Audit MCQ by Icai
Audit MCQ by Icai
3 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)
7. SA-700 requires the use of specific headings, which are intended to assist in making
auditor’s reports that refer to audits that have been conducted in accordance with SAs more
recognizable. Which of the following is that specific heading :
(a) Key audit matters
(b) Basis of opinion
(c) Date
(d) All of the above
8. The auditor shall express ________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.
(a) Adverse
(b) Qualified
(c ) Disclaimer
(d) None of the above
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
13 SQC 1 “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.
14. 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
15. 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.
16. The completion of the assembly of the final audit file after the date of the auditor’s
report is
(a) an administrative process that does not involve the performance of new audit
procedures but certainly involves the drawing of new conclusions.
(b) an administrative process that involves the performance of new audit procedures or
the drawing of new conclusions.
(c) an administrative process that does not involve the performance of new audit
procedures or the drawing of new conclusions.
(d) a statutory process.
18. 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
20. According to SA 210 “Agreeing the Terms of Audit Engagements”, The auditor
shall agree the terms of the audit engagement :
(a) with management and those charged with governance, as appropriate.
(b) with management
(c) with those charged with governance
(d) with management or those charged with governance, as appropriate.
22. If law or regulation prescribes in sufficient detail the terms of the audit engagement ,
(a) the auditor need not record them in a written agreement, except for the fact that such law or regulation
applies and that management acknowledges and understands its responsibilities.
23. A request from the client for the auditor to change the engagement may result from-
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally requested
3. a restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
4 All of the above
24.
The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal requirements;
(b) Whether the quality control system has been appropriately designed and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures have been appropriately applied, so
that reports that are issued by the firm or engagement partners are appropriate in the
circumstances.
(d) All of the above
25. The firm’s system of quality control should include policies and procedures addressing which of the
following element:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
.(d) All of the above
26. Once the overall audit strategy has been established, _______can be developed to address the
various matters identified in the overall audit strategy, taking into account the need to achieve the
audit objectives through the efficient use of the auditor’s resources.
(a) audit strategy
(b)audit plan
(c)audit plan and audit strategy
(d)audit note book
27. _________refers to the record of audit procedures performed, relevant audit evid ence obtained,
and conclusions the auditor reached.
(a) Audit documentation
(b) Audit File
(c) Audit Note Book
(d) Completion Memorandum
29. The auditor shall assemble the audit documentation in _____and complete the administrative process
of assembling the final audit file on a timely basis after the date of the audito r’s report.
(a) audit note book
(b) completion memorandum
(c) audit file
(d) any of the above
30. After the assembly of the final audit file has been completed
(a) the auditor shall delete or discard the audit documentation of any nature before the end of its retention
period.
(b) the auditor may delete or discard audit documentation of any nature before the end of its retention
period.
(c) the auditor may not delete or discard audit documentation of any nature before the end of its retention
period.
(d) , the auditor shall not delete or discard audit documentation of any nature before the end of its retention
period.
31. Judging the significance of a matter requires _____of the facts and circumstances.
33. Audit evidence is necessary to support the auditor’s opinion and report. It is_____in nature and is
primarily obtained from audit procedures performed during the course of the audit.
(a) cumulative
(b) regressive
(c) selective
(d) objective
35.
______refer to the audit procedures performed to obtain an understanding of the entity and its environment,
including the entity’s internal control, to identify and assess the risks of material misstatement, whether due
to fraud or error, at the financial statement and assertion levels.
(a) Audit assessment procedures
(b) substantive procedures
(c) test of control
(d) Risk assessment procedures
36.
When more persuasive audit evidence is needed regarding the effectiveness of a control,
(a) it may be appropriate to increase the extent of testing of the control and reduce the extent of the
degree of reliance on controls.
(b) it may be appropriate to decrease the extent of testing of the control as well as the degree of
reliance on controls.
(c) it may be appropriate to decrease the extent of testing of the control and increase the extent of the
degree of reliance on controls.
37 When deviations from controls upon which the auditor intends to rely are detected,
(a) the auditor shall not make any inquiries to understand these matters and their potential
consequences
(b) the auditor shall make specific inquiries to understand these matters and their potential
consequences
(c) the auditor shall make general inquiries to understand these matters and their potential
consequences
(d) the auditor shall make both general as well as specific inquiries to understand these matters and
their potential consequences
(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
39.
Because the assessment of the risk of material misstatement takes account of internal control,
(a) the extent of substantive procedures may need to be increased irrespective of the results from
tests of controls.
(b) the extent of substantive procedures may need to be increased when the results from tests of
controls are satisfactory.
(c) the extent of substantive procedures may need to be decreased when the results from tests of
controls are unsatisfactory.
(d) the extent of substantive procedures may need to be increased when the results from tests of
controls are unsatisfactory.
(a) Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.
(b) Written representations provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal.
(c) Written representations neither provide necessary audit evidence nor they provide sufficient appropriate
audit evidence.
42. Standard on Quality Control (SQC) 1 sets out the responsibilities of the _____for establishing policies
and procedures regarding compliance with relevant ethical requirements :
(a) Firm
(b) engagement partner
(c) Senior Audit Assistant
(d) All the above
43. SA 220 sets out the ____responsibilities with respect to relevant ethical requirements.
(a) firm’s
(b) Senior Audit Assistant
(c) engagement partner’s
(d) All the above
44. SA 220 recognises that the ____is entitled to rely on a firm’s systems in meeting its responsibilities with
respect to quality control procedures.
(a) objectivity
(b) Professional competence
(c) Integrity
(d) independence in appearance.
46. 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
47. _____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) Familiarity threats
(b) Self-interest threats
(c) Advocacy threats
(d) Intimidation threats
49. According to 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) Audit committee
50.Planning an audit involves establishing the overall audit strategy for the engagement and
(a) developing an audit plan.
Solution
1 D 11 C 21 B 31 A 41 A
2 B 12 D 22 A 32 C 42 A
3 D 13 A 23 D 33 A 43 C
4 A 14 B 24 D 34 B 44 B
5 D 15 C 25 D 35 D 45 D
6 A 16 C 26 B 36 D 46 B
7 D 17 B 27 A 37 B 47 A
8 A 18 C 28 B 38 A 48 B
9 C 19 A 29 C 39 D 49 D
10 D 20 D 30 D 40 D 50 A
1. If the auditor concludes that there is reasonable 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.
2 If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by
management to continue the original audit engagement, the auditor shall:
(a) Withdraw from the audit engagement where possible under applicable law or regulation;
(b)Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to
other parties, such as those charged with governance, owners or regulators.
(c) Withdraw from the audit engagement where possible under applicable law or regulation and determine
whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties,
such as those charged with governance, owners or regulators.
(d) Withdraw from the audit engagement where possible under applicable law or regulation or determine
whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties,
such as those charged with governance, owners or regulators.
3. A request from the client for the auditor to change the engagement may result from -
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally requested
3. a restriction on the scope of the engagement, whether imposed by management or caused by circum stances.
11. Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit
evidence.
(a) obtaining audit evidence.
(b) evaluating audit evidence.
(c) obtaining or evaluating audit evidence.
(d) obtaining and evaluating audit evidence.
13. As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, _________is obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate opinion
when the financial statements are materially misstated) to an acceptably low level.
(a) absolute assurance
(b) limited assurance
(c) reasonable assurance
(d) reasonable or absolute assurance
14. Auditor’s judgment as to sufficiency may be affected by the factors such as:
(a) Materiality
(b) Risk of material misstatement
(c) Size and characteristics of the population.
(d) All of the above
.
15. Audit risk is a function of the
(a) risks of material misstatement and detection risk.
(b) audit risk and detection risk.
(c) control risk and detection risk.
(d) inherent risk and detection risk.
.
16. Risk of material misstatement may be defined as the risk
(a) that the financial statements are materially misstated after audit.
(b) that the financial statements are materially misstated during audit.
(c) that the financial statements are materially misstated prior to audit.
(d) All of the above
17. The susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement that could be material, either individually or when aggregated with other misstatements, before
consideration of any related controls is-
Solution
1 A 6 B 11 D 16 C
2 C 7 C 12 A 17 B
3 D 8 A 13 C 18 A
4 B 9 D 14 D 19 B
5 A 10 B 15 A 20 A
Paper 6: Auditing and Assurance (New Course)
1. Marvin Ltd. is a renowned food chain supplier in a posh area providing restaurant facility along with food
delivering. CA. Felix was appointed as an auditor of the company for the Financial Year 2017-18. While
examining the books of account of the company, CA. Felix came to know about one of the major expenses
of the company i.e. rent expense of Rs. 1,20,000 per month, for which he applied substantive analytical
procedure for verification purpose. Explain, how would CA. Felix perform substantive analytical procedure
in the given scenario?
(a) CA. Felix would inspect every single rent invoice per month of Rs. 1,20,000 and verify other
elements appropriately.
(b) CA. Felix would compare the rental expense of the company with that of another nearby company
having corresponding dimensions, for high degree of accuracy.
(c) CA. Felix would select the first month rent invoice of Rs. 1,20,000 and appropriately verifying other
elements would predict that the rent for the whole year would be Rs. 14,40,000 (i.e. Rs. 1,20,000 *
12). Thereafter, he would compare the actuals with his prediction and follow-up for any fluctuation.
(d) (a) and (b), both.
2. Coyote Ltd. is dealing in trading of electronic goods. Huge inventory (60% approximately) of the company is
lying on consignment (i.e. under the custody of third party). CA. Star, the auditor of the company, wants to
obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory lying on
consignment. Thus, he requested & obtained confirmation from the third party as to the quantities and
condition of inventory held on behalf of the entity, however, it raised doubts about the integrity and
objectivity of the third party. Which of the following other audit procedures may be performed by CA. Star to
obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory under
the custody of third party?
(a) Attend third party’s physical counting of inventory.
(b) Arrange for another auditor to attend third party’s physical counting of inventory.
(c) Inspect warehouse receipts regarding inventory held by third parties.
(d) All of the above.
3. In July, 2018, M/s Tom & Co. entered into an agreement with M/s Jerry & Co. under which a machinery
would be let on hire and M/s Jerry & Co. would have the option to purchase the machinery in accordance
with the terms of the agreement. Thus, M/s Jerry & Co. agreed to pay M/s Tom & Co. a settled amount in
periodical instalments. The property in the goods shall be passed to M/s Jerry & 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 Jerry & Co.
(b) That the hire purchase agreement specifies clearly the hire-purchase price of the machinery to which
the agreement relates.
(c) That M/s Tom & Co. charges depreciation throughout the life of the machinery.
(d) All of the above.
4. The management of Magoo 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. Olive has been appointed as an auditor of the company for current Financial Year 2017-18. Before
starting the audit, she wants to evaluate the internal control system of Magoo Ltd. To facilitate the
5. CA. Bobby is a recently qualified Chartered Accountant. He is appointed as an auditor of Droopy Ltd. for
the current Financial Year 2017-18. He is quite conservative in nature which is also replicated in his
professional work. CA. Bobby is of the view that he shall record all the matters related to audit, audit
procedures to be performed, audit evidence obtained and conclusions reached. Thus, he maintained a file
and recorded each and every of his findings during the audit. His audit file, besides other thing, includes
audit programmes, notes reflecting preliminary thinking, letters of confirmation, e-mails concerning
significant matters, etc. State which of the following need not be included in the audit documentation?
(a) Audit programmes.
(b) Notes reflecting preliminary thinking.
(c) Letters of confirmation.
(d) E-mails concerning significant matters.
6. While auditing the books of accounts of QHMP Ltd., CA. Ranker, 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. Ranker discussed with the management that according to accounting standards, 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. Ranker explained which type of goodwill may be recognized as a fixed asset for which the
management got justified. State which of the following examples the auditor must have given to the
management?
(a) If an item meeting the definition of an intangible asset is acquired in a business combination, it forms
part of the goodwill to be recognized at the date of the amalgamation.
(b) Only those goodwill needs to be recognized as a fixed asset which can be touched like physical
assets, for example, land and buildings.
(c) 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.
(d) All of the above.
7. 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 Rs. 60 Lakh. At
the year end, it provides the following information regarding its paid-up capital and reserve & surplus-
Particulars Amount (in Rs.)
Paid-up Capital
- Consideration received in cash for equity shares 40,00,000
You are provided with the provisions regarding applicability of Companies (Auditor’s Report) Order, 2016,
(CARO, 2016) 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 Rs. 1 crore as on the Balance Sheet date and which does not have total borrowings exceeding
Rs. 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 Rs. 10 crore during the
financial year.
Considering the information given above, which of the following shall be considered as a reason regarding
applicability or non-applicability of CARO, 2016?
(a) Reporting under CARO, 2016 shall be applicable as the company is having a paid up capital and
reserves and surplus of Rs. 1.07 crore i.e. more than Rs. 1 crore as on the Balance Sheet date.
(b) Reporting under CARO, 2016 shall be applicable as the company is having a paid up capital and
reserves and surplus of Rs. 1.02 crore i.e. more than Rs. 1 crore as on the Balance Sheet date.
(c) Reporting under CARO, 2016 shall not be applicable as the company is having a paid up capital and
reserves and surplus of Rs. 0.92 crore i.e. not more than Rs. 1 crore as on the Balance Sheet date.
(d) Reporting under CARO, 2016 shall not be applicable as the company is having a paid up capital and
reserves and surplus of Rs. 0.82 crore i.e. not more than Rs. 1 crore as on the Balance Sheet date.
8. 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 material 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.
9. While auditing the accounts of ThoughtCo Ltd., CA. Bliss, the auditor of the company came across certain
accounts payable balances for which direct confirmation procedure needs to be applied. Thus, for the year
ending 31st March, 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.
10. CA. Daffy is the auditor of xBose 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
appointment 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.
11. 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 Rs. 10,00,000;
2 Balances in the range of Rs. 7,75,001 to Rs. 10,00,000;
3 Balances in the range of Rs. 5,50,001 to Rs. 7,75,000;
4 Balances in the range of Rs. 2,25,001 to Rs. 5,50,000;
From the abovementioned 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 Rs.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.
12. The notes to the account statement of ASD Ltd. shows the break-up of accounts payable for the Financial
Year 2016-17 as follows:
Accounts Payable Amount (in Rs.)
Mr. Kraby 1,20,000
Mr. Runny 40,000
Mr. Bluffy 14,56,000
Total 16,16,000
CA. Sandy, the auditor of ASD Ltd., wants to investigate the valuation of accounts payable of Mr. Bluffy
amounting to Rs. 14,56,000. Which of the following procedures is best fitted & more reliable to be followed
by CA. Sandy to get more reliable evidence for the existence of such balance as on 31st March, 2017?
(a) Inspect each and every journal entry passed in the books of ASD Ltd.
(b) Ask ASD Ltd. to provide the details of payment made during the year 2017-18.
(c) Inspect the invoices issued by Mr. Bluffy and the payments made.
(d) Interrogate the cash manager of ASD Ltd.
13. CA. Donald was appointed as the auditor of PS Ltd. at the remuneration of Rs. 30,000. However, after 4
months of continuing his services, he could not continue to hold his office of the auditor as his wife got a
government job at a distant place and he needs to shift along with her to the new place. Thus, he resigned
from the company and did not perform his responsibilities relating to filing of statement to the company and
the registrar indicating the reasons and other facts as may be relevant with regard to his resignation. How
much fine may he be punishable with under Companies Act, 2013?
(a) Nothing.
(b) Rs. 30,000.
(c) Not less than Rs. 50,000 but which may extend to Rs. 5, 00,000.
(d) Not less than Rs. 30,000 but which may extend to Rs. 5, 00,000.
14. Misstatements in the financial statements can arise either from fraud or error. The auditor is concerned with
fraud that causes a material misstatement in the financial statements which may further be classified as
fraudulent financial reporting or misappropriation of assets.
15. MeLeredian is a renowned hotel operating in the city. The charge for room sales is posted to guest bills by
Mr. Charlie, the night auditor. He has the responsibility for balancing the revenue and expense
transactions, occurring during the day. He is also required to respond to guests’ complaints and handling
emergencies that may arise. While vouching the room sales, what special points may be considered by you
as an auditor of the hotel?
(a) Audit tests to be carried out to ensure that the correct numbers of guests are charged for the correct
period.
(b) Any deviation between the charged rates used on the guests’ bills and the standard room rate
should be investigated to ensure that they have been properly authorised.
(c) Testing of reports, containing details of the rooms which were occupied the previous night and the
number of beds kept in each room, with the guests’ register and with the individual guest’s bill.
(d) All of the above.
16. An entity in addition to undertaking purchases and incurring employee benefit expenses also 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
regarding specific deals.
Iconic Ltd. is having a retainership agreement with a lawyer, Mr. Avi, 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 retainership agreements, only 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 any provision and the matter may also not have
been discussed/ highlighted to the auditor for his specific consideration.
(d) In case of monthly retainership 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.
17. CA. Sylvester, the statutory auditor of Yosemitee Pvt. Ltd., encountered unavoidable circumstances that
bring into question his ability to continue holding office of the auditor. Considering it appropriate, CA.
Sylvester resigned from the office of auditor of Yosemitee Pvt. Ltd. and thus, the Board of Directors itself
appointed CA. Granny, a practicing Chartered Accountant, as the statutory auditor of the company to hold
office of the auditor till the conclusion of 6th meeting. Which of the following statement is true in the given
scenario?
(a) The appointment of CA. Granny made by the Board of Directors is invalid.
18. Minnie Ltd., a listed company, appointed CA. Kranny for auditing complete set of consolidated financial
statements of the company. CA. Kranny is unable to obtain sufficient appropriate audit evidence regarding
an investment in a foreign associate. The possible effects of the inability to obtain sufficient appropriate
audit evidence are deemed to be material but not pervasive to the consolidated financial statements. Based
on the audit evidence obtained, CA. Kranny concludes that a material uncertainty does not exist related to
events or conditions that may cast significant doubt on the company’s ability to continue as a going concern
in accordance with SA 570. State what type of opinion CA. Kranny must have provided in the given
scenario?
(a) Unmodified opinion.
(b) Qualified opinion.
(c) Adverse opinion.
(d) Disclaimer of opinion.
19. The management of BOB 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 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 it is more likely that no present obligation exists.
20. Miss Betty, relative of CA. Tweety (one of the partners of M/s AB & Co.), owed Rs. 1,50,000 to Satyan Ltd.
for goods purchased in the normal course of business. Later on, M/s AB & Co. was appointed as statutory
auditors of Prakash Ltd. (which holds 51% shares in Satyan Ltd.). On discovering the said fact, Miss Betty
cleared the dues to Satyan Ltd. on 59th day following the date of appointment of M/s AB & Co. as statutory
auditors of Prakash Ltd. Which of the following statement is true in the given scenario with respect to
validity of appointment of M/s AB & Co.?
(a) Miss Betty, relative of CA. Tweety (one of the partners of M/s AB & Co.) is indebted to the subsidiary
of Prakash Ltd. but not to the company itself. Thus, the appointment of M/s AB & Co. as the statutory
auditors of Prakash Ltd. is valid.
Solution
1 C 6 A 11 B 16 C
2 D 7 C 12 C 17 D
3 B 8 A 13 D 18 B
4 D 9 A 14 C 19 D
5 B 10 C 15 D 20 D