Auditing and Assurance Model Test Paper - 2 (Answers) | Model Test Papers for CA Intermediate PDF Download

 Page 1


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)  
2. (c)  
3. (a)  
4. (b)  
5. (d)  
6. (c)   
7. (c)   
8. (d)   
9. (d)   
10. (d)   
11. (a)   
12. (c)   
13. (c) 
14. (c) 
15. (a) 
PART II -Descriptive Answers 
1. (a)  Audit Sampling refers to the application of audit procedures to less than 
100% of items within a population relevant under the audit such that all 
sampling units (i.e. all the items in the population) have an equal chance 
of selection. 
 In the given situation, senior team member is not selecting items for 
testing by means of audit sampling. He is only selecting specific items 
from a population. In accordance with SA 500, one of the means 
available to auditor for selecting items for testing is “by selecting specific 
items.”  
 Specific items selected may include: - 
•  High value or key items: The auditor may decide to select specific 
items within a population because they are of high value, or exhibit 
some other characteristic, for example, items that are suspicious, 
unusual, particularly risk-prone or that have a history of error.  
•  All items over a certain amount: The auditor may decide to examine 
items whose recorded values exceed a certain amount so as to verify 
425
Page 2


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)  
2. (c)  
3. (a)  
4. (b)  
5. (d)  
6. (c)   
7. (c)   
8. (d)   
9. (d)   
10. (d)   
11. (a)   
12. (c)   
13. (c) 
14. (c) 
15. (a) 
PART II -Descriptive Answers 
1. (a)  Audit Sampling refers to the application of audit procedures to less than 
100% of items within a population relevant under the audit such that all 
sampling units (i.e. all the items in the population) have an equal chance 
of selection. 
 In the given situation, senior team member is not selecting items for 
testing by means of audit sampling. He is only selecting specific items 
from a population. In accordance with SA 500, one of the means 
available to auditor for selecting items for testing is “by selecting specific 
items.”  
 Specific items selected may include: - 
•  High value or key items: The auditor may decide to select specific 
items within a population because they are of high value, or exhibit 
some other characteristic, for example, items that are suspicious, 
unusual, particularly risk-prone or that have a history of error.  
•  All items over a certain amount: The auditor may decide to examine 
items whose recorded values exceed a certain amount so as to verify 
425
a large proportion of the total amount of a class of transactions or 
account balance.  
•  Items to obtain information: The auditor may examine items to 
obtain information about matters such as the nature of the entity or 
the nature of transactions. 
 Therefore, Sanjeev’s understanding is not proper. 
 The above approach for selecting items for testing is subject to non-
sampling risk. Non-sampling risk is the risk that auditor may reach an 
erroneous conclusion for any reason not related to sampling risk. Like, 
erroneous conclusion may be reached due to some inappropriate audit 
procedure.  
(b)  In carrying out audit of advances, the auditor is primarily concerned with 
obtaining evidence about the following: - 
(i)  Amounts are included in balance sheet in respect of advances 
which are outstanding at the date of the balance sheet. 
(ii)  Advances represent amount due to the bank branch. 
(iii)  Amounts due to the bank branch are appropriately supported by 
loan documents and other documents as applicable to the nature 
of advances. 
(iv)  There are no unrecorded advances. 
(v)  The stated basis of valuation of advances is appropriate and 
properly applied and the recoverability of advances is recognised 
in their valuation. 
(vi)  The advances are disclosed, classified and described in 
accordance with recognised accounting policies and practices and 
relevant statutory and regulatory requirements. 
(vii)  Appropriate provisions towards advances have been made as per 
the RBI norms, Accounting Standards and generally accepted 
accounting practices. 
(c)  Subsequent events are events occurring between the date of financial 
statements and the date of the auditor’s report and facts that become 
known to the auditor after the date of the auditor’s report. 
 In the given case, the company had already made provision of ` 10 lakhs 
in financial statements for year 2022-23. However, there is an out of 
court settlement between the company and employee for ` 6 lakhs.  
 It is an example of event which provides evidence of conditions that 
existed at the date of financial statements i.e. 31
st
 March, 2023. It 
provides evidence on adjustment in provision amount already made in 
financial statements. Therefore, internal auditor should ask management 
to revise provision downwards to ` 6 lakhs so that financial statements 
are in accordance with applicable accounting standards. 
426
Page 3


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)  
2. (c)  
3. (a)  
4. (b)  
5. (d)  
6. (c)   
7. (c)   
8. (d)   
9. (d)   
10. (d)   
11. (a)   
12. (c)   
13. (c) 
14. (c) 
15. (a) 
PART II -Descriptive Answers 
1. (a)  Audit Sampling refers to the application of audit procedures to less than 
100% of items within a population relevant under the audit such that all 
sampling units (i.e. all the items in the population) have an equal chance 
of selection. 
 In the given situation, senior team member is not selecting items for 
testing by means of audit sampling. He is only selecting specific items 
from a population. In accordance with SA 500, one of the means 
available to auditor for selecting items for testing is “by selecting specific 
items.”  
 Specific items selected may include: - 
•  High value or key items: The auditor may decide to select specific 
items within a population because they are of high value, or exhibit 
some other characteristic, for example, items that are suspicious, 
unusual, particularly risk-prone or that have a history of error.  
•  All items over a certain amount: The auditor may decide to examine 
items whose recorded values exceed a certain amount so as to verify 
425
a large proportion of the total amount of a class of transactions or 
account balance.  
•  Items to obtain information: The auditor may examine items to 
obtain information about matters such as the nature of the entity or 
the nature of transactions. 
 Therefore, Sanjeev’s understanding is not proper. 
 The above approach for selecting items for testing is subject to non-
sampling risk. Non-sampling risk is the risk that auditor may reach an 
erroneous conclusion for any reason not related to sampling risk. Like, 
erroneous conclusion may be reached due to some inappropriate audit 
procedure.  
(b)  In carrying out audit of advances, the auditor is primarily concerned with 
obtaining evidence about the following: - 
(i)  Amounts are included in balance sheet in respect of advances 
which are outstanding at the date of the balance sheet. 
(ii)  Advances represent amount due to the bank branch. 
(iii)  Amounts due to the bank branch are appropriately supported by 
loan documents and other documents as applicable to the nature 
of advances. 
(iv)  There are no unrecorded advances. 
(v)  The stated basis of valuation of advances is appropriate and 
properly applied and the recoverability of advances is recognised 
in their valuation. 
(vi)  The advances are disclosed, classified and described in 
accordance with recognised accounting policies and practices and 
relevant statutory and regulatory requirements. 
(vii)  Appropriate provisions towards advances have been made as per 
the RBI norms, Accounting Standards and generally accepted 
accounting practices. 
(c)  Subsequent events are events occurring between the date of financial 
statements and the date of the auditor’s report and facts that become 
known to the auditor after the date of the auditor’s report. 
 In the given case, the company had already made provision of ` 10 lakhs 
in financial statements for year 2022-23. However, there is an out of 
court settlement between the company and employee for ` 6 lakhs.  
 It is an example of event which provides evidence of conditions that 
existed at the date of financial statements i.e. 31
st
 March, 2023. It 
provides evidence on adjustment in provision amount already made in 
financial statements. Therefore, internal auditor should ask management 
to revise provision downwards to ` 6 lakhs so that financial statements 
are in accordance with applicable accounting standards. 
426
(d)  As given above, the engagement involves gathering of sufficient 
appropriate evidence on the basis of which limited conclusion can be 
drawn up. It is a limited assurance engagement like review. Other two 
features of such type of engagement are: - 
(1)  It provides lower level of assurance than reasonable assurance 
engagement. 
(2)  It performs fewer procedures than reasonable assurance 
engagement. 
2. (a)  Written representation about management’s responsibilities involves 
confirmation of fulfilment of management’s responsibilities in following 
areas: - 
(I)  Preparation of the financial statements  
 The auditor shall request management to provide a written 
representation that it has fulfilled its responsibility for the 
preparation of the financial statements in accordance with the 
applicable financial reporting framework, including, where relevant, 
their fair presentation, as set out in the terms of the audit 
engagement. 
 Due to its responsibility for the preparation and presentation of the 
financial statements and its responsibilities for the conduct of the 
entity’s business, management would be expected to have 
sufficient knowledge of the process followed by the entity in 
preparing and presenting the financial statements and the 
assertions therein on which to base the written representations.  
(II) Information provided and completeness of transactions  
 The auditor shall request management to provide a written 
representation that: -  
(i)  It has provided the auditor with all relevant information and 
access as agreed in the terms of the audit engagement and 
(ii)  All transactions have been recorded and are reflected in the 
financial statements.  
(b) Prior to auditor’s identification and assessment of risks of material 
misstatement, planning includes the need to consider following matters:  
1. The analytical procedures to be applied as risk assessment 
procedures. 
2. Obtaining a general understanding of the legal and regulatory 
framework applicable to the entity and how the entity is complying 
with that framework. 
3. The determination of materiality. 
4. The involvement of experts. 
5. The performance of other risk assessment procedures. 
427
Page 4


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)  
2. (c)  
3. (a)  
4. (b)  
5. (d)  
6. (c)   
7. (c)   
8. (d)   
9. (d)   
10. (d)   
11. (a)   
12. (c)   
13. (c) 
14. (c) 
15. (a) 
PART II -Descriptive Answers 
1. (a)  Audit Sampling refers to the application of audit procedures to less than 
100% of items within a population relevant under the audit such that all 
sampling units (i.e. all the items in the population) have an equal chance 
of selection. 
 In the given situation, senior team member is not selecting items for 
testing by means of audit sampling. He is only selecting specific items 
from a population. In accordance with SA 500, one of the means 
available to auditor for selecting items for testing is “by selecting specific 
items.”  
 Specific items selected may include: - 
•  High value or key items: The auditor may decide to select specific 
items within a population because they are of high value, or exhibit 
some other characteristic, for example, items that are suspicious, 
unusual, particularly risk-prone or that have a history of error.  
•  All items over a certain amount: The auditor may decide to examine 
items whose recorded values exceed a certain amount so as to verify 
425
a large proportion of the total amount of a class of transactions or 
account balance.  
•  Items to obtain information: The auditor may examine items to 
obtain information about matters such as the nature of the entity or 
the nature of transactions. 
 Therefore, Sanjeev’s understanding is not proper. 
 The above approach for selecting items for testing is subject to non-
sampling risk. Non-sampling risk is the risk that auditor may reach an 
erroneous conclusion for any reason not related to sampling risk. Like, 
erroneous conclusion may be reached due to some inappropriate audit 
procedure.  
(b)  In carrying out audit of advances, the auditor is primarily concerned with 
obtaining evidence about the following: - 
(i)  Amounts are included in balance sheet in respect of advances 
which are outstanding at the date of the balance sheet. 
(ii)  Advances represent amount due to the bank branch. 
(iii)  Amounts due to the bank branch are appropriately supported by 
loan documents and other documents as applicable to the nature 
of advances. 
(iv)  There are no unrecorded advances. 
(v)  The stated basis of valuation of advances is appropriate and 
properly applied and the recoverability of advances is recognised 
in their valuation. 
(vi)  The advances are disclosed, classified and described in 
accordance with recognised accounting policies and practices and 
relevant statutory and regulatory requirements. 
(vii)  Appropriate provisions towards advances have been made as per 
the RBI norms, Accounting Standards and generally accepted 
accounting practices. 
(c)  Subsequent events are events occurring between the date of financial 
statements and the date of the auditor’s report and facts that become 
known to the auditor after the date of the auditor’s report. 
 In the given case, the company had already made provision of ` 10 lakhs 
in financial statements for year 2022-23. However, there is an out of 
court settlement between the company and employee for ` 6 lakhs.  
 It is an example of event which provides evidence of conditions that 
existed at the date of financial statements i.e. 31
st
 March, 2023. It 
provides evidence on adjustment in provision amount already made in 
financial statements. Therefore, internal auditor should ask management 
to revise provision downwards to ` 6 lakhs so that financial statements 
are in accordance with applicable accounting standards. 
426
(d)  As given above, the engagement involves gathering of sufficient 
appropriate evidence on the basis of which limited conclusion can be 
drawn up. It is a limited assurance engagement like review. Other two 
features of such type of engagement are: - 
(1)  It provides lower level of assurance than reasonable assurance 
engagement. 
(2)  It performs fewer procedures than reasonable assurance 
engagement. 
2. (a)  Written representation about management’s responsibilities involves 
confirmation of fulfilment of management’s responsibilities in following 
areas: - 
(I)  Preparation of the financial statements  
 The auditor shall request management to provide a written 
representation that it has fulfilled its responsibility for the 
preparation of the financial statements in accordance with the 
applicable financial reporting framework, including, where relevant, 
their fair presentation, as set out in the terms of the audit 
engagement. 
 Due to its responsibility for the preparation and presentation of the 
financial statements and its responsibilities for the conduct of the 
entity’s business, management would be expected to have 
sufficient knowledge of the process followed by the entity in 
preparing and presenting the financial statements and the 
assertions therein on which to base the written representations.  
(II) Information provided and completeness of transactions  
 The auditor shall request management to provide a written 
representation that: -  
(i)  It has provided the auditor with all relevant information and 
access as agreed in the terms of the audit engagement and 
(ii)  All transactions have been recorded and are reflected in the 
financial statements.  
(b) Prior to auditor’s identification and assessment of risks of material 
misstatement, planning includes the need to consider following matters:  
1. The analytical procedures to be applied as risk assessment 
procedures. 
2. Obtaining a general understanding of the legal and regulatory 
framework applicable to the entity and how the entity is complying 
with that framework. 
3. The determination of materiality. 
4. The involvement of experts. 
5. The performance of other risk assessment procedures. 
427
(c)  In an initial audit engagement, in the case of inventories, the current 
period’s audit procedures on the closing inventory balance provide little 
audit evidence regarding inventory on hand at the beginning of the 
period. Therefore, additional audit procedures may be necessary, and 
one or more of the following may provide sufficient appropriate audit 
evidence: 
• Observing a current physical inventory count and reconciling it to 
the opening inventory quantities. 
• Performing audit procedures on the valuation of the opening 
inventory items. 
• Performing audit procedures on gross profit and cut-off. 
(d)  Internal Control Questionnaire 
• Are competitive quotes obtained from different insurers? 
• Is comprehensive insurance cover obtained for fire, flood, burglary, 
earthquake risks etc.? 
• Are all three locations in city A and B covered? 
• Are all assets consisting of building, plant & machinery and 
inventories covered? 
• Is there an adequate procedure to ensure that assets acquired 
between two renewal dates are also covered by insurance? 
• Is there an official who decides on value for which policies are taken?  
• Does officer who decides on policy value review periodically 
adequacy of insurance cover? 
• Is loss-of-profits insurance cover taken? 
• Have there been any instances of rejection of claims? 
• Are pending claims followed-up with insurers? 
3. (a)  The above disclosure is not in accordance with requirements of  
Division I of Schedule III of the Companies Act, 2013. The discrepancies 
are as under: - 
(1)  The Company has wrongly disclosed information for trade 
receivables in a manner which is applicable for trade payables.  
(2)  No distinction between MSME and other trade receivables is 
required.  
(3)  Trade receivables are to be categorised into undisputed and 
disputed trade receivables as under: - 
• Undisputed trade receivables considered good 
• Undisputed trade receivables considered doubtful 
• Disputed trade receivables considered good 
428
Page 5


ANSWERS OF MODEL TEST PAPER 2 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS 
SUGGESTED ANSWERS / HINTS 
PART I - Multiple Choice Questions 
1. (b)  
2. (c)  
3. (a)  
4. (b)  
5. (d)  
6. (c)   
7. (c)   
8. (d)   
9. (d)   
10. (d)   
11. (a)   
12. (c)   
13. (c) 
14. (c) 
15. (a) 
PART II -Descriptive Answers 
1. (a)  Audit Sampling refers to the application of audit procedures to less than 
100% of items within a population relevant under the audit such that all 
sampling units (i.e. all the items in the population) have an equal chance 
of selection. 
 In the given situation, senior team member is not selecting items for 
testing by means of audit sampling. He is only selecting specific items 
from a population. In accordance with SA 500, one of the means 
available to auditor for selecting items for testing is “by selecting specific 
items.”  
 Specific items selected may include: - 
•  High value or key items: The auditor may decide to select specific 
items within a population because they are of high value, or exhibit 
some other characteristic, for example, items that are suspicious, 
unusual, particularly risk-prone or that have a history of error.  
•  All items over a certain amount: The auditor may decide to examine 
items whose recorded values exceed a certain amount so as to verify 
425
a large proportion of the total amount of a class of transactions or 
account balance.  
•  Items to obtain information: The auditor may examine items to 
obtain information about matters such as the nature of the entity or 
the nature of transactions. 
 Therefore, Sanjeev’s understanding is not proper. 
 The above approach for selecting items for testing is subject to non-
sampling risk. Non-sampling risk is the risk that auditor may reach an 
erroneous conclusion for any reason not related to sampling risk. Like, 
erroneous conclusion may be reached due to some inappropriate audit 
procedure.  
(b)  In carrying out audit of advances, the auditor is primarily concerned with 
obtaining evidence about the following: - 
(i)  Amounts are included in balance sheet in respect of advances 
which are outstanding at the date of the balance sheet. 
(ii)  Advances represent amount due to the bank branch. 
(iii)  Amounts due to the bank branch are appropriately supported by 
loan documents and other documents as applicable to the nature 
of advances. 
(iv)  There are no unrecorded advances. 
(v)  The stated basis of valuation of advances is appropriate and 
properly applied and the recoverability of advances is recognised 
in their valuation. 
(vi)  The advances are disclosed, classified and described in 
accordance with recognised accounting policies and practices and 
relevant statutory and regulatory requirements. 
(vii)  Appropriate provisions towards advances have been made as per 
the RBI norms, Accounting Standards and generally accepted 
accounting practices. 
(c)  Subsequent events are events occurring between the date of financial 
statements and the date of the auditor’s report and facts that become 
known to the auditor after the date of the auditor’s report. 
 In the given case, the company had already made provision of ` 10 lakhs 
in financial statements for year 2022-23. However, there is an out of 
court settlement between the company and employee for ` 6 lakhs.  
 It is an example of event which provides evidence of conditions that 
existed at the date of financial statements i.e. 31
st
 March, 2023. It 
provides evidence on adjustment in provision amount already made in 
financial statements. Therefore, internal auditor should ask management 
to revise provision downwards to ` 6 lakhs so that financial statements 
are in accordance with applicable accounting standards. 
426
(d)  As given above, the engagement involves gathering of sufficient 
appropriate evidence on the basis of which limited conclusion can be 
drawn up. It is a limited assurance engagement like review. Other two 
features of such type of engagement are: - 
(1)  It provides lower level of assurance than reasonable assurance 
engagement. 
(2)  It performs fewer procedures than reasonable assurance 
engagement. 
2. (a)  Written representation about management’s responsibilities involves 
confirmation of fulfilment of management’s responsibilities in following 
areas: - 
(I)  Preparation of the financial statements  
 The auditor shall request management to provide a written 
representation that it has fulfilled its responsibility for the 
preparation of the financial statements in accordance with the 
applicable financial reporting framework, including, where relevant, 
their fair presentation, as set out in the terms of the audit 
engagement. 
 Due to its responsibility for the preparation and presentation of the 
financial statements and its responsibilities for the conduct of the 
entity’s business, management would be expected to have 
sufficient knowledge of the process followed by the entity in 
preparing and presenting the financial statements and the 
assertions therein on which to base the written representations.  
(II) Information provided and completeness of transactions  
 The auditor shall request management to provide a written 
representation that: -  
(i)  It has provided the auditor with all relevant information and 
access as agreed in the terms of the audit engagement and 
(ii)  All transactions have been recorded and are reflected in the 
financial statements.  
(b) Prior to auditor’s identification and assessment of risks of material 
misstatement, planning includes the need to consider following matters:  
1. The analytical procedures to be applied as risk assessment 
procedures. 
2. Obtaining a general understanding of the legal and regulatory 
framework applicable to the entity and how the entity is complying 
with that framework. 
3. The determination of materiality. 
4. The involvement of experts. 
5. The performance of other risk assessment procedures. 
427
(c)  In an initial audit engagement, in the case of inventories, the current 
period’s audit procedures on the closing inventory balance provide little 
audit evidence regarding inventory on hand at the beginning of the 
period. Therefore, additional audit procedures may be necessary, and 
one or more of the following may provide sufficient appropriate audit 
evidence: 
• Observing a current physical inventory count and reconciling it to 
the opening inventory quantities. 
• Performing audit procedures on the valuation of the opening 
inventory items. 
• Performing audit procedures on gross profit and cut-off. 
(d)  Internal Control Questionnaire 
• Are competitive quotes obtained from different insurers? 
• Is comprehensive insurance cover obtained for fire, flood, burglary, 
earthquake risks etc.? 
• Are all three locations in city A and B covered? 
• Are all assets consisting of building, plant & machinery and 
inventories covered? 
• Is there an adequate procedure to ensure that assets acquired 
between two renewal dates are also covered by insurance? 
• Is there an official who decides on value for which policies are taken?  
• Does officer who decides on policy value review periodically 
adequacy of insurance cover? 
• Is loss-of-profits insurance cover taken? 
• Have there been any instances of rejection of claims? 
• Are pending claims followed-up with insurers? 
3. (a)  The above disclosure is not in accordance with requirements of  
Division I of Schedule III of the Companies Act, 2013. The discrepancies 
are as under: - 
(1)  The Company has wrongly disclosed information for trade 
receivables in a manner which is applicable for trade payables.  
(2)  No distinction between MSME and other trade receivables is 
required.  
(3)  Trade receivables are to be categorised into undisputed and 
disputed trade receivables as under: - 
• Undisputed trade receivables considered good 
• Undisputed trade receivables considered doubtful 
• Disputed trade receivables considered good 
428
• Disputed trade receivables considered doubtful 
(4)  Aging is to be reflected for each of above categories in respect of 
outstandings for the following periods from due date of payment  
• for less than 6 months  
• 6 months-1 year  
• 1- 2 years  
• 2-3 years  
• more than 3 years 
(5)  Following information is also required to be disclosed: - 
 Trade receivables shall be sub-classified as:  
(a)  Secured, considered good 
(b)  Unsecured, considered good 
(c)  Doubtful.  
(6)  Allowance for bad and doubtful debts shall be disclosed under 
the relevant heads separately.  
(7)  Debts due by  
• directors or other officers of the company or any of them 
either severally or jointly with any other person or 
• firms or private companies respectively in which any 
director is a partner or a director or a member should be 
separately stated. 
(b)  Audit procedures to verify existence and valuation assertions for work-
in-progress are as under: - 
• Attend inventory count in accordance with SA 501 and understand 
how work in progress is arrived at. 
• Evaluate work of management expert, if any, in this regard. 
• Ascertain how the various stages of production/ value additions are 
measured and in case estimates are made, understand the basis for 
such estimates.  
• Ascertain what elements of cost are included. If overheads are 
included, ascertain the basis on which they are included and compare 
such basis with the available costing and financial data/ information 
maintained by the entity. 
• Ensure that material costs exclude any abnormal wastage factors. 
(c)  The ascertaining of reporting objectives of engagement helps the auditor 
to plan timing of different audit procedures and also nature of 
communications. Some of the instances are given under: - 
? The entity’s timetable for reporting 
429