Question 1

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:

Accepted Answer

**Answer: (B)**

Comparing salary expense across three consecutive years (2022–23, 2023–24, 2024–25) to identify a 43% increase is a classic example of **trend analysis**, which involves examining data over multiple periods to identify unusual fluctuations or patterns. This falls under **analytical procedures** as described in **SA 520 (Analytical Procedures)**. A reasonableness test compares data against an independent expectation; ratio analysis compares two related figures; and substantive test of details involves examining individual transactions — none of which is being performed here.

Question 2

Despite only a small increase in employees, salary expense increased significantly. What should be the auditor's next step after identifying this unusual trend?

Accepted Answer

**Answer: (C)**

When analytical procedures reveal an unusual trend — such as a 43.2% spike in salary expense against only 2.3% employee growth and marginal overtime increase — the auditor cannot simply accept or dismiss the anomaly. As per **SA 520 (Analytical Procedures)**, when analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information, the auditor must investigate by making inquiries of management and performing **further audit procedures** to corroborate or refute management's explanations. In this case, the unexplained variance raises risks of fictitious employees, unauthorized pay revisions, or misclassification, all of which demand detailed substantive testing of payroll records, employee master list, HR approvals, and supporting documents before any conclusion can be drawn.

Question 3

Which of the following situations most strongly indicates a risk of fictitious employees based on the trend analysis results?

Accepted Answer

**Answer: (A)**

The salary expense rose by 43.2% while employee headcount grew by only 2.3% and overtime hours increased marginally by 9%, with no authorized pay scale revision and no corresponding increase in production. This disproportionate surge in salary expense relative to the number of employees is a classic red flag for fictitious employee fraud, directly implicating the **occurrence** assertion. Options (B), (C), and (D) are either immaterial or unrelated to the payroll anomaly identified.

Question 4

Which situation BEST tests the Occurrence assertion for employee benefit expenses?

Accepted Answer

**Answer: (B)**

The **Occurrence assertion** addresses whether recorded transactions actually took place — i.e., that salary payments were made only to real, authorized employees. Matching payroll expense with personnel records directly tests whether payments relate to bona fide employees, thereby detecting fictitious employee fraud (ghost employees). Option (A) tests **Completeness**, Option (C) tests **Accuracy**, and Option (D) tests **Presentation and Classification**.

Question 5

Which situation BEST reflects the Completeness assertion for employee benefit expenses?

Accepted Answer

**Answer: (D)**

The **Completeness assertion** addresses whether all transactions and events that should have been recorded have in fact been recorded — i.e., nothing has been *omitted*. In the context of payroll, completeness means ensuring that employee benefit expenses for **all actual personnel** have been fully captured in the financial statements.

Option (A) relates to the **Occurrence** assertion — it asks whether payments were made to real, authorized employees (no fictitious employees). Option (B) also relates to **Occurrence/Validity** — verifying that recorded expenses pertain to genuine transactions. Option (C) relates to the **Classification and Presentation** assertion. Option (D) correctly captures the essence of **Completeness** — that no legitimate salary transactions have been left out.

The case scenario itself confirms this distinction: the auditor verified through attendance records, appointment files, and HR approvals that all genuine employee benefit expenses were recorded and no legitimate transactions were omitted — confirming completeness was not at issue. The concern raised was about *overstatement* (fictitious payments), which is an **Occurrence** issue, not a Completeness issue.

Question 6

Which audit procedure confirms whether Madan Leasing Co. is legally permitted to transact the lease of the Textile machine?

Accepted Answer

**Answer: (A)**

To confirm whether Madan Leasing Co. Ltd. is legally permitted to transact the lease of the Textile machine, the auditor must **check the object clause in the Memorandum of Association** of the company. The object clause defines the legal capacity and scope of activities a company is authorised to undertake. As per the Companies Act 2013, any act beyond the object clause is *ultra vires* and void. Since the company's object clause authorises leasing of capital goods, the auditor verifies this to confirm legal capacity to enter the lease. Options (B), (C), and (D) relate to documentation completeness or agreement terms, not the company's legal authority to transact.

Question 7

Which missing document in the lease file creates an audit issue about whether the lessee accepted delivery in good order?

Accepted Answer

**Answer: (C)**

The **acceptance letter from the lessee** is the document that confirms the lessee received the equipment in good order and accepted delivery. Fact (vi) explicitly states that no such acceptance letter is on file. This creates an audit issue because without it, the auditor cannot verify that the lease commencement date is correctly established, that the asset was actually delivered and accepted by Sulekha Engineering, and that rental obligations have rightfully begun. The invoice (A) only evidences purchase by the lessor, the board resolution (B) authorises execution of the lease agreement, and the lease proposal form (D) is a pre-lease document — none of these confirm physical delivery and acceptance by the lessee.

Question 8

Which procedure would the auditor perform to evaluate the lessee's ability to meet lease commitments?

Accepted Answer

**Answer: (D)**

To evaluate the lessee's ability to meet lease commitments, the auditor would verify whether a procedure exists to ascertain **credit analysis of the lessee**. Credit analysis involves reviewing the lessee's past credit record, financial position, capitalisation details, and proposed collateral — all of which directly assess the lessee's repayment capacity. Options (A), (B), and (C) relate to documentation safekeeping, insurance, and contractual restrictions respectively, and do not pertain to evaluating the lessee's financial ability to honour lease obligations.

Question 9

Given the facts, which control deficiency should the auditor report as missing in Madan Leasing Co.'s records?

Accepted Answer

**Answer: (C)**

Fact (viii) explicitly states that copies of the insurance policy for the Textile machine are not found in the lessor's records. In the audit of leasing companies, it is a standard internal control requirement that the lessor obtains and retains copies of insurance policies covering the leased asset, since the asset remains the lessor's property and must be adequately protected. Options (A) and (B) are incorrect because the invoice (fact v) and the Board resolution (fact vii) are both present in the file. Option (D) is incorrect because fact (iii) confirms the lease agreement does describe the equipment and location.

Question 10

The auditor noticed a 35% increase in raw material value with only a 12% rise in production. Which audit procedure is being used here?

Accepted Answer

**Answer: (B)**

The auditor is comparing the **35% increase in raw material value** against only a **12% rise in production levels** — this is a ratio/trend comparison used to identify unusual fluctuations and form expectations about account balances. This technique of evaluating financial information by studying plausible relationships among financial and non-financial data is the definition of a **Substantive Analytical Procedure** under **SA 520 (Analytical Procedures)**. It is 'substantive' because it is used to detect material misstatements in an account balance (inventory), not merely to test whether controls are operating effectively.

Question 11

Unauthorized access to the Inventory Management System by production supervisors indicates which type of risk?

Accepted Answer

**Answer: (A) Control Risk**

Unauthorized access to the Inventory Management System (IMS) by production supervisors — without documented authorisation — indicates a failure in the entity's internal controls. **Control Risk** is the risk that a material misstatement could occur in an assertion and not be prevented, or detected and corrected, on a timely basis by the entity's internal control. Here, the absence of proper access controls (i.e., allowing production supervisors to modify stock quantities when only store managers are supposed to do so) represents a breakdown in internal control, which directly constitutes **Control Risk** as defined under **SA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment**.

Question 12

Preparing a visual diagram showing the movement of material requisitions and barcode-based issuance represents which method of internal control evaluation?

Accepted Answer

**Answer: (D) Flow Chart**

A **flowchart** is a diagrammatic representation of the sequence of operations or processes in a system, showing the flow of documents, authorizations, and activities using standardized symbols. When the audit team prepares a **visual diagram** depicting the movement of material requisitions, approvals, barcode scanning, and issuance of materials to the shop floor, they are using the **Flowchart method** of internal control documentation. This method is particularly useful for identifying gaps in **segregation of duties** and authorization controls, as it visually maps each step and control point in the process.

Question 13

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?

Accepted Answer

**Answer: (B)**

CA Riya is following a **principles-based approach**. In the absence of a specific ethical rule or detailed guidance for the unusual transaction, she is relying on her professional judgment, knowledge, skills, and expertise to determine the ethically correct course of action. This reflects the core of a principles-based approach, which emphasizes applying fundamental ethical principles such as integrity, objectivity, professional competence, confidentiality, and professional behavior to novel or unusual situations not explicitly covered by rules. Rather than waiting for or seeking a specific rule (rules-based approach), she is using her professional judgment grounded in underlying principles—precisely what the ICAI Code of Ethics expects from CAs.

Question 14

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 progra…

Accepted Answer

**Answer: (A)**

A properly prepared and approved audit programme serves as documentary evidence that the auditor planned and executed audit procedures with reasonable skill and care. This defence is valid under SA 220 (Quality Management for an Audit of Financial Statements) and SA 230 (Audit Documentation), which require auditors to document their audit strategy and detailed audit plans before commencing fieldwork. When an audit programme comprehensively sets out the nature, timing, and extent of audit procedures, clearly assigns responsibilities, and records the exercise of professional judgment—and is approved by the engagement partner—it provides prima facie evidence that the auditor followed a systematic approach consistent with professional standards. In negligence proceedings, such documentation rebuts allegations of carelessness by demonstrating that the auditor did not act arbitrarily but followed a planned, reasoned methodology. Option (B) is incorrect because an audit programme does not guarantee detection of all frauds and errors; the auditor's responsibility is limited to detecting material misstatements. Option (C) is incorrect as the programme documents planned procedures, not actual execution; errors can still occur during execution. Option (D) is incorrect because an audit programme does not shift responsibility to the client; the auditor remains fully accountable for audit quality.

Question 15

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?

Accepted Answer

**Answer: (B)**

Under SA 265 (Communicating Deficiencies in Internal Control to Those Charged with Governance and Management), the auditor is required to communicate significant deficiencies in internal control **in writing** to those charged with governance (such as the Audit Committee or Board) on a **timely basis**. This requirement is mandatory regardless of whether management has acknowledged the deficiencies or offered alternative solutions such as oral briefings. The purpose of written communication is to ensure formal documentation and enable those charged with governance to take appropriate action. The timing must be appropriate to allow sufficient opportunity for remediation during the audit period itself, making delayed communication (post-audit) insufficient.

CA Inter Audit & Ethics

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2Examiner-rewarded phrases

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Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap