Internal Audit – CA Final Audit Question Bank

Internal Audit – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Internal Audit – CA Final Audit Question Bank

Question 1.
JKH Pvt. Ltd. who is into the business of imparting coaching to CA students did not appoint any internal auditor for the year ended 31st March, 2021. As on 31st March, 2020, the company had paid up capital of ₹ 50 lakhs and reserves of ₹ 10 crores. Its turnover for the 3 years preceding the year ended 31st March, 2021 was ₹ 75 crores, ₹ 145 crores and ₹ 260 crores respectively. As an auditor of the company for the year ended 31st March, 2021, how would you deal with the above? [Nov. 17 (4 Marks)]
Answer:
Applicability of Provisions of Internal Audit:
As per section 138 of the Companies Act, 2013, read with rule 13 of Companies (Audit and Auditors) Rules, 2014 every private company shall be required to appoint an internal auditor or a firm of internal auditors, having-

turnover of two hundred crore rupees or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year:

As per Para 3(xiv) of CARO, 2020, auditor is required to report (a) whether the company has an internal audit system commensurate with the size and nature of its business; (b) whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor.

In the instant case, JKH Pvt. Ltd. is having turnover of ₹ 260 crores during the preceding financial year which is more than two hundred crore rupees.

Conclusion: Company has the statutory liability to appoint an Internal Auditor and mandatorily conduct internal audit.

If the company does not have an internal audit system, statutory auditor is required to state the facts in his report under CARO, 2020.

Question 2.
WWF Ltd. is a public company having ₹ 40 lacs paid up capital in previous financial year which raised to ₹ 60 lacs in current financial year under audit. The company had turnover of previous three consecutive financial years being ₹ 49 crores, ₹ 145 crores and ₹ 150 crores. During the previous year, WWF Ltd. borrowed a loan from a public financial institution of ₹ 110 crores but squared up ₹ 20 crores by the year end. The company does not have any internal audit system. In view of the management, internal audit system is not mandatory. Comment. [MTP-April 18]
Answer:
Applicability of Internal Audit:
As per Section 138 of Companies Act 2013, such class or classes of companies as may be prescribed shall be required to appoint an internal auditor. As per Rule 13 of Companies [Accounts] Rules, 2014, following companies must have internal auditor:

every listed company;
every unlisted public company having-
1. paid up share capital of ₹ 50 Cr. or more during the preceding financial year; or
2. turnover of ₹ 200 Cr. or more during the preceding financial year; or
3. outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 Cr. or more at any point of time during the preceding financial year; or
4. outstanding deposits of ₹ 25 Cr. or more at any point of time during the preceding financial year; and
every private company having-
1. turnover of ₹ 200 Cr. or more during the preceding financial year; or
2. outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 Cr. or more at any point of time during the preceding financial year.

In the present case, WWF Ltd. had borrowed a loan from a public financial institution for ₹ 110 Cr. hence the company must have an internal audit system.

Conclusion: Management contention that internal audit system is not mandatory is not correct.

If the company does not have an internal audit system, statutory auditor is required to state the facts in his report under CARO, 2020.

Question 3.
Interior Pvt. Ltd. is a manufacturing company having turnover of ₹ 210 crore but having maximum outstanding loan from public financial institution of ₹ 90 crore only during the preceding financial year. You are required to state whether the company is liable for internal audit as per the provisions of the Companies Act, 2013
Answer:
Applicability of Internal Audit:
As per Section 138 of Companies Act, 2013, such class or classes of companies as may be prescribed shall be required to appoint an internal auditor. As per Rule 13 of Companies (Accounts] rules, 2014, following companies must have internal auditor:

(a) every listed company;
(b) every unlisted public company having-

paid up share capital of ₹ 50 Cr. or more during the preceding financial year; or
turnover of ₹ 200 Cr. or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 Cr. or more at any point of time during the preceding financial year; or
outstanding deposits of ₹ 25 Cr. or more at any point of time during the preceding financial year; and

turnover of ₹ 200 Cr. or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 Cr. or more at any point of time during the preceding financial year.

In the present case, turnover of Interior Pvt. Ltd. for the immediate preceding financial year was ₹ 210 Cr. which is more than the prescribed limit.

Conclusion: Interior Pvt. Ltd. is liable for the internal audit. Statutory auditor will have to mention in his report the fact of not having internal audit system by the Company.

If the company does not have an internal audit system, statutory auditor is required to state the facts in his report under CARO, 2020.

Question 4.
PQR Ltd., a listed company and having an average annual turnover of more than ₹ 5 crores have no Internal Audit System. Give your views. [Nov. 10 (5 Marks)]
Answer:
Applicability of Internal Audit:
As per Section 138 of Companies Act, 2013, such class or classes of companies as may be prescribed shall be required to appoint an internal auditor. As per Rule 13 of Companies (Accounts) Rules, 2014, following companies must have internal auditor:

(a) every listed company;
(b) every unlisted public company having-

paid up share capital of ₹ 50 Cr. or more during the preceding financial year; or
turnover of ₹ 200 Cr. or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 Cr. or more at any point of time during the preceding financial year; or
outstanding deposits of ₹ 25 Cr. or more at any point of time during the preceding financial year; and

turnover of ₹ 200 Cr. or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding ₹ 100 Cr. or more at any point of time during the preceding financial year.

In the present case, PQR Ltd. is a listed entity which is covered under Rule 13 irrespective of its turnover.

Conclusion: PQR Ltd. is liable for the internal audit.

If the company does not have an internal audit system, statutory auditor is required to state the facts in his report under CARO, 2020.

Question 5.
AB Pvt. Ltd. company having outstanding loans or borrowings from banks exceeding one hundred crore rupees wants to appoint internal auditor. Please guide him who can be appointed as internal auditor and what would be reviewed by him. [May 15 (4 Marks)]
Answer:
Who can be appointed as Internal Auditor:
As per Section 138 of the Companies Act, 2013, every private limited company is required to have internal audit system if its outstanding loans or borrowings from banks or public financial institutions exceed ₹ 100 Cr. at any point of time during the preceding financial year. In present case, AB Pvt. Ltd. is under compulsion to conduct internal audit, as its loans or borrowings exceed ₹ 100 Cr.

As per Section 138, the internal auditor shall either be a chartered accountant, whether engaged in practice or not, or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the companies. The internal auditor may or may not-be an employee of the company.

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

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

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

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

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

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

“ICAI Examiner Comments”
Many candidates could not mention either who can be appointed as an internal auditor or the work to be reviewed by internal auditor.

Question 6.
XYZ Yarns Ltd. is a manufacturing company engaged in manufacturing of different types of yarns. Its. annual turnover is ₹ 100 Crores and net profit ₹ 10 crores. It has two manufacturing units. Company is facing difficulties in maintaining adequate system of internal control. Company wants to appoint Internal Auditor who would help in the above task and also various other functions including compliance. In view of above, you are required to explain the main responsibility of Internal Auditors. [MTP-Oct. 18]
Answer:
Responsibilities of Internal Auditor:

To maintain adequate system of internal control by a continuous examination of accounting procedures, receipts and disbursements and to provide adequate safeguards against misappropriation of assets.
To operate independently of the accounting staff and must not in any way divest himself of any of the responsibilities placed upon him.
To observe unusual facts and circumstances and bring them to notice of management.
To appraise policies and procedures prevailing in the entity and bring to the notice of management any deficiencies, wherever these require to be corrected.
To perform his work with independence. He need to associate closely with management and his knowledge must be kept up to date by his being kept informed about all important occurrences and events affecting the business, as well as the changes that are made in business policies.

Question 7.
The internal auditor must be regarded as part of the management and not merely as an assistant thereto. He must have authority to investigate from the financial angles every phase of the organisational activity under any circumstances. Explain.
Answer:
Role and Responsibilities of Internal Auditor:
Rule 13 of Companies (Accounts) Rules, 2014 provides that the scope, functioning, periodicity and methodology for conducting the internal audit shall be formulated by the Audit Committee of the company or the Board shall, in consultation with the Internal Auditor.

Over a period of time, scope of internal auditing has been widened so as to cover all operations besides accounting and financial operations. To be effective, the Internal Auditor must be regarded as part of the management and not merely as an assistant thereto. He must have authority to investigate from the financial angles, every phase of the organisational activity under any circumstances.

Major responsibilities that are entrusted to Internal Auditor are listed as below:

To maintain adequate system of internal control by a continuous examination of accounting procedures, receipts and disbursements and to provide adequate safeguards against misappropriation of assets.
To operate independently of the accounting staff and must not in any way divest himself of any of the responsibilities placed upon him.
To observe unusual facts and circumstances and bring them to notice of management.
To appraise policies and procedures prevailing in the entity and bring to the notice of management any deficiencies, wherever these require to be corrected.
To perform his work with independence. He need to associate closely with management and his knowledge must be kept up to date by his being kept informed about all important occurrences and events affecting the business, as well as the changes that are made in business policies.

Question 8.
M/s ME Ltd. is a manufacturing Company of M/s Bars and Rods. The turnover of the company for financial year 2019-20 was ₹ 870 crores. The audit committee has appointed M/s MK Associates, Chartered Accountants as an internal auditor of the company for the financial year 2020-21. As an auditor of ME Ltd., draw out the internal audit plan specifying coverage of area. [May 16 (4 Marks)]
Answer:
Internal Audit Plan specifying the coverage of Area:
While drawing internal audit plan, following specific areas may be covered:

Terms of audit engagement and scope of internal audit as determined by audit committee.
Nature and timing of reports and other communications.
Legal or statutory requirements.
Accounting policies adopted by the client and changes made therein.
New accounting or auditing pronouncements and their impact on the entity.
Identification of significant audit areas.
Setting up of materiality levels for purpose of audit.
Circumstances requiring special attention, such as the possibility of material error or fraud or related party transactions.
Degree of reliance to be placed on accounting system and internal control.
Nature, form and extent of audit evidence to be obtained.
Nature, timing and extent of procedures to be performed.
Use of expert’s work.
Establishing and coordinating staffing requirements.
Attending the inventory count
Method of physical verification of cash and investment.
Verification of Assets and Liabilities.
Compliance of laws and Regulations.

“ICAI Examiner Comments”
Candidates, in general, failed to explain the areas to be covered in drawing an internal audit plan and rather discussed about role of internal auditor, internal control & internal check.

Question 9.
ABC Ltd. is engaged in manufacturing of Yarns and Towels. It sells its product in both domestic as well as in International Market. It has achieved turnover of ₹ 200 crores in the F.Y. 2019-20. Directors of the company realized that they are not managing the company professionally and thereby request your firm of Internal Auditors for appraisal of its organizational structure to ascertain : whether it is in harmony with the objectives of ABC (P) Ltd. Comment. [MTP-Aug. 18]
Or
Internal Auditor makes an appraisal of organization structure to ensure that it is in harmony with the objectives of the entity, besides checking of financial truncations and operational activities of the entity. Elaborate. [Nov. 18 – New Syllabus (4 Marks)]
Answer:
Appraisal of Organisational Structure by Internal Auditor:
The Internal Auditor should conduct an appraisal of the organisation structure to ascertain:

whether it is in harmony with the objectives of the enterprise and
whether the assignment of responsibilities is in consonance therewith.

For this purpose. Internal Auditor should:
(a) Review the manner in which the activities of the enterprise are grouped for managerial control so as to find out whether responsibility and authority are in harmony with the grouping pattern.

(b) Examine the organisation chart to find out whether the structure is simple and economical and that no function enjoys an undue dominance over the others.

(c) Ensure that the responsibilities of managerial staff at headquarters do not overlap with those of chief executives at operating units.

(d) Examine the reasonableness of the span of control of each executive (the number of subordinates that an executive controls). He should examine whether there is a unity of command i.e., whether each person reports only to one superior.

(e) Evaluate the process of managerial development in the enterprise.

Question 10.
“Review of the internal audit function has become statutory responsibility for the statutory auditor.” [May 15 (4 Marks)]
Answer:
Review of internal audit Function by Statutory Auditor:
It is obligatory for a statutory auditor to examine the scope and effectiveness of the work carried out by the internal auditor.

For this purpose, statutory auditor should examine the Internal Audit function of the organisation, the strength of the internal audit staff, their qualification and powers.

Besides statutory auditor should have studied the procedures adopted by internal auditor, refer audit programmes, reports submitted, points raised in audit and ascertain how these had been dealt with subsequently.

The extent of independence exhibited by the internal auditor in the discharge of his duties and his status in the organisation are important factors for determining the effectiveness of his audit.

In a large business, it has been increasingly recognised that, if function of internal auditor and those of statutory auditors could be integrated, it might not be necessary for the statutory auditors to go over the same facts and figure as have been previously examined by a competent and trustworthy internal audit staff.

“ICAI Examiner Comments”
Many candidates wrote about evaluation of internal control instead,of need for review of internal audit function. They also failed to explain the factors that should be considered by statutory auditor while reviewing the work of internal auditor.

Question 11.
ABC Ltd appointed CA Mr. X, for conducting internal audit for the financial year 2020-21. Mr. X seeks your advice in drafting a good quality internal audit report. You are, therefore, required to guide him by elaborating essential features of a good internal audit report.
Or
Webcom Ltd., a public company with a paid up share capital of ₹ 20 crores has a turnover for the financial year 2019-20 of ₹ 220 crores. X, a recently qualified Chartered Accountant, has been appointed for conducting internal audit. He seeks your advice in drafting a good quality internal audit report. Please guide him by elaborating (in brief) the essential features of good internal audit report. [May 19 – Old Syllabus (5 Marks)]
Answer:
Essential Features of Internal Audit Report
1. Objectivity: Comments and opinions expressed in the report should be as objective and unbiased as possible.
2. Clarity: The language used should be simple and straight-forward.
3. Accuracy: The information contained in the report, whether quantified or otherwise, should be accurate.
4. Conciseness: Important information should not be omitted.
5. Constructiveness: Destructive criticism should carefully be avoided in the report.

6. Readability: The reader’s interest should be captured and retained throughout. For this, appropriate paragraph heading may be used.

7. Timeliness: The report should be submitted promptly because if the time lag between the occurrence of an event and its reporting is considerable, the opportunity for taking action may be lost or a wrong decision may be taken in the absence of the information.

8. Findings and conclusions: These may be given either department-wise or in the order of importance. Each conclusion and opinion should normally follow the findings.

9. Recommendations: An internal audit report usually includes recommendations for potential improvements.

10. Auditee’s views: The auditee’s views about audit conclusions or recommendations may also be included in the audit report in appropriate circumstances.

11. Summary: A summary of conclusions and recommendations may be given at the end. This is particularly useful in long reports.

12. Supporting information: The internal auditor should supplement his report by such documents and data which adequately and convincingly support the conclusions. Supporting information may include the relevant standards or regulations.

13. Draft Report: Before writing the final report, the internal auditor should prepare a draft report. This would help him in finding out the most effective manner of presenting his reports.

14. Writing and issuing the Final Report: The final report should be written only when the auditor is completely satisfied with the draft report. The head of the internal auditing department, may review and approve the final report. Before issuing the final report, the auditor should discuss conclusions and recommendations appropriate levels of management. The report should be duly signed.

Internal Audit – CA Final Audit Question Bank

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