EXCEL ACADEMY

AUDIT TEST SOLUTION CH 1,4 & 6

1 Hour 30 Marks
Descriptive Questions – 5 Marks Each
1. Maruti Ltd is a leading Indian automobile manufacturer with many offerings across commercial,
passenger and electric vehicles. The Company is pioneering India’s electric vehicle transition and
enjoys considerable advantage in one of the fastest growing automotive markets. MM & Associates
have been appointed as its statutory auditors for financial year 2022-23. J and K are newly appointed
audit assistants in the firm and are part of engagement team constituted for purpose of audit of Maruti
Motors Ltd. However, they are confused about what such an audit tends to achieve. They perceive
audit as a guarantee against possible errors or frauds in financial statements. Do you agree with
perception of both the assistants? In this context, outline objectives of an independent audit
conducted in accordance with Standards on Auditing.

Answer- In conducting audit of financial statements, objectives of auditor in accordance with SA-200
“Overall Objectives of the Independent auditor and the conduct of an audit in accordance with
Standards on Auditing” are: -

(a) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework; and

(b) To report on the financial statements, and communicate as required by the SAs, in accordance
with the auditor’s findings.

An analysis of above brings out following points clearly: -

(1) Auditor’s objective is to obtain a reasonable assurance whether financial statements as a whole are
free from material misstatement whether due to fraud or error.

Reasonable assurance is to be distinguished from absolute assurance. Absolute assurance is a

complete assurance or a guarantee that financial statements are free from material misstatements.
However, reasonable assurance is not a complete guarantee. Although it is a high-level of assurance
but it is not complete assurance.

(2) Misstatements in financial statements can occur due to fraud or error or both. The auditor seeks
to obtain reasonable assurance whether financial statements as a whole are free from material
misstatements caused by fraud or error. He has to see effect of misstatements on financial statements
as a whole, in totality.

(3) Obtaining reasonable assurance that financial statements as a whole are free from material
misstatements enables the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting framework.

(4) The opinion is reported and communicated in accordance with audit findings through a written
report as required by Standards on Auditing.

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Therefore, perception of both assistants is not proper. Auditor of financial statements does not seek
to provide guarantee that financial statements are free from material misstatements caused by frauds
or errors. He obtains reasonable assurance.

2. CA J is conducting statutory audit of Gemini Ltd engaged in manufacturing of pharma products. The
company is fairly large one and has a well-functioning internal audit department. While considering
sending out external confirmation requests to trade receivables outstanding as on date of financial
statements, CA J has delegated the process of choosing trade receivables, designing requests and
receiving responses from customers to internal audit department. The responses are also received on
the mail id of internal audit department. Is the approach of CA J proper?

Answer- When using external confirmation procedures, the auditor shall maintain control over
external confirmation requests, including:

(a) Determining the information to be confirmed or requested;

(b) Selecting the appropriate confirming party;

(c) Designing the confirmation requests, including determining that requests are properly addressed
and contain return information for responses to be sent directly to the auditor; and

(d) Sending the requests, including follow-up requests when applicable, to the confirming party.

In the given case, it appears that external auditor has delegated entire work of sending out external
confirmation requests to internal audit department over which he has no control. Further, responses
to external confirmation requests are received on mail id of internal audit department. All these acts
are not in line with requirements under SA 505.

3. Discussing meaning of completion memorandum, elaborate upon its importance.

Answer- Completion memorandum is a summary that describes the significant matters identified
during the audit and how they were addressed.

Such a summary may facilitate effective and efficient review and inspection of the audit
documentation, particularly for large and complex audits. Further, the preparation of such a summary
may assist auditor’s consideration of the significant matters. It may also help the auditor to consider
whether there is any individual relevant SA objective that the auditor cannot achieve that would
prevent the auditor from achieving the overall objectives of the auditor.

4. SPR Ltd has been into the media business since 2001. During the F.Y 2022-2023, many notices were
received by the company for hurting public sentiments and financial claims were filed against the
company. As an auditor of the company, you requested the management for arranging the meeting
with company's external legal counsel. Management is of the view that such meetings are necessary
in certain circumstances only. Can you list down such circumstances?

Answer- Circumstances when it becomes necessary to meet with company’s external legal counsel:

In the given case of SPR Ltd., Auditor requested the management for meeting with SPR’s external legal
counsel.

In certain circumstances, the auditor also may judge it necessary to meet with the entity’s external
legal counsel to discuss the likely outcome of the litigation or claims.

This may be the case, for example, where:

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 (i) The auditor determines that the matter is a significant risk.
(ii) The matter is complex.
(iii) There is disagreement between management and the entity’s external legal counsel.

Ordinarily, such meetings require management’s permission and are held with a representative of
management in attendance.

5. Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards
on Review Engagements (SREs) apply in “review of historical financial information.” Explain in detail
giving examples.

Answer-Standards on Auditing (SAs) apply in “audit of historical financial information” whereas

Standards on Review Engagements (SREs) apply in “review of historical financial information”.
Standards on auditing apply in “audit” of historical financial information which is a reasonable
assurance engagement whereas Standards on Review Engagements apply in “review” of historical
financial information which is a limited assurance engagement only.

“Historical financial information means” information expressed in financial terms in relation to a

particular entity, derived primarily from that entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances at points in time in the
past.

“Audit” and “review” are two different terms. Audit is a reasonable assurance engagement, and its
objective is reduction in assurance engagement risk to an acceptably low level in the circumstances of
the engagement. However, “review” is a limited assurance engagement, and its objective is a reduction
in assurance engagement risk to a level that is acceptable in the circumstances of the engagement.

Standards on Auditing have been issued on wide spectrum of issues in the field of auditing including
(but not limited to) overall objectives of independent auditor, audit documentation, planning an audit
of financial statements, identifying and assessing risk of material misstatement, audit evidence, audit
sampling, going concern and forming an opinion and reporting on financial statements.

Some examples of Standards on Auditing are:

(i) SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
(ii) SA 230 Audit Documentation

Examples of Standards on Review engagements are

(i) SRE 2400 (Revised) Engagements to Review Historical Financial Statements

(ii) SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the
Entity

MCQ’S – 1 Mark Each

6. Audit documentation provides:

(a) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of
the auditor; or evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.

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(b) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives
of the auditor; and evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.

(c) evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of
the auditor

(d) evidence that the audit was planned and performed in accordance with SAs and applicable legal
and regulatory requirements.

7. Which of the following is not an analytical procedure?

(a) Tracing of purchases recurred in the purchase book to purchase invoices.

(b) Comparing aggregate wages paid to number of employees

(c) Comparing the actual costs with standard costs

(d) All of them are analytical procedures

8. A request that the confirming party respond directly to the auditor only if the confirming party
disagrees with the information provided in the request.

(a) Positive confirmation request

(b) Non Response

(c) Negative Confirmation request

(d) Exception

9. No business or institution can effectively carry on its activities without the help of proper
____________:

(a) Audit

(b) Record and accounts

(c) neither (a) nor (b)

(d) both (a) and (b)

10. Audit evidence includes

(a) information contained in the accounting records underlying the financial statements

(b) both information contained in the accounting records underlying the financial statements and
other information.

(c) other information.

(d) information contained in the accounting records underlying the financial statements or other
information.

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