CA Final Audit – Chapter 6 – Audit Reports MCQs

SA-700 deals with ______________

SA-701 deals with ______________

SA-705 deals with ______________

SA-706 deals with ______________

The auditor’s report shall have a title that clearly indicates that it is the report of an ________.

The Opinion section of the auditor’s report shall not include which of the following

M/s A prepares Financial statements on going concern basis which is not appropriate as per the standards on Auditing, In this case the Auditor may issue ___________ opinion.

M/s A prepares Financial statements on going concern basis which is appropriate but there exists material uncertainty and there is adequate disclosure by the management , In this case the Auditor may issue ___________ opinion.

M/s A prepares Financial statements on going concern basis which is appropriate but there exists material uncertainty and there is adequate disclosure is not made by the management , In this case the Auditor may issue ___________ opinion.

CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2022-23. While concluding the audit CA Sameer decided to issue an unmodified opinion, though he also concluded that a material uncertainity exists with respect to the company’s ability to continue as a going concern on account of a pending litigation related to labour laws. He is of the view that the company has made appropriate disclosures with respect to such pending litigation in the notes to accounts annexed to the financial statements of Tram Fram Ltd. for the FY 2022-23. Explain how CA Sameer will deal with the above situation in his auditor’s report.

For audits of complete sets of ___________, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701.

The matters in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period has to be reported under which para

Key audit matters are selected from ___________-

Auditors responsibilities in Audit of Financial statements is to describe an audit by stating that the Auditors responsibilities is to evaluate the appropriateness of

Which report may be issued if the auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement.

Which report is issued if the auditor, having obtained sufficient appropriate audit evidence, concludes thatmisstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements

XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor of the company for the FY 2022-23. The company has taken long term funding for fixed capital requirements and short-term funding for its working capital requirements. During the course of audit, CA Sudhir found that the company’s financing arrangements are about to expire and the company is unable to re- negotiate or obtain the replacement financing. As such the company may be unable to realize its assets and discharge its liabilities in the normal course of business. Notes to accounts annexed to the financial statements discuss the magnitude of financing arrangements, the expiration and the total financing arrangements; however, the financial statements do not include discussion on the impact or the availability of refinancing. Thus, the financial statements (and notes thereto) do not fully disclose this fact. What kind of opinion should CA Sudhir issue in case of XYZ Ltd.?

ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the statutory auditors of ABC Ltd. for the FY 2022-23. During the course of audit, CA Prakash, the engagement partner, found that the Company’s financing arrangements have expired and the amount outstanding was payable on March 31, 2023. The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact. What opinion should CA Prakash express in case of ABC Ltd.?

MNO Ltd. is a power generating company having its plants in the north eastern states of the country. For the FY 2022-23, M/s PRT & Associates are the statutory auditors of the company. During the course of audit, the audit team was unable to obtain sufficient appropriate audit evidence about a single element of the consolidated financial statements. That is, the auditor was also unable to obtain audit evidence about the financial information of a joint venture investment (in XYZ Ltd.) that represents over 90% of the entity’s net assets. What kind of opinion should the statutory auditors issue in such case?

XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor of the company for the FY 2022-23. The company has taken long term funding for fixed capital requirements and short-term funding for its working capital requirements. During the course of audit, CA Sudhir found that the company’s financing arrangements are about to expire and the company is unable to re- negotiate or obtain the replacement financing. As such the company may be unable to realize its assets and discharge its liabilities in the normal course of business. Notes to accounts annexed to the financial statements discuss the magnitude of financing arrangements, the expiration and the total financing arrangements; however, the financial statements do not include discussion on the impact or the availability of refinancing. Thus, the financial statements (and notes thereto) do not fully disclose this fact. What kind of basis of opinion should CA Sudhir issue in case of XYZ Ltd.

ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the statutory auditors of ABC Ltd. for the FY 2022-23. During the course of audit, CA Prakash, the engagement partner, found that the Company’s financing arrangements have expired and the amount outstanding was payable on March 31, 2023. The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact. How the basis of opinion paragraph CA Prakash express in case of ABC Ltd.?

MNO Ltd. is a power generating company having its plants in the north eastern states of the country. For the FY 2022-23, M/s PRT & Associates are the statutory auditors of the company. During the course of audit, the audit team was unable to obtain sufficient appropriate audit evidence about a single element of the consolidated financial statements. That is, the auditor was also unable to obtain audit evidence about the financial information of a joint venture investment (in XYZ Ltd.) that represents over 90% of the entity’s net assets. What kind of Basis of opinion should the statutory auditors issue in such case?

CA Yash is the statutory auditor of Laksmi Vardhan Limited for the FY 2022-23. In respect of loans and advances of Rs. 55,00,000/- given to Sarvagya Private Limited, the Company has not furnished any agreement to CA Yash and in absence of the same, he is unable to verify the terms of repayment, chargeability of interest and other terms. What kind of opinion should CA Yash give in such situation?

In the financial year 2022-23, MSD Ltd. faced an extraordinary event (earthquake), which destroyed a lot of business activity of the company. These circumstances indicate material uncertainty on the company’s ability to continue as going concern. Due to such event it may not be possible for the company to realize its assets or pay off the liabilities during the regular course of its business. The financial statement and notes to the financial statements of the company do not disclose this fact. What kind of opinion should the statutory auditor of MSD Ltd. issue in such circumstances?

CA Abhimanyu is the statutory auditor of PQR Ltd. for the FY 2022-23. During the course of audit CA Abhimanyu noticed the following:

1. Debtors amounting to Rs 150 crores, no balance confirmation was received by the audit team. Further, there have been defaults on the payment obligations by debtors on the due dates during the year under audit. The Company has created a provision for doubtful debts to the tune of Rs25 Cr. during the year under audit. The Company has stated that the provision is based on receivables which are older than 36 months, which according to the audit team is inadequate and as such the audit team is unable to ascertain the carrying value of trade receivables.

2. Further, in respect of Inventories (which constitutes 40% of the total assets of the company), during the reporting period, the management has not undertaken physical verification of inventories at periodic intervals. Also, the Company has not maintained adequate inventory records at the factory. The audit team was unable to undertake the physical inventory count as such the value of inventory could not be verified. Under the above circumstances what kind of opinion should CA Abhimanyu give?

Which of the following auditor shall communicate with those charged with governance

An educational institute was collecting fees from their students by cash/ cheque / draft and through net banking. Institute follows the policy to account for the fees received in the year of receipt only and for the cheques or drafts received but not deposited in bank or credited in bank account, should be shown in reconciliation statement. The internal auditor of branches noticed that at some branches only the fees received up to 25th March are accounted for in the same year and the receipts after that date are carried forward to be accounted for in the next financial year. The fees collected in these branches between 25 to 31 March amounted to Rs. 15 lakhs for the year 2022-23 and the collection for the financial year ended 31st March 2023 amounted to Rs. 115 crores. The auditor was of the view that it will not give a true and fair view on institute’s revenue for the year. What do you think should be the next step of the auditor?

QRP Lifecare Private Limited, (the ‘Company’ or ‘QRP’), is engaged in the pharmaceuticals. The Company is based in Hyderabad and has an annual turnover of INR 400 crores. One of the directors of the Company did not give declaration to the Company under section 164(2) of the Companies Act 2013 as at 31 March 2022. The auditors of the Company have completed their audit of the financial statements for the year ended 31 March 2022 and are awaiting this declaration. But the management is of the view that they will not be able to receive this declaration. All other directors have given the required declarations and the auditors have also verified that. QRP had given an advance amounting to INR 50 crores to its subsidiary, RPS Ltd (RPS), on 12 January 2018 for carrying out certain projects. The net worth of the subsidiary has eroded substantially as on 31 March 2022 and looking at the future projections there is no certainty in terms of the profitability of the subsidiary. QRP has a subsidiary, SPS Ltd (SPS), in UK. The company has outstanding trade receivables amounting to INR 10 crores from SPS. QRP has observed that there have been some FEMA (Foreign Exchange Management Act) non-compliances on the part of QRP but the management has an action plan which they have initiated and on the basis of which management is sure that the noncompliance would be done good and there would be no penalty on the company. In case the penalty arises, the impact would be significant for QRP. The auditors of QRP have evaluated this matter by involving a regulatory matters expert and also agree with the management’s view. QRP was using a customized ERP package upto 31 March 2018. However, with effect from 1 April 2022, QRP moved on SAP (ERP package) considering the increase in size of the operations of QRP. The auditors of QRP are of the view that for the financial year ended 31 March 2023, being the first year of SAP implementation, no work on IT controls would be required and they are also evaluating to qualify report on IFC because on the basis of their experience on other clients in the past where the IT controls in the first year of ERP implementation were very weak.

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

1. How should the auditors of QRP deal with the matter related to non-receipt of declaration under 164(2) of the Companies Act?

How should the auditors of QRP deal with the matter related to erosion of net worth of RPS? Is there any reporting implication for the same?

Please suggest the way auditors have handled the matter related to FEMA non-compliances is appropriate or not.

QRP has been preparing consolidated financial statements but they do not consolidate financial statements of SPS every year. This is because the financial year followed by SPS is January to December as against April to March followed by QRP. The auditors have also been fine with this position of the management of QRP year on year. Choose the correct option

As an expert what will be your advice about the view of the auditors of QRP regarding not testing IT controls in the first year of SAP implementation and evaluating qualification in IFC report.

MINSAN Ltd, an unlisted company in South India, is engaged in the business of spice oil extraction. Total paid up capital of the company is Rs 9 Crore. Details of annual turnover and profit of the company for the last 3 years are given below: The company is using conventional method for extraction of oil from spices. This requires more human intervention and hence, cost of production is high as compared to innovative method used by other new companies. Though the company had significant growth in the past years, it has not done well over the last two financial years due to competition A new competitor viz, Natural Extracts Ltd, had come in the market during the year 2021 and by the end of March, 2022, they captured around 75% of market share by offering the product at a reduced price. They use new machinery which allows whole range of automated extraction method, thus, minimizing manual steps and reducing cost of labour.In order to reduce cost of production and thereby re-capture the market, the management of MINSAN Ltd has planned to erect a new plant with an automatic machine. The estimated cost of plant & machinery is Rs 90 lac. The company approached SA Bank Ltd for a term loan of Rs 80 lac which would be repaid in 5 years. On 28-12-2022, the bank had sanctioned the loan; and disbursed Rs 40 lac till 31st March, 2023. MINSAN Ltd has appointed M/s Check & Check, Chartered Accountants, as auditors of the company at its AGM held on 18-09-2021 for a period of 5 years. As agreed, the audit team commenced their audit work for the year 2022-2023 in February, 2023 and completed the work by the end of May, 2023. The audit team submitted following findings to the engagement partner:

 PX Ltd, one of the material suppliers, filed a case against the company on 12-09-2022 for a compensation of Rs. 3 crore.
 Company has made an estimate for allowance of debtors @5%.
 70% of the value of inventory was only covered in physical verification during the year 2021-22 due to outbreak of Novel Corona Virus (COVID-19) and subsequent lockdown thereof.
 Company got a show cause notice from State Pollution Control Board for the contravention of the provisions of Hazardous and waste Management Rule.
 Three incidence of fraud noticed (Total Rs 1.02 crore)- fraud committed by the Purchase manager Rs 85 Lakh, by Accounts manager Rs 15 Lakh and by a cashier Rs 2 lac.

As an auditor of MINSAN Ltd for the year 2022-23, answer the following questions based on the facts given in the above paragraph:

1. Though the company had significant growth in the past years, it has not done well over the last two financial years. As per SA 570, there are certain events or conditions that individually or collectively may cast significant doubt about the going concern assumptions. In order to assess whether MINSAN Ltd is a going concern or not, which of the following audit procedures should NOT be
performed?

Company has made an estimate for allowance of debtors @5%. Some financial statement items cannot be measured precisely but can only be estimated. The nature and reliability of information available to management to support the making of an accounting estimate varies widely, which thereby affects the degree of estimating uncertainty associated with accounting estimates. Please advise which among the following may have higher estimate uncertainty and higher risk as per SA 540?

The company in the notes accompanying its financial statements disclosed the existence of suit filed against the company with full details. Based on the audit evidence obtained, it is necessary to draw user’s attention to the matter presented in the financial statement by way of clear additional communication as there is an uncertainty relating to the future outcome of the litigation. In this situation, which of the following reporting option would be correct if auditor is satisfied with the conclusions reached by the management and this matter is fundamental to the reader of financial statements?

Company got a show cause notice from State Pollution Control Board. As per SA 250, the auditor shall perform the audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements. As the audit team of the company became aware of information concerning an instance of non-compliance with law, what would NOT be the audit procedure to be performed?

The company had availed some amount of loan for new plant and machinery during the year under audit. Out of the total loan sanctioned an amount of Rs 25 lac was earmarked for the purchase of the machinery-Oil Extractor; but, the company has acquired an improved model of machinery, viz, Oil extractor with Dryer in its stead. State which of the reporting option would be correct.

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 2019 -20. After completing the initial engagement procedures and audit planning, the audit team started with the verificati on 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
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

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?

While conducting the current year audit of Finco Ltd, the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements. This misstatement was related to recognition of research and development expenditure. The provisions of Ind AS 38 Intangible Assets relating to capitalisation of development expenditure was not applied properly. On this, unmodified opinion had been previously issued. The current auditor verified that the misstatement had not been dealt with as required under Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Accordingly, the current auditor will

SBC Private Limited appointed Mr. Vijay, Chartered Accountant as auditor of the company for the year 2022-23. While verifying the accounts Mr. Vijay noticed that the company has neither made any provision for accrued gratuity liability nor obtained the actuarial valuation thereon. Mr. Vijay obtained the actuarial valuation and includes the matter in his Audit Report to the Company’s Board of Directors mentioning the amount of accrued liability not provided for. The Board agreed with the auditor’s observation and the amount of liability quantified by him. But the auditor didn’t disclose the same in his audit report to Member’s. One of the members raised an objection on the audit report stating that it does not represent a true and fair view as even though the company has not maintained proper books of accounts as per accounting standards, the auditor has not qualified his report. Whether the auditor is require to give a qualified opinion in his report to members on non-provision of gratuity in company’s accounts when the same has already been included in the report to Company’s Board of Directors?

M/s. Suresh & Co., a partnership firm, has been appointed, for the 7th consecutive year, as the statutory auditor of Alkis Ltd., an unlisted public company, for financial year 2020-21. Mr. Suresh while preparing a report under section 143 of the Companies Act, 2013, made a statement with respect to the remuneration paid by the Alkis Ltd. to one of its directors, Mr. Mahesh, was in excess of the limit laid down under section 197 and also gave such other details as prescribed.Under which section of the auditor’s report, Mr. Suresh needs to report with respect to the excess remuneration being paid to Mr. Mahesh?

In case of audits of unlisted corporate entities, other information section is required in auditor’s report when at the date of auditor’s report

If the prior period financial statements were not audited, the auditor shall state the same