CA Final Audit – Chapter 3 – Risk Assessment and Internal Control MCQs

What assesses the level of risk in the various business processes.

________ is the risk of expressing an inappropriate audit opinion on financial statements that are materially misstated.

Audit Risk is __________

______________ is anticipated risk that a material misstatement may exist in financial statement before start of the audit.

Risk of material misstatement has how many components.

What is a risk that a material Misstatement remained undetected even if all
Audit procedures applied.

Which assertions is to consider whether transactions and events that have been recorded have occurred and pertain to the entity.

Which assertions is to consider whether amounts and other data relating to recorded transactions and events have been recorded appropriately.

which assertion is to consider whether transactions and events have been
recorded in the proper accounts.

Which is/are not Assertions about account balances at the period end

Which is/are not Assertions about classes of transactions and events for the period under audit

What is an unintentional mistake resulting from omission.

What is an intentional misstatement in the accounting records or supporting documents

The risk-based audit process is presented in how many distinct phases

what are the phases of risk-based audit process.

Performing client acceptance or continuance procedures is which stage of Risk based Audit Process

Communicating any material weaknesses in the design and implementation of internal control to management and those charged with governance is which stage of Risk Based Audit Process

________ is to design and perform further audit procedures that respond to the assessed risks of material misstatement and will provide the evidence necessary to support the audit opinion.

__________ means all the policies and procedures (internal controls) adopted by the management of an entity to assist in achieving management’s objective.

When obtaining audit evidence about the effective operation of internal controls, the auditor considers

The objectives of internal controls relating to the accounting system is/are

The basic accounting control objectives which are to be achieved are

Statement 1: Internal control, no matter how effective, can provide an entity with only reasonable assurance and not absolute assurance
Statement 2 : Internal control, if it is effective, can provide an entity with absolute assurance

Independent verification of the control systems, designed and implemented by the management, involves periodic or regular review by independent persons to ascertain whether the control procedures are operating effectively or not is called _________

Which Is Not A Components Of Internal Controls

R Private Limited is engaged in the business of retail and has its retail outlets concentrated towards Northern India. Currently, the company has 59 outlets and the plan of the management is to take this to at least 100 over the next 2 years. The company is audited by Raj & Associates, a firm of Chartered Accountants, who have been operating for over 20 years, however, they don’t have much experience in the retail sector. Because of this fact the audit team decided to plan efficiently for the audit of the financial statements of the company for the year ended 31 March 2022, being their first year of audit. During the course of risk assessment by the auditors, it was discussed that the company is operating in an industry where the operations are not very complicated and mostly the processes are known to all. Considering the same they decided that assessment of inherent risk should not be done for this company as that would be inefficient. However, the auditors will take due care of the control risks. The same assessment was deliberated upon and after lot of discussions it was finalized like this. In the given situation, please advise which one of the following would be correct.

Management’s actions to eliminate or mitigate incentives or temptations that might prompt personnel to engage in dishonest, illegal, or unethical acts is an example for __________

The ___________ process may address how the entity considers the possibility of unrecorded transactions or identifies and analyses significant estimates recorded in the financial statements

Generally, Control activities relevant to an audit may be categorised as policies and procedures that pertain to the following except which of the following

______________include reviews and analyses of actual performance versus budgets, forecasts.

Checking the arithmetical accuracy of records is an example of which control

controls that restrict access to programs or data is an example of which control

Information systems control activities which apply to the processing of individual applications are known as which controls.

which controls are policies and procedures that relate to many applications and support the effective functioning of application controls.

____________ is intended to reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the person’s duties.

____________ implies organization of the overall system of book-keeping and arrangement of Staff duties.

The effectiveness of an efficient system of internal check depends on which of the following

Periodic review of the chain of operations and work flow is called ________

________ may be defined as, an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization.

_________ is a series of instructions or questions on internal control which the auditor must follow or answer.

__________ gives a bird’s eye view of the system and is drawn up as a result of the auditor’s review thereof.

___________ are defined as absence of adequate controls on flow of transactions that increases the possibility of errors and frauds in the financial statements of the entity.

Which objective as specified in the COSO Framework related to the effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss

Which objective as speicified in the COSO Framework related to internal and external financial and non-financial reporting to stakeholders, which would encompass reliability, timeliness, transparency, or other terms as established by regulators, standard setters, or the entity’s policies.

The CoCo framework outlines criteria for effective control in how many areas.

COBIT stands for ____________.

Internal control framework has how many components

ABC Ltd. is in the business of trading garments. Within a span of five years since its incorporation, the company has gained a good market reputation. Last year, in its Kochi warehouse the inventory was less than 1% of total inventory value, so the auditor instead of witnessing or performing the physical count of inventory relied upon the management’s inventory confirmation and management in turn relied upon the warehouse keeper’s stock register without verifying the actual count. The same year there was some difference between the store register and books of accounts closing balance. The management considered it to be an immaterial amount and wrote it off through “Miscellaneous Profit and Loss Account”.
In the current year, while performing analytical procedure, the auditor saw a significant reduction in sales through Kochi warehouse, whereas there was a spike in freight charges to Kochi. Through further examination, the auditor noticed that there was increase in number of
shipments to Kochi and increase in number of invoice cancellation instances and sales return instances from the customers of GST unregistered category. However, this year the inventory lying at Kochi is 4.5% as per books. The Auditor enquired on the periodicity of physical verification and sales process through Kochi warehouse. The management gave the following response to the auditor:
1. The physical verification takes place every six months and the warehouse keeper is responsible for physical verification and sending records back to the head office.
2. Because of low operations in past years the warehouse keeper himself takes care of invoicing and dispatching the goods.
3. Monthly invoice details along with the monthly stock register is
sent to the head office.
4. Further, this year too there is a substantial difference among inventory as per books, inventory as per stock register and inventory as per physical verification in descending order.
The auditor decided to visit the Kochi warehouse and conduct the root cause analysis and get the correct closing value of the inventory. After the visit, the auditor concluded that the warehouse keeper was issuing the stocks with invoices, however on the sales return the credit notes were issued to various customers and the entry was made in the stock register of “Goods received on sales return” but physically the goods were never returned.
The Auditor also doubts that the same instance might have happened last year as well because of which there was a difference between physical stock and the books.
On this information, the management has asked auditor that why this was not brought into notice last year and whether the audit not
conducted properly then. Further, a consultant was appointed by the management for the overview of internal controls with regard to verification of inventory and suggest recommendations.

Based on the above facts, answer the following:-

1 In the view of the above case scenario, which according to you is the correct statement:

Which components of audit risks are represented in the aforesaid scenario?

Which Internal Control seems to have been compromised as the root cause here?

To ensure that such instances are not taking place in other warehouses as well, the management wants to get an audit done. Which of the following audits is right in the above case scenario:

Which Segregation of Duties aspect seems to have been compromised here?

Sankalp Edible Oil Limited is a public company which has the business of manufacturing cooking oil. The company is in this particular business since last 25 years. The Financial results of the company for the previous year FY 2020-21 is as follows:-
1 Aggregate Outstanding Loans, debentures and deposits – Rs 10 crore
2 Turnover of the company – Rs 100 crore
3 Paid-up capital of the company – Rs 50 crore
4 Net Profit (after tax) of the company – Rs 5 crore

For the year 2020-21, M/s Aagam & Associates were the auditors of the Company. The auditors found out significant deficiencies in internal control and misrepresentation of amounts in the area of Trade Payables. Therefore, Auditor issued qualified Audit Report. Next year, management did not wish to re-appoint the same auditors, and hence, Board of Director recommended Ms. Aangi as the Statutory Auditor for FY 2021-22 to the members of the Company.
After appointment, Ms. Aangi went through previous year financials
statements, audit report etc. and emphasised the understatement of Trade Payable balance as a significant audit risk. Auditor set the materiality at Rs 15,00,000 for conducting audit of the year 2021-22. Further, Ms. Aangi is in process to select the samples for testing so as to get the samples on which Vendor Balance Reconciliations can be performed, she is considering the following for the same:

(i) Major Vendors where the confirmation balances agrees to General Ledger.
(ii) Vendors which have high volume of business with Sankalp Edible Oil Limited.
(iii) Vendors with balances of Rs 15,00,000 or more outstanding at the year end.
(iv) Vendors with balances of Rs 15,00,000 or less outstanding at the year-end.
As at March 31st, 2022, the balance of two vendor as per company’s
General Ledger and as per the balance of the External Confirmation which are received from vendors are as under:-
Vendor Name Balance as per Balance as per External
General Ledger Confirmation

Suchi Groundnut Rs 15,00,000 Rs 20,00,000
Seeds Limited

Nishi Sunflower Rs 65,00,000 Rs 80,00,000
Seeds Limited

Suchi Groundnut Seeds Ltd.:-

The difference in the balance is due to one of the order received by the Company. This order is under dispute as the Company claims that
the received raw material is of sub-standard quality. The consignment received was sent back to the vendor on March 30, 2022.

Nishi Sunflower Seeds Ltd.:-

The difference in the balance is due to the reason of two invoices of Rs 10,00,000 and Rs 5,00,000 dated March 25, 2022 & March 27, 2022 respectively. As per the Accounts Payable Executive, both the invoices were received on April 03rd, 2022 and therefore, those were not recorded in the financial statement for the year ended March 31st, 2022.

Ms. Aangi took the samples to verify Trade payable balances, which covered 30% of population. During the Audit, she came across 2
errors amounting to Rs 12,00,000: • Rs 4,00,000 was due to one invoice not being recorded due to weak inefficient control mechanism and;
• Rs 8,00,000 error was made by Mr. Samyak, an executive who came as a temporary replacement for one week in the place of Ms. Hetavi, who is permanent accountant of the company. The mistake was clerical in nature.

Based on the above facts, answer the following:-

1. Which items should Ms. Aangi select for testing so as to get the samples on which Vendor Balance Reconciliations can be performed?
(i) Major Vendors where the confirmation balances agrees to General Ledger.
(ii) Vendors which have high volume of business with
Sankalp Edible Oil Limited.
(iii) Vendors with balances of Rs 15,00,000 or more outstanding at the year end.
(iv) Vendors with balances of Rs 15,00,000 or less
outstanding at the year-end.

How can Ms. Aangi audit the operating effectiveness of internal control around the accounting of Trade payables?

What are the audit procedures that Ms. Aangi should perform to verify whether the payable balances of Nishi Sunflower Seeds Ltd. are correctly recorded in the financial statements.?

What would be proper course of action to be taken by Ms. Aangi for two errors amounting to Rs 4,00,000 and Rs 8,00,000 in the given scenario?

Speak Ltd. is an industry providing telecommunication services and is
operating in a completely automated environment. It uses software such as ‘Call Data Record package’ for capturing revenue from telecommunication services, ‘HRMS package’ for processing pay of employees and Sanchar soft for capturing special transactions on franchisee transactions. All these software data culminate into the SAP software used for financial accounting and reporting.
Speak Ltd., as an industry is subjected to various risks such as
technology risks, security risks, operational risks etc. which may prevent the company from achieving its business objectives. The entity may also be subject to risk pertaining to the use of IT systems.
The auditor of the company during the course of the audit has found the following issues:
Issue1: Speak Ltd. has issued material for tower works worth Rs 30 crore on 10th October 2021 and this entry made by a staff is approved by the assistant store manager and the store manager. The very next day the staff who entered the data found that there is some clerical error and store worth only Rs 29.8 crore was issued. He made the changes immediately and the system accepted the same without the approval of assistant store manager and store manager. Issue2: Speak Ltd. is showing a commission expense of Rs 2 crore during the month of October 2021. The auditor has made an effort to understand the business process that makes up this financial statement line item as to how it is initiated, recorded, approved, posted and reported. During this exercise, he finds that there is a difference of Rs 1,50,000/- in the commission recorded as per the Sanchar Soft software (source) and commission as reflected in SAP accounts. (destination). Issue 3: While verifying the salary expense of employees, the auditor
has been asked to rely on the values as per SAP software and some hard copy reports and documents as the HRMS package (source software) has become corrupt during the year and the management is not having any data backup.

With the above information, answer the following questions by choosing the correct option?

1. What is the terminology for the formal program or framework that is implemented across an enterprise or company for enabling risk management?

What kind of a risk in the automated environment is observed by the auditor in “issue 1”?

What is the kind of risk assessment carried out by the auditor in case of ” issue 2″?

What should the auditor do about the difference identified in” issue 2″?

How should the auditor deal with “issue 3”?

Arogya Pradhan Limited is a public company incorporated in September 2011 with a registered office in Chennai. The company is in business of Healthcare services. The company has 151 Ayurvedic clinics and 303 Ayurvedic pharmacies throughout the country. In the previous year, company achieved turnover of Rs 3,000 crore and had earned the Net Profit of Rs 25 crore. The company had borrowed a term loan of Rs 100 crore from State Bank of India.
M/s Bright Moon LLP are appointed as statutory Auditors of the company for the year 2020-21. After completing the initial engagement procedures and audit planning, the audit team started with the verification of Internal Financial Controls of the company.
While understanding the controls established by the management in the ‘Revenue Process’, the audit team observed that there is only one Review Control wherein 20 executives had to prepare the sales invoice and Mr. Darshan – Sales Manager, had to review and authorise all the invoices. It was observed that on many occasions, Mr. Darshan had more than 1000 invoices to authorise in a single day. Further, he has frequently asked 2 senior most executive to review pending invoices and he has relied on them by directly giving his authorization on the invoice. It was observed that Mr. Darshan did not take any leave during the entire year. It was observed that Mr. Darshan’s performance bonus was linked with number of invoices authorised by him. In addition, Mr. Darshan was the sole authority to approve the sales commission and sales discount which was to be applied by the customers.
The audit team has set Rs 30 crore as materiality based on 1% of
Turnover. For selecting the samples, Mr. Santosh – Audit Executive,
used the below mentioned formula:-
Ledger Balance * 100
Materiality * 365 days
Mr. Santosh selected 30 samples for the verification of above mentioned “Review Control”. It was observed that out of 30 samples, 20 samples had irregularities in invoices which was clearly due to improper functioning of review control. The amount of irregularity in 20 invoices amounted to Rs 4 crore. The auditor still issued the clean audit report and took the written representation letter from the management for efficient implementation of Internal Financial Controls.

On the basis of the abovementioned facts, you are required to answer the following MCQs:

1. Is the Control “Designed” appropriately?

Is the Control “Implemented” effectively?

In the above case, to whom should M/s Bright Moon LLP report first?

How samples are to be selected for the purpose of verification of Internal Financial Control?

In the current scenario, how should M/s Bright Moon LLP report?

The management of M Ltd. has developed a strong internal control in its accounting system in such a way that the work of one person is reviewed by another. Since no individual employee is allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds and errors are high. CA. O has been appointed as an auditor of the company for current Financial Year 2021- 22. Before starting the audit, she wants to evaluate the internal control system of M Ltd. To facilitate the accumulation of the information necessary for the proper review and evaluation of internal controls, CA. O decided to use internal control questionnaire to know and assimilate the system and evaluate the same. Which of the following questions need not be framed under internal control questionnaire relating to purchases?

Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills of services provided would be defalcated, inquiring on the same matter management has assured that internal control can prevent such defalcation to 75%.At his part the Auditor assesses that the procedure he could apply in the remaining time to complete Audit gives him satisfaction level of detection of frauds & error to an extent of 60%.

Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills of services provided would be defalcated, inquiring on the same matter management has assured that internal control can prevent such defalcation to 25%.At his part the Auditor assesses that the procedure he could apply in the remaining time to complete Audit gives him satisfaction level of detection of frauds & error to an extent of 40%.

Risk may arise due to which of the following circumstances:

R Private Ltd is engaged in the business of manufacturing of water bottles and is experiencing significant increase in turnover year on year. It is a subsidiary of R Gmbh, based out of Germany. During the financial year ended 31 March 2022, the company carried out a detailed physical verification of its inventory and property, plant and equipment. During the year, various other activities were carried out to increase efficiency in operations and reductions of costs. The statutory auditors of the company started their audit work from April 2022 and requested for a documentation on changes in processes and activities during the year as well as any resultant impact of the same on management controls. The management of the company told the auditors that all such documentation is maintained by the parent company as this is a closely held private company and even though internal financial controls reporting is applicable on this company, the parent company is taking due care of each and every process. The auditors did not agree with the views of the management. Please advise both the management and the auditors.

ABC Private Limited is engaged in trading of parts of machineries used in boiler plants. Internal auditor of the company has identified frequent changes in the bank account and other master details of suppliers. At this expansion planning phase, company has no defined control to provide assurance on said supplier master changes. Management agreed to develop the process of monthly
detailed review of supplier master changes done in supplier master by Finance assistant in order to ensure authorized changes in supplier master. One of the members from the Management would like to know that above controls falls under which category

Manual elements in internal control may be more suitable where judgment and discretion are required.

Adequate design and effective implementation of Internal Controls may not lead to the identification of which of the following