CA INTER AUDIT

CORRECT/ INCORRECT QUESTIONS MUST DO TO SCORE 80 +

BY CA SHIVAM NAGPAL (AUDIT + IDT FACULTY)
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CHAPTER 1 – NATURE, SCOPE AND OBJECTIVES OF AUDIT

1. The basic objective of audit does not change with reference to nature, size or form of an
entity.

Correct: An audit is an independent examination of financial information of any entity,

whether profit oriented or not, and irrespective of its size or legal form, when such an
examination is conducted with a view to expressing an opinion thereon. It is clear that the
basic objective of auditing, i.e., expression of opinion on financial statements does not
change with reference to nature, size or form of an entity.

2. The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements.

Correct: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with Standards on Auditing”, the purpose of an audit is to enhance
the degree of confidence of intended users in the financial statements. This is achieved by
the expression of an opinion by the auditor on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting
framework.

3. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error.

Correct: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with Standards on Auditing”, the auditor is not expected to, and
cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or error. This is
because there are inherent limitations of an audit, which result in most of the audit evidence
on which the auditor draws conclusions and bases the auditor’s opinion being persuasive
rather than conclusive.

4. The audit engagement letter is sent by the client to auditor.

 Incorrect: As per SA 210 “Agreeing the Terms of Audit Engagements”, the Audit engagement
letter is sent by the auditor to his client.
5. Specific disclosure is required of the fundamental accounting assumptions followed in the
financial statements.

Incorrect, as per AS 1, “Disclosure of Accounting Policies”, specific disclosure of the

fundamental accounting assumption is required if they are not followed in the financial
statements.

6. An Auditor is considered to lack independence if the partner of the audit firm deals with
shares and securities of the audited entity.

Correct: As per section 141 (3)(d), a person shall not be eligible for appointment as an
auditor of a company namely- a person, or his relative or partner is holding any security of
or interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company. From the above it can be concluded that if the partner
deals with shares and securities of the audited entity, he would be lacking independence,
hence, disqualified to be appointed as an auditor.
Further, the Code of Ethics for Professional Accountants, prepared by the International
Federation of Accountants (IFAC) identifies five types of threats and if partner of the firm
deals with shares and securities of the audited firm then such threat is known as the
Advocacy Threats and auditor will be lacking independence.

7. The Audit Engagement documentations should ordinarily be retained by the auditor for
minimum of six years from the date of the auditor's report or the date of the group
auditor's report, whichever is later.

Incorrect: SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements ordinarily is no
shorter than seven years from the date of the auditor’s report, or, if later, the date of the
group auditor’s report.

8. Mr. S, one of the new team members of the auditor of Extremely Effective Limited was of
the view that for the purpose of conducting an audit, only knowledge of direct tax is
required whereas no knowledge of indirect tax is required.

Incorrect: The viewpoint of Mr. S is incorrect because for the purpose of conducting an
audit, proper knowledge of both direct tax as well as indirect tax is required.

9. According to Mr. H, one of the team members of the auditor of Very Essential Limited was
of the view that no relation exists between accounting and auditing from the point of view
of a company.

Incorrect: The viewpoint of Mr. H is incorrect because there exists a proper relation between
accounting and auditing from the point of view of a company. Audit is conducted for
financial statements of a company and those financial statements are prepared with the
help of books of accounts of that company. In order to properly conduct an audit of a
 company, an auditor is required to be aware of accounting principles and accounting policies
of that company.

CHAPTER 2: AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME

1. The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since changes in
one may result in consequential changes to the other.

Correct: Once the overall audit strategy has been established, an audit plan can be developed to
achieve the audit objectives through the efficient use of the auditor’s resources. The establishment
of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential
processes, but are closely interrelated since changes in one may result in consequential changes to
the other.

2. Establishing an overall audit strategy that sets the scope, timing and direction of the audit,
and that guides the development of the audit plan is prerogative of the management.

Incorrect. The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan.

3. Planning is a discrete phase of an audit

Incorrect. Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begin shortly after (or in connection with) the completion of the previous
audit and continues until the completion of the current audit engagement. Planning, however,
includes consideration of the timing of certain activities and audit procedures that need to be
completed prior to the performance of further audit procedures.

4. Materiality for the financial statements as a whole (and, if applicable, the materiality level
or levels for particular classes of transactions, account balances or disclosures) does not
need any revision.

Incorrect: Materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account balances or
disclosures) may need to be revised as a result of a change in circumstances that occurred
during the audit (for example, a decision to dispose of a major part of the entity’s business),
new information, or a change in the auditor’s understanding of the entity and its operations
as a result of performing further audit procedures.

5. A detailed Audit Programme once prepared for a business can be used for all business under
all circumstances.

Incorrect. Businesses vary in nature, size and composition; work which is suitable to one
business may not be suitable to others; efficiency and operation of internal controls and the
exact nature of the service to be rendered by the auditor are the other factors that vary from
assignment to assignment. On account of such variations, evolving one audit programme
applicable to all business under all circumstances is not practicable
 6. The audit plan is more detailed than the overall audit strategy.

Correct. The audit plan is more detailed than the overall audit strategy that includes the nature, timing
and extent of audit procedures to be performed by engagement team members. Planning for these
audit procedures takes place over the course of the audit as the audit plan for the engagement
develops.

CHAPTER 3: – AUDIT DOCUMENTATION AND AUDIT EVIDENCE

1. As per SA 230 on “Audit Documentation”, the working papers are not the property of
the auditor.

Incorrect: As per SA 230 on “Audit Documentation” the working papers are the property of
the auditor and the auditor has right to retain them. He may at his discretion can make
available working papers to his client. The auditor should retain them long enough to meet
the needs of his practice and legal or professional requirement.

2. Purchase invoice is an example of internal evidence.

Incorrect: Internal evidence is the evidence that originates within the client’s
organisation. Since purchase invoice originates outside the client’s organisation,
therefore, it is an example of external evidence.

3. Sufficiency is the measure of the quality of audit evidence.

Incorrect: Sufficiency is the measure of the quantity of audit evidence. On the other
hand, appropriateness is the measure of the quality of audit evidence.

4. Inquiry alone is sufficient to test the operating effectiveness of controls.

Incorrect: Inquiry along with other audit procedures (for example observation,
inspection, external confirmation etc.) would only enable the auditor to test the
operating effectiveness of controls. Inquiry alone is not sufficient to test the operating
effectiveness of controls.

5. 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.

Incorrect: SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality

Control (SQC) 1, provides that, unless otherwise specified by law or regulation, audit
documentation is the property of the auditor. He may at his discretion, make portions
of, or extracts from, audit documentation available to clients, provided such disclosure
does not undermine the validity of the work performed, or, in the case of assurance
engagements, the independence of the auditor or of his personnel.

6. When auditor inquires the management as part of the audit procedures it should be
formal written form only and not informal oral inquiries.
 Incorrect: When auditor inquires the management as part of audit procedures such
inquiries may range from formal written inquiries to informal oral inquiries.

7. Assertions refer to the representations by the auditor to consider the different types of
the potential misstatements that may occur.

Incorrect: Assertions refer to representations by management that are embodied in the

financial statements as used by the auditor to consider the different types of the potential
misstatements that may occur.

CHAPTER 4: RISK ASSESSMENT AND INTERNAL CONTROL

1. As per section 138 of the Companies Act, 2013 private companies are not required to
appoint internal auditor.

Incorrect: Section 138 of the Companies Act, 2013 requires every private company to
appoint an internal auditor having turnover of ` 200 crore or more during the preceding
financial year; or outstanding loans or borrowings from banks or public financial
institutions exceeding ` 100 crore or more at any point of time during the preceding
financial year.

2. There is direct relationship between materiality and the degree of audit risk.

Incorrect: There is an inverse relationship between materiality and the degree of audit risk.
The higher the materiality level, the lower the audit risk and vice versa. For example, the
risk that a particular account balance or class of transactions could be misstated by an
extremely large amount might be very low but the risk that it could be misstated by an
extremely small amount might be very high.

3. Control risk is the susceptibility of an account balance or class of transactions to

misstatement that could be material either individually or, when aggregated with
misstatements in other balances or classes, assuming that there were no related internal
controls.

Incorrect: Inherent risk is the susceptibility of an account balance or class of transactions

to misstatement that could be material either individually or, when aggregated with
misstatements in other balances or classes, assuming that there were no related internal
controls.

4. Tests of control are performed to obtain audit evidence about the effectiveness of
Internal Controls Systems.

Correct: Tests of Control are performed to obtain audit evidence about the
effectiveness of: (a) the design of the accounting and internal control systems that
is whether, they are suitably designed to prevent or detect or correct material
misstatements and (b) the operation of the internal controls throughout the period.
 5. Maintenance of Internal Control System is the responsibility of the Statutory Auditor.

Incorrect: The management is responsible for maintaining an adequate accounting system

incorporating various internal controls to the extent appropriate to the size and nature of
the business. Maintenance of Internal Control System is responsibility of management
because the internal control is the process designed, implemented and maintained by
those charged with governance/management to provide reasonable assurance about the
achievement of entity’s objectives.

6. One of the directors of Very Fresh Fruits Limited was of the view that internal auditor to
be appointed must be an employee of Very Fresh Fruits Limited.

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

7. Mr. W, one of the team members of auditor of Different Limited was of the view that
understanding the Internal Control of Different Limited will not help in developing an
Audit Programme.

Incorrect: Understanding the Internal Control of Different Limited will help in developing
an Audit Programme because it will assist the auditor and his team to understand as to
how much they can rely on internal control of the company and what audit procedures
would be appropriate to be used during the course of audit.

8. Information obtained by performing risk assessment procedures shall not be used by the
auditor as audit evidence to support assessments of the risks of material misstatement.

Incorrect: Information obtained by performing risk assessment procedures and related

activities may be used by the auditor as audit evidence to support assessments of the risks of
material misstatement.

CH 5: FRAUD AND RESPONSIBILITES OF AUDITOR

1. Teeming and lading is one of the techniques of inflating cash payments.

Incorrect: Teeming and Lading is one of the techniques of suppressing cash receipts and
not of inflating cash payments. Money received from one customer is misappropriated and
the account is adjusted with the subsequent receipt from another customer and so on.

2. Fraud can be termed as intentional error.

Correct: Fraud is the word used to mean intentional error. This is done deliberately which
implies that there is intent to deceive, to mislead or at least to conceal the truth. It follows
 that other things being equal they are more serious than unintentional errors because of
the implication of dishonestly which accompanies them.

3. Auditor needs to report to Central Government in case of fraud involving 20 lakhs rupees.

Incorrect: As per section 143(12) of the Companies Act, 2013, if an auditor of a company, in
the course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or
employees of the company, he shall immediately report the matter to the Central
Government (in case amount of fraud is ` 1 crore or above) or Audit Committee or Board in
other cases (in case the amount of fraud involved is less than 1 crore) within such time and
in such manner as may be prescribed.
Thus, fraud involving amount of 20 lakh rupees should be reported to Audit Committee.

4. The primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and management.

Correct: As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of

Financial Statements’. It is important that management, with the oversight of those charged
with governance place a strong emphasis on fraud prevention, which may reduce
opportunities for fraud to take place, and fraud deterrence, which could persuade
individuals not to commit fraud because of the likelihood of detention and punishment. This
involves a commitment to create a culture of honesty and ethical behavior which can be
reinforced by an active oversight by those charged with governance.

5. Fraudulent financial reporting only involves manipulation, falsification or alteration of

accounting records or supporting documents from which financial statements are
prepared.

Incorrect: As per SA 240, ”The Auditor’s Responsibilities Relating to fraud in an Audit of

Financial Statements’, fraudulent financial reporting may involve manipulation, falsification
or alteration of accounting records or supporting documents from which financial
statements are prepared, misrepresentation in or intentional omission from, financial
statements of events, transaction or other significant information or intentional
misapplication of accounting principles relating to amounts, classification, manner of
presentation or disclosure.

6. Unusual delays by the entity in providing requested information shows problematic or

unusual relationships between the auditor and management.

Correct: It is a strong example of circumstances that indicate the possibility of fraud. This
happiness only because of the Management’s intolerance towards the auditor’s
Professional scepticism
 7. In comparing management fraud with employee fraud, the auditor’s risk of failing to
discover the fraud is less for management fraud.

Incorrect: In comparing management fraud with employee fraud, the auditor’s risk of
failing to discover the fraud is greater for management fraud because of management’s
ability to override existing internal controls.

8. Excessive interest by management in maintaining or increasing the entity’s inventory price

or earnings trend is an example of Fraud Risk Factor related to Opportunities.

Incorrect: Excessive interest by management in maintaining or increasing the entity’s

inventory price or earnings trend is an example of Fraud Risk Factor related to
Rationalization.

9. Misstatements in the financial statements can arise from fraud only.

Incorrect: Misstatements in the financial statements can arise from either fraud or error.
The distinguishing factor between fraud and error is whether the underlying action that
results in the misstatement of the financial statements is intentional or unintentional.

10. Misappropriation of Assets involves the theft of an entity’s assets and is often perptrated
by employees in relatively large and material amounts.

Incorrect: - Misappropriation of Assets involves the theft of an entity’s assets and is often
perpetrated by employees in relatively small and immaterial amounts.

11. An auditor conducting an audit in accordance with SAs is responsible for obtaining absolute
assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.

Incorrect: - An auditor conducting an audit in accordance with SAs is responsible for obtaining
reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. As described in SA200, “Overall Objectives of
the Independent Auditor and the Conduct of an Audit in Accordance with Standards on
Auditing,” owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements will not be detected, even though the audit
is properly planned and performed in accordance with the SAs.

CHAPTER 6: AUDIT IN AN AUTOMATED ENVIRONMENT

1. All automated environments are complex.

Incorrect: The complexity of an automated environment depends on various factors

including the nature of business, level of automation, volume of transactions, use of ERP
 and so on. There could be environment where dependence on IT and automation is
relatively less or minimal and hence, considered less complex or even non-complex.

2. In an audit of financial statements, the auditor should plan response to all IT risks.

Incorrect. The auditor should plan response to those IT risks that are relevant to
financial reporting and not “all” IT risks.

3. General IT controls support the functioning of Application controls.

Correct. General IT controls support the functioning of automated application controls

and IT dependent controls.

4. Inquiry is often the most efficient audit testing method, but least effective.

Correct. Inquiry is the most efficient but least effective. Moreover, testing through
inquiry alone is not sufficient. Inquiry should be corroborated by applying any one or a
combination of observation, inspection or reperformance.

5. Specialised audit tools like IDEA, ACL are required to perform data analytics.

Incorrect. Even though specialised audit tools are very useful, such tools are not always
required or necessary to carry out data analytics. More commonly available spreadsheet
applications like MS-Excel can also be effectively used for carrying out data analytics

6. A combination of processes, tools and techniques that are used to tap vast amounts of
electronic data to obtain meaningful information is known as meaningful data.

Incorrect. A combination of processes, tools and techniques that are used to tap vast
amounts of electronic data to obtain meaningful information is known as Data Analytics.

7. During the assessment of Internal Controls, if the auditor can test Compensating controls,
he should obtain evidence of other mitigating factors.

Incorrect. If the auditor can test Compensating controls, he should obtain additional
evidence that may be required. Obtaining evidence of other mitigating factors is
required when he can’t test compensating controls during his assessment of the Internal
Controls.

8. An automated environment basically refers to a business environment where the

processes, operations, accounting except the decisions are carried out by using computer
systems.

Incorrect. An automated environment basically refers to a business environment

where the processes, operations, accounting and even decisions are carried out by
using computer systems
 9. The Company auditor need not report on the efficacy of Internal Financial controls in his
Audit Report in the case of a One Person Company.

Correct. A One Person Company and Small Company are exempted frpm this
requirement as per proviso to Section 143(3)(i).

10. Generally, applying inquiry in combination with reperformance as audit testing method
gives the most effective and efficient audit evidence

Incorrect. Generally, applying inquiry in combination with inspection gives the most effective
and efficient audit evidence

CHAPTER 7: AUDIT SAMPLING

1. The method which involves dividing the population into groups of items is knows
as block sampling.

Incorrect: The method which involves dividing the population into groups of
items is known as cluster sampling whereas block sampling involves the selection
of a defined block of consecutive items.

2. Universe refers to the entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions.

Incorrect: Population refers to the entire set of data from which a sample is
selected and about which the auditor wishes to draw conclusions.

3. Non-Statistical sampling is an approach to sampling that has the random selection

of the sample items; and the use of probability theory to evaluate sample results,
including measurement of sampling risk characteristics.

Incorrect: Statistical sampling is an approach to sampling that has the random

selection of the sample items; and the use of probability theory to evaluate
sample results, including measurement of sampling risk characteristics.

4. Sample need not be representative

Incorrect: Whatever may be the approach non-statistical or statistical sampling,

the sample must be representative. This means that it must be closely similar to
the whole population although not necessarily exactly the same. The sample
must be large enough to provide statistically meaningful results.

5. The objective of stratification is to increase the variability of items within each

stratum and therefore allow sample size to be reduced without increasing sampling
risk.
 Incorrect: The objective of stratification is to reduce the variability of items
within each stratum and therefore allow sample size to be reduced without
increasing sampling risk.

6. When statistical sampling is used to select a sample, sample need not be

representative because the statistical sampling takes care of the representation.

Incorrect: Whatever may be the approach non-statistical or statistical sampling,

the sample must be representative. This means that it must be closely similar to
the whole population although not necessarily exactly the same. The sample
must be large enough to provide statistically meaningful results.

7. Stratified Sampling is used for homogeneous population.

Incorrect: Stratified sampling is used when the population is diversified i.e

heterogeneous. The population is divided into sub population having similar
characteristics. Sample are then chosen from these sub populations which are
called as Stratum. Therefore, stratified sampling is not useful in case of
homogeneous population.

8. Non-statistical sampling is considered to be more scientific than the statistical

sampling.

Incorrect: Statistical sampling uses scientific method of choosing samples from a

given population. The use of probability theory is involved in statistical sampling
so that every sampling unit has an equal chance of getting selected. In the non-
statistical sampling, auditors’ judgment and past experience is used to choose
samples without any scientific method.

9. In case of Statistical sampling, auditor’s bias in choosing sample is involved.

Incorrect: Statistical sampling uses scientific method choosing samples from a

given population. The use of probability theory is involved in statistical sampling
so that every sampling unit has an equal chance of getting selected. In the non-
statistical sampling, auditor’s judgment and past experience is used to choose
samples without and scientific method. Hence, personal bias is involved in Non-
statistical sampling and not Statistical.

10. In stratified sampling, the conclusion drawn on each stratum can be directly
projected to the whole population.

Incorrect: In case of stratified sampling, the conclusions are drawn on the

stratum. The combination of all the conclusions on stratum together will be used
to determine the possible effect of misstatement or deviation. Hence the
samples are used to derive conclusion only on the respective stratum from where
they are drawn and not the whole population.
 11. Low acceptable sampling risk requires larger sample size.

Correct: Sampling risk arises from possibility that the auditor’s conclusion based
upon sample may be different from conclusion that would have been reached if
same audit procedures were applied on the entire population. If acceptable
sampling risk is low, large sample size is needed.

CH:8 ANALYTICAL PROCEDURES

1. As per the Standard on Auditing (SA) 520 “Analytical Procedures” ‘the term
“analytical procedures” means evaluations of financial information through
analysis of plausible relationships among financial data only.

Incorrect. As per the Standard on Auditing (SA) 520 “Analytical Procedures” the term
“analytical procedures” means evaluations of financial information through analysis
of plausible relationships among both financial and non-financial data.

2. Auditor can depend on routine checks to disclose all the mistakes or manipulation
that may exist in accounts.

Incorrect. Routine checks cannot be depended upon to disclose all the mistakes or
manipulation that may exist in accounts, certain other procedures also have to be
applied like trend and ratio analysis in addition to reasonable tests.

3. Only purpose of analytical procedures is to obtain relevant and reliable audit

evidence when using substantive analytical procedures.

Incorrect. Analytical procedures use comparisons and relationships to assess whether

account balances or other data appear reasonable. Analytical procedures are used for
the following purposes:
(i) To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
(ii) To design and perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion as to whether the financial
statements are consistent with the auditor’s understanding of the entity.

4. Analytical Procedures are required in the planning phase only.

Incorrect. Analytical Procedures are required in the planning phase and it is often
done during the testing phase. In addition these are also required during the
completion phase.

5. Substantive analytical procedures are generally less applicable to large volumes of

transactions that tend to be predictable over time
 Incorrect. Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time.

6. Ratio analysis is useful in analyzing revenue and expense account only.

Incorrect: Ratio analysis is useful for analysing asset and liability accounts as well as
revenue and expense accounts

7. Reasonableness test rely only on the events of the prior period like other analytical
procedures.

Incorrect: Unlike trend analysis, Reasonableness test does not rely on events of prior
periods, but upon non-financial data for the audit period under consideration.

8. The statutory auditor of the company can apply analytical procedures to the
standalone financial statements of a company only and not to the consolidated
financial statements.

Incorrect: Analytical procedures may be applied to consolidated financial

statements, components and individual elements of information.

CH 9: AUDIT OF ITEMS OF FINANCIAL ITEMS

1. Employee benefits expenses represent the sum an entity pays to its employees for
their labour/ efforts only.

Incorrect: Employee benefits expenses, commonly called payroll expenses,

represent the aggregate sum an entity pays to its employees for their labour/ efforts,
as well as associated expenses such as perquisites/ benefits, post- employment
benefits like gratuity, superannuation, leave encashment, provident fund
contribution etc. as well as towards their hiring, their welfare and training.

2. Dividends are recognised in the statement of profit and loss only when the entity’s
right to receive payment of the dividend is established.

Incorrect: Dividends are recognised in the statement of profit and loss only when:
(i) the entity’s right to receive payment of the dividend is established;
(ii) it is probable that the economic benefits associated with the dividend will flow
to the entity; and
(ii) the amount of the dividend can be measured reliably.

3. “Sweat Equity Shares” means equity shares issued by the company to employees
or directors at a premium or for consideration other than cash for providing know-
 how or making available right in the nature of intellectual property rights or value
additions, by whatever name called.

Incorrect: “Sweat Equity Shares” means equity shares issued by the company to
employees or directors at a discount or for consideration other than cash for
providing know-how or making available right in the nature of intellectual property
rights or value additions, by whatever name called.

4. Capital reserves represent profits that are available for distribution to shareholders
held for the time being or any one or more purpose.

Incorrect: Revenue reserves represent profits that are available for distribution to
shareholders.

5. A capital reserve, generally, can be utilised for writing down fictitious assets or
losses or (subject to provisions in the Articles) for issuing bonus shares if it is
realised.

Correct: A capital reserve, generally, can be utilised for writing down fictitious
assets or losses or (subject to provisions in the Articles) for issuing bonus shares if
it is realised. But the amount of share premium or capital redemption reserve
account can be utilised only for the purpose specified in Sections 52 and 55
respectively of the Companies Act, 2013.

6. If Company X’s balance sheet shows building with carrying amount of ` 100 lakh,
the auditor shall assume only one point that the management has only asserted
that the building recognized in the balance sheet exists as at the period-end.

Incorrect: If Company X’s balance sheet shows building with carrying amount of ` 100
lakh, the auditor shall assume that the management has claimed/ asserted that:
The building recognized in the balance sheet exists as at the period- end (existence
assertion);
Company X owns and controls such building (Rights and obligations assertion);
The building has been valued accurately in accordance with the measurement
principles (Valuation assertion);
All buildings owned and controlled by Company X are included within the carrying
amount of 100 lakh (Completeness assertion).

7. The securities premium account may only be applied by the Company towards the
issue of unissued shares of the company to the members of the company as fully
paid bonus shares.

Incorrect: The securities premium account may be applied by the Company:

(a) towards the issue of unissued shares of the company to the members of the company as
fully paid bonus shares;
(b) in writing off the preliminary expenses of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue
of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.

8. Material and wages are considered to be revenue expenditure when incurred for
construction of building.

Incorrect: Material and Wages incurred on construction of building qualify to be

capital expenditure as per AS 10 “Plant, Property and Equitment”. Therefore, these
have to be added to the cost of the asset i.e building and shall not be expensed off
to Statement of Profit and Loss.

9. Tangible assets are depreciated when the asset is actually put to active use.

Incorrect: Depreciation is a fall in value of asset due to obsolescence, usage

and effluxion of time, Therefore, depreciation is charged when the asset is
ready for use . Active use of asset is not a mandatory criteria for charge of
depreciation.

10. Increase in authorised capital of the company requires special resolution to be

passed at the general meeting.

Incorrect: Increase in Authorised capital requires alteration of capital clause of

memorandum of Association. Therefore, ordinary resolution is passed for increase
in authorised capital of the company as per the Companies Act, 2013.

11. Capital redemption reserve can be used for distribution of dividends.

Incorrect: Capital Redemption reserve is not a free reserve. It is a restrictive

reserve and can be used only for purposes given in the Act. Since it is not a free
reserve, it cannot be utilised for payment of dividends. CRR can be used only for
the purpose of issuing fully paid up bonus shares.

12. Dividends are recommended by the Board, and declared by the Shareholders.

Correct: The dividends are recommended by the Board of Directors by passing a

resolution at the board meeting. The Shareholders declare the dividends at the AGM
by passing an ordinary resolution. Declaration of dividend is an item of ordinary
business. However, the shareholders can decrease the amount of dividends
recommended by the board but cannot increase it.

13. In verifying Trade Receivables balance, Direct Confirmation Procedure is one of the
important audit activity.

Correct: While auditing trade receivable balance, direct confirmations as per SA 505,
is considered to be the most important audit activity. Direct confirmation can be
sought from the debtors directly confirming their balance due. The replies to the
confirmation can be then matched with the records maintained by the client. Any
 discrepancies so revealed, can be investigated and checked in detail for possibility
of any risk of material misstatement. Auditor selects few debtors’ balances and ask
the client to prepare the confirmations properly addressed to the debtors. Auditor
maintains strict control over this process.
CH:10 COMPANY AUDIT

1. The first auditor of a Government company was appointed by the Board in its
meeting after 10 days from the date of registration.

Incorrect: According to section 139(7) of the Companies Act, 2013, in the case of a
Government company, the first auditor shall be appointed by the Comptroller and
Auditor- General of India within 60 days from the date of registration of the company.
If CAG fails to make the appointment within 60 days, the Board shall appoint in next
30 days.

2. Director's relative can act as an auditor of the company.

Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be
eligible for appointment as an auditor of a company whose relative is a Director or is
in the employment of the Company as a director or key Managerial Personnel.

3. If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company,

every partner of a firm shall be authorized to act as an auditor.

Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm including a
limited liability partnership (LLP) is appointed as an auditor of a company, only the
partners who are Chartered Accountants shall be authorised to act and sign on behalf
of the firm.

4. AB & Co. is an audit firm having partners Mr. A and Mr. B. Mr. C, the relative of Mr.
B is holding securities having face value of ` 2,00,000 in XYZ Ltd. AB & Co. is qualified
for being appointed as an auditor of XYZ Ltd.

Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be
appointed as an auditor of a company if his relative is holding any security of or interest in
the company of face value exceeding ` 1 lakh.
Therefore, AB & Co. shall be disqualified for being appointed as an auditor of XYZ Ltd.
as Mr. C, the relative of Mr. B who is a partner in AB & Co., is holding securities in XYZ
Ltd. having face value of ` 2 lakh.

5. The auditor of a Ltd. Company wanted to refer to the minute books during audit but
board of directors refused to show the minute books to the auditors.

Incorrect: The provisions of Companies Act, 2013 grant rights to the auditor to access
books of account and vouchers of the company. He is also entitled to require
information and explanations from the company. Therefore, he has a statutory right
to inspect the minute book.
6. Manner of rotation of auditor will not be applicable to company A, which is having
paid up share capital of ` 15 crores and having public borrowing from nationalized
bank of ` 50 crore because it is a Private Limited Company.

Incorrect: According to section 139 of the Companies Act, 2013, the provisions related to
rotation of auditor are applicable to all private limited companies having paid up share capital
of ` 20 crore or more; and all companies having paid up share capital of below threshold limit
mentioned above, but having public borrowings from financial institutions, banks or public
deposits of ` 50 crore or more.
Although company A is a private limited company yet it is having public borrowings
from nationalized bank of ` 50 crores, therefore it would be governed by provisions
of rotation of auditor.

7. The auditor should study the Memorandum and Articles of Association to see the
validity of his appointment.

Incorrect: The auditor should study the Memorandum of Association to check the objective
of the company to be carried on, amount of authorized share capital etc. and Articles of
Association to check the internal rules, regulations and ensuring the validity of transactions
relating to accounts of the company.
To see the validity of appointment, the auditor should ensure the compliance of the
provisions of section 139, 140 and 141 of the Companies Act, 2013. In addition, the
auditor should study the appointment letter & the prescribed Form submitted to the
Registrar of the Companies to see the validity of his appointment.

8. Managing director of A Ltd. himself appointed the first auditor of the company.

Incorrect: As per section 139(6) of the Companies Act, 2013, the first auditor of a company,
other than a government company, shall be appointed by the Board of directors within 30
days from the date of registration of the company.
Therefore, the appointment of first auditor made by the managing director of A Ltd.
is in violation of the provisions of the Companies Act, 2013.

9. A Chartered Accountant holding securities of S Ltd. having face value of ` 950 is

qualified for appointment as an auditor of S Ltd.

Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be
appointed as an auditor of a company if he is holding any security of or interest in the
company.
As the chartered accountant is holding securities of S Ltd. having face value of ` 950,
he is not eligible for appointment as an auditor of S Ltd.

10. Mr. N, a member of the Institute of Company Secretary of India, is qualified to be

appointed as auditor of XYZ Limited.

Incorrect: As per section 141 of the Companies Act, 2013, a person shall be eligible for
appointment as an auditor of a company only if he is a chartered accountant.
 Thus, Mr. N is disqualified to be appointed as an auditor of XYZ Limited

11. The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is
required to fill the casual vacancy of an auditor only after taking into account the
recommendations of the audit committee.

Correct: Where a company is required to constitute an Audit Committee under

section 177, all appointments, including the filling of a casual vacancy of an auditor
under this section shall be made after taking into account the recommendations of
such committee.

12. Bhartiya Gas Ltd. a Government Company, the Comptroller and Auditor General of
India shall, in respect of a financial year, appoint an auditor duly qualified to be
appointed as an auditor of companies under this Act, within a period of 180 days
from the end of the financial year, who shall hold office till the end of the next
Financial year.

Incorrect- As per section 139(5), in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, the Comptroller and
Auditor-General of India shall, in respect of a financial year, appoint an auditor duly
qualified to be appointed as an auditor of companies under this Act, within a period
of 180 days from the commencement of the financial year, who shall hold office till
the conclusion of the annual general meeting.

13. CA K has resigned as an auditor after 2 months of his appointment in NML Ltd. He
needs to file ADT-3 with the Registrar within 60 days from the date of resignation.

Incorrect: As per section140(2) of the Companies Act, 2013, the auditor who has
resigned from the company shall file within a period of 30 days from the date of
resignation, a statement in the prescribed Form ADT–3(as per Rule 8 of CAAR) with
the company and the Registrar.

14. The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is
required to fill the casual vacancy of an auditor only after taking into account the
recommendations of the audit committee.

Correct: Where a company is required to constitute an Audit Committee under

section 177, all appointments, including the filling of a casual vacancy of an auditor
under this section shall be made after taking into account the recommendations of
such committee.

15. Any partner of an LLP, who is appointed as an auditor of a company, can sign the
audit report.

Incorrect: Section 141(2) of the Companies Act, 2013 states that where a firm
including a limited liability partnership is appointed as an auditor of a company, only
 the partners who are chartered accountants shall be authorised to act and sign on
behalf of the firm.

16. Audit committee is to be constituted by every public company to ensure better

standards of corporate governance.
Incorrect. Under Section 177 of Companies Act, 2013 read together with Rule 4 of
Companies( Appointment and qualification of Directors) Rules, 2014 prescribe that audit
committee is to be constituted by every listed public company and following classes of public
companies only:-
(i) the Public Companies having paid up share capital of ten crore rupees or more;
or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans,
debentures and deposits, exceeding fifty crore rupees:
Hence, the statement that all public companies are required to constitute audit
committee is incorrect.

17. XYZ Ltd is engaged in manufacture of textiles specified under prescribed rules
having total revenue of Rs.100 crore (including export turnover of Rs.88 crores in
foreign exchange) in immediately preceding financial year. The said company is
required to get cost audit conducted for immediately preceding financial year.

Incorrect. The provisions of cost audit are not applicable in case of companies having
revenue from exports in foreign exchange being more than 75% of its total revenue.
As the company is having export turnover of Rs.88 crore in total revenues of Rs.100
core, the provisions of cost audit are not applicable to the said company.

18. The auditor has to report under section 143 of companies act, 2013 whether
company has adequate internal controls in place and overall effectiveness of such
internal controls.

Incorrect: Under provisions of Section 143 of the companies Act, 2013, auditor has to
report whether the company has adequate internal financial controls with reference
to financial statements in place and operating effectiveness of such controls. The
auditor has to report on adequacy and effectiveness of internal financial controls only
and not internal controls.

19. Discovery of an offence of a fraud of Rs.100 lakh by auditor against the company
committed by its officers is to be reported to Serious Fraud Investigation office
(SFIO).

Incorrect: Fraud of Rs.100.00 lakhs or above (i.e. Rs.1.00 crore or above) has to be
reported to Central government (precisely to Secretary, Ministry of Corporate affairs)
in Form ADT-4.

20. The concept of “joint audit” has legal foothold under the Companies Act, 2013.
 Correct: Under provisions of section 139(3), the members of a company may
resolve to provide that audit shall be conducted by more than one auditor. Hence,
the concept of “joint audit” has legal foothold also under Companies Act, 2013.

CHAPTER 11: AUDIT REPORT

1. The auditor shall express a qualified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.

Incorrect: The auditor shall express an unmodified opinion when the auditor
concludes that the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework.

2. There is no need of addressee in the Auditor’s report.

Incorrect: The auditor’s report shall be addressed, as appropriate, based on the

circumstances of the engagement. Law, regulation or the terms of the engagement
may specify to whom the auditor’s report is to be addressed. The auditor’s report
is normally addressed to those for whom the report is prepared, often either to
the shareholders or to those charged with governance of the entity whose
financial statements are being audited.

3. The auditor shall modify the opinion in the auditor’s report only when the
auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement.

Incorrect: The auditor shall modify the opinion in the auditor’s report when: (a)
The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or (b) The auditor
is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.

4. The auditor shall express a disclaimer of opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.

Correct: The auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements.
 5. Communicating key audit matter in the auditor’s report constitutes a substitute
for disclosure in the financial statements.

Incorrect: Communicating key audit matters in the auditor’s report is in the

context of the auditor having formed an opinion on the financial statements as
a whole. Communicating key audit matters in the auditor’s report is not a
substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make, or that are otherwise
necessary to achieve fair presentation

6. When the auditor has to express an adverse opinion, he need not communicate
with those charged with governance as this may have an impact on payment of
his audit fees.

Incorrect: When the auditor expects to modify the opinion in the auditor’s
report, the auditor shall communicate with those charged with governance the
circumstances that led to the expected modification and the wording of the
modification.

7. Instead of modifying an opinion in accordance with SA 705, the statutory

auditor can use Key Audit Matter paragraph in the audit report with an
unmodified opinion.

Incorrect: Communicating key audit matters in the auditor’s report is not a

substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705
(Revised);

CHAPTER 12: AUDIT OF BANKS

1. RBI has been entrusted with the responsibility of regulating the activities of
commercial banks only.

Incorrect. RBI has been entrusted with the responsibility of regulating the activities
of commercial and other banks.

2. In the computerised environment, the auditor need not be familiar with latest
applicable RBI guidelines that have bearing on the classification/ provisions and
income recognition.
 Incorrect. In the Computerized environment, it is imperative that the auditor is
familiar with, and is satisfied that, all the norms/parameters as per the latest
applicable RBI guidelines are incorporated and built into the system that generates
information/data having a bearing on the classification/ provisions and income
recognition.

3. The auditor can assume that the system generated information is correct and relied
upon without evidence that demonstrates that the system driven information is
based on validation of the required parameters for the time being in force and
applicable.

Incorrect. The auditor should not go by the assumption that the system generated
information is correct and can be relied upon without evidence that demonstrates
that the system driven information is based on validation of the required parameters
for the time being in force and applicable.

4. Collateral security refers to the security offered by the borrower for bank finance
or the one against which credit has been extended by the bank.

Incorrect. Primary security refers to the security offered by the borrower for bank
finance or the one against which credit has been extended by the bank. This security
is the principal security for an advance.

5. Registered mortgage is affected by a mere delivery of title deeds or other

documents of title with intent to create security thereof

Incorrect. Equitable mortgage, on the other hand, is affected by a mere delivery

of title deeds or other documents of title with intent to create security thereof.

6. Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
within 90 days of becoming due.

Incorrect. Any amount due to the bank under any credit facility is ‘overdue’ if it is
not paid on the due date fixed by the bank.

7. An account should be treated as 'out of order' if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power.

Correct. An account should be treated as 'out of order' if the outstanding balance

remains continuously in excess of the sanctioned limit/drawing power.

8. Banks recognize income on Non-Performing Assets on accrual basis.

Incorrect: Income from non-performing assets (NPA) is not recognised on accrual

basis due to its uncertainty but is booked as income only when it is actually received.

9. Auditor of a Nationalised bank is to be appointed at the annual general meeting of

the shareholders.
 Incorrect- Auditor of a nationalized bank is to be appointed by the bank concerned
acting through its Boards of Directors and approval of the Reserve bank is required
before the appointment is made.

CHAPTER 13: AUDIT OF DIFFERENT TYPE OF ENTITIES

1. Article 150 of the Constitution provides that the accounts of the Union and of
the States shall be kept in such form as the Finance Minister may on the advice
of the C&AG prescribe.

Incorrect. Article 150 of the Constitution provides that the accounts of the Union
and of the States shall be kept in such form as the President may on the advice of
the C&AG prescribe.

2. According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or infructuous expenditure even though the expenditure has been
incurred in conformity with the existing rules and regulations.

Correct. According to ‘propriety audit’, the auditors try to bring out cases of
improper, avoidable, or infructuous expenditure even though the expenditure has
been incurred in conformity with the existing rules and regulations.

3. Expenditure incurred by the municipalities and corporations can be broadly

classified under the following heads: (a) general administration and revenue
collection, (b) public health, (c) public safety, (d) education, (e) public works, and
(f) others such as interest payments.

Correct . Expenditure incurred by the municipalities and corporations can be

broadly classified under the following heads: (a) general administration and
revenue collection, (b) public health, (c) public safety, (d) education, (e) public
works, and (f) others such as interest payments, etc.

4. The external control of municipal expenditure is exercised by the Central

Government through the appointment of auditors to examine municipal
accounts.

Incorrect. The external control of municipal expenditure is exercised by the

state governments through the appointment of auditors to examine municipal
accounts.

5. NGOs may be defined as non-profit making organisations which raise funds from
members, donors or contributors apart from receiving donation of time, energy
and skills for achieving their social objectives.
 Correct. NGOs can be defined as non-profit making organisations which raise
funds from members, donors or contributors apart from receiving donation of
time, energy and skills for achieving their social objectives like imparting
education, providing medical facilities, economic assistance to poor, managing
disasters and emergent situations.

6. The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules
2009.

Incorrect- Rule 24 of LLP Rules 2009 provides that any LLP, whose turnover does
not exceed, in any financial year, forty lakh rupees, or whose contribution does
not exceed twenty five lakh rupees, is not required to get its accounts audited.
However, if the partners of such limited liability partnership decide to get the
accounts of such LLP audited, the accounts shall be audited only in accordance
with such rules.

7. The auditor of an LLP may be appointed by the Designated Partners or other

Partners whosoever is available at the time of appointment.

Incorrect- The auditor is to be appointed by the designated partners of the LLP.

However , the Partners may appoint the auditors only if the Designated
Partners have failed to appoint them.

8. The Comptroller and Auditor General does not have any authority to audit the
accounts of stores and inventory kept in any office or department of the Union
or of a State .

Incorrect- The Comptroller and Auditor General shall have authority to audit and
report on the accounts of stores and inventory kept in any office or department
of the Union or of a State.

9. An Operating Lease is a kind of Financing arrangement.

Incorrect- A Finance Lease is a Financing arrangement. An Operating lease, on

the other hand, is a simple arrangement where, in return for rent, the lessor
allows the lessee to use the asset for a certain period.

10. An auditor should ensure that proper valuation of occupancy-in progress at the
balance sheet date is made and included in the accounts in the case of audit of
a Hotel.

Correct- The auditor should ensure that proper valuation of occupancy-InProgress at

the balance sheet date is made and included in the accounts for proper recording of
closing and opening entries and maintenance of accounts on Accrual basis as per the
Matching concept.
CORRECT/ INCORRECT QUESTIONS MUST DO TO SCORE 80 +
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