Q1Analytical procedures – trend analysis
2 marks hard
Case: Samta Tools Pvt. Ltd. manufactures precision cutting tools. You are auditing the company for FY 2024–25. The company employs about 450 workers. The auditor performs trend analysis on salary expense for the past three years: Number of Employees: 430 (2022-23), 440 (2023-24), 450 (2024-25); Salary Expense (₹ crore): 18.0 (2022-23), 19.2 (2023-24), 27.5 (2024-25); Overtime Hours: 8,000 (2022-23), 7,500 (2023-24), 8,200 (2024-25). Observations by Auditor: (i) Salary expense increased by 43.2% in 2024–25 (from 19.2 to 27.5 crore). (ii) Number of employees increased by only 2.3% (from 440 to 450). (…
The auditor compares salary expense for the current year with the previous two years and notes a 43% increase. This method is an example of:
(A) Reasonableness test
(B) Trend analysis
(C) Ratio analysis
(D) Substantive test of details
Q2Response to unusual analytical findings – payroll
2 marks hard
Case: Samta Tools Pvt. Ltd. manufactures precision cutting tools. You are auditing the company for FY 2024–25. The company employs about 450 workers. The auditor performs trend analysis on salary expense for the past three years: Number of Employees: 430 (2022-23), 440 (2023-24), 450 (2024-25); Salary Expense (₹ crore): 18.0 (2022-23), 19.2 (2023-24), 27.5 (2024-25); Overtime Hours: 8,000 (2022-23), 7,500 (2023-24), 8,200 (2024-25). Observations by Auditor: (i) Salary expense increased by 43.2% in 2024–25 (from 19.2 to 27.5 crore). (ii) Number of employees increased by only 2.3% (from 440 to 450). (…
Despite only a small increase in employees, salary expense increased significantly. What should be the auditor's next step after identifying this unusual trend?
(A) Conclude that the increase is justified
(B) Ignore it as overtime hours also increased
(C) Perform further audit procedures to investigate the cause
(D) Reduce audit work as trend analysis provides sufficient evidence
Q3Fraud risk indicators – fictitious employees
2 marks hard
Case: Samta Tools Pvt. Ltd. manufactures precision cutting tools. You are auditing the company for FY 2024–25. The company employs about 450 workers. The auditor performs trend analysis on salary expense for the past three years: Number of Employees: 430 (2022-23), 440 (2023-24), 450 (2024-25); Salary Expense (₹ crore): 18.0 (2022-23), 19.2 (2023-24), 27.5 (2024-25); Overtime Hours: 8,000 (2022-23), 7,500 (2023-24), 8,200 (2024-25). Observations by Auditor: (i) Salary expense increased by 43.2% in 2024–25 (from 19.2 to 27.5 crore). (ii) Number of employees increased by only 2.3% (from 440 to 450). (…
Which of the following situations most strongly indicates a risk of fictitious employees based on the trend analysis results?
(A) Salary expense increased far more than employee count
(B) Overtime hours increased slightly
(C) Production increased by 5%
(D) A new HR manager joined during the year
Q4Financial statement assertions – occurrence for payroll
2 marks hard
Case: Samta Tools Pvt. Ltd. manufactures precision cutting tools. You are auditing the company for FY 2024–25. The company employs about 450 workers. The auditor performs trend analysis on salary expense for the past three years: Number of Employees: 430 (2022-23), 440 (2023-24), 450 (2024-25); Salary Expense (₹ crore): 18.0 (2022-23), 19.2 (2023-24), 27.5 (2024-25); Overtime Hours: 8,000 (2022-23), 7,500 (2023-24), 8,200 (2024-25). Observations by Auditor: (i) Salary expense increased by 43.2% in 2024–25 (from 19.2 to 27.5 crore). (ii) Number of employees increased by only 2.3% (from 440 to 450). (…
Which situation BEST tests the Occurrence assertion for employee benefit expenses?
(A) Ensuring all employee benefit expenses have been recorded
(B) Matching payroll expense with personnel records to confirm no unauthorized persons were paid
(C) Checking the arithmetic accuracy of payroll calculations
(D) Verifying that all employee benefits are presented under the correct heading
Q5Financial statement assertions – completeness for payroll
2 marks hard
Case: Samta Tools Pvt. Ltd. manufactures precision cutting tools. You are auditing the company for FY 2024–25. The company employs about 450 workers. The auditor performs trend analysis on salary expense for the past three years: Number of Employees: 430 (2022-23), 440 (2023-24), 450 (2024-25); Salary Expense (₹ crore): 18.0 (2022-23), 19.2 (2023-24), 27.5 (2024-25); Overtime Hours: 8,000 (2022-23), 7,500 (2023-24), 8,200 (2024-25). Observations by Auditor: (i) Salary expense increased by 43.2% in 2024–25 (from 19.2 to 27.5 crore). (ii) Number of employees increased by only 2.3% (from 440 to 450). (…
Which situation BEST reflects the Completeness assertion for employee benefit expenses?
(A) Confirming that no unauthorized employees have received salary payments
(B) Ensuring that every recorded employee benefit expense relates to a genuine employee and represents a valid transaction
(C) Ensuring salary expense is correctly classified in the financial statements
(D) Ensuring that employee benefit expenses for all personnel have been fully accounted for
Q6Audit of leasing companies – object clause and legal capacit
2 marks hard
Case: Madan Leasing Co. Ltd. is a non-banking leasing company that leases industrial machinery and consumer durables. During the current year, Madan Leasing entered into a lease agreement with Sulekha Engineering Pvt. Ltd. for a Textile machine valued at ₹ 10 Crore. Facts gathered by the audit team from the lease files are: (i) The company's object clause in the memorandum authorises leasing of capital goods but is silent about undertaking financing activities. (ii) A credit appraisal file exists for Sulekha Engineering containing their past credit record, capitalisation details and proposed collate…
Which audit procedure confirms whether Madan Leasing Co. is legally permitted to transact the lease of the Textile machine?
(A) Check the object clause of the leasing company to verify permitted activities
(B) Examine the lease proposal form submitted by the lessee
(C) Examine the lease agreement for description of equipment and location
(D) Verify that copies of insurance policies have been obtained
Q7Audit of leasing companies – delivery confirmation document
2 marks hard
Case: Madan Leasing Co. Ltd. is a non-banking leasing company that leases industrial machinery and consumer durables. During the current year, Madan Leasing entered into a lease agreement with Sulekha Engineering Pvt. Ltd. for a Textile machine valued at ₹ 10 Crore. Facts gathered by the audit team from the lease files are: (i) The company's object clause in the memorandum authorises leasing of capital goods but is silent about undertaking financing activities. (ii) A credit appraisal file exists for Sulekha Engineering containing their past credit record, capitalisation details and proposed collate…
Which missing document in the lease file creates an audit issue about whether the lessee accepted delivery in good order?
(A) Invoice retained safely in the file
(B) Board resolution authorising execution of lease
(C) Acceptance letter obtained from the lessee
(D) Lease proposal form submitted by the lessee
Q8Audit of leasing companies – credit analysis of lessee
2 marks hard
Case: Madan Leasing Co. Ltd. is a non-banking leasing company that leases industrial machinery and consumer durables. During the current year, Madan Leasing entered into a lease agreement with Sulekha Engineering Pvt. Ltd. for a Textile machine valued at ₹ 10 Crore. Facts gathered by the audit team from the lease files are: (i) The company's object clause in the memorandum authorises leasing of capital goods but is silent about undertaking financing activities. (ii) A credit appraisal file exists for Sulekha Engineering containing their past credit record, capitalisation details and proposed collate…
Which procedure would the auditor perform to evaluate the lessee's ability to meet lease commitments?
(A) Ensure that the invoice is retained safely
(B) See that copies of the insurance policies have been obtained
(C) Check whether the agreement prohibits subletting
(D) Verify whether there exists a procedure to ascertain credit analysis of lessee
Q9Audit of leasing companies – insurance policy control defici
2 marks hard
Case: Madan Leasing Co. Ltd. is a non-banking leasing company that leases industrial machinery and consumer durables. During the current year, Madan Leasing entered into a lease agreement with Sulekha Engineering Pvt. Ltd. for a Textile machine valued at ₹ 10 Crore. Facts gathered by the audit team from the lease files are: (i) The company's object clause in the memorandum authorises leasing of capital goods but is silent about undertaking financing activities. (ii) A credit appraisal file exists for Sulekha Engineering containing their past credit record, capitalisation details and proposed collate…
Given the facts, which control deficiency should the auditor report as missing in Madan Leasing Co.'s records?
(A) The invoice for the machine is not retained
(B) The Board resolution authorising lease execution is absent
(C) Copies of insurance policies for the leased asset are not obtained
(D) The lease agreement does not describe equipment and location
Q10Substantive analytical procedures – inventory
2 marks hard
Case: Trimurti & Co., Chartered Accountants, are appointed as the statutory auditors of Techno Industries Ltd., a medium-sized manufacturing company engaged in producing automobile parts. The audit team is led by CA Aakriti, assisted by one qualified assistant, Mr. Pradeep, and two articled trainees. While planning the audit, the team notes that Techno Industries Ltd. recently implemented a new Inventory Management System (IMS). The management claims that the new system allows real-time tracking of raw materials, automated reorder levels, and barcode-based issuance of materials for production. Durin…
The auditor noticed a 35% increase in raw material value with only a 12% rise in production. Which audit procedure is being used here?
(A) Test of Controls
(B) Substantive Analytical Procedure
(C) Inquiry
(D) Test of Details
Q11Control risk – unauthorized system access
2 marks hard
Case: Trimurti & Co., Chartered Accountants, are appointed as the statutory auditors of Techno Industries Ltd., a medium-sized manufacturing company engaged in producing automobile parts. The audit team is led by CA Aakriti, assisted by one qualified assistant, Mr. Pradeep, and two articled trainees. While planning the audit, the team notes that Techno Industries Ltd. recently implemented a new Inventory Management System (IMS). The management claims that the new system allows real-time tracking of raw materials, automated reorder levels, and barcode-based issuance of materials for production. Durin…
Unauthorized access to the Inventory Management System by production supervisors indicates which type of risk?
(A) Control Risk
(B) Business Risk
(C) Detection Risk
(D) Audit Risk
Q12Internal control documentation – flowchart method
2 marks hard
Case: Trimurti & Co., Chartered Accountants, are appointed as the statutory auditors of Techno Industries Ltd., a medium-sized manufacturing company engaged in producing automobile parts. The audit team is led by CA Aakriti, assisted by one qualified assistant, Mr. Pradeep, and two articled trainees. While planning the audit, the team notes that Techno Industries Ltd. recently implemented a new Inventory Management System (IMS). The management claims that the new system allows real-time tracking of raw materials, automated reorder levels, and barcode-based issuance of materials for production. Durin…
Preparing a visual diagram showing the movement of material requisitions and barcode-based issuance represents which method of internal control evaluation?
(A) Narrative Record
(B) Internal Control Questionnaire
(C) Checklist
(D) Flow Chart
Q13Ethics – principles-based vs rules-based approach
2 marks easy
A newly qualified Chartered Accountant, CA Riya is handling an assignment where no specific ethical rule is prescribed for a particular unusual transaction. She decides to evaluate the situation based on her knowledge, skills and expertise to determine the most ethical course of action, even though there is no detailed rule guiding her. Which approach is Riya following?
(A) Rules-based approach
(B) Principles-based approach
(C) Statutory compliance approach
(D) Disciplinary approach
Q14Audit programme – defence against negligence
2 marks easy
An audit firm, RST & Co., conducted the statutory audit of Bluewing Traders Ltd. During the review of audit files by regulatory authority, it was alleged that the auditor failed to exercise due professional care while verifying certain high-value transactions. Also, Bluewing Traders faced financial losses and the management claimed that the auditor was negligent. However, during the proceedings, RST & Co. produced a detailed audit programme that had been prepared before commencing audit work. The programme documented the steps planned, the nature and extent of checking, the responsibilities assigned to assistants and the areas where professional judgement was exercised. It was also signed and approved by the engagement partner. The auditor argued that this properly constructed audit programme demonstrated that reasonable skill and care had been exercised throughout the audit. In the above situation, which of the following best explains why the detailed audit programme prepared by RST & Co. can help defend the auditor against allegations of negligence?
(A) A properly drawn-up audit programme provides documentary proof that the auditor planned and executed audit procedures with reasonable skill and care thereby supporting his defence against charges of negligence
(B) An audit programme allows the auditor to detect all types of fraud and errors which automatically proves that negligence cannot occur during the audit
(C) The existence of an audit programme guarantees that no mistakes were made by the audit staff during the examination of financial records
(D) An audit programme shifts the entire responsibility for negligence to the client because it shows that the auditor relied on management representations
Q15Communication of significant deficiencies in internal contro
2 marks easy
During the audit of JKL Industries, the auditor identified certain significant deficiencies in the company's internal control system. Senior management acknowledged these issues but suggested that an oral briefing would be sufficient. The auditor, however, was required to determine the appropriate method and timing of communication. Which action is the auditor required to take?
(A) Provide only an oral communication to management since they have acknowledged the deficiencies
(B) Communicate in writing the significant deficiencies in internal control to those charged with governance on timely basis
(C) Delay the communication until the audit is completed to avoid disturbing the management's ongoing activities while the audit is still in progress
(D) Communicate only if the deficiencies are expected to materially misstate the financial statements