CA Inter Auditing Important Question
Table of Content
Other Important Questions Blog :
Question 1.
Assurance engagements are not restricted to audit of financial statements alone. Discuss.
Answer:
| Checkbox | Example of assurance engagement | Type of assurance engagement |
| 1. | Audit of financial statements | Reasonable assurance engagement |
| 2. | Review of financial statements | Limited assurance engagement |
| 3. | Examination of Prospective financial information | Provides assurance regarding reasonability of assumptions forming basis of projections and related matters |
| 4. | Report on controls operating at an organization | Provides assurance regarding design and operation of controls |
Question 2.
MNO Ltd requested the auditor CA P to provide for absolute assurance in respect of its ten branches scattered in Delhi and confirm that the financial statements are free from material misstatement due to fraud or error. Advise.
Answer:
Question 3.
CA N is the auditor of SR Ltd. The auditor expressed his opinion on the financial statements without ascertaining as to whether the financial statements as a whole were free from material misstatements or not. In your opinion, whether CA N has complied with objectives of audit considering the applicability of relevant SA?
Answer:
Question 4.
Explain the objectives of an Audit as per SA 200.
Answer:
Question 5.
An audit is distinct from investigation. However, it is quite possible that sometimes investigation results from the prima facie findings of the auditor. Discuss.
Answer:
Question 1.
CA Vikas Jain discussed with his audit team about advantages and disadvantages of audit programme. He explained to his team that –“work may become mechanical” as a disadvantage of the audit programme. Discuss explaining the disadvantages of an audit programme
Answer:
M/s. TP & Co., a firm of Chartered Accountants, is auditor of KSR Ltd. for many years. KSR Ltd. has diversified their business into newer areas during the last year. The senior member of the audit team handed over the standard audit programmer of earlier years to the audit assistants and instructed them to follow the same. The assistants are conducting the audit accordingly. Whether the attitude of the audit assistants is justified or they are required to keep an open mind? Guide them.
Answer:
Question 3.
XYZ & associates are appointed as the statutory auditors of Fisco Ltd. for the FY 2021 -22. While constructing the audit programme, the engagement partner, CA X, should keep in mind various points. List such points.
Answer:
Question 4.
Explain what do you mean by documentation of audit plan. Discuss the purpose served by it and also elaborate the tools used by the auditor to reflect the particular engagement circumstances.
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Question 5.
M/s. TP & Co., a firm of Chartered Accountants, is auditor of KSR Ltd. for many years. KSR Ltd. has diversified their business into newer areas during the last year. The senior member of the audit team handed over the standard audit programmer of earlier years to the audit assistants and instructed them to follow the same. The assistants are conducting the audit accordingly. Whether the attitude of the audit assistants is justified or they are required to keep an open mind? Guide them.
Answer:
Question 1.
XYZ & Associates, Chartered Accountants, while evaluating the operating effectiveness of internal controls, detects deviation from controls. In such a situation, state the specific inquiries to be made by an auditor to understand these matters and their potential consequences.
Answer:
Evaluating the Operating Effectiveness of Controls: When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate whether misstatements that have been detected by substantive procedures indicate that controls are not operating effectively. The absence of misstatements detected by substantive procedures, however, does not provide audit evidence that controls related to the assertion being tested are effective.
When deviations from controls upon which the auditor intends to rely are detected, the auditor shall make specific inquiries to understand these matters and their potential consequences, and shall determine whether:
(a) The tests of controls that have been performed provide an appropriate basis for reliance on the controls;
(b) Additional tests of controls are necessary; or
(c) The potential risks of misstatement need to be addressed using substantive procedures.
A material misstatement detected by the auditor’s procedures is a strong indicator of the existence of a significant deficiency in internal control.
Question 2.
XYZ Ltd is engaged in the business and running several stores dealing in variety of items such as ready made garments for all seasons, shoes, gift items, watches etc.
There are security tags on each and every item. Moreover, inventory records are physically verified on monthly basis.
Discuss the types of inherent, control and detection risks as perceived by the auditor.
Answer:
Question 3.
(a) Prince Blankets is engaged in business of blankets. Its major portion of sales is taking place through internet. Advise the auditor how he would proceed in this regard as to understanding the entity and its environment.
(b) The auditor of ABC Textiles Ltd chalks out an audit plan without understanding the entity’s business. Since he has carried out many audits of textile companies, there is no need to understand the nature of business of ABC Ltd. Advise the auditor how he should proceed.
(c) A Partnership Firm of Chartered Accountants HT and Associates was appointed to udit the books of accounts of Wind and Ice Limited for the financial year 2020-21. There was a risk that HT and Associates would give an inappropriate audit opinion if the financial statements of Wind and Ice Limited are materially misstated. State the Risk mentioned in the question.
(d) Mr. H, a team member of the auditor of There and Here Limited was of the view that evaluation of internal control of the company would help in identifying the areas where internal control is weak. Advise
(e) Mr. Y, one of the team member of the auditors of What and Where Limited was very keen in knowing whether the internal control of the company would safeguard the company’s assets. Advise Mr. Y.
Answer:
Question 4.
(a) While auditing the books of accounts of Heavy Material Limited for the financial year 2020-21, a team member of the auditor of Heavy Material Limited showed no inclination towards understanding the business and the business environment of the above mentioned company. Is the approach of team member of the auditor of Heavy Material Limited correct or incorrect? Also give reason for your answer.
(b) The team member of the auditor of Simple and Easy Limited was of the view that understanding the internal control of the company would not help them in any manner in relation to audit procedures to be applied while conducting the audit.
Answer:
Question 5.
The auditor of XYZ Ltd, engaged in FMCG (Fast Moving Consumable Goods) obtains an understanding of the control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behavior; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment.
Answer:
Question 1.
In larger organisations, with huge transactions, statistical sampling is always recommended as it is unbiased, and the samples selected are not prejudged.
Features/Characteristics of Statistical Sampling :
(1) Audit testing done through this approach is more scientific than testing based entirely on the auditor’s own judgment because it involves use of mathematical laws of probability in determining the appropriate sample size in varying circumstances.
(2) Statistical sampling has reasonably wide application where a population to be tested consists of many similar items and more in the case of transactions involving compliance testing, trade receivables’ confirmation, payroll checking, vouching of invoices and petty cash vouchers.
(3) There Is no personal bias of the auditor in case of statistical sampling. Since it is scientific, the results of sample can be evaluated and projected on the whole population in a more reliable manner.
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the statements of account and give an expert opinion about the truth and fairness of such accounts. This he cannot do unless he has examined the financial statements objectively. Discuss explaining clearly the meaning of audit evidence in detail.
Answer:
Question 3.
The newly appointed auditor of BTN Limited wants to obtain sufficient appropriate audit evidence about whether the opening balances contain misstatemen`ts that materially affect the current period's financial statements. What audit procedures should he perform for this purpose ?
Answer:
Question 4.
M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC Limited. CA Pankaj did not apply any audit procedures regarding opening balances. He argued that since financial statements were audited by the predecessor auditor therefore he is not required to verify them. Is CA Pankaj correct in his approach?
Answer:
Question 5.
Paramount Exports Ltd is a manufacturer exporter having its own production capacity and also gets the job work done through various job workers. The auditor of Paramount Exports Ltd. Considers that inventory held with job workers is material to the financial statements.
Required
Suggest the audit procedures in the given case.
Answer:
Question 1.
Auditor of ABC Ltd while auditing its financial statements wants to ensure whether the disclosures regarding sales has been made as required under Schedule III (Part 1) to Companies Act, 2013. Explain such disclosure requirements.
Answer:
With respect to sales of the client entity, the auditor is required to ensure whether the following disclosures as required under Schedule III (Part 1) to Companies Act, 2013 have been made:
Whether disclosure of sales in respect of each class of goods has been made.
Whether revenue from operations is disclosed separately in the notes as revenue arising from:
Whether brokerage and discount on sales other than usual trade discount has been disclosed.
Whether the transactions with related parties are appropriately disclosed in notes to accounts.
Question 2.
ABC limited appointed XYZ & Company, Chartered Accountants, as a Statutory Auditor of the Company for the year 2019-20. CA X, partner of XYZ & Company, was looking after the audit of other income of the company which consists of interest income on fixed deposits. As a Statutory Auditor how would CA X verify interest income on fixed deposits for the year 2019-20?
Answer:
Question 3.
You are an auditor of PQR Ltd. which has spent Rs. 10 lakhs on Research activities of the product during period under audit. Board of Directors want to recognize it as an internally generated intangible asset. Advise and discuss the conditions necessary to be fulfilled to recognize the intangible assets in the financial statements.
Answer:
Question 4.
Proceedings have been initiated against the company ABC Ltd for holding one of its property as benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made thereunder. State the disclosure requirements to be complied with by ABC Ltd as per Schedule III to the Companies Act, 2013.
Answer:
Question 5.
While auditing the accounts of ABC Ltd, a member of audit team is not clear about :
(i) the criteria regarding classification of liability into current liability and non-current liability.
(ii) Classification of Reserves and Surplus
You being the senior member of audit team guide the member of the audit team about such criteria and classification as per general instructions for preparation of balance sheet as per Schedule III.
Answer:
Question 1.
One of the factors affecting the form, content and extent of audit documentation relates to size and complexity of the entity. State six other factors in this respect.
Answer:
One of the factors affecting the form, content and extent of audit documentation relates to size and complexity of audit. Other factors are:
1. The nature of the audit procedures to be performed.
2. The identified risks of material misstatement.
3. The significance of the audit evidence obtained.
4. The nature and extent of exceptions identified.
5. The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed or audit evidence obtained.
6. The audit methodology and tools used.
Question 2.
State with reason (in short) whether the following statement is correct or incorrect:
Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is audited by Mr. B, another Chartered Accountant. Mr. A requests for the photocopies of the audit documentation of Mr. B pertaining to the branch audit.
Answer:
Question 3.
M/s Samar Amar & Associates are the statutory auditors of Ganga Ltd. for FY 2020-21. CA Samar is the engagement partner for such assignment. While discussing with the engagement team, CA Samar briefed his team that “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. SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation.” Explain.
Answer:
Question 4.
Define audit documentation. Also give some examples.
Answer:
Question 5.
The form, content and extent of audit documentation depend on factors such as the size and complexity of the entity, the nature of the audit procedures to be performed etc. Explain in detail.
Answer:
Question 1.
CA K is statutory auditor of DEMA Private Limited for the year 2022-23. The company has three plants in India. He is nearing completion of audit procedures relating to financial statements for the year under audit and has yet to sign audit report. Meanwhile, a huge fire had broken out in one of plants of the company located near Nashik on 25th June, 2023 damaging substantial part of machinery and work-in-process resulting in loss of about ` 5 crores. Unaware of the incident, he is in process of finalizing his report in first fortnight of July 2023. State few audit procedures to be performed by him to obtain sufficient appropriate evidence for identifying such events. Also explain auditor’s responsibilities in this situation.
Answer:
In the given situation, a huge fire had broken out in one of plants of company on 25th June, 2023 destroying substantial part of machinery and work-in-process resulting in loss of ` 5 crores. The auditor has yet to sign audit report.
Before signing audit report, he should perform following audit procedures to obtain sufficient appropriate audit evidence that all such events have been identified and are appropriately reflected in financial statements: -
• Inquiry of management whether any subsequent events have occurred
• Reading minutes of the meetings of owners, management that have been held after date of financial statements and inquiring about matters discussed at such meetings for which minutes are not available
• Reading entity’s latest subsequent interim financial statements
• Obtaining Written representations from management in accordance with SA 580
The situation is an example of subsequent event occurring between date of financial statements and date of audit report requiring disclosure in financial statements. The auditor has a responsibility to obtain sufficient appropriate audit evidence whether such an event requiring disclosure in financial statements is appropriately reflected in financial statements.
Question 2.
M/s ANS & Associates has been appointed as the statutory auditors of MNO Ltd. The company has been suffering losses due to the emergence of highly successful competitor, thereby leading to negative networth. Also, the sales head, key management personnel, of the company left the company due to health issues. When CA Amar, the engagement partner discussed the scenario with the management of the company, he did not get any satisfactory reply from the management. What is the responsibility of M/s ANS & Associates with regard to SA 570?
Answer:
Question 3.
SA 560, “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent events in an audit of financial statements. Financial statements may be affected by certain events that occur after the date of the financial statements. Many financial reporting frameworks specifically refer to such events. Explain those events and also define subsequent events
Answer:
Question 4.
While doing audit of ABC Pvt Ltd, on the basis of sufficient and appropriate evidence, auditor comes to a conclusion that use of the Going Concern Basis of Accounting is appropriate, but a material uncertainty exists. Discuss the implications for auditor’s report if:
(a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements
(b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
Answer:
Question 1.
The company has dispensed with the practice of taking inventory of their inventories at the year-end as in their opinion the exercise is redundant, time-consuming and intrusion to normal functioning of the operations. Explain reporting requirement under CARO, 2020.
Answer:
Clause (ii) of Para 3 of CARO, 2020, requires the auditor to report (a) whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account;
whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details;
In the given case, the above requirement of physical verification of inventory by the management has not been taken place and therefore the auditor should point out the same under CARO, 2020. He may consider the impact on financial statement and report accordingly.
Question 2.
G Pvt. Ltd. had fully paid up Capital and Reserves of ₹1.20 crore as at the end of F.Y 20X1-20X2. During the F.Y 20X2-20X3, business was interrupted due to Covid restrictions and therefore the company incurred losses to the tune of 25 lacs. During the year, the company also borrowed ₹55 lakh each from a bank and a financial institution independently. It had a turnover of ₹850 lakh (other than revenue of ₹250 lakh from discontinuing operations). Ascertain whether CARO, 2020 is applicable to the company.
Answer:
Question 3.
Discuss the reporting requirements as per CARO, 2020, regarding:
(i) Statutory Dues and
(ii) Transactions with Related Parties
Answer:
Question 4.
“The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.” Explain.
Answer:
Question 5.
Discuss the reporting requirements as per CARO, 2020, regarding:
(i) Inventory and
(ii) Deposits accepted by company or amounts which are deemed to be deposits.
Answer:
Question 1.
The audit programme of NGO should include in a sequential order all assets, liabilities, income and expenditure ensuring that no material item is omitted. Explain.
Answer:
The audit programme should include in a sequential order all assets, liabilities, income and expenditure ensuring that no material item is omitted.
(i) Corpus Fund: The contributions / grants received towards corpus be vouched with special reference to the letters from the donor(s). The interest income be checked with Investment Register and Physical Investments in hand.
(ii) Reserves: Vouch transfers from projects / programmes with donors letters and board resolutions of NGO. Also check transfer of gross value of asset sold from capital reserve to general reserve and adjustments during the year.
(iii) Ear-marked Funds: Check requirements of donors institutions, board resolution of NGO, rules and regulations of the schemes of the ear-marked funds.
(iv) Project / Agency Balances: Vouch disbursements and expenditure as per agreements with donors for each of the balances.
(v) Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
(vi) Fixed Assets: Vouch all acquisitions / sale or disposal of assets including depreciation and the authorisations for the same. Also check donor’s letters/ agreements for the grant. In the case of immovable property check title, etc.
(vii) Investments: Check Investment Register and the investments physically ensuring that investments are in the name of the NGO. Verify further investments and dis - investments for approval by the appropriate authority and reference in the bank accounts for the principal amount and interest.
(viii) Cash in Hand: Physically verify the cash in hand and imprest balances, at the close of the year and whether it tallies with the books of account.
(ix) Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding and unadjusted amounts.
(x) Inventory: Verify inventory in hand and obtain certificate from the management for the quantities and valuation of the same.
(xi) Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting the particular programme or project to ascertain the conditions with respect to undertaking the programme/project and accordingly, in the case of programmes/projects involving contracts, ensure that income tax is deducted, deposited and returns filed and verify the terms of the contract.
(xii) Establishment Expenses: Verify that provident fund, life insurance premium, employees state insurance and their administrative charges are deducted, contributed and deposited within the prescribed time. Also check other office and administrative expenses such as postage, stationery, travelling, etc.
Question 2.
State the points which merit consideration in the audit of a CLUB w.r.t its members.
Answer:
Question 3.
In case of Government entities, audit of accounts of stores and inventories has been developed as a part of expenditure audit. Discuss about the duties and responsibilities entrusted to C&AG.
Answer:
Question 1.
"Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March, 2018. In the audit planning, the partner of Ramjilal & Co., observed that the allotted branches are predominantly based in rural areas and major portion of the advances were for agricultural purpose."
Now he needs your assistance on the following points so as to incorporate them in the audit plan:
(i) for determination of NPA norms for agricultural advances
(ii) for accounts where there is erosion in the value of security/frauds committed by the borrowers.
Answer:
(i) NPA norms for Agricultural Advances:
As per the guidelines, Agricultural Advances are of two types, (1) Agricultural Advances for “long duration” crops and (2) Agricultural Advances for “short duration” crops
The “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops would be treated as “short duration” crops.
The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State.
The following NPA norms would apply to agricultural advances (including Crop Term Loans):
- A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons and,
(ii) Accounts where there is erosion in the value of security / frauds committed by borrowers -
Not prudent to follow stages of asset classification. It should be straightaway classified as doubtful or loss asset as appropriate.
(i) Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
(ii) If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.
Question 2.
The functioning of banking industry in India is regulated by the Reserve Bank of India (RBI) which acts as the central Bank of our country. Explain
Answer:
Question 3.
In carrying out audit of income, the auditor is primarily concerned with obtaining reasonable assurance that the recorded income arose from transactions, which took place during the relevant period and pertained to the bank, there is no unrecorded income and the income is recorded at appropriate amount. Explain the Audit Approach and Procedures regarding following points in the above context :
(i) RBI’s Directions
(ii) Materiality
(iii) Revenue Certainty
(iv) Revenue Uncertainty
Answer:
Question 1.
R & Co, a firm of Chartered Accountants have not revised the terms of engagements and obtained confirmation from the clients for last 5 years despite changes in business and professional environment.
Required
Elucidate the circumstances that may warrant the revision in terms of engagement.
Answer:
As per SA 210 on “Agreeing the Terms of Audit Engagements”, the auditor may decide not to send a new audit engagement letter or other written agreement each period. However, the factors that may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms are:
Question 2.
(a) Professional integrity and independence are considered essential characteristics of all the professions. There are two interlinked perspectives of independence of auditors, one, independence of mind and two, independence in appearance. Explain.
(b) The Chartered Accountant has a responsibility to remain independent by taking into account the context in which they practice, the threats to independence and the safeguards available to eliminate the threats. Explain the guiding principles in the above context.
Answer:
Question 3.
“The Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants (IFAC) identifies five types of threats.” Explain
Answer:
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