AUDIT CA INTERMEDIATE Revision For May 19 Notes

CA INTERMEDIATE
AUDIT QUESTION BANK
BY CA CS POOJA RATHI DHOOT
MASTER BLASTER MCQs & Correct-Incorrect…..

FOR SURE SHOT SUCCESS ESPECIALLY DESIGNED
FOR MAY 2019 BATCH
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MCQ ON ARP QUESTIONS
1. What are analytical procedures?

(a) Substantive tests designed to assess control risk
(b) Substantive tests designed to evaluate the validity of management’s representation
letter
(c) Substantive tests designed to study relationships between financial and non-
financial
(d) All of the above
2. Which of the following is not an analytical procedure?

(a) Tracing of purchases recurred in the purchase book to purchase invoices.
(b) Comparing aggregate wages paid to number of employees
(c) Comparing the actual costs with standard costs
(d) All of them are analytical procedures
3. Analytical procedures issued in the planning stage of an audit, generally:

(a) helps to determine the nature, timing and extent of other audit procedures
(b) directs attention to potential risk areas
(c) indicates important aspects of business
4. The basic assumption underlying the use of analytical procedures is:

(a) It helps the auditor to study relationship among elements of financial information
(b) Relationship among data exist and continue in the absence of known condition to
the contrary
(c) Analytical procedures will not be able to detect unusual relationships
(d) None of the above
5. What is the primary objective of analytical procedures used in the overall review
stage of an audit?
(a) To help to corroborate the conclusions drawn from individual components of
financial statements
(b) To reduce specific detection risk
(c) To direct attention to potential risk areas
(d) To satisfy doubts when questions arise about a client’s ability to continue
Answers to MCQs
1. (c)
2. (a)
3.(d)
4. (b) 5. (a)
MCQ ON AUDIT DOCUMENTATION
1. ________ refers to the record of audit procedures performed, relevant audit

evidence obtained, and conclusions the auditor reached.
(a) Audit Techniques
(b) Audit evidence
(c) Audit Documentation
2. _________ may be defined as one or more folders or other storage media, in

physical or electronic form, containing the records that comprise the audit
documentation
for a specific engagement.
(a) Audit File
(b) Audit evidence
(c) Completion Memorandum
(d) both (a) and (b) above
3. As per SQC-1 “An appropriate time limit within which to complete the assembly of
the final audit fi le is ordinarily not more than ____ days after the date of the auditor’s
report”.
(a) 30
(b) 60
(c) 90
(d) 45
4. A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request.
(a) Positive confirmation request
(b) Non Response
(c) Negative Confirmation request
(d) Exception
5. Auditor’s judgment as to sufficiency may be affected by which factor:

(a) Materiality
(b) Risk of material misstatement
(c) Size and characteristics of the population.
6. Which of the following is not an Audit procedures to obtain audit evidence :

(a) Inspection
(b) Observation
(c) External Confirmation
7. Which of the following is not an assertion about presentation and disclosure:

(a) Occurrence and rights and obligations
(b) Completeness
(c) Classification and understandability
(d) Existence
1. (c)
2. (a)
3.(b)
4. (c)
5. (d)
6. (d) 7. (d)
MCQ ON AUDIT SCOPE AND OBJECTIVE
1. ----------- along with other disciplines such as accounting and law, equips you with all
the knowledge that is required to enter into auditing as a profession.
(a) Auditing
(b) Taxation
(c) Finance
(d) Taxation and Finance both
2. No business or institution can effectively carry on its activities without the help of
proper -------------:
(a) Audit
(b) Record and accounts
(c) neither (a) nor (b)
(d) both (a) and (b)
3.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
(b) To report on the financial statements
(c) Both (a)and (b) above
(d) none of the above
4 (IESBA Code) (INTERNATIONAL ETHICS STANDARDS BOARD FOR

ACCOUNTANTS CODE) related to an audit of financial statements establishes which
of the following as the fundamental principles of professional ethics relevant to the
auditor when conducting an audit of financial statements :
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
5. ICAI was established as a statutory body on:

(a) 1/7/1956
(b) 1/7/1949
(c) 1/4/1949
(d) 1/4/2014
6. ICAI is covered under which Ministry

(a) Ministry of corporate affairs
(b) Ministry of defence
(c) Ministry of finance
(d) Ministry of accountancy
7. Which is the largest financial and accounting body in the world

(a) Institute of Chartered Accountants of India
(b) American Institute of Certified Public Accountants
(c) Association of Chartered Certified Accountants
(d) Institute of Chartered Accountants in Australia
8. Rules and regulations for accounting and auditing are prescribed by

(a) AS
(b) SA
(c) Both
(d) None
9. ----------- is the criteria to determine measurement, presentation, recognition and

disclosure of items of financial statements
(a) SA
(b) Financial Reporting Framework
(c) Internal control system
(d) Assertions
10. Audit risk is a function of ROMM and:

(a) Detection risk
(b) Control risk
(c) Inherent risk
(d) Business risk
11. Applicable FRF is acceptable in which of the following factors:

(a) Nature of entity
(b) Objective of financial statements
(c) Laws and regulations
(d) all of the above
12. Audit documentation retention period is:

(a) 10 years
(b) 6 years
(c) 7 years
(d) 8 years
13.------------ ia a bound book in which variety of matters are observed and recorded in
course of audit
(a) final audit file
(b) audit notebook
(c) audit documentation
(d) audit working papers
14. Assembly of audit file after date of AUDITOR’S REPORT is an

(a) administrative process involve performance of new audit procedures or drawing
new conclusions
(b) administrative process does not involve performance of new audit procedures or
drawing new conclusions
(c) administrative process does not involve performance of new audit procedures but
involve drawing new conclusions
(d) administrative process involve performance of new audit procedures but no new
drawing new conclusions
15. ------- is an individual (internal or external to the firm) who has practical audit
experience, reasonable understanding of audit procedures, knowledge of all SA , laws,
business environment and reporting requirements:
(a) Management expert
(b) Auditor
(c) Experienced auditor
(d) Internal auditor
16. A request from client to auditor to change the engagement terms and conditions
may result from:
(a) Misunderstanding
(b) Scope restrictions
(c) Change in circumstances
(d) All of above
17. If laws and regulations prescribes sufficient detail on terms of engagement, then:
(a) auditor need not to record them in writing except the fact that management
acknowledges the same
(b) auditor need to record them in writing fully
(c) auditor need not to record them in writing only
(d) none
18.------ are the threats which could happen because of threat of replacement on
disagreements on application of AS or pressure to disproportionately reduce the work
in response to reduced audit fees
(a) Familiarity threats
(b) Self review threats
(c) Advocacy threats
(d) Intimidation threats
19. Acceptance of significant gifts or hospitality is

(a) Self interest threats
(b) Familiarity threats
(d) Self review threats
20. Hanuman is appointed as auditor of Ram ltd. Was working as senior officer in Ram
ltd is a kind of
(a) Self interest threat
(b) Self review threat
(d) Intimidation threats
Answer:
1. (a) 9. (b) 17. (a)
2. (b) 10. (a) 18. (d)
3. (c) 11. (d) 19. (b)
4. (d) 12. (c) 20. (b)
5. (b) 13. (b)
6. (a) 14. (b)
7. (b) 15. (c)
8. (c) 16. (d)
MCQs ON AUDIT STRATEGY
1. The audit plan is ______detailed than the overall audit strategy

(a) Less
(b) More
(c) Equal
2. Planning is _____ process of an audit 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:
(a) continuous
(b) discrete
(c) neither continuous nor discreet
3. The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures
(b) The nature, timing and extent of planned further audit procedures at the
assertion level.
(c)Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
4. With reference to SA 300, the auditor shall document:

(a) The overall audit strategy
(b) The audit plan
(c) Any significant changes made during the audit engagement to the overall
audit strategy or the audit plan, and the reasons for such changes.
5. The overall audit strategy and the audit plan remain the ____ responsibility.
(a) auditor’s
(b) management’s
(c) those charged with governance
6. Determining a percentage to be applied to a chosen benchmark (in relation to

materiality) involves the exercise of ___________
(a) Independence
(b) Professional Judgement
(c) Professional skepticism
Answers to MCQs
1. (b)
2. (a)
3. (d)
4. (d)
5. (a)
6. (b)
MCQ ON COMPANY ACCOUNTS
1. Which assertion is common among income statement and balance sheet captions:
(a) Existence
(b) Valuation
(c) Completeness
(d) Measurement
2. Direct confirmation procedures are performed during audit of accounts receivable

balances to address the following balance sheet assertion:
(a) Rights and obligations
) Existence
(c) Valuation
(d) Completeness
3. Where no reply is received during the performance of direct confirmation procedures

as part of audit of accounts receivable balances, the auditor should perform:
(a) No additional testing
(b) Additional testing including agreeing the balance to cash received; agreeing
the detail of the respective balance to the customer’s remittance advice
(c) Additional testing including preparing a detailed analysis of the balance, ensuring it
consists of identifiable transactions and confirming that these revenue transactions
actually occurred
(d) Both (b) and (c)
4. Obtaining trade receivables ageing report and analysis and identification of doubtful
debts is performed during audit of accounts receivable balances to address the
following balance sheet assertion:
(a) Valuation
(b) Rights and obligations
(c) Existence
(d) Completeness
5. Observing inventory being counted and personally performing test counts to verify
counts is performed during audit of inventory balances to address the following
balance sheet assertion:
(a) Rights and obligations
(b) Valuation
(c) Completeness
(d) Existence
6. Wages paid to workers would always qualify as:

(a) Revenue expenditure
(b) Capital expenditure
(c) Revenue or capital expenditure depending upon facts and circumstances.
7. During the course of audit of intangible assets, expenditure incurred during following
phase is generally not capitalised:
(a) Development phase
(b) Research phase
(c) None of the above
(d) Both (a) and (b)
8. Search for unrecorded liability is performed during audit of current liabilities to

address the following balance sheet assertion:
(a) Valuation
(b) Rights and obligations
(c) Existence
(d) Completeness
9. Cut-off testing is performed during audit of sales to address the following income
statement assertion:
(a) Occurrence
(b) Measurement
(c) Completeness
10. ABC’s investee company- XYZ declares final dividend for financial year 2016-17 in
the meeting of board of directors held on April 10, 2017. In which financial year should
ABC account for the dividend income:
(a) Proportionately i.e. considering 10 days of financial year 2017-18 and 355
days of financial year 2016-17
(b) Financial year 2016- 17
(c) Financial year 2017- 18
(d) Equally between financial year 2016-17 and financial year 2017-18
11. All inventory units held by the audit entity and that should have been recorded,
has been recognized in the financial statements. The assertion involved is :
(a) Existence
(b) Completeness
(c) Rights and Obligations
(d) Valuation
12. Which of the following is not an example of revenue expenditure -

(a) Salaries and wages of employees engaged directly or in-directly in production
(b) Repairs, maintenance and renewals of fixed assets
(c) Legal and professional expenses
(d) development expenditure on land
Answers to MCQs
1. (c)
2. (b)
3.(d)
4. (a)
5. (d)
6.(c)
7. (b)
8. (d)
9. (c)
10. (c)
11. (b)
12. (d)
EDP MCQ
1. Which of the following is a General IT control?

(a) IT Environment
(b) Application Control
(c) Access Security
(d) IT Dependent Control
2. Which of the following is an automated control?

(a) Program change
(b) System generated report
(c) Application control
(d) Configurations
3. Who is mainly responsible for implementation of internal fi nancial controls in a

company?
a) Auditors
(b) Directors
(c) Employees
(d) Regulators
4. The Guidance Note on Audit of Internal Financial Controls over Financial Reporting
has been issued by?
(a) ICAI
(b) SEBI
(c) MCA
(d) RBI
5. The standard that requires auditors to analyse journal entries in an audit is?
(a) SA 260
(b) SA 230
(c) SA 315
(d) SA 240
1. (c)
2. (d)
3. (b)
4. (a)
5. (d)
MCQ ON FRAUDS
.Q1 When credit purchases of rs.5100 is recorded on credit side and credit sales of
rs5100 is recorded on debit side, this kind of error is called ______.
(a) Error of omission.
(b) Compensating error.
(c) Error of principle.
(d) Error of commission.
2. If, as a result of a misstatement resulting from fraud, the auditor encounters

exceptional circumstances that bring into question his ability to continue performing the
audit, he shall-
(a) Withdraw from the engagement immediately.
(b) Report to Audit team regarding withdrawal.
(c) Determine the professional and legal responsibilities applicable in the
circumstances.
(d) Ask the management for his withdrawal.
3. Which of the following is an example of inflating cash payments?

(a) Making payments against purchase vouchers.
(b) Teeming and lading.
(c) Not accounting for cash sales fully.
(d) Making payments against inflated vouchers.
4. The type of errors, existence of which becomes apparent in the process of

compilation of accounts is known as-
(a) Self-revealing errors.
(b) Intentional errors.
(c) Concealed errors.
(d) Unconcealed errors.
5. Misappropriation of assets may occur because there is-

(a) Adequate record keeping with respect to assets.
(b) Known history of violations of securities laws.
(c) Lack of complete and timely reconciliations of assets.
(d) Dispute between shareholders in a closely held entity
Ans:
(1) b
(2) c
(3) d
(4) a
(5) c
MCQ ON INTERNALCONTROLS
1.Audit risk is a function of the risks of material misstatement and _______

(a) detection risk.
(b) inherent risk
(c) control risk
(d) business risk
2. For a given level of audit risk, the acceptable level of detection risk bears ______
relationship to the assessed risks of material misstatement at the assertion level.
(a) direct.
(b) Inverse
(c) no
3. Risk of material misstatement has _______components

(a) one
(b) two
(d) three
(d) four
4. Controls can be _________related to an assertion.

(a) directly
(b) indirectly
(c) directly or indirectly
5.Control activities, whether within IT or manual systems, have various objectives and
are applied at various organisational and functional levels. Which of the following is an
example of control activities:
(a) Authorization.
(b) Performance reviews.
(c) Information processing.
6. Internal controls has ------ components

(a) 2
(b) 3
(c) 4
(d) 5
1. (a) 4. (c)
2. (b) 5. (d)
3. (b) 6. (d)
MCQ ON SAMPLING
1. The main advantage of using statistical sampling techniques is that such techniques:
(a) Mathematically measure risk
(b) Eliminate the need for judgmental sampling
(c) Defines the values of tolerable error
(d) all of the them.
2. Which of the following factors is (are) considered in determining the sample size for
tests of control?
(a) Projected error
(b) Tolerable error
(c) Expected error
(d) Both (b) and (c)
3. Tolerable error, is the maximum monetary error that the auditor is prepared to
accept in the population and still conclude that audit objective has been achieved, is
directly related to
(a) Sample size
(b) Audit risk
(c) Materiality
(d) Expected error
4. Which of the following is source of Non Sampling risk :

(a) Human Mistakes
(b) Applying audit procedures not appropriate to the objectives of audit
(c). Misinterpreting the sample results
5. Which of the following is more scientific :

(a) Statistical
(b) Non- statistical
(c) both (a) and (b)
1. (a)
2. (d)
3. (c)
4. (d)
5. (a)
MCQ ON SPECIAL AUDITS
1. While auditing a cinema hall, the auditor needs to verify that-

(a) entrance to the cinema-hall during show is only through printed tickets
(b) tickets are serially numbered and bound into books
(c) that for advance booking a separate series of tickets is issued
2. Article 151 requires that the reports of the C&AG relating to the accounts of the
Union/State shall be submitted to the -------- who shall cause them to be laid before
House of Parliament/State Legislature
(a) President/Governor
(b) Prime Minister/ Chief Minister
(c) Union Finance Minister/State Finance Minister
3. The C&AG Act gives which of the following power to the C&AG in connection with
the performance of his duties-
(a) To inspect any office of accounts under the control of the Union or a State
Government including office responsible for the creation of the initial or subsidiary
accounts.
(b) To require that any accounts, books, papers and other documents which deal with
or are otherwise relevant to the trans actions under audit, be sent to specified places.
(c) To put such questions or make such observations as he may consider necessary
to the person in charge of the office and to call for such information as he
may require for the preparation of any account or report which is his duty to prepare.
4. ________aims at ascertaining that the expenditure incurred has been on the

purpose for which the grant and appropriation had been provided and that the amount
of such expenditure does not exceed the appropriation made.
(a) Audit against provision of funds
(b) Propriety audit
(c) Audit of sanctions
(d) Audit against rules and orders
1. (d)
2. (d)
3. (d)
4. (a)
CA INTERMEDIATE
AUDIT QUESTION BANK

FOR MAY 2019 BATCH
DISCLAIMER:
IF YOU WANT TO
Ignore Nahi Karna!!
Correct/Incorrect
(i) As per SA 230 on “Audit Documentation”, the working papers are not the property of
the auditor.
Incorrect:
As per SA 230 on “Audit Documentation” 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
(ii) Purchase invoice is an example of internal evidence
Incorrect:
Internal evidence is the evidence that originates within the client’s organisation. Since
purchase invoice originates outside the client’s organisation, therefore, it is an example
of external evidence.
(iii) Sufficiency is the measure of the quality of audit evidence.
Incorrect:
Sufficiency is the measure of the quantity of audit evidence. On the other hand,
appropriation is the measure of the quality of audit evidence.
(iv) inquiry is an effective and efficient audit tool.
Incorrect:
Inquiry alone is not sufficient to test the operating effectiveness of controls.
Accordingly, other audit procedures are performed in combination with inquiry. In this
regard, inquiry combined with inspection or reperformance may provide more
assurance than inquiry and observation, since an observation is pertinent only at the
point in time at which it is made.
(v). 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.
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.
(vi). According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or infructuous expenditure even though the expenditure has been incurred
in conformity with the existing rules and regulations.
Correct.
According to ‘propriety audit’, the auditors try to bring out cases of improper, avoidable,
or infructuous expenditure even though the expenditure has been incurred in
conformity with the existing rules and regulations.
(vii) Expenditure incurred by the municipalities and corporations can be broadly

classified under the following heads: (a) general administration and revenue
collection, (b) public health, (c) public safety, (d) education, (e) public works, and
(f) others such as interest payments.
Correct .
Expenditure incurred by the municipalities and corporations can be broadly classified
under the following heads: (a) general administration and
revenue collection, (b) public health, (c) public safety, (d) education, (e) public
works, and (f) others such as interest payments, etc
(viii) The external control of municipal expenditure is exercised by the Central

Government through the appointment of auditors to examine municipal accounts
Incorrect.
The external control of municipal expenditure is exercised by the state governments
through the appointment of auditors to examine municipal accounts
(ix). NGOs may be defined as non-profit making organisations which raise funds from
members, donors or contributors apart from receiving donation of time, energy and
skills for achieving their social objectives.
Correct.
NGOs can be defined as non-profit making organisations which raise funds from
members, donors or contributors apart from receiving donation of time, energy and
skills for achieving their social objectives like imparting education, providing medical
facilities, economic assistance to poor, managing disasters and emergent situations
(x). As per the Standard on Auditing (SA) 520 “Analytical Procedures” ‘the term
“analytical procedures” means evaluations of financial information through analysis of
plausible relationships among financial data only.
Incorrect.
As per the Standard on Auditing (SA) 520 “Analytical Procedures” ‘the term “analytical
procedures” means evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data
(xi). Auditor can depend on routine checks to disclose all the mistakes or manipulation
that may exist in accounts
Incorrect.
Routine checks 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 in addition to reasonable tests.
(xii). Only purpose of analytical procedures is to obtain relevant and reliable audit
evidence when using substantive analytical procedures.
Incorrect.
Analytical procedures use comparisons and relationships to assess whether account
balances or other data appear reasonable. Analytical procedures are used for the
following purposes:
(i) To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
(ii) To design and perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion as to whether the financial statements
are consistent with the auditor’s understanding of the entity.
(xiii) Analytical Procedures are required in the planning phase only.
Incorrect.
Analytical Procedures are required in the planning phase and it is often done during
the testing phase. In addition these are also required during the completion phase
(xiv). Substantive analytical procedures are generally less applicable to large volumes
of transactions that tend to be predictable over time.
Incorrect.
Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time
(xv). The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential processes, but are closely inter-related since
changes in one may result in consequential changes to the other.
Correct.
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. The establishment of the overall audit strategy and the detailed
audit plan are not necessarily discrete or sequential processes, but are closely inter-
related since changes in one may result in consequential changes to the other
(xvi). Establishing an overall audit strategy that sets the scope, timing and direction of
the audit, and that guides the development of the audit plan is prerogative of the
management.
Incorrect.
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.
(xvii) Planning is a discrete phase of an audit
Incorrect.
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.
Planning, however, includes consideration of the timing of certain activities and audit
procedures that need to be completed prior to the performance of further audit
procedures
(xviii). Materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account balances or
disclosures) does not need any revision.
Incorrect.
Materiality for the financial statements as a whole (and, if applicable, the materiality
level or levels for particular classes of transactions, account balances or disclosures)
may need to be revised as a result of a change in circumstances that occurred during
the audit (for example, a decision to dispose of a major part of the entity’s business),
new information, or a change in the auditor’s understanding of the entity and its
operations as a result of performing further audit procedures.
(xix).Employee benefits expense or commonly called payroll represents the sum an

entity pays to its employees for their labour/ efforts only.
Incorrect
Employee benefits expense or commonly called payroll represents the aggregate sum
an entity pays to its employees for their labour/efforts, as well as associated expenses
such as perquisites/ benefits, post- employment benefits like gratuity, superannuation,
leave encashment, provident fund contribution etc. as well as towards their hiring, their
welfare and training
(xx).Dividends are recognised in the statement of profit and loss only when the entity’s
right to receive payment of the dividend is established.
Incorrect :
Dividends are recognised in the statement of profit and loss only when:
(i) the entity’s right to receive payment of the dividend is established;
(ii) it is probable that the economic benefi ts associated with the dividend will flow to
the entity; and (iii) the amount of the dividend can be measured reliably
(xxi). “Sweat Equity Shares” means equity shares issued by the company to
employees
or directors at a premium or for consideration other than cash for providing know-how
or making available right in the nature of intellectual property rights or value additions,
by whatever name called
Incorrect :
“Sweat Equity Shares” means equity shares issued by the company to employees or
directors at a discount or for consideration other than cash for providing know-how or
making available right in the nature of intellectual property rights or value additions, by
whatever name called.
(xxii). There is no difference between reserves and provision.
Incorrect :
The difference between the two is that provisions are amounts set aside to meet
specific/ identified liabilities or diminution in recoverable value of assets. These must
be provided for regardless of the fact whether the Company has earned profit or not.
(xxiii).Capital reserves represent profits that are available for distribution to

shareholders held for the time being or any one or more purpose.
Incorrect : Revenue reserves represent profits that are available for distribution to
shareholders held for the time being or any one or more purpose
(xxiv).A capital reserve, generally, can be utilised for writing down fictitious assets or
losses or (subject to provisions in the Articles) for issuing bonus shares if it is realised.
Correct :
A capital reserve, generally, can be utilised for writing down fictitious assets or losses
or (subject to provisions in the Articles) for issuing bonus shares if it is realised. But the
amount of share premium or capital redemption reserve account can be utilised only
for the purpose specifi ed in Sections 52 and 55 respectively of the Companies Act,
2013
(xxv).If Company X’s balance sheet shows building with carrying amount of 100 lakh,
the auditor shall assume that the management has only asserted that the building
recognized in the balance sheet exists as at the period-end.
Incorrect :
If Company X’s balance sheet shows building with carrying amount of 100 lakh, the
auditor shall assume that the management has claimed/ asserted that:
The building recognized in the balance sheet exists as at the period- end (existence
assertion);
Company X owns and controls such building (Rights and obligations assertion);
The building has been valued accurately in accordance with the measurement
principles (Valuation assertion);All buildings owned and controlled by Company X are
included within the carrying amount of 100 lakh (Completeness assertion).
(xxvi). Authorised capital is the sum stated in the memorandum as the capital of the
company with which it is to be registered being the maximum amount which it is
authorised to raise by issuing shares, and upon which it pays the stamp duty.
Correct : As per section 2(8) of the Companies Act, 2013. “Authorised capital” or
“Nominal capital” means such capital as is authorised by the memorandum of a
company to be the maximum amount of share capital of the company.
Thus, it is the sum stated in the memorandum as the capital of the company with which
it is to be registered being the maximum amount which it is authorised to raise by
issuing shares, and upon which it pays the stamp duty. It is usually fixed at the amount,
which, it is estimated, the company will need, including the working capital and reserve
capital, if any
(xxvii). The securities premium account may only be applied by the Company towards
the issue of unissued shares of the company to the members of the company as fully
paid bonus shares.
Incorrect :
The securities premium account may be applied by the Company:
(a) towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
(xxviii) The method which involves dividing the population into groups of items is
known as block sampling.
Incorrect.
The method which involves dividing the population into groups of items is known as
cluster sampling whereas block sampling involves the selection of a defined block of
consecutive items
(xxix) Universe refers to the entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions.
Incorrect
Population refers to the entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions
(xxx) Non Statistical sampling is an approach to sampling that has the random
selection of the sample items; and the use of probability theory to evaluate sample
results, including measurement of sampling risk characteristics.
Incorrect :
Statistical sampling is an approach to sampling that has the random selection of the
sample items; and the use of probability theory to evaluate sample results, including
measurement of sampling risk characteristics
(xxxi) Sample need not be representative
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
(xxxii) The objective of stratification is to increase the variability of items within each
stratum and therefore allow sample size to be reduced without increasing sampling
risk.
Incorrect
The objective of stratification is to reduce the variability of items within each stratum
and therefore allow sample size to be reduced without increasing sampling risk
CA INTERMEDIATE
AUDIT QUESTION BANK

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Theoretical question answers
Q. Write a note on SIA.

Answer:
Institute of Chartered Accountants of India has constituted a Committee on Internal
Audit (CIA) as a non-standing committee on February 5, 2004. The CIA was
constituted with the object of formulating Standards and Guidance Notes on Internal
Audit now it is known as Internal Audit Standard Board
The Board has, till date, issued eighteen Standards on Internal Audit (SIAs) and the list
is given below. The SIAs aim to codify the best practices in the area of internal audit
and also serve to provide a benchmark of the performance of the internal audit
services. While formulating SIAs, the Board takes into consideration the applicable
laws, customs, usages and business environment and generally accepted auditing
practices in India.
Q . Write a note on functions of Internal Auditor.

Answer:
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 such as the following:
1. Activities Relating to Governance:
The internal audit function may assess the governance process in its accomplishment
of objectives on ethics and values, performance management and accountability,
communicating risk and control information to appropriate areas of the organization
and effectiveness of
communication among those charged with governance, external and internal auditors,
and management.
2. Activities Relating to Risk Management:
The internal audit function may assist the entity by identifying and evaluating significant
exposures to risk and contributing to the improvement of risk management and internal
control
(including effectiveness of the financial reporting process). The internal audit function
may perform procedures to assist the entity in the detection of fraud.
3. Activities Relating to Internal Control:
(i)Evaluation of internal control:
The internal audit function may be assigned specific responsibility for reviewing
controls, evaluating their operation and recommending improvements thereto. In doing
so, the internal audit function provides assurance on the control. For example, the
internal audit function might plan and perform tests or other procedures to provide
assurance to management and those charged with governance regarding the design,
implementation and operating effectiveness of internal control, including those controls
that are relevant to the audit.
(ii)Examination of financial and operating information:
The internal audit function may be assigned to review the means used to identify,
recognize,
measure, classify and report financial and operating information, and to make specific
inquiry into individual items, including detailed testing of transactions, balances and
procedures.
(iii)Review of operating activities:
The internal audit function may be assigned to review the economy, efficiency and
effectiveness of operating activities, including nonfinancial activities of an entity.
(vi) Review of compliance with laws and regulations:
The internal audit function may be assigned to review compliance with laws,
regulations and
other external requirements, and with management policies and directives and other
internal requirements.
Q. What are the factors to be considered to decide extent of sampling.

Answer
The factors that should be considered for deciding upon the extent of checking on a
sampling plan are following:
(i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
(v) Degree of the desired confidence.
Question “When deviations from controls upon which the auditor intends to rely are
detected, the auditor shall make specific inquiries to understand these matters and
their potential consequences” Explain.
Ans:
When deviations from controls upon which the auditor intends to rely are detected, the
auditor shall make specific inquiries to understand these matters and their potential
consequences, and shall determine whether:
(a) The test of controls that have been performed provide an appropriate basis for
reliance on the controls;
(b) Additional test of controls are necessary; or
(c) The potential risks of misstatement need to be addressed using substantive
procedures
Q. Write a note on matters to be considered while deciding extent of compliance

procedures.
Ans:
Matters the auditor may consider in determining the extent of test of controls include
the following:
 The frequency of the performance of the control by the entity during the period.
The length of time during the audit period that the auditor is relying on the
operating effectiveness of the control.
 The expected rate of deviation from a control.
The relevance and reliability of the audit evidence to be obtained regarding the
operating effectiveness of the control at the assertion level.
The extent to which audit evidence is obtained from tests of other controls related to
the assertion
Q. Write a note on Threats to Independence
Ans:The Code of Ethics for Professional Accountants, prepared by the International

Federation of Accountants (IFAC) identifies five types of threats. These are:
1. Self-interest threats : which occur when an auditing firm, its partner or associate
could benefit from a financial interest in an audit client. Examples include
(i) direct financial interest or materially significant indirect financial interest in a

client,
(ii) loan or guarantee to or from the concerned client,
(iii) undue dependence on a client’s fees and, hence, concerns about losing the
engagement,
(iv) close business relationship with an audit client,
(v) potential employment with the client, and
(vi) contingent fees for the audit engagement.
2. Self-review threats: which occur when during a review of any judgement or

conclusion reached in a previous audit or non-audit engagement (Non audit services
include any professional services provided to an entity by an auditor, other than audit
or review of the financial statements. These include management services, internal
audit, investment advisory service, design and implementation of information
technology systems etc.), or when a member of the audit team was previously a
director or senior employee of the client. Instances where such threats come into play
are
(i) when an auditor having recently been a director or senior officer of the company,
and
(ii) when auditors perform services that are themselves subject matters of audit.
3. 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.
4. 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.
This can occur in many ways:
(i) close relative of the audit team working in a senior position in the client
company,
(ii) former partner of the audit firm being a director or senior employee of the
client,
(iii) long association between specific auditors and their specific client
counterparts, and
(iv) acceptance of significant gifts or hospitality from the client company, its
directors or employees.
5. 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.
Q Write a note on steps taken by auditor to Safeguards his Independence.
Answer:
The Chartered Accountant has a responsibility to remain independent by taking into

account the context in which they practice, the threats to independence and the
safeguards available to eliminate the threats. The following are the guiding principles in
this regard: -
1. For the public to have confidence in the quality of audit, it is essential that auditors
should always be and appears to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and
professional skepticism, which necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it

involves threats to his independence.
4. When such threats exist, the auditor should either desist from the task or put in
place safeguards that eliminate them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he
must not accept the work
Q. M/s S & Co. has been appointed as an auditor of SC Ltd. for the financial year
2014-15. CA. Suresh, one of the partners of M/s S& Co., completed entire routine audit
work by 29thMay, 2015. Unfortunately, on the very next morning, while roving towards
office of SC Ltd. to sign final audit report, he met with a road accident and died. CA.
Chandra, another partner of M/s S & Co., therefore, signed the accounts of SC Ltd.,
without reviewing the work performed by CA S. State with reasons whether CA.
Chandra is right in expressing an opinion on financial statements the audit of which is
performed by another auditor.
SOLUTION
Relying on Work Performed by Another Auditor: As per SA 220 “Quality Control for an
Audit of Financial Statements”,
An engagement partner taking over an audit during the engagement may apply the
review procedures such as the work has been performed in accordance with
professional standards and regulatory and legal requirements; significant matters have
been raised for further consideration; appropriate consultations have taken place and
the resulting conclusions have been documented and implemented; there is a need to
revise the nature, timing and extent of work performed; the work performed supports
the conclusions reached and is
appropriately documented; the evidence obtained is sufficient and appropriate to
support the auditor’s report; and the objectives of the engagement procedures have
been achieved.
Further, one of the basic principles, which govern the auditor’s professional
responsibilities and which should be complied with wherever an audit is carried, is that
when the auditor delegates work to assistants or uses work performed by other auditor
and experts, he will continue to be responsible for forming and expressing his opinion
on the financial information. However, he will be entitled to rely on work performed by
others, provided he exercises adequate skill and care and is not aware of any reason
to believe that he should not have so relied. This is the fundamental principle which is
ethically required as per Code of Ethics.
However, the auditor should carefully direct, supervise and review work delegated. He
should obtain reasonable assurance that work performed by other auditors/experts and
assistants is adequate for his purpose. In the given case, all the auditing procedures
before the moment of signing of final report have been performed by CA S. However,
the report could not be signed by him due to his unfortunate death. Later on, CA.
Chandra signed the report relying
on the work performed by CA. S.
Here, CA. Chandra is allowed to sign the audit report, though, will be responsible for
expressing the opinion. He may rely on the work performed by CA. S provided he
further exercises adequate skill and due care and review the work performed by him.
CA INTERMEDIATE
STANDARDS ON AUDITING
SUMMARY LECTURE!

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SA 200 BASIC PRINCIPLES GOVERNING AN AUDIT
SA 200 states that auditor shall comply with the following requirements to perform an audit:
1. Integrity, (a) Auditor should be straightforward, honest and sincere in his

objectivity and professional work.
independence (b) He should be fair and must not be biased.
(c) He should maintain impartiality. He should be free of any interest.
2. Confidentiality (a) He should maintain confidentiality of information acquired during his

work.
(b) He should not disclose any such information to a third party without
specific permission of client or legal or professional duty to disclose.
3. Skill and (a) He should perform work with due professional care.
competence (b) Audit should be performed by persons having adequate training,
experience and competence.
4. Work performed (a) The auditor can delegate work to assistants or use work performed by
by others other auditors and experts.
(b) But he will continue to be responsible for his opinion on financial
information.
(c) The Auditor is entitled to rely on work performed by others, provided.
 He exercises adequate skills and care and
 There is nothing to doubt.
5. Documentation (a) He should document matters relating to the audit (maintain working
papers.)
(b) Working papers are maintained to demonstrate that the audit was
carried out in accordance with the basic principles.
6. Planning (a) He should plan his work to conduct audit in effective and timely
manner.
(b) Plans should be based on knowledge of the client's business.
(c) Plans should be further developed and revised during audit if
circumstances require so.
7. Audit Evidence (a) Auditor should obtain sufficient and appropriate audit evidence by
performing compliance and substantive procedures.
(b) Evidences enable the auditor to draw reasonable conclusion.
(c) Compliance procedures mean the tests designed to obtain reasonable
assurance that internal controls have been properly designed &
operating effectively throughout the year.
(d) Substantive Procedures are performed to obtain evidence as to the
completeness, accuracy and validity of data produced by the
accounting system.
8. Accounting (a) Internal control system ensures that the accounting system is adequate
system and and that all the accounting information has been duly recorded.
internal control (b) The auditor should understand the accounting system and related
internal controls adopted by the management.
(c) He should study and evaluate internal controls system to determine
the nature, timing and extent of other audit procedures.
9. Audit (a) The auditor should review and assess the conclusions drawn from the
conclusions and audit evidences obtained through performance of procedures.
reporting (b) The audit report should contain clear written expression of opinion on
the financial statements.
(c) His report is on whether:
 The financial information has been prepared using acceptable
accounting policies which have been consistently applied;
 The financial information complies with relevant regulation
and statutory requirements;' and
 There is adequate disclosure of all material matters.
(d) The report should be as per legal requirement. When other than clean
opinion is given, the audit report should state the reasons thereof.
OBJECTIVES OF AUDIT
Primary Reporting Audit is conducted to express an opinion on financial

objective statements. Thus, primary objective is Reporting.
The objective of audit of financial statements is to enable the
auditor to express an opinion on such financial statements.
Reporting on The auditor reports whether financial statements represent

what? true & fair view.
True & fair- It can be examined by considering whether:

Meaning
(a) Financial statement have been prepared using consistent &
acceptable accounting policies &
(b) Financial statements comply with relevant rules &
regulations &
(c) Financial statements contain disclosure of all material
matters.
Secondary Detection of (a) Auditor is expected to provide opinion on true & fair view
objective misstatement of financial statement as above.
(b) He cannot frame such opinion if he is not able to
confirm/dispel the possibility of existence of fraud & error
in financial statements.
(c) Thus incidental/ secondary objective is detection of
misstatement in financial statements.
As per SA-240 (a) Primary responsibility of prevention, detection &
correction misstatement is that of management.
(b) However, if there are doubtful situation that some
misstatement may exist, auditor should extent his
procedure to confirm I dispel the doubt.
(c) Audit may not reveal all the misstatement (due to inherent
limitations of audit).
(d) If auditor performs his work in accordance with basic
principles governing an audit, he cannot be held liable for
non-detection of misstatement in financial statements of
client.
(e) However, if he notices material misstatement resulting
from fraud, he should communicate the same at
appropriate level of management.
(f) If misstatements are, found, he should ensure their
appropriate disclosure either in financial statements by the
management or in his audit report.
Inherent limitations (1) Auditor cannot obtain absolute assurance (cannot reduce audit risk
of an audit to Zero)
(2) This is due to inherent limitations of an audit due to which auditor
obtains persuasive evidence rather than conclusive.
(3) It arise from:
(i) Nature of financial reporting.
(ii) Nature of audit procedures
(iii) Limitation w.r.t. time and cost.
(i) Nature of  Preparation of financial statement involves

financial judgment by management
reporting  For Example, accounting estimates.
 There may be subjective decisions.
 Moreover, auditor has to consider whether there
estimates appear to be reasonable.
 Evidences w.r.t. such items can only be persuasive.
(ii) Nature of  Management or others may not provide complete

Audit information.
procedures  Moreover, frauds may involve carefully designed
And other schemes to conceal it. Thus auditor may not detect
matters them.
 AN AUDIT IS NOT OFFICIAL INVESTIGATION
INTO ALLEGED WRONG DOING
(iii)  Users expect that the auditor will form an opinion

Limitations on financial statements within reasonable time and
w.r.t. time cost.
and cost  Thus auditor resorts to test procedures (not 100%
checking)
 Moreover, he directs more efforts to risky areas.
SA 210 (REVISED) AGREEING THE TERMS OF AUDIT ENGAGEMENT
(on or after April 1, 2010)
Preconditions for an Audit Audit Engagement Terms
Precondition for an Audit: Audit Engagement letter includes
1. Preparation and presentation of financial  Objectives of the Audit

 Scope of audit
statements as per applicable FRF
 Responsibility of Mgt and Auditor
2. Designing, implementation and
 Identification of FRF
maintenance of internal control system of  Reference to expected form &
entity content of report to be issued by
3. Access to auditor all information , at all the auditors
times, all premises from all personnel  If Law/regulation prescribes terms
then no need for a separate
If all above preconditions are accepted, accept written terms, except that
the engagement. management acknowledges the
same.
If not accepted or scope limitations exist, do
not accept the engagement
Should not accept Audit if
Aforesaid precondition Prior to acceptance,

not present management imposes
limitation
SQC 1 SA 220
QUALITY CONTROL TO BE MAINTAINED BY

ALL FIRMS PERFORMING ALL ENGAGEMENTS QUALITY CONTROL TO BE MAINTAINED BY ALL
(AUDIT/ ASSURANCE/ REVIEW/RELATED FIRMS PERFORMING AUDIT ENGAGEMENTS
SERVICES)
GENERALLY APPLIED FOR ALL SPECIFICALLY RELATED TO AUDIT

SA – 220 (REVISED)
QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS.
Leadership Ethical Independence Acceptance/ Assignment management Monitorin Documentatio

Responsibilities Requirements continuance of of performance g n
Client relationship Engagement
term
 EP should EP to remain  Be Satisfied that EP to be (1) Direction, Obtain By Auditor :
emphasize the ET alert for Form an appropriate satisfied that Supervision and reasonable  Issues raised
the following. evidence of conclusion on procedures ET & performance assurance compliance
Compliance with non- compliance regarding client Auditor's  In compliance that its with ethical
professional compliance with acceptance/ Expert not with standards. policies/ requirement
standards and with applicable continuance have part of ET  To make an procedures & inner
legal requirement. relevant independence been followed have appropriate AR relating resolution
 Compliance with ethical requirement  Determine appropriate (2) Reviews in QC are  Compliance
firm's quality requirement whether competence accordance with relevant, with
control policies. s by ET Identify & conclusions & policies/procedur adequate independence
 Issuance of through : Evaluate reached are capabilities es and requirements
appropriate audit  Inquiry circumstances appropriate to : (3) Consultation operating  Nature scope
report.  Observation & If  Perform  Wherever effectively conclusions of
 Ability to raise Relationship Engagement audit required Consider : simulation
concerns without If there is an that threatens partner engagemen  Ensure its  Whether
fear. indications of independence obtains t in implementation deficienci
 Quality is non-compliance information accordance (4) Engagement es noted
essential & with relevant Evaluate that would with quality Control may
Indispensable in ethical Information have caused professiona Review required affect the
engagement requirements on identified firm to l standards (5) Differences of audit
performance EP should breaches that withdraw the and Opinion follow engagem
 Consult threatens engagement regularity the firm policies & ent
others in the independence communicate or legal procedures for
firm. information requiremen dealing with and
 Determine Take promptly to ts and resolving
appropriate appropriate firm  Enable an differences of
action action to AR that is opinion.
eliminate such appropriate
threats or in the
promptly circumstan
report inability ces.
to take
appropriate
action to firm
EQCR: The EQC reviewer shall  Discussion of significant  Review of FS & proposed audit report.
evaluate the following : matters with ET
 Review of selected audit  Evaluation of conclusions reached
documentation
SA 230 AUDIT WORKING PAPERS (DOCUMENTATION)
 Documentation refers to working papers kept by the auditor in

Meaning
connection with performance of his audit work.
 It is the record of planning, procedure performed, evidence obtained
& conclusion
 It shows that audit work has been conducted as per requirement.
documentation provides basis of auditor’s conclusion and a proof that
audit was planned and performed in accordance with SA and legal
regularity framework
(i) W.P should be designed & organised according to size, complexity
Basic
requirements and circumstances of each audit.
(ii) As far as possible, working papers should be kept in standardised
form, wrt to nature of audit procedures being performed, identified
ROMM. AUDIT METHODOLOGY TOOLS TECHNIQUES BEING
USED.
(iii) Documentation should be sufficiently complete, dated & signed.
(iv) All significant matters involving judgment should be documented.
(v) As per ICAI, documentation is the property of auditor & he should
maintain it at least upto 7 years from date of signing of audit report.
(vi) If it is in electronic/magnetic media, he should take proper care for
its storage & retrieval.
(vii) AUDIT DOCUMENTATION includes audit programmes, analyses,
memorandas, WRL, checklists, correspondence obtained from clients
(viii) He should maintain confidentiality (should not show his W.P. to
outsiders).
AUDIT FILE MAY BE DEFINED AS ONE OR MORE FOLDERS OR
Working paper
files OTHER STORAGE MEDIA in physical or electronic form containing
records that comprises audit documentation for a specific engagement.
SQC-1 states An appropriate time limit within which to complete the
assembly of final audit file is not more than 60days from the date of
auditor’s report
In case of recurring audit, two type of files are maintained to avoid
duplicity of documentation. These are as follows:
Meaning It is generally a bound book which large variety of
Audit note Book
matters observed during audit.
Examples of contents (i) Audit queries not solved immediately.

(ii) Irregularities observed during audit.
(iii) Important information regarding entity not
appearing in accounts.
(iv) Important matters for future reference.
Features/usefulness (i) It is permanent record of auditor, which can be
referred to later on.
(ii) It contains all details of work carried out. This
work can be linked, if concerned assistant is
away.
(iii) It contains all workflow of audit in detail.
(iv) It can be important defence for auditor if action
for negligence is brought against him
subsequently.
(v) It shows weakness in clients system, thus
helpful in formulating audit programs in
future.
(vi) It helps in follow up of work done.
(i) Provides guidance to audit staff.

Important
advantage of (ii) Responsibility of work can be fixed as documentation kept is signed
working papers and checked by appropriate personnel.
(iii) Act as a defence if charge of negligence is brought against him.
(iv) Important for future planning.
(v) Contains basis for forming an opinion.
(vi) Helps the senior to review work done by assistants.
Auditors property Ownership & custody of working papers rests
Guidance note
on auditors right with auditor. Thus, it is auditor’s property.
if client & others Rule of As per SA-200 ,auditor should not disclose any
seek access to his confidentiality Confidential matter relating to client to any 3T
document party unless it is
Permitted by client his legal /Professional
duty to disclose
Can he show working 3rd parties No, otherwise it will violate rule
papers to including other of confidentiality as above.
auditors
Client (i) Client doesn’t have any right
to access audit W.P. kept by
auditor.
(ii) But auditor may, at his
discretion, show some
complete W.P. to client.
(iii) If he shows W.P. to client
itself, rule of confidentially
does not arise at all.
SA-240 wef 1/4/2009: The auditor’s responsibility relating to fraud in an audit of financial statements
Auditor’s objective 1. To identify , assess the risk of material misstatements(ROMM) in f

st. due to fraud
2. To obtain SAAE about assessed ROMM THROUGH DESIGNING
APPROPRIATE RESPONSES
3. To respond appropriately to identified frauds
Nature of frauds  Frauds in financial statements are of two types:

1. Fraudulent financial reporting (eg window dressing or kiting or
overstatement/ understatement of accounts)
2. Misappropriations of assets(eg teeming and lading, embezzlement
etc)
 Frauds involve sophisticated , carefully planned schemes,
intentional act of deception to gain unjust or illegal advantage
Responsibility of
(g) Primary responsibility of prevention, detection & correction
management
misstatements and frauds is that of management and TCWG
Responsibility of
(d) Auditor is expected to provide opinion on true & fair view of financial
AUDITOR
statements and for that he has to obtain reasonable assurance that fst
are free from ROMM
(e) He cannot frame such opinion if he is not able to confirm/dispel the
possibility of existence of fraud & error in financial statements. He has
to be alert or has to maintain professional skepticism throughout the
audit.
Thus incidental/ secondary objective is detection of misstatement in
financial statements.
Audit procedures While auditing, auditor notices any material misstatements or frauds in
fst, he shall expand his audit procedures to know the impact of fraud .
For its correction, he will communicate the matter to management /
TCWG
If management take corrective If no corrective action is taken
action , then ok by management / TCWG , then
auditor shall show his impact
on the audit report regarding
materiality and pervasiveness
of the frauds
SA 250 (REVISED) " CONSIDERATION OF LAWS AND REGULATION IN AN AUDIT OF F.St.
Auditor's Responsibilities
ic specific Auditor procedure in Indications that cast

Reporting responsibilities
ponsibilities Responsibilities w.r.t. case any Non doubts on non
compliance of laws
Compliance identified
and regulations
suspected
Law & Other Law & To TCWG Regularity &
Auditor Report
tain general Regulation Regulations that Enforcement  Investigations by
derstanding having a direct do not affect Authority regulatory authorities
effect on  Obtain understanding  Payment of fines or
amount and
egal & determination Material Affect Unable to penalties
disclosure in F.S. of all applicable the
of material on F.S Conclude die to required  Payments for unspecified
gularity but compliance Act by law
amount and Limitation services or consultants,
amework disclosures in with which may  circumstances in which imposed by related parties etc
pplicable F.S. be fundamental it is occurred.  Excessive sales commission
ompliance by operating  Evaluate possible of agent's fees.
Q/A
ntry with that aspects effects on F.S.  Purchasing at prices above
amework.  Discuss with Mngt & or below market price
Mngt.
 Unusual payments in cash
To obtain TCWG Circumstances
 Payments without proper
Sufficient &  Obtain legal advice
To perform control documentation
Appropriate wherever required Q/D
Limited  Unauthorized transactions
audit procedures: Consider or improperly recorded
Evidence  Inquiring of mint the effect transaction
& on audit  Adverse media comment
 Matters involving non compliance report
 inspecting
 If TCWG is involved, communicate to Higher
To ensure correspondence
Level, if any
compliance with relevant  Otherwise, obtain Legal Advice
Licensing/
Regulatory
authority
To Identify
instances of non
compliance
Obtain Written Representation that all instances of non

compliance or suspected non-compliance have been
disclosed to auditor
SA 260 (REVISED) COMMUNICATION WITH TCWG :
Meaning of Auditor's Responsibilities Communication Process Factors affection Mode of

Management & TCWG
Communication
TCWG Determine Matters to be

the communicated  in writing when oral
appropriate communication is not  Whether matters has
Persons with person to been strictly resolved?
adequate.
responsibility for whom  Whether management
communicate (a) Auditor's responsibility in  on timely basis
overseeing the has previously
is made relate to F.S Audit
strategic communicated the
(b) Planned scope & timing
directions &  need to Evaluate adequacy of
of audit. matter
obligations communicate
(c) Significant findings from
communication for the  Size, operating
related to with purpose of the audit.
audit w.r.t. structure , legal
Accountability Governing
 Accounting policies structure of
body. if If not adequate, evaluate
 Accounting Estimates organisatiion
Management communicates its effect, on the nadir's
 Material weakness in I.C.  Previous or ongoing
Person with with subgroup. assessment of the risk of
 Matters discuss with communication
executive  if all of TCWG material misstatement.
Mngt. between TCWG and
responsibility for are involved
 Other significant matters auditor
conduct of managing the
entity’s operation entity the (d)Statement with respect
responsibility for matters need to compliance of ethical
not to be requirements regarding
conduct of entity
communicated independence.
again
SA-265 "COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO TCWG & MANAGEMENT"
Meaning of deficiency in Auditor's responsibilty

internal control
(a) Inability of I.C. to

prevent detect & Communication of deficiencies in Internal Control
correct misstatement Identification of deficiencies in Internal Control
or
(b) Absence of control
Determine whether individually or in
necessary to prevent
combination they constitute significant Mode of communication
misstatements Content of communicator
deficiencies
a)Description of
In writing via LETTER OF
deficiencies
WEAKNESS
b)Explanation of shier
Via LETTER OF
potential effect
c)Sufficient informative to
To TCWG To Mngt. explain
 that purpose is to
express an opinion
Significant deficiencies Significant deficiencies  I.C. is evaluated to
and other deficiencies design further audit
procedures
“SA” RELATED TO AUDIT EVIDENCES
SA 500-580
SA 500 AUDIT EVIDENCES
SA 520 SUBSTANTIVE ANALYTICAL

PROCEDURES
SA 530 SAMPLING
SA 580 MANAGEMENT REPRESENTATION

LETTERS
SA 505 EXTERNAL CONFIRMATION REQUESTS
SA 501 SPECIFIC AUDIT CONSIDERATIONS-
INVENTORY, CLAIMS AND LITIGATIONS,
SEGMENT INFORMATION
SA 510 INITIAL AUDIT ENGAGEMENT
SA 540 AUDITING ACCOUNTING ESTIMATES
SA 550 AUDITING RELATED PARTIES

TRANSACTIONS
SA 560 SUBSEQUENT EVENTS
SA 570 GOING CONCERN ASSUMPTION

SA 500: AUDIT EVIDENCES
Meaning Audit Evidence refers to any information obtained by the auditor so that
he can draw conclusions & express opinion financial statements.
It is Information used by the auditor in arriving at the conclusions on
which the auditor’s opinion is based. Audit evidence includes both
information contained in the accounting records underlying the financial
statements and other information.
Sufficient and (a) Auditor should obtain Sufficient & Appropriate evidences.
Appropriate
(b) Sufficiency refers to quantum of audit evidence.
Evidence
(c) Appropriateness refers to quality of audit evidence.
Types of Audit According 1. Visual For example, observing stock

to nature taking conducted by client's staff.
Evidence
2. Documentary For example, Having a copy of
loan agreement, sales bills etc.
3. Oral For example, discussion with

management regarding current
trends in business.
According 1. Internal Which is created within client’s

to source organisation? For example., copies
of bills given to customers
employee’s wage sheets etc.
2. External This originates outside client’s

organisation. For example,
purchase invoice, bank statement
According etc.
to impact 1. Persuasive
2. Conclusive Leads to conclusion by implication

Provides complete assurance
3. Confirmatory Provides additional corroborative
information
Difference Basic Internal External
between Internal
& External Meaning Created & retained within Originates outside client's
Evidence client's organization . organization.
Source Copies of sales invoice, Purchase invoice, bank

wage sheet statements
Reliability Less reliable More reliable
Reliability of (a) External evidence is generally more reliable than internal evidence.
Evidence (b) Evidence obtained directly by auditor is more reliable than that
obtained through client.
(c) Written Evidence is more reliable than oral evidence.
(d) Internal Evidence is reliable if related internal controls are good.
(e) Evidence Provided by original documents is more reliable than those
provided by photocopies or digitalized documents.
Consistency of (i) The audit evidences, obtained through different sources or of

Evidence different nature should be consistent.
(ii) If there is inconsistency among different relating to a single item,
auditor should perform additional procedures to resolve
inconsistency.
Compliance procedures are performed to check
Procedures to (i) Compliance
obtain Evidence designing, operating effectiveness and continuity of\
Procedure
I.C. system. Auditor performs compliance procedures
in respect of the following assertions relating to
internal control system :
Existence (Design) that the internal control exists.
Operating that the I.C. system is
effectiveness operating effectively.
Continuity that the internal control has
been so operated throughout
the period.
(ii) Substantive Substantive procedures are performed to check

Procedure completeness, accuracy and Validity of transactions
and balances. Auditor performs substantive
procedures in respect of following assertions relating
to data produced by accounting system :
Measurement That a transaction is recorded

in the proper period at proper
amount.
Presentation and An item is disclosed, classified

disclosure and described as per
recognized accounting policies
and relevant statutory
requirements, if any.
Completeness That there is no unrecorded

asset or liability or transaction.
Occurrence That a transaction or event

place which pertains to the
entity during the relevant
period.
Valuation That an asset or liability is

recorded at an appropriate
carrying value.
Existence That an asset or a liability
exists at a given date.
Rights and That an asset is a right of the

obligations entity and liability is an
obligation of the entity at a
given date.
*WHILE CARRYING OUT SUBSTANTIVE PROCEDURES , ARRSERTIONS USED BY THE

AUDITOR CAN BE DIVIDED INTO 3 CATAEGORIES:
ASSERTIONS ABOUT ASSERTIONS ABOUT ASSERTIONS ABOUT

CLASS OF YEAR END BALANCES PRESENTATION AND
TRANSACTIONS AND DISCLOSURE
EVENTS OF CURRENT FY
Occurrence Existence Occurrence

Completeness Rights and obligations Rights and obligations
Cut-off Completeness Completeness
Accuracy Valuation Classification
classification allocation Accuracy
valuation
AUDIT TOOLS AND TECHNIQUES
AUDIT PROCEDURES
Risk Assessment Other Procedures

Procedures (SA 315)
Compliance Procedure/Test of control Substantive procedure

To test whether I.C. have been designed To test completeness,
and these are operating effectively accuracy & validity of
throughout the period data produced by
accounting system. It
consists of
Test of Details Analytical review procedures i.e.,

analysis of significant ratios & trends.
SUBSTANTIVE ANALYTICAL PROCEDURES
VOUCHING: VERIFICATION:
Testing transactions testing balances
(vouching) (verification)
RISK Audit procedures performed to obtain understanding of entity and its
ASSESSMENT environment and IC system to identify and assess the ROMM and it includes
PROCEDURES the following:
Compliance & substantive procedures are performed by following methods/ tools

/ tecniques :
1. Inspection Inspection consists of examining records documents

or tangible assets.
(i) documentary evidence originating from and held
by third parties,
(ii) documentary evidence originating from third
part and held by the entity;
(iii) documentary evidence originating from the
entity and held by third parties; and
(iv) documentary evidence originating from and held
by the entity.
2. Observation (i) Observation consists of witnessing a process or

procedure being performed by others.
(ii) For example, the auditor may observe the
counting of inventories being performed by
client's personnel.
3.Inquiry and (i) Inquiry consists of seeking appropriate

Confirmation information from knowledgeable persons inside
or outside the entity.
(ii) Confirmation consists of the response to an
inquiry.
(iii) For example, the auditor requests confirmation of
receivables by direct communication with
debtors.
4. Computation Computation consists of checking the arithmetical

accuracy of records or performing independent
calculations.
5. Analytical Analytical review refers of studying significant ratios

Review and trends and investigating unusual fluctuations.
6. Reperfor- It means performing some work which had already

mance been done by management. For Eg.- Preparing Bank
Reconciliation statement.
SA-520(Revised) ANALYTICAL PROCEDURES (on or after April 1,2010)
Definitions  Means evaluation of financial information.

 Through analysis of relationship.
 Among both financial & nonfinancial data.
Nature of 1. It includes comparison with :

Analytical
(a) Comparable information for prior periods.
Procedures
(b) Anticipated results like budgets or forecasts.
(c) Similar industry information.
2. These can be performed by either simple comparison or complex
analysis (advanced statistical techniques)
Objectives of (a) Obtain evidences when using Substantive analytical Procedures &.
Auditor w.r.t.
(b) Design & perform analytical Procedures near end of audit to conclude
Analytical
whether financial statements are consistent with auditors
Procedures
understanding of entity.
How to carry 1. Suitability of (1) He should determine suitability of SAP for a

out SAP ? particular SAP particular item.
(2) These are generally adopted for those
transactions or accounts or data that tend to be
predictable(continuous) over time and those data
which can be segregated (disaggregation)
The determination of the suitability of particular
substantive analytical procedure is influenced by the
nature of the assertion and the auditor’s assessment
of the risk of material misstatement.
For example, if controls over sales order processing
are weak, the auditor may place more reliance on
tests of details rather than on substantive analytical
procedures for assertions related to receivables
2. Availability It is influenced by the following :
Relevance and
(a) source of information available (for example it is
Reliability of
more reliable if obtained from some independent
Data to be
source)
compared
(b) Comparability of information available (Entities
should be comparable)
(c) Relevance of the information available (budgets
should be realistic).
(d) Control over Preparation of information (if last
year’s financial statements are audited)
3. Development (1) He shall develop an expectation of recorded

of expectations values.
by addressing
“what may go (2) Their expectations should be sufficiently precise
wrong” or any so that any misstatement can be easily identified.
inherent risk
4. Difference of (1) SA 330 requires the auditor to obtain more
Recorded persuasive evidence if he identifies high risk.
amount from
(2) Thus, for risky items, acceptable differences
expected
should be low.
values that is
acceptable (3) If difference is more than acceptable difference,
he shall further investigate to rule out the
possibility of misstatement.
Factors to be
considered for 1.Availability of Data The availability of reliable and relevant data
carrying out will facilitate effective procedures.
SAP
degree of disaggregation in available data can
2.Disaggregation
directly affect the degree of its usefulness in
detecting misstatements
3.Account Type Substantive analytical procedures are more
useful for certain types of accounts than for
others.
4.Source Some classes of transactions tend to be more

predictable because they consist of numerous,
similar transactions, (e.g., through routine
processes). Whereas the transactions recorded
by non-routine and estimation are often
subject to management judgment and
therefore more difficult to predict
5.Predictability Substantive analytical procedures are more

appropriate when an account balance or
relationships between items of data are
predictable (e.g., between sales and cost of
sales or between trade receivables and cash
receipts). A predictable relationship is one that
may reasonably be expected to exist and
continue over time
Substantive analytical procedures may be
6.Nature of Assertion
more effective in providing evidence for some
assertions (e.g., completeness or valuation)
than for others (e.g., rights and obligations).
Predictive analytical procedures using data
analytics can be used to address completeness,
valuation/measurement and occurrence.
When inherent risk is higher, we may design
7.Inherent Risk or
tests of details to address the higher inherent
“What Can Go Wrong”
risk. When significant risks have been
identified, audit evidence obtained solely from
substantive analytical procedures is unlikely
to be sufficient.
Techniques to (1) Trend analysis ( comparison with prior period)
carry out SAP
(2) Ratio analysis (inter firm or intra firm)
(3) Reasonableness tests ( comparison with non financial aspects of audit
period)
(4) Structural modeling ( modeling tool constructing a statistical model
from financial or non financial data of previous year to predict current
year account balances)
Analytical (5) He shall design and perform analytical procedures near the end of
Procedures audit.
that assist
(6) This way he can conclude whether financial statements are consistent
when forming
with his understanding of entity.
overall
conclusion (7) Thus, it helps him in forming opinion on financial statement .
Investigating If he identifies fluctuations or a significant difference between recorded &

results of expected values, he shall investigate by
Analytical
(a) Inquiring of management and thereafter obtaining evidences to
Procedures
corroborate the same,
&
(b) Performing other procedures as necessary in the circumstances (for eg:-
If management’s responses are not available or reliable).
Difference in Application of SAP may be different as

SAP approach
 Different accounting approach: business entities follow accrual
for business
entities and basis where as PSU’s follow cash basis
non business  Availability of data: data are published for business units but are
public sector
confidential for PSU’s
entities
TEST CHECKING/SAMPLING- SA 530
Test checking means examining less then 100% of items in the

Meaning
population.
Audit sampling refers to application of audit procedures to less than
100% of the items within a population of audit relevance such that all
sampling units have a chance of selection in order to provide auditor
with reasonable basis on which to draw conclusions about the entire
population. Sample so selected out of population shall be a true
representative of the population. however the population from which
sample is to be taken should be appropriate, reliable and complete.
While designing audit sample, auditor shall consider the purpose of

audit procedures and characterstics of the population from which sample
will be drawn on basis of stratification( dividing heterogenous
population into homogeneous groups) and value weighted selection(
selection on basis of monetary amount)
Auditor shall determine the sample size sufficiently to reduce the audit
sampling risk to a acceptably lower level and further shall select items in
such a way that each sample unit has a equal chance of selection
(i) Auditor usually doesn’t have enough time for detailed 100%
Why it is
required examination.
(ii) Number of transactions / Balances are generally very high.
(iii) Mostly items are identical.
(iv) If, on basis of compliance procedures, it is concluded that internal
control system very effective, there is no need for detailed 100%
examination.
(i) Checking bank reconciliation statement.
Examples where
it may not be (ii) Few transactions, very high in amount.
suitable (iii) Few transactions with related parties.
(iv) Few transactions, having unusual nature.
(v) Disclosure requirement of accounting standards.
(vi) Compliance with statutory provision.
(vii) Significant entries near/at year-end.
(viii) Few transactions involving foreign exchange.
(ix) When internal controls are very weak.
The factors that should be considered for deciding upon the extent of
Factors deciding
extent of checking on a sampling plan are following:
sampling plan (i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
(v) Degree of the desired confidence.
(i) Thorough The flow of transactions should be completely studied
Precautions
study of before adopting sampling.
while conducting
accounting
test checking
system
(how to make
sampling (ii) Thorough Proper study of internal control system helps the
effective) study of I.C. auditor to devise further test check plans.
System
(iii) Areas not Auditor should take care to ensure that detailed
suitable for complete checking is done for required items (as
sampling above).
(iv) Proper Proper plan for test checking should be devised &
planning explained to audit staff.
(v) Classificatio Transactions & Balance should be classified &
n Stratified, if required.
(vi) Sample size The number of items in a sample should be
appropriately determined.
(vii) No bias Sample should be chosen in unbiased way.
(viii) Analysis Errors found in sample should be analysed properly.

of
misstatement
Meaning  Sample size & composition are decided on basis of
Type-I
Judgmental auditor’s experience.
sampling  This is a traditional method of sampling.
Example He may decide to check entries in July November &
February and March during audit of certain year &
out of remaining months in next year (Rotation of
Emphasis).
Advantages  Simple to operate.
 Traditional approach thus understandable by audit
staff with the little expertise.
 Rotation of emphasis is done.
 Normally year end transactions are checked in
detail to ensue whether cut off procedures are
adequate.
Limitations (i) Unscientific method
(ii) There may be personal bias. .
(iii) Sample may not be true representative of
population
(iv) Not suitable if situations changes materially (due
to inadequacy of experience of auditor in that
particular area).
Meaning  Sample is chosen by applying certain mathematical
Type-2 Statistical
& statistical devices.
sampling
 It is generally based on probability theory.
Advantages (i) More scientific.
(ii) No personal bias.
(iii) Results of sample can be evaluated & projected in
more reliable way.
(iv) Widely accepted way of sampling.
Limitations (i) Complex to operate.
(ii) Not suitable for audit staff having no knowledge
of statistical technique.
(iii) It may be tin consuming exercise.
METHOD FOR SELECTING THE SAMPLE

Meaning  Method means the way in which sample is chosen.
 Method should be such that sample can be expected to be true
representative, of population.
 For this, it is necessary that each item in population have equal

chance of being chosen.
 There are basically two methods by which sample can be selected.
METHOD
Random sampling Interval/systematic sampling
Simple random Stratified random Block Cluster
Meaning (i) All items have equal chances of selection.

Method-I Random
Sampling (ii) It may involve use of random number table.
(iii) It can be of two types i.e. simple random or
stratified random.
(1) Simple (i) Each item of population (for Eg. :- each debtor) has
Random equal chance of selection.
Sampling (ii) It can be chosen by
 use of random number table.
 help of computer.
 Picking up number in a random way.
(iii) Suitable for Homogeneous population
(population having similar items). For example:-
Debtors ranging from Rs. 5,000 to 15,000.
(2) Stratified  Stratification means dividing a heterogeneous
Random population into more homogeneous sub
Sampling populations.
 Sample is taken from each sub population
(stratum).
 It is useful for diversified population.
 For Eg.:- Debtor in range of 20 Rs. to 5,00,000 Rs.
where it can be divided into stratum as following.
A RS. 20 TORS. 50000
B RS. 50000 TORS. 100000
C RS. 100000 TORS. 300000
D RS. 300000 TORS. 500000
 Now, random sample is chosen from each
stratum.
 Its results are more appropriate in case of
population having different characteristics.
 It is simply an extension of simple random
sampling.
 However, it requires special attention to judge
contents of each stratum.
Meaning  Items are chosen in such a way that there is
Method-2
Interval/Systematic constant interval between selections.
Sampling  The first interval has random start.
 Interval may be based on
(i) Certain number (Eg.:- every 10th sales invoice),
(ii) (Monetary total (Eg. every increase of Rs.
10,000 in cumulative wage summary)
 It is used in case when population does not
correspond to a particular trend.
 It can be of two types - block & cluster.
(i) Block  Selection of a definite block of consecutive items.
Sampling  For Eq.:- first 50 purchase invoice for month of
November.
 This is a simple method like judgmental sampling.
 However, it may be biased at times.
(ii)Cluster (i) Population is divided into groups called Cluster.
Sampling (ii) A number of clusters are selected on random
basis.
(iii) For Eg. 1000 sales invoices are divided into 10
clusters having 100 items each, then 3rd, 6th & 9th
clusters are chosen.
(iv) Less effective than random sampling since each
item is not randomly chosen.
Other ways to choose a sample:
1. Monetary unit sampling (also called as value weighted selection)
2. Haphazard selection (most inappropriate method- no standard way of sampling)
FACTORS AFFECTING SIZE OF SAMPLE

(i) Tolerable Error
Meaning
(ii) Expected Error
(iii) Sampling Risk
 Maximum Error in population that auditor is ready to accept for a
1. Tolerable
Error given sample size.
 If smaller tolerable error, big sample size is needed.
In compliance procedure Maximum rate of deviation from established
procedure of I.C.
In substantive procedure Maximum monetary error.
 If auditor expects possibility of error in population, larger sample size

2. Expected Error
is required.
 If population is expected to be free of misstatement, smaller sample
size is needed.
1. It arise from possibility that
3. Sampling
Risk  Auditor’s conclusion based upon sample,
 May be different from,
 Conclusion that would have been reached,
 If same audit procedures were applied entire population.
2. It is always in sampling.
3. If acceptable sampling risk is low, large sample is needed.
4. It arises in both compliance procedures & substantive procedure.
In Risk of under Based upon sample, auditor concludes

Compliance reliance that I.C. system is not adequate,
procedure however actually it is not so.
Risk of over Based upon sample, auditor concludes
reliance that I.C. are very effective & thus
decides to rely &n them, however it is
not so in reality.
In Risk of incorrect Based upon sample, auditor concludes
Substantive Rejection that transactions/balances are
procedure materially misstated, whereas in fact
these are not.
Risk in incorrect Based upon sample auditor concludes
Acceptance that transactions/balances are not
materially misstated while in fact these
are misstated.
Sampling Risk (at a glance)
In Compliance Procedure Risk of Under reliance Risk of over reliance

In Substantive Procedure Risk of Incorrect rejection Risk of incorrect acceptance
These both lead to more These both may lead to

Effect
work to be performed by erroneous opinion by
auditor. However audit auditor.
report is not erroneous.
1. Surprise checks should be considered as a desirable part of each audit.
Recommendations
by ICAI 2. The areas over which surprise checks should be-employed would
depend upon the circumstances of each audit but should normally
include:
(a) Verification of cash and investments;
(b) Test-verification of stores and stocks and the records relating
thereto;
(c) Verification of books of prime entry and statutory registers.
3. The frequency of surprise checks may be determined by the auditor in
the circumstances.
4. The results of the surprise checks should be communicated to the
management.
5. The auditor should satis1himself that adequate action is taken by the
management on the matters communicated by him.
6. It is not necessary in all cases for the results of the surprise checks to
be included in the auditors report on the accounts. They should,
however, be included if in the opinion of the auditor, they are
material and affect a true and fair view of the financial statements.
Q. Mention, any four, areas where surprise check can significantly improve effectiveness of
an audit. (May2008)
Ans.
Surprise checks should be considered as a desirable part of each audit. The areas over which
SA 580 (REVISED)- WRITTEN REPRESENTATIONS
(w.e.f. 1st april, 2009)
Scope of this This standard on Auditing (SA) deals with the auditor's responsibility to
SA obtain written representations from management and TCWG.
Written  Similar to response to inquiries, written representations are audit

Representations evidence
as Audit
 Although written representations provide necessary audit evidence,
Evidence
they do not provide sufficient appropriate audit evidence on their
own about any of the matters with which they deal.
 Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit
evidence that the auditor obtains.
Objectives of  To obtain written representations from management that

auditors management believes that it has fulfilled the fundamental
responsibilities.
 To support other audit evidence by means of written representations,
if determined necessary by the auditor or required by other SAs; and
 To respond appropriately to written representations provided by
management or absence thereof.
Written A written statement by management provided to the auditor to confirm

representations certain matter or to support other audit evidence. Written
representations in this context do not include financial statements, the
assertions therein or supporting books and records.
from Whom That auditor shall request written representations from management
with appropriate responsibilities for the financial statement and
knowledge of the matters concerned.
Written Preparation and Written representation that mgt. has fulfilled its
Representations Presentation of responsibility for the preparation and presentation of
about the Financial the financial statements
Management's Statements
Responsibilities
Information Written representation that mgt has provided the
Provided to the auditor with all relevant information agreed in the
Auditor terms of the audit engagement and that all
transactions have been recorded and are reflected in
the financial statements.
Other Written Other SAs require the auditor to request written representations. If, in
Representations addition to such required representations, the auditor determines that it
is necessary to obtain one or more written representations, the auditor
shall request such other written representations.
Date of and The date of the written representations shall be as near as practicable to,
Period (s) but not after, the date of the auditor’s report on the financial statements.
Covered by The written representations shall he for all financial statements and
Written period(s) referred to in the auditor’s report.
Representations
Form of Written  The written representations shall be in the form of a representation

Representations letter addressed to the auditor.
 If law or regulation requires management to make written public
statements about its responsibilities, the relevant matters covered by
such statements need not be included in the representation letter.
Doubt as to the Doubt to the  If the auditor has concerns about the competence,
Reliability of Reliability of integrity, ethical values or diligence of
Written Written management, the auditor shall determine their
Representations Representations effect on the reliability of representations (oral or
and Requested written) and audit evidence in general.
Written
Representations  In particular, if written representations are
No Provided inconsistent with other audit evidence, the auditor
shall perform audit procedures to attempt to
resolve the matter.
 If the auditor concludes that the written
representations are not reliable, the auditor shall
take appropriate actions, including determining
the possible effect on the opinion.
Requested If management does not provide one or more of the

Written requested representation, he shall discuss the matter
Representations with mgt. and re evaluate the reliability and integrity
Not provided of mgt. He shall consider its effect on his audit report
as well.
Effect on audit The auditor shall disclaim an opinion on the financial

report statements if:
(a) The audit concludes that there is sufficient doubt
about the integrity of management such that the
written representations are not reliable; or
(b) Management does not provide the written
representations.
Situations 1. Direct verification by auditor not possible

where MRL is
2. There are proper internal check and control systems
justifiable
3. MRL is in agreement with the records primafacie and are
appearing to be reliable by auditor
4. Items are of technical nature outside the reach of the auditor and
the expert preparing such certificate / MRL are reliable and
reputed and trustworthy
SA 505 (REVISED) EXTERNAL CONFIRMATION
(on or after April 1, 2010)
External  Audit Evidence obtained

confirmation
 as a direct written response
 to the auditor from a third party
 in paper/Electronic/other form
External  He shall maintain control

Confirmation
 Over external conformation requests
Procedures
 including following :
(a) Determining the information to be confirmed,
(b) Selecting the appropriate third party,
(c) Designing the confirmation requests (Properly addressed also),
(d) Sending the request including follow-up requests if required.
Areas where (a) Bank balance and Other confirmation from bankers
External (b) Account Receivable/Account Payable Balance
Confirmation (c) Stock Lying with Third Parties
may be (d) Property Title Deed held by third parties
obtained (e) Investments Purchased but delivery not taken
(f) Loan from Lenders
(g) Terms of agreement to Transaction with Third Parties
Mgt. refusal (A) In such case, he shall
to allow the
(i) Inquire mgt’s reasons for refusal and assess their validity,
auditor to
send a (ii) Evaluate the possibility of risk of material misstatement and
confirmation
(iii) Perform alternative procedures.
request
 If mgt's refusal in unreasonable, or
 Auditor unable to perform alternate procedures
 Then he shall communicate with TCWG and consider effect on his
report.
Reliability of (1) If he has doubts about reliability of response, he shall obtain further
Response evidences to resolve doubts.
(2) If response if found to be unreliable, it may indicate fraud risk factors.
He shall consider its effects on NTE of other procedures.
Form of Positive  It asks the third party (Confirming party).

confirmation confirmation
 to replay to the auditor
requests requests
 in all cases
 Either by indicating agreement/disagreement
with the given information
 Or by asking third party to provide information
 A response to positive Confirmation request is
ordinarily expected to be reliable.
 If replay to a request in not received in reasonable
time, he may send and additional confirmation
request.
Negative  It asks the third party

confirmation
 to respond directly to the auditor
requests
 only if there is disagreement
 with the information provided in the request.
 It is considered to be less persuasive than the
positive confirmation request.
 Auditor should use them only if all of follosing are
present :
(a) Risk of misstatement is low
(b) I.C. is effective
(c) Item contains small amount
(d) Low exception rate is expected
(e) No reason to believe that recipient may
disregard the request.
Non-response (1) It means failure of third party to respond or the request returned
to positive undelivered.
confirmation
(2) In case of each non-response he shall perform alternate procedures.
request
(3) However, if the determines that response in necessary & thus alternate
procedures do not provide sufficient appropriate evidences, he should
determine its effect on audit.
Exception (1) It means a response indicating disagreement of third party.

(2) Auditor shall investigate exceptions to determine whether these are
indicative of misstatement.
SA-501 (REVISED) AUDIT EVIDENCE-SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
Audit Objective
Auditor's Objective
To Obtain Sufficient appropriate audit Evidence
Inventory Litigation and Claims Segment Information
Presentation & Disclosure

Existence &
in accordance with FRF
Condition Completeness
Audit Procedures When inventory is material to the F.S., the auditor shall obtain
W.R.T. Inventory sufficient appropriate audit evidence regarding the existence
and condition of inventory by:
(a) Attendance at physical inventory counting, unless
impracticable, to:
 Evaluate mngt. instructions & procedures for
recording & controlling the results of the entity's
physical inventory counting;
 Observe the performance of management's count
procedures;
 Inspect the inventory;
 Perform test counts;
(b) Performing audit procedures over the entity's final
inventory records to determine whether they accurately
reflect actual inventory count results.
Procedures in Special Circumstances
(a) Auditor unable make or observe some physical counts on an alternative date,
to attend and perform audit procedures on intervening transactions
Inventory
Count
(b) Attendance at  Perform alternative audit procedures to obtain S.A.A.E.
inventory regarding existence and condition of inventory.
count is  Alternative Audit Procedure. Inspection of
impracticable documentation of the subsequent sale of specific
inventory items acquired/purchased prior to physical
inventory counting.
 If it is not possible to do so, modify the opinion in the
auditor's report in accordance with SA 705.
(c) Inventory under Obtain S.A.A. E. by performing the

custody and following
control of Third (a) Request confirmation from
Party third party
(b) Perform Inspection/other
audit procedure.
If doubt arises over the
integrity/Objectivity of third party,
perform the following:
(a) Attending/arranging for
another auditor to attend,
the third party's physical
counting of inventory, if
practicable.
(b) Obtaining service auditor's
report, on the adequacy of
the third party's I.C. w.r.t.
proper count and safeguard
of inventory.
(c) Inspecting documentation,
for example, warehouse
receipts.
(d) Requesting confirmation
from other parties when
inventory pledged as
collateral.
Audit Procedures Inquiry: of Mngt. & others within entity.
w.r.t. Litigation and  Review-minutes of meetings of TCWG, communication
Claims between entity & external legal counsel.
 Review-Legal expenses account
Procedures in Special (a) Auditor's Seek Communication directly with
Circumstances Assessment of Entity's External Legal Counsel
Risk of material If Jaw/regulation or respective legal
misstatement professional body prohibits entity's
w.r.t.existence of external legal counsel from
Litigation or communicating directly with the
Claim. auditor, the auditor shall perform
alternative audit procedures.
(b) Management
Refuses to Permit
auditor to
communicate
(c) External Legal Modify Opinion in accordance with
Counsel Refuses SA 705
(d) Auditor unable
to collect SAAE
from alternate
procedures.
Written (a) All known actual/possible Litigation & Claim affecting
Representation from FS have
Mngt. and TCWG (b) Appropriately accounted for and disclosed in
accordance with the applicable FRF.
Audit Procedures The auditor shall obtain sufficient appropriate audit evidence
w.r.t. Segment regarding the presentation and disclosure of segment
Information information in accordance with the applicable financial
reporting framework by:
(a) Obtaining an understanding of the methods used by
management in determining segment information, &
 Evaluating whether such methods are likely to result
in disclosure in accordance with the applicable FRF;
and
 Where appropriate, testing the application of such
methods; and
(b) Performing analytical procedures or other audit
procedures appropriate in the circumstances.
SA – 510 (REVISED) "INITIAL AUDIT ENGAGEMENTS- OPENNG BALANCES"
Meaning of in initial audit engagement : An Engagement in which E.S. for prior period are not audited or were
audited by predecessor auditor Meaning of opening balance A/c balance that exist at beginning of period &
also includes disclosures exist at beginning of period.
Audit Procedures
Consistency Modification Opening Balance

of in Predecessor
Accounting Auditor's
Policies Report  Read most recent F.s. and auditor report
thereon.
 Obtain S.A. audit evidence w.r.t existence of
Evaluate the any material misstatement
Obtain effect of  Determining application of appropriate
sufficient & modification accounting policies.
appropriate  If any misstatement detected perform
Audit additional procedures to determine their
Evidence effect on current Period financial statements.
In assessing risk
 If misstatement exists in current period F.S.
of material
communicate to Mngt & TCWG.
misstatement in
w.r.t. current period
consistent F.St
application
or Properly
Unable to Contain material
accounting Modification obtain misstatements
& disclosure remains sufficient not properly
for changes. relevant & & accounted /
material for Appropria disclosed in
current period te Audit current year F.S.
Inconsistency F.S. Evidence
exists or
changes not
properly
Modify Current Qualified /
accounted or
Year Audit Disclaimer
disclosed
Report
accordingly
Qualified / Adverse Report

SA-540 "AUDITING ACCOUNTING EXTIMATES, INCLUDING FAIR VALUE ACCOUNTING
ESTIMATES AND RLATED DISCLOSURES" (W.E.F. 01.04.2009)
Meaning & An accounting estimate may be defined as "An approximation of a

Nature of monetary amount in the absence of a precise means of
Accounting measurement". This term is used for an amount measured at fair
Estimates value where there is estimation uncertainty.
The degree of estimation uncertainty affects the risks of material
misstatement of accounting estimates.
[Estimation Uncertainty: The susceptibility of an accounting estimate
and related disclosures to an inherent risk of precision in its
measurement].
A difference between the outcome of an accounting estimate and the
amount originally recognized in the financial statements does not
necessarily represent a misstatement of the financial statements. This
is particularly the case for fair value accounting estimates.
Objective of To obtain sufficient appropriate audit evidence whether:
auditor (a) Accounting estimates, including fair value accounting
estimates are reasonable; and
(b) related disclosures in the financial statements are adequate.
Risk Assessment Auditor shall obtain an understanding of the following in order to
Procedures and identify and assess the risks of material misstatement for accounting
Related Activities estimates:
(a) The requirements of the applicable financial reporting
framework.
(b) How management identifies those transactions, events and
conditions that may give rise to the need for accounting
estimates.
(c) The estimation making process adopted by the management
including:
 The method, including where applicable the model used
in making the accounting estimates.
 Relevant controls
 Where management has used an expert.
 Where there has been or ought to have been a change
from the prior period in the methods for making the
accounting estimates, and if so why, and
 The auditor shall review the outcome of accounting
estimates included in the prior period financial
statements.
Measurement and  The auditor shall obtain sufficient appropriate audit evidence
Disclosures about whether the accounting estimate and their disclosure in the
Related to financial statements is appropriate.
Accounting  For accounting estimates that give rise to significant risks, the
Estimates auditor shall check adequacy of the disclosure of their estimation
uncertainty in the financial statements.
Written The auditor shall obtain written representations from
Representations management whether management believes significant
assumptions used by it in making accounting estimates are
reasonable.
SA 550-(REVISED) "RELATED PARTIES"
Auditor's procedures Documentation

Meaning of Related Party (RP)
A RP as defined in applicable
General Duties Specific procedures in Auditor's Procedures in case of Name of
FRF (A S 18),or Where
case FRF establishes identification of unidentified / identified RP
applicable FRF establishes Obtain an understanding of RP accounting & Disclosure undisclosed RP or RP
minimal or no RP Relation and Transactions: for RP Relationship & transaction Nature of RP
requirements: -Promptly communicate
transactions relationship
- To recognize Fraud Risk relevant info to other
a. A person/entity having factors members of engagement
control/ significant influence Perform audit procedures
team.
reporting entity to Identify Assess &
- To conclude whether F.S. in
Respond to Risk of -Where FRF establishes RP
so far as they are affected by
b. Entity over which reporting Material Misstatement requirements:
those relations and
entity has control/ significant transactions achieve
influence and -Request mgt to identify all
 ture and fair presentation Evaluate whether the transactions with newly
c. Entity under common Identified RP relationship identified RP for further
and
control with reporting entity evaluation.
 not misleading and Transactions have
through been appropriately
accounted for and -Inquire reason for failure or
 Common controlling disclosed as per FRF. entity's controls to
ownership identify/disclose RP
 owners who are close family relationships & transactions.
members Obtain WR from Mngt/
 Common key Mngt. TCWG wrt -Perform appropriate
substantive audit procedures
 Disclosure to auditor relating to newly identified RP
the ardently of RP of or significant RP transactions.
which they are aware
and -Re-consider risk that other RP
 Appropriate accounting or significant RP transactions
& disclosure as per FRF may exist that mgt has not
previously
identified/disclosed.
-If non-disclosure by mgt

appears intentional, evaluate
implications for audit.
SA560 (REVISED) "SUBSEQUENT EVENTS" (W.E.F. 01.04.2009
Events Occurring Between the Facts Which Become Known to the Face Which Become Known to the
Date of the Financial Statements Auditor After the Date of the Auditor After the Financial
and the Date of the Auditor's Auditor's Report but Before the Statements have been Issued
Report Date the Financial Statements are
Issued:
(a) The auditor shall perform (a) The auditor has no (a) The auditor has no obligation
audit procedures to obtain obligation to perform any to perform any audit
sufficient & appropriate audit procedures procedures regarding such
audit evidence to ensure regarding the financial financial statements.
that events which require statements the date of the (b) However, if a fact becomes
adjustments or disclosure auditor's report. known to the auditor that,
in the financial statements (b) However, if a fact becomes had it been known to the
have been identified. known to the auditor that, auditor at the date of the
(b) In determining nature & had it been known to the auditor's report, may have
extent of audit procedures, auditor at the date of the caused the auditor to amend
auditor shall: auditor's report, may have the auditor's report, the
 Obtain an understanding caused the auditor to auditor shall:
of the procedures through amend the auditor's report,  Discuss the matter with
which management has the auditor shall: management
identified subsequent  Discuss the matter with  Determine whether the
events management. financial statements
 Inquiring of management  Determine whether the need amendment and, if
as to occurrence of financial statements so,
Subsequent events which need amendment and,  Inquire how
affect the financial if so, management intends to
statements and obtain  Inquire how address the matter in the
MRL management intends to financial statements.
 Read minutes of address the matter in (c) If the management amends
management meetings the financial the financial statements, the
that have been held after statements. auditor shall:
the date of the financial (c) If management amends  Carry out of audit
statements. the financial statements, procedures necessary in the
Read the entity's latest the auditor shall: circumstances on the
subsequent interim Extend the audit amendment.
financial statements, if procedures to the date of  review the steps taken of the
any. the new auditor[s report; situation.
(c) If auditor identifies events and  Extend the audit procedures
that require adjustment of Provide a new auditor's to the date of the new
disclosure in the financial report on the annexed auditor's report; and
statements, the auditor financial statements.  Provide a new auditor's
should determined report on the amended
whether each such event is financial statements.
appropriately reflected in
the financial statement.. (d) In the amended auditor's
report an EOM paragraph
referring to a note to the F.S.
that discussed the reason of
amendment in F.S., should be
included.
SA – 570 (REVISED) " GOING CONCERN"
Management Auditor's Duties. For this purpose auditor is

Responsibilities required to
Perform preliminary assessment

 Asses the entity's ability and risk assessment procedures
to continue as a going To obtain sufficient appropriate audit evidence about the regarding management ‘s going
concern. appropriateness of management's use of going concern assumption concern assumption
 General purpose F.S. are
prepared on a going a) Cover the same period as that
concern basis unless Identified events that cast significant doubt that a material used by management
management intend to inconsistency exist related to going concern assumption b) Consider whether
liquidate the entity or to management has considered
cease operation as per Perform additional procedures all relevant information of
AS1 which auditor is aware.
 In case F.S. are not
prepared on going
Going concern Going Concern Mngt.  Request management to
concern basis, the fact
assumption Assumption unwilling to make its assessment of
would need to be
Appropriate but Inappropriate make its entity's ability to continue as
appropriately disclosed.
Material assessment going concern, Evaluating
Uncertainty exists management plans for future.
 Consider the reliability of
additional facts or information
Determine Adverse Opinion Consider the since the date of management
whether F.St. implications assessment.
Makes relevant on Auditor's  Requesting written
disclosure Report. representations from Mngt.
regarding their plans for
future
Yes No
EOM Q/A

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CA INTERMEDIATE

AUDIT QUESTION BANK

BY CA CS POOJA RATHI DHOOT

MASTER BLASTER MCQs & Correct-Incorrect…..

1. What are analytical procedures?

2. Which of the following is not an analytical procedure?

3. Analytical procedures issued in the planning stage of an audit, generally:

4. The basic assumption underlying the use of analytical procedures is:

1. ________ refers to the record of audit procedures performed, relevant audit

2. _________ may be defined as one or more folders or other storage media, in

5. Auditor’s judgment as to sufficiency may be affected by which factor:

6. Which of the following is not an Audit procedures to obtain audit evidence :

7. Which of the following is not an assertion about presentation and disclosure:

3.As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an

4 (IESBA Code) (INTERNATIONAL ETHICS STANDARDS BOARD FOR

5. ICAI was established as a statutory body on:

6. ICAI is covered under which Ministry

7. Which is the largest financial and accounting body in the world

8. Rules and regulations for accounting and auditing are prescribed by

9. ----------- is the criteria to determine measurement, presentation, recognition and

10. Audit risk is a function of ROMM and:

11. Applicable FRF is acceptable in which of the following factors:

12. Audit documentation retention period is:

14. Assembly of audit file after date of AUDITOR’S REPORT is an

19. Acceptance of significant gifts or hospitality is

1. The audit plan is ______detailed than the overall audit strategy

4. With reference to SA 300, the auditor shall document:

6. Determining a percentage to be applied to a chosen benchmark (in relation to

MCQ ON COMPANY ACCOUNTS

2. Direct confirmation procedures are performed during audit of accounts receivable

3. Where no reply is received during the performance of direct confirmation procedures

6. Wages paid to workers would always qualify as:

8. Search for unrecorded liability is performed during audit of current liabilities to

12. Which of the following is not an example of revenue expenditure -

1. Which of the following is a General IT control?

2. Which of the following is an automated control?

3. Who is mainly responsible for implementation of internal fi nancial controls in a

2. If, as a result of a misstatement resulting from fraud, the auditor encounters

3. Which of the following is an example of inflating cash payments?

4. The type of errors, existence of which becomes apparent in the process of

5. Misappropriation of assets may occur because there is-

1.Audit risk is a function of the risks of material misstatement and _______

3. Risk of material misstatement has _______components

4. Controls can be _________related to an assertion.

6. Internal controls has ------ components

4. Which of the following is source of Non Sampling risk :

5. Which of the following is more scientific :

1. While auditing a cinema hall, the auditor needs to verify that-

4. ________aims at ascertaining that the expenditure incurred has been on the

BY CA CS POOJA RATHI DHOOT

MASTER BLASTER MCQs & Correct-Incorrect…..

(ii) Purchase invoice is an example of internal evidence

(iii) Sufficiency is the measure of the quality of audit evidence.

(iv) inquiry is an effective and efficient audit tool.

(vii) Expenditure incurred by the municipalities and corporations can be broadly

(viii) The external control of municipal expenditure is exercised by the Central

(xiii) Analytical Procedures are required in the planning phase only.

(xvii) Planning is a discrete phase of an audit

(xix).Employee benefits expense or commonly called payroll represents the sum an

(xxii). There is no difference between reserves and provision.

(xxiii).Capital reserves represent profits that are available for distribution to

(xxxi) Sample need not be representative

BY CA CS POOJA RATHI DHOOT