Audit MCQ Book201025122140
Audit MCQ Book201025122140
2. 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
3. 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.
4. 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
5. 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.
(a) (1) only
(b) (1) and (2)
(c) (1), (2) and (3)
(d) (1) or (2) or (3)
6. 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.
7. 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.
9. 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
10. 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
12. 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.
b. The auditor need not record them in a written agreement
c. The auditor needs to record them in a written agreement
d. None of the above
13. A request from the client for the auditor to change the engagement may result from-
(a) A change in circumstances affecting the need for the service,
(b) A misunderstanding as to the nature of an audit or related service originally
requested
(c) A restriction on the scope of the engagement, whether imposed by management or
caused by circumstances.
(d) All of the above
14. 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.
15. 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.
(b) The auditor need not record them in a written agreement
(c) The auditor needs to record them in a written agreement
(d) None of the above
16. The agreed terms of the audit engagement shall be recorded in
(a) An audit engagement letter
(b) An audit engagement letter or other suitable form of written agreement
(c) Any suitable form of written agreement
(d) None of the above
17. 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
18. SA 220 recognizes that the _is entitled to rely on a firm’s systems in meeting its
responsibilities with respect to quality control procedures.
(a) Engagement partner
(b) Engagement team
(c) Firm
(d) Senior Audit Assistant
19. 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.
20. 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.
CHAPTER 2: Audit Strategy, Planning and Audit Programme
1. When planning the audit,
(a) The auditor considers what would make the financial information materially misstated.
(b) The auditor need not consider what would make the financial information materially
misstated.
(c) The auditor need not consider what would make the financial information materially
misstated at planning stage
(d) The auditor needs to consider what would make the financial information materially
misstated while conducting audit only
4. 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
6. 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
7. The auditor shall develop an audit plan that shall include a description of:
a. The nature, timing and extent of planned risk assessment procedures
b. The nature, timing and extent of planned further audit procedures at the
assertion level.
c. Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
d. All of the above
8. Planning an audit involves establishing the overall audit strategy for the engagement
and
(a) Developing an audit plan.
(b) Enveloping an audit program
(c) Developing detailed strategy
(e) Any of the above
10. SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor
a. Should not consider materiality and its relationship with audit risk while
conducting an audit.
b. Should consider materiality and its relationship with audit risk while conducting
an audit.
c. Should not consider materiality but should consider its relationship with audit risk
while conducting an audit.
d. Should consider materiality but need not consider its relationship with audit risk
while conducting an audit.
11. When planning the audit,
a. The auditor considers what would make the financial information materially
misstated.
b. The auditor need not consider what would make the financial information
materially misstated.
c. The auditor need not consider what would make the financial information
materially misstated at planning stage
d. The auditor needs to consider what would make the financial information
materially misstated while conducting audit only
7. 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?
i. Unmodified opinion.
ii. Qualified opinion.
iii. Adverse opinion.
iv. Disclaimer of opinion.
17.
Audit programmes.
Analyses.
Issues memoranda.
Summaries of significant matters.
Are examples of:
(a) Audit Evidence
(b) Audit Documentation
(c) Audit File
(d) Final Audit File
18. 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
20. 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.
21. 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?
i. 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.
ii. 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.
iii. 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.
iv. 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.
23. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express :
a. A disclaimer opinion
b. A qualified opinion
c. A qualified opinion or a disclaimer of opinion, as appropriate, in accordance with
SA 705.
d. Unmodified opinion
25. Most of the auditor’s work in forming the auditor’s opinion consists of :
a. Obtaining audit evidence.
b. Evaluating audit evidence.
c. Obtaining or evaluating audit evidence.
d. Obtaining and evaluating audit evidence.
2. The auditor shall design and perform audit procedures in order to identify litigation and
claims involving the entity which may give rise to a risk of material misstatement,
including:
a. Inquiry of management and, where applicable, others within the entity, including
in-house legal counsel.
b. Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel.
c. Reviewing legal expense accounts.
d. All of the above.
11. 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.
(d) It may be appropriate to increase the extent of testing of the control as well as the
degree of reliance on controls.
12. 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-
(a) Control Risk
(b) Inherent Risk
(c) Detection Risk
(d) Audit Risk
13. 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 accumulation of the information necessary for the proper review
and evaluation of internal controls, CA. Olive decided to use internal control
questionnaire to know and assimilate the system and evaluate the same. Which of the
following questions need not be framed under internal control questionnaire relating to
purchases?
i. Are authorized signatories for purchases limited to elected officials?
ii. Are payments approved only on original invoices?
iii. Does authorized official thoroughly review the documents before signing cheques?
iv. Are monthly bank reconciliations implemented for each and every bank accounts
of the company?
14. The risks of material misstatement at the assertion level consist of two components:
a. Inherent risk and detection risk
b. Control risk and detection risk
c. Audit risk and detection risk
d. Inherent risk and control risk
17. The auditor shall design and perform audit procedures in order to identify litigation
and claims involving the entity which may give rise to a risk of material misstatement,
including:
a. Inquiry of management and, where applicable, others within the entity, including
in-house legal counsel.
b. Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel.
c. Reviewing legal expense accounts.
d. All of the above
18. 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
2. One of your junior audit team members is confused 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 Rs.5,000 in relation to assets of Rs.20 lakhs.
(2) A payroll fraud of Rs.100 in a company where profit before tax is Rs.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
3. The standard that requires auditors to analyses journal entries in an audit is?
a. SA 260
b. SA 230
c. SA 315
d. SA 240
4. 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.
There are certain events or conditions that indicate an incentive or pressure to commit
fraud or provide an opportunity to commit fraud which may be termed as fraud risk
factors. Which of the following is an example of fraud risk factor relating to
misstatements arising from misappropriation of assets?
a. Known history of violations of laws and regulations.
b. Management failing to remedy known significant deficiencies in internal control on
a timely basis.
c. Inventory items that are small in size, but of high value or in high demand.
d. An interest by management in employing inappropriate means to minimize
reported earnings for tax- motivated reasons.
5. The type of errors, existence of which becomes apparent in the process of compilation
of accounts is known as-
a. Self-revealing errors.
b. Intentional errors.
c. Concealed errors.
d. Unconcealed errors.
6. 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
3. 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;
5 Balances Rs. 2,25,000 and below
Form 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 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?
i. Systematic sampling.
ii. Stratified sampling.
iii. Section sampling.
iv. Selection sampling.
8. 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 auditor’s
report.
a. Audit note book
b. Completion memorandum
c. Audit file
d. Any of the above
9. 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 auditor’s
report.
(a) Audit note book
(b) Completion memorandum
(c) Audit file
(d) Any of the above
10. 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?
i. CA. Felix would inspect every single rent invoice per month of Rs. 1,20,000 and
verify other elements appropriately.
ii. CA. Felix would compare the rental expense of the company with that of another
nearby company having corresponding dimensions, for high degree of accuracy.
iii. 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 actual with his prediction and follow-up for any fluctuation.
iv. (a) and (b), both.
11. 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.
2. 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 out flow 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?
i. Depreciation.
ii. Clean-up costs for unlawful environmental damage.
iii. Product warranties.
iv. Lawsuit against the company where it is more likely that no present obligation
exists.
3. 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?
i. 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.
ii. Only those goodwill needs to be recognized as a fixed asset which can be touched
like physical assets, for example, land and buildings.
iii. Goodwill is recognized only when there is a contractual or other legal rights for a
physical asset which shall not be amortized over the period.
iv. All of the above.
4. Which of the following Assertion is not related to assertion about presentation and
disclosure:
a. Occurrence and rights and obligations
b. Completeness
c. Classification and understandability
d. Valuation and allocation
5. While auditing the accounts of Thought Co 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?
i. Perform additional testing which may include agreeing the balance to subsequent
cash paid.
ii. Accept the balances as it is assuming other replies against received confirmation
requests being correct.
iii. Accept the balances as it is assuming that the trade payables must have replied in
case of any discrepancies.
iv. None of the above.
6. 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 31 st March, 2017?
i. Inspect each and every journal entry passed in the books of ASD Ltd.
ii. Ask ASD Ltd. to provide the details of payment made during the year 2017-18.
iii. Inspect the invoices issued by Mr. Bluffy and the payments made.
iv. Interrogate the cash manager of ASD Ltd.
9. The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report. However, when, after the date of the
auditor’s report but before the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the auditor’s report, the auditor shall:
a. Discuss the matter with management and, where appropriate, those charged with
governance.
b. Determine whether the financial statements need amendment.
c. Inquire how management intends to address the matter in the financial statements.
d. All of the above
CHAPTER 10: The Company Audit
1. 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.
3. 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.
4. 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-
Particular Amount(in Rs)
Paid- Up Capital
- Consideration received in cash for equity shares(including unpaid 40,00,000
calls of Rs. 5,00,000)
- 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, 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?
i. 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.
ii. 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.
iii. 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.
iv. 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.
5. 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?
i. 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.
ii. CA. Daffy shall continue to hold the office of the auditor and ask the Board to re-
appoint her in a private meeting.
iii. CA. Daffy shall continue to hold the office of the auditor as no such ratification
provisions for appointment by members at every AGM exist.
iv. 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.
6. 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 retainer ship 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?
i. In case of monthly retainer ship agreements, only verify if the expenditure for all
12 months has been recorded correctly.
ii. The auditor should verify that the payments have been only through bank
vouchers.
iii. 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.
iv. 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.
7. 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.
(b) Casual vacancy can be filled by the Board of Directors subject to approval by the
company at a general meeting convened within 3 months of the recommendation
of the Board.
(c) CA. Granny cannot hold the office of auditor till the conclusion of 6th meeting i.e.
the appointment cannot be made for five years. The auditor can hold office only till
the conclusion of the next AGM.
(d) All of the above.
8. 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.?
i. 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.
ii. M/s AB & Co. is not eligible for appointment as an auditor of Prakash Ltd. as
Miss Betty, relative of CA. Tweety (one of the partners of M/s AB & Co.) is
indebted to Satyan Ltd. (subsidiary of Prakash Ltd.) Thus, the appointment made
is not valid.
iii. As the corrective action has been taken regarding indebtness to Satyan Ltd.
(subsidiary of Prakash Ltd.) within 60 days of such appointment, the appointment
of M/s AB & Co. is valid.
iv. There is no such contravention of the provisions of the Companies Act, 2013 in
the given scenario. Thus, the appointment of M/s AB & Co. as the statutory
auditors of Prakash Ltd. is valid.
9. 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
10. 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 60days.
d. Be filled by the Board of Directors within 30days.
11. 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.
13. 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.
15. 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.
16. 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
recommendation of such committee.
4. 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
5. 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
6. 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.
8. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express :
a. A disclaimer opinion
b. A qualified opinion
c. A qualified opinion or a disclaimer of opinion, as appropriate, in accordance with
SA 705.
d. Unmodified opinion
9. The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report. However, when, after the date of the
auditor’s report but before the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the auditor’s report, the auditor shall:
a. Discuss the matter with management and, where appropriate, those charged with
governance.
b. Determine whether the financial statements need amendment.
c. Inquire how management intends to address the matter in the financial statements.
d. All of the above.
10. Which of the following is correct :
a. The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit file on a timely basis after
the date of the auditor’s report.
b. The auditor shall assemble the audit documentation in an audit file and shall not
complete the administrative process of assembling the final audit file.
c. The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit file on a timely basis before
the date of the auditor’s report.
d. The auditor shall not assemble the audit documentation in an audit file.
2. You are at the planning stage for one of your firm’s client XYZ Bank for the year ended
31 March 2018. The bank is a commercial bank that provides a number of products
and services to the general public and other segments of the economy in the area of
South Mumbai. You are assigned the audit of one of the branches of XYZ Bank. The
audit engagement team was called to have a detailed discussion on the following
matters. Which one of the following should not be included in the discussion for the
audit of banks?
a. Discuss on the error of last year in the application of accounting policies of the
bank.
b. Discuss on the method of fraud if any perpetrated by the bank employee within
particular balances and/or disclosures
c. Discuss with the team the appointment and remuneration to be received on this
bank audit.
d. Discuss the effect of the results of the risk assessment procedures on other aspects
to decide the nature, timing and extent of further audit procedures.
CHAPTER 13: Audit of Different Types of Entities
1. 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 1 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 has 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.
3. In July, 2018, M/s Tom & Co. entered into an agreement with M/s Jerry & Co. under
which 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 installments. The
property in the goods shall be passed to M/s Jerry & Co. on the payment of last of such
installments. While checking such hire-purchase transaction, what would the auditor
examine?
i. That the periodical installments paid are charged as an expenditure by M/s Jerry &
Co.
ii. That the hire purchase agreement specifics clearly the hire-purchase price of the
machinery to which the agreement relates.
iii. That M/s Tom & Co. charges depreciation throughout the life of the machinery.
iv. All of the above.
4. 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?
i. Audit tests to be carried out to ensure that the correct numbers of guests are
charged for the correct period.
ii. 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 authorized.
iii. 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.
iv. All of the above.
6. A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request is-
a. Positive confirmation request
b. Non-response
c. Exception
d. Negative confirmation request
MCQ ANSWER:
CHAPTER 1: Nature, Objective and Scope of Audit
1 B 2 A 3 A
4 C 5 D 6 C
7 A 8 D 9 D
10 C 11 B 12 A
13 D 14 D 15 A
16 B 17 C 18 B
19 A 20 A
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