Official Suggested Answer
Assembly of the Final Audit File:
Audit documentation may be recorded on paper or on electronic or other media. Audit file may be defined as one or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement. Hence the views of CA B that audit documentation should be maintained mandatorily in paper form is not correct.
The auditor shall prepare audit documentation on timely basis. Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of the audit and facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor's report is finalized. Documentation prepared after the audit work has been performed is likely to be less accurate than documentation prepared at the time such work is performed. Completing the audit Documentation by CA B not on timely basis is not proper.
An appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor's report. In the given situation, CA. B, after completion of audit season, is completing the audit file as well as assembling of final audit files of his client after three months of the date of audit report which is not valid as per SQC 1.
SQC 1 "Quality Control for Firms that perform Audits and Review of Historical Financial Information, and other Assurance and Related Services", requires firms to establish policies and procedures for the retention of engagement documentation. The retention period for audit engagements ordinarily is no shorter than seven years from the date of the auditor's report, or, if later, the date of the group auditor's report. He retains audit file of the client for 4 years from the date of audit report is also non-compliance of SQC 1.
Source: ICAI Board of Studies. open source PDF ↗
Worked Solution
✓ VerifiedAnswer: (C)
CA D is employing a reasonableness test, a substantive analytical procedure where the auditor calculates what a financial statement figure should logically be based on known data, then compares it with the actual recorded amount.
Here, the auditor:
- Takes the known credit facility amount: Rs. 10 crores
- Applies the stipulated interest rate from sanction letter: 8% p.a.
- Calculates expected interest expense: Rs. 10 crores × 8% = Rs. 80 lacs
- Compares with recorded interest in financial statements: Rs. 60 lacs
- Identifies a variance of Rs. 20 lacs, triggering investigation into why actual interest is lower than expected
This procedure tests the reasonableness of the recorded interest expense by independently computing what it should be. Reasonableness tests are particularly effective for substantive analytical procedures as they use independent data (loan agreement terms) to validate recorded amounts in financial statements.
Write it like this
1The skeleton
- State the answer option first (C — Reasonableness Test) — in MCQs, examiners scan the first line for your pick; don't make them dig through your working to find it.
- Define reasonableness test in one line — 'auditor independently computes an expected figure using known parameters and compares it with the recorded amount' — this is the definition that earns the reasoning mark.
- Show the computation explicitly — Rs.10 cr × 8% = Rs.80 lacs expected vs Rs.60 lacs recorded; without this working, you're just claiming the answer, not proving you understand it.
- State the variance and its significance — Rs.20 lacs gap is what triggers further inquiry; naming this shows you know WHY the procedure matters, which is what SA 520 is about.
- Distinguish it from trend/ratio analysis in one line — examiners love when you rule out the other options briefly; it signals you didn't just guess (C).
2Examiner-rewarded phrases
3Common trap
Most students confuse reasonableness test with ratio analysis and pick the wrong option — ratio analysis compares two financial figures against each other (like interest/loan), but reasonableness test uses external/independent data (the sanction letter rate) to build an expected figure from scratch. If you don't clock that distinction, you'll likely mark (B) and drop both marks.