AUDITING AND ASSURANCE
FULL SYLLABUS TEST-1
Question N0. 1 is Compulsory
Attempt any Four Questions out of remaining Five Questions
Total Marks 100
CASE STUDY
1. M/s JK& Associates have been appointed as auditors of Venus Ltd. for the financial year
2019-20. The team consist of Mr.1 & Mr. K both Chartered Accountants as also the engagement
partners and the audit staff consisting of 2 article assistants. While starting the audit work of
Venus Ltd., the engagement partners briefed the audit staff about the audit work, areas to be
covered and the various auditing concepts and their application in the audit of Venus Ltd. along
with applicable Standard on Auditing.
Various topics like audit planning, overall audit strategy, audit programme were discussed in
detail. The team was told about the purpose and Implication of various statements and
guidance notes issued by the Institute of Chartered Accountants of India (ICAI) from time to
time. Mr. K also briefed the team about the concept of materiality to be applied while planning
and performing audit. The team was also explained In detail about the area where benchmark
materiality can be applied in case of Venus Ltd.
Based on the above facts, answer the following:
A. _________sets the scope, timing & direction of the audit and uuides the development of
the more detailed plan.
a) Audit Programme
b) Overall Audit Strategy
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c) Completion Memorandum
d) Audit Plan
B. Statement 1: The establishment of the overall audit strategy and the detailed audit plan
are not necessarily discrete or sequential process but are closely inter-related.
Statement 2: The auditor shall establish an overall audit strategy that guides the
development of audit plan.
a) Only Statement 1 is correct
b) Only Statement 2 is correct
c) Both Statements 1 & 2 are correct
d) Both Statements 1 & 2 are incorrect
C. ______________means the amount set by the auditor at less than materiality for the
financial statements as a whole to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatement exceeds materiality for the
financial statements as a whole:
a) Benchmark Materiality
b) Materiality in Planning
c) Performance Materiality
d) Materiality.
D. Which of the following is not an example of benchmark that can be used in determining
the materiality in the case of financial statements:
a) Total Revenue
b) Profit before tax
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c) Net Asset
d) None of the above
Q.5 (i) Guidance notes issued by ICAI provide guidance to members on matters which may
arise in the course of their professional work.
(ii) Statements are issued by ICAI with a view to secure compliance by members on some
matters.
(iii) Guidance notes are recommendatory in nature.
(iv) Statements are mandatory in nature.
a) All the above statements are correct
b) Statements 1 & 2 are correct
c) Statements 1, 2 & 3 are correct
d) Statements 1,2 & 4 are correct
(5 x 1 = 5 marks)
2. ABC Ltd. is a company dealing in products namely chocolate and coffee. ABC Ltd. approached
audit firm XYZ & Associates for the statutory audit of its financial statements for the year ended
31.03.2019. The Gross turnover of the company is Rs 105 crores, out of which turnover from
one of its product namely coffee is of Rs. 95 crores during the immediate preceding Financial
Year.
During the course of Audit, XYZ & Associates found certain delay in the payment of the
Employees Provident Fund by ABC Ltd. They understand that the same need to be reported
under the relevant provisions of Companies (Auditors Report) Order 2016.
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During the FY 2018-2019, Mrs. X wife of CA Mr. X who is partner in XYZ & Associates acquires
certain shares of ABC Ltd. The audit firm is of the opinion that this may call for a disqualification
for the firm for being working as the auditor of the company under the relevant provisions of
the Companies Act, 2013.
Further, ABC Ltd. also approached the auditors to provide them the Investment Banking service
to which the auditors denied as per the provisions of Companies Act, 2013.
During the course of audit, XYZ & Associates has reason to believe that an offence of fraud
involving some amount has been committed in the ABC Ltd. by its General Manager. The
auditors understand that there is a requirement for reporting of fraud by the auditors under
the Companies Act and the relevant rules.
Based on the above facts, answer the following:
A. After the appointment of XYZ & Associates, ABC Ltd. should inform the auditor and file a
notice of such appointment with registrar within:
a) 60 days
b) 30 days
c) 15 days
d) 20 days
B. If Mrs. X acquires security exceeding the prescribed limit in the ABC Ltd., then XYZ &
Associates shall take corrective actions within__________days. What is the prescribed limit:
a) 100 days, Market Value Rs. 1,00,000
b) 60 days, Face value Rs. 1,00,000
c) 90 days, Face value Rs. 1,00,000
d) 15 days, Market Value Rs. 1,00,000
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C. Under which section reporting of fraud by an auditor to the Central Government is
required and what is the amount of fraud:
a) Section 143(12), 1 crore & above
b) Section 139(12), 1 crore & above
c) Section 143(12), 2 crore & above
d) None of the above
D. What is the requirement for ABC Ltd. as per the relevant provisions regarding maintenance
of cost records:
a) Maintenance of cost records is mandatory, in Form CRA 1.
b) Maintenance of cost records is mandatory, in Form CRA 2.
c) Maintenance of cost records is mandatory, in any general format.
d) No requirement of maintenance of cost records.
E. Under relevant clause of CARO, 2016, XYZ & Associates is required to report the extent of
arrears of Employees Provident Fund as at the balance sheet date:
a) Exceeding 9 months
b) Exceeding 3 months
c) Exceeding 6 months
d) Exceeding 12 months
(5 x 1 = 5 marks)
3. As per SA-200 "Overall Objectives of the Independent Auditor", in conducting an audit of
financial statements, the overall objectives of the auditor is:
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a) to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement and to report on the financial statements, and
communicate as required by the SAs, in accordance with the auditor's findings
b) to guide the management as to design, implementation and maintenance of internal
controls which are necessary to obtain reasonable assurance that financial statements
are free from material misstatements
c) to communication with Those Charged with Governance, the weaknesses identified
during the course
d) to ensure compliance of laws and regulations that are applicable over the entity
4. "If inventory is material to the financial statements, the auditor shall obtain sufficient
appropriate audit evidence regarding the existence of inventory by attending the physical
inventory counting unless impracticable." Purpose of attending inventory count is to:
1. Evaluate management's instructions and procedures for recording and controlling the
results of the entity's physical inventory counting
2. Observe the performance of management's count procedures;
3. Inspect the inventory;
4. Perform test counts
5. Valuation of the inventory
6. Identify the weaknesses to be informed to those charged with governance as per
requirement of SA 260
7. Determine the key audit matters so as to be incorporated in the audit report as per
requirements of SA 701 Select the main purpose:
a) 1, 2, 6 and 7
b) 1,2, 3 and 4
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c) 1, 2, 5, 6 and 7
d) 5, 6 and 7
5. Which of the following is false?
a) If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express a qualified opinion or a disclaimer of
opinion, as appropriate in accordance with SA 705
b) If the auditor concludes that the opening balances contain a misstatement that
materially affects the current period's financial statements and the effect of the
misstatements is not properly accounted for or adequately presented or disclosed, the
auditor shall express a qualified opinion or an adverse opinion as appropriate in
accordance with SA 705
c) If the auditor concludes that the current period ac- counting policies are consistency
applied in relation to opening balances in accordance with applicable FRF, the auditor
shall express a qualified opinion or an adverse opinion as appropriate in accordance
with SA 705
d) If the auditor concludes that a change in account- ing policies is not properly accounted
for or not adequately presented or disclosed in accordance with the applicable FRF, the
auditor shall express a qualified opinion or an adverse opinion as appro- priate in
accordance with SA 705
6. M/s Honest Limited has entered into a transaction on 5th March, 2018, near year-end,
whereby it has agreed to pay 5 lakhs p.m. to Mr. Y as annual retainer-ship fee for
"engineering consultation", No amount was actually paid, but 60 lakhs is provided in books of
account as on March 31, 2018. Your inquiry elicits a response that need-based consultation
was obtained round the year, but there is no documentary or other evidence of receipt of the
service. As the auditor of M/s Honest Limited, what would be your approach?
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a) Auditor should consider the requirements of SA 240 and recognize the possibility that a
material misstatement due to fraud could exist
b) Auditor should consider the requirements of Section 143(12) of Companies Act, 2013 as
to reporting of fraud to the Central Government
c) Auditor should consider the requirements of Para 3(x) of CARO, 2016 as to reporting of
fraud
d) All of the above
7. While auditing TEN Ltd., CA. Porky divided the whole population of trade receivables
balances to tested in a few separate groups called 'strata' and started taking a sample from
each of them. He treated be He treated each stratum as if it was a separate population. He
divided the trade receivables balances of TEN Ltd. for the Financial Year 2017-18 into groups
on the basis of personal judgment as follows:
S. No. Particulars
1. Balance in excess of Rs 10,00,000
2. Balance in the range of Rs7,75,001 to Rs 10,00,000
3. Balance in the range of Rs 5,50,001 to Rs 7,75,000
4. Balance in the range of Rs 2,25,001 to Rs 5,50,000
5. Balance Rs 2,25,000 and below
From the abovementioned groups, CA. Porky picked up different percentage of items for
examination from each of the groups, for example, from the top group i.e. balances in excess
of 10,00,000, he selected all the items to be examined; from the second group, he opted for
25% of the items to be examined; from the lowest group, he selected 2% of the items for
examination; and so on from rest of the groups. Which one of the following methods of
sample selection is he following?
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a) Systematic sampling.
b) Stratified sampling.
c) Section sampling.
d) Selection sampling
(5 x 2 = 10 marks)
8. Substantive analytical procedures have certain advantages. Which of the following is an
advantage of substantive analytical procedures?
a) analytical procedures are effective when applied to the financial statements of the
entity as a whole rather than when applied to financial statements of components of a
diversified entity
b) obtaining data used to develop an expectation and ensuring the reliability of that data
at an appropriate level of disaggregation can account for a substantial amount of the
time
c) substantive analytical procedures deliver the de- sired results every year
d) substantive analytical procedures often enable o auditors to focus on a few key factors
that affect the account balance
9. Where no reply is received during the performance of direct confirmation procedures as
part of audit of trade receivable balances, the auditor should perform:
a) Additional testing including agreeing the balance to b cash received; agreeing the detail
of the respective balance to the customer's remittance advice
b) Additional testing including preparing a detailed analysis of the balance, ensuring it
consists of identifiable transactions and confirming that these revenue transactions
actually occurred
c) No additional testing
d) Both (a) and (b)
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10. ABC Pvt. Ltd., a new company, incorporated on 01.07.2018 is engaged in the
manufacturing business. On 30.07.2018, the Managing Director of ABC Pvt. Ltd. himself
appointed CA Mohan, as the first auditor of the company.
a) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by
members of the company as per Sec. 139(6) of Companies Act, 2013
b) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by
Board of Directors as per Sec. 139(6) of Companies Act, 2013
c) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by
members of the company as per Sec. 139(1) of Companies Act, 2013
d) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by
Board of Directors as per Sec. 139(1) of Companies Act, 2013
11. Company auditor is required to report "Whether the Nidhi Company has complied with
the Net Owned Fund to Deposits in the ratio of 1:20 to meet out the liability and whether the
Nidhi Company is maintaining 10% unencumbered term deposits as specified in the Nidhi
Rules, 2014 to meet out the liability". This reporting requirement is prescribed by:
a) Sec. 143(1) of Companies Act, 2013
b) Para 3 of NBFC Auditor's Report (Reserve Bank) Directions, 2016
c) Para 3(xii) of Companies (Auditor's Report) Order,
d) Para 3(xvi) of Companies (Auditor's Report) Order, 2016
12. As per SA 700 "Forming an Opinion and Reporting on Financial Statements" when
expressing an unmodified opinion on financial statements prepared in accordance with a fair
presentation framework, the auditor's opinion shall, unless otherwise required by law or
regulation, use which of the following phrase:
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a) In our opinion, the accompanying financial statements present fairly, in all material
respects, [.….]in accordance with [the applicable financial reporting framework].
b) In our opinion, the accompanying financial statements give a true and fair view of [...] in
accordance with [the applicable financial reporting framework].
c) In our opinion, the accompanying financial statements are prepared, in all material
respects, in accordance with [the applicable financial reporting framework].
d) Either (a) or (b).
13. XYZ Limited received a grant of 25 lakhs under the Government's Subsidy Scheme, for
acquiring an imported machinery for setting up new plant The entire grant received is
credited to Profit and Loss Account. While preparing the audit report, the auditor needs to:
a) qualify the report stating the fact that the income has been overstated to the extent of
the amount of opinion, grant net of proportionate credit that would have been worked
out
b) qualify the report stating the fact that the income has been understated to the extent of
the amount of grant net of proportionate debit that would have been worked out
c) express unmodified opinion as Accounting Stan- dard-12 allow the recognition of grant
received as income
d) None of the above
14. Agricultural advances are classified as NPA if interest and/or Instalment of principal is
overdue for_______ in case loans granted for Short Duration crops and _____________ in
case loans granted for Long Duration crops (i.e. more than 1 year)
a) two crop seasons; one crop season.
b) one crop season; one crop season.
c) two crop seasons; two crop seasons.
d) one crop season; two crop season.
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15. An inquiry may be ordered by Central Registrar u/s78 of Multi-State Co-operative
Societies Act, 2002, on a request received from:
a) not less than 1/3rd of the members of the board or not less than 1/5th of the total
number of members of a multi-state cooperative society
b) not less than 1/5th of the members of the board or not less than 1/3rd of the total
number of members of a multi-state cooperative society
c) not less than 1/3rd of the members of the board or not less than 1/3rd of the total
number of members of a multi-state cooperative society
d) not less than 1/5th of the members of the board or not less than 1/5th of the total
number of members of a multi-state cooperative society
16. Cloud Ltd. appointed an auditor for the financial year 2018-19. While going through the
audit procedure, the auditor observed that the management has entered into certain
transactions which are irregular in nature and the management is personally benefited from
such transactions
a) Auditor should consider the requirements of SA 240 and recognize the possibility that a
material misstatement due to fraud could exist
b) Auditor should consider the requirements of Section 143(12) of Companies Act, 2013 as
to reporting of fraud to the Central Government
c) Auditor should consider the requirements of Para 3(x) of CARO, 2016 as to reporting of
fraud
d) All of the above
17. CARO, 2016 is applicable over a private limited company, having paid up capital and
reserves and surplus is Rs 1 crore or more as on the balance sheet date. For this purpose,
a) Paid-up share capital would include equity share capital only
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b) Amount of calls unpaid should be added to the figure of paid-up capital
c) Amount originally paid-up on forfeited shares should be added to the figure of paid-up
capital
d) Share application money received should be considered as part of the paid-up capital
(10 x 1 = 10 marks)
Q-1 Examine with reasons (in short) whether the following statements are correct or
incorrect: (Attempt any 7 out of 8)
(i) Overall audit plan sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit strategy.
(ii) The Constitution of India contains no specific provisions regarding the appointment,
salary and duties and powers of the C&AG. Moreover, the constitution does not
guarantee the independence of the C&AG of India.
(iii) When we are designing audit procedures to address an inherent risk or “what can go
wrong”, we consider the nature of the risk of material misstatement.
(iv) If an entity has a known number of employees at fixed rates of pay throughout the
period, there would be more need to perform tests of details on the payroll.
(v) The term “relative”, as defined under the Companies Act, 2013, means anyone who is
closely related to another.
(vi) According to Section 140(1), the auditor appointed under section 139 may be removed
from his office before the expiry of his term only by passing a Board resolution.
(vii) In considering the qualitative aspects of the entity’s accounting practices, the
auditor may not become aware of possible bias in management’s judgments.
(viii) One of the key principles of accrual basis of accounting requires that an asset’s
cost is proportionally expensed based on the period over which the asset is expected to
be used.
(7 x 2 = 14 marks)
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Q-2
(A) The firm should establish policies and procedures designed to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, operating effectively and complied with in practice. Such policies and
procedures should include an ongoing consideration and evaluation of the firm's system of
quality control, including a periodic inspection of a selection of completed engagements.
Explain in the above context the purpose of monitoring compliance with quality control policies
and procedures.
(4 marks)
(B) Discuss the relationship between overall audit strategy and audit plan.
(4 marks)
(C) The assessment of risks is a matter of professional judgment. Explain stating clearly what is
not included in Audit Risk?
(3 marks)
(D) The risk of not detecting a material misstatement resulting from fraud is higher than the risk
of not detecting one resulting from error Explain.
(3 marks)
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Q-3
(A) While reviewing Employee benefits expenses of a company, how you as an auditor you will
evaluate its hiring, appraisal and retirement process?
(4 marks)
(B) Audit of the accounts of stores and inventories has been developed as a part of expenditure
audit with reference to the duties and responsibilities entrusted to C&AG. Discuss.
(4 marks)
(C) While planning the audit of S Ltd., you want to apply sampling techniques. What are the risk
factors you should keep in mind?
(3 marks)
(D) What do you mean by deficiencies in Internal Control? Explain various indicators of
Significant deficiencies.
(3 marks)
Q-4
(A) State briefly the reporting requirements as per SA 250 on non-compliance with laws and
regulations.
(4 marks)
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(B) With respect to audit in an automated environment, explain the following:
a) CAATS
b) Data Analytics
c) Database
d) Information Systems
e) Privileged access
(4 marks)
(C) Detection of manipulation of accounts with a view to presenting a false state of affairs is a
task requiring great tact and intelligence. Explain stating clearly how this type of fraud is
generally committed.
(3 marks)
(D) Comment on the following: XYZ (Pvt.) Ltd. has paid up capital and Reserves of Rs 110 lacs
and secured Loans of Nationalized Banks having sanctioned limit of 28 lacs and outstanding
balance of 23 lacs. The turnover of the company is 5.10 crores for the year ended 31-3-2019.
Customer returns goods worth 40 lacs on 2-4-2019, out of sales made during the year ended
31-3-2019. The management is of the opinion that CARO is not applicable to the company.
(3 marks)
Q-5
(A) Elucidate the provisions of Companies Act, 2013 relating to submission of cost audit report
to the Board and Central Government.
(4 marks)
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(B) Define Depreciation and discuss various purposes of providing depreciation.
(4 marks)
(C) When deviations from controls upon which the auditor intends to rely are detected, the
auditor shall make specific inquiries to understand these matters and their potential
consequences". Explain.
(3 marks)
(D) As per SA 220, "Quality Control for an Audit of Financial Statements" the auditor should
obtain information considered necessary in the circumstances before accepting an engagement
with a new client, when deciding whether to continue an existing engagement and when
considering acceptance of a new engagement with an existing client. Explain
(3 marks)
Q-6
A. The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”. Explain what is included in this “Basis for Opinion” section.
(4 marks)
B. Cinescreen Multiplex Ltd. is operating cinemas in different locations in Mumbai and has
appointed you as an internal auditor. What are the areas that need to be verified in relation to
receipts from sale of Tickets?
(4 marks)
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C. The auditor’s report shall include a section with a heading “Responsibilities of Management
for the Financial Statements.” SA 200 explains the premise, relating to the responsibilities of
management and, where appropriate, those charged with governance, on which an audit in
accordance with SAs is conducted. Explain.
(3 marks)
D. Write the audit procedures to be performed as an auditor for valuation (assertion) of
following:
I. Loans and Advances and other current assets.
II. Finished goods and goods for resale.
(3 marks)
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