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Question Paper
AUDITING & ETHICS Duration: 70
Details: Test 11 (Ch-11 ) Marks: 35
Instructions:
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Q1. XYZ Ltd. is a rapidly growing company. During the audit of XYZ Ltd., the auditor, Mr. A,
discovered that the financial statements were deliberately manipulated to inflate the
company's profits. When Mr. A pointed this out to the CFO, he was offered a substantial
monetary reward to overlook the issue. Additionally, the CFO threatened to terminate Mr. A's
audit engagement if he reported the manipulation.
Which fundamental principles of professional ethics would be violated if Mr. A accepts the
reward or succumbs to the CFO's threat? How should Mr. A act to comply with the principles?
(5 marks)
Q2. Ramesh, as part of his articled training, is part of an engagement team conducting an audit
of a company. He has come across a statement that mentions the engagement letter issued by
the auditor to the client also includes the expected form and content of the auditor's report. He
is confused about how an auditor can specify the form and content of the report in advance.
Can you help Ramesh understand this?
(3 marks)
Q3. CA Sudhakar has been appointed as the auditor of AMRO Ltd. Before accepting the
appointment, he learns that his cousin, who held shares in the company and recently passed
away without children, named him as the nominee for these shares, which have substantial
value. Although holding such shares through a distant relative does not violate legal provisions
or affect his independence, this unexpected inheritance places him in a dilemma. Advise CA
Sudhakar on how he should deal with this situation and safeguard his independence.
(6 marks)
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Q4. Familiarity threats are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client’s interests. Explain.
(5 marks)
Q5. Mr. Rajesh, a seasoned auditor and engagement partner at a reputable auditing firm in
India, is responsible for conducting the audit of XYZ Ltd., a well-established manufacturing
company. As per the firm's quality control system, Mr. Rajesh is accountable for implementing
quality control procedures for this audit engagement.
Explain the key elements of Mr. Rajesh as the engagement partner in relation to quality control,
as outlined in SA 220, to ensure that the audit of XYZ Ltd. complies with professional standards,
regulatory and legal requirements, and that the auditor's report issued is appropriate in the
circumstances. Provide a comprehensive answer, considering each aspect of Mr. Rajesh's role in
quality control procedures for this specific audit engagement.
(6 marks)
Q6. CASE STUDY BASED MCQ’S
Sharma & Associates, a renowned chartered accountancy firm, has been auditing the financial
records of ABC Ltd, a manufacturing company, for the past 5 years. Sharma & Associates
maintains a strong reputation for high-quality audits, and regular quality control procedures are
conducted by the firm’s engagement partner. During a recent internal meeting, the firm’s staff
discussed the elements of the firm’s system of quality control in line with SQC 1 and the
professional ethics as per SA 200.
In the 6th year of auditing ABC Ltd, the company undergoes significant changes due to a
restructuring. As a result, Sharma & Associates decides to revise the audit terms in accordance
with SA 210. Additionally, new accounting standards and legal requirements raise concerns
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about the appropriateness of the financial reporting framework used by ABC Ltd, leading the
auditor to consider the potential impact on the audit report.
Following these developments, Mr. Sharma instructs his team to thoroughly review the audit
program and make the necessary adjustments. He also revises the audit plan for the company.
During the execution of the audit for the 6th year, the following issues arise:
a) As per the new Income Tax Law, the company is required to report certain high-value
transactions. Upon reviewing the company’s records, the auditor suspects non-compliance with
this requirement, and believes that the potential effect of this non-compliance could materially
affect the financial statements. The auditor discusses this issue with the management, but is
unable to obtain satisfactory information confirming the company’s compliance with the law.
b) The management of ABC Ltd presents reports from a recent external investigation that raises
concerns regarding the company’s internal control system. The management accuses the
auditor of failing to properly assess the internal control system and threatens legal action if the
auditor is found to be at fault.
Considering the above facts, answer the following questions by selecting the correct answer.
1. Which of the following is NOT an element of a firm’s system of quality control?
(a) Ethical Requirements
(b) Acceptance and continuance of client relationships and specific engagements
(c) Engagement review
(d) Monitoring
2. When conducting an audit of financial statements, which of the following is NOT a
fundamental principle of professional ethics?
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(a) Integrity
(b) Professional Skepticism
(c) Confidentiality
(d) Objectivity
3. Which of the following statements is incorrect considering the context of revision in audit
terms as per SA 210?
(a) Indication that the entity has misunderstood the objective and scope of the audit
(b) A significant change in ownership of the company
(c) A change in legal or regulatory requirements
(d) Significant change in the audit team
GENERAL MCQ’S
4. Which of the following statements best explains the meaning of ethics and its role in an
individual's behavior?
A) Ethics refers to the set of laws and rules enforced by the government that dictate how
individuals should behave in society, ensuring they adhere to societal norms and avoid
punishment for immoral actions.
B) Ethics is the branch of knowledge that deals with moral principles governing a person’s
behavior. It is an intrinsic quality that individuals must cultivate, forming a habit that helps
them act in accordance with moral values, even when faced with temptation or selfish motives.
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C) Ethics is a set of external guidelines that individuals must follow to achieve success in their
professional life, focusing solely on how one should behave in the workplace, without
influencing personal life decisions.
D) Ethics refers to the instinctive understanding of right and wrong, which does not require
deliberate thought or cultivation, as it is naturally present in every individual.
5. A well-respected audit firm has implemented the following practices. Which situation
presents the MOST significant threat to auditor independence, considering both independence
of mind and appearance?
A) The audit firm maintains a strict policy where audit partners must rotate every 7 years for
listed company audits, even though the local regulation requires rotation only every 10 years.
B) An audit manager owns shares in a mutual fund that has a small investment (0.1% of the
fund's portfolio) in a client company, but the manager has no direct control over the fund's
investment decisions.
C) The audit firm hired a junior auditor whose sibling is a non-key management employee in the
sales department of a client company. The junior auditor is not assigned to that client's
engagement.
D) The audit firm provides both audit and tax advisory services to a private company, with the
tax fees being 15% of the audit fees. The tax advice relates to routine compliance matters, and
all services are pre-approved by those charged with governance.
(2×5= 10 marks)
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