1554382617CA Final Audit MCQ Booklet PDF

CA FINAL
OLD AND NEW COURSE
ADVANCED AUDITING
&
PROFESSIONAL ETHICS
Booklet of 70 Important MCQs
along with reasons of the answers
(includes latest Mock Test Questions of ICAI)
Compiled by
CA Samiksha Sethia
E-mail ID: samiksha.sjc@gmail.com
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this booklet
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tips to solve MCQs
Advanced Auditing and Professional Ethics
Sample MCQs with Solution
1. Temporary Audit File does not include:
(a) Communications with other auditors, experts and other third parties.
(b) Letters of representation or confirmation received from the client.
(c) Conclusions reached by the auditor.
(d) Legal and organizational structure of the entity.
Reason: Legal and organizational structure of the entity is a part of Permanent Audit File and not
Temporary/Current audit file.
d
2. The risk that the auditor's conclusion based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure is known as
(a) Non-Sampling Risk
(b)Detection Risk
(c) Population Risk
(d)Sampling Risk
Reason: As per SA 530 Audit sampling, the risk that the auditor's conclusion based on a sample may
be different from the conclusion if the entire population were subjected to the same audit procedure is d
Sampling Risk
3. Which standard is applicable to a user entity auditor using service organization services?
(a) SAE 3402
(b) SA 402
(c) SAE 3400
(d) SA 450
Reason: SA 402 is Audit considerations relating to an entity using a service organization. Don't get
confused with SAE 3402 as that is related to assurance reports on controls at a service organization b
4. A real-time environment has several critical IT components that enable anytime, anywhere transactions to take
place. Which of the following is not an IT-component of real-time environment?
(a) Applications
(b)Networks
(c) IT controls
(d)Hardware
Reason: IT controls is not an IT-component of real-time environment rather these are IT based
controls in an organization c
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5. Obtaining trade receivables ageing report and analysis and identification of doubtful debts is performed during
audit of accounts receivable balances to address the following balance sheet assertion:
(a) Valuation
(b) Rights and obligations
(c) Existence
(d) Completeness
Reason: Ageing report of trade receivables will help in analysis of bad and doubtful debts and hence
will address the Valuation assertion of the Balance Sheet a
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.
(a) Positive confirmation request
(b) Non Response
(c) Negative Confirmation request
(d) Exception
Reason: As per SA 505 External Confirmations, in case of a Negative Confirmation Request the
confirming party will respond only if the they disagree with the information provided in the request. c
7. Which of the following information should a successor auditor obtain during the inquiry of the predecessor
auditor before accepting engagement?
i) Information about integrity of management

ii) Disagreement with management concerning auditing procedures
iii)Review of internal control system.
iv)Organisation structure
(a) (i) and (ii)

(b) (ii) and (iii)
(c) (i) , (ii) and (iii)
(d) (i) and (iii)
Reason: Before accepting an audit engagement the auditor should communicate with the predecessor
auditor about the integrity of management and whether there was any disagreement with management a
regarding auditing procedures so that he/she may have an opportunity to know the reasons for change
in order to safeguard his/her own interest and also the interest of public.
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8. ONZ Ltd is in the business of trading of consumer equipments. The company’s turnover is INR 347 crores. The
company has not been doing well over the last few years due to which its profitability has gone down
significantly. The company charges cartage/freight from its customers. Because there is a huge cost incurred in
this respect, the company ensures that this amount is recovered on time.
During the performance of the internal audit procedures, the internal auditors of the company found that in
some cases freight was charged in the bills manually, rather than through the automated system of generating an
invoice. Internal auditor raised this point to the management. The management replied that it happens only in
exceptional cases that the freight is charged manually on automated generated invoice.
How would you deal with this as an auditor?
(a) Internal auditor should report this matter.
(b) Internal auditor should discuss with management about way forward and drop this point.
(c) Internal audit observation is not right
(d) Internal auditor should ignore on the grounds of materiality.
Reason: Internal Auditor should report the matter irrespective of the fact that this happens only in a
few exceptional cases because in the given situation an important automated control is bypassed and it a
is the responsibility of the auditor to report the same to the management as a deficiency in operation of
the control may be a fraud risk factor.
9. ALM Ltd. is a trading company engaged in the business of selling readymade garments with a turnover of
around Rs. 85 crore in the year 2017-18. Your firm has been appointed as statutory auditors for the year 2018-
19. In the process of audit for the half year ending 30th September, 2018 your senior has instructed you to
verify the debtors of the company. While verifying the same it came to your notice that the company is not
taking balance confirmations from the debtors and the balance shown in the books of company is considered
final for the preparation of accounts. As a statutory auditor what should be your decision on the debtors
balances:
(a) Statutory auditor should review the internal audit report and ensure as per section 143 of the
Companies Act, 2013 that the company has adequate internal financial controls in place.
(b) There is no need to take debtors confirmation as it is immaterial for the purpose of Audit Report.
(c) The auditor is required to take external confirmation independently and wherever the auditor gets
negative or no response or the response is doubtful an alternative audit procedure should be followed.
(d) A management representation letter should be obtained by the auditor.
Reason: A statutory auditor should obtain External Confirmations as required by SA 505 to obtain
relevant and reliable audit evidence as part of his audit procedure. Reviewing the internal audit report c
will not suffice the purpose as it is the responsibility of the statutory auditor to perform audit
procedures independently although they can Use the work of Internal Auditors as per SA 610.
Management Representation letter can be used as an audit evidence but it is not sufficient and
appropriate audit evidence as per SA 500 and SA 580.
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10. PR Co. designs and manufactures specialised furniture for offices in and around the city of Mumbai. The
revenue has been gradually increasing over the last few years. The main concern for PR Co is finding credit-
worthy customers who will make the payment on due dates. You are assigned as the audit team member to test
the controls in sales and purchase system of the entity. The year end of the entity is 31 March 2018. One of the
control objectives of the sales system of PR Co is to ensure that goods and services are sold to credit-worthy
customers.Which of the following control activities would assist the entity in achieving this objective?
(a) All sales orders above Rs.10 lakh is based on authorised price lists.
(b) Credit limits for all the customers are checked before sales orders are accepted.
(c) Overdue debts are chased each month by the credit controller.
(d) The aged-debt listing is reviewed by the finance director of PR Co on a monthly basis
Reason: Overdue debts must be chased by the credit controller so as to ensure that goods are only
sold to credit worthy customers. Control objectives are objectives to be achieved through established c
controls.It can be checked once the control is implemented. Hence, credit controller should chase
overdue debts so check whether the control objective of selling goods and services to credit-worthy
customers only is duly achieved.
11. The assessment of the risks of material misstatement may be expressed in

(a) quantitative terms, such as in percentages, or in non-quantitative terms.
(b) quantitative terms, such as in percentages,
(c) non-quantitative terms.
(d) None of the above
Reason: As per SA 200, an auditor may make separate assessment of Inherent Risk and Control Risk
(in combination known as Risk of material misstatement). The assessment of risks of material a
misstatements may be expressed in both quantitative terms such as percentages(eg., percentage
increase in related party transactions) or in non quantitative terms
12. Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of
the auditor; or evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
(b) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of
the auditor; and evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
(c) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of
the auditor
(d) evidence that the audit was planned and performed in accordance with SAs and applicable legal and
regulatory requirements.
Reason: As per SA 230,Audit documentation, the nature of audit documentation should be such that it
provides- evidence of the auditor’s basis for a conclusion about the achievement of the overall b
objectives of the auditor and evidence that the audit was planned and performed in accordance with
SAs and applicable legal and regulatory requirements
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13. 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
(including unpaid 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?
(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.
Reason: As per Guidance note on terms used in Financial Statements, “paid-up share capital” is that
part of the subscribed share capital for which consideration in cash or otherwise has been received. This
includes bonus shares allotted by the corporate enterprise. Paid-up share capital would include both
equity share capital as well as the preference share capital. While calculating the paid-up capital,
amount of calls unpaid should be deducted from and the amount originally paid-up on forfeited shares
should be added to the figure of paid-up capital. Share application money received should not be
considered as part of the paid-up capital. Therefore Paid up share capital and Reserves and surplus in
c
the present case is 0.92 crores. Hence CARo 2016 is not applicable.
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14. CA. Bobby is a recently qualified Chartered Accountant. He is appointed as an auditor of Droopy Ltd. for
the current Financial Year 2018-19. 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) Analyses
(b) Notes reflecting preliminary thinking.
(c) Letters of confirmation.
(d) E-mails concerning significant matters.
Reason: As per SA 230,Audit documentation, examples of Audit documentation includes- Audit

programmes, analyses, issues memoranda, summaries of significant matters, letters of confirmation b
and representations, checklists and correspondence (including e-mails concerning significant matters.
However, notes reflecting preliminary thinking need not be included in audit documentation.
15. 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.
(c) In our opinion and to the best of our information and according to the explanations given to us,
subject to the misstatement regarding inventories, the aforesaid financial statements present fairly,
in all material respects, or give a true and fair view in conformity with the applicable financial
reporting framework.
(d) In our opinion and to the best of our information and according to the explanations given to us,
with the explanation described in the Basis for Qualified Opinion section of our report, the
aforesaid financial statements present fairly, in all material respects, or give a true and fair view in
conformity with the applicable financial reporting framework.
Reason: As per SA 705, Modifications to the opinion in the Independent Auditor's report when the
auditor concludes that the misstatements, individually or in aggregate are material but not pervasive to a
the financial statements, the auditor shall express a Qualified opinion. The form of expressing a
qualified opinion should include " except for the effects of the matter described in the Basis for
Qualified Opinion section of our report...."
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16. 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.
Reason: As per Section 139(8)(i), in the case of a company other than a company whose accounts are
subject to by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the d
Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of
an auditor, such appointment shall also be approved by the company at a general meeting convened
within three months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting.
17. Which of the following company is not exempted from reporting under CARO, 2016?
(a) Banking company.
(b) Private limited company having Total Revenue of Rs. 2 crores
by the Board
(c) ofCompany
Directorslicensed
within thirty days, under
to operate but if section
such casual
8 of vacancy is as a result
the Companies of
Act, 2013.
(d) Private limited company having paid up capital and reserves and surplus of Rs. 5 crore.
the resignation
Reason: CAROof2016
an auditor, such appointment
is applicable shall also
to Private limited be approved
companies bypaid
having the company
up capital and reserves
and surplus exceeding ₹1 crore as on the Balance sheet date. Hence, private limited company having d
paid up capital and reserves and surplus of ₹ 1 crore is not expempted from reporting under CARO
2016
at a general meeting convened within three months of the recommendation of the Board
18. A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was
approved and to ascertain the amount and terms of the invoice. Which of the following lists two tests that the
and heauditor performed?
shall hold the office till the conclusion of the next annual general meeting
(a) Substantive procedures and analytical procedures
by the Board of Directors within thirty days, but if such casual vacancy is as a result of
(b) Substantive analytical procedures and test of controls
(c) Test of details and test of controls
audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled
(d) Test of details and substantive procedures
the resignation of an auditor, such appointment shall also be approved by the company
Reason: Test of details and Test of controls are the types of Substantive procedures which the auditor
can perform
by the Boardtoofdetermine
Directors whether was approved
within thirty and
days, but if to ascertain
such the amount
casual vacancy is as aand terms
result c
of of the invoice.
Approval
at a general meeting convened within three months of the recommendation of the Boardbe checked
of invoice can be checked through test of controls and amount and terms can
through test of details.
and he shall hold the office till the conclusion of the next annual general meeting
at
byathe
general
Boardmeeting convened
of Directors within
within thirtythree
days,months of thecasual
but if such recommendation
vacancy is asofa the Board
result of
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19. The cost auditor shall submit the cost audit report along with his or its reservations or qualifications or
observations or suggestions, if any, in
(a) Form CRA-3
(b) Form CRA-1
(c) Form CRA-2
Reason: Cost Audit Report should be given in Form CRA-3. Cost records should be maintained in
Form CRA-1 and Form CRA-2 is Form of intimation of appointment of cost auditor by the company a
to Central Goverment.
20. The Reserve Bank of India requires statutory central auditors of banks to verify the compliance with SLR
requirements of 12 odd dates in different months of a fiscal year not being
(a) Wednesdays
(b) ofMondays
by the Board Directors within thirty days, but if such casual vacancy is as a result of
(c) Thursdays
(d) Fridays
the resignation of an auditor,ofsuch appointment shall also be approved byrequirements
the company on 12 odd dates
Reason: Statutory auditors banks should verify compliance
in different months of a fiscal year not being Fridays.
with SLR
d
at21. A Peermeeting
a general Reviewer shall check
convened compliance
within withofTechnical,
three months Professional
the recommendation of and Ethical Standards by the Practice
the Board
unit. Technical, Professional and Ethical Standards include
(i) Engagement Standards
by the Board of(ii) Standards
Directors on Internal
within Audit
thirty days, but if such casual vacancy is as a result of
(iii) Guidance Notes
(iv) Notifications/Directions issued from time to time by the Council or any of its committees
audit by an(a)
auditor appointed by the Comptroller and Auditor-General of India, be filled
(i), (ii), (iii), (iv)
(b) (i) and (ii)
at a general(c)meeting
(iii) and (iv) within three months of the recommendation of the Board
convened
by the Board(d) of(i),
Directors
(ii) and within
(iii) thirty days, but if such casual vacancy is as a result of
Reason: Technical, Professional and Ethical Standards include Engagement Standards, Standards on
and
the
he shall
Internal hold
Audit,
resignation of
the office
Guidance
an
till the
Notes
auditor, such
andconclusion
appointment
of the next annual
Notifications/Directions
shall also be
general
issued from meeting
approved by
time to time by the Council
the company
a
or any of its committees.
22. by
audit A an
process
auditordesigned
appointedtobyprovide an objective
the Comptroller evaluation, before
and Auditor-General the report
of India, is issued, of the significant
be filled
at a general meeting
judgments convened
of the withinteam
engagement threeand
months of the recommendation
the conclusions they reached of
in the Board the report is
formulating
(a) Quality Review
(b) ofLimited
by the Board Review
Directors within thirty days, but if such casual vacancy is as a result of
by the Board
(c) ofEngagement
Directors within thirty
Quality days,Review
Control but if such casual vacancy is as a result of
(d) Peer Review
the resignation
Reason: As perof SQC-1,
an auditor, such appointment
Engagement Quality shall also Review
Control be approved
is a by the company
process designed to provide an
objective evaluation, before the report is issued, of the significant judgments of the engagement team c
and the conclusions they reached in formulating the report.
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by
andthe
he Board of Directors
shall hold the officewithin
till thethirty days, but
conclusion of if
thesuch
nextcasual
annualvacancy
generalismeeting
as a result of
23. Because of the risk of material misstatement, an audit of financial statements in accordance with generally
accepted auditing standards should be planned and performed with an attitude of
(a) Independence
(b) Objectivity
(c) Professional Skepticism
(d) Integrity
Reason: As per SA 200- Overall objectives of an Independent Auditor and conduct of Audit in
accordance with SAs, the auditor shall plan and perform an audit with professional skepticism c
recognising that circumstances may exist that cause the financial statements to be materially misstated
i.e., there is a risk of material misstatement.
24. As per CARO, 2016, the auditor is required to report whether the company has entered into any non -cash
transactions with directors or persons connected with him and if so, whether the provisions of section 192 of
Companies Act, 2013 have been complied with;
by the Board(a) ofUnder Clause
Directors (xi) thirty
within of paragraph 3 of
days, but the CARO,
if such 2016 is as a result of
casual vacancy
(b) Under Clause (xvi) of paragraph 3 of the CARO, 2016
(c) Under Clause (xv) of paragraph 3 of the CARO, 2016
(d) Under Clause (xiv) of paragraph 3 of the CARO, 2016
Reason: As per Para 3(xv), an auditor is required to report whether the company has entered into any
non-cash transaction with the director or person concerned with his and if so, whether the provision of c
Section 192 meeting
at a general of Companies Act,within
convened 2013 has been
three complied
months of thewith.
recommendation of the Board
25. Shahi & Co., a firm of Chartered Accountants printed the firms vision and values behind the visiting card of
and hethe firm. The
thefirm is guilty
till theofconclusion
Professional misconduct under
shall hold office of the next annual general meeting
(a) Clause 5 of Part I of First Schedule of Chartered Accountants Act,1949
by the Board
(b) ofClause
Directors
6 ofwithin
Part I thirty days,
of First but if such
Schedule casual vacancy
of Chartered is as aAct,1949
Accountants result of
(c) Clause 1 of Part II of Second Schedule of Chartered Accountants Act,1949
audit by an(d)
auditor
Noneappointed by the Comptroller and Auditor-General of India, be filled
of the above
Reason: As per decision of Ethical Standards Board it is not permissible for a CA Firm to print its
by the Board
values of Directors
and vision within
behind its thirty
visiting days,
cards as but if suchamount
it would casual to
vacancy is as aand
solicitation result of be violative of
would b
Clause 6 of Part
at a general I of convened
meeting First Schedule ofthree
within Chartered
monthsAccountants Act,1949
of the recommendation of the Board
the26.
resignation of an auditor,
As per Section 271J ofsuch appointment
Income Tax Act, shall alsoanbeaccountant
1961,If approved by or the companybanker or a registered valuer,
a merchant
and hefurnishes
shall holdincorrect
the officeinformation in a report
till the conclusion or next
of the certificate
annualunder any
general provisions of the Act or the rules made
meeting
there under, the Assessing Officer or the Commissioner (Appeals) may direct him to pay a sum of
by the _______________for____________
Board of Directors within thirty days,bybut wayif such casual vacancy is as a result of
of penalty.
at a general(a)
meeting convened withinrupees,
three months of the recommendation of the Board
twenty five thousand each incorrect information in such report or certificate
audit by an(b)auditor appointed by the Comptroller and Auditor-General
ten thousand rupees, each such report or certificate of India, be filled
the resignation ten
(c) thousand
of an auditor,rupees, each incorrect
such appointment shallinformation in suchby
also be approved report or certificate
the company
and he shall(d)hold the office
twenty till the conclusion
five thousand rupees, eachof the
suchnext annual
report general meeting
or certificate
by the Board
Reason: of Directors
As per withinofthirty
Section 271J Incomedays,Tax
butAct,
if such casualanvacancy
1961,if is as or
accountant a result of
a merchant banker or a
registered
at a generalvaluer,
meetingfurnishes
convenedincorrect information
within three monthsinofathe
report or certificate of
recommendation under any provisions of the
the Board b
Act or the rules made there under, the Assessing Officer or the Commissioner (Appeals) may direct
himresignation
the to pay a sum an ₹auditor,
of of 10,000such
for each such report/certificate.
appointment shall also be approved by the company
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27. In case of Casual vacancy by resignation the _________ auditor shall file ___________ within 30 days from
the date of resignation with the company and the Registrar.
(a) Incoming auditor, ADT-4
(b) Resigning auditor, ADT-3
(c) Resigning auditor, ADT-4
(d) Incoming Auditor, ADT-3
Reason: As per Section 140(2) of Companies Act read with Rule 8 of Companies(Audit and
Auditor's) Rules,2014, the auditor who has resigned from the company shall file within a period of 30 b
days a statement Form ADT-3 with the company and the Registrar.
28. 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
by theconfirmation
Board of Directors
replieswithin thirty
from the days,
trade but if such
payables casual
on time vacancyexcept
as correct is as afrom
resultfive
of 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 resignation the balances
of an auditor, as it is assuming
such appointment shall other replies
also be against
approved by received confirmation requests being
the company
correct.
(c) Accept the balances as it is assuming that the trade payables must have replied in case of any
discrepancies.
at a general(d)
meeting
None convened within three months of the recommendation of the Board
of the above.
Reason: As per SA 505- External Confirmations, in case of non-response, the auditor shall perform
alternative audit procedures to obtain relevant and reliable audit evidence.
a
29. The basic assumption underlying the use of analytical procedures is
(a) It helps the auditor to study relationship among elements of financial information
audit by an(b)
auditor
Relationship
appointedamong
by thedata
Comptroller
exist and and
continue
Auditor-General
in the absence
of India,
of known
be filled
condition to the contrary
(c) Analytical procedures will not be able to detect unusual relationships
Reason: Analytical
by the Board procedures
of Directors meansdays,
within thirty the but
evaluation of financial
if such casual vacancyinformation
is as a resultthrough
of analysis of
plausible relationships among both financial and non financial data. Hence,
the resignation of an auditor, such appointment shall also be approved by the company theses are based on the b
assumption that relationship among data exist and continue in the absence of known condition to the
contrary.
30. Audit evidence includes
(a) information contained in the accounting records underlying the financial statements
at a general(b)meeting convened within
both information threeinmonths
contained of the recommendation
the accounting of thethe
records underlying Board
financial statements and other
and he Board
by the shall hold the officewithin
ofinformation.
Directors till thethirty
conclusion of if
days, but thesuch
nextcasual
annual generalismeeting
vacancy as a result of
(c) other information.
(d)hold
and he shall information
the office contained in the accounting
till the conclusion of the nextrecords
annualunderlying the financial statements or other
general meeting
audit
the resignation information.
by an auditorof anappointed by the
auditor, such Comptrollershall
appointment andalso
Auditor-General
be approved byof India, be filled
the company
Reason: As per SA 500- Audit Evidence, audit evidence includes both information contained in the
accounting
by
at athe Board
general records
meetingunderlying
of Directors
convened thethirty
within financial
within statements
days,months
three but if such and other
casual
of the information.
vacancy
recommendationis asofa the
result of
Board a
the
and resignation ofthe
he shall hold an auditor,
office tillsuch
the appointment
conclusion ofshall also annual
the next be approved bymeeting
general the company
10 | P a g e
31. The agreed terms of the audit engagement shall be recorded in an audit engagement letter which shall
include the following except-
(a) Responsibilities of the auditor
(b) Description of methods to be followed for obtaining audit evidence
(c) Responsibilities of management
(d) Objective and scope of the audit of the financial statements
Reason: As per SA 210- Agreeing the terms of Audit engagement, an engagement letter shall include
the objective and scope of audit, responsibilities of the auditor, responsibilities of the management, b
identification of applicable financial reporting framework and reference of expected form and content
of any reports to be issued
32. _________ margin is computed on the aggregate of the net cumulative outstanding positions (purchases or
sales) in each security.
(a) Volatality
(b) ofAd-hoc
by the Board Directors within thirty days, but if such casual vacancy is as a result of
(c) Mark to market
Reason: Grossofexposure
the resignation margin
an auditor, is computedshall
such appointment on the
alsoaggregate of by
be approved thethe
netcompany
cumulative outstanding
positions (purchases or sales) in each security. d
at33. Accounts
a general where
meeting regular/ad
convened hocthree
within limits are not
months reviewed
of the within ______
recommendation of the from
Boardthe due date/date of adhoc
sanction, have to be considered as NPA
(a) 90 days
(b) of120
by the Board days within thirty days, but if such casual vacancy is as a result of
Directors
and he shall hold the
(c) 180 daysoffice till the conclusion of the next annual general meeting
the resignation
Reason: of an where
Accounts auditor,regular/ad
such appointment shallare
hoc limits also
notbe reviewed
approved within
by the company
180 days from the due
audit by an auditor appointed by the Comptroller and
date/date of adhoc sanction, have to be considered as NPAAuditor-General of India, be filled c
at34. Control
a general activities,
meeting whether
convened within
within IT months
three or manual systems,
of the have various
recommendation of objectives
the Board and are applied at various
organisational and functional levels. Which of the following is an example
by the Board of Directors within thirty days, but if such casual vacancy is as a result of control
of activities:
(a) Authorization.
(b) ofPerformance
by the Board reviews.
(c)hold
and he shall Information processing.
the office till the conclusion of the next annual general meeting
the resignation
(d) ofAllanofauditor,
the abovesuch appointment shall also be approved by the company
Reason: As per SAauditor,
315- Identifying and assessing
shall also the risk of material misstatements through
the resignation
audit
understanding
at a general
of an
by an auditor appointed
the entity
meeting convened
such appointment
and by
its the Comptroller
environment andand
within three months
related
be approved
Auditor-General
of the recommendation
by the company
of India,
internal controls, be filled
specific
of the Board
control activities d
include those relating to authorization, performance reviews, information processing, physical
controls and segregation of duties.
the resignation
by the Board ofof an auditor,
Directors suchthirty
within appointment
days, butshall alsocasual
if such be approved
vacancybyis the
as acompany
result of

at
thea resignation
general meeting
of an convened within
auditor, such three months
appointment shallofalso
the be
recommendation ofcompany
approved by the the Board
11 | P a g e
35. Which of the following is eligible to act as an auditor of a Multi State Co-operative society?
(a) A person who is a member or who is in the employment, of an officer or employee of the Multi-
State co-operative society.
(b) A person who is indebted to the Multi-State co-operative society or who has given any guarantee or
provided any security in connection with the indebtedness of any third person to the Multi-State co-
operative society for an amount of rupees five hundred.
(c) A body corporate.
(d) An officer or employee of the Multi-State co-operative society.
Reason: A person who is indebted to the Multi-State co-operative society or who has given any
guarantee or provided any security in connection with the indebtedness of any third person to the c
Multi-State co-operative society for an amount exceeding one thousand rupees is not eligible for
appointment as auditor.
36. Compliance audit also includes an examination of the rules, regulations, orders and
instructions for their
(i) Legality
by the Board
(ii) ofAdequacy
(iii) Transparency
(a) (i) ,(ii) and (iii)

(b) (i) and (iii)
(c) Only (i)
Reason: Compliance audit also includes an examination of the rules, regulations, orders and
instructions for their legality, adequacy, transparency, propriety, prudence and effectiveness a
37. Where the insured chooses to have more than one insurer for the same transaction of risk, it would amount to
(a) Re-insurance
(b)anCo-insurance
audit by auditor appointed by the Comptroller and Auditor-General of India, be filled
(c) Double insurance
the resignation
(d) CoverofInsurance
an auditor, such appointment shall also be approved by the company
Reason: Where the insured chooses to have more than one insurer for the same transaction of risk, it
would amount
at a general to Co-insurance.
meeting Re-insurance
convened within is an
three months agreement
of the between of
recommendation a ‘ceding company’ and a
the Board b
‘reinsurer’ whereby the former agrees to ‘cede’ and the latter agrees to accept a certain specified share
therisk
of resignation of an
or liability auditor,
upon terms such
as setappointment shall also be approved by the company
out in the agreement
at athe
by general
Boardmeeting convened
of Directors within
within thirtythree
days,months of thecasual
but if such recommendation
vacancy is asofa the Board
result of
and resignation
the he shall hold
ofthe office tillsuch
an auditor, the appointment
conclusion ofshall
the next
also annual general
be approved bymeeting
the company
12 | P a g e
38. Where the ceding company binds itself to cede a fixed percentage of all policies issued by it under a defined
scope of business covered by the agreement, it is classified as-
(a) Auto-Fac treaty
(b) Quota share treaty
(c) Surplus Treaty
Reason: Where the ceding company binds itself to cede a fixed percentage of all policies issued by it
under a defined scope of business covered by the agreement, it is a type Proportional Treaty classified b
as Quota share treaty
39. Every depository shall intimate the Board the place where the records and documents are maintained.
Subject to the provisions of any other law the depository shall preserve records and documents for a
minimum period of ____________
(a) 5 years
(b) 7 years
(c) 6 years
(d) 8 years
Reason: According to the SEBI (Depositories and Participants) Regulations, 1996, every depository
shall intimate the Board the place where the records and documents are maintained. Subject to the a
provisions of any other law the depository shall preserve records and documents for a minimum period
and he shall
of five years.hold the office till the conclusion of the next annual general meeting
40. Audit of accounts of all non-corporate borrowers enjoying working capital limits of ₹ ______ and above
audit from
by theby an the
Board ofbanking
auditor
Directorssystem
appointed byisthe
within recommended
days, but by
Comptroller
thirty RBI.
ifand Auditor-General
such casual vacancyofisIndia, be filled
as a result of
(a) 20 lakhs
(b) 50 lakhs
(c) 10 lakhs
by
thethe Board of Directors
resignation within thirty days, but if such casual vacancy is as a result of
(d) Noneofofan
theauditor,
above such appointment shall also be approved by the company
Reason: The Reserve Bank of India (RBI), keeping in view the need for bringing discipline in the
matter of maintenance of accounts by non-corporate entities, has issued a circular dated 12th April,
the
at aresignation
general of an convened
meeting auditor, such appointment
within three shallofalso
months be approved by theofcompany
c
1985 to all Banks recommending audit of accounts ofthe
allrecommendation the Board
non-corporate borrowers enjoying working
capital limits of ₹ 10 lakhs and above from the banking system.
of
at amaintenance
general of accounts by non-corporate entities, has recommendation
issued a circular dated 12th April,
and
41. shall meeting
heWhen hold
unitstheofconvened
office till within
an open-ended three months
the conclusion
scheme of the
are ofnext
sold, the
andannual general
sale price of thethan
meeting
is higher Board
face value of the unit, part of
1985 tosale proceeds
all Banks that represents
recommending auditunrealised
of accountsgains
of allshall be credited
non-corporate to
borrowers enjoying
(a) Securities Premium account
working
and capital
(b) Unit limits ofoffice
Premium ` 10reserve
lacs and above from the banking system
audithebyshall hold
an auditor theappointed tillbythethe
conclusion
Comptrollerof the
andnext annual generalofmeeting
Auditor-General India, be filled
(c) Distributable reserve
by the Board
Reason: When of units
Directors
of anwithin thirty days,
open-ended schemebutare
if such
sold,casual vacancy
and sale is higher
price is as a result
thanofface value of the
unit, part of sale proceeds that represents unrealised gains shall be credited to a separate account (Unit b
Premium Reserve) and shall be treated at par with Unit capital and the same shall not be utilized for
the determination
resignation of of
an distributable
auditor, suchsurplus.
appointment shall also be approved by the company
by
at athe Boardmeeting
general of Directors within
convened thirtythree
within days,months
but if such casual
of the vacancy is asofa the
recommendation result of
Board
13 | P a g e
42. Dividend income earned by a scheme should be recognised, not on the date the dividend is declared, but on
the date the share is quoted on______________
(a) Ex-dividend basis

(b) Cum-dividend basis
(c) Stock exchange
Reason: According to the Ninth Schedule of SEBI(Mutual Funds) Regulations, 1996 Dividend
income earned by a scheme should be recognised, not on the date the dividend is declared, but on the a
date the share is quoted on an ex-dividend basis. For investments which are not quoted on the stock
exchange, dividend income must be recognised on the date of declaration.
43. SEBI has directed the exchanges to apply circuit filters on scrips traded in Rolling Settlement if their price
fluctuates more than _______ of the closing price of scrips on the previous day in any direction.
(a) 20%
(b) 10%
(c) 15%
(d) 25%
Reason: SEBI has directed the exchanges to apply circuit filters on scrips traded in Rolling Settlement
if
at atheir pricemeeting
general fluctuates more within
convened than 20%
threeofmonths
the closing price of scrips on
of the recommendation of the previous day in any
the Board
a
direction. Price bands restrict extreme price movements and thereby resist price manipulation.
44. ___________ are stored in ______ book till the trigger price specified in the order is reached or surpassed.
and heWhen
shall hold the office
the trigger pricetill
is the conclusion
reached of the next
or surpassed, annualisgeneral
the order releasedmeeting
in the regular lot book
(a) Odd lot orders, Odd lot book
(b) Spot orders, Spot Orders book
(c)anRegular
audit by auditor orders, Regular
appointed by thelotComptroller
book and Auditor-General of India, be filled
(d) Stop loss orders, Stop Loss book
Reason: Stop loss orders are stored in Stop Loss book till the trigger price specified in the order is
reached or surpassed.
by the Board When
of Directors thethirty
within trigger price
days, but isif such
reached or vacancy
casual surpassed, thea result
is as order of
is released in the d
regular lot book.
45. As per section 177 of Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its
Powers) Rules, 2014, it is mandatory for certain classes of companies to constitute an Audit Committee.
Which of the following companies are not required to constitute an Audit Committee?
(a) Every Listed company
(b) all public companies with a paid up capital of five crore rupees or more;
(c) all public companies having turnover of one hundred crore rupees or more;
(d) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding fifty crore rupees or more
Reason: All public companies with a paid up capital of ₹ ten crores or more is required to constitute
an audit committee. b
14 | P a g e
46. Which of the following is not categorised as a Corporate Fraud?
(a) Advance Billing

(b) Shell company scheme
(c) Money Laundering activities
(d) Off Book frauds
Reason: In off book frauds, the fraud perpetrator misappropriates the cash before these are recorded in
the books or before the sale is recorded in the books. This is a type of Fraud at operational level d
47. Which of the following is an example of Statutory investigation?
(a) Investigation by Serious Fraud Investigation Office

(b) Investigation on behalf of an incoming partner
(c) Investigation on behalf of a bank proposing to advance loan to a company
(d) Investigation of frauds
Reason: As per Section 212 of Companies Act, 2013,the Central Government may, by an order,
assign the investigation, into the affairs of the company, to the Serious Fraud Investigation Office, a
when it considers necessary to investigate into the affairs of the company, on receipt of a report of the
Registrar or inspector; or on intimation of a special resolution passed by a company; or in public
interest; or on request from the Department of the Central Government, or a State Government.
48. Which Section of Companies Act, 2013 empower the CAG to order the supplementary audit of financial
statements of Government companies?
(a) Section 139(5) of Companies Act, 2013
(b) Section 139(7) of Companies Act, 2013
(c) Section 143(7) of Companies Act, 2013
Reason: Section 143(6) of Companies Act, 2013 empowers the CAG to order the supplementary audit
of financial statements of Government companies. d
49. Audit documentation shall be maintained for a period of 7 years from the _______________
(e) Date of assembly of final audit file
(f) Date of Financial statements
(g) Date of last written representation
(h) None of the above
Reason: As per Paragraph 83 of SQC-1, audit documentation shall be maintained for a period of 7
years from the date of Auditor's report, or, if later, the date of the group auditor's report d
50. The auditor appointed under Section 139 of Companies Act,2013 may be removed from his office before the
expiry of his term by ________________
(a) Ordinary resolution
(b) Special resolution of the company
(c) Special resolution of the company, after obtaining the previous approval of the Central Government
(d) Board resolution
Reason: As per Section 140(1) of Companies Act 2013, the auditor appointed under section 139 may
be removed from his office before the expiry of his term only by a special resolution of the company, c
after obtaining the previous approval of the Central Government
15 | P a g e
51. One of your team members has recently qualified as a chartered accountant and joined your team to audit a
portfolio of audit clients who are private companies. One of the clients Surrey Pvt. Ltd. is a hotel in the small
town near Jaipur. The revenue generated for the current year ended is ₹10.5 crores and the entity is not a
holding or subsidiary of any public company. The owner of the business Mr. Hazelwood runs this family
business from last 10 years. Your team member is keen to know whether Surrey Pvt . Ltd is required to
comment on the matter prescribed under CARO 2016. Which of your explanations to him are correct?
(a) The entity’s revenue exceeds ₹10 crores. Hence, no need to comment on the matter prescribed under
CARO 2016.
(b) The entity is not a holding or subsidiary of any public company, hence no need to comment on the
matter prescribed under CARO 2016.
(c) The entity’s revenue for the year is ₹10.5 cr which exceed the limit of ₹10 cr. Hence, the entity has to
provide the comment on the matter prescribed under CARO 2016.
(d) The entity is not a holding or subsidiary of any public company, hence there is a need to comment on
the matter prescribed under CARO 2016.
Reason: CARO 2016 is not applicable to private limited companies if all the four conditions are
cumulatively satisfied: (i) not being a holding or a subsidiary company of a public company(ii)with a c
paid a paid up capital and reserves and surplus not more than ₹ 1crore (iii) does not have total
borrowings exceeding ₹ 1crore from any bank or any financial institution at any point of time during
the FY and (iv)does not have total revenue as defined in schedule III, to the 2013 Act (including
revenue from discontinuing operations) exceeding ₹ 10 crore during the financial year as per the
financial statements. In this case since Total revenue is ₹10.5 crores, CARO 2016 is applicable.
52. Prakash Limited has around 25 branch offices and all the branch offices were on company’s own land and
building. Company has the Policy that all the original title deeds for land and building owned by the
company will be kept in the custody of authorised official at company’s head office and a certified copy of
the same is kept with the respective branch for verification. You have been appointed as the internal auditor
for the branches of the company and during the course of audit you observed that the original title deeds of
some of the branch office are kept in the branch under the custody of branch officials itself. What action will
you take in such case?
(a) It is not a material discrepancy, so the auditor is not required to take any action in such case.
(b) The auditor should inform the internal auditor of the Head Office for the compliance of the same.
(c) The auditor should ask the branch office/official to send original title deed to the authorised official at
Head Office of the company immediately and submit the Internal Audit Report once the confirmation
received from Head office of company.
(d) As an internal auditor, report the matter in the Internal Audit Report and check for the compliance of the
same in the next audit period.
Reason: Since an important policy of the Company is not being followed the internal auditor should
report the matter in the Internal Audit report and check the compliance of the same in the report of the d
next period.
53. Following are the registered persons under GST Act, 2017. Which one of the registered person is required
to get his accounts audited and also furnish a copy of audited annual accounts and a reconciliation statement,
duly certified in FORM GSTR –9C?
(a) Mr. A is an advocate whose turnover for the financial year ended 31 March 2018 was ₹1.25 crores.
(b) Mr. B is a labour contractor managing construction services and his turnover for 31 March 2018 was
₹3.95 crores.
(c) Dr. C is a pediatric surgeon who has newly set up his practice in Pune. He paid an amount of ₹10.5
lakhs as taxes in the current year.
(d) Mr. D who is an architect has paid taxes of ₹22.5 lakhs in the current year.
Reason: Every registered taxable person whose turnover during a financial year exceeds ₹ 2 crores
shall get his accounts audited. b
16 | P a g e
54. High Limited is a public limited company engaged in the manufacturing of watches. The company has
appointed CA. Eshaan as statutory auditor of the company for the year 2018-19. On verification of the
composition of Board of Directors of the company, the auditor observed that during the reporting period
in one of the board meeting the chairman was non-executive director and less than one-third of the Board
comprised of Independent Directors. The auditor wants to examine the effect of changes in the composition
of the Board and/or its chairman and its impact on compliance throughout the reporting period. But the
management restricts the auditor from examining the same. Whether the auditor has right to examine the
effect of changes in composition of board?
(a) The auditor has no right to verify the composition of Board and examine the effect of changes in the
composition since it is not related with preparation of financial statements.
(b) The auditor should verify the composition of Board and examine its impact on compliance throughout
the reporting period as a part of certifying compliance with the requirements of corporate governance.
(c) The management’s act is void, as the auditor is appointed by Board of Directors only so the auditor
should necessarily verify the composition of Board and its impact on compliance.
(d) Since High Limited is a public limited company, its Board composition has to be compulsorily
verified by the auditor.
Reason: As per SEBI(LODR),2015 Compliance certificate from either the auditors or practicing
company secretaries regarding compliance of conditions of corporate governance to be annexed b
with Boar Report. Hence, the auditor should verify the composition of Board and examine its impact
on compliance throughout the reporting period as a part of certifying compliance with the
requirements of corporate governance.
55. As an auditor appointed under section 44AB of the Income Tax Act, 1961, under which clause of Form
3CD, you will report for amounts deemed to be profits and gains under section 32AC, 33AB or 33ABA
or 33AC
(a) clause 24
(b) clause 40
(c) clauses 31
(d) clause 23
Reason: As per Clause 24 of Form 3CD, an auditor is required to report any amounts deemed to be
profits and gains under section 32AC, 33AB or 33ABA or 33AC a
56. An audit firm is the subject of the Peer review, please indicate the maximum number of years in the review
cycle:
(a) 1 year
(b) 2 years
(c) 3 years
(d) 5 years
Reason: Statement of Peer Review aims to confine the scope of review to preceding three years since
this would establish the consistency or deviations, if any, in respect of procedures followed by the
practice unit
c
57. In Case of PSU, Direct Reporting Engagement does not include
(a) Performance audits
(b) Compliance audits
(c) Financial audits
(d) Comprehensive Audit
Reason: Financial audits are always attestation engagements, as they are based on financial
information presented by the responsible party. Performance audits, compliance audits and
comprehensive audits are generally direct reporting engagements.
c
17 | P a g e
58. Bajaj Allianz General Insurance Ltd. agreed to insure a large commercial client. Due to the size of this
client's operations, there is the potential that it could suffer a substantial loss. It would be financially difficult
for Bajaj Allianz to pay the entire claim itself. To spread this risk, Bajaj Allianz contacted Bharti AXA
General Insurance to request that it cover a portion of the risk. Bharti AXA General Insurance agreed, but
only on the condition that it receive a portion of the premium the client has paid to Bajaj Allianz General
Insurance Ltd. The term that best describes this scenario is
(a) retention.
(b) reinsurance.
(c) loadings.
(d) casualty insurance.
Reason: Reinsurance is a risk mitigating tool adopted by Insurer whereby the risk underwritten by one
Insurer is transferred partially to another Insurer. Reinsurance means one insurer purchasing coverage
from a second insurance company for a risk that the first insurer is insuring.
b
59. Brown Ltd is a holding company with two subsidiaries Black Ltd and White Ltd. You have been given the
task of covering the valuation of non-current tangible assets in the consolidated financial statements. You
note that Black Ltd and Brown Ltd. adopt straight line method of depreciation for its assets whereas White
Ltd, follows written down method for calculating the depreciation. Which of the following adjustment
would be considered as correct in respect of the consolidated financial statements preparation?
(a) White Ltd is required to depreciate the assets adopting straight line method of depreciation which is the
method adopted by the holding company.
(b) Brown Ltd is required to make suitable adjustments as to the depreciation charged by White Ltd, at the
time of consolidation.
(c) Brown Ltd and Black Ltd are required to depreciate the assets adopting written down value as to
facilitate the harmonization of accounting policies.
(d) No adjustment is required as there can be different methods of calculation of depreciation for its assets
for the group companies.
Reason: No adjustment is required as there can be different methods of calculation of depreciation for
its assets for the group companies. d
60. XY & Co. is a chartered firm with two partners Mr. X and Mr. Y. The firm was appointed auditor for 35
companies in the year 2017 and Mr. X was having total 19 audits in his name. Mr. Y was also partner in
EFY & Co. Where he was appointed auditor in 4 companies. On 4th August 2017, Mr. X met with an
accident and died. The firm was reconstituted with Mr. Y as the proprietor of new firm and the audits of the
new firm reduced to 16. The new firm, in which Mr. Y is the proprietor, accepted the audit of a Private
Limited Company having paid up capital of ₹ 52 crores on 30th August 2017. EFY & Co., another chartered
firm, contended that Mr. Y cannot accept the appointment of Private Limited Company as he has already
crossed the ceiling of 20 company audits in that year. Do you think that EFY & Co.’s claim is valid?
(a) EFY & Co.’s claim is valid as MR. Y has already been appointed auditor for 20 companies i.e. 16
in the reconstituted firm and 4 in EFY & Co.
(b) Mr. Y cannot accept the audit of Private Limited Company in the year in which there is change in the
constitution of firm, therefore the claim of EFY & Co. is valid.
(c) Mr. Y can accept the audit as the ceiling of 20 company audits is applicable for each firm in which the
chartered accountant is a partner or proprietor.
(d) EFY & Co.’s claim is void as the ceiling of 20 company audits doesn’t include audit of private
company having paid up capital less than ₹ 100 crores.
Reason: For the purpose of Section 141(3)(g),appointments held in One person companies, small
companies, dormant companies and private companies having paid up share capital less than ₹100
crores shall not be considered for calculation of ceiling limit for number of audits.
d
18 | P a g e
61. Management of HFC Ltd. noticed a sudden increase in expense under the head “wages & salaries” for the
year 2017-18 and 2018-19. The management felt a need to get the management audit done in order to
identify the reason for the sudden increase. Mr. Arsh Gupta, Chartered Accountant was appointed as
management auditor by the company on 15th April 2019. What areas do you think the auditor need to verify
for the purpose?
(a) Check the payroll sheet prepared as per approved pay and allowances; verify the overtime sanctioned
and authorised; and verify the payment process followed by the company for the payment of wages &
salaries to employees.
(b) Overtime authorised and the payment done to employees are the main areas need to be verified by the
auditor.
(c) Auditor should first understand the HR Policy of the company. Then verify all the authorised vouchers
for overtime payments done during the year; verify the payroll preparation and reconcile the gross pay
in terms of increments/ promotions & resignations; verify the appointments made during the year as per
HR Policy and payments made to agencies providing contractual staff.
(d) Auditor need to verify the new appointments i.e. of company’s payroll or outsourced staff and the
overtime allowance paid to employees.
Reason: Auditor should first understand the HR Policy of the company. Then verify all the
authorised vouchers for overtime payments done during the year; verify the payroll preparation and
reconcile the gross pay in terms of increments/ promotions & resignations; verify the appointments
c
made during the year as per HR Policy and payments made to agencies providing contractual staff.
62. Mr. Sunil was member of Bombay Stock Exchange from 2004 and was conducting the business in securities
from his proprietorship firm. During the financial 2017-2018 his firm conducted the business of securities
for 30days with income of ₹2 lakhs only. SEBI sent a letter to the firm for getting the accounts audited for
the year 2017-18 but as per Mr. Sunil it was not necessary to get the firm’s accounts audited as the firm was
not in active business of securities during the year. Do you think that Mr. Sunil was right as per Government
notification on Securities Contract Rules?
(a) Mr. Sunil took a right decision as it is not necessary for the proprietary firm to get the accounts audited
as per Securities Contract Rules.
(b) As per Government notification issued in 1984 a member of the stock exchange is considered active for
the purpose of audit if he has conducted the business in securities even for a single day in the year and
shall get its accounts audited if it is required by SEBI.
(c) Mr. Sunil cannot be considered an active member as he has not conducted the business in securities for
180 days or more during the year. So, he is not required to get his accounts audited.
(d) As during the year the firm’s income from conducting the business in securities is less then ₹5 lakhs, the
firm is not required to get the accounts audited.
Reason: It has been clarified by the Government, vide its letter dated 31st May, 1984, that a member
of the stock exchange, irrespective of the size of his business, would be considered ‘active’ for the
purpose of audit if he has conducted business in securities even for a single day in the accounting year.
b
63. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is :
(a) Not available to depositors of NBFCs
(b) Available to depositors of NBFCs
(c) Available to depositors of Banks
(d) Not available to depositors of both NBFCs and banks
Reason: A major difference between a bank and NBFC is that deposit insurance facility of Deposit
Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of NBFCs, unlike
in case of banks.
a
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64. BVM & Associates is an audit firm that employs large number of audit assistants. CA Mahesh, a partner
pays extreme attention to briefing the audit assistants every day while the audit is continuing. All audit
assistants are required to document their notes in the daily briefing and accordingly conduct the audit. CA
Mahesh has made it very clear that any assistant who does not document the notes taken and the steps taken
accordingly will be reprimanded as it will mean that the assistants are not creating their audit programmes
on the job. The practice deployed by CA Mahesh can be termed as?
(a) Unacceptable as CA Mahesh being the auditor should be providing the audit programme and he cannot
expect the team to take daily notes instead of performing the audit.
(b) Appropriate and in line with SA 230 as the audit programme must be prepared on the basis of
documentation of auditor’s briefing notes.
(c) Acceptable but incomplete as CA Mahesh has not given any audit programme to the audit assistants to
follow.
(d) Inappropriate as CA Mahesh should not only provide the audit programme but also make sure that audit
programme is formally approved by all partners of the firm.
Reason: Action taken by CA Mahesh is acceptable but it is incomplete as CA Mahesh should provide
the audit assistants with the audit programme which they can follow. At the same time, daily notes
should be documented by the audit assistants.
c
65. An educational institute was collecting fees from their students by cash/ cheque / draft and through net
banking. Institute follows the policy to account for the fees received in the year of receipt only and for the
cheques or drafts received but not deposited in bank or credited in bank account, should be shown in
reconciliation statement. The internal auditor of branches noticed that at some branches only the fees
received up to 25th March are accounted for in the same year and the receipts after that date are carried
forward to be accounted for in the next financial year. The fees collected in these branches between 25th to
31st March amounted to ₹ 15 lakhs for the year 2017-18 and the collection for the financial year ended 31st
March 2018 amounted to ₹ 115 crores. The auditor was of the view that it will not give a true and fair view
on institute’s revenue for the year. What do you think should be the next step of the auditor?
(a) The branches have accounted for those receipts in the next financial year so the auditor can ignore the
observation.
(b) Auditor should report the matter in Executive Summary paragraph and highlight it as significant internal
control lapse.
(c) Internal auditor can discuss the matter with the management to take a strict action against the branches
not following institute’s policy.
(d) Auditor should get the accounts modified and report the matter in action taken report.
Reason: Internal auditor should get the accounts modified and report the matter because revenue
recognition policy which should ideally be followed by all branches in a Group is not being followed
by a few branches.
d
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66. AFM coaching institute was accepting fees from its students in cash or cheque or online transfer for an
amount up to ₹10000/-, and if the amount of fees is above ₹10000/- by cheque or online transfer only. In the
year 2017 the institute’s total fees collection was of ₹82 crores. Your firm has been appointed the internal
auditor by the Institute and during the verification of vouchers for fee receipts you noticed that cash receipts
of approximately ₹5 lakhs were directly credited in bank account instead of routing through cash account.
Management explained that since the deposit slips used for fees received in cash or cheque are same, the
accountant has erroneously shown them in the bank account but he has always tallied the cash at day end and
those cash receipts were deposited in the bank account same day. Whether the auditor will consider the
discrepancy as material for audit report?
(a) The auditor should disclose the fact with his comment in the audit report as it is material for giving a
true and fair view on financial statements.
(b) It is not a material discrepancy as the total receipts amount will remain the same and the fees collected
in cash are deposited in bank account only.
(c) The auditor should verify that whether such cash receipts reflects in bank statement on the same day and
cash ledger reconciles with the cash book on the respective dates or not. If it is followed then auditor can
include the matter in observation paragraph with his comments else disclose the matter as major internal
control lapse.
(d) Auditor can ask the management to give a representation letter in writing.
Reason: Instead of relying only on management representations, the auditor should verify that whether
such cash receipts reflects in bank statement on the same day and cash ledger reconciles with the cash
book on the respective dates or not. If it is followed then auditor can include the matter in observation
c
paragraph with his comments else disclose the matter as major internal control lapse.
67. You are a manager in the audit department of Narang & Co, and you are dealing with several ethical and
professional matters raised at recent management meetings, all of which relate to audit clients of your firm:
One of your client Bernwood Co has a year ending 31 March 2018. During this year, the company
established a pension plan for its employees, and this year end the company will be recognising for the first
time a pension deficit on the balance sheet, in accordance with Ind AS 19 Employee Benefits. The finance
director of Bernwood Co has contacted the audit engagement partner, asking if your firm can provide an
actuarial valuation service in respect of the amount recognised.
Which of the following options need to be considered by the audit engagement partner?
(a) The issue is whether there is a self-review threat, as the valuation of the amount recognised would be
recorded in the financial statements. The audit partner should decline the work of valuation service.
(b) The issue is whether the audit firm would be likely to possess the requisite competence to provide such a
valuation service. The audit partner should decline since not professionally qualified to provide the
valuation service.
(c) Narang & Co. needs to assess the materiality of the figure, and the degree of subjectivity involved. If it
considers that safeguards like using separate personnel, performing a second partner review, could
reduce the threat to an acceptable level, then it can go ahead with both the audit and the valuation
service.
(d) The audit partner could go ahead with the valuation service and disclose the fact in its audit report about
the service provided during the period. This will safeguard and reduce the threat to an acceptable level.
Reason: Engagement-specific safeguards in the work environment like involving an additional
professional accountant, consulting an independent party, discussing ethical issues, rotating senior
assurance team personnel or involving another firm may eliminate or reduce threats to an acceptable
c
level.
21 | P a g e
68. KJA Ltd is in the business of consultancy services. The business of the company has been growing
significantly and considering the nature of business, it becomes subject to various laws and regulations.
Compliances have also increased because of this and management has found this very difficult to keep in
pace with the changing regulatory requirements. The statutory auditors of the company, Shilpa & Associates,
have considered compliance with laws and regulations as a significant risk for the purpose of their audit.
Auditors had a audit planning meeting with the management and management has understood that it will be
their responsibility including those charged with governance to ensure that the company’s operations are
fully compliant with the provisions of various laws and regulations. This may also have an impact on the
reported amounts and disclosures in the financial statements of the company.
Management is planning to ensure full compliance and may implement policies and procedures, wherever
required, to assist in the prevention and detection of non-compliance with laws and regulations. Please
suggest among the following which one will not be a policy/ procedure to be implemented to assist in the
prevention and detection of non-compliance with laws and regulations in accordance with SA 250?
(a) Maintaining a register of significant transactions of the company with comparison to particular industry
and a record of complaints.
(b) Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements.
(c) Developing, publicising and following a code of conduct.
(d) Instituting and operating appropriate systems of internal control.
Reason: Maintaining a register of significant transactions of the company with comparison to
particular industry and a record of complaints will not be useful for prevention and detection of non-
compliance with laws and regulations because compliance of laws and regulations should not be
a
compared with Industry compliances. An entity shall comply with all laws and regulations applicable
to it.
69. You are an audit senior of Joyous Accountants and are currently conducting the audit of Stalwart Co for the
year ended 31 March 2018. Below is an extract from the list of supplier statements as at 31 March 2018 held
by the company and corresponding payables ledger balances at the same date along with some commentary
on the noted differences:
Name of Supplier Supplier Statement Balance(₹) Payables Ledger Balance(₹)

AB Co 90,000 70,000
CD Co 1,85,000 1,15,000
AB Co: The difference in the balance is due to an invoice which is under dispute due to faulty goods which
were returned on 29 March 2018.
CD Co: The difference in the balance is due to the supplier statement showing an invoice dated 27 March
2018 for Rs. 70,000 which was not recorded in the financial statements until after the year end. The payables
clerk has advised the audit team that the invoice was not received until 3 April 2018.
The audit manager has asked you to review the full list of trade payables and select balances on which
supplier statement reconciliations will be performed. Which of the following statement is correct in respect
of including or excluding from your sample?
(a) Exclude with material balances at the year-end.
(b) Exclude suppliers which have a high volume of business with Stalwart Co
(c) Include major suppliers with nil balances at the year-end.
(d) Include suppliers where the statement agrees to the ledger.
Reason: As per SA 505, External Confirmations the auditor shall determine the information to be
confirmed and the appropriate confirming parties. While selecting the appropriate confirming party,
the auditor shall include parties with Nil balance at the year end to ensure whether the account balance
c
is actually Nil or not and also examine the adjustments, if any which rendered the account balance as
NIl.
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70. You are an audit senior at Govardhan & Co and are currently performing the final audit of Bingham Co. for
the year ended 31 March 2018. The company is a manufacturer and retailer of table lamps. The current audit
senior is ill, and you have been asked to complete the audit of payroll in their absence. On arrival at the head
office of Bingham Co, you determine the following data from a review of the current year and prior year
audit files:
 As at 31 March 2017, the company had 350 employees
 On 1 April 2017, 10% of staff were made redundant, effective immediately, due to discontinuation of a
product line
 On 1 June 2017, all remaining staff received a 5% pay rise
 Over the course of the year, sales levels met performance targets which resulted in a fixed bonus of
Rs.8,000 being paid to each employee on 31 March 2018.
The following audit evidence has been gathered relating to the accuracy of wages and salaries for Bingham
Co.
1. Proof in total calculation performed by an audit team member

2. Written representation from the directors of Bingham Co confirming the accuracy of wages and
salaries
3. Verbal confirmation from the finance director of Bingham Co confirming the accuracy of wages and
salaries
4. Recalculation of the gross and net pay for a sample of employees by an internal audit team member
of Bingham Co.
What is the order of reliability of the audit evidence starting with the MOST RELIABLE first?
(a) Audit evidence - 1, 2, 3, 4
(b) Audit evidence - 1, 4, 2, 3
(c) Audit evidence - 4, 1, 2, 3
(d) Audit evidence - 4, 1, 3, 2
Reason: As per SA 501, reliability of audit evidence is high in the following cases-
1. obtained directly by the auditor
2. obtained from an independent third party
b
3. obtained through written representations of management
4. obtained from original documents
5. obtained in written form
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CA FINAL

OLD AND NEW COURSE

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i) Information about integrity of management

(a) (i) and (ii)

11. The assessment of the risks of material misstatement may be expressed in

12. Audit documentation provides:

Particulars Amount (in Rs.)

Reason: As per SA 230,Audit documentation, examples of Audit documentation includes- Audit

audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled

(a) (i) ,(ii) and (iii)

(a) Ex-dividend basis

(a) Advance Billing

(a) Investigation by Serious Fraud Investigation Office

Name of Supplier Supplier Statement Balance(₹) Payables Ledger Balance(₹)

1. Proof in total calculation performed by an audit team member

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