Worked Solution
✓ VerifiedANSWER TO ANY EIGHT QUESTIONS:
(a) CORRECT - The scope of work of an internal auditor may extend even beyond the financial accounting. Internal auditors examine not only financial records but also operational efficiency, compliance with policies, risk management, and management controls. Unlike external auditors who focus on financial statements, internal auditors have a broader mandate including operational and strategic audit areas.
(b) INCORRECT - An auditor cannot be indifferent to prudence or profitability. While the auditor is not responsible for ensuring profitability, they must verify application of the prudence concept in valuation of assets, recognition of liabilities, adequacy of provisions, and going concern assessment. The auditor also considers appropriateness of accounting policies and compliance with Indian Accounting Standards (Ind AS) which embodies prudence.
(c) CORRECT - Evaluating responses to enquiries is an integral part of the inquiry process. Per SA 500 (Audit Evidence), inquiry involves not merely asking questions but critically evaluating the nature, source, reliability, and consistency of responses received. The auditor must assess whether responses are corroborated by other evidence and whether the respondent has appropriate knowledge.
(d) CORRECT - Internal control questionnaires (ICQs) are a good source for identifying weaknesses in internal control systems. ICQs comprise structured questions about control design and operation. However, they must be supplemented with observation and testing procedures to confirm actual implementation and effectiveness of controls.
(e) CORRECT - Cluster sampling is less effective than random sampling for audit purposes. Cluster sampling involves dividing the population into clusters and randomly selecting entire clusters. Random sampling provides better representativeness as each item has equal chance of selection. For audit populations, random sampling generally yields more reliable and defensible conclusions.
(f) INCORRECT - Errors of duplication do NOT affect the Trial Balance. When the same transaction is posted twice (both debit and credit sides are duplicated equally), the trial balance continues to balance. Such errors affect the accuracy of individual account balances and financial statements but not the agreement of trial balance totals. These are errors of accuracy, not of principle affecting trial balance agreement.
(g) INCORRECT - Substantive procedures DO test the balances of accounts. Substantive procedures include substantive tests of details and substantive analytical procedures specifically designed to test account balances and detect misstatements. They directly address the risk of material misstatement at the assertion level.
(h) INCORRECT - The first auditors of a Government company are NOT appointed by the Board of Directors. Under the Companies Act, 2013, the first auditors of a Government company are appointed by the Central Government, State Government, or the Comptroller and Auditor General (CAG) as applicable. The Board appoints subsequent auditors after the first auditors' term.
(i) CORRECT - The members of XYZ Ltd. can validly lodge a complaint against the auditor for failing to send the auditor's report. Under the Companies Act, 2013, the auditor's report must be placed before the company in general meeting and members have a statutory right to receive copies. Failure by the auditor to ensure members receive the report constitutes a breach of statutory duty.
(j) INCORRECT - Mr. Pawan cannot be appointed as Tax-Consultant of ABC Ltd. where his father is the Managing Director. This appointment violates the principle of independence as enshrined in the Chartered Accountants Act, 1949 and professional ethics. A close family relationship with a key management person creates a threat to independence and objectivity. Such professional engagements are not permitted due to conflict of interest and self-interest threat.
Write it like this
1The skeleton
- Write CORRECT or INCORRECT in bold capitals as your very first word — examiners scan the left margin of each sub-part first; if they don't see an instant verdict, they assume you're unsure and mark down.
- Follow immediately with the governing law or SA reference — e.g., 'As per SA 500' or 'Under Section 139 of the Companies Act, 2013' — this one phrase signals you're not guessing and locks in partial marks even if your reason trails off.
- Give exactly one reason sentence, not a paragraph — this is a 2-marks-per-part question; two tight sentences max, and the second should state the consequence or correct position, not repeat the verdict.
- Choose your 8 strategically in the first 30 seconds — mentally scan all 10 and pick the ones where you can name a section or SA cold; skipping a sub-part you half-know is smarter than losing 1.5 marks on a shaky answer.
- End each part with the correct legal position, not just the negation — saying 'the statement is incorrect' without stating what IS correct costs you the application mark every time.
2Examiner-rewarded phrases
3Common trap
Heads up — most students write a correct reason but forget the verdict word entirely, or bury it mid-sentence; that's an automatic half-mark deduction per sub-part because the examiner's marking scheme literally starts with 'stated CORRECT/INCORRECT'. Also, don't attempt all 10 thinking you'll get bonus credit — you won't, and you'll waste 4-5 minutes that cost you elsewhere.