Worked Solution
✓ VerifiedEXAMINATION OF STATEMENTS:
(i) INCORRECT. The auditor cannot reduce audit risk to zero or obtain absolute assurance. Per SA 200, auditors can only obtain reasonable assurance, not absolute assurance. Audit risk comprises inherent risk, control risk, and detection risk. While auditors can minimize detection risk through increased sample sizes and testing procedures, they cannot reduce it to zero due to the inherent limitations of auditing, sampling uncertainty, and the potential for management override of controls. The presence of inherent uncertainty in evidence evaluation makes zero audit risk impossible.
(ii) CORRECT. Materiality is fundamental to auditing. SA 320 establishes that materiality is essential for audit planning and performing procedures. It determines the nature, timing, and extent of audit procedures and enables the auditor to evaluate whether misstatements are significant. Materiality underpins the audit risk model and is critical for reaching audit conclusions on financial statement fairness.
(iii) INCORRECT. External confirmation evidence is not always reliable. While SA 505 (External Confirmations) recognizes confirmations as generally reliable, reliability depends on: (a) the nature of confirmation (positive vs. negative); (b) the third party's independence and objectivity; (c) controls over the confirmation process; (d) the auditor's assessment of the responding party's ability to confirm. Confirmations from related parties, those subject to management pressure, or inadequately controlled processes may not be reliable. Fake confirmations and management involvement can compromise reliability.
(iv) INCORRECT. Under Section 140(4) of the Companies Act, 2013, an auditor who resigns must file Form ADT-4 with the Registrar within 30 days from the date of resignation, not 60 days. The shorter timeframe (30 days) is critical for disclosure of resignation circumstances to the company and registrar.
(v) INCORRECT. A satisfactory control environment is not an absolute deterrent to fraud. SA 240 clarifies that while a strong control environment reduces fraud risk, it does not eliminate it. Fraud can still occur through: (a) management override of controls; (b) collusion between two or more employees; (c) sophisticated schemes bypassing controls; (d) tone at the top not translating to actual implementation. A good control environment is a mitigating factor, not absolute prevention.
(vi) INCORRECT. This statement violates Section 139 of the Companies Act, 2013 on multiple grounds: (a) first auditor appointment must be made by the Board, not by the Managing Director alone—it requires Board approval at a meeting held within 30 days of company incorporation; (b) In this case, the appointment on 31-12-2019 is beyond the 30-day window from incorporation on 01-10-2019 (approximately 92 days), making it a late appointment in violation of statutory requirements. The Managing Director lacks authority for this appointment.
(vii) CORRECT. All NGOs/Not-for-Profit entities registered under the Companies Act, 2013 are permitted to maintain accounts on either cash basis or accrual basis. Per the Companies (Accounts) Rules, 2014, Schedule VI, NGOs have the flexibility to adopt either method based on their operational needs and stakeholder requirements, though accrual basis is generally preferred for larger organizations for better reflection of financial position.
(viii) INCORRECT. In an automated environment, inquiry is NOT the most efficient or effective audit testing method. SA 315 and SA 330 emphasize that in IT environments, the most appropriate procedures include: (a) testing of automated controls and system-generated reports; (b) data analytics and CAATs (Computer Assisted Audit Techniques); (c) testing system configuration and access controls; (d) tracing transactions through system logic. Inquiry has limitations in automated environments because the audit trail is system-generated; reliance on oral/written evidence about automated processes is less effective than testing the controls and outputs directly.
Write it like this
1The skeleton
- State verdict in word one — write 'CORRECT.' or 'INCORRECT.' in caps before anything else; examiners mark these questions by scanning for the verdict first, then checking the reason.
- Drop the SA/Section number in line 2 — e.g., 'As per SA 200...' or 'Under Section 140(4)...'; without this, your reason floats and you lose the citation mark even if your logic is right.
- Give ONE crisp reason sentence, not three — pick the single strongest point (e.g., for audit risk: 'inherent limitations of auditing make zero risk impossible'); padding with 4 sub-points wastes 30 seconds per statement and dilutes the core logic.
- Never skip the 'why wrong' angle for INCORRECT statements — don't just state the correct position; explicitly say what the statement got wrong (e.g., '60 days is incorrect — the actual limit is 30 days'), because examiners look for the contrast.
- Budget exactly ~3.5 minutes per statement and move on — you're doing 7 out of 8, so pick the 7 you know cold in the first 30 seconds; attempting a shaky 8th and crossing out wastes time and signals uncertainty.
2Examiner-rewarded phrases
3Common trap
The trap here is writing mini-essays — students spend 6-7 lines on statements (i) and (v) they know well, then run out of time and leave statement (vi) or (viii) half-answered. Each statement is worth exactly 2 marks: 1 for verdict, 1 for reason — treat it like a 2-mark sprint, not a paragraph question.