CA Inter Audit Compiler PDF

Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 1...

Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 1 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 2 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 3 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics Table of Contents Sr. Particulars Page Number No 1 Nature, Objective and Scope of Audit 6 to 37 2 Audit Strategy, Audit Planning and Audit 39 to 74 Programme 3 Risk Assessment and Internal Control 76 to 169 4 Audit Evidence 171 to 288 5 Audit of Items of Financial Statements 290 to 368 6 Audit Documentation 370 to 392 7 Completion and Review 394 to 420 8 Audit Report 422 to 503 9 Special Features of Audit of Different Type of 505 to 570 Entities 10 Audit of Banks 572 to 611 11 Ethics and Terms of Audit Engagements 613 to 645 12 Case Scenarios 679 to 769 4 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 5 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics Chapter 1: NATURE, OBJECTIVE AND SCOPE OF AUDIT Attempt wise Distribution May- Nov- May- Nov- Nov- Jan- Jul- Dec- May- Nov- May- Nov- Attempts 18 18 19 19 20 21 21 21 22 22 23 23 MCQ Q2,Q Q4,Q MTP Q8 Q3 Q5 6 7 RTP Q1 Q9 Q&A Q1 Q13, 1,Q Q12, Q8,Q MTP Q14 Q20 Q16 Q17 21 Q19 Q10 Q9 18 Q2 Q22, 4, Q2,Q Q7,Q Q4,Q Q2 Q6,Q RTP 27 23 25 6 Q3 Q1 28 Q5 Q15 Section A MULTIPLE CHOICE QUESTIONS (MCQS) 1. M/s KYC & Co. is a reputed Audit firm in Mumbai. They are appointed as Statutory Auditors of Blessed Ltd. Which of the below is the responsibility of M/s KYC & Co. (a) Preparation of financial statements (b) Designing, implementation and maintenance of internal control system (c) Reporting on true and fair view of financial statements (d) Compliance with the applicable law and regulation. (RTP Nov’20) Ans:(c) 2. Which of the following is the responsibility of the auditor: (a) Preparation and presentation of the financial statements in accordance with applicable financial reporting (b) Design, implementation and maintenance of internal controls (c) Express an opinion on the Financial Statements (d) To obtain limited assurance. (MTP1 Mark April 22) 6 Ans: (c) Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 3. The matter of difficulty, time, or cost involved is : (a) not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. (b) in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. (c) not in itself a valid basis for the auditor to omit an audit procedure for which alternative exists. (d) not in itself a valid basis for the auditor to omit an audit procedure. (MTP 1 Mark March ’19) Ans: (a) 4. Which of the following is Incorrect: (a) 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. (b) As described in SA 200, 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. (c) The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error. (d) The risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud. (MTP 1 Mark March ’23) Ans: (a) 5. The persons with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity are : (a) management (b) Those charged with governance – (c) audit committee (d) board of directors (MTP 1 Marks March ’21, Oct’23, RTP May ’21, Nov’21, Nov’23) Ans: (b) 7 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 6. The Auditor of a Sole Proprietor Concern is appointed by (a) CAG (b) Bank (c) Sole Proprietor himself (d) District Administration (MTP 1 Mark April 22) Ans: (c) 7. With respect to auditing, which of the following statement is correct: (a) Audited financial statements are absolutely free from all material misstatement due to fraud or error. (b) An audit is an official investigation into alleged wrongdoing and auditor has specific legal powers to conduct investigation (c) The auditor can obtain only a reasonable assurance about whether the financial statement as a whole are free from material misstatement and report on it. (d) An auditor’s opinion is an assurance as the future viability of the enterprise or the efficiency or effectiveness of the management. (MTP 1 Marks April ’23) Ans: (c) 8. Determining a percentage to be applied to a chosen benchmark (in relation to materiality) involves the exercise of (a) Independence (b) Professional Judgement (c) Professional skepticism (d) All of the above (MTP 1 Mark April’19) Ans: (b) 9. The persons with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity are (a) Management (b) those charged with governance 8 (c) audit committee Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics (d) board of directors (RTP May ’21, Nov’21) Ans: (b) Question & Answers Question 1 Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards on Review Engagements (SREs) apply in “review of historical financial information.” Explain in detail giving examples. (RTP May ’22) Answer 1 It is to be understood that Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards on Review Engagements (SREs) apply in “review of historical financial information”. Remember that Standards on auditing apply in “audit” of historical financial information which is a reasonable assurance engagement whereas Standards on Review Engagements apply in “review” of historical financial information which is a limited assurance engagement only. “Historical financial information means” information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past. Here, we have to broadly understand that “audit” and “review” are two different terms. Audit is a reasonable assurance engagement, and its objective is reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement. However, “review” is a limited assurance engagement, and its objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, Standards on Auditing have been issued on wide spectrum of issues in the field of auditing including (but not limited to) overall objectives of independent auditor, audit documentation, planning an audit of financial statements, identifying and assessing risk of material misstatement, audit evidence, audit sampling, going concern and forming an opinion and reporting on financial statements. Some examples of Standards on Auditing are: (i) SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing (ii) SA 230 Audit Documentation (iii) SA 315 Identifying and Assessing the Risks of Material Misstatement 9 through Understanding the Entity and its Environment Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics (iv) SA 500 Audit Evidence (v) Revised SA 700 Forming an Opinion and Reporting on Financial Statements Examples of Standards on Review engagements are (i) SRE 2400 (Revised) Engagements to Review Historical Financial Statements (ii) SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity Question 2 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. Explain. (RTP Nov ’18) Answer 2 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. The inherent limitations of an audit arise from: (i) The Nature of Financial Reporting: The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. (ii) The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example: 1. There is the possibility that management or others may not provide, intentionally or unintentionally, the complete information that is relevant to the preparation and presentation of the financial statements or that has been requested by the auditor. 2. Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents. 10 3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as Page the power of search, which may be necessary for such an Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics investigation. (iii) Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. (iv) Other Matters that Affect the Limitations of an Audit: In the case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters include: - Fraud, particularly fraud involving senior management or collusion. - The existence and completeness of related party relationships and transactions. - The occurrence of non-compliance with laws and regulations. - Future events or conditions that may cause an entity to cease to continue as a going concern. Question 3 There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain giving examples. (RTP Nov ’21, May’20) Answer 3 There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example: 2. There is the possibility that management or others may not provide, intentionally or unintentionally, the complete information that is relevant to the preparation and presentation of the financial statements or that has been requested by the auditor. 3. Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents. 4. An audit is not an official investigation into alleged wrongdoing. 11 Accordingly, the auditor is not given specific legal powers, such as the Page power of search, which may be necessary for such an investigation. Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics Question 4 In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Explain such assertions or subject matters. (RTP May ’20, PYP 3 Marks July ’21) Answer 4 Other Matters that Affect the Limitations of an Audit: In the case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters include: Fraud, particularly fraud involving senior management or collusion. The existence and completeness of related party relationships and transactions. The occurrence of non-compliance with laws and regulations. Future events or conditions that may cause an entity to cease to continue as a going concern. Question 5 An audit is distinct from investigation. However, it is quite possible that sometimes investigation results from the prima facie findings of the auditor. Discuss. (RTP May ’23) Answer 5 Audit is distinct from investigation. Investigation is a critical examination of the accounts with a special purpose. For example, if fraud is suspected and it is specifically called upon to check the accounts whether fraud really exists, it takes character of investigation. The objective of audit, on the other hand as we have already discussed, is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion. Therefore, audit is never started with a pre-conceived notion about state of affairs; about wrong-doing; about some wrong having been committed. The auditor seeks to report what he finds in normal course of examination of accounts. However, it is quite possible that sometimes investigation results from the prima facie findings of the auditor. It may happen that auditor has given some findings of serious concern. Such findings may prompt for calling an investigation. Question 6 State with reason (in short) whether the following statements are true or false: 12 There is no difference between “audit” and “review.”.(RTP Nov’22) Answer 6 Page Incorrect: “Audit” and “Review” are two different terms. Audit is a Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics reasonable assurance engagement, and its objective is reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement. However, “review” is a limited assurance engagement, and its objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement Question 7 State with reason (in short) whether the following statements are true or false: The preparation of financial statements does not involve judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. (RTP May ‘19) Answer 7 Incorrect: The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. Question 8 Discuss the following: CA Jatin is the auditor of JP Ltd. The auditor expressed his opinion on the financial statements without ascertaining as to whether the financial statements as a whole were free from material misstatements. Explain w.r.t SA 200. (MTP 3 Marks April ‘23) OR Mr. Z, auditor of the Company, Different and Capable Limited for the financial year 2022-23, explained to audit team members about the objectives of the Independent Auditor in accordance with the relevant Standard on Auditing. Explain those objectives. (RTP Nov ’23) (PYP 3 Marks May ’22) Answer 8 Overall Objectives of the Independent Auditor: As per SA-200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, in conducting an audit of financial statements, the overall objectives of the auditor are: (i) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in 13 accordance with an applicable financial reporting framework; and (ii) To report on the financial statements, and communicate as required by Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics the SAs, in accordance with the auditor’s findings. In the given case of JP Ltd, CA Jatin expressed his opinion on the financial statements of JP Ltd without obtaining reasonable assurance about whether the financial statements as a whole are free from material misstatement or not. Therefore, it can be concluded that CA Jatin did not comply with the objective of audit as stated in SA 200. Question 9 Examine with reasons (in short) whether the following statements are correct or incorrect The Auditor is expected to reduce audit risk to zero and can therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. (MTP 2 Marks Oct’22, MTP 2 Marks Oct’21, PYP 2 Marks Jan 21) Answer 9 Incorrect: 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. Question 10 The auditor has to form an opinion on the financial statements within a reasonable period of time and at a reasonable cost. Explain the above statement with reference to "Timeliness of Financial Reporting and the Balance between Benefit and Cost". (MTP 4 Marks April 22, RTP- May’18] Answer 10 Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. There is an expectation by users of financial statements that the auditor will form an opinion on the financial statements within a reasonable period of time and at a reasonable cost, recognizing that it is impracticable to address all information that may exist or to pursue every matter exhaustively on the assumption that 14 information is in error or fraudulent until proved otherwise. Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics Question 11 Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He said, “an auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true” Explain stating clearly the qualities of an auditor. (MTP4 Marks March ’21, RTP May’19) OR Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. Explain stating the qualities an auditor should possess. (MTP 4 Marks Oct ‘21) Answer 11 It is not enough to realise what an auditor should be. He is concerned with the reporting on financial matters of business and other institutions. Financial matters inherently are to be set with the problems of human fallibility; errors and frauds are frequent. The qualities required, according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. In short, all those personal qualities that go to make a good businessman contribute to the making of a good auditor. In addition, he must have the shine of culture for attaining a great height. He must have the highest degree of integrity backed by adequate independence. In fact, Code of ethics mentions integrity, objectivity and independence as one of the fundamental principles of professional ethics. He must have a thorough knowledge of the general principles of law which govern matters with which he is likely to be in intimate contact. The Companies Act need special mention but mercantile law, specially the law relating to contracts, is no less important. Needless to say, where undertakings are governed by a special statute, its knowledge will be imperative; in addition, a sound knowledge of the law and practice of taxation is unavoidable. He must pursue an intensive programme of theoretical education in subjects like financial and management accounting, general management, business and corporate laws, computers and information systems, taxation, economics, etc. Both practical training and theoretical education are equally necessary for the development of professional competence of an auditor for undertaking any kind of audit assignment. The auditor should be equipped not only with a sufficient knowledge of the way in which business generally is conducted but also with an understanding of the special features peculiar to a particular business 15 whose accounts are under audit. The auditor, who holds a position of Page trust, must have the basic human qualities apart from the technical Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics requirement of professional training and education. He is called upon constantly to critically review financial statements and it is obviously useless for him to attempt that task unless his own knowledge is that of an expert. An exhaustive knowledge of accounting in all its branches is the sine qua non of the practice of auditing. He must know thoroughly all accounting principles and techniques. Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He said, “an auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true”. Question 12 Examine with reasons (in short) whether the following statement is correct or incorrect: The preparation of financial statements involves judgment by management. (MTP 2 Marks Nov ’21, Mar’22) Answer 12 Correct: The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. Question 13 The relationship between auditing and law is very close one. (MTP 4 Marks Oct 19, RTP Nov ’18) Answer 13 The relationship between auditing and law: The relationship between auditing and law is very close one. Auditing involves examination of various transactions from the view point of whether or not these have been properly entered into. It necessitates that an auditor should have a good knowledge of business laws affecting the entity. He should be familiar with the law of contracts, negotiable instruments, etc. The knowledge of taxation laws is also inevitable as entity is required to prepare their financial statements taking into account various provisions affected by various tax laws. In analysing the impact of various transactions particularly from the accounting aspect, an auditor ought to have a good knowledge about the direct as well as indirect tax laws. 16 Question 14 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its finished products both in the domestic as well as in the international market. The company is making total turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year 2017-18, proprietor of the firm is worried about the financial position of the company and is under the impression that since he is out of India, therefore firm might run into losses. He approaches a CA about advantages of getting his accounts audited throughout the year so that he may not suffer due to accounting weaknesses. Advise regarding advantages of getting accounts audited. (MTP 5 Marks March ‘18) OR PACE is proprietorship firm of Mr. Abhinav engaged in the manufacturing of textile and handloom products. It sells its finished products both in the domestic as well as in the international market. The company is making total turnover of Rs. 50 crores. It has also availed cash credit limit of Rs. 5 crores from Axis Bank. In the year 2017-18, proprietor of the firm is worried about the financial position of the company and is under the impression that since he is out of India, therefore firm might run into losses. He approaches CA Mahesh about advantages of getting his accounts audited throughout the year so that he may not suffer due to accounting weaknesses. Advise regarding advantages of getting accounts audited. (MTP 5 Marks Oct 18) OR The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of considerable value even to those enterprises and organizations where audit is not compulsory. Explain. (RTP Nov ‘18) Answer 14 The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of considerable value even to those enterprises and organisations where audit is not compulsory, these advantages are given below: (a) It safeguards the financial interest of persons who are not associated with the management of the entity, whether they are partners or shareholders, bankers, FI’s, public at large etc. (b) It acts as a moral check on the employees from committing defalcations or embezzlement. (c) Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining the purchase 17 consideration for a business. Page (d) These are also useful for settling trade disputes for higher wages or Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics bonus as well as claims in respect of damage suffered by property, by fire or some other calamity. (e) An audit can also help in the detection of wastages and losses to show the different ways by which these might be checked, especially those that occur due to the absence or inadequacy of internal checks or internal control measures. (f) Audit ascertains whether the necessary books of account and allied records have been properly kept and helps the client in making good deficiencies or inadequacies in this respect. (g) As an appraisal function, audit reviews the existence and operations of various controls in the organisations and reports weaknesses, inadequacies, etc., in them. (h) Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner. (i) Government may require audited and certified statement before it gives assistance or issues a license for a particular trade. Question 15 In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Explain such assertions or subject matters. (RTP Nov’23) Answer 15 In the case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters include: - Fraud, particularly fraud involving senior management or collusion. - The existence and completeness of related party relationships and transactions. - The occurrence of non-compliance with laws and regulations. - Future events or conditions that may cause an entity to cease to continue as a going concern. Question 16 “An audit is 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.” Explain stating clearly how the person conducting this task should take care to ensure that financial statements would not mislead anybody. (MTP 4 Marks Oct 19) 18 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics The person conducting audit should take care to ensure that financial statements would not mislead anybody. Explain stating clearly the meaning of Auditing. (RTP May ’20) Answer 16 “An audit is 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.” Analysis of the Definition 1. Audit is Independent examination of Financial information. 2. of any entity – that entity may be profit oriented or not and irrespective of its size or legal form. For example – Profit oriented – Audit of Listed company engaged in business. On the other hand, Audit of NGO – not profit oriented. 3. The objective of the audit is to express an opinion on the financial statements. The person conducting this task should take care to ensure that financial statements would not mislead anybody. This he can do honestly by satisfying himself that: (i) the accounts have been drawn up with reference to entries in the books of account; (ii) the entries in the books of account are adequately supported by sufficient and appropriate evidence; (iii) none of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements; (iv) the information conveyed by the statements is clear and unambiguous; the financial statement amounts are properly classified, described and disclosed in conformity with accounting standards; and the statement of accounts present a true and fair picture of the operational results and of the assets and liabilities. Question 17 Examine with reasons (in short) whether the following statements are correct or incorrect: Mr. Z, a team member of auditor of Grateful and Competent Limited was of the opinion that while conducting an audit of a company no distinction is required to be made between revenue expenditure and capital expenditure. (MTP 2 Marks Oct 20) 19 Answer 17 Page Incorrect: The opinion of Mr. Z is incorrect because one of the important Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics aspects to be followed while conducting audit of a company is that a distinction is required to be made properly between revenue expenditure and capital expenditure. Question 18 Examine with reasons (in short) whether the following statements are correct or incorrect. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. (MTP 2 Marks March ’23) Answer 18 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. Question 19 The person conducting the audit should take care to ensure that financial statements would not mislead anybody. Explain (MTP 4 Marks Oct ‘21) Answer 19 The person conducting the audit should take care to ensure that financial statements would not mislead anybody. This he can do honestly by satisfying himself that: (i) the accounts have been drawn up with reference to entries in the books of account; (ii) the entries in the books of account are adequately supported by sufficient and appropriate evidence; (iii) none of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements; (iv) the information conveyed by the statements is clear and unambiguous; (v) the financial statement amounts are properly classified, described and disclosed in conformity with accounting standards; and (vi) the statement of accounts present a true and fair picture of the operational results and of the assets and liabilities. 20 Question 20 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics Examine with reasons (in short) whether the following statement is correct or incorrect : The objective of audit is to obtain absolute assurance about whether the financial statements as a whole are free from material misstatement. (MTP 2 Marks April 19, RTP May’23, RTP May’18) OR The auditor is expected to and can reduce audit risk to zero (MTP 2 Marks May 20, MTP 2 Marks Oct’21) Answer 20 Incorrect: The objective of audit is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. In auditing, reasonable assurance can be given which is high level assurance but not absolute assurance. 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. Question 21 Examine with reasons (in short) whether the following statements are correct or incorrect: 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 conclusive rather than persuasive. (MTP 2 Marks April ‘21) Answer 21 Incorrect: As per SA 200, 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. Question 22 Both accounting and auditing are closely related with each other. Explain (RTP Nov’20) Answer 22 Both accounting and auditing are closely related with each other as auditing reviews the financial statements which are nothing but a result of the overall accounting process. It naturally calls on the part of the auditor to have a thorough and sound knowledge of generally accepted principles of accounting before he can review the financial statements. In fact, 21 auditing as a discipline is also closely related with various other disciplines as there is lot of linkages in the work which is done by an auditor in his Page day-to-day activities. To begin with, it may be noted that the discipline of Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics auditing itself is a logical construct and everything done in auditing must be bound by the rules of logic. Ethical precepts are the basis on which the foundation of the entire accounting profession rests. The knowledge of language is also considered essential in the field of auditing as the auditor shall be required to communicate, both in writing as well as orally, in day- to-day work. Question 23 State with reason (in short) whether the following statements are true or false: An audit is an official investigation into alleged wrongdoing. (RTP May ’19, Nov’18) Answer 23 Incorrect: An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation. Question 24 The knowledge of human behavior is indeed very essential for an auditor so as to effectively discharge his duties. Explain. (RTP Nov ’21) Answer 24 The field of auditing as a discipline involves review of various assertions; both in financial as well as in non-financial terms, with a view to prove the veracity of such assertions and expression of opinion by auditor on the same. Thus, it is quite logical and natural that the function of audit can be performed if and only if the person also possesses a good knowledge about the fields in respect of which he is conducting such a review. The discipline of behavioral science is closely linked with the subject of auditing. While it may be said that an auditor, particularly the financial auditor, deals basically with the figures contained in the financial statements but he shall be required to interact with a lot of people in the organization. As against the financial Audi tor, the internal auditor or a management auditor is expected to deal with human beings rather than financial figures. One of the basic elements in designing the internal control system is personnel. Howsoever, if a sound internal control structure is designed, it cannot work until and unless the people who are working in the organization are competent and honest. The knowledge of human behavior is indeed very essential for an auditor so as to effectively discharge his duties. Question 25 Explain the objectives of an Audit as per SA 200. (RTP May ’20, May’19) Answer 25 22 As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of financial statements, the overall objectives of the Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics auditor are: (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement; and (b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings. Question 26 State with reason (in short) whether the following statements are true or false: The auditor’s opinion helps determination of the true and correct view of the financial position and operating results of an enterprise. (RTP May ’21) Answer 26 Incorrect: The auditor’s opinion helps determination of the true and fair view of the financial position and operating results of an enterprise. Question 27 State with reason (in short) whether the following statements are true or false: The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. (RTP Nov ’18, RTP Nov’21) Answer 27 Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. Question 28 There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain giving examples. Also explain the difference between audit and investigation. (RTP Nov 22, Nov’23) Answer 28 The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example: 1. There is the possibility that management or others may not provide, intentionally or unintentionally, the complete information that is 23 relevant to the preparation and presentation of the financial statements or that has been requested by the auditor. Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics 2. Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents. 3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation. We have to clearly understand that audit is distinct from investigation. Investigation is a critical examination of the accounts with a special purpose. For example, if fraud is suspected and it is specifically called upon to check the accounts whether fraud really exists, it takes character of investigation. The objective of audit, on the other hand as we have already discussed, is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion. Therefore, audit is never started with a pre-conceived notion about state of affairs; about wrong-doing; about some wrong having been committed. The auditor seeks to report what he finds in normal course of examination of accounts. However, it is quite possible that sometimes investigation results from the prima facie findings of the auditor. It may happen that auditor has given some findings of serious concern. Such findings may prompt for calling an investigation. Section B CASE STUDY-1 Rohit, Gurpreet, Ali and Goreti are friends since their school days based in Mumbai. They have cleared CA foundation exams in the same attempt and now plan to appear for CA Intermediate exams. All of them are avid news listeners and regularly keep track of business news even on social media. They are trying to understand new subjects including auditing. Rohit, Gurpreet and Ali have also started attending Live Coaching Classes (LCC) being conducted by Board of studies of ICAI. Goreti has not been able to join Live Coaching Classes yet as she was away on a holiday with 24 her parents. However, she plans to catch it up with her friends very soon. Ali had also joined the classes but he had skipped some lectures. Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics During one informal get together, their discussions centred around new subject of auditing. They discussed many things regarding its nature, scope, benefits and other general practical issues. Goreti was regular in keeping track of audited results of companies being published in leading newspapers. Her view was that audited financial statements of companies give 100% guarantee to different stake holders. It is the main reason behind so much reliance upon auditing. But she could not understand why wrong doings in financial matters are being discovered after many years have gone by. Ali also concurred with her view and added that when financial statements are audited, each and every transaction appearing in books of accounts is verified. However, he could not give clarity to Goreti. Gurpreet was of the opinion that audit was conducted on the basis of sample checking. He was also of the view that audited financial statements are not a guarantee against probable wrong doings in financial matters of the companies. Not to be left behind, Rohit also jumped in the fray. He supported Gurpreet and also added something of his own. MULTIPLE CHOICE QUESTIONS (MCQS) Based on above, answer the following questions: - 1. Gurpreet was of the view that audited financial statements are not a guarantee against probable wrong doings in financial matters of companies. What kind of assurance does audit of financial statements provide? (a) It provides reasonable assurance meaning a moderate level of assurance. (b) It provides reasonable assurance meaning a low level of assurance. (c) It provides reasonable assurance meaning a high level of assurance. (d) It provides reasonable assurance meaning an absolute level of assurance. Ans: (c) 2. Rohit added that auditor can force an employee of the company to provide him required information and documents. Can he do so? (a) Yes, he can do so. It is necessary to obtain audit evidence. 25 (b) Yes, he can do so. There are express rights given to him in this Page respect. Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics (c) No, he cannot do so. He can only request for providing him with necessary information and documents. But it cannot be forced by him. (d) No, he cannot do so. He has no right of seeking information and documents. Therefore, question of forcing does not arise. Ans: (c) 3. Ali had listened in one of the classes that audit covers all aspects of an entity and concluded that each and every transaction of entity is verified by auditor. Goreti also seemed to be in agreement with him but she was of the view that besides this, it also meant that audit should be so organized to cover all areas of an entity. Which of following statements is appropriate in this regard? (a) Only view of Ali is correct. (b) Only view of Goreti is correct. (c) Views of both Ali and Goreti are correct. (d) Views of both Ali and Goreti are incorrect. Ans: (d) 4. All of them also discussed about benefits of auditing. Which of the following is not a likely benefit of auditing? (a) Since auditing is connected to future events, audited information can be easily relied upon by users. (b) Errors or frauds may be discovered during audit. (c) Government authorities can make use of audited accounts for different purposes. (d) It can help in bringing out deficiencies in maintenance of financial records. Ans: (a) 5. Goreti told her friends that she had read a news report about how a company had misled its auditors by producing some fabricated documents. Which of following statements seems to be appropriate in this regard? 26 (a) It was wrong on the part of auditor to rely upon fabricated documents. He must have discovered it as the same falls within the Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics scope of his duties. (b) Although it was wrong on the part of auditor to rely upon fabricated documents, he cannot do anything in the matter. He has to report on the basis of documents provided to him. He has no duty in this regard. (c) Auditor has to conduct audit by exercising professional skill. But he is not an expert in discovering genuineness of documents. Hence, management consisting of dishonest persons may have led him to rely upon fabricated documents deliberately. (d) Management cannot mislead auditor due to high level of knowledge and expertise possessed by him. The above is an outlier case-one of the rare odd cases. Ans: (c) CASE STUDY-2 Me and You Private Limited has been newly incorporated. The plant of the company has recently started production with the help of funds provided by a bank for purchase and installation of machinery. Further, the company is also utilizing working capital credit facilities from the same bank for meeting its day to day working capital requirements like for purchase of raw materials, labour payment etc. However, just within six months of its operations, the management feels that working capital funds are inadequate and situation is creating liquidity issues in the company. The management of the company has approached its bankers and requested for enhancement in working capital credit facilities. The bank manager is insisting upon financial statements of the company for half year along with report providing assurance in this respect duly signed by Chartered Accountant as audit is far away. It also requires projected financial statements for coming years along with a report from CA providing assurance regarding these projections to consider request of management. The management approaches CA P, who has qualified recently and started practising. Reports providing assurance for half yearly results and projected financial statements are sought from CA P. The Management provides necessary information and records to him in this regard. 27 Assume, in above case, the company only provides trial balance, financial statements in draft/preliminary form along with accompanying Page records for the relevant half year to CA P and requests him to provide Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics duly signed financial statements with a report for mutually agreed professional fees. MULTIPLE CHOICE QUESTIONS (MCQS) Based on above, answer the following questions: - 1. The management of company has engaged CA P to issue a duly signed report for half year. Which of the following standards, if any, issued by ICAI are relevant for CA P? (a) Standards on Review Engagements (b) Standards on Auditing (c) Standards on Related Services (d) There are no standards for issuing report in such situation. Ans: (c) 2. Which of the following statements is MOST APRROPRIATE in given case situation? (a) CA P can assist management in preparation of financial statements of the company. However, issue of a report in such a case is outside the scope of work. (b) CA P can assist management in preparation of financial statements of the company and he can issue an audit report. (c) CA P can assist management in preparation of financial statements of the company and he can issue a compilation report in this respect. (d) The responsibility of preparation of financial statement is of company’s management. CA P cannot assist management in preparation of financial statements of the company. However, he can issue a review report. Ans: (c) 3. In the above said scenario for issuance of signed financial statements for half year by CA P, as discussed in last para of Case Study, identify the MOST APPROPRIATE statement: - (a) Standard on Quality control (SQC 1) is not applicable as CA P cannot issue audit report. (b) Standard on Quality Control (SQC 1) is not applicable as CA P 28 cannot issue review report. Page (c) Standard on Quality Control (SQC 1) is applicable in such type of Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics engagement. (d) Standard on Quality Control (SQC 1) is not applicable as CA P is barred from issuing any report in such type of engagement. Ans: (c) 4. The banker of company has also requested for projected financial statements for coming years along with a report from CA regarding these projections to consider request of management. Which of the following standards issued by ICAI are relevant for CA P in such a situation, if any? (a) Standards on Review Engagements (b) There are no standards for issuing such type of reports. (c) Standards on Related Services (d) Standards on Assurance Engagements Ans: (d) 5. Suppose CA P also accepts work of issuing projected financial statements with a report to be signed by him. The management has projected turnover of `100 core for the next year, `150 crore & `200 crore for following years respectively as compared to present turnover of `25 crore in current half year. Identify the MOST APPROPRIATE statement in this situation: - (e) CA P has to satisfy himself regarding arithmetical accuracy of projected data. (f) CA P has to satisfy himself regarding reasonableness of assumptions underlying projected turnover and its consistency with actuals. (g) CA P has to satisfy himself regarding arithmetical accuracy of data along with its proper presentation to banker. (h) CA P has to satisfy himself regarding reasonableness of assumptions underlying projected turnover, its consistency with actuals, disclosure and presentation. Ans: (d) TEST YOUR KNOWLEDGE Which of the following is not an advantage of audit? 29 6. It provides high quality financial information. Page (a) Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics (b) It acts as a moral check on employees. (c) It enhances risk of management bias. (d) It helps in safeguarding interests of shareholders. Ans: (c) 7. Which of the following is NOT TRUE about an assurance engagement? (a) It relates to providing assurance about historical financial information only. (b) The practitioner obtains sufficient appropriate evidence. (c) There is some information to be examined by practitioner. (d) A written assurance report in appropriate form is issued by practitioner. Ans: (a) 8. Which of the following is TRUE about Engagement Standards? (a) Engagement standards ensure proper rights to practitioners in course of performance of their duties. (b) Engagement standards ensure preparation and presentation of financial statements in a standardized manner. (c) Engagement standards ensure uniformity by practitioners in course of performance of their duties. (d) Engagement standards ensure savings in resources of clients. Ans: (c) 9. Consider following statements in relation to “Limited assurance engagement”:- Statement I - It involves obtaining sufficient appropriate evidence to draw reasonable conclusions. Statement II - Review of interim financial information of a company is an example of limited assurance engagement. (a) Statement I is correct. Statement II is incorrect. (b) Both Statements I and II are correct. (c) Both Statements I and II are incorrect. (d) Statement I is incorrect. Statement II is correct. 30 Ans: (d) Page 10. Which of the following is TRUE about Standards on auditing? Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics (a) These deal mainly with voluntary responsibilities of auditors. (b) These deal mainly with mandatory responsibilities of auditors. (c) Their sole purpose is to help government authorities in augmenting revenues. (d) These deal mainly in carrying out audit according to legal provisions. Ans: (b) Correct /Incorrect State with reasons (in short) whether the following statements are correct or incorrect: (i) The basic objective of audit does not change with reference to nature, size or form of an entity. Ans: 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. (ii) The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. Ans: 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. (iii) 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. Ans: 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 31 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 Page Crack your CA CS CMA Exams in 1 Attempt -Join CA Mentoring Program if you are unable to manage/focus on your studies. Batch 1: Working Students (Job) Batch 2: Doing Classes Batch 3: Full time available for Studies Batch 4: Married Students Visit CAmentoringprogram.org |WhatsApp +91 7890770777 | Telegram https://t.me/caraviagarwaloriginal all subjects free Question Bank Dr. CA Ravi Agarwal's CA inter Audit Compiler 6.0 Score 70+ in Audit Paper 4 – Auditing & Ethics on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive. Theoretical Questions Answer Question 1 “Choosing of appropriate accounting policies in relation to accounting issues is responsibility of management”. Do you agree? Discuss duty of auditor, if any, in relation to accounting policies. Answer 1 Choosing of appropriate accounting policies is responsibility of management. The role of auditor lies in evaluating selection and consistent application of accounting policies by management. The following points are included in scope of audit of financial statements: - (1) Coverage of all aspects of entity Audit of financial statements should be organized adequately to cover all aspects of the entity relevant to the financial statements being audited. (2) Reliability and sufficiency of financial information The auditor should be reasonably satisfied that information contained in underlying accounting records and other source data (like bills, vouchers, documents etc.) is reliable and sufficient basis for preparation of financial statements. The auditor makes a judgment of reliability and sufficiency of financial information by making a study and assessment of accounting systems and internal controls and by carrying out appropriate tests, enquiries and procedures. (3) Proper disclosure of financial information The auditor should also decide whether relevant information is properly disclosed in the financial statements. He should also keep in mind applicable statutory requirements in this regard. It is done by ensuring that financial statements properly summarize transactions and events recorded therein and by considering the judgments made by management in preparation of financial statements. The management responsible for preparation and presentation of financial statements makes many judgments in this process of preparing and presenting financial statements. For example, choosing of appropriate accounting policies in relation to various accounting issues