3 P3 Audit MCQ.pdf

CA FINAL | PAPER 3 [NEW SCHEME] ADVANCED AUDITING, ASSURANCE AND PROFESSIONAL ETHICS COMPREHENSIVE MCQ BOOKLET [Independent and Case Study Based MCQ] [400 plus MCQs are covered from Various Sources] 1 Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 INDEPENDENT MCQ’S__________________________________________________________________ 3 ANSWERS KEY FOR INDEPENDENT MCQS ______________________________________________________ 47 MCQ’s FROM PAST RTP’s and MTP’s _____________________________________________________ 53 NOV 2023 RTP ____________________________________________________________________________ 53 MAY 2023 RTP ____________________________________________________________________________ 53 NOV 2022 RTP ____________________________________________________________________________ 54 MAY 2022 RTP ____________________________________________________________________________ 56 ANSWERS TO RTP QUESTIONS _______________________________________________________________ 57 RTP - MAY 2024 ___________________________________________________________________________ 58 MTP - MAY 2024 (S1) ______________________________________________________________________ 62 MTP - MAY 2024 (S2) ______________________________________________________________________ 69 INTEGRATED CASE SCENARIOS [NEW SCHEME] ____________________________________________ 75 AUDIT REPORTING ________________________________________________________________________ 75 AUDIT OF BANKS AND NBFC’S _______________________________________________________________ 77 GROUP AUDIT ____________________________________________________________________________ 79 AUDIT OF PSU ____________________________________________________________________________ 82 AUDIT PLANNING, STRATEGY AND EXECUTION _________________________________________________ 84 RISK ASSESSMENT AND INTERNAL CONTROL ___________________________________________________ 86 GENERAL AUDITING PRINCIPLES AND AUDITOR’S RESPONSIBILITIES ________________________________ 88 MATERIALITY, RISK ASSESSMENT AND INTERNAL CONTROL _______________________________________ 90 AUDIT EVIDENCE __________________________________________________________________________ 92 COMPLETION AND REVIEW ________________________________________________________________ 102 QUALITY CONTROL _______________________________________________________________________ 110 DIGITAL AUDITING AND ASSURANCE_________________________________________________________ 112 SPECIALISED AREAS_______________________________________________________________________ 117 RELATED SERVICES _______________________________________________________________________ 120 REVIEW OF FINANCIAL INFORMATION _______________________________________________________ 122 PROSPECTIVE FINANCIAL INFORMATION AND OTHER ASSURANCE SERVICES ________________________ 125 SUSTAINABLE DEVELOPMENT GOALS (SDG) & ENVIRONMENT, SOCIAL AND GOVERNANCE (ESG) ASSURANCE _______________________________________________________________________________________ 127 INTEGRATED CASE SCENARIOS [OLD SCHEME] ____________________________________________ 132 2 Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 INDEPENDENT MCQ’S 1. PMP Ltd. is an associate of PMP Inc, a company based in Kuwait. PMP Ltd. is listed in India having its corporate office at Assam. The company’s operations have remained stable over the years and the management is looking to expand the operations for which the management is considering different business ventures. The company’s auditors issued clean audit report on the audit of the financial statements for the year ended 31st March 2020. For the financial year ended 31st March 2021, the auditors made some changes in their audit team. While the audit partner remained the same, the field incharge has been replaced, as the field incharge who was engaged in the audit of the financial statements for the year ended 31st March 2020 has left the firm. The audit team has a new person as External Quality Control Reviewer (EQCR) who has specialized knowledge of the industry in which the company is operating. EQCR has been employed with the firm for over 2.5 years and is yet to clear his CA (Chartered Accountancy) final exams. The changes were made on the basis of the consideration that the firm has enough experience of engagement with this client. The audit team commenced the work for audit of the year ended 31st March 2021 after detailed planning and it was observed that EQCR had various comments on certain matters which were not accepted by the audit partner. Audit partner had better understanding of the client and after assessing the comments of the EQCR did not find those relevant. The audit partner without concurrence of the EQCR finalized the audit and issued the audit report. In the given situation, please advise which one of the following is correct? a. The changes in the audit team were not appropriate except for the field incharge who had left the firm. EQCR should have been a member of the Institute of Chartered Accountants of India (ICAI). b. The audit partner did the right thing by ignoring the comments of EQCR as he is the final authority to decide on any matter and take decisions. Further EQCR was junior to the audit partner. c. The audit partner must discuss each and every comment of EQCR with the client and ensure that a proper disclosure in respect of those points should be made either in the financial statements or the audit report. d. EQCR had sufficient and appropriate experience. He should have been given the authority to objectively evaluate various matters, before the report is issued, the significant judgments the engagement team made and the conclusions they reached in formulating the report. By ignoring the comments of the EQCR, audit partner took additional professional responsibility on himself. By considering the comments of EQCR, he could have passed the responsibility to EQCR. 2. VKPL & Associates, a firm of Chartered Accountants, have been operating for the last 5 years having its office in Gurgaon. The firm has staff of around 25 persons with 3 Partners. The firm has been offering statutory audit, risk advisory and tax services to its various clients. The major work of the firm is for taxation services. The audit partners also discussed that the firm needs to work significantly to improve the quality of the services they offer and that would also help the firm to grown its business. Considering this objective, the firm started training programmes for the staff which were made mandatory to be attended. During one of the training programmes on quality, a topic was discussed regarding the information that should be obtained by the firm before accepting an engagement with a new client, when 3 deciding whether to continue an existing engagement, and when considering acceptance of a new Page engagement with an existing client. It was explained that the following points may assist the CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 engagement partner in determining whether the conclusions reached regarding the acceptance and continuance of client relationships and audit engagements are appropriate (as per SA 220): i. The integrity of the principal owners, key management and those charged with governance of the entity; ii. The qualification of all the employees of the entity; iii. Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities, including time and resources; iv. The remuneration offered by the entity to its various consultants; v. Whether the firm and the engagement team can comply with relevant ethical requirements; and vi. Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship. We would like to understand from you which of the above mentioned points are relevant for the topic under discussion? a. i, ii, iv and v. b. ii, iv, v and vi. c. iii, iv, v and vi. d. i, iii, v and vi. 3. ZOV is a private limited company engaged in the business of mining. The company’s operations are fairly large and its turnover is INR 4,000 crore on an annual basis. Due to the nature of the business and the size of the company, the company has appointed a firm of Chartered Accountants as its statutory auditors who have the relevant experience of the industry in which the company has been operating. During the course of the audit of the financial statements for the year ended 31st March 2021, the audit team had various observations which resulted in many adjustments in the financial statements of the company and that was also appreciated by the CFO of the company. At the time of final reviews of the audit team, the audit partner requested working paper on final analytical procedures from the engagement team, however, the engagement team explained that they performed substantive testing procedures which also resulted in some adjustments and the same was incorporated in the final set of financial statements given to the audit partner for the review and accordingly there was no need to perform final analytical procedures. Audit partner was not convinced with this and requested the engagement team to perform this procedure. Considering that the timeline to conclude the audit was approaching, the audit partner also requested the CFO that the audit team would need some more time to perform final analytical procedures. CFO was very impressed with the engagement team and agreed for the time but he also told the audit partner that work of the team was excellent and hence the audit partner should avoid these additional procedures. You are requested to give your view in respect of this matter as per SA 520. a. The explanation of the audit team was correct. After doing substantive testing which also resulted in audit adjustments, there was no need to perform final analytical procedures. b. The suggestion of CFO should have been considered by the audit partner as the CFO was observing the work of the engagement team and hence he could assess that better than the audit partner. c. The requirement in view of the audit partner was valid. The conclusions drawn from the results of final analytical procedures are intended to corroborate conclusions formed during the audit of individual components or elements of the financial statements. 4 d. The audit team did the right thing by not performing final analytical procedures, however, one Page additional procedure in that case should have been - obtain the document containing the analysis CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 performed by the client on the financial statements. This document is required to be assembled in the audit file. 4. BDJ Private Ltd. was established in 2001 and since then the company’s operations have grown significantly. The company is based in Kanpur and has branch offices outside Kanpur. The company is engaged in tours and travels business and because of the nature of the business, it has voluminous transactions. The annual turnover of the company is INR 700 crore. During the audit of the financial statements of the company for the year ended 31st March 2021, the auditors observed wide variation in various details of sales and various expenses as compared to last year. Various balances of trade receivables, loans and advances, statutory liabilities showed significant increase and many balances were found to be non-moving which were aged for more than 3 years. On the basis of the materiality and planned procedures, the audit team requested the client for testing of various samples for sales, expenses etc. The client observed that the number of samples that the team has requested increased as compared to last year and asked the team to cut down on the number of samples so that it is the same number of samples which were tested in the previous years. The audit team did not agree with this and explained various factors which the team had considered for sample selection and the reasons for changes in the samples and also explained the requirements of SA 530 to the client but the client still did not agree. Now there is a situation of deadlock and you are requested to provide your guidance to resolve this matter. a. The argument of the client is not valid. Sample selection is based on certain principles as per SA 530 and that is on the assessment of the audit team. It may change year on year and hence the client should provide the required information to the audit team. b. The explanation of the audit team is not valid. Referring SA 530 was not correct in this case. The audit team should have explained their entire approach around risk assessment to the client before starting the fieldwork and should have formally shared that with the client in writing. c. In the given situation, the audit team instead of getting into any arguments should cut down the number of samples and should increase their procedures around analytical work. That would resolve the problem. d. The audit team should make a formal request in writing for these details from the client and if the client still refuses then they should report this matter to the audit partner. In that case, the auditing standards require audit partner to check some of the documents which may not be provided by the client to the audit team. 5. SKJ Private Ltd. is engaged in the business of construction. The company has also got some real estate projects few years back on which it started the work in the last 2 years. The annual turnover of the company is INR 600 crore and profits of INR 40 crore. The statutory auditors of the company got rotated by another audit firm due to mandatory audit rotation requirements as per the Companies Act 2013. The new statutory auditors of the company started audit of the financial statements for the year ended 31st March 2021 in May 2021. The audit team also requested the client to provide certain information on the opening balances to perform their audit procedures. Initially the management 5 did not provide any information to the auditors on the opening balances thinking that this is not Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 within the scope of their work, however, after going through the auditing standards, the management agreed and provided the required information. Later on, the audit team also started requesting information for the period from 1st April 2021 to 31st May 2021. With this requirement, CFO of the company got very upset and angry and set up a meeting with the senior members of the audit team. CFO raised a concern that the audit team has not been doing the work properly and has been asking for unnecessary information like information on opening balances and then the information for the period after 31st March 2021. The audit partner explained to the CFO that everything requested by the audit team has been as per the auditing standards, however, CFO said that in the earlier years, the previous auditors never asked for such information. You are requested to give your view in respect of this matter. a. The requirement of the auditors for opening balances was valid but for the period after 31st March 2021 is completely wrong as that is out of their scope for the current year’s audit. They can ask for those details during the audit of next year. b. The concern of the CFO was valid. He has seen the previous auditors not performing such audit procedures and hence the new audit team should also follow the same approach which was followed by previous auditors as that would lead to efficient in audit. c. The audit team should set up a meeting with previous auditors wherein it should be assessed why different approach was followed by the previous auditors. On the basis of that discussion with the previous auditors, next course of action should be decided. d. The requirement of the auditors for opening balances as well as for the period after 31st March 2021 is valid. After the requirements of SA 510 and SA 560, audit team is required to perform these procedures. 6. M/s Ram Raj & Associates have been appointed as statutory auditors of Venus Ltd. for the FY 2020- 21. During the year, the company has entered into some related party transactions. CA Ram, the engagement partner has taken a management representation letter regarding the proper accounting, presentation and disclosure of such related party transactions. Is there any further responsibility of CA Ram with respect to the other procedures to be performed for related party transactions? a. No, there is no further responsibility of CA Ram as the best audit evidence for the related party transaction is the management representation letter. b. No, there is no further responsibility of CA Ram as the audit firm is responsible for verifying the balances and disclosure of related party transactions. The identification of related party transactions is the responsibility of the management of Venus Ltd. c. Yes, the audit firm has the responsibility to perform the audit procedures to identify, assess and respond to the risk of material misstatement arising from the entity’s failure to appropriately account for related party relationships, transactions and balances. d. Yes, the auditor has the responsibility to detect fraud and error with respect to the related party transactions. Ans: c. Yes, the audit firm has the responsibility to perform the audit procedures to identify, assess and respond to the risk of material misstatement arising from the entity’s failure to appropriately account for related party relationships, transactions and balances. 6 Page 7. MNO Ltd. is a company engaged in the manufacture of Kids toys. The company sells its goods on CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 credit basis. M/s. Ajay Vijay & Associates have been appointed as statutory auditors of MNO Ltd. for the FY 2020-21. During the course of audit, CA Ajay, the engagement partner asks the management about the email addresses of trade receivables of the company for the purpose of obtaining balance confirmation from the trade receivables. The management of the company asked its sales supervisor to send confirmation request to the trade receivables and collect all the responses and provide all such responses to the auditor. The management of MNO Ltd. also informed CA Ajay that confirmation with respect to two of its trade receivables namely Sports Star Ltd. and Kids Zone Ltd. won’t be available as a dispute between MNO Ltd. and both the trade receivables is going on. With respect to other trade receivables, the sales supervisor provided CA Ajay with all the balance confirmation. With respect to the balance confirmation request, which of the following is warranted as per the requirement of the relevant SA? a. CA Ajay should not have relied on the explanation provided by the management with respect to the trade receivables namely Sports Star Ltd. and Kids Zone Ltd. and he should perform alternative procedures with respect to such trade receivables. b. CA Ajay should have obtained direct response from all other trade receivables instead of sales supervisor receiving direct responses from trade receivables and providing them to the auditor. c. Both a and b. d. CA Ajay should give a qualified opinion as balance confirmation with respect to two trade receivables is not available. 8. M/s ABC & Associates are the statutory auditors of PQR Ltd. for the FY 2020-21. While conducting the audit, CA Aman, the engagement partner noticed the following: Payments of various fines and penalties Unusual cash payments Payments to various government employees not supported by any document Notices received from various regulatory authorities. Heavy payments to legal counsels. CA Aman should consider the above as indicative of: a. Doubt on Internal Controls of PQR Ltd. b. Doubt of non compliance to laws by PQR Ltd. c. Doubt on the accounting system of PQR Ltd. d. Doubt on the going concern assumption of PQR Ltd. 9. Auditors do not normally examine all the information available to them as it would be impractical to do so and using audit sampling will produce valid conclusions. Random selection ensures that all items in the population have an equal chance of selection, e.g. by use of random number tables or random number generators. Block sampling method includes selection of a block or blocks of continuous items from within the organisation. Which of the following selection can be considered as block sampling method? a. Auditor Mr. A divided the trade receivables into 2 groups as: balances above Rs.20 lakh and balances between Rs.10 lakh to Rs.20 lakh and selected different percentage of items from each group. b. Auditor Mr. A determined the starting point as 10 for the list of receivables and selected every 10th balance for receivables thereafter as samples to perform the tests. c. Auditor Mr. A selected sample size as all the high-value balances from the list of trade receivables to ensure that these balances shown are correctly recorded. 7 d. Auditor Mr. A uses a sample of 50 consecutive cheques to test whether cheques are signed by Page authorised signatories rather than picking 50 single cheques throughout the year. CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 10. You are the audit senior of Tey & Co. are responsible for the audit work to be managed for the fixed assets of the company. Tey & Co. has 4 properties amounting to Rs.12.5 crore. One of the important tasks ahead for you is to confirm the ownership of these properties. Which of the following would provide the most persuasive evidence of the ownership? a. To conduct a physical inspection of all the properties located at different areas. b. To ask the management registration documents of these properties and inspect and verify them. c. To check whether all the properties are recorded properly in the fixed asset register and depreciation has been calculated correctly. d. Enquire with the management, if these properties are insured and review the insurance documentation. 11. Professional skepticism is defined as: a. An attitude to avoid significant mistakes which could influence the economic decisions of users taken on the basis of the financial statements. b. The application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. c. An analysis of management decisions in terms of failed outcomes. d. An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence. 12. Professional judgement is defined as: a. The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. b. An attitude to avoid significant mistakes which could influence the economic decisions of users taken on the basis of the financial statements. c. Decision making about the requirements of the accounting profession. d. An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence. 13. Judgements about materiality are made in the light of surrounding circumstances, and are affected by: a. The auditor’s perception of the financial information needs of users of the financial statements. b. Both the auditor’s perception of the financial information needs of users of the financial statements, the size or nature of a misstatement. c. The size or nature of a misstatement. d. The company’s control environment. 14. The following inherent limitations in an audit affect the auditor’s ability to detect material misstatements except: a. Test and sampling. b. Audit process permeated by judgement. c. Poor corporate governance. 8 d. Audit evidence. Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 15. AK & Co., a firm of Chartered Accountants, have been operating for the last 6 years. Due to the quality of service offered by the firm, it has made its name and is quite renowned especially in Southern India where its head office is located. The firm has a staff size of 240 including graduates, Chartered Accountants, Management Consultants, Company Secretaries and lawyers. The firm has 3 branches other than head office at Bangalore, Chennai and Pune. The firm has got many clients for statutory audit over the period and ensures that to maintain the quality of work, proper planning is done by each team before starting any engagement. One of the engagement team, picked up for statutory audit of Sun Private Ltd., was involved in the process of planning of audit for the financial year ended 31st March, 2021. The audit for the financial year ended 31st March, 2020 was conducted by a different engagement team. However, the engagement team of Sun Private Ltd. for the current year has got the industry experience. The audit team is confused during the planning work and would like to have your views on following points. Please advise by answering one of them. a. The engagement team should consult the previous year’s engagement team during the course of their planning. b. The engagement team should be independent and hence, cannot consult the previous year’s engagement team during the course of their planning. c. The engagement team needs to maintain confidentiality and hence, cannot consult the previous year’s engagement team during the course of their planning. d. Only the Partner who is going to sign the audit report may consult the previous year’s audit team. 16. Kshitij Private Ltd. is a company based out of Kochi having operations primarily in Europe. Because of the nature of the operations of the company, it is required to prepare its financial statements as per International Standards for reporting to the local regulatory authorities over there. Since the business is based in Europe, the audit team is also required to visit the locations wherever the company has offices and is accordingly, required to perform certain audit procedures over there. During the audit of this company for the financial year ended 31st March, 2021, the auditors, who had planned their work appropriately and had a large team for conducting the audit, were facing lot of challenges at various stages. They were also required to revisit their materiality level during the course of the work. However, at the time of final reviews when this was discussed with the Audit Partner (Audit Incharge), he was not convinced with the approach of the audit team wherein they reassessed their plans continuously resulting in waste of time. In this situation, please advise which one of the following would be correct. a. Audit Partner being the senior most team member is right and same thing should be considered by audit team by documenting it in the audit file. b. Audit Partner’s view is not correct as the audit team did the right thing. c. Audit Partner was correct, however, during the course of an audit which required visits at various locations it was mandatory. d. Audit Partner’s view is not correct because the materiality was revised by the audit team which is a big thing and same should have been considered by the audit partner. 9 Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 17. RJ Private Limited having its office at Bangalore and operations spread across Southern India, had a discussion with its statutory auditors regarding the audit plan and the timelines. In the past years, there have been significant delays in completion of audit work and the management wanted that for the current year, audit should get completed on time. For doing this, the audit team suggested that the information for the purpose of audit should be ready on time and only then the timelines as agreed can be achieved. On the basis of the discussions with the client & the auditors and internal discussions amongst the audit team members, a detailed audit programme was prepared by the audit team for the current year’s audit. But the audit team discussed that they will not document this audit programme till the completion of the audit work because at various stages, the work may require changes. If the audit team documents the audit programme then it would create problems later on at the time of assembling of the audit file wherein the audit team would have to show the changes made by them in the audit programme during the course of the audit. You are required to share your views in respect of this understanding and approach of the auditor. a. The decision of audit team regarding not documenting the audit programme is very good as this would avoid unnecessary problems of documentation of changes made in the audit programme at the time of assembly of file. b. Instead of considering the audit programme, the audit team could have prepared a checklist. In case of a checklist, such problem will not arise. Because in case of a checklist if any changes are made then the final checklist can be kept in the file along with old working checklist used during the audit. c. The approach of the audit team not to document audit programme is not correct. The audit team needs to document it properly at the time of planning stage itself and any changes made after that should also be documented with explanations. d. The decision of audit team not to document the audit programme is not correct. Their concern that the changes may arise in the audit programme is valid, however, to take care of that, the audit team can take approval from the ICAI later on when those changes will be made. The audit team will have to document the changes and the approval note of the ICAI. 18. KJ Private Ltd. has a business of pharmaceuticals and has an annual turnover of INR 1,500 crore. During the last few years, considering the environment in which the company operates, its profit has reduced and are still reducing. Hence, the management has been looking at various ways to cut the costs. AD & Associates are the statutory auditors of the company and RM & Associates are the internal auditors of the company. Initially, the company did not want to appoint any internal auditors to save costs, however, at insistence of the statutory auditors, the company appointed the internal auditors. During the course of the statutory audit for the financial year ended 31st March, 2021, the statutory auditors requested for the detailed working papers of the internal auditors which the internal auditors refused. However, the statutory auditors told the management if the same are not provided then they would qualify their report. In this situation, please advise which of the following would be correct. a. The statutory auditors should review the detailed working papers but they cannot qualify their report on this ground. 10 b. The statutory auditors may review the detailed working papers and even after that they may qualify Page their report. CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 c. The statutory auditors are not required to go to the extent of review of detailed working papers of internal auditors. d. The statutory auditors may review the detailed working papers of internal auditors but for that purpose they would require prior approval of the ICAI. 19. RIM Private Ltd. is engaged in the business of manufacturing of steel having annual turnover of INR 10,000 crore. The company is very capital intensive and has its plants at two locations – Mohali and Hosur. During the year ended 31st March, 2021, the company carried out a detailed physical verification of its property, plant and equipment and also reassessed their useful lives by engaging a consultant. The consultant submitted its report to the management on 21st April, 2021. The statutory auditors of the company started their audit work from May 2021 and when this information was given to them regarding the physical verification and the reassessment of the useful lives of property, plant and equipment, the auditors told the management that the consultant should have submitted its report to the auditors also independently. Further, in the absence of this direct communication of the report of the consultant to the auditors, the audit team would have to review the work of the consultant which is not efficient but it cannot be avoided now. Management did not agree with both the points of the auditors that the consultant should have shared report with the auditors directly and that the auditors need to review the work of the consultant. The management would like to have your views on this matter. a. The view of the management seems to be correct because there is no such requirement that any consultant of the company should share his report directly with the auditor. Also when the consultant has already submitted a detailed report, no further review is required on that. b. Both the management and auditors are not correct. The auditor is not supposed to receive the report directly. Further, the auditor needs to review the work of the consultant irrespective of the fact whether he received the report directly or not. c. The auditor’s requirements are reasonable because he carries duty in respect of audit of financial statements and by not getting report directly from the consultant, he would not know whether it belongs to that consultant or not. And now only because of this lack of proper communication the auditor would have to review the work of the consultant. d. Both management and auditors should find a solution to this problem. The management may request the consultant to send the report to the auditor directly now. On the basis of the same, the auditor can avoid unnecessary procedure related to review of report of the consultant. 20. M/s Viaan Viraj & associates are the statutory auditors of ABC Ltd. for the FY 2020-21. The company has a strong internal audit team. During the course of audit, CA Viaan, the engagement partner found that the company has factories all across the country. In order to verify the wages expenses at all the factories, CA Viaan decided to use the Internal Audit Team of the company. He accordingly discussed the same with Mr. Gaurank, the Chief Internal Auditor of ABC Ltd. to provide him a report on the wages expenses across all factories. Which of the following requirements as per SA 610 are required to be fulfilled by CA Viaan prior to using the direct assistance of the Internal Audit Team of the company? a. CA Viaan should obtain written agreement from the management of ABC Ltd. that the internal audit team will be allowed to follow the statutory auditors’ instructions. 11 b. CA Viaan should obtain written agreement from Mr. Gaurank that his team will keep the matters Page confidential. CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 c. Both a & b d. CA Viaan can use the direct assistance of the Internal Audit Team after discussing the same with the management. No prior written agreement is required. 21. An auditor’s expert may be either an auditor’s internal or an external expert. Which of the following can not be an auditor’s internal expert? a. Partner of the Auditor’s Firm b. Temporary Staff of the Auditor’s Firm c. Permanent Staff of Auditor’s Network Firm d. A Prospective CA, soon to join the Auditor’s Firm as a Partner. 22. CA Sameer, after developing the audit strategy for Menka Ltd., develops an audit plan but finds a need to revise the materiality levels set earlier and therefore, a deviation from the already set audit strategy is felt necessary. In this case, he should a. Continue with the Audit Plan without considering the Audit Strategy. b. Drop the audit and withdraw from the engagement. c. First Modify the audit strategy and thereafter, prepare the audit plan according to the modified strategy. d. Devise a new audit plan and then, change the strategy as per the Revised Plan. 23. M/s MNO & Co. (a CA firm with 3 partners) are the statutory auditors of PCL Limited, a company engaged in real estate business. PCL Limited recently launched a real estate project in Bangalore Whitefield location at an all- inclusive price of Rs.5,500. PCL Limited also announced that their first 50 customers would be allowed a special inauguration discount of 10%. Mr. M, one of the partners with MNO & Co. and the audit engagement partner for PCL Limited booked one 3 BHK flat and he was offered the all- inclusive price of Rs.4,950 (after 10% inauguration discount). Another partner- Mr. N also booked one 3 BHK flat at the all- inclusive price of Rs.5,500. Which of the following statements is correct: a. M/s MNO & Co., being the auditors shall not suffer any disqualification on account of such business transaction by Mr. M with audit client since Mr. N was not offered any discount in the booking price. b. M/s MNO & Co., being the auditors shall not suffer any disqualification on account of such business transactions by Mr. M and Mr. N with PCL Limited since the third partner- Mr. O had not done any business transaction with PCL Limited. c. M/s MNO & Co., being the auditors shall not suffer any disqualification on account of such business transactions by Mr. M and Mr. N with audit client since business transactions with audit client in the ordinary course of business, are allowed, without any consideration on transaction price. d. M/s MNO & Co., being the auditors shall not suffer any disqualification on account of such business transaction by Mr. M with audit client if Mr. M qualified as among the first 50 eligible customers as per the marketing scheme and it can be demonstrated that PCL Limited has passed on similar 10% inauguration discount to other 49 customers and further, the discount of 10% offered to Mr. M was in the nature of routine commercial transaction, in the ordinary course of business of PCL Limited. 24. Raj Private Limited is engaged in the business of retail and has its retail outlets concentrated 12 towards Northern India. Currently, the company has 59 outlets and the plan of the management is Page to take this to at least 100 over the next 2 years. CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 The company is audited by Raj & Associates, a firm of Chartered Accountants, who have been operating for over 20 years, however, they don’t have much experience in the retail sector. Because of this fact the audit team decided to plan efficiently for the audit of the financial statements of the company for the year ended 31st March 2021, being their first year of audit. During the course of risk assessment by the auditors, it was discussed that the company is operating in an industry where the operations are not very complicated and mostly the processes are known to all. Considering the same they decided that assessment of inherent risk should not be done for this company as that would be inefficient. However, the auditors will take due care of the control risks. The same assessment was deliberated upon and after lot of discussions it was finalized like this. In the given situation, please advise which one of the following would be correct. a. The assessment of audit team is correct. b. The assessment of audit team is wrong considering the fact that this is a private company wherein such assessment is not possible. c. The assessment of audit team is wrong for this company. d. The assessment of audit team is correct considering the fact that this has been thoroughly discussed. 25. Kshitij Private Ltd. is a company based out of Noida having operations in India and Dubai. The company’s operations in Dubai have increase over the last 2 years and the management is earning very good profits. Because of the profits, the management also planned that they should now focus on strengthening of internal controls of the company and for that purpose they have discussed with the statutory auditors to carry out the audit for the financial year ended 31st March 2021 very rigorously. The report on internal financial controls is also applicable to the company and hence the auditors during the course of their work asked for Risk-control matrices from the company. During the year ended 31st March 2020, Risk-control matrix was not available with the company and was prepared in a draft manner and the same was shared with the audit team during that year and the auditors completed their work on the basis of that. However, for the year ended 31st March 2021, the auditors would like to have robust documentation and are not ready to accept the same Risk-control matrices. In the given situation, please suggest what should be the course of action. a. The request of audit team is correct and the management should provide that. b. The requirement of audit team is not justified considering the fact that last year same documentation was used by them. c. The requirement of audit team is not justified considering the fact that it’s a private company and auditor anyways is required to perform rigorous audit procedures. d. In case of a private company on which internal financial controls report is required, the auditor is not allowed to take any Risk-control matrix from the management. Seems to be an ethical issue. 26. SK Private Limited is a medium-sized company having operations in Jharkhand. The company manufactures some parts and sells that to various dealers on ex-works basis. The financial statements of the company are prepared as per Ind AS and internal financial controls report is also 13 applicable on the same. Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 During the course of audit of the financial statements for the year ended 31st March 2021, the management of the company had a detailed discussion with the auditors for audit planning. Further it was also decided that any observations of the auditors should also be discussed with the management before conclusion by the audit team which was not done in the past years. Considering this, the auditors started the risk assessment and requested the management to share their documentation for the same on which the management said that they don’t have any risks and if the auditors come across any such thing they can discuss that with the management. But the auditors were not convinced with the view of the management and the same thing has happened in the past years as well. You are required to provide your inputs to resolve this matter. a. The requirement of the audit team is not correct. b. The view of the management is correct because of the applicability of Ind AS. c. The view of the management is correct because of the applicability of internal financial controls reporting. d. The view of the management is not correct. 27. AJ Private Ltd. is in the business of telecom and have significant operations across India predominantly in Northern India. The statutory auditors of the company have been continuing for the last 3 years and have been issuing clean report. For the financial year ended 31st March 2021, the statutory auditors commenced their work in March 2021 as per discussions with the management and with a plan to complete the audit by first week of May 2021. The audit team concluded the work as per the agreed timelines and the financial statements and audit report were signed on 5th May 2021 along with the engagement letter for the financial year ended 31st March 2021. In the given situation, please advise which of the following would be correct. a. The engagement letter should have been signed before commencing the audit work. b. The engagement letter should have been signed at least a day before signing the audit report. c. The engagement letter should have been signed at least a day before signing the financial statements. d. The engagement letter is optional in case of a private company and hence can be signed anytime. 28. RIM Private Ltd. is engaged in the business of manufacturing of water bottles and is experiencing significant increase in turnover year on year. It is a subsidiary of RIM Gmbh, based out of Germany. During the financial year ended 31st March 2021, the company carried out a detailed physical verification of its inventory and property, plant and equipment. During the year, various other activities were carried out to increase efficiency in operations and reductions of costs. The statutory auditors of the company started their audit work from April 2021 and requested for 14 a documentation on changes in processes and activities during the year as well as any resultant impact of the same on management controls. Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 The management of the company told the auditors that all such documentation is maintained by the parent company as this is a closely held private company and even though internal financial controls reporting is applicable on this company, the parent company is taking due care of each and every process. The auditors did not agree with the views of the management. Please advise both the management and the auditors. a. The auditors should look for documentation as per Sarbanes Oxley in this case. b. The auditors are correct in this case and the management should provide the required documentation. c. The auditors are correct in this case and the management should provide the required documentation. However, in case the parent company is covered by Sarbanes Oxley then it can be ignored by the auditors. d. The management is correct. 29. XYZ Private Limited is engaged in trading of parts of machineries used in boiler plants. Company has seen growth of 60% in the sales and management expecting similar growth in next 3 financial years and is planning to onboard new dealers in order to achieve management goal. Purchase department also expect to develop new suppliers in order to meet customer demands. Internal auditor of the company has identified frequent changes in the bank account and other master details of suppliers. At this expansion planning phase, company has no defined control to provide assurance on said supplier master changes. Management agreed to develop the process of monthly detailed review of supplier master changes done in supplier master by Finance assistant in order to ensure authorized changes in supplier master. One of the members from the Management would like to know that above controls falls under which category: a. Automated control. b. Preventive control. c. Detective control. d. Compensating control. 30. The management of Magoo Ltd. has developed a strong internal control in its accounting system in such a way that the work of one person is reviewed by another. Since no individual employee is allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds and errors are high. CA. Olive has been appointed as an auditor of the company for current Financial Year 2020-21. Before starting the audit, she wants to evaluate the internal control system of Magoo Ltd. To facilitate the accumulation of the information necessary for the proper review and evaluation of internal controls, CA. Olive decided to use internal control questionnaire to know and assimilate the system and evaluate the same. Which of the following questions need not be framed under internal control questionnaire relating to purchases? a. Are authorized signatories for purchases limited to elected officials? b. Are payments approved only on original invoices? c. Does authorized officials thoroughly review the documents before signing cheques? d. Are monthly bank reconciliations implemented for each and every bank accounts of the company? 15 31. The firm from which you are pursuing your articleship training is the internal auditor of ABC Ltd. Page While conducting the audit of the medical expense reimbursements of the company employees, CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 you come across some bills which are clearly not medical in nature, and some others which have been overwritten. During the discussions, the accountant points out that the employee is a functional head who enjoys a significantly higher medical expense reimbursement limit, and that you should ignore those bills as the amount is not material. You will: a. Accept the explanation and the bills. b. Recommend that the claim should be reduced, and clear guidelines should be issued to all employees on the matter, with a provision for disciplinary action. c. Recommend that the employee be asked to submit fresh bills to avail the tax benefit. d. Recommend that the employee be taxed on the aggregate amount of the suspect bills. 32. Adequate design and effective implementation of Internal Controls may not lead to the identification of: a. Frauds and errors. b. Design and Implementation gaps in Processes. c. Abuse by Process Owners. d. Segregation of Duties. 33. KPL Private Limited is a large software company based out of Hyderabad. The annual turnover of the company is INR 2,100 crore. The company sells software and is also involved in the implementation of those software for its clients. The major chunk of the revenue though comes from sale of software only. The company works on a completely paper-less office and accordingly, most of the documents are available in soft copy. During the financial year ended 31st March 2021, the auditors during the course of their audit obtained various audit evidence some of which were in hard copy but mostly in soft copy. On conclusion of the audit, the auditors are in a dilemma whether to maintain their documentation entirely in hard copy or soft copy or can it be mixed of both. After consultations with various persons, the auditors stood that the documentation for this company, being operated in fully automated environment should be in soft copy only. Please advise whether this understanding is correct. a. This is a matter of documentation of audit evidence for a client working in fully automated environment and hence it should be in soft copy only. b. As per the requirements of auditing standards, this documentation can be in a mix of both soft and hard copy. c. Since the client is operating in a fully automated environment, it would be important to check with them because all this documentation has come from the client only. d. As per the requirements of auditing standards, documentation is not required in case of a client working in automated environment because everything is automated and can be accessed easily at any point of time. 34. KJ Private Ltd. is engaged in the business of e-commerce wherein most of the operations are automated. The company has SAP at its ERP package and is planning to upgrade the SAP version. Currently, the version of SAP being used is fine but the higher version would lead to increased efficiencies and hence the company is considering this plan which will also involve a huge outlay. 16 Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 KPP & Associates, were appointed as the statutory auditors of this company for the year ended 31st March 2021 and the statutory audit firm has been working in this industry for long but most of the work which the firm did was more of risk advisory or internal audit. For the first time, this audit will be conducted and that’s why the audit team started obtaining understanding of the operations of the company which included understanding of the SAP system of the company. However, the management of the company was not comfortable with this approach of the audit team particularly because audit team was spending good time on understanding of the IT systems of the company. The management suggested that the auditors should limit their understanding and should perform audit procedures rather than getting into business/ operations. But the auditors have a different view on this matter and because of which work has got stuck. In the given situation, please suggest what should be the course of action. a. The approach of audit team to obtain detailed understanding of the company before starting with the audit procedures is absolutely fine. If the auditors don’t understand the systems properly the audit procedures may not be appropriate. b. The management’s concern regarding the approach of the auditors seems reasonable. The auditors are spending time on understanding of the systems/ business and not performing their audit procedures. c. This being a private company and that too into the business of e-commerce, the auditors should have knowledge about the operations of the company through their understanding of the industry and hence should not get into this process of obtaining detailed understanding at the client place. d. The audit team could have planned their work differently. They should involve IT experts who would have knowledge of the systems of the company and hence lot of time can be saved. Further in case of such type of industry, involvement of IT experts is anyways required mandatorily as per the legal requirements. 35. AR Private Limited is a medium-sized company engaged in the business of trading of electronic equipment. The company has various warehouses where all of these equipment are kept and has an inventory levels of generally 2-3 months. The internal environment of the company is driven by various processes some of them are manual and some automated. Accordingly, the management has also set up various controls both manual and automated and is comfortable with their design and operating effectiveness. During the course of audit of the financial statements for the year ended 31st March 2021, the auditors raised various queries regarding various processes where the controls were operating effectively. This was because of the fact that auditor was considering either only manual controls or only automated controls in a process. As per the auditor, the management should have adopted the same approach and hence they would like to increase the substantive audit procedures because they had a view that as per the current approach of the management, controls should be considered as ineffective irrespective of the fact that the testing which the audit team had performed resulted in the controls being effective. Currently, the concern was regarding the approach on which management was also stuck on their 17 point. Page You are required to provide your inputs to resolve this matter. CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 a. The approach of the management doesn’t seem to be correct because of the nature of the operations of the company. The current approach which the management has followed can be accepted only in case of manufacturing industry. b. The management should have discussed their approach with the auditors before appointing them. The Companies Act 2013 provide specific guidance on these matters wherein the management of the company can follow such approach by taking pre-approval from their auditors and in such a case, the report of the auditors is always clean. c. The approach of the management is completely fine. The auditors need to correct their understanding of the internal controls and the application of internal controls. A process cannot be limited to have either only manual control or automated control. d. Considering the size of the company, such matters should be ignored by the auditors. Even if the approach of the management is not correct, it would not have any impact on the work of the auditors because all such matters get resolved at the time when auditors perform final analytical procedures. 36. AJ Private Ltd. is in the business of construction and infrastructure having an annual turnover of INR 1,100 crore. The operations of the company are run efficiently driven by the well laid out policies and procedures. The processes of the company are very strong and are well documented and properly communicated to its employees, as required. The management had also done a detailed risk assessment in the earlier years and currently the risk management system of the company is considered to be very effective. The internal controls include both automated and manual. During the course of the audit of the financial statements of the company for the financial year ended 31st March 2021, the statutory auditors did their risk assessment and also reviewed the general IT controls which were found to be effective. Considering the same, one of the senior audit team members asked the team to start performing the substantive audit procedures taking the approach that controls are effective. However, the audit team did not find this approach correct and discussed that they should also check the effectiveness of other manual and automated controls by testing them and then move on to substantive testing. The audit team recently had a training on the internal controls and hence their understanding was different from the audit senior. This led to a conflicting situation between the audit senior and remaining audit team. In the given situation, please advise which of the following would be correct. a. The audit senior is correct because general IT controls were found to be effective and hence no further work may be required on controls. b. The view of the audit team looks fine because without testing of internal controls covering all types of controls (manual and automated), those controls can not be said to be operating effectively. c. The audit senior seems reasonable in his approach because general IT controls were found to be effective. However, it would be more appropriate to also test application controls before concluding on the effectiveness of the controls. d. The argument of the audit team looks better because every audit requires significant time to be spent on testing of internal controls and by only covering general IT controls, it would be difficult 18 to justify this requirement later on in the audit file. Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 37. RIM Private Ltd. is engaged in the business of manufacturing of cranes and other construction equipment. The nature of the operations are such that purchases are quite significant even though the sales may or may not be very significant, in terms of number of transactions during the year. The company’s statutory auditors have also obtained certain audit tools to help the audit team on various audit procedures to bring efficiency in various audits. During the course of the audit of the financial statements for the financial year ended 31st March 2021, the auditors used those audit tools (also known as computed assisted audit techniques) for sampling procedures and data analytics. The outcome of the tools resulted in some analysis and requirements which the audit team requested from the client. However, the client refused to provide any such information because as per the client all these tools were those of the auditor and any outcome of the same needs to be handled by themselves instead of asking the management. The auditors have suggested that such an attitude of non-cooperation would not help the either party and would defeat the objective of the audit. The management of the company is, however, ready to provide any other information to the auditors. In this situation, please advise both the management and the auditors. a. Since the management is ready to provide any other information, the auditor should obtain this information as well by not disclosing the management that it is outcome of any audit tool. b. The view of the management is correct because audit tools are there to support the auditors and not to lead to increased work for the management. c. The auditors are correct because by using audit tools they are performing their audit procedures. d. The auditors should ignore all these tools and plan their audit procedures accordingly. 38. ABC Private Limited uses in-house developed application system for Accounting. The auditor observed that user ID and password is mandatory to access the application system and felt that this is a good control. What type of control is this? a. IT General Control. b. Application Control. c. Detective Control. d. Preventive Control. 39. XYZ Private Limited uses ERP software for all business processes. The application is hosted in cloud and is maintained by a third party. Statutory Auditor is not confident about the risk management process in the third party organization and requests for audit access to such data centre. The request was declined and management informed that the third party is ISO certified and audit on controls at Service Organisation is regularly being conducted. What the auditor should do? a. Do not ask for any thing else since the Third Party is ISO certified. b. Insist on conducting audit in the Third Party. c. Take the ISO certificate. d. Take the Service Organisation control audit report to review. 40. Rimmi Ltd. was set up initially as a private limited company. Subsequently, it got converted into a public company. The company’s management has plans of expansion but the business was not 19 growing in an organic manner. Therefore, the management decided to acquire the competitors. During the financial year ended 31st March, 2021, the company acquired two companies in India Page and France in September, 2020 and January, 2021 respectively. The company controls both of CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 these companies as per the criteria laid down in the Companies Act 2013 as well as the applicable accounting standards. The management started discussions with the auditors regarding the audit wherein it was also pointed out by the auditors that the management should also prepare consolidated financial statements (CFS), if they want. Management needs your advise on the same. a. Management must prepare the CFS as per the requirements of the Companies Act, 2013. b. Management has a choice not to prepare CFS but should go for that considering that its true performance and financial position can then be demonstrated. c. Management could have prepared CFS if the acquired companies would have completed at least one year post acquisition. d. Management must prepare CFS but it should include only the company acquired in India. 41. SKJ Private Ltd. has an annual turnover of INR 200 crore and profits of INR 25 crore. The company is engaged in the business of textiles and has fairly stable operations over the years. There has not been much growth in the company in the last few years despite the attempts of the management. Currently the management is more focused towards cost cutting and has been considering all the options to achieve that objective. The statutory auditors of the company have been auditing the financial statements for the last 3 years and have issued clean reports over these years. During the financial year ended 31st March 2021, management got a large project from a new customer which resulted in significant increase in the turnover of the company. However, the profitability of the company did not improve much because the margins in the contract were not high. The statutory auditors during the course of their audit of financial statements for the year ended 31st March 2021 (their fourth year of audit) did not agree with the revenue recognition criteria followed by the company. Since the matter was significant, lot of discussions/ debates happened between the auditor and the management. But it was finally agreed that the auditors would qualify their audit report. Auditors wanted that the management should explain this matter in detail in the notes to accounts to the financial statement over which the auditors are qualifying the audit report. However, the management had a different view. Management said that if the auditor is qualifying his report then why should the management also highlight that matter in the financial statement and hence refused to include any note for the same. On account of the conflict, since audit is not getting concluded. You are required to suggest how the matter get resolved? a. In the given situation, if the management does not agree to give a note in the financial statements then the auditor should not hold the audit report. However, in such a case, the auditor would need to give disclaimer of opinion in his report instead of qualification. b. The argument of the management seems correct. Auditor cannot do both the things i.e. to qualify and then also get that highlighted in the financial statements. That note would not be beneficial for the users of the financial statements. c. In case of such matters related to revenue recognition, it is always better to give detailed explanation in the notes to accounts to the financial statements. If the explanation is satisfactory then the auditor should also consider giving emphasis of matter instead of qualification. d. The requirement of the auditor is beneficial for the company because by giving an explanation of 20 the matter, on which auditor has given a qualification, in the notes to accounts, the management Page would be able to explain their perspective/ point of view to the users of the financial statements. CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 In that case, auditor while giving the qualification can give reference to the notes to accounts otherwise the entire matter would form part of the audit report. However, the auditor should not hold his report if the management does not want to give any explanation in the notes to accounts. 42. A significant deficiency exists in the process of flow of approval of travel re-imbursements of the officials. This was communicated in the previous year to those charged with Governance and no remedial action was taken on the same so far. The auditors are of the opinion that it need not be communicated again. Is the opinion of the auditors on NOT to communicate the deficiency in internal control reported in the previous year correct? a. Yes, the auditor is not required to communicate the same again as it is the duty of the management and those charged with governance to maintain the internal control system. b. No, the current year’s communication may repeat the description from previous communication or simply reference the previous communication. c. Yes, the auditor is not required to communicate the same again as written representation is being obtained from management and those charged with governance that they are responsible for maintaining internal control. d. No, it needs to be communicated again but an oral reminder to those charged with governance on the matter may suffice. 43. BC Ltd. is the business of manpower consulting. The company has a huge cash and bank balance including fixed deposits with banks. During the course of audit of the financial statements of the company for the year ended 31st March 2021, auditors circulated independent bank balance confirmations. The auditors received all the balance (covering fixed deposits) confirmations independently. Auditors observed that the fixed deposits balances as per the independent balance confirmation did not match with the books balances in some cases. Management produced the fixed deposit certificates to the auditors wherein the balances of fixed assets matched with the balances as per the books. How should the auditor deal with this matter? a. Auditor should qualify the audit report in respect of differences in book balances of fixed deposits vis-a-vis independent balance confirmations. b. Auditor should consider the fixed deposit certificates produced by the management and basis that any differences in book balances of fixed deposits vis-a-vis independent balance confirmations should be ignored. c. Auditor should consider the documentation provided by the management i.e. the fixed deposit certificates, however, independent balance confirmations is also required to be considered by the auditor which shows various difference. The auditor should obtain balance confirmations again. d. Auditor should consider the documentation provided by the management i.e. the fixed deposit certificates, however, independent balance confirmations is also required to be considered by the auditor which shows various difference. The auditor should look to perform alternate procedures and basis that the matter should be looked at. 44. While auditing the complete set of consolidated financial statements of Tulips Ltd., a listed company, using a fair presentation framework, M/s Pintu & Co., a Chartered Accountant firm, discovered that the consolidated financial statements are materially misstated due to the non- consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial statements. The effects of the misstatement on the consolidated financial 21 statements have not been determined because it was not practicable to do so. Thus, Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 M/s Pintu & Co. decided to provide an adverse opinion for the same and further determined that, there are no key audit matters other than the matter to be described in the Basis for Adverse Opinion section. Comment whether M/s Pintu & Co. needs to report under SA 701 ‘Communicating Key Audit Matters in the Independent Auditor’s Report’? a. M/s Pintu & Co. have the option to follow SA 701, thus, need not to report any key audit matters. b. SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit matters other than the matter to be described in the Basis for Adverse Opinion section, no ‘Key Audit Matters’ para needs to be stated under audit report. c. SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit matters other than the matter to be described in the Basis for Adverse Opinion section, M/s Pintu & Co. shall state, under ‘Key Audit Matters’ para, that ‘except for the matter described in the Basis for Adverse Opinion section, we have determined that there are no other key audit matters to communicate in our report.’ d. M/s Pintu & Co. is under compulsion to follow SA 701 as the audit is of a listed company and shall report under ‘Key Audit Matters’ para the matter same as stated in ‘Adverse Opinion’ para regarding non- consolidation of a subsidiary. 45. 50:50 test determination is popularly used in: a. Banking Company. b. Insurance Company. c. NBFC Company. d. Stock Trading Company. 46. XYZ & Associate Chartered Accountants were appointed auditors for Weknow LLP. The engagement manager of the audit team, while designing the auditor response to assessed risk, concluded that there are no requirements of the applicable financial reporting framework for disclosing the related party transaction in the Firm’s Financial Statement and hence the audit team is not required to perform any audit procedures with respect to identification and disclosure of related party relationship and transaction in financial statement. You as an engagement partner guide the engagement manager by selecting the appropriate response from below: a. Even if the applicable financial reporting framework establishes minimal or no related party requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party relationships and transactions and should sufficiently be able to conclude whether the financial statements, insofar as they are affected by those relationships and transactions achieve a true and fair presentation and are not misleading. b. If the applicable financial reporting framework establishes minimal or no related party requirements, then the auditor is not required to obtain an understanding of the entity’s related party relationships and transactions. c. Even if the applicable financial reporting framework establishes minimal or no related party requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party relationships and transactions and should sufficiently be able to conclude whether the financial statements, as a whole, are free from all the material related party transactions. d. Because related parties are not independent of each other, hence auditor can obtain the written representation from the Related Party’s auditor regarding the accuracy and completeness of the related party transactions disclosed in Firm’s Financial Statement. This should only be carried where the applicable financial reporting framework establishes minimal or no related party 22 requirements. Page CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 47. BCO Private Limited is operating in India for the last 15 years. It has three group companies – one subsidiary in India and the other two in Ireland and France. All these subsidiaries were acquired one by one and investments were made in these companies gradually i.e. initially control was not obtained and after investment for some period, control was obtained. The statutory auditors have evaluated that all the group companies are significant for the purpose of audit of consolidated financial statements. During the year ended 31st March 2021, the audited financial statements of all the components are available except for French company whose audit got delayed and would not get completed before the release date of CFS of parent company. For the purpose of consolidation, the parent company has provided the audited financial statements of other components. Please suggest what can be the possible situation in respect of financial statements of French company for the purpose of consolidation for the purpose of audit of CFS. a. Since the audit of French company is in progress, its financial statements subject to audit can be considered by auditor of parent company and audited signed financials can be given to auditors even after release of audited CFS as this is matter of documentation only. b. The management should give management accounts to the auditors of CFS and auditor can mention the same point in other matters paragraph in his audit report which is an acceptable approach. c. Auditor should get the financial statements of French company excluded from CFS. d. If the auditor does not receive audited financial statements of French company, he should modify his audit report. 48. KB Ltd. is engaged in the business of construction. It has multiple subsidiaries and associates in India. The company acquired PPP GMBH in Germany on 1st February 2021. The company also obtained control in PPP GMBH on the same date. Its investment in PPP GMBH was of a huge amount. The company has been preparing its CFS over the last few years and this has also become a matter of concern for the company for the year ended 31st March 2021. The management is of the view that consolidation of PPP GMBH would not be required in CFS for the year ended 31st March 2021 because this is the first year of acquisition. However, the auditors have not been agreeing for the same. The timeline of submission of audited financial statements is due in few months time. In the meantime, the management moved on the consolidation of PPP GMBH taking audited financial statements of PPP GMBH which are available in the GAAP of its local country and GAAP conversion adjustments from its local GAAP to Indian GAAP have been made by the parent company. GAAP conversion adjustments are significant at CFS level. In the meantime, the management has also been consulting whether the consolidation would be required or not also considering the fact that comparative figures in case of PPP GMBH would not be available. Further the auditors have also raised observations regarding the GAAP conversion adjustments over which management has a disagreement. As per the management the auditors are not required to comment on GAAP adjustments because audited financial statements of PPP Gmbh have been given to the auditors. Please help to resolve these matters. a. Consolidation of PPP Gmbh should be done but GAAP conversion adjustments are not required to 23 be audited. Page b. Consolidation of PPP Gmbh should not be done and accordingly, GAAP conversion adjustments CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 would not arise. c. Consolidation of PPP Gmbh should be done and GAAP conversion adjustments are also required to be audited. d. Consolidation of PPP Gmbh is a choice of management as the accounting standard does not mandate this. However, in case it is done then the GAAP conversion adjustments would be required to be audited. 49. VDN Ltd. is a medium-sized company engaged in the business of retail. It has two subsidiaries and one joint venture. Both the subsidiaries are larger in size as compared to the parent company. The accounting policies of the parent company, its subsidiaries and joint venture were same. However, during the year ended 31st March 2021, one of its subsidiary, SMA Pvt Ltd. changed the method of depreciation of Property, plant and equipment (PPE) to written down value method which is different from the method followed by the parent company i.e. Straight line method. Further this subsidiary also changed the method of valuation from FIFO to Weighted average method which has become different from parent as the parent follows FIFO method. These changes were made by the subsidiary because it reflected the better picture of its standalone financial statements. Now for the purpose of CFS, the auditors have asked the management of parent company to ensure that accounting policies of the group companies should align with that of parent in line with the requirements of accounting standard. But the management of parent and subsidiary company believe that out of three group companies other than parent, only one group company requires this change for the purpose of consolidation and the same should be ignored by the auditors. Please suggest. a. The view of management is correct. b. For CFS, method of depreciation of SMA Pvt Ltd. may continue to be different, however, method of valuation of inventory should be aligned with that of the parent. c. For CFS, method of valuation of inventory of SMA Pvt Ltd. may continue to be different, however, method of depreciation should be aligned with that of the parent. d. The auditor should get these changes made in the standalone financial statements of SMA Pvt Ltd. 50. AJ Private Ltd. is engaged in the business of retail having annual turnover of Rs.1,800 crore. The company has a plan to get listed on Bombay Stock Exchange next year. The company has 3 associates, 4 subsidiaries, and 1 joint venture. The company prepares its consolidated financial statements on a quarterly basis for the purpose for internal purposes. The quarterly financials are reviewed by the statutory auditors of the company. The group companies of the parent company have increased in terms of their size looking at the total assets and revenue of the group. For the purpose of audit of consolidated financial statements for the year ended 31st March 2021, management has request the statutory auditors that it would be able to provide management certified accounts of the joint venture as its audit would not get completed on time and even without joint venture, the auditors would be able to cover 75% of the total assets of the group at consolidated level. However, the statutory auditors are insisting that they need to cover at least 80% of the total assets of the group at consolidated level as per the requirements of the Auditing Standards and for that financials of the joint venture should also be audited. Please advise. 24 a. Auditors should accept the management certified accounts of joint venture; evaluate implications on audit report as qualification will be required for unaudited components as per SA 705. Page b. Auditors cannot accept management certified accounts of joint venture and should report the CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 matter to the Registrar of Companies. c. Auditors cannot accept management certified accounts of joint venture and should report the matter to the Securities and Exchange Board of India, considering the plan to get listed next year. d. Auditors should accept management certified accounts of joint venture provided the revenue of the joint venture is less than 10% of the total revenue of the group. 51. Advik Ltd. is an unlisted public company. The company acquired few companies in the last 3-4 years which have been assessed as its subsidiaries/ associates/ joint ventures (hereinafter jointly called as ‘components’). The company prepares its condensed consolidated financial statements every quarter to review the performance of the group. In the past years, the company used to get the financials of its components reviewed/ audited on a quarterly basis. AJ & Co LLP is the statutory auditor of parent company and KSH & Associates is the statutory auditor of all the components. Quarterly condensed consolidated financial statements of the group are reviewed by the statutory auditors as per the terms of the engagement letter. AJ & Co LLP has communicated to Advik Ltd. that in line with the requirements of the Companies Act 2013, it would also be required to undertake audit/ limited review of all the components which would be consolidated with those of Advik Ltd. and for which KSH & Associates are the statutory auditors currently. Management is not agreeing with the same as they don’t want to change KSH & Associates as auditors of the components and the requirement mentioned by AJ & Co LLP would lead to duplication of work of auditors as well as the management. Please advise. a. In an audit/review of consolidated financial statements (whether condensed or complete), the principal auditor is required to perform various procedures in accordance with SA 600, Using the work of another auditor and hence the requirement of auditor is valid. b. In an audit/review of consolidated financial statements (whether condensed or complete), the principal auditor is required to perform various procedures in accordance with the requirements of the Companies Accounts and Audit Rules 2014 and hence the requirement of auditor is valid. c. In an audit/review of consolidated financial statements (whether condensed or complete), the principal auditor is not required to re-perform audit/ limited review of the components and hence the requirement of auditor is not correct. d. Management and the auditor need to decide this mutually as this is based on the contractual arrangement between them. 52. Entity P, is audited by a different auditor than the parent entity Q. The principle auditor i.e. the auditor of entity Q, decides to use the work of auditor of component i.e. entity P, in relation to audit of consolidated financial statements. In doing so, he should comply with requirements of: a. SA 600, “Using the work of Another Auditor”. b. SA 299, “Joint Audit of Financial statements”. c. SA 720, “The Auditor’s Responsibilities Relating to Other Information”. d. SRS 4410, “Compilation Engagements”. 53. You are the internal auditor of FCD Bank Limited for the year 2020-21 and the bank maintains all the data on computer. You are instructed by your senior to verify the loan against fixed deposits of the Navi Mumbai branch. As per the scope of audit, you need to ensure that proper lien has been 25 marked on all the fixed deposits against which loan has been issued. Which of the following Page procedure you will follow for the same: CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 a. Ensure that all the fixed deposit receipts are attached along with the approved loan documents. b. Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are discharged in favour of bank and check that the lien is marked in the computer software. c. Discuss the process followed for lien marking with the branch manager. d. Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are discharged in favour of bank, check that the lien is marked in the computer software and the fixed deposit should be kept separately with the branch manager. 54. PFS Bank was engaged in the business of providing Portfolio Management Services to its customers, for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of the Bank’s financial statements for the year 2020-21. Your senior has instructed you to verify the transactions of Portfolio Management Services (PMS). While verifying the transactions you noticed that the bank has not prepared separate record for PMS transactions from the Bank’s own investments. As a statutory auditor what will be your decision for verification of PMS transactions? a. It is not necessary to maintain separate records for PMS clients from Bank’s own investments, so the auditor can verify the PMS transactions as part of investment verification for Bank’s financial statements and submit the audit report accordingly. b. As per RBI guidelines PMS investments need to be audited separately by the external auditors and the auditors are required to give a certificate separately for the same. So, in the above case the auditor should not verify the PMS transactions and advise the bank to segregate the PMS transactions from its own investments and provide the certificate of external auditor. c. The auditor can give a qualified opinion in his audit report on the financial statements of the Bank and report the matter in special purpose certificate. d. Auditor should verify that PMS funds are not utilised for lending, inter-bank deposits or deposits to corporate bodies and bills re-discounting only. So, whether the PMS transactions are recorded separately or not will not matter for the auditor. 55. Your firm has been appointed statutory auditor by a Nationalised Bank for the year 2020-21. Your senior advised you to check all the standard assets shown in the balance sheet as on 31st March 2021. While verifying you observed that one of the accounts was regularised on 28th March 2021, for which the interest and instalment amount was overdue from the quarter ending 30th September 2020. The account was regularised after the repayment of overdue interest and instalment amounts was done on 26th March 2021. Only the last day of the financial year was reckoned as the date of account becoming NPA by the Bank. As a statutory auditor will you agree with the Bank’s policy? a. As the interest charged in the account was overdue for more than 90 days from the end of quarter, it should be classified as NPA and should be considered as sub-standard asset for the balance sheet as on 31st March 2021. b. As the overdue interest and instalment amount was paid before the balance sheet date there is no reason to classify the account as NPA. c. The auditor should not agree with the Bank’s policy to regularise the account before balance sheet date as overdue interest indicates more than normal risk attached to the business. d. Bank can regularise the account before balance sheet date but should ensure that the amount has been paid through genuine resources and not by sanction of additional facilities, and the account remains in order subsequently. 26 Page 56. XYZ bank had an NPA account of M/s Glenpark showing recoverable amount of Rs.55 lakh in the CA Final Advanced Auditing | MCQ Book | By CA Ram Harsha | Edition 2024 books. It sold the NPA for Rs.56 lakh. Please select as to which of the following options is the correct accounting: a. Credit the excess of Rs.1 lakh to profit on sale of assets. b. Let the amount remain in Glenpark account. c. Credit the excess of Rs.1 lakh to Provision for loss on sale of NPAs. d. Return Rs.1 lakh to the party purchasing the NPA. 57. Below is an extract from the list of supplier statements as at 31st March 2021 held by the Company and corresponding payables ledger balances at the same date along with some commentary on the noted differences: Supplier Statement balance Payables ledger balance Rs.'000 Rs.'000 Cete Company 80 60 Lice Company 185 115 The difference in the balance of Cete Company is due to an invoice which is under dispute due to defective goods which were returned on 30th March 2021. Which of the following audit procedures should be carried out to confirm the balance owing to Cete Company? i. Review post year-end credit notes for evidence of acceptance of return. ii. Inspect pre year-end goods returned note in respect of the items sent back to the supplier. iii. Inspect post year-end cash book for evidence that the amount has been settled. a. 1, 2 and 3. b. 1 and 3 only. c. 1 and 2 only. d. 2 and 3 only. Ans: c. 1 and 2 only. 58. AJ & Co. LLP is a firm of Chartered Accountants. The firm has 10 Partners. The firm

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