,23,000/3) × 2 = ₹ 2,82,000
Value of option recognised as expense in 2011-12 = ₹ 1,44,000
Value of option recognised as expense in 2012-13 = ₹ 2,82,000 – ₹ 1,44,000 = ₹ 1,38,000

Year 2013-14
Fair value of option per share = ₹ 9
Number of shares actually vested under the scheme = 45 × 1,000 = 45,000
Fair value = 45,000 × ₹ 9 = 2 4,05,000
Vesting period = 3 years
Cumulative value of option to recognise as expense in 2011-12, 2012-13 and 2013-14 = ₹ 4,05,000
Value of option recognised as expense in 2011-12 and 2012-13 = ₹ 2,82,000
Value of option recognised as expense in 2013-14 =₹ 4,05,000 – ₹ 2,82,000 = ₹ 1,23,000

Employees’ Compensation A/c

ESOP Outstanding A/c

Question 19.
X Ltd. granted 500 stock options to its employees on 1.4.2011 at ₹ 50 per share. The vesting period is 2 years and the maximum exercise period is one year. Market price on that date is ₹ 140 per share. All the options were exercised on 30.06.2014. Pass journal entries giving suitable narrations, if the face value of equity share is t 10 per share. (Nov. 2014) (8 Marks)
Answer:
Journal entries in the books of X Ltd.

Working. Note:
1. Total employees compensation expenses
= 500 × (₹ 140 – ₹ 50) = ₹ 45,000

2. Employees compensation expense has been written off during 21/2 years on straight line basis as under:
Ist Year = ₹ 18,000 (for full year)
IInd Year = ₹ 18,000 (for full year)
IIIrd Year = ₹ 9,000 (for half year)

Question 20.
You are provided with the following details in respect of ABC Limited:

1. 10,000 equity shares of nominal value of ₹ 10 each (under ESOP) were issued on 31st March, 2014;
2. Exercise price of equity shares granted under ESOP was ₹ 160 per share;
3. Market price of share was ₹ 400 each on the date of the grant;
4. Vesting of shares was in the ratio of 30%, 60% and 100% after 1 year, 2 year and 3 year respectively from the date of grant;
5. Vested options can be exercised up to 1 year from the date of vesting;
6. The number of shares expired and exercised are as under:

	Years ended
Particulars	31.03.2015	31.03.2016	31.03.2017
Vested Options Lapsed during the year	–	200	600
Unvested Options Lapsed during the year	400	600	1,000
Options Exercised during the year		2,500	2,000

From the above details you are required to calculate:

1. Employee Compensation Expense for the year ending 31 st March, 2015, 31st March, 2016 and 31st March, 2017
2. Balance of Employee Stock Option Outstanding Account as on 31st March, 2015, 31st March, 2016 and 31st March, 2017
   Entries relating to ESOP lapsed and options exercised were passed at the end of the respective financial year. (Nov. 2017) (8 Marks)

Answer:
(i) Computation of Employee Compensation Expense (Refer Working Note)

Vesting Date as on 31st March	Cost to be recognized in the year ending on 31st March
	2015	2016	2017
Grade I (30%)	6,24,000
Grade II (30%)	2,88,000	2,88,000
Grade III (40%)	2,40,000	2,40,000	2,40,000
Cost for the year	11,52,000	5,28,000	2,40,000
Cumulative cost	11,52,000	16,80,000	19,20,000

(ii) Balance of ESOP Outstanding Account

Working Note:
Determination of number of options expected to vest under each group

Total compensation expense of ₹ 19,20,000, determined at the grant date, is attributed to 3 years.

Students should practice these Nature, Objective and Scope of Audit – CA Inter Audit MCQ based on the latest syllabus.

Nature, Objective and Scope of Audit – CA Inter Audit MCQ

Question 1.
Objective of Audit is to :
(a) safeguarding of assets
(b) prevention and detection of fraud and error
(c) compliance of laws and regulations
(d) express an opinion on financial Statements
Answer:
(d) express an opinion on financial Statements

Question 2.
As per SA-200 “Overall Objectives of the Indepen¬dent Auditor”, in conducting an audit of financial statements, the overall objectives of the auditor is:
(a) to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement and to report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings
(b) to guide the management as to design, implemen-tation and maintenance of internal controls which are necessary to obtain reasonable assurance that financial statements are free from material mis-statements
(c) to communication with Those Charged with Gover-nance, the weaknesses identified during the course of audit
(d) to ensure compliance of laws and regulations that are applicable over the entity
Answer:
(a) to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement and to report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings

Question 3.
Which of the following is an example of Voluntary Audit?
(a) Audit of companies governed by Companies Act, 2013
(b) Audit of Individuals under Section 44AB of Income Tax Act, 1961
(c) Audit of companies under Section 44AB of Income Tax Act, 1961
(d) Audit of Individuals on the directives of Government for the purpose of sanction of grants
Answer:
(d) Audit of Individuals on the directives of Government for the purpose of sanction of grants

Question 4.
Which of the following is not an inherent limita¬tion of audit?
(a) Nature of Financial Reporting
(b) Nature of Audit procedures
(c) Nature and Size of Business Entity
(d) Existence of related party transactions
Answer:
(c) Nature and Size of Business Entity

Question 5.
The IAASB functions as an independent standard-setting body under the auspices of :
(a) International Federation of Auditors
(b) International Federation of Accountants
(c) Auditing Practices Committee
(d) International Ethical Standard Board of Accountants
Answer:
(b) International Federation of Accountants

Question 6.
As per SQC-1, which of the following element is not part of the firm’s system of quality control:
(a) Leadership responsibilities for quality within the firm
(b) Ethical requirements including independence
(c) Preparation of financial statements in compliance of applicable Financial reporting Framework
(d) Acceptance and continuance of client relationships and specific engagements
Answer:
(c) Preparation of financial statements in compliance of applicable Financial reporting Framework

Question 7.
SQC1 requires the firm to obtain information be-fore accepting an engagement. Which of the following information will not assist the engagement partner in determining whether the decisions regarding the acceptance and continuance of audit engagements are appropriate:
(a) The integrity of the principal owners, key management and those charged with governance of the entity;
(b) Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities, including time and resources;
(c) Whether the firm and the engagement team can comply with relevant ethical requirements;
(d) Whether the firm and the engagement partner are able to communicate with the TCWG
Answer:
(d) Whether the firm and the engagement partner are able to communicate with the TCWG

Question 8.
SQC1 “Quality Control for Firms that perform Audits and Review of Historical Financial Information, and other Assurance and related services”, requires firms to establish policies and procedures for the timely completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of the Final audit File is
(a) Ordinarily not more than 60 days after the date of the auditor’s report
(b) Ordinarily not more than 30 days after the date of the auditor’s report
(c) Ordinarily not more than 90 days after the date of the auditor’s report
(d) Ordinarily not more than 120 days after the date of the auditor’s report
Answer:
(a) Ordinarily not more than 60 days after the date of the auditor’s report

Question 9.
SQC 1 requires firms to establish policies and procedures for the retention of
(a) Audit File
(b) Engagement documentation
(c) Final Audit file
(d) Audit Documentation
Answer:
(b) Engagement documentation

Question 10.
SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The retention period for audit engagements ordinarily is:
(a) No shorter than eight years from the date of the auditor’s report, or, if later, the date of the group auditor’s report
(b) No shorter than six years from the date of the auditor’s report, or, if later, the date of the group auditor’s report
(c) No shorter than seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s report
(d) No shorter than ten years from the date of the auditor’s report, or, if later, the date of the group auditor’s report
Answer:
(c) No shorter than seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s report

Question 11.
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. In order to establish whether the precon-ditions for an audit are present, the auditor shall:
(a) determine whether the audit can be performed in accordance with Quality Control and Engagement Standards
(b) determine whether the financial reporting framework is acceptable
(c) determine whether the audit can be performed in accordance with legal and regulatory requirements
(d) determine whether policies and procedures as followed for internal control are acceptable
Answer:
(b) determine whether the financial reporting framework is acceptable

Question 12.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter which shall include the following except-
(a) Responsibilities of the auditor
(b) Description of methods to be followed for obtaining audit evidence
(c) Responsibilities of management
(d) Objective and scope of the audit of the financial statements
Answer:
(b) Description of methods to be followed for obtaining audit evidence

Question 13.
Which of the following is correct?
(a) Auditing implies systematic, critical and special examination of the records of a business for a specific purpose
(b) The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements
(c) Auditing is legally obligatory for all types of business organisations
(d) Auditor’s Opinion is an assurance as to the future viability of the enterprise or the efficiency or effec-tiveness with which management has conducted the affairs of the enterprise
Answer:
(b) The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements

Question 14.
Which of the following is not an advantage of independent audit?
(a) Settlement of Taxes
(b) Protection of Interest of Stakeholders
(c) Guarantee as to future viability of the entity
(d) Moral Check on employees
Answer:
(c) Guarantee as to future viability of the entity

Question 15.
Threats occur when, because of a relationship, a professional accountant becomes too sympathetic to the interests of others, are known as:
(a) Self-interest threats
(b) Self-review threats
(c) Familiarity threats
(d) Intimidation threats
Answer:
(c) Familiarity threats

Question 16.
Loan or guarantee to or from the concerned client is an example of –
(a) Self-review threats
(b) Self-interest threats
(c) Advocacy threats
(d) Intimidation threats
Answer:
(b) Self-interest threats

Question 17.
When an auditor deals with shares or securities of the audited company is an example of:
(a) Self-review threats
(b) Self-interest threats
(c) Advocacy threats
(d) Intimidation threats
Answer:
(c) Advocacy threats

Question 18.
Intimidation threats occur:
(a) when a professional accountant may be deterred from acting objectively by threats, actual or per-ceived
(b) whenaprofessional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised
(c) when a previous judgment needs to be re-evaluated by the professional accountant responsible for that judgment
(d) as a result of the financial or other interests of a professional accountant or of a relative
Answer:
(a) when a professional accountant may be deterred from acting objectively by threats, actual or per-ceived

Question 19.
Which of the following is correct?
(a) To maintain an adequate accounting system incorporating various controls is the responsibility of Management
(b) The term independence implies that the auditor should respect the confidentiality of client information
(c) An unqualified opinion in audit report is aguarantee as to the future viability of the company
(d) The audit engagement letter is sent by the client to auditor
Answer:
(a) To maintain an adequate accounting system incorporating various controls is the responsibility of Management

Question 20.
An attitude that includes a questioning mind, beingalertto conditions whichmay indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence, is known as
(a) Professional Judgment
(b) Professional Skepticism
(c) Professional Competence
(d) Professional Behaviour
Answer:
(b) Professional Skepticism

Question 21.
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, is known as:
(a) Professional Judgment
(b) Professional Skepticism
(c) Professional Competence
(d) Professional Behaviour
Answer:
(a) Professional Judgment

Question 22.
SA 210 deals with:
(a) Agreeing the terms of Review Engagement
(b) Agreeing the terms of Audit Engagement
(c) Agreeing the terms of Compilation Engagement
(d) Agreeingthe terms of Other Assurance Engagement
Answer:
(b) Agreeing the terms of Audit Engagement

Question 23.
Which of the following is incorrect?
(a) Auditor is able to obtain only reasonable assurance due to inherent limitation of audit
(b) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain ab-solute assurance that the financial statements are free from material misstatement due to fraud or error
(c) An Auditor is considered to lack independence if the partner of the audit firm deals with shares and securities of the audited entity
(d) 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
Answer:
(d) 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

Question 24.
Which of the following standard requires implementation of quality control procedures while performing an audit engagement:
(a) SQC 1
(b) SA 220
(c) SQC 1 and SA 220
(d) SA 200 and SA 220
Answer:
(b) SA 220

Question 25.
Which of the following aspect is not covered in audit of financial statements:
(a) Examination of Accounting System & Internal Control
(b) Vouching of the transactions
(c) Verification of Assets & Liabilities
(d) Design, implementation and maintenance of internal Control System
Answer:
(d) Design, implementation and maintenance of internal Control System

Question 26.
Which of the following is true?
(a) Management of the organisation is solely responsible for the compliance of auditing standards while preparing financial statements
(b) 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
(c) The basic objective of audit does not change with reference to nature, size or form of the entity
(d) Audit procedures used to gather audit evidence may be effective for detecting an intentional mis-statement
Answer:
(c) The basic objective of audit does not change with reference to nature, size or form of the entity

Question 27.
Standards on Assurance Engagements are to be applied in:
(a) the audit of historical financial information
(b) the review of historical financial information
(c) assurance engagements, engagements dealing with subject matter other than historical financial information
(d) engagements involving application of agreed upon procedures to information and other related services such as compilation engagements
Answer:
(c) assurance engagements, engagements dealing with subject matter other than historical financial information

Question 28.
Ethical requirements are defined as the Code of Ethics issued by the ICAI establishes the fundamen¬tal principles of professional ethics. Which of the following is not specified in Code of Ethics, as such:
(a) Objectivity
(h) Professional competence
(c) Confidentiality
(d) Communication Skills
Answer:
(d) Communication Skills

Question 29.
Which of the following is false?
(a) Engagement letter need to be entered for each year of the period of auditor’s appointment
(b) The objective of auditor is to obtain reasonable assurance and to report on the financial statements
(c) An audit is not an official investigation into alleged wrongdoing
(d) Guidance Notes are recommendatory in Nature
Answer:
(a) Engagement letter need to be entered for each year of the period of auditor’s appointment

Question 30.
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. Which of the following circumstance do not require revision in the terms of the audit engagement or to remind the entity of existing terms:
(a) significant change of senior management
(b) significant change in ownership
(c) significant change in nature or size of the entity’s business
(d) significant change in engagement ream members
Answer:
(d) significant change in engagement ream members

Question 31.
Judging the significance of a matter requires analysis of the facts and circumstances.
(a) objective
(b) subjective
(c) both subjective and objective
(d) qualitative
Answer:
(a) objective

Question 32.
An important factor in determining the form, content and extent of audit documentation of significant matters is the extent of exercised in performing the work and evaluating the results.
(a) professional skepticism
(b) professional integrity
(c) professional judgment
(d) professional sincerity
Answer:
(c) professional judgment

Question 33.
Standard on Quality Control (SQC) 1 provides that, unless otherwise specified by law or reg¬ulation, audit documentation is the property of
(a) Management.
(b) Those charged with governance.
(c) Management or Those charged with governance.
(d) Auditor.
Answer:
(d) Auditor.

Question 34.
Professional skepticism is necessary to the critical assessment of
(a) audit documentation
(b) audit evidence
(c) audit procedures and techniques
(d) none of the above
Answer:
(b) audit evidence

Question 35.
As per SA 210 “Agreeing the Terms of Audit Engagements”, the auditor shall agree the terms of the audit engagement with:
(a) Management
(b) Those charged with governance
(c) Management or those charged with governance, as appropriate,
(d) Engagement team members
Answer:
(c) Management or those charged with governance, as appropriate,

Question 36.
The matter of difficulty, time, or cost involved is:
(a) not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
(b) in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
(c) not in itself a valid basis for the auditor to omit an audit procedure for which alternative exists.
(d) not in itself a valid basis for the auditor to omit an audit procedure.
Answer:
(a) not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.

Question 37.
____________ are self-evident, and occur when auditors form relationships with the client where they end up being too sympathetic to the client’s interests.
(a) Self-review threats
(b) Familiarity threats
(c) Intimidation threats
(d) Advocacy threats
Answer:
(b) Familiarity threats

Question 38.
If the auditor concludes that there is reason¬able justification to change the engagement and if the audit work performed complied with the SAs applicable to the changed engagement, the report issued would be appropriate for the revised terms of engagement. In order to avoid confusion, the report would not include reference to:
(a) the original engagement; or any procedures that may have been performed in the original engagement.
(b) the original engagement;
(c) any procedures that may have been performed in the original engagement
(d) the original engagement and any procedures that may have been performed in the original engagement.
Answer:
(a) the original engagement; or any procedures that may have been performed in the original engagement.

Question 39.
Which of the following is correct?
(a) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain ab-solute assurance that the financial statements are free from material misstatement due to fraud or error.
(b) The auditor is expected to and can reduce audit risk to zero and can therefore obtain absolute assurance.
(c) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain reasonable assurance that the financial statements are free from material misstatement due to fraud or error.
(d) The auditor is expected to and can reduce audit risk to zero and can therefore obtain reasonable assurance that the financial statements are free from material misstatement due to fraud or error.
Answer:
(a) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain ab-solute assurance that the financial statements are free from material misstatement due to fraud or error.

Question 40.
Direct financial interest or materially significant indirect financial interest in a client is an example of
(a) Self-review threats
(b) Self-interest threats
(c) Advocacy threats
(d) Intimidation threats
Answer:
(b) Self-interest threats

Question 41.
M/s KYC & Co. is a reputed Audit firm in Mumbai. They are appointed as Statutory Auditors of Blessed Ltd. Which of the below is the responsibility of M/s KYC & Co.
(a) Preparation of financial statements
(b) Designing, implementation and maintenance of internal control system
(c) Reporting on true and fair view of financial statements
(d) Compliance with the applicable law and regulation
Answer:
(c) Reporting on true and fair view of financial statements

Question 42.
Mr. A, auditor and Mr. B, Finance Manager of XYZ Pvt. Ltd. are friends. Mr. A prepares the audit report according to the wishes and directions of Mr. B. In this situation which essential quality of the auditor has been compromised:
(a) Professional Competence
(b) Independence
(c) Professional Skepticism
(d) Due care
Answer:
(b) Independence

Question 43.
Mr. Salman, is an engagement partner of Khan & Co. Chartered Accountants for an audit of Lava Ltd., he died of a stroke on 30.09.2020 after completing the entire routine audit work of Lava Ltd. Mr. Shoaib, one of the partners of Khan & Co. will be signing the accounts of Lava Ltd. What is the course of action to be taken by Mr. Shoaib?
(a) Sign the accounts of Lava Ltd. without reviewing the work of his partner
(b) Sign the balance sheet after reviewing the work of his partner
(c) Withdraw the audit as the person who has per-formed the audit is no more
(d) Issue an adverse report
Answer:
(b) Sign the balance sheet after reviewing the work of his partner