CH.01P05 SA 500

MCQ--500.3

The measure of the quality of audit evidence about its relevance and reliability in providing support for the conclusions on which the auditor’s opinion is based is:

(CNO-SA500.080)

• a) Sufficiency of audit evidence

• b) Appropriateness of audit evidence

• c) Accounting estimates

• d) Reasonableness of audit evidence

MCQ--500.5

You are an audit senior at Ghaisas & Co and are currently performing the final audit of Bingham Co. for the year ended 31 March 2018. The company is a manufacturer and retailer of table lamps. The current audit senior is ill, and you have been asked to complete the audit of payroll in their absence. On arrival at the head office of Bingham Co, you determine the following data from a review of the current year and prior year audit files:

• As at 31 March 2017, the company had 350 employees

• On 1 April 2017, 10% of staff were made redundant, effective immediately, due to discontinuation of a product line

• On 1 June 2017, all remaining staff received a 5% pay rise.

• Over the course of the year, sales levels met performance targets which resulted in a fixed bonus of Rs.8,000 being paid to each employee on 31 March 2018. The following audit evidence has been gathered relating to the accuracy of wages and salaries for BinghamCo.

1. Proof in total calculation performed by an audit team member.

2. Written representation from the directors of Bingham Co confirming the accuracy of wages and salaries.

3. Verbal confirmation from the finance director of Bingham Co confirming the accuracy of wages and salaries.

4. Recalculation of the gross and net pay for a sample of employees by an internal audit team member of Bingham Co. What is the order of reliability of the audit evidence starting with the MOST RELIABLE first?

(CNO-SA500.080)

• a) Audit evidence - 1, 2, 3, 4

• b) Audit evidence - 1, 4, 2, 3

• c) Audit evidence - 4, 1, 2, 3

• d) Audit evidence - 4, 1, 3, 2

MCQ--500.6

RIM Private Ltd is engaged in the business of manufacturing of steel having annual turnover of INR 10,000 crores. The company is very capital intensive and has its plants at two locations – Mohali and Hosur. During the year ended 31 March 2021, the company carried out a detailed physical verification of its property, plant and equipment and also reassessed their useful lives by engaging a consultant. The consultant submitted its report to the management on 21 April 2021. The statutory auditors of the company started their audit work from May 2021 and when this information was given to them regarding the physical verification and the reassessment of the useful lives of property, plant and equipment, the auditors told the management that the consultant should have submitted its report to the auditors also independently. Further, in the absence of this direct communication of the report of the consultant to the auditors, the audit team would have to review the work of the consultant which is not efficient, but it cannot be avoided now. Management did not agree with both the points of the auditors that the consultant should have shared report with the auditors directly and that the auditors need to review the work of the consultant. The management would like to have your views on this matter.

(CNO-SA500.100)

• a) The view of the management seems to be correct because there is no such requirement that any consultant of the company should share his report directly with the auditor. Also, when the consultant has already submitted a detailed report, no further review is required on that.

• b) Both the management and auditors are not correct. The auditor is not supposed to receive the report directly. Further, the auditor needs to review the work of the consultant irrespective of the fact whether he received the report directly or not.

• c) The auditor’s requirements are reasonable because he carries duty in respect of audit of financial statements and by not getting report directly from the consultant, he would not know whether it belongs to that consultant or not. And now only because of this lack of proper communication the auditor would have to review the work of the consultant.

• d) Both management and auditors should find a solution to this problem. The management may request the consultant to send the report to the auditor directly now. On the basis of the same, the auditor can avoid unnecessary procedure related to review of report of the consultant.

MCQ--500.7

You are the audit senior of Tey & Co. are responsible for the audit work to be managed for the fixed assets of the company. Tey & Co.has 4 properties amounting to ` 12.5 crore. One of the important tasks ahead for you is to confirm the ownership of these properties. Which of the following would provide the most persuasive evidence of the ownership?

(CNO-Unique)

• a)To conduct a physical inspection of all the properties located at different areas.

• b) To ask the management registration documents of these properties and inspect and verify them.

• c) To check whether all the properties are recorded properly in the fixed asset register and depreciation has been calculated correctly.

• d) Enquire with the management, if these properties are insured and review the insurance documentation

MCQ--500.8

You are the audit manager of Ranker & Co are responsible for the audit work to be managed for the fixed assets of the company. Ranker & Co has 5 properties amounting to Rs.11.5 crore. One of the important tasks ahead for you is to confirm the ownership of these properties. Which of the following would provide the most persuasive evidence of the ownership?

(CNO-Unique)

• a) To conduct a physical inspection of all the properties located at different areas

• b) To ask the management registration documents of these properties and inspect and verify them

• c) To check whether all the properties are recorded properly in the fixed asset register and depreciation has been calculated correctly

• d)Enquire with the management if these properties are insured and review the insurance documentation

MCQ--501.1

You have only eight working hours for raw material inventory verification. Based on your observation during these eight hours, you have to form an opinion with respect to the correctness of inventory value calculated by the management. The company uses ERP system for updating and recording raw material inventory. The ERP system of the company has passed all the ITGC checks and inventory rates are calculated by ERP on moving average price (MAP) basis. The company has done ABC analysis of all raw material inventory items and has vast number of items in each category. You will form your opinion based on

(CNO-Unique)

• a) Based on ABC analysis, check physical inventory of all “A” class items during allotted time and matching it with ERP stock.

• b) Understand the process of recording of inventory in ERP to ascertain potential weaknesses and checking physical inventory of mostly “A” class items, some “B” class items and some “C” class items.

• c) Check physical inventory of “A” class items as much as possible along with certain “B” class items and certain “C” class items on sample basis in value wise descending order, compare the physical stock with ERP system, and tabulate the result. The exercise should be continued till the end of allotted eight hours.

• d) Check physical stock of only those items, which have standard packaging so that verification is faster considering the eight-hour time limit.

MCQ--501.2

Your firm has been appointed as the statutory auditors of GBM Private Limited for the financial year 2017-18. While verification of company’s inventories as on 31st March 2018 you found that the significant amount of inventories belonging to the company are held by other parties. However, the company has kept all the records of the inventories maintained by other parties, what is your duty as an auditor in order to ensure that third parties are not such with whom the stock should not be held, and the stock as disclosed in company’s records actually belongs to them?

(CNO-SA501.100)

• a) Ensure that the total stock including the stock with third party tally with the stock register maintained by the company.

• b) Obtain confirmation from the third party/s with whom the inventories of the company are held and reconcile the same with stock register.

• c) Conduct a physical verification of stock maintained with third party/s.

• d) Obtain a written confirmation from the departmental head of the company for the inventories maintained at other places as audit evidence.

MCQ--501.3

M/s Brahmi and Associates have been appointed as the statutory auditor of Prompton Leaves Limited, a manufacturer of gas geysers for the FY 2021-22. During the course of audit, the auditor found that two customer complaints have been filed against the company in the FY 2021-22, for the use of sub standard pipes and wires in manufacture of gas geysers. The gas geyser blasted at high temperature leading to severe injuries to the family of complainant along with damage to their property. They have sought a demand of rupees 10 crore. However, the lawyer of Prompton Leaves Limited believes that such claim is unsustainable as the incident occurred due to short circuit at both the complainants place. The management of Prompton Leaves Limited accordingly did not include any reference to the litigation in the financial statements. The auditor obtained legal advice from some independent lawyer according to whom the outcome of the case is not ascertainable as of now

(CNO-SA501.120)

• a) The statutory auditor should give an unqualified opinion.

• b) The statutory auditor should give an unqualified opinion with Emphasis of Matter paragraph.

• c) The statutory auditor should withdraw from the audit engagement

• d) The statutory auditor should give a qualified opinion.

MCQ--505.1

ALM Ltd. is a trading company engaged in the business of selling readymade garments with a turnover of around Rs. 85 crore in the year 2017-18. Your firm has been appointed as statutory auditors for the year 2018-19. In the process of audit for the half year ending 30th September 2018 your senior has instructed you to verify the debtors of the company. While verifying the same it came to your notice that the company is not taking balance confirmations from the debtors and the balance shown in the books of company is considered final for the preparation of accounts. As a statutory auditor what should be your decision on the debtor’s balances:

(CNO-Unique)

• a) Statutory auditor should review the internal audit report and ensure as per section 143 of the Companies Act, 2013 that the company has adequate internal financial controls in place.

• b) There is no need to take debtors confirmation as it is immaterial for the purpose of Audit Report.

• c) The auditor is required to take external confirmation independently and wherever the auditor gets negative or no response or the response is doubtful an alternative audit procedure should be followed.

• d) A management representation letter should be obtained by the auditor.

MCQ--505.2

As a Central Statutory auditor of KG Ltd. for the year 2018-19 you need to verify the bank balances for the half year ending 30th September 2018. The company is holding Bank accounts in five different banks, but you found that the bank reconciliation is not complete for some of the bank accounts. When discussed with the management they explained that the number of transactions in these accounts is very huge on daily basis and there are some old entries (existing in the reconciliation statement from the year 2008 and they are not material in nature) so it is difficult to reconcile these bank accounts. As a Central Statutory Auditor what will be your decision:

(CNO-Unique)

• a) The unusually old outstanding entries, as are not material in nature, should be removed from reconciliation statement and the balance in books of accounts should be considered as the balance for the balance sheet purpose.

• b) The auditor should confirm the appropriateness of the old outstanding entries by taking bank confirmations for the same to reduce audit risk and obtain a management representation letter on pending reconciliation.

• c) The auditor should disclose the matter in Notes to accounts of the audit report with respect to incomplete bank reconciliation

• d) The auditor should communicate it to those charged with governance as deficiency in internal control.