WorksheetsCH04-AAE
Total questions: 16
Worksheet time: 8mins
MCQ--AAE.1
AJ Private Ltd is in the business of construction and infrastructure having an annual turnover of INR 1,100 crores. The operations of the company are run efficiently driven by the well laid out policies and procedures. The processes of the company are very strong and are well documented and properly communicated to its employees, as required. The management had also done a detailed risk assessment in the earlier years and currently the risk management system of the company is considered to be very effective. The internal controls include both automated and manual. During the course of the audit of the financial statements of the company for the financial year ended 31 March 2021, the statutory auditors did their risk assessment and also reviewed the general IT controls which were found to be effective. Considering the same, one of the senior audit team members asked the team to start performing the substantive audit procedures taking the approach that controls are effective. However, the audit team did not find this approach correct and discussed that they should also check the effectiveness of other manual and automated controls by testing them and then move on to substantive testing. The audit team recently had a training on the internal controls and hence their understanding was different from the audit senior. This led to a conflicting situation between the audit senior and remaining audit team. In the given situation, please advise which of the following would be correct.
(CNO-Unique)
a) The audit senior is correct because general IT controls were found to be effective and hence no further work may be required on controls.
b) The view of the audit team looks fine because without testing of internal controls covering all types of controls (manual and automated), those controls cannot be said to be operating effectively.
c) The audit senior seems reasonable in his approach because general IT controls were found to be effective. However, it would be more appropriate to also test application controls before concluding on the effectiveness of the controls.
d) The argument of the audit team looks better because every audit requires significant time to be spent on testing of internal controls and by only covering general IT controls, it would be difficult to justify this requirement later on in the audit file.
MCQ--AAE.2
AR Private Limited is a medium-sized company engaged in the business of trading of electronic equipments. The company has various warehouses where all of these equipments are kept and has an inventory levels of generally 2-3 months. The internal environment of the company is driven by various processes some of them are manual and some automated. Accordingly, the management has also set up various controls both manual and automated and is comfortable with their design and operating effectiveness. During the course of audit of the financial statements for the year ended 31 March 2021, the auditors raised various queries regarding various processes where the controls were operating effectively. This was because of the fact that auditor was considering either only manual controls or only automated controls in a process. As per the auditor, the management should have adopted the same approach and hence he would like to increase the substantive audit procedures because they had a view that as per the current approach of the management, controls should be considered as ineffective irrespective of the fact that the testing which the audit team had performed resulted in the controls being effective. Currently, the concern was regarding the approach on which management was also stuck on their point. You are required to provide your inputs to resolve this matter.
(CNO-Unique)
a) The approach of the management doesn’t seem to be correct because of the nature of the operations of the company. The current approach which the management has followed can be accepted only in case of manufacturing industry.
b) The management should have discussed their approach with the auditors before appointing them. The Companies Act 2013 provide specific guidance on these matters wherein the management of the company can follow such approach by taking preapproval from their auditors and in such a case, the report of the auditors is always clean.
c) The approach of the management is completely fine. The auditors need to correct their understanding of the internal controls and the application of internal controls. A process can is not limited to have either only manual control or automated control
d) Considering the size of the company, such matters should be ignored by the auditors. Even if the approach of the management is not correct, it would not have any impact on the work of the auditors because all such matters get resolved at the time when auditors perform final analytical procedures. (d) The audit team could have planned their work differently. They should involve IT experts who would have knowledge of the systems of the company and hence lot of time can be saved. Further in case of such type of industry, involvement of IT experts is anyways required mandatorily as per the legal requirements.
MCQ--AAE.3
KJ Private Ltd is engaged in the business of e-commerce wherein most of the operations are automated. The company has SAP at its ERP package and is planning to upgrade the SAP version. Currently, the version of SAP being used is fine, but the higher version would lead to increased efficiencies and hence the company is considering this plan which will also involve a huge outlay. KPP & Associates were appointed as the statutory auditors of this company for the year ended 31 March 2021 and the statutory audit firm has been working in this industry for long but most of the work which the firm did was more of risk advisory or internal audit. For the first time, this audit will be conducted and that’s why the audit team started obtaining understanding of the operations of the company which included understanding of the SAP system of the company. However, the management of the company was not comfortable with this approach of the audit team particularly because audit team was spending good time on understanding of the IT systems of the company. The management suggested that the auditors should limit their understanding and should perform audit procedures rather than getting into business/ operations. But the auditors have a different view on this matter and because of which work has got stuck. In the given situation, please suggest what should be the course of action.
(CNO-AAE.060)
a) The approach of audit team to obtain detailed understanding of the company before starting with the audit procedures is absolutely fine. If the auditors don’t understand the systems properly the audit procedures may not be appropriate.
b) The management’s concern regarding the approach of the auditors seems reasonable. The auditors are spending time on understanding of the systems/ business and not performing their audit procedures.
c) This being a private company and that too into the business of e-commerce, the auditors should have knowledge about the operations of the company through their understanding of the industry and hence should not get into this process of obtaining detailed understanding at the client place.
d) The audit team could have planned their work differently. They should involve IT experts who would have knowledge of the systems of the company and hence lot of time can be saved. Further in case of such type of industry, involvement of IT experts is anyways required mandatorily as per the legal requirements.
MCQ--AAE.4
KPL Private Limited is a large software company based out of Hyderabad. The annual turnover of the company is INR 2,100 crores. The company sells software and is also involved in the implementation of those software’s for its clients. The major chunk of the revenue though comes from sale of software only. The company works on a completely paper-less office and accordingly, most of the documents are available in soft copy. During the financial year ended 31 March 2021, the auditors during the course of their audit obtained various audit evidence some of which were in hard copy but mostly in soft copy. On conclusion of the audit, the auditors are in a dilemma whether to maintain their documentation entirely in hard copy or soft copy or can it be mixed of both. After consultations with various persons, the auditors stood that the documentation for this company, being operated in fully automated environment should be in soft copy only. Please advise whether this understanding is correct.
(CNO-Unique)
a) This is a matter of documentation of audit evidence for a client working in fully automated environment and hence it should be in soft copy only.
b) As per the requirements of auditing standards, this documentation can be in a mix of both soft and hard copy.
c) Since the client is operating in a fully automated environment, it would be important to check with them because all this documentation has come from the client only.
d) As per the requirements of auditing standards, documentation is not required in case of a client working in automated environment because everything is automated and can be accessed easily at any point of time.
MCQ--AAE.5
RIM Private Ltd is engaged in the business of manufacturing of cranes and other construction equipment’s. The nature of the operations are such that purchases are quite significant even though the sales may or may not be very significant, in terms of number of transactions during the year. The company’s statutory auditors have also obtained certain audit tools to help the audit team on various audit procedures to bring efficiency in various audits. During the course of the audit of the financial statements for the financial year ended 31 March 2021, the auditors used those audit tools (also known as computed assisted audit techniques) for sampling procedures and data analytics. The outcome of the tools resulted in some analysis and requirements which the audit team requested from the client. However, the client refused to provide any such information because as per the client all these tools were those of the auditor and any outcome of the same needs to be handled by themselves instead of asking the management. The auditors have suggested that such an attitude of non-cooperation would not help the either party and would defeat the objective of the audit. The management of the company is, however, ready to provide any other information to the auditors. In this situation, please advise both the management and the auditors.
(CNO-AAE.060)
a) Since the management is ready to provide any other information, the auditor should obtain this information as well by not disclosing the management that it is outcome of any audit tool.
b) The view of the management is correct because audit tools are there to support the auditors and not to lead to increased work for the management.
c) The auditors are correct because by using audit tools they are performing their audit procedures.
d) The auditors should ignore all these tools and plan their audit procedures accordingly.
MCQ--AAE.6
For the current year audit of Beta Co for the year ended 31 March 2018, your manager suggested that we could use computer-assisted audit techniques. He asked you to plan the audit work on trade receivables. The financial statements of Beta Co showed trade receivables of Rs.243 crores in the current year. Which of the following procedures could not be performed by using computer assisted audit techniques?
(CNO-AAE.280)
a) Selection of a sample of receivables for confirmation
b) Calculation of receivables days.
c) Production of receivables' confirmation letters
d) Evaluation of the adequacy of the allowance for irrecoverable receivables
MCQ--AAE.7
Which of the following is an example of Direct Entity level ?
(CNO-AAE.240)
a) Ethics policy
b) Human resource policy
c) Business performance reviews
d) Job roles & responsibilities of employees
MCQ--AAE.8
XYZ Private Limited is engaged in trading of parts of machineries used in boiler plants. Company has seen growth of 60% in the sales and management expecting similar growth in next 3 financial years and is planning to onboard new dealers in order to achieve management goal. Purchase department also expect to develop new suppliers in order to meet customer demands. Internal auditor of the company has identified frequent changes in the bank account and other master details of suppliers. At this expansion planning phase, company has no defined control to provide assurance on said supplier master changes. Management agreed to develop the process of monthly detailed review of supplier master changes done in supplier master by Finance assistant in order to ensure authorized changes in supplier master. One of the members from the Management would like to know that above controls falls under which category:
(CNO-Unique)
a) Automated control.
b) Preventive control
c) Detective control.
d) Compensating control
MCQ--AAE.9
ABC Private Limited uses in-house developed application system for Accounting. The auditor observed that user ID and password is mandatory to access the application system and felt that this is a good control. What type of control is this?
(CNO-Unique)
a) IT General Control
b) Application Control
c) Detective Control.
d) Preventive Control.
MCQ--AAE.10
KPC Limited is a garment manufacturing company having Head Office in Mumbai, 4 factories, 10 marketing offices across the country. The company uses SAP ERP for almost all its business processes except Payroll which is being outsourced to an Agency in Bangalore. Once payroll is processed, data is sent to the HR department at HO. HR department shares such details with Finance Department at HO for making the payment. Journal entries are recorded in SAP. Employees complained about incorrect Income Tax calculation and KPC Limited appointed a CA firm to review the payroll system in detail. It was observed that logic of Income Tax calculation is not as per the requirements of the Act and when the outsourced Agency confirmed that they carried out program changes recently and error may be due to such changes. The Auditor attributed the error of such incorrect software changes to:
(CNO-Unique)
a) Loss of Application Controls.
b) Loss of Overall Controls.
c) Loss of IT General Controls.
d) Human oversight.
MCQ--AAE.11
Which of the following is an example of Direct Entity level control
(CNO-AAE.240)
a) Company code of conduct and ethics policies
b) Human resource policies
c) Job roles & responsibilities of employees.
d) Monitoring of effectiveness of controls activities by Internal Audit function
MCQ--Incs.12.1
Discussed with Mr. Bajaj (the engagement partner) about the strong internal control system of the company. The management discussed about the whistle blowing policy of the company, the HR policies, company code of conduct and ethics policies. Mr. Bajaj was told that the audit team can rely on the information provided to them and the entity level controls without any second thought. The management advised the auditor not to waste time in checking the direct entity level controls and instead to concentrate on indirect entity level controls during their conduct of audit.
What should be Mr. Bajaj’s audit plan regarding the checking of direct entity level controls and indirect entity level controls after considering the management’s advise?
(CNO-AAE.240)
a) Mr. Bajaj should check the indirect entity level controls in detail and he can skip the checking of direct entity level controls as the company has a strong internal control system.
b) Mr. Bajaj should check the direct entity level controls in detail and he can skip the checking of indirect entity level controls as the company has a strong internal control system.
c) Mr. Bajaj should evaluate and understand both direct entity level controls and indirect entity level controls and should accordingly decide the nature, timing, extent of audit procedures.
d) Mr. Bajaj should check the indirect entity level controls in detail as it relates the business process and account balance and contribute indirectly to the effective operation of direct ELC. Thus, he can skip the checking of direct entity level controls.
MCQ--Incs.28.1
What is the terminology for the formal program or framework that is implemented across an enterprise or company for enabling risk management?
(CNO-AAE.300)
a) Risk assessment process.
b) Enterprise Risk Management.
c) Corporate Risk Management.
d) Automated environment risk management.
MCQ--Incs.28.2
Issue1: Speak Ltd. has issued material for tower works worth Rs. 30 crore on 10th October 2021 and this entry made by a staff is approved by the assistant store manager and the store manager. The very next day the staff who entered the data found that there is some clerical error and store worth only Rs. 29.8 crore was issued. He made the changes immediately and the system accepted the same without the approval of assistant store manager and store manager
What kind of a risk in the automated environment is observed by
the auditor in "issue 1"?
(CNO-AAE.120)
a) It is an entity level risk related to governance, organisation and management of IT.
b) It is a risk in the IT processes and procedures being followed in terms of unauthorised access.
c)There is no material risk involved in the issue observed by the auditor.
d) It is a manual internal control risk and not connected to any automated controls in the system.
MCQ--Incs.28.3
Issue2: Speak Ltd. is showing a commission expense of Rs. 2 crore during the month of October 2021. The auditor has made an effort to understand the business process that makes up this financial statement line item as to how it is initiated, recorded, approved, posted and reported. During this exercise, he finds that there is a difference of Rs. 1,50,000/- in the commission recorded as per the Sanchar Soft software (source) and commission as reflected in SAP accounts. (destination).
What is the kind of risk assessment carried out by the auditor in
case of " issue 2"?
(CNO-AAE.260)
a) It is an evaluation of risks and controls at process level.
b) It is a direct entity level control evaluation.
c) It is an indirect entity level control evaluation.
d) There is no risk assessment as such carried out by auditor in issue 2.
MCQ--Incs.40.1
Mr. Sunil did not consider it necessary to increase the extent of testing of a relevant control in inventory handling and maintenance system of the company. Further, for this year’s audit, Mr. Sunil observed that controls over sales order processing have been weakened due to change in hierarchy of organization which he also discussed with the management of the company through a letter of weakness.
For what type of control in inventory handling and maintenance system, Mr. Sunil would have not considered it necessary to increase the extent of testing?
(CNO-AAE.200)
a) Application control
b) Automated control
c) Process Level control
d) Entity Level control
