Question 1

Examine with reasons (in short) whether the following statements are correct or incorrect: (Attempt any 7 out of 8)

Accepted Answer

**Statement (i): INCORRECT** — The primary responsibility for prevention and detection of fraud rests with **management and those charged with governance (TCWG)**, not the auditor. Per SA 240, the auditor's responsibility is to obtain reasonable assurance that financial statements are free from **material misstatement due to fraud**, but this is different from prevention. The auditor designs audit procedures to detect fraud causing material misstatement, but cannot be held responsible for preventing all frauds.

**Statement (ii): INCORRECT** — Written representations are **not sufficient audit evidence by themselves**. SA 580 (Management Representations) explicitly requires that written representations must be **corroborated with other appropriate audit evidence**. Representations are supportive evidence, not standalone evidence. The auditor should not rely on management representations as the only source of audit evidence for any material matter.

**Statement (iii): INCORRECT** — A statutory auditor appointed under **Section 139 of the CA 2013 CANNOT be appointed as cost auditor** of the same company. Per Section 148 of the CA 2013, the cost auditor must be a **separate qualified person**. Dual appointment would create conflicts of interest and compromise independence. The law mandates separate appointments.

**Statement (iv): INCORRECT** — Both the **overall audit strategy AND the audit plan must be updated and revised** as and when required during the course of audit. SA 3…

Question 2

Is CA Ghan Shyam right in changing the overall audit strategy and plan after the audit team has started working as per the earlier strategy established & plan so developed?

Accepted Answer

**Answer: (C)**

As per **SA 300 (Planning an Audit of Financial Statements)**, the overall audit strategy and audit plan are not static documents. The auditor is required to update and change the overall audit strategy and audit plan as necessary during the course of the audit. If, during execution, the auditor identifies that internal controls are not functioning as expected, it is entirely appropriate — and in fact required — to revise the strategy and plan accordingly. CA Ghan Shyam is therefore right in changing both the overall audit strategy and the audit plan once he discovered that the internal control systems were not in place.

Question 3

Which of the following audit procedures should the audit team perform with respect to verification of debtors balance?

Accepted Answer

**Answer: (D) Both a & b.**

For verification of debtors' balances, the audit team should perform both of the following procedures:

**Comparison of balances (Option A):** Ghan Shyam & Associates can compare the debtors balance reflected in the financial statements with the total of individual ledger balances in the books of ABC Ltd. This helps identify any discrepancies or misstatements in the reported figure.

**External confirmation (Option B):** As per **SA 505 – External Confirmations**, the auditor may obtain direct balance confirmation from debtors. External confirmations are considered highly reliable audit evidence as they are obtained directly from third parties independent of the entity.

**Option C is incorrect** because as per **SA 580 – Written Representations**, management representations alone do not constitute sufficient and appropriate audit evidence. They cannot substitute for other audit procedures — they are supplementary evidence only.

Question 4

Statement 1: The reliability of information to be used as audit evidence is influenced by its source and its nature, and the circumstances under which it is obtained.
Statement 2: The audit evidence obtained from sources external to the entity are generally more reliable than the audit evidence from internal sources.

Accepted Answer

**Answer: (C)**

Both statements are true. **SA 500 (Audit Evidence)** explicitly states that the reliability of audit evidence is influenced by its source, nature, and the circumstances under which it is obtained (Statement 1). It further provides that audit evidence obtained from **external sources** (e.g., third-party confirmations) is generally more reliable than evidence obtained from **internal sources** (e.g., internal records, management representations) (Statement 2). Both are foundational principles under SA 500.

Question 5

With respect to the inventory of ABC Ltd. kept in warehouse, which audit procedures can the audit team perform to obtain sufficient and appropriate audit evidence?

Accepted Answer

**Answer: (C)**

As per **SA 501 (Audit Evidence — Specific Considerations for Selected Items)**, when inventory is held by a third party such as a warehouse, the auditor should obtain sufficient and appropriate audit evidence by: (a) checking warehouse receipts or similar documents with the inventory records of the company, and (b) obtaining **direct external confirmation** from the third party (warehouse) regarding the quantity and condition of inventory. Both procedures together provide corroborating evidence and are therefore the correct approach. Option (D) is incorrect as management representation alone does not constitute sufficient audit evidence for third-party held inventory, nor is disclosure in the audit report a substitute for audit procedures.

Question 6

Is management correct in asking the debtors to provide the reply of confirmation request of auditor to the General Manager of accounts department of the company?

Accepted Answer

**Answer: (B)**

As per **SA 505 – External Confirmations**, an external confirmation is defined as audit evidence obtained as a **direct written response to the auditor from a third party** (the confirming party), either in paper form or by electronic or other medium. The key requirement is that the response must come **directly to the auditor**, not through the management or any intermediary.

In the given case, the management of ABC Ltd. asked the debtors to send their confirmation responses to the **General Manager of the accounts department**, who would then forward them to the audit team. This arrangement is **not acceptable** under SA 505 because it allows management to intercept the responses, which defeats the very purpose of external confirmation — which is to obtain independent, unbiased evidence bypassing management.

Therefore, management is **not correct** in asking debtors to respond to the GM of accounts department. The responses must be sent **directly to the auditor** (Ghan Shyam & Associates).

Question 7

Which of the following factors should not be considered by CA Raj in deciding the extent of checking while making the sample plan in case of UVW Ltd.?

Accepted Answer

**Answer: (A)**

The size of the entity is **not** a factor that determines the extent of audit sampling. According to **SA 530 (Audit Sampling)**, the factors that influence sample size include the tolerable error, expected error, the assessed level of control risk (i.e., state of internal controls), and the competence/reliability of the audit team and procedures — but the mere size of the entity does not directly determine how large a sample should be. Options (B), (C), and (D) are all recognized factors affecting sample size and extent of checking.

Question 8

With respect to the weakness in internal control system of accounts receivable during the FY 2019-20, the audit team:-

Accepted Answer

**Answer: (A)**

When internal control weaknesses are identified, the auditor's assessment of control risk increases. As per **SA 530 (Audit Sampling)**, a higher risk of material misstatement — arising from weak internal controls — requires the auditor to increase the sample size to obtain sufficient appropriate audit evidence. Therefore, the audit team should consider a **larger sample size or 100% examination** of accounts receivables to compensate for the lack of reliance on internal controls.

Question 9

Statement 1: While conducting an audit, it is obligatory for the auditor to apply sampling.
Statement 2: There may be sometimes where test checking or sampling may not be suitable.

Accepted Answer

**Answer: (B)**

Audit sampling is **not obligatory** for auditors — Statement 1 is false. As per **SA 530 (Audit Sampling)**, the auditor may choose to apply sampling techniques, but it is not mandatory in all situations. In certain cases, 100% examination or other audit procedures may be more appropriate. Statement 2 is correct: there are situations where test checking or sampling may **not be suitable**, such as when the population is very small, when the nature of the item demands 100% verification (e.g., all items above a materiality threshold), or when a pattern of error is detected (as in the case scenario — errors found specifically on 9th and 10th of every month suggest a systematic issue requiring complete examination rather than sampling).

Question 10

With respect to selecting sample for accounts receivable and accounts payable which method of selecting of sample is advised by CA Raj to the engagement team?

Accepted Answer

**Answer: (A)**

CA Raj advised the engagement team to divide the accounts receivable and accounts payable balances into **separate groups** and take samples from each group. This technique of dividing a population into sub-groups (strata) and selecting samples from each stratum is known as **Stratified Sampling**. As per **SA 530 (Audit Sampling)**, stratified sampling improves audit efficiency by allowing the auditor to direct efforts toward higher-risk or higher-value items within each stratum.

Question 11

With respect to the deviation identified by the auditor occurring on 9th and 10th of every month, what course of action should the audit firm adopt?

Accepted Answer

**Answer: (D) Both b & c**

When the auditor identifies a **systematic deviation** — one that occurs on specific days (9th and 10th of every month), it cannot be treated as a random or isolated error. Such a pattern suggests the deviation is **intentional or systematic in nature**, which raises the possibility of **fraud or deliberate override of internal controls**.

As per **SA 530 (Audit Sampling)**, when deviations from prescribed control procedures are detected, the auditor must investigate their nature and causes. A systematic deviation is far more serious than a random one because it indicates a **breakdown in internal controls on a recurring basis**.

Accordingly, RRM & Associates should:
1. **Extend audit procedures** to cover all transactions falling on the 9th and 10th of each month (Option B), since the sample may not have captured all affected transactions.
2. **Investigate the nature and cause** of the deviation — whether it is due to staff absence, deliberate circumvention, or fraud — as required under **SA 240 (The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements)** (Option C).

Option (A) is incorrect — systematic deviations must never be ignored merely because they appear infrequent in absolute terms.

Question 12

………….. is the threat which occurs when auditors are deterred from acting objectively with an adequate degree of professional skepticism.

Accepted Answer

**Answer: (D)**

The **intimidation threat** occurs when auditors are deterred from acting objectively with an adequate degree of professional skepticism due to actual or perceived pressures, threats, or coercion from management or other parties. This threat prevents the auditor from exercising independent judgment and maintaining the professional skepticism required for an effective audit.

Question 13

Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud are called as:

Accepted Answer

**Answer: (A)**

According to SA 240 - "The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements", the term **Fraud risk factors** refers to events or conditions that indicate an incentive or pressure to commit fraud, or that provide an opportunity to commit fraud. These factors form part of the auditor's understanding of the entity's fraud risk assessment and help in identifying areas of heightened risk during the audit.

Question 14

Which of the following is an example of revenue expenditure?

Accepted Answer

**Answer: (B)**

Regular repairs incurred on PPE are **revenue expenditure** because they maintain the asset in its existing operational condition without enhancing its value, improving its performance, or extending its useful life materially. These are routine maintenance costs written off as expenses in the period incurred.

Option (A) is incorrect: Wages on installation of machinery are part of the cost of bringing the asset to its intended location and condition—these are **capitalized** as part of the cost of the asset under AS 10.

Option (C) is incorrect: Legal expenses incurred in the purchase of land and building are directly attributable acquisition costs and must be **capitalized** as part of the asset's cost.

Option (D) is incorrect: Freight inwards on purchase of PPE is a cost necessary to bring the asset to the company's premises and is **capitalized** as part of the asset's cost.

Question 15

SA 320 on 'Materiality in Planning and Performing an Audit' requires that an auditor

Accepted Answer

**Answer: (B)**

SA 320 'Materiality in Planning and Performing an Audit' explicitly requires that an auditor must consider both materiality and its relationship with audit risk while conducting an audit. The standard mandates that auditors establish overall materiality and performance materiality during audit planning, and this materiality must be evaluated in conjunction with audit risk. The relationship between materiality and audit risk is inverse: as materiality levels increase, audit risk decreases (requiring less extensive audit procedures), and vice versa. SA 320 requires auditors to use this relationship to determine the nature, timing, and extent of audit procedures. Therefore, ignoring either materiality or its relationship with audit risk would be non-compliant with the standard.

Question 16

In relation to completed engagements, procedures designed to provide evidence of compliance by engagement teams with the firm's quality control policies and procedures is known as:

Accepted Answer

**Answer: (A)**

Monitoring, as defined in SQC 1 (Standard on Quality Control), is the process by which a firm obtains and evaluates information to determine whether its quality control policies and procedures remain relevant and operating effectively. A key component of monitoring involves reviewing completed engagements to gather evidence of whether engagement teams have complied with the firm's established quality control policies and procedures. This continuous assessment ensures quality standards are maintained across all engagements.

Question 17

As per SQC 1 the retention period for audit engagements ordinarily is no shorter than …………. from the date of the auditor's report.

Accepted Answer

**Answer: (B)** According to SQC 1 (System Quality Control) issued by ICAI, the engagement partner and the firm are required to establish policies and procedures for the retention of engagement files and other relevant documentation. The retention period for audit engagements ordinarily shall be no shorter than **five years from the date of the auditor's report**. This requirement ensures proper documentation, facilitates quality reviews, and supports the firm's quality control procedures.

Question 18

Which of the following is correct, in case of joint audit, where there is disagreement with regard to the opinion or any matters to be covered by the audit report?

Accepted Answer

**Answer: (C)**

When joint auditors have a disagreement regarding the audit opinion or matters to be covered in the audit report, both statements (A) and (B) are correct. Under SA 299, joint auditors who cannot agree on a significant matter affecting the audit opinion must issue **separate audit reports** expressing their individual opinions. This is required because each auditor has professional responsibility for their audit opinion and cannot compromise on matters of significance affecting that opinion.

Additionally, each of the separate audit reports shall **make clear reference to the other auditor's report**, specifically highlighting the nature and extent of the disagreement. This transparency ensures that users of the financial statements are aware that the joint auditors have differing views.

Option (D) is incorrect because auditors cannot be bound by a majority opinion when they hold a separate professional view on a significant matter. The auditing standards recognize that forcing a dissenting auditor to issue a report with an opinion they do not support would compromise auditor independence and professional integrity.

Question 19

……………. refer to representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur.

Accepted Answer

**Answer: (A)**

**Assertions** are representations by management, explicit or otherwise, that are embodied in the financial statements. Auditors use these assertions as the basis to identify and assess risks of material misstatement. Management assertions fall into five categories: (1) Existence/Occurrence, (2) Completeness, (3) Rights and Obligations, (4) Valuation/Allocation, and (5) Presentation and Disclosure. By understanding these assertions, the auditor can design appropriate audit procedures to detect different types of potential misstatements and obtain sufficient appropriate audit evidence.

Question 20

The persons with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity are:

Accepted Answer

**Answer: (B)**

The term 'those charged with governance' is specifically defined in SA 260 (Communication with Those Charged with Governance) as the person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This encompasses the governance functions regardless of structure or nomenclature, making it the correct and most comprehensive answer. While Board of Directors typically fulfills this role, and audit committees are part of the governance structure, only 'Those charged with governance' captures the full scope of accountability and strategic oversight responsibilities referenced in the question.

Question 21

The risk that the financial statements are materially misstated prior to audit is called-

Accepted Answer

**Answer: (A)**

The risk that financial statements are materially misstated prior to audit is called **Risk of Material Misstatement (RMM)**. This represents the inherent vulnerability of financial statements to material errors or fraud before the auditor applies any audit procedures. RMM comprises two components: inherent risk (susceptibility of an assertion to material misstatement) and control risk (the risk that the internal control system fails to prevent or detect misstatement). Detection risk, by contrast, is the risk that audit procedures fail to identify an existing misstatement. Audit risk is the overall risk that the auditor expresses an inappropriate opinion, calculated as the product of RMM and detection risk.

CA Inter FM + SM

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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