AUDITING & ETHICS

Details: Test 1 (Ch-1)

Question Paper

Total Marks: - 35

Q1. The management of Cool Drinks Limited suspects that some employees of the company
may be involved in making fraudulent payments to dummy workers at its various plants in
the country. Therefore, they are considering appointment of a firm of auditors to conduct
audit involving detailed examination of accounts. However, one senior person among Board
members, Mr. P, objects to use of word “audit” in proposed assignment. Comment. Also,
discuss how audit is different from investigation.

(4 MARKS)

Q2. SQC 1 requires assumption of leadership responsibilities for quality within firm. Are such
leadership responsibilities required for audit engagements only? Who assumes such
leadership responsibilities within firm? How it is important for audit quality?

(4 MARKS)

Q3. RST Ltd., a mid-sized trading company, recently faced challenges in securing a bank loan
due to doubts about the reliability of its financial statements. The management realised the
importance of having audited accounts to build confidence among lenders and other
stakeholders. Elucidate the benefits and need of an audit.

(5 MARKS)

Q4. RST Ltd., a retail company, has set up internal controls requiring all invoices to be stamped
and signed by an authorised person in “Goods Receiving Section” of the company stating the

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date and time of receiving goods in premises to ensure that only those purchase bills are
produced for payment for which goods have been actually received.

During the audit, the auditor finds that two employees – a purchasing manager and an
accounts clerk – have worked together to bypass this control, submitting fake invoices that
resulted in payments for goods that were never received. You are required to state the
objectives of an audit, as per SA 200, when it comes to ensuring the reliability of financial
statements? Also explain, why auditor can provide only reasonable, rather than absolute,
assurance that the financial statements are free from material misstatement due to fraud or
error in the context of the given situation?

(6 MARKS)

Q5. Explain the inherent limitations of an audit and why an auditor cannot provide absolute
assurance that the financial statements are free from material misstatement due to fraud or
error.

(6 MARKS)

Q6. MCQS

1. Which of the following activities is outside the scope of an auditor's responsibility during a
statutory audit?

A. Verifying whether the financial statements are free from material misstatements.

B. Reviewing the accounting treatment of depreciation for fixed assets.

C. Certifying the physical condition and life expectancy of a factory building.

D. Checking compliance with accounting standards applicable to the entity.

2. Which of the following statements best reflects the nature of audit requirements for
different entities?

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A. Audit is mandatory only for companies registered under the Companies Act.

B. All entities, whether corporate or non-corporate, are legally required to conduct audits.

C. Audit may be mandatory or voluntary depending on legal requirements, funding

D. Audit is mandatory only when an entity receives a government grant.

3. All of them also discussed about benefits of auditing. Which of the following is not a likely
benefit of auditing?

(a) Since auditing is connected to future events, audited information can be easily relied upon
by users.

(b) Errors or frauds may be discovered during audit.

(c) Government authorities can make use of audited accounts for different purposes.

(d) It can help in bringing out deficiencies in maintenance of financial records.

4. Which of the following combinations best represents the essential qualities that contribute
to making a good auditor?

A) Aggressiveness, flexibility, and quick decision-making

B) Tact, integrity, discretion, and expert accounting knowledge

C) Creativity, intuition, and persuasive communication

D) Authoritativeness, risk-taking, and marketing ability

5. CA P is engaged to issue a report on projected financial statements which show a sharp

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(a) He has to verify only the arithmetical accuracy of the projected data.

(b) He must examine the reasonableness of assumptions behind the projections and their
consistency with past performance.

(c) He must ensure arithmetical accuracy and proper presentation of projections to the
banker.

(d) He must examine the reasonableness of assumptions, their consistency with actuals,
proper disclosure, and presentation of the projected data.

(2×5= 10 MARKS)

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