Worked Solution
✓ VerifiedAnswer: Seven statements answered below
(a) CORRECT – In government and non-business public sector entity audits, the audit objectives, nature of transactions, and authorization frameworks differ fundamentally from commercial enterprises. Traditional financial relationships used in business audits (e.g., gross profit consistency, receivables aging patterns, debt-to-equity ratios) may have limited relevance where entities operate under budget allocation and compliance-based frameworks rather than profit maximization principles. Government audit must adapt procedures to address public accountability rather than investor returns.
(c) INCORRECT – A sales invoice is internal evidence, not external evidence. Internal evidence comprises documents prepared or maintained by the entity itself (invoices, cash memos, ledgers). External evidence originates from third-party independent sources outside the entity's control (bank confirmations, supplier confirmations from vendors, correspondence with external agencies, tax authority documents). Only third-party originated documents qualify as external evidence.
(d) INCORRECT – Under Section 148 of the Companies Act, 2013, any vacancy in the Cost Auditor position due to resignation must be filled within 30 days of occurrence, not 60 days. The company must inform the central government in Form CRA-2 within 45 days of such appointment. The statement misstates the appointment timeline as 60 days, making it incorrect.
(e) INCORRECT – Under AS 19 (Accounting for Leases) and Ind AS 116, a finance lease is identified when the lease term extends to at least 75% or more of the economic life of the underlying asset. A lease term of less than 75% of useful life characterizes an operating lease, not a finance lease. The statement reverses this fundamental classification criterion, rendering it incorrect.
(f) INCORRECT – Block sampling is a non-statistical method involving selection of contiguous items (e.g., all transactions in January), but the statement's characterization is inaccurate. Block sampling does involve judgment in choosing which blocks to examine. While it does not use random number tables, it does possess a structured approach (systematic division of population into blocks). The blanket assertion that it has "no structured approach" and "no judgment" is overstated and incorrect.
(g) CORRECT – "Audit against provision of funds" is a core component of government expenditure audit. It verifies that every expenditure item is covered by proper sanction (general or special) from competent authority, ensuring authorized spending within allocated budgets and preventing unauthorized or ultra vires expenditure. This statement accurately reflects government audit principles.
(h) CORRECT – Where regulatory or governance frameworks mandate that auditors express an opinion on the effectiveness of internal controls over financial reporting (e.g., COSO framework requirements or Companies Act provisions for certain entity categories), the entity must establish, document, and maintain effective internal control systems. The statement correctly identifies the reciprocal requirement: opinion mandates require existence of controls to be opined upon.
Write it like this
1The skeleton
- Write CORRECT / INCORRECT in bold capitals as your very first word — examiners scan the first word of each answer; if they don't see the verdict instantly, your reason gets read with doubt already planted.
- Name the exact standard or section in line 1 of your reason — 'Under AS 19' or 'Under Section 148 of the Companies Act, 2013' before anything else, because that phrase alone signals to the examiner you know the source, not just the concept.
- State what the rule actually says, then contrast it with the statement — e.g., 'The correct period is 30 days, not 60 days as stated' — this two-part structure (correct rule + error identification) is exactly how model answers are written and earns full reason marks.
- Pick your seven strategically in the first 30 seconds — scan all statements, mark the ones where you're 100% sure of the section/standard, attempt those; a confident wrong-answer attempt on a hard one loses more time than marks gained.
- Keep each reason to 2-3 sentences max — you have roughly 2 minutes per statement; padding with extra lines doesn't earn extra marks and burns time you need for later sections.
2Examiner-rewarded phrases
3Common trap
Watch out — most students write the reason correctly but forget to say CORRECT or INCORRECT at the top, or they bury it mid-paragraph; in a scan-read exam, that costs you the verdict mark even if your reasoning is perfect. Also, don't mix up internal vs external evidence — a sales invoice feels like it 'goes outside' but it's prepared by the entity, so it's internal; that single confusion kills part (c).