CA Inter Audit Lec 19 & 20

501.1

Coyote Ltd. is dealing in trading of electronic goods. Huge inventory (60% approximately) of the company is lying on consignment (i.e. under the custody of third party). CA. Star, the auditor of the company, wants to obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory lying on consignment. Thus, he requested & obtained confirmation from the third party as to the quantities and condition of inventory held on behalf of the entity, however, it raised doubts about the integrity and objectivity of the third party. Which of the following other audit procedures may be performed by CA. Star to obtain sufficient appropriate audit evidence regarding the existence and condition of the inventory under the custody of third party?

• a) Attend third party’s physical counting of inventory.

• b) Arrange for another auditor to attend third party’s physical counting of inventory.

• c) Inspect warehouse receipts regarding inventory held by third parties.

• d) All of the above.

Incs.05.1

"M/s JJ & associates having office in Chennai are statutory auditors under Companies Act, 2013 of a company viz. Sweet Aroma Private Limited engaged in business of obtaining and manufacturing rice from paddy catering to both domestic as well as international market mainly in Gulf nations. The company has a huge plant capacity for rice extraction in one of the states in Northern India. Needless to state that inventories are in huge quantity in such type of business consisting of raw material, work in progress and finished goods. The auditors want to obtain sufficient appropriate audit evidence regarding inventories. In above context, answer the following questions: -"

" Which of the following is most likely correct in relation to obtaining of sufficient appropriate audit evidence regarding existence and condition of inventory?

• a) It is mandatory for the auditor to attend physical inventory counting on the date of financial statements in all circumstances.

• b) Physical inventory counting may be attended by auditor on the date of financial statement or at a date other than date of financial statements in his discretion mandatorily in all circumstances.

• c) The attendance of auditors at physical inventory counting is impracticable due to time and costs involved because of auditor’s office location vis-à-vis company’s plant location. Hence, attendance at physical inventory counting may be skipped and alternative audit procedures may be performed to obtain sufficient appropriate evidence.

• d) The auditor shall attend at physical inventory counting unless impracticable. However, issue of time and costs involved because of auditor’s office location vis-à-vis company’s plant location is not a valid basis for skipping physical inventory counting."

Incs.05.2

"M/s JJ & associates having office in Chennai are statutory auditors under Companies Act, 2013 of a company viz. Sweet Aroma Private Limited engaged in business of obtaining and manufacturing rice from paddy catering to both domestic as well as international market mainly in Gulf nations. The company has a huge plant capacity for rice extraction in one of the states in Northern India. Needless to state that inventories are in huge quantity in such type of business consisting of raw material, work in progress and finished goods. The auditors want to obtain sufficient appropriate audit evidence regarding inventories. In above context, answer the following questions: -"

" Below are given certain cluster of matters which are relevant in planning attendance of auditor at physical inventory counting. Which of the following clusters consists of a likely inappropriate combination?

• a) Nature of inventory, timing of physical inventory counting and stages of completion of work in progress

• b) Nature of inventory, timing of physical inventory counting and valuation method of inventory

• c) Nature of inventory, timing of physical inventory counting, considerations regarding maintenance of a perpetual inventory system

• d) Risks of material misstatements related to inventory, nature of internal control pertaining to inventory, considerations regarding maintenance of a perpetual inventory system"

Incs.05.3

Needless to state that inventories are in huge quantity in such type of business consisting of raw material, work in progress and finished goods. The auditors want to obtain sufficient appropriate audit evidence regarding inventories.

" Which of the following is the most likely logical sequence of steps in relation to attendance at physical inventory counting by auditor?

• a) Observance of performance of management’s count procedures, inspection of inventory, performing test counts and evaluation of management’s procedures for recording and controlling results of physical inventory counting

• b) Observance of performance of management’s count procedures, performing test counts, inspection of inventory and evaluation of management’s procedures for recording and controlling results of physical inventory counting

• c) Performing test counts, inspection of inventory, Observance of performance of management’s count procedures and evaluation of management’s procedures for recording and controlling results of physical inventory counting.

• d) Evaluation of management’s procedures for recording and controlling results of physical inventory counting, Observance of performance of management’s count procedures, inspection of inventory and performing test counts.

Incs.05.4

Needless to state that inventories are in huge quantity in such type of business consisting of raw material, work in progress and finished goods. The auditors want to obtain sufficient appropriate audit evidence regarding inventories. In above context, answer the following questions: -"

        "During attendance at physical inventory counting, the auditor inspects inventory. Following outcomes stated as I, II & III are given below of this inspection procedure: -

Outcome I --- Existence of inventory

Outcome II ---- Ownership of inventory

Outcome III ------ Condition of inventory

 Which of following statements is most likely true?

• a) Outcomes I, II and III are all necessarily established after inspection.

• b) Only Outcomes I and III are established after inspection and Outcome II is never established.

• c) Outcomes I and III are established after inspection. However, outcome II may not be necessarily established.

• d) Outcome II and III are established after inspection. However, outcome I may not be necessarily established."

Incs.40.3

"How should the auditor verify the inventory held in custody with the third party?

• a) SA 501 mandates auditor to verify the same physically, hence management refusal will lead to a disclaimer of opinion

• b) The auditor should perform other procedures like requesting confirmation from third party or inspecting documentation like warehouse receipts to confirm existence of the inventory

• c) The auditor should obtain written representation from management on the inventory held in custody with third party

• d) Inventory of client held with third party is outside the scope of audit; hence auditor need not verify the same for his audit opinion on the financial statements."

Incs.47.4

“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?

• a) Checking of warehouse receipt with the inventory record of ABC Ltd.

• b) Obtaining direct confirmation with respect to quantity & condition of inventory of ABC Ltd. from the warehouse.

• c) Both a & b

• d) Seeking a management representation regarding inventory valuation and mentioning the fact regarding inventory being kept at the warehouse in the audit report.

501.2

The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:

• a)  Inquiry of management and, where applicable, others within the entity, including in-house legal counsel.

• b)  Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel.

• c)  Reviewing legal expense accounts

• d) All of the above

505.6

Which of the following is not correct?

• a) SA 230- Audit Documentation

• b) SA 500- Audit Evidence

• c)  SA 505- Written Representation

• d) SA 560- Subsequent Events

Incs.24.2

 

"The auditor can perform the following procedures to identify litigation and claims of Mars Ltd:-

• a) Inquiry of management including in house legal counsel.

• b) Reviewing legal expenses account.

• c) Reviewing of minutes of meetings of those charged to governance and correspondence between entity and external legal counsel.

• d) All of the above."