COMPILATION OF CORRECT AND INCORRECT

(Till now 26 stuff covered that includes past papers, rtp and mtp)

May 18 sugg
RTP MAY 18
Nov 18 sugg
Rtp nov 18
MAY 19 sugg
Rtp may 19
Mtp may 19 srs 1 & 2
Nov 19 sugg old + new
RTP NOV 19
(MAY 20 ATTEMPT POSTPONED DUE TO PANDEMIC SO NO EXAMS SO NO MAY 20 SUGG)
RTP MAY 20
MTP MAY 20
RTP NOV 20
MTP NOV 20
SUGG NOV 20
JAN 21 SUGG (NO RTP , MTP WAS POSTED)
SUGG MAY 21
RTP MAY 21
MTP MAY 21 SRS 1
MTP MAY 21 SRS 2
RTP NOV 21
MTP NOV 21 SRS 1
MTP NOV 21 SRS 2
SUGG NOV (DEC) 21
SUGG MAY 22
RTP MAY 22
RTP NOV 22
MTP NOV 22 SRS 1

May 18 sugg
Examine with reasons (in short) whether the following statements are correct or incorrect:
(i) Few members of the Board of Directors oppose the appointment of Mr. N, an employee of the
company, as an Internal Auditor, stating that Mr. N is not a chartere d accountant and further he is
an employee of the company.
(ii) An Auditor is considered to lack independence if the partner of the audit firm deals with shares
and securities of the audited entity.
(iii) The Audit Engagement documentations should ordinarily be retained by the auditor for minimum
of six years from the date of the auditor’s report or the date of the group auditor’s report, whichever
is later.
(iv) Inquiry alone is sufficient to test the operating effectiveness of controls.
(v) During the audit process, the Auditor can easily identify all mistakes or manipulations that may
exist in the accounts through routine checking processes.
(vi) PQR & Co., Chartered Accountants, resigned from the audit of a Government Company and filed
the resignation with the company and the registrar within 30 days. Comment, whether PQR & Co.
has complied with the provisions of the Companies Act, 2013.
(vii) K Ltd., a non-government company, was incorporated on 01 -10-2017. Mr. B, Managing Director of
K Ltd., himself appointed the first auditor of the company on 31-12-2017.
(viii) The statutory auditor of ABC Ltd. is of the opinion that communicating key audit matters in the
auditor’s report constitutes a substitute for disclosure in the financial statements.
(ix) When statistical sampling is used to select a sample, sample need not be representative because
the statistical sampling takes care of the representation.
(x) Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is audited by Mr. B, another Chartered
Accountant. Mr. A requests for the photocopies of the audit documentation of Mr. B pertaining to
the branch audit. (2 x 10 = 20 Marks)

Answer
(a) Incorrect: As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in practice or not), or such other professional as may be decided by
the Board to conduct internal audit of the functions and activities of the companies. The internal
auditor may or may not be an employee of the company.
(b) Correct: As per section 141 (3)(d), a person shall not be eligible for appointment as an auditor of
a company namely- a person, or his relative or partner is holding any security of
or interest in the company or its subsidiary, or of its holding or associat e company or a subsidiary
of such holding company. From the above it can be concluded that if the partner deals with shares
and securities of the audited entity, he would be lacking independence, hence, disqualified to be
appointed as an auditor.
Further, the Code of Ethics for Professional Accountants, prepared by the International Federation
of Accountants (IFAC) identifies five types of threats and if partner of the firm deals with shares
and securities of the audited firm then such threat is known as the Advocacy Threats and auditor
will be lacking independence.
(c) Incorrect: SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than seven
years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.
(d) Incorrect: Inquiry along with other audit procedures (for example observation, inspection,
external confirmation etc.) would only enable the auditor to test the operating effectiveness of
controls. Inquiry alone is not sufficient to test the operating effectiveness of controls.
(e) Incorrect: Routine checking cannot be depended upon to disclose all the mistakes or manipulation
that may exist in accounts. Certain other procedures also have to be applied like trend and ratio
analysis including review of internal control.
(f) Incorrect: As per section 140(2) the auditor who has resigned from the company shall file
within a period of 30 days from the date of resignation, a statement in the prescribed Form with
the company and the Registrar, and in case of the companies referred to in section 139(5) i.e.
Government company, the auditor shall also file such statement with the Comptroller and Auditor-
General of India, indicating the reasons and other facts as may be relevant with regard to his
resignation. In this case, the PQR & Co., was also required to file prescribed Form with C & AG of
India but it did not file the same. Therefore, it did not comply with the provisions of the Companies
Act, 2013.
(g) Incorrect: Section 139(6) of the Companies Act, 2013 lays down that the first auditor of a company
shall be appointed by the Board of Directors within 30 days from the date of registration of the
company. In view of the above, the appointment of first auditor made by the managing director is
 in violation of the provisions of the Companies Act, 2013
(h) Incorrect: Communicating key audit matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable Financial reporting framework requires
management to make, or that are otherwise necessary to achieve fair presentation.
(i) Incorrect: Whatever may be the approach non-statistical or statistical sampling, the sample must
be representative. This means that it must be closely similar to the whole population although not
necessarily exactly the same. The sample must be large enough to provide statistically meaningful
results.
(j) Incorrect: SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality Control
(SQC) 1, provides that, unless otherwise specified by law or regulation, audit documentation is
the property of the auditor. He may at his discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure does not undermine the validity of
the work performed, or, in the case of assurance engagements, the independence of the auditor or
of his personnel.

RTP MAY 18
State with reason (in short) whether the following statements are true or false:
(i) The objective of audit is to obtain absolute assurance and to report on the financial statements.
(ii) Teeming and lading is one of the techniques of suppressing cash receipts.
(iii) There is direct relationship between materiality and the degree of audit risk.
(iv) As per SA 230 on “Audit Documentations”, the working papers are not the property of the auditor.
(v) Control risk is the susceptibility of an account balance or class of transactions to misstatement
that could be material either individually or, when aggregated with misstatements in other
balances or classes, assuming that there were no related internal controls.
(vi) As per section 138 of the Companies Act, 2013 private companies are not required to appoint
internal auditor.
(vii) The term “internal audit” is defined as the “checks on day to day transactions which operate
continuously as part of the routine system whereby the work of one person is proved
independently or is complementary to the work of another, the object being the prevention or
early detection of errors or fraud”.
(viii) A Chartered Accountant holding securities of S Ltd. having face value of ` 950 is qualified for
appointment as an auditor of S Ltd.
(ix) Manner of rotation of auditor will not be applicable to company A, which is having paid up share
capital of ` 15 crores and having public borrowing from nationalized bank of ` 50 crore because
it is a Private Limited Company.
(x) If LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company, every partner
of a firm shall be authorized to act as an auditor.

ANSWERS
(i) Incorrect: As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit
of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement; and
(b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.
(ii) Correct: Teeming and Lading is one of the techniques of suppressing cash receipts Money
 received from one customer is misappropriated and the account is adjusted with the subsequent
receipt from another customer and so on.
(iii) Incorrect: There is an inverse relationship between materiality and the degree of audit risk. The
higher the materiality level, the lower the audit risk and vice v ersa. For example, the risk that
a particular account balance or class of transactions could be misstated by an extremely large
amount might be very low but the risk that it could be misstated by an extremely small amount
might be very high.
(iv) Incorrect: As per SA 230 on “Audit Documentations” the working papers are the property of
the auditor and the auditor has right to retain them. He may at his discretion can make available
working papers to his client. The auditor should retain them long enough to meet the needs of
his practice and legal or professional requirement.
(v) Incorrect: Inherent risk is the susceptibility of an account balance or class of transactions to
misstatement that could be material either individually or, when aggregated with misstatements
in other balances or classes, assuming that there were no related internal controls.
(vi) Incorrect: Section 138 of the Companies Act, 2013 requires every private company to appoint
an internal auditor having turnover of ` 200 crore or more during the preceding financial year;
or outstanding loans or borrowings from banks or public financial institutions exceeding ` 100
crore or more at any point of time during the preceding financial year.
(vii) Incorrect: As defined in scope of Standards on Internal Audit, “Internal Audit means an
independent management function, which involves a continuous and critical appraisal of the
functioning of an entity with a view to suggest improvements thereto and add value to and
strengthen the overall governance mec hanism of the entity, including the entity’s strategic risk
management and internal control system ”.
(viii) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be
appointed as an auditor of a company if he is holding any security of or interest in the company.
As the chartered accountant is holding securities of S Ltd. having face value of ` 950, he is not
eligible for appointment as an auditor of S Ltd.
(ix) Incorrect: According to section 139 of the Companies Act, 2013, the provisions related to
rotation of auditor are applicable to all private limited companies having paid up share capital
of ` 50 crore or more; and all companies having paid up share capital of below threshold limit
mentioned above, but having public borrowings from financial institutions, banks or public
deposits of ` 50 crore or more.
Although company A is a private limited company having paid up share capital of
` 15 crores yet it is having public borrowings from nationalized bank of ` 50 crores, therefore it
would be governed by provisions of rotation of auditor.
(x) Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm including a limited
liability partnership (LLP) is appointed as an auditor of a company, only the partners who are
Chartered Accountants shall be authorised to act and sign on behalf of the firm.

Nov 18 sugg
Examine with reasons (in short) whether the following statements are correct or incorrect:
(i) Judgemental matters are transactions that are unusual due to either its size or nature and that
therefore occur infrequently.
(ii) A well designed and drafted audit plan and audit strategy which takes care of all the uncertainties
and conditions, need not be changed during the course of audit.
(iii) An auditor is not concerned with consistency of accounting policies relating to opening balances.
(iv) Audit evidence obtained from external confirmation is always reliable.
(v) Banks recognize income on Non-Performing Assets on accrual basis.
(vi) Management of the organization is solely responsible for the compliance of auditing standards
while preparing financial statements.
(vii) The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is required to fill
the casual vacancy of an auditor only after taking into account the recommendations of the audit
committee.
(viii) Any partner of an LLP, who is appointed as an auditor of a company, can sign the audit report.
(ix) When auditing in an automated environment, inquiry is often the most efficient and effective audit
testing method.
(x) An auditor should issue disclaimer of opinion when there is difference of opinion between
him and the management on a particular point. (2 x 10 = 20 Marks)

Answer
(a)a Incorrect: Significant risks often relate to significant non-routine transactions or judgemental
matters. Non-routine transactions are transactions that are unusual, due to either size or nature,
and that therefore occur infrequently. Judgemental matters may include the development of
accounting estimates for which there is significant measurement uncertainty. T hus judgemental
matters are not always unusual due to their size or nature.
(a)b Incorrect: T he auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit. As a result of unexpected events, changes in conditions,
or the audit evidence obtained from the results of audit procedures, the auditor may need to
modify the overall audit strategy and audit plan and thereby the resulting planned nature, timing
and extent of further audit procedures, based on the revised consideration of assessed risks.
(c) Incorrect: In conducting an initial audit engagement, one of the objective of the auditor with respect
to opening balances is to obtain sufficient appropriate audit evidence about whether appropriate
accounting policies reflected in the opening balances have been consistently applied in the current
period’s financial statements, or changes thereto are properly accounted for and adequately
presented and disclosed in accordance with the applicable financial reporting framework.
(d) Incorrect: T he reliability of information to be used as audit evidence, and therefore of the audit
evidence itself, is influenced by its source and its nature, and the circumstances under which it
is obtained, including the controls over its preparation and maintenance where relevant. Even
when information to be used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.
For example, information obtained from an independent external source may not be reliable if
the source is not knowledgeable, or a management’s expert may lack objectivity.
(e) Incorrect: Income from non-performing assets (NPA) is not recognised on accrual basis due to its
uncertainty but is booked as income only when it is actually received.
(f) Incorrect: As per Section 143(9) of the Companies Act, 2013, every auditor shall comply with the
auditing standards.
(g) Correct: Where a company is required to constitute an Audit Committee under section 177, all
appointments, including the filling of a casual vacancy of an auditor under this section shall be
made after taking into account the recommendations of such committee.
(h) Incorrect: Section 141(2) of the Companies Act, 2013 states that where a firm including a limited
liability partnership is appointed as an auditor of a company, only the partners who are chartered
accountants shall be authorised to act and sign on behalf of the firm.
(i) Incorrect: There are basically four types of audit tests that should be used in an automated
environment. They are inquiry, observation, inspection and re -performance. Inquiry is the most
efficient audit test but it also gives the least audit evidence. Hence, inquiry should always be used
 in combination with any one of the other audit testing methods. Inquiry alone is not sufficient.
Applying inquiry in combination with inspection gives the most effective and efficient audit
evidence.
(j) Incorrect: T he auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that the
possible effects on the financial statements of undetected misstatements, if any, could be both
material and pervasive.
In case of difference of opinion, either the auditor will issue qualified report or adverse report and
not disclaimer of opinion.

RTP NOV 18
State with reason (in short) whether the following statements are true or false:
(i) The preparation of financial statements does not involve judgment by management in applying
the requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity.
(ii) Audit procedures used to gather audit evidence may be effective for detect ing an intentional
misstatement.
(iii) An audit is an official investigation into alleged wrongdoing.
(iv) The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit an
audit procedure for which there is no alternative.
(v) There is no relation between Audit Plans and knowledge of the client’s business
(vi) Planning is not a discrete phase of an audit, but rather a continual and iterative process.
(vii) Audit documentation is a substitute for the entity’s accounting records.
(viii) An appropriate time limit within which to complete the assembly of the final audit file is ordinarily
not more than 30 days after the date of the auditor’s report.
(ix) When the auditor has determined that an assessed risk of material misstatement at the assertion
level is a significant risk, the auditor shall not perform substantive procedures that are specifically
responsive to that risk.
(x) The SAs ordinarily refer to inherent risk and control risk separately .

SAME ANS AS BELOW

RTP MAY 19
State with reason (in short) whether the following statements are true or false:
(i) The preparation of financial statements does not involve judgment by management in
applying the requirements of the entity’s applicable financial reportin g framework to the
facts and circumstances of the entity.
(ii) Audit procedures used to gather audit evidence may be effective for detecting an intentional
misstatement.
(iii) An audit is an official investigation into alleged wrongdoing.
(iv) The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit
an audit procedure for which there is no alternative.
(v) There is no relation between Audit Plans and knowledge of the client’s business
(vi) Planning is not a discrete phase of an audit, but rather a continual and iterative process.
(vii) Audit documentation is a substitute for the entity’s accounting records.
(viii) An appropriate time limit within which to complete the assembly of the final audit file is
 ordinarily not more than 30 days after the date of the auditor’s report.
(ix) When the auditor has determined that an assessed risk of material misstatement at the
assertion level is a significant risk, the auditor shall not perform substantive procedures
that are specifically responsive to that risk.
(x) The SAs ordinarily refer to inherent risk and control risk separately.

Answers
(i) Incorrect: The preparation of financial statements involves judgment by management in
applying the requirements of the entity’s applicable financial reporting framework to the facts
and circumstances of the entity. In addition, many financial statement items involve subjective
decisions or assessments or a degree of uncertainty, and there may be a range of acceptable
interpretations or judgments that may be made.
(ii) Incorrect: Fraud may involve sophisticated and carefully organised schemes designed to conceal
it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an
intentional misstatement that involves, for example, collusion to falsify documentation which
may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither
trained as nor expected to be an expert in the authentication of documents.
(iii) Incorrect: An audit is not an official investigation into alleged wrongdoing. Accordingly, the
auditor is not given specific legal powers, such as the power of search, which may be necessary for
such an investigation.
(iv) Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative. Appropriate planning assists in
making sufficient time and resources available for the conduct of the audit. Notwithstanding this,
the relevance of information, and thereby its value, tends to diminish over time, and there is a
balance to be struck between the reliability of information and its cost.
(v) Incorrect: The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner. Plans should be based on knowledge of the client’s business
(vi) Correct: According to SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete
phase of an audit, but rather a continual and iterative process that often begins shortly after (or in
connection with) the completion of the previous audit and continues until the completion of the
current audit engagement.
(vii) Incorrect: The auditor may include copies of the entity’s records (for example, significant and
specific contracts and agreements) as part of audit documentation. Audit documentation is not a
substitute for the entity’s accounting records.
(viii) Incorrect: SQC 1 “Quality Control for Firms that perform Audits and Review of Historical Financial
Information, and other Assurance and related services”, requires firms to establish policies and
procedures for the timely completion of the assembly of audit files. An appropriate time limit
within which to complete the assembly of the final audit file is ordinarily not more than 60 days
after the date of the auditor’s report.
(ix) Incorrect: When the auditor has determined that an assessed risk of material misstatement at
the assertion level is a significant risk, the auditor shall perform substantive procedures that
are specifically responsive to that risk. When the approach to a significant risk consists only of
substantive procedures, those procedures shall include tests of details.
(x) Incorrect: The SAs do not ordinarily refer to inherent risk and control risk separately, but rather
to a combined assessment of the “risks of material misstatement”.
However, the auditor may make separate or combined assessments of inherent and control risk
depending on preferred audit techniques or methodologies and practical considerations. The
assessment of the risks of material misstatement may be expressed in quantitative terms, such
as in percentages, or in non-quantitative terms. In any case, the need for the auditor to make
 appropriate risk assessments is more important than the different approaches by which they may
be made.

MAY 19
Question 1
Examine with reasons whether the following statements are correct or incorrect. (Answer any seven
out of eight)
(a) Where the firm is appointed as an auditor of the entity the audit report is signed only in the name
of audit firm.
(b) Satisfactory Control environment is not an absolute deterrent to fraud.
(c) Bhartiya Gas Ltd. a Government Company, the Comptroller and Auditor-General of India shall,
in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of
companies under this Act, within a period of 180 days from the end of the financial year, who shall
hold office till the end of the next Financial year.
(d) Joint auditor is always bound by the views of majority of the joint auditors regarding matters to
be covered in report.
(e) Auditor of a Nationalised bank is to be appointed at the annual general meeting of the shareholders.
(f) The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules 2009.
(g) Positive Confirmation request is a request where the confirming party respond only if it disagrees
with the information provided in the request.
(h) Rule 3 of the Companies (Cost Records and Audit) Rule, 2014 provides the classes of companies,
engaged in the production of goods or providing services, having an overal lturnover of ` 25 crore
or more during the immediately preceding financial year, required to include cost records in their
books of account. (7 x 2 = 14 Marks)

Answer
(a) Incorrect: Where the firm is appointed as the auditor, the report is signed in the personal name of
the auditor and in the name of the audit firm. T he partner/proprietor signing the audit report also
needs to mention the membership number assigned by the Institute of Chartered Accountants of
India along-with registration number for the firm.
(b) Correct- T he existence of a Satisfactory Control environment can be a positive factor when an
auditor assesses the risk of material misstatement. However, although it may help reduce the risk
of fraud, a satisfactory Control environment is not an absolute deterrent to fraud.
(c) Incorrect- As per section 139(5), in the case of a Government company or any other company
owned or controlled, directly or indirectly, by the Central Government, or by any State Government
or Governments, or partly by the Central Government and partly by one
or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a
financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under
this Act, within a period of 180 days from the commencement of the financial year, who shall hold
office till the conclusion of the annual general meeting.
(d) Incorrect- Where the joint auditors are in disagreement with regard to the opinion or any matters
to be covered by the audit report, they shall express their opinion in a separate audit report. In
such circumstances, the audit report(s) issued by the joint auditor(s) shall make a reference to
each other’s audit report(s). T herefore, joint auditor is not bound by the views of the majority of
the joint auditors regarding the matters to be covered in the audit report.
(e) Incorrect- Auditor of a nationalized bank is to be appointed by the bank concerned acting through
its Boards of Directors and approval of the Reserve bank is required before the appointment is
made.
(f) Incorrect- Rule 24 of LLP Rules 2009 provides that any LLP, whose turnover does not exceed,
in any financial year, forty lakh rupees, or whose contribution does not exceed twenty five lakh
rupees, is not required to get its accounts audited. However if the partners of such limited liability
partnership decide to get the accounts of such LLP audited, the accounts shall be audited only in
accordance with such rules.
(g) Incorrect –In Positive confirmation request confirming party respond directly to the auditor
indicating whether the confirming party agrees or disagrees with the information in the request,
or providing the requested information whereas Negative confirmation request is a request that
the confirming party respond directly to the auditor only if the confirming party disagrees with
the information provided in the request.
(h) Incorrect- Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of
companies, engaged in the production of goods or providing services, having an overall turnover
from all its products and services of ` 35 crore or more during the immediately preceding financial
year, required to include cost records in their books of account.

MTP MAY 19 SERIES 1

Examine with reasons (in short) whether the following statements are correct or incorrect :
(Attempt any 7 out of 8)
(a) A modelling tool constructs a statistical model from financial data only of prior accounting
periods to predict current account balances.
(b) When we are designing audit procedures to address an inherent risk or “what can go
wrong”, we consider the nature of the risk of material misstatement in order to determine
if a substantive analytical procedure can be used to obtain audit evidence.
(c) According to SA 530 “Audit sampling”, ‘audit sampling’ refers to the application of audit
procedures to 100% of items within a population of audit relevance.
(d) The fundamental principle of an automated environment is the ability to carry out business
with less manual intervention and more system driven.
(e) Other matter paragraph is paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to users’ understanding of the
financial statements.
(f) The auditor shall express an adverse opinion when:
(i) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive
(g) The assessment of risks is a matter capable of precise measurement.
(h) The matters which the banks require their auditors to deal with in the long form audit
report have been specified by the Central Government. (7 x 2 = 14 Marks)

(a) Incorrect: A modelling tool constructs a statistical model from financial and/or non -financial
data of prior accounting periods to predict current account balances (e.g., linear regression).
(b) Correct. — When we are designing audit procedures to address an inherent risk or “what can
go wrong”, we consider the nature of the risk of material misstatement in order to deter mine
if a substantive analytical procedure can be used to obtain audit evidence. When inherent risk
 is higher, we may design tests of details to address the higher inherent risk. When significant
risks have been identified, audit evidence obtained solely from substantive analytical procedures
is unlikely to be sufficient.
(c) Incorrect: According to SA 530 “Audit sampling”, ‘audit sampling’ refers to the application of
audit procedures to less than 100% of items within a population of audit relevance such that all
sampling units have a chance of selection in order to provide the auditor with a reasonable basis
on which to draw conclusions about the entire population.
(d) Correct: The fundamental principle of an automated environment is the ability to carry out
business with less manual intervention and more system driven. The complexity of a business
environment depends on the level of automation i.e., if a business environment is more automated,
it is likely to be more complex.
(e) Incorrect: Emphasis of Matter paragraph is a paragraph included in the auditor’s report that
refers to a matter appropriately presented or disclosed in the financial statements that, in the
auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the
financial statements.
(f) Incorrect: The auditor shall express a qualified opinion when:
The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or
The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive
(g) Incorrect: The assessment of risks is based on audit procedures to obtain information necessary
for that purpose and evidence obtained throughout the audit. T he assessment of risks is a matter
of professional judgment, rather than a matter capable of precise measurement.
(h) Incorrect: The matters which the banks require their auditors to deal with in the long form audit
report have been specified by the Reserve Bank of India.

MTP MAY 19 SRS 2

State with reason (in short) whether the following statements are true or false:
1) As per Section 139(6), the first auditor of a company, including a Government company, shall be
appointed by the Board of Directors within 60 days from the date of registration of the company.
2) As per section 140(2) of the Act, the auditor who has resigned from the company need not inform
the Registrar of Companies.
3) Preconditions for an audit have not been defined in SA 210 “Agreeing the T erms of Audit
Engagements.”
4) The auditor need not discuss elements of planning with the entity’s management in any case.
5) Planning is a discrete phase of an audit.
6) Subjective examination connotes critical examination and scrutiny of the accounting statements.
7) Inquiry alone provides sufficient audit evidence of the absence of a material misstatement at the
assertion level and of the operating effectiveness of controls.
8) T he assessment of risks is a matter capable of precise measurement.
9) According to Section 53 of the Companies Act, 2013, a company can issue shares at a discount.
10) An intangible asset is an identifiable monetary asset.
DESCRIPTIVE ANSWERS
1) Incorrect: As per Section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days from the date of registration
of the company.
2) Incorrect: As per section 140(2) of the Act, the auditor who has resigned from the company shall
file within a period of 30 days from the date of resignation, a statement in the prescribed Form
ADT –3 (as per Rule 8 of CAAR) with the company and the Registrar.
3) Incorrect: As per SA 210 “Agreeing the T erms of Audit Engagements”, preconditions for an audit
may be defined as the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where appropriate,
those charged with governance to the premise on which an audit is conducted.
4) Incorrect: T he auditor may decide to discuss elements of planning with the entity’s management
to facilitate the conduct and management of the audit engagement.
5) Incorrect: According to SA-300, “Planning an Audit of Financial Statements” , planning is not a
discrete phase of an audit, but rather a continual and iterative process that often begins shortly after
(or in connection with) the completion of the previous audit and continues until the completion
of the current audit engagement. T he auditor shall establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the development of the audit plan.
6) Incorrect: Objective examination connotes critical examination and scrutiny of the accounting
statements of the undertaking with a view to assessing how far the statements present the actual
state of affairs in the correct context and whether they give a true and fair view about the financial
results and state of affairs.
7) Incorrect: Although inquiry may provide important audit evidence, and may even produce
evidence of a misstatement, inquiry alone ordinarily does not provide sufficient audit evidence of
the absence of a material misstatement at the assertion level, nor of the operating effectiveness of
controls.
8) Incorrect: T he assessment of risks is based on audit procedures to obtain information necessary
for that purpose and evidence obtained throughout the audit. T he assessment of risks is a matter
of professional judgment, rather than a matter capable of precise measurement.
9) Incorrect: According to Section 53 of the Companies Act, 2013, a company shall not issue shares
at a discount, except in the case of an issue of sweat equity shares given under Section 54 of the
Companies Act, 2013.
10) Incorrect: An intangible asset is an identifiable non-monetary asset, without physical substance,
held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes.

Nov 19 sugg new

Examine with reasons whether the following statements are correct or incorrect. (Answer any seven
out of eight)
(i) The auditor’s reporting on internal financial control will be applicable with respect to interim
financial statements.
(ii) Under a properly framed audit programme by the auditor, the danger is significantly less and audit
can proceed systematically.
(iii) All entities that are under common control by a state (i.e., national, regional or local government)
are considered related party.
(iv) Provision of CARO, 2016 is not applicable to ABC Pvt. Ltd., a subsidiary of XYZ Ltd. (a public
company) having fully paid up Capital and Reserves & Surplus of ` 50 lakhs, Secured loan from
bank of ` 90 Lakhs and Turnover of ` 5 Crore, for the financial year 2018-19.
(v) CA K has resigned as an auditor after 2 months of his appointment in NML Ltd. He needs to file
ADT-3 with the Registrar within 60 days from the date of resignation.
(vi) The non-statistical sampling is criticized on the grounds that it is neither objective nor scientific.
(vii) The auditor’s substantive procedure at the assertion level means substantive analyti cal procedures
only.
(viii) For an auditor, the Risk assessment procedure provides sufficient appropriate audit evidence
to base the audit opinion. (2 x 7 = 14 Marks)

Answer
(i) Incorrect: Clause (i) of Sub-section 3 of Section 143 of the Act requires the auditors’ report to state
whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls.
It may be noted that auditor’s reporting on internal financial controls is a requirement specified in
the Act and, therefore, will apply only in case of reporting on financial statements prepared under
the Act and reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable with respect to interim
financial statements, such as quarterly or half-yearly financial statements, unless such reporting
is required under any other law or regulation.
(ii) Correct: Without a written and pre-determined programme, work is necessarily to be carried
out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or
overlooking certain books and records.
Thus under a properly framed programme, the danger is significantly less and the audit can
proceed systematically.
Incorrect: Entities that are under common control by a state (i.e., a national, regional or local
government) are not considered related unless they engage in significant transactions or share
resources to a significant extent with one another.
(iii) Incorrect: The CARO specifically exempts a private limited company, not being a subsidiary or
holding company of a public company, having a paid up capital and reserves and surplus not more
than rupees 1 crore as on the balance sheet date and which does not have total borrowings exceeding
rupees 1 crore from any bank or financial institution at any point of time during the financial year
and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding rupees 10 crore during the financial
year as per the financial statements.
From the above, it is clear that ABC Pvt. Ltd. is a subsidiary of XYZ Ltd. and hence not exempt
from CARO, 2016 although it is satisfying the conditions that allow exemption to private limited
company which is not a subsidiary or holding company of a public company
(iv) Incorrect: As per section140(2) of the Companies Act, 2013, the auditor who has resigned from
the company shall file within a period of 30 days from the date of resignation, a statement in the
prescribed Form ADT–3(as per Rule 8 of CAAR) with the company and the Registrar.
(v) Correct: The non-statistical sampling is criticized on the grounds that it is neither objective nor
scientific. The expected degree of objectivity cannot be assured in non -statistical sampling because
the risk of personal bias in selection of sample items cannot be eliminated. The closeness of the
qualities projected by the sample results with that of the whole population cannot be measured
because the sample has not been selected in accordance with the mathematically based statistical
techniques.
(vi) Incorrect: The auditor’s substantive procedures at the assertion level may be tests of details,
substantive analytical procedures, or a combination of both. The decision about which audit
procedures to perform, including whether to use substantive analytical procedure, is based on
the audtior’s judgment about the expected effectiveness and efficiency of the available audit
 procedures to reduce audit risk at the assertion level to an acceptably low level.
(vii) Incorrect: The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement and
assertion levels. Risk assessment procedures by themselves, however, do not provide sufficient
appropriate audit evidence on which to base the audit opinion.

Ipcc old audit nov 19

State with reasons (in short) whether the following statements are correct or incorrect : (Answer any
Seven)
(a) A Company while preparing financial statements as prescribed under Division I of Schedule III of
Companies Act, 2013 for the year ended 31.03.2019 has disclosed value of imports calculated on
F.O.B. basis and earnings in foreign exchange (on exports of goods) on C.I.F. basis.
(b) All Non-Governmental Organisations (NGOs) are allowed to maintain accounts either on accrual
basis or cash basis.
(c) A compilation engagement will also include engagement to provide limited assistance to a client
in the preparation of financial statements.
(d) The frequency of surprise checks may be determined by the auditor in the circumstances of each
audit but should normally be atleast twice in the course of an audit.
(e) Decline in the market value of investments between the Balance sheet date and the date on which
the financial statements are approved is an example of adjusting event.
(f) Communicating key Audit matters is not a substitute for disclosure in the financial statements.
(g) There are inherent limitations of an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being conclusive rather than persuasive.
(h) If appointment of a new auditor other than the existing auditor is void-ab-initio, then it should be
treated as a casual vacancy. (2 x 7 = 14 Marks)

Answer
(a) Incorrect: As per Division I of Schedule III of Companies Act, 2013, the value of imports should
be calculated on C.I.F. basis and earning in foreign exchange (on export of go ods) on F.O.B. basis.
(b) Incorrect: NGOs registered under the Companies Act, 2013 must maintain their books of account
under the accrual basis as required by the provisions of section 128 of the said Act. If the accounts
are not maintained on accrual basis, it would amount to non-compliance of the provision of the
Companies Act, 2013. The NGOs which are not registered under the Companies Act, 2013 are
allowed to maintain accounts either an accrual basis or cash basis.
(c) Incorrect: A compilation engagement would ordinarily include the preparation of financial
statements (which may or may not be a complete set of financial statements) but may also include
the collection, classification and summarisation of other financial information. Engagements to
provide limited assistance to a client in the preparation of financial statements (for example, on
the selection of an appropriate accounting policy) do not constitute an engagement to compile
financial information.
(d) Incorrect: The need for and frequency of surprise checks is obviously a matter to be decided
having regard to the circumstances of each audit. It would depend upon the extent to which the
auditor considers the internal control system as adequate, the nature of the clients’ transaction,
the locations from which he operates and the relative importance of items like cash, investments,
stores etc. However, wherever feasible a surprise check should be made at least once in the course
of an audit.
(e) Incorrect: Adjusting events are those significant events occurring after the balance sheet date
that provide additional information materially affecting the determination of the amounts relating
 to conditions existing at the balance sheet date whereas non -adjusting events are those events
which do not relate to conditions existing at the balance sheet date. Decline in the market value of
investments between the balance sheet date and the date on which the financial statements are
approved is example of non-adjusting events.
(f) Correct: As per SA 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”,
communicating key audit matters in the auditor’s report is not a substitute for disclosures in the
financial statements that the applicable financial reportin g framework requires management to
make, or that are otherwise necessary to achieve fair presentation.
(g) Incorrect: As per SA 200, the auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit,
which result in most of the audit evidence on which the auditor draws conclusions and bases the
auditor’s opinion being persuasive rather than conclusive.
(h) Incorrect: If appointment of a person as an auditor is void ab initio, it should not be treated as
casual vacancy, rather the existing auditor shall continue to be an auditor of the company as per
Section 139(10) of the Companies Act, 2013.

Rtp nov 19
State with reason (in short) whether the following statements are true or false:
(i) As per Section 139(6), the first auditor of a company, including a Government company, shall be
appointed by the Board of Directors within 60 days from the date of registration of the company.
(ii) As per section 140(2) of the Act, the auditor who has resigned from the company need not inform
the Registrar of Companies.
(iii) Preconditions for an audit have not been defined in SA 210 “Agreeing the T erms of Audit
Engagements.”
(iv) The auditor need not discuss elements of planning with the entity’s management in any case.
(v) Planning is a discrete phase of an audit.
(vi) Subjective examination connotes critical examination and scrutiny of the accounting statements.
(vii) Inquiry alone provides sufficient audit evidence of the absence of a material misstatement at the
assertion level and of the operating effectiveness of controls.
(viii) T he assessment of risks is a matter capable of precise measurement.
(ix) According to Section 53 of the Companies Act, 2013, a company can issue shares at a discount.
(x) An intangible asset is an identifiable monetary asset.

(i) Incorrect: As per Section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days from the date of registration
of the company.
(ii) Incorrect: As per section 140(2) of the Act, the auditor who has resigned from the company shall
file within a period of 30 days from the date of resignation, a statement in the prescribed Form
ADT –3 (as per Rule 8 of CAAR) with the company and the Registrar.
(iii) Incorrect: As per SA 210 “Agreeing the T erms of Audit Engagements”, preconditions for an audit
may be defined as the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where appropriate,
those charged with governance to the premise on which an audit is conducted.
(iv) Incorrect: T he auditor may decide to discuss elements of planning with the entity’s management
to facilitate the conduct and management of the audit engagement.
(v) Incorrect: According to SA-300, “Planning an Audit of Financial Statements” , planning is not a
discrete phase of an audit, but rather a continual and iterative process that often begins shortly after
(or in connection with) the completion of the previous audit and continues until the completion
of the current audit engagement. T he auditor shall establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the development of the audit plan.
(vi) Incorrect: Objective examination connotes critical examination and scrutiny of the accounting
statements of the undertaking with a view to assessing how far the statements present the actual
state of affairs in the correct context and whether they give a true and fair view about the financial
results and state of affairs.
(vii) Incorrect: Although inquiry may provide important audit evidence, and may even produce
evidence of a misstatement, inquiry alone ordinarily does not provide sufficient audit evidence of
the absence of a material misstatement at the assertion level, nor of the operating effectiveness of
controls.
(viii) Incorrect: T he assessment of risks is based on audit procedures to obtain information necessary
for that purpose and evidence obtained throughout the audit. T he assessment of risks is a matter
of professional judgment, rather than a matter capable of precise measurement.
(ix) Incorrect: According to Section 53 of the Companies Act, 2013, a company shall not issue shares
at a discount, except in the case of an issue of sweat equity shares given under Section 54 of the
Companies Act, 2013.
(X) Incorrect: An intangible asset is an identifiable non-monetary asset, without physical substance,
held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes.

RTP MAY 20
1. State with reason (in short) whether the following statements are true or false:
(i) all public companies, having in aggregate, outstanding loans or borrowings or debentures or
deposits exceeding hundred crore rupees or more shall constitute an Audit Committee.
(ii) According to Section 140(1), the auditor appointed under section 139 may be removed from his
office before the expiry of his term only by a general resolution of the company.
(iii) As per sub-section (5) of the section 140, the Tribunal cannot direct the company to change its
auditors.
(iv) SA 210 does not require the auditor to agree management’s responsibilities in an engagement
letter or other suitable form of written agreement.
(v) Government audit does not serve as a mechanism or process for public accounting of government
funds.
(vi) An account should be treated as ‘out of order’ if the outstanding balance remains continuously
in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing power, but there are no
credits continuously for 180 days as on the date of Balance Sheet or credits are not enough to
cover the interest debited during the same period, these accounts should be treated as ‘out of
order’.
(vii) An Audit report is an opinion drawn on the entity’s financial statements to make sure that the
records are true and correct representation of the transactions they claim to represent.
(viii) In the planning stage, analytical procedures would not in any way assist the auditor.
(ix) Statistical sampling has narrower application where a population to be tested consists of a large
number of similar items.
(x) Risk assessment procedures are not performed to obtain an understanding of the entity and its
environment.
DESCRIPTIVE ANSWERS
1. (i) Incorrect: all public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding fifty crore rupees or more shall constitute an Audit Committee.
(ii) Incorrect: According to Section 140(1), the auditor appointed under section 139 may be removed
from his office before the expiry of his term only by a special resolution of the company, after
obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR,
2014
(iii) Incorrect: As per sub-section (5) of the section 140, the Tribunal either suo motu or on an
application made to it by the Central Government or by any person concerned, if it is satisfied
that the auditor of a company has, whether directly or indire ctly, acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may,
by order, direct the company to change its auditors.
(iv) Incorrect: SA 210 requires the auditor to agree management’s responsibilities in an engagement
letter or other suitable form of written agreement.
(v) Incorrect: Government audit serves as a mechanism or process for public accounting of government
funds. It also provides public accounting of the operational, management, programme and policy
aspects of public administration as well as accountability of the officials administering them.
Incorrect: An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these accounts should be treated as
‘out of order’.
(vii) Incorrect: The purpose of an audit is to enhance the degree of confidence of intended users of
the financial statements. The aforesaid pu rpose is achieved by the expression of an independent
reporting by the auditor as to whether the financial statements exhibit a true and fair view of the
affairs of the entity.
Thus, an Audit report is an opinion drawn on the entity’s financial statements t o make sure that
the records are true and fair representation of the transactions they claim to represent.
(viii) Incorrect: In the planning stage, analytical procedures assist the auditor in understanding the
client’s business and in identifying areas o f potential risk by indicating aspects of and developments
in the entity’s business of which he was previously unaware. This information will assist the auditor
in determining the nature, timing and extent of his other audit procedures. Analytical proced ures
in planning the audit use both financial data and non-financial information, such as number of
employees, square feet of selling space, volume of goods produced and similar information.
(ix) Incorrect: Statistical sampling has reasonably wide application where a population to be
tested consists of a large number of similar items and more in the case of transactions involving
compliance testing, trade receivables’ confirmation, payroll checking, vouching of invoices and
petty cash vouchers.
(x) Incorrect: Risk assessment procedures refer to the audit procedures performed to obtain an
understanding of the entity and its environment, including the entity’s internal control, to identify
and assess the risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels.
MTP MAY 20
Examine with reasons (in short) whether the following statements are correct or incorrect : (Attempt
any 7 out of 8)
The auditor is expected to and can reduce audit risk to zero
SQC1 requires engagement partner to establish policies and procedures for the timely completion of
the assembly of audit files. An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 30 days after the date of the auditor’s report.
It is important for the auditor that each party should be clear about the nature of the engagement.
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
the auditor shall include an Emphasis of Matter paragraph in the auditor’s report.
Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a practicing Chartered Accountant,
as first auditor of the company.
Article 150 of the Constitution provides that the accounts of the Union and of the States shall be kept in
such form as the Finance Minister may on the advice of the C&AG prescribe.
LLP need not file a “Statement of Accounts and Solvency”.
Depending on how the business operates, the management may value inventory using weighted average
basis. (7 x 2 = 14 Marks)

(i) Incorrect: The objective of audit is to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement. In auditing, reasonable assurance
can be given which is high level assurance but not absolute assurance. The auditor is not expected
to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or error. This is because
there are inherent limitations of an audit.
(ii) Incorrect: SQC1“ Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and related services”, requires firms to establish policies
and procedures for the timely completion of the assembly of audit files. An appropriate time limit
within which to complete the assembly of the final audit file is ordinarily not more than 60 days
after the date of the auditor’s report.
(iii) Incorrect: It is important, both for the auditor and client, that each party should be clear about
the nature of the engagement. It must be reduced to writing and should exactly specify the scope
of the work.
(iv) Incorrect: If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate, in accordance with SA 705.
(v) Incorrect: Section 139(6) of the Companies Act, 2013 lays down that the first auditor of a company
shall be appointed by the Board of Directors within 30 days from the date of registration of the
company. In the instant case, the proposed appointment of CA. Champ, a practicing Chartered
Accountant, as first auditor by the Managing Director of Pigeon Ltd. by himself is in violation of
Section 139(6) of the Companies Act, 2013, which authorizes the Board of Directors to appoint the
first auditor of the company.
In view of the above, the Managing Director of Pigeon Ltd. should be advised not to appoint the
first auditor of the company.
(vi) Incorrect: Article 150 of the Constitution provides that the accounts of the Union and of the States
shall be kept in such form as the President may on the advice of the C&AG prescribe.
(vii) Incorrect: A LLP shall be under obligation to maintain annual accounts reflecting true and fair
view of its state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed
by every LLP with the Registrar every year.
(viii) Incorrect: Depending on how the business operates, the management may value inventory using
First-in first-out (FIFO) or weighted average basis

RTP NOV 20
1. State with reason (in short) whether the following statements are true or false:
(i) Overall audit plan sets the scope, timing and direction of the audit, and guides the development of
the more detailed audit strategy.
(ii) The Constitution of India contains no specific provisions regarding the appointment, salary and
duties and powers of the C&AG. Moreover, the constitution does not guarantee the independence
of the C&AG of India.
(iii) When we are designing audit procedures to address an inherent risk or “what can go wrong”, we
consider the nature of the risk of material misstatement.
(iv) If an entity has a known number of employees at fixed rates of pay throughout the period, there
would be more need to perform tests of details on the payroll.
(v) The term “relative”, as defined under the Companies Act, 2013, means anyone who is closely
related to another.
(vi) According to Section 140(1), the auditor appointed under section 139 may be removed from his
office before the expiry of his term only by passing a Board resolution.
(vii) In considering the qualitative aspects of the entity’s accounting practices, the aud itor may not
become aware of possible bias in management’s judgments.
(viii) One of the key principles of accrual basis of accounting requires that an asset’s cost is proportionally
expensed based on the period over which the asset is expected to be used.

(i) Incorrect: Overall audit strategy sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit plan.
(ii) Incorrect: The Constitution of India contains specific provisions regarding the appointment,
salary and duties and powers of the C&AG. The constitution guarantees the independence of the
C&AG of India by prescribing that he shall be appointed by the President of India and shall not be
removed from o ffice except on the ground of proven mis-behaviour or incapacity.
(iii) Correct : When we are designing audit procedures to address an inherent risk or “what can go
wrong”, we consider the nature of the risk of material misstatement in order to determine if a
substantive analytical procedure can be used to obtain audit evidence. When inherent risk is
higher, we may design tests of details to address the higher inherent risk. When significant risks
have been identified, audit evidence obtained solely from substantive analytical procedures is
unlikely to be sufficient.
(iv) Incorrect: If an entity has a known number of employees at fixed rates of pay throughout the
period, it may be possible for the auditor to use this data to estimate the total payroll costs for the
period with a high degree of accuracy, thereby providing audit evidence for a significant item in
the financial statements and reducing the need to perform tests of details on the payroll.
(v) Incorrect: The term “relative”, as defined under the Companies Act, 2013, mean s anyone who is
related to another as members of a Hindu Undivided Family; husband and wife; Father (including
step- father), Mother (including step-mother), Son (including step- son), Son’s wife, Daughter,
Daughter’s husband, Brother (including step- brother), Sister (including step-sister).
(vi) Incorrect: According to Section 140(1), the auditor appointed under section 139 may be
removed from his office before the expiry of his term only by a special resolution of the company,
after obtaining the previous approval of the Central Government in that behalf as per Rule 7
of CAAR, 2014
(vii) Incorrect: In considering the qualitative aspects of the entity’s accounting practices, the auditor
 may become aware of possible bias in management’s judgments. The auditor may conclude that
lack of neutrality together with uncorrected misstatements causes the financial statements to be
materially misstated.
(viii) correct: One of the key principles of accrual basis of accounting requires that an asset’s cost is
proportionally expensed based on the period over which the asset is expected to be used. Both
depreciation and amortization are methods that are used to prorate the cost of a specific type of
asset over its useful life. Depreciation represents systematic allocation of the depreciable value
of an item of PPE over its useful life while amortisation represents systematic allocation of the
depreciable amount of an intangible asset over its useful life.

MTP NOV 20
Examine with reasons (in short) whether the following statements are correct or incorrect :
(Attempt any 7 out of 8)
(i) Mr. Z, a team member of auditor of Grateful and Competent Limited was of the opinion that
while conducting an audit of a company no distinction is required to be made between revenue
expenditure and capital expenditure.
(ii) The audit engagement letter is sent by the client to auditor.
(iii) A detailed Audit Programme once prepared for a business can be used for all business under all
circumstances.
(iv) Assertions refer to the representations by the auditor to consider the different types of the potential
misstatements that may occur.
(v) One of the directors of Very Fresh Fruits Limited was of the opinion that internal auditor to be
appointed must be an employee of Very Fresh Fruits Limited.
(vi) Audit committee is to be constituted by every public company to ensure better standards of
corporate governance.
(vii) The auditor has to report under section 143 of companies act, 2013 whet her company has
adequate internal controls in place and overall effectiveness of such internal controls.
(viii) Tangible assets are depreciated when the asset is actually put to active use. (7 x 2 = 14 Marks)

Answers
(i) Incorrect: The opinion of Mr. Z is incorrect because one of the important aspects to be followed
while conducting audit of a company is that a distinction is required to be made properly between
revenue expenditure and capital expenditure.
(ii) Incorrect: As per SA 210 “Agreeing the Terms of Audit Engagements”, the Audit engagement letter
is sent by the auditor to his client.
(iii) Incorrect. Businesses vary in nature, size and composition; work which is suitable to one business
may not be suitable to others; efficiency and operation of internal controls and the exact nature
of the service to be rendered by the auditor are the other factors that vary from assignment to
assignment. On account of such variations, evolving one audit programme applicable to all business
under all circumstances is not practicable
(iv) Incorrect: Assertions refer to representations by management that are embodied in the financial
statements as used by the auditor to consider the different types of the potential misstatements
that may occur.
(v) Incorrect: As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in practice or not), or such other professional as may be decided by
the Board to conduct internal audit of the functions and activities o f the companies. The internal
auditor may or may not be an employee of the company.
(vi) Incorrect: Under Section 177 of Companies Act, 2013 read together with Rule 4 of Companies
 (Appointment and qualification of Directors) Rules, 2014 prescribe that audit committee is to be
constituted by every listed public company and following classes of public companies only: -
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits,
exceeding fifty crore rupees:
Hence, the statement that all public companies are required to constitute audit committee is
incorrect.
(Vii) Incorrect: Under provisions of Section 143 of the companies Act, 2013, auditor has to report
whether the company has adequate internal financial controls with reference to financial
statements in place and operating effectiveness of such contr ols. The auditor has to report on
adequacy and effectiveness of internal financial controls only and not internal controls.
(iii) Incorrect: Depreciation is a fall in value of asset due to obsolenscene, usage and effluxion of time,
Therefore, depreciation is charged when the asset is ready for use . Active use of asset is not a
mandatory criteria for charge of depreciation.

SUGG NOV 20
Examine with reasons whether the following statements are correct or incorrect. (Answer any seven
out of eight)
(i) Even if law or regulation prescribes sufficient details of the terms of the audit engagement the
auditor should record them in a written agreement.
(ii) It is not necessary for the auditor to periodically review the audit programme.
(iii) Dividends are recognized in the statement of profit and loss only when the amount of dividend can
be measured reliably.
(iv) Every LLP is required to submit Statement of Account and Solvency in Form 8, which shall be
filed within a period of sixty days from the end of three months of the financial year to which the
Statement of Account and Solvency relates.
(v) Classification as NPA should be based on the availability of security and asset classification would
be facility wise and not borrower wise.
(vi) The audit plan is more detailed than the overall audit strategy.
(vii) Risks of material misstatement may be greater for significant judgmental matter s that require the
development of accounting estimates.
(viii) External confirmation procedures are restricted to the items of addressing assertions associated
with account balances & their elements only. (2 x 7 = 14 Marks)

Answer
(i) Incorrect: If law or regulation prescribes in sufficient detail the terms of the audit engagement,
the auditor need not record them in a written agreement, except for the fact that such law or
regulation applies and that management acknowledges and understands its responsibilities.
(ii) Incorrect: There should be periodic review of the audit programme to assess whether the same
continues to be adequate for obtaining requisite knowledge and evidence about the transactions.
Unless this is done, any change in the business policy of the client may not be adequately known,
and consequently, audit work may be carried on, on the basis of an obsolete programme and for
this negligence, the whole audit may be held as negligently conducted and the auditor may have to
face legal consequences.
(iii) Incorrect: Dividends are recognised in the statement of profit and loss only when:
(a) the entity’s right to receive payment of the dividend is established;
 (b) it is probable that the economic benefits associated with the dividend will flow to the entity;
and
(c) the amount of the dividend can be measured reliably.
(iv) Incorrect: Every LLP is required to submit Statement of Account and Solvency in Form 8 which
shall be filed within a period of thirty days from the end of six months of the financial year to
which the Statement of Account and Solvency relates.
(v) Incorrect: Classification as NPA should be based on the record of recovery. Availability of security
or net worth of borrower/guarantor is not to be taken into account for purpose of treating an
advance as NPA or otherwise.
Asset classification would be borrower-wise and not facility-wise. All facilities including
investments in securities would be termed as NPA.
(vi) Correct: The audit plan is more detailed than the overall audit strategy that includes the nature,
timing and extent of audit procedures to be performed by engagement team members. Once the
overall audit strategy has been established, an audit plan can be developed to achieve the audit
objectives through the efficient use of the auditor’s resources.
(vii) Correct: Risks of material misstatement may be greater for significant judgmental matters that
require the development of accounting estimates, arising from matters such as the following:
• Accounting principles for accounting estimates or revenue recognition may be subject to
differing interpretation.
• Required judgment may be subjective or complex, or require assumptions about the effects
of future events, for example, judgment about fair value.
(viii) Incorrect: External confirmation procedures frequently are relevant when addressing assertions
associated with certain account balances and their elements. However, external confirmation need
not be restricted to account balances only.

JAN 2021
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples (Answer any seven out of eight)
(a) The Complexity of a business environment depends on the level of automation i.e., if a business
environment is more automated, it is likely to be less complex.
(b) The Auditor is expected to, reduce audit risk to zero and can therefore obtain absolute assurance
that the financial statements are free from material misstatement due to fraud or error.
(c) Determining materiality involves the exercise of professional judgement.
(d) The objectives and scope of internal audit functions are restricted to activities relating to evaluation
of internal control only.
(e) If the purpose of an audit procedure is to test for understatement in the existence or valuation of
accounts payable then testing the recorded accounts payable may be relevant audit procedure.
(f) As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor
shall in case of a company other than a company whose accounts are subject to audit by an auditor
appointed by Comptroller and Auditor General of India, be filled by the Shareholders at an Annual
General Meeting within 60 days.
(g) Sufficiency is the measure of the quantity of audit evidence.
(h) Communicating Key Audit Matters is a substitute for the auditor expressing a modified audit
opinion when required by the circumstances of a specific audit engagement in accordance with SA
705. (7 x 2 = 14 Marks)
Answer
(a) Incorrect: The fundamental principle of an automated environment is the ability to carry out
business with less manual intervention and more system driven. The complexity of a business
environment depends on the level of automation i.e., if a business environment is more automated,
it is likely to be more complex. If a company uses an integrated enterprise resource planning
system (ERP) viz., SAP, Oracle etc., then it is considered more complex to audit. On the other hand,
if a company is using an off-the-shelf accounting software, then it is likely to be less automated and
hence less complex environment.
(b) Incorrect: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing”, The auditor is not expected to, and cannot, reduce
audit risk to zero and cannot therefore obtain absolute assurance that the financial statements
are free from material misstatement due to fraud or error. This is because there are inherent
limitations of an audit.
(c) Correct: Determining materiality involves the exercise of professional judgment. A percentage is
often applied to a chosen benchmark as a starting point in determining materiality for the financial
statements as a whole.
(d) Incorrect: As per SA-610, “Using the Work of an Internal Auditor”, the objectives of internal audit
functions vary widely and depend on the size and structure of the entity and the requirements of
management and, where applicable, those charged with governance.
The objectives and scope of internal audit functions typically include assurance and consulting
activities designed to evaluate and improve the effectiveness of the entity’s governance processes,
risk management and internal control.
From the above, it can be concluded that the objective and scope of internal audit function are not
restricted to activities relating to evaluation of con trol only.
(e) Incorrect: If the purpose of an audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable may be a relevant audit
procedure.
On the other hand, when testing for understatement in the existence or valuation of accounts
payable, testing the recorded accounts payable would not be relevant, but testing such information
as subsequent disbursements, unpaid invoices, suppliers’ statements, and unmatched receiving
reports may be relevant.
(f) Incorrect: As per Section 139(8), any casual vacancy in the office of an auditor shall in the case of
a company other than a company whose accounts are subject to audit by an auditor appointed by
the Comptroller and Auditor-General of India, be filled by the Board of Directors within 30 days.
(g) Correct: Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor’s assessment of the risks of misstatement (the higher the assessed
risks, the more audit evidence is likely to be required).
(h) Incorrect: Communicating key audit matters in the auditor’s report is not a substitute for the
auditor expressing a modified opinion when required by the circumstances of a specific audit
engagement in accordance with SA 705 (Revised);

MAY 2021 SUGG

Question 1
State with reasons whether the following statements are correct or incorrect. (Answer any seven)
(a) Misstatement in the financial statements is always because of a fraud.
(b) The first auditor of a Multi-State co-operative Society will be appointed in Annual General Meeting.
(c) Assertions refer to the representations by the auditor to consider the different types of the potential
misstatements that may occur.
(d) There is a very thin difference between advocacy threats and intimidation threats to an auditor
while performing his duty.
(e) In stratified sampling, the conclusion drawn on each stratum can be directly projected to the whole
population.
(f) With reference to General IT control, the objective of Data Center and Network Operations is
to ensure that systems are developed, configured and implemented to meet financial reporting
objectives.
(g) In the context of related parties, the potential effects of inherent limitations on the auditor’s ability
to detect material misstatements are greater.
(h) The Location of the description of the auditor’s responsibilities for the audit of the financial
statements is always within the body of the auditor’s report. (2 x 7 = 14 Marks)

Answer
(a) Incorrect: Misstatements in the financial statements can arise from either fraud or error.
The distinguishing factor between fraud and error is whether the underly ing action that results in
the misstatement of the financial statements is intentional or unintentional . Hence misstatement
can arise from error or fraud.
Alternative solution: Misstatement refers to a difference between the amount, classification,
presentation, or disclosure of a reported financial stateme nt item and the amount, classification,
presentation or disclosure that is required for the item to be in accordance with the applicable
financial reporting frame work. Hence misstatement can arise from error or fraud.
(b) Incorrect: Section 70 of the Multi-State Co-operative Societies Act, 2002 provides that the first
auditor or auditors of a Multi-State co-operative society shall be appointed by the board within
one month of the date of registration of such society and the auditor or auditors so appointed shall
hold office until the conclusion of the first annual general meeting. If the
board fails to exercise its powers under this sub-section, the Multi-State Co-operative Society in
the general meeting may appoint the first auditor or auditors.
(c) Incorrect: Assertions refer to representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to consider the di fferent types of
potential misstatements that may occur.
(d) Incorrect: Advocacy threats, which occur when the auditor promotes, or is perceived to promote,
a client’s opinion to a point where people may believe that objectivity is getting compromised. e.g.
when an auditor deals with shares or securities of the audited company, or becomes the client’s
advocate in litigation and third party disputes.
Intimidation threats, which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.
So, it can be concluded that there is not very thin difference between the advocacy threats and
intimidation threats.
(e) Incorrect: In case of stratified sampling, the conclusions are drawn on the stra tum. The
combination of all the conclusions on stratum together will be used to determine the possible
effect of misstatement or deviation. Hence the samples are used to derive conclusion only on the
respective stratum from where they are drawn and not the whole population.
(f) Incorrect: Objective of Data Center and Network Operations is to ensure that production systems
are processed to meet financial reporting objectives.
Objective of Application system acquisition, development, and maintenance is to ensure that
systems are developed, configured and implemented to meet financial reporting objectives.
(g) Correct: In the context of related parties, the potential effects of inherent limitations on the
auditor’s ability to detect material misstatements are greater for such reasons as the following:
• Management may be unaware of the existence of all related party relationships.
• Related party relationships may present a greater opportunity for collusion, concealment or
manipulation by management.
(h) Incorrect: The description of the auditor’s responsibilities for the audit of the financial statement
shall be always shown as below -
• Within the body of the auditor’s report
• Within an appendix to the auditor’s report, in which case the auditor’s report s hall include
a reference to the location of the appendix or
By a specific reference within the auditor’s report to the location of such a description on a website
of an appropriate authority, where law, regulation or national auditing standards expressly permit
the auditor to do so

MAY 21 RTP
1. State with reason (in short) whether the following statements are true or false:
(i) Familiarity threats, which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.
(ii) The auditor’s opinion helps determination of the true and correct view of the financial position
and operating results of an enterprise.
(iii) When establishing the overall audit strategy, the auditor need not determine materiality for the
financial statements as a whole.
(iv) The policy of income recognition, in case of a Bank, should be subjective .
(v) The assignment is the creation of an equitable charge which is created in favor of the lending bank
by execution of hypothecation agreement in respect of the moveable securities belonging to the
borrower.
(vi) As per SA 240 the primary responsibility for the prevention and detection of fraud rests with
Auditors.
(vii) Article 151 of the Constitution provides that the accounts of the Union and of the States shall be
kept in such form as the President may on the advice of the C&AG prescribe.
(viii) In considering the qualitative aspects of the entity’ s accounting practices, the auditor may become
aware of possible bias in management’s judgments.

(i) Incorrect: Intimidation threats, which occur when auditors are deterred from acting objectively with
an adequate degree of professional skepticism. Basically, these could happen because of threat
of replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.
Familiarity threats are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests.
(ii) Incorrect: The auditor’s opinion helps determination of the true and fair view of the financial
position and operating results of an enterprise.
(iii) Incorrect : When establishing the overall audit strategy, the auditor shall determine materiality
for the financial statements as a whole.
(iv) Incorrect: The policy of income recognition should be objective and based on record of recovery
 rather than on any subjective considerations. Income from non -performing assets (NPA) is not
recognized on accrual basis but is booked as income only when it is actually received.
(v) Incorrect: The hypothecation is the creation of an equitable charge (i.e., a charge created not by
an express enactment but by equity and reason), which is created in favor of the lending bank
by execution of hypothecation agreement in respect of the moveable securities belonging to the
borrower.
Assignment represents a transfer of an existing or future debt, right or property belonging to a
person in favor of another person.
(vi) Incorrect: As per SA 240 the primary responsibility for the prevention and detection of fraud
rests with management. An auditor conducting an audit in accordance with SAs is responsible for
obtaining reasonable assurance that the financial statements are free from material misstatement,
whether caused by fraud or error.
(vii) Incorrect: Article 150 of the Constitution provides that the accounts of the Union and of the
States shall be kept in such form as the President may on the advice of the C&AG prescribe.
Article 151 requires that the reports of the C&AG relating to the accounts of the Union/State
shall be submitted to the President/Governor who shall cause them to be laid before House of
Parliament/State Legislature.
(viii) Correct: In considering the qualitative aspects of the entity’s accounting practices, the auditor
may become aware of possible bias in management’s judgments. The auditor may conclude that
lack of neutrality together with uncorre cted misstatements causes the financial statements to be
materially misstated.

MTP MAY 21 SRS 1

1. Examine with reasons (in short) whether the following statements are correct or incorrect :
(Attempt any 7 out of 8)
(i) The primary responsibility for the prevention and detection of fraud rests with the statutory
auditor of the company.
(ii) Written representation in itself is a sufficient and appropriate audit evidence about any of the
matters with which they deal.
(iii) The auditor appointed by a company under section 139 of the Companies Act, 2013, can be
appointed for conducting the audit of cost records of the same company.
(iv) The auditor should update and revise the audit plan as and when required, however, the overall
audit strategy once established cannot be changed during the course of audit.
(v) All Non-Governmental Organisations (NGOs) are allowed to maintain accounts either on accrual
basis or cash basis.
(vi) As per AS 26, internally generated goodwill is not recognised as an asset .
(vii) No entry is passed for cheques received by the auditee on the last day of the year and not yet
deposited with the Bank.
(viii) The inclusion of an Emphasis of Matter paragraph in the Auditor’s Report affects the auditor’s
opinion. (7 x 2 = 14 Marks)

Ans:
(i) Incorrect: As per SA 240 the primary responsibility for the prevention and detection of fraud
rests with management. An auditor conducting an audit in accordance with SAs is responsible for
obtaining reasonable assurance that the financial statements are free from ma terial misstatement,
whether caused by fraud or error.
(ii) Incorrect: Written representations provide necessary audit evidence, they do not provide
 sufficient appropriate audit evidence on their own about any of the matters with which they deal .
(iii) Incorrect: The cost audit shall be conducted by a Cost Accountant who shall be appointed by
the Board of such remuneration as may be determined by the members in such manner as may
be prescribed. It may be noted that no person appointed under secti on 139 as an auditor of the
company shall be appointed for conducting the audit of cost records.
(iv) Incorrect: The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit. As a result of unexpected events, changes in conditions,
or the audit evidence obtained from the results of audit procedures, the auditor may need to
modify the overall audit strategy and audit plan and thereby the resulting planned nature, timing
and extent of further audit procedures, based on the revised consideration of assessed risks.
(v) Incorrect: NGOs registered under the Companies Act, 2013 must maintain their books of account
under the accrual basis as required by the provisions of section 128 of the said Act. If the accounts
are not maintained on accrual basis, it would amount to non -compliance of the provision of the
Companies Act, 2013. The NGOs which are not registered under the Companies Act, 2013 are
allowed to maintain accounts either an accrual basis or cash basis.
(vi) Correct: As per AS 26, Intangible Assets, internally generated goodwill is not recognised as an
asset because it is not an identifiable resource controlled by the enterprise that can be measured
reliably at cost.
(vii) Incorrect: The person who is controlling the trade receivables should ensure that proper accounting
entries have been passed by crediting respective trade receivables account. The balance of cheque
in hand should be disclosed along with the cash and bank balances in the financial statements.
(viii) Incorrect: When the auditor includes an Emphasis of Matter paragraph in the auditor’s report,
the auditor shall Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized. Such a paragraph shall refer only to information presented or disclosed in the
financial statements. The inclusion of an Emphasis of Matter paragraph in the auditor ’s report
does not affect the auditor’s opinion.

MTP MAY 21 SRS 2

Examine with reasons (in short) whether the following statements are correct or incorrect :
(Attempt any 7 out of 8)
(i) There are inherent limitations of an audit, which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being conclusive rather than persuasive.
(ii) Audit notes can serve as a guide in framing Audit programme.
(iii) The terms of audit engagement can restrict the scope of an audit. ·
(iv) If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report.
(v) Few members of the Board of Directors oppose the appointment of Mr. N, an employee of the
company, as an Internal Auditor, stating that Mr. N is not a chartered accountant and further he is
an employee of the company.
(vi) (VI) Article 150 of the Constitution provides that the accounts of the Union and of the States shall
be kept in such form as the Finance Minister may on the advice of the C&AG prescribe.LLP need
not file a “Statement of Accounts and Solvency”.
(vii) (VII)It is the function of an audit to establish that payments have been made validly to the persons
who are shown to be recipients. (7 x 2 = 14 Marks)

ANSWERS
(i) Incorrect: As per SA 200, the auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are free from material
 misstatement due to fraud or error. This is because there are inherent limitations of an audit,
which result in most of the audit evidence on which the auditor draws conclusions and bases the
auditor’s opinion being persuasive rather than conclusive.
(a) Correct: Audit notes can serve as a guide in framing audit programme in the future as they
indicate the weaknesses in the system of the client which specially need to be watched.
(b) Incorrect: The scope of an audit of financial statements will be determined by the auditor
for having regard to the terms of the engagement, the requirement of relevant legislation
and the pronouncements of the Institute. The terms of engagement cannot, however, restrict
the scope of an audit in relation to matters which are prescribed by legislation or by the
pronouncements of the Institute.
(ii) Incorrect: If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate, in accordance with SA 705.
(iii) Incorrect: As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in practice or not), or such other professional as may be decided by
the Board to conduct internal audit of the functions and activities of the companies. The internal
auditor may or may not be an employee of the company.
(iv) Incorrect: Article 150 of the Constitution provides that the accounts of the Union and of the States
shall be kept in such form as the President may on the advice of the C&AG prescribe.
(v) Incorrect: A LLP shall be under obligation to maintain annual accounts reflecting true and fair
view of its state of affairs. A “Statement of Accounts and Solvency” in prescribed form shall be filed
by every LLP with the Registrar every year.
(vi) Correct: It is the function of audit to establish that payments have been made validly to persons
who are shown to be recipients. For checking the validity of a transaction, it is usually necessary
to refer to documentary evidence.

RTP NOV 21
1. State with reason (in short) whether the following statements are true or false:
(i) One of the objectives of the written representation is to support other audit evidence relevant to
the financial statements
(ii) computer software which is the integral part of the related hardware should be treated as fixed
asset/tangible asset.
(iii) The auditor appointed under section 139 may be removed from his office before the expiry of his
term by Board resolution only.
(iv) The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit an
audit procedure for which there is no alternative.
(v) The auditor must include in audit documentation superseded drafts of working papers and
financial statements, notes that reflect incomplete or preliminary thinking etc.
(vi) If the auditor assesses a risk of material misstatement regarding litigation or claims that have been
identified, the auditor need not seek direct communication with the entity’s external legal counsel.
(vii) Collateral security refers to the security offered by the borrower for bank finance or the one against
which credit has been extended by the bank. This security is the principal security for an advance.
(viii) The first auditor or auditors of a Multi-State co-operative society shall be appointed by the board
within one month of the date of registration of such society
ANSWERS
(i) Correct: One of the objectives of the written representation is to support other audit evidence
relevant to the financial statements or specific assertions in the financial statements by means of
written representation. Written representations cannot be a substitute for other evidence that the
auditor could expect to be reasonably available.
(ii) Correct: As per AS-26 on Intangible Assets, computer software for a computer controlled machine
tool that cannot operate without that specific software is an integral part of the related hardware
and it is treated as a fixed asset. Therefore, computer software which is the integral part of the
related hardware should be treated as fixed asset/tangible asset.
(iii) Incorrect: According to Section 140(1), the auditor appointed under section 139 may be removed
from his office before the expiry of his term only by a special resolution of the company, after
obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR,
2014.
(iv) Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the conduct
of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between the reliability of information and
its cost.
(v) Incorrect: The auditor need not include in audit documentation superseded drafts of working
papers and financial statements, notes that reflect incomplete or preliminary thinking, previous
copies of documents corrected for typographical or other errors, and duplicates of documents.
(vi) Incorrect: If the auditor assesses a risk of material misstatement regarding litigation or claims that
have been identified, or when audit procedures performed indicate that other material litigation
or claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek
direct communication with the entity’s external legal counsel.
(vii) Incorrect: Primary security refers to the security offered by the borrower for bank finance or
the one against which credit has been extended by the bank. This security is the principal security
for an advance.
Collateral security is an additional security. Security can be in any form i.e. tangible or intangible
asset, movable or immovable asset.
(viii) Correct: Section 70 of the Multi-State Co-operative Societies Act, 2002 provides that the first
auditor or auditors of a Multi-State co-operative society shall be appointed by the board within
one month of the date of registration of such society and the auditor or auditors so appointed shall
hold office until the conclusion of the first annual general meeting. If the board fails to exercise its
powers under this sub -section, the Multi-State co-operative society in the general meeting may
appoint the first auditor or auditors.

MTP NOV 21 SRS 1

Examine with reasons (in short) whether the following statements are correct or incorrect : (Attempt
any 7 out of 8)
1) The auditor is expected to, and can, reduce audit risk to zero and can therefore obtain absolute
assurance.
2) The concept of materiality is an important and relevant consideration for the auditor in financial
 statement.

3) Audit evidence obtained from external confirmation is always reliable.

4) CA K has resigned as an auditor after 2 months of his appointment in NML Ltd. He ne eds to file
ADT-4 with the Registrar within 60 days from the date of resignation.
5) Satisfactory Control environment is an absolute deterrent to fraud.
6) K Ltd., a non-government company, was incorporated on 01-10-2019. Mr. B, Managing Director of
K Ltd., himself appointed the first auditor of the company on 31 -12-2019.
7) All Non-Governmental Organisations (NGOs) registered under the Companies Act, 2013 are
allowed to maintain accounts either on accrual basis or cash basis.
8) When auditing in an automated environment, inquiry is often the most efficient and effective audit
testing method. (7 x 2 = 14 Marks)

(1) Incorrect: The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
obtain absolute assurance that the financial statements are free from material misstatement due
to fraud or error. This is because there are inherent limitations of an audit.
(2) Correct: The concept of materiality is fundamental to the process of accounting. It covers all the
stages from recording to classification and presentation. It is very important for the auditor who
has constantly to judge whether a particular item is material or not and ensure that a material
item is disclosed separately and distinctly.
(3) Incorrect: The reliability of information to be used as audit evidence, and therefore of the audit
evidence itself, is influenced by its source and its nature, and the circumstances under which it
is obtained, including the controls over its preparation and maintenance where relevant. Even
when information to be used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.
(4) Incorrect: As per section140(2) of the Companies Act, 2013, the auditor who has resigned from
the company shall file within a period of 30 days from the date of resignation, a statement in the
prescribed Form ADT–3(as per Rule 8 of CAAR) with the company and the Registrar.
(5) Incorrect: The existence of a Satisfactory Control environment can be a positive factor when an
auditor assesses the risk of material misstatement. However, although it may help reduce the risk
of fraud, a satisfactory Control environment is not an absolute deterrent to fraud.
(6) Incorrect: Section 139(6) of the Companies Act, 2013 lays down that the first auditor of a company
shall be appointed by the Board of Directors within 30 days from the date of registration of the
company. In view of the above, the appointment of first auditor made by the managing director is
in violation of the provisions of the Companies Act, 2013
(7) Incorrect: NGOs registered under the Companies Act, 2013 must maintain their books of account
under the accrual basis as required by the provisions of section 128 of the said Act. If the accounts
are not maintained on accrual basis, it would amount to non -compliance of the provision of the
Companies Act, 2013. The NGOs which are not registered under the Companies Act, 2013 are
allowed to maintain accounts either an accrual basis or cash basis.
(8) Incorrect: There are basically four types of audit tests that should be used in an automated
environment. They are inquiry, observation, inspection and re -performance. Inquiry is the most
efficient audit test but it also gives the least audit evidence. Hence, inquiry should always be used
in combination with any one of the other audit testing methods. Inquiry alone is not sufficient.
Applying inquiry in combination with inspection gives the most effective and efficient audit
evidence.

MTP NOV 21 SRS 2

Examine with reasons (in short) whether the following statements are correct or incorrect : (Attempt
any 7 out of 8)
1) The preparation of financial statements involves judgment by management.
2) Evolving one audit programme applicable toffiall business under all circumstances is not practicable
3) Inquiry alone ordinarily does not provide sufficient audit evidence.
4) The SAs do not ordinarily refer to inherent risk and control risk separately.
5) Intentional errors are most difficult to detect and auditors generally devote greater attention to this
type
6) All automated environments are not complex.
7) A combination of processes, tools and techniques that are used to tap vast amounts of electronic
data to obtain meaningful information is known as meaningful data.
8) When auditing in an automated environment, inquiry is often the most efficient and effective audit
testing method. (7 x 2 = 14 Marks)

1) Correct: The preparation of financial statements involves judgment by management in applying

the requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity. In addition, many financial statement items involve subjective decisions
or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations
or judgments that may be made.
2) Correct: Businesses vary in nature, sizeffiand composition; work which is suitable to one business
may not be suitable to others; e ciency and operation of internal controls and the exact nature
of the service to be rendered by the auditor are the other factors that vary from assignment to
assignment. On account of such variations, evolving one audit programme applicable to all business
under all circumstances is not practicable
3) Correct: Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and
evaluating audit evidence. Audit procedures to obtain audit evidence can include inspection,
observation, confirmation, recalculation, re-performance and analytical procedures, often in some
combination, in addition to inquiry. Although inquiry may provide important audit evidence, and
may even produce evidence of a misstatement, inquiry alone ordinarily does not provide sufficient
audit evidence of the absence of a material misstatement at the assertion level, nor of the operating
effectiveness of controls.
4) Correct: The SAs do not ordinarily refer to inherent risk and control risk separately, but rather
to a combined assessment of the “risks of material misstatement”. However, the auditor may
make separate or combined assessments of inherent and control risk depending on preferred
audit techniques or methodologies and practical considerations. The assessment of the risks of
material misstatement may be expressed in quantitative terms, such as in percentages, or in non-
quantitative terms. In any case, the need for the auditor to make appropriate risk assessments is
more important than the different approaches by which they may be made.
5) Correct: Intentional errors are most difficult to detect and auditors generally devote greater
attention to this type because out of long and sometimes unfortunate experience, auditors have
developed a point of view that, if they direct their procedures of discovering the more difficult
intentional errors, they are reasonably certain to locate the more simple and far more common
unintentional errors on the way.
6) Correct: The complexity of an automated environment depends on various factors including the
nature of business, level of automation, volume of transactions, use of ERP and so on. There could
be environment where dependence on IT and automation is relatively less or minimal and hence,
considered less complex or even non-complex.
7) Incorrect A combination of processes, tools and techniques that are used to tap vast amounts of
 electronic data to obtain meaningful information is known as Data Analytics.
8) Incorrect: There are basically four types of audit tests that should be used in an automated
environment. They are inquiry, observation, inspection and re-performance. Inquiry is the most
efficient audit test but it also gives the least audit evidence. Hence, inquiry should always be used
in combination with any one of the other audit testing methods. Inquiry alone is not sufficient.
Applying inquiry in combination with inspection gives the most effective and efficient audit
evidence.

SUGG NOV (DEC) 21

State with reasons whether the following statements are correct or incorrect. (Answer any seven)
(a) Internal control cannot eliminate risk of material misstatements in the financial statements.
(b) When Profit before tax from continuing operations is non -volatile, other benchmarks will be
appropriate.
(c) When inventory under the custody and control of a third party is material to the financial
statements, the auditor can obtain sufficient appropriate audit evidence regarding the existence
and condition of that inventory by taking written representation from management.
(d) While auditing the books of accounts of ABC Ltd., the auditor of the company looked at the
inventory counting process to obtain audit evidence. In the present case, audit procedure used by
the auditor is known as “Inspection”.
(e) Statistical sampling being more scientific and without personal bias will always be appropriate to
use under all circumstances.
(f) As per section 139(5) of the Companies Act, 2013, in the case of a government company, board of
directors shall appoint the subsequent auditor within a period of 60 days from the commencement
of the financial year.
(g) Auditor has to disclose the impact, if any, of the pending litigations on the financial position of the
auditee in his audit report.
(h) Reporting of fraud of INR 150 Lakhs by auditor will be done within three days of the fraud coming
to the knowledge of the auditor to the Board or the Audit Committee along with remedial action
taken. (2 x 7 = 14 Marks)

Answer
(a) Correct: Control risk is a function of the effectiveness of the design, implementation and
maintenance of internal control by management. However, internal control can only reduce but
not eliminate risks of material misstatement in the financial statements. This is because of the
inherent limitations of internal control.
There is possibility of human errors or mistakes, or of controls being circumvented by collusion.
Accordingly, some control risk will always exist.
(b) Incorrect: Profit before tax from continuing operations is often used for profit -oriented entities.
When profit before tax from continuing operations is volatile, other benchmarks may be more
appropriate, such as gross profit or total revenues.
(c) Incorrect: When inventory under the custody and control of a third party is material to the
financial statements, the auditor shall obtain sufficient appropriate audit evidence regarding the
existence and condition of that inventory by performing one or both of the following:
(a) Request confirmation from the third party as to the quantities and condition of inventory held on
behalf of the entity.
(b) Perform inspection or other audit procedures appropriate in the circumstances.
(d) Incorrect: The audit procedure used by the auditor of ABC Ltd. is known as “observation”.
Whereas inspection involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.
(e) Incorrect: Statistical sampling is widely accepted way of sampling as it is more scientific, without
personal bias and the result of sample can be evaluated and projected in more reliable way.
Under some audit circumstances, statistical sampling methods may not be appropriate. The
auditor should not attempt to use statistical sampling when another approach is either necessary
or will provide satisfactory information in less time or with less e ffort. For instance, when exact
accuracy is required or in case of legal requirements etc.
(f) Incorrect : As per section 139(5), in the case of a Government company or any other company
owned or controlled, directly or indirectly, by the Central Government, or by any State Government
or Governments, or partly by the Central Government and partly by one or more State Governments,
the Comptroller and Auditor -General of India shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act, within a period of 180
days from the commencement of the financial year, who shall hold office till the conclusion of the
annual general meeting.
(g) Incorrect: Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes the other
matters to be included in auditor’s report. The auditor’s report shall also include their views and
comments on - whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement.
(h) Incorrect: The auditor shall report the matter to the Board or the Audit Committee, as the case
may be, immediately but not later than 2 days of his knowledge of the fraud, see king their reply
or observations within 45 days. Company is bound to disclose remedial action taken in Board’s
report.

SUGG ANS MAY 22

Question 1
State with reasons whether the following statements are correct or incorrect. (Answer any seven).
(a) Pervasive is a term used, in the context of misstatements, to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements of misstatements,
if any, that are detected by obtaining sufficient appropri ate audit evidence.
(b) Audit findings and control deficiencies can be evaluated or assessed arbitrarily.
(c) Inappropriate management can override internal controls of any organization.
(d) Once the audit plan has been drafted and communicated, it is obligatory on the auditor to follow
the same.
(e) According to CARO 2020, the company auditor is required to state that whether the title deeds of
all immovable properties held in the name of the company are disclosed in its financial statements.
(f) SA 520 deals with the auditor’s use of analytical procedures as substantive procedures (“substantive
analytical procedures”), and as procedures near the end of the audit, that assist the auditor in
preparation of the financial statements.
(g) Misappropriation of assets is often accompanied by false or misleading records or documents in
order to conceal the fact that the assets are missing or have been pledged with proper authorization.
(h) Materiality is not a matter of size . (2 x 7 = 14 Marks)

Answer
(a) Incorrect: Pervasive is a term used, in the context of misstatements, to describe the effects on
the financial statements of misstatements or the possible effects on the financial statements of
misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit
evidence.
(b) Incorrect: Evaluation and assessment of audit findings and control deficiencies involves applying
professional judgement that include considerations for quantitative and qualitative measures.
Each finding should be looked at individually and in the aggregate by combining with other
findings/deficiencies.
(c) Correct: Controls can be circumvented by the collusion of two or more people or inappropriate
management override of internal control. For example, management may enter into side
agreements with customers that alter the terms and conditions of the entity’s standard sales
contracts, which may result in improper revenue recognition. Also, edit checks in a software
program that are designed to identify and report transacti ons that exceed specified credit limits
may be overridden or disabled.
(d) Incorrect: The auditor shall update and change the overall audit strategy and the audit plan as
necessary during the course of the audit. As a result of unexpected events, changes in conditions,
or the audit evidence obtained from the results of audit procedures, the auditor may need to
modify the overall audit strategy and audit plan and thereby the resulting planned nature, timing
and extent of further audit procedures, based on the revised consideration of assessed risks. This
may be the case when information comes to the auditor’s attention that differs significantly from
the information available when the auditor planned the audit procedures.
(e) Incorrect: According to CARO, 2020, the company auditor is required to state whether the title
deeds of all the immovable properties (other than properties where the company is the lessee and
the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements
are held in the name of the company.
(f) Incorrect: SA 520 deals with the auditor’s use of analytical procedures as substantive procedures
(“substantive analytical procedures”), and as procedures near the e nd of the audit that assist the
auditor when forming an overall conclusion on the financial statements.
(g) Incorrect: Misappropriation of assets is often accompanied by false or misleading records or
documents in order to conceal the fact that the assets are missing or have been pledged without
proper authorization.
(h) Incorrect: Financial statements should disclose all ‘material items’, i.e., the items the knowledge
of which might influence the decisions of the user of the financial statement. Materiality is not
always a matter of relative size. For example -a small amount lost by fraudulent practices of
certain employees can indicate a serious flaw in the enterprise’s internal control system requiring
immediate attention to avoid greater losses in future. In certain cases, quantitative limits of
materiality are specified.

RTP MAY 22
1. State with reason (in short) whether the following statements are true or false:
(i) No entry is passed for cheques received by the auditee on the last day of the year and not yet
deposited with the Bank.
(ii) Written representation from management can be a substitute for other evidence that the auditor
could expect to be reasonably available.
(iii) According to Para 3(1)(d) of CARO, 2020, an auditor needs to report whether the company has
revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or
both during the year and, if so, whether the revaluation is based on the valuation by a Registered
Valuer; specify the amount of change, if change is 5% or more in the aggregate of the net carrying
value of each class of Property, Plant and Equipment or intangible assets
(iv) Communicating key audit matters in the auditor’s report is a substitute for reporting in accordance
with SA 570 when a material uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern
(v) A loan granted for short duration crops will be treated as NPA, if the ins talment of principal or
 interest thereon remains overdue for one crop season.
(vi) It needs to be ensured that the drawing power is calculated as per the extant guidelines formulated
by the RBI and agreed upon by the concerned statutory auditors. Special consideration need not
be given to proper reporting of sundry creditors for the purposes of calculating drawing power.
(vii) The duties and powers of the Comptroller and Auditor General in relation to the audit of the
accounts of government companies shall be performed and exercised by him in accordance with
the provisions of the The Comptroller & Auditor General’s (Duties, Powers and Conditions of
Service) Act, 1971
(viii) Before holding inquiry by the Central Registrar thirty days’ notice must be given t o the Multi-State
co-operative society.

Descriptive Answers
(i) Incorrect: The person who is controlling the trade receivables should ensure that proper accounting
entries have been passed by crediting respective trade receivables account. The balance of cheque
in hand should be disclosed along with the cash and bank balances in the financial statements.
(ii) Incorrect: One of the objectives of the written representation is to support other audit evidence
relevant to the financial statements or specific assertions in the financial statements by means of
written representation. So it is clear that written representations cannot be a substitute for other
evidence that the auditor could expect to be reasonably available.
(iii) Incorrect: According to Para 3(1)(d) of CARO, 2020, an auditor needs to report whether the
company has revalued its Property, Plant and Equipment (including Right of Use assets) or
intangible assets or both during the year and, if so, whether the revaluation is based on the
valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible
assets
(iv) Incorrect: Communicating key audit matters in the auditor’s report is not a substitute for reporting
in accordance with SA 570 when a material uncertainty exists relating to events or conditions that
may cast significant doubt on an entity’s ability to continue as a going concern
(v) Incorrect: A loan granted for short duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains overdue for two crop seasons .
A loan granted for long duration crops will be treated as NPA, if the instalment of principal or
interest thereon remains overdue for one crop season.
(vi) Incorrect: It needs to be ensured that the drawing power is calculated as per the extant guidelines
formulated by the Board of Directors of the respective bank and agreed upon by the concerned
statutory auditors. Special consideration should be given to proper reporting of sundry creditors
for the purposes of calculating drawing power.
(vii) Incorrect The duties and powers of the Comptroller and Auditor General in relation to the audit
of the accounts of government companies shall be performed and exercised by him in accordance
with the provisions of the Companies Act, 2013
(viii) Incorrect: Before holding inquiry by the Central Registrar fifteen days’ notice must be given to the
Multi-State co-operative society.

RTP NOV 22
1. State with reason (in short) whether the following statements are true or false:
(i) The level of sampling risk that the auditor is willing to accept will not affect the sample size.
(ii) There is no difference between “audit” and “review.”
(iii) Negative assertions, encountered in the financial statements, may be expressed or implied.
(iv) Development of an audit plan is important before the establishment of the overall audit strategy
to address the various matters.
(v) An unexplained decrease in GP Ratio may result due to fictitious sales.
(vi) An auditor has to report on the matters specified in section 143(1) of the Companies Act, 2013.
(vii) There is an inverse relationship between detection risks and the combined level of inherent and
control risks.
(viii) For auditor’s opinion, reasonable assurance is an absolute level of assurance.

ANSWERS
(i) Incorrect: As per SA 530, “Audit Sampling” the level of sampling risk that the auditor is willing
to accept affects the sample size required. The lower the risk the auditor is willing to accept, the
greater the sample size will need to be.
(ii) Incorrect: “Audit” and “Review” are two different terms. Audit is a reasonable assurance
engagement, and its objective is reduction in assurance engagement risk to an acceptably low level
in the circumstances of the engagement. However, “review” is a limited assurance engagement,
and its objective is a reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement
(iii) Correct: Negative assertions are also encountered in the financial statements and the same may
be expressed or implied. For example, if it is stated that there is no contingent liability it would
be an expressed negative assertion; on the other hand, if in the balance sheet there is no item as
“building”, it would be an implied negative assertion that the entity did not own any building on
the balance sheet date.
(iv) Incorrect: As per SA-300, “Planning an Audit of Financial Statements”, the auditor shall establish
an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the
development of the audit plan. Once the overall audit strategy has been established, an audit plan
can be developed to address the various matters identified in the overall audit strategy, taking
into account the need to achieve the audit objectives through the efficient use of the auditor’s
resources.
(v) Incorrect: A fictitious sale will increase the GP Ratio, instead of decreasing it. GP ratio normally
comes down if there are unrecorded sales or reversal of fictitious sale entries recorded in the
previous year or fictitious purchase or decrease in closing stock.
(vi) Incorrect: The auditor is not required to report on the matters specified in section 143(1) of the
Companies Act, 2013 unless he has any special comments to make on any of the items referred to
therein. If he is satisfied as a result of the inquiries, he has no further duty to report that he is so
satisfied. However, the auditor should make a report to the members in case he finds answer to
any of these matters in adverse.
(vii) Correct: There is an inverse relationship between detection risks and the combined level of
inherent and control risks. For example, when inherent and control risks are high. acceptable
detection risks need to be low to reduce audit risk to an acceptably low level. On the other hand,
when inherent and control risks are low, an auditor can accept a higher detection risks and still
reduce audit risks to an acceptably low level.
(viii) Incorrect: Reasonable assurance is a high level but not an absolute level of assurance, because
there are inherent limitations of an audit which result in most of the audit evidence on which the
auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

MTP NOV 22 SRS 1

1. Examine with reasons (in short) whether the following statements are correct or incorrect :
(Attempt any 7 out of 8)
(i) The concept of materiality is an important and relevant consideration for the auditor in financial
statement.
(ii) No entry is passed for cheques received by the auditee on the last day of the year and not yet
 deposited with the Bank.
(iii) Misstatements in the financial statements can arise from either fraud or error.
(iv) In case of stratified sampling, the conclusions are drawn on the stratum.
(v) Intentional errors are most difficult to detect and auditors generally devote greater attention to
this type
(vi) The auditor shall prepare audit documentation on a timely basis.
(vii) Written representations are requested from those responsible for the preparation and presentation
of the financial statements.
(viii) The auditor can formulate his entire audit programme only after he has had a satisfactory
understanding of the internal control systems and their actual operation. (7 x 2 = 14 Marks)

Division B - Descriptive Answers

6. (i) Correct: The concept of materiality is fundamental to the process of accounting. It covers all the
stages from recording to classification and presentation. It is very important for the auditor who
has constantly to judge whether a particular item is material or not and ensure that a material
item is disclosed separately and distinctly.
(ii) Incorrect: The person who is controlling the trade receivables should ensure that proper accounting
entries have been passed by crediting respective trade receivables account. The balance of cheque
in hand should be disclosed along with the cash and bank balances in the financial statements.
(iii) Correct: Misstatements in the financial statements can arise from either fraud or error. The
distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the financial statements is intentional or unintentional. Hence misstatement can
arise from error or fraud.
(iv) Correct: In case of stratified sampling, the conclusions are drawn on the stratum. The combination
of all the conclusions on stratum together will be used to de termine the possible effect of
misstatement or deviation. Hence the samples are used to derive conclusion only on the respective
stratum from where they are drawn and not the whole population .
(v) Correct: Intentional errors are most difficult to detect and auditors generally devote greater
attention to this type because out of long and sometimes unfortunate experience, auditors have
developed a point of view that, if they direct their procedures of discovering the more di fficult
intentional errors, they are reasonably certain to locate the more simple and far more common
unintentional errors on the way.
(vi) Correct: The auditor shall prepare audit documentation on a timely basis. Preparing sufficient
and appropriate audit documentation on a timely basis helps to enhance the quality of the audit
and facilitates the effective review and evaluation of the audit evidence obtained and conclusions
reached before the auditor’s report is finalised. Documentation prepared after the audit work has
been performed is likely to be less accurate than documentation prepared at the time such work
is performed.
(Vii) Correct: Written representations are requested from those responsible for the preparation and
presentation of the financial statements. Those individuals may vary depending on the governance
structure of the entity, and relevant law or regulation. However, management (rather than those
charged with governance) is often the responsible party.
Written representations may therefore be requested from the entit y’s chief executive officer and
chief financial officer, or other equivalent persons in entities that do not use such titles. In some
circumstances, however, other parties, such as those charged with governance, are also responsible
for the preparation and presentation of the financial statements.
(Viii)Correct: The auditor can formulate his entire audit programme only after he has had a satisfactory
understanding of the internal control systems and their actual operation. If he does not care to study
this aspect, it is very likely that his audit programme may become unwieldy and unnecessarily
heavy, and the object of the audit may be altogether lost in the mass of entries and vouchers.