Auditing and Assurance Model Test Paper - 4 (Answers) | Model Test Papers for CA Intermediate PDF Download

 Page 1


ANSWERS OF MODEL TEST PAPER 4 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
 Part I - Multiple Choice Questions 
1. (a)
2. (c)
3. (a)
4. (b)
5. (b)
6. (d)
7. (c)
8. (a)
9. (b)
10. (a)
11. (b)
12. (b)
13. (c)
14. (b)
15. (b)
Part II -Descriptive Answers 
1. (a)  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. One of the factors to be taken into consideration while 
establishing audit strategy relates to ascertaining of reporting objectives 
of engagement to plan the timing of the audit and the nature of the 
communications required. Some of the instances are given under:  
• The entity’s timetable for reporting
• Organization of meetings to discuss of nature, timing and extent of
audit work with management
• Discussion with management regarding the expected type and
timing of reports to be issued including the auditor’s report
• Discussion with management regarding the expected
communications on the status of audit work throughout the
engagement.
• Expected nature and timing of communications among
449
Page 2


ANSWERS OF MODEL TEST PAPER 4 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
 Part I - Multiple Choice Questions 
1. (a)
2. (c)
3. (a)
4. (b)
5. (b)
6. (d)
7. (c)
8. (a)
9. (b)
10. (a)
11. (b)
12. (b)
13. (c)
14. (b)
15. (b)
Part II -Descriptive Answers 
1. (a)  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. One of the factors to be taken into consideration while 
establishing audit strategy relates to ascertaining of reporting objectives 
of engagement to plan the timing of the audit and the nature of the 
communications required. Some of the instances are given under:  
• The entity’s timetable for reporting
• Organization of meetings to discuss of nature, timing and extent of
audit work with management
• Discussion with management regarding the expected type and
timing of reports to be issued including the auditor’s report
• Discussion with management regarding the expected
communications on the status of audit work throughout the
engagement.
• Expected nature and timing of communications among
449
engagement team members, including the nature and timing of 
team meetings and timing of the review of work performed. 
In the given case, working paper highlights that auditor has taken into 
account expected timelines to plan the audit and nature of the 
communications required. Since the working paper relates to the 
statutory audit of a company, the ascertaining of reporting objectives of 
engagement helps the auditor to plan timing of different audit procedures 
and also nature of communications.  
(b) (i) In the given case, risk of material misstatement has been assessed 
as high in respect of assertions relating to revenue and various 
direct expenses due to increase in gross profit ratio of company 
from 14% in year 2022-23 to 24% in year 2023-24.  
Few possible reasons which could have led to abnormal jump in 
gross profit ratio include: - 
• Overvaluation of inventories
• Overstatement of revenues
• Understatement of direct expenses
(ii) SA 200, “Overall Objectives of the Independent auditor and the
conduct of an audit in accordance with Standards on Auditing”
defines detection risk as the risk that the procedures performed by
the auditor to reduce audit risk to an acceptably low level will not
detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
Tisha is of a view that detection risk in this engagement should be
kept at high level whereas in the given situation, risk of material
misstatement has been assessed as high for assertions relating to
revenue and direct expenses. Therefore, detection risk has to be
kept at low level so that a material misstatement in these assertions
does not remain undetected.
Therefore, view of Ms. Tisha is not proper.
(c) As per SA 500, “Audit Evidence”, if the entity has employed or engaged
experts, the auditor may rely on the works of experts, provided he is
satisfied that sufficient and appropriate audit evidence is obtained with
reasonable assurance to form an opinion on the financial statements.
When information to be used as audit evidence has been prepared using
the work of a management’s expert, the auditor shall, to the extent
necessary, having regard to the significance of that expert’s work for the
auditor’s purposes: -
(a) Evaluate the competence, capabilities and objectivity of that expert
(b) Obtain an understanding of the work of that expert and
(c) Evaluate the appropriateness of that expert’s work as audit
evidence for the relevant assertion.
450
Page 3


ANSWERS OF MODEL TEST PAPER 4 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
 Part I - Multiple Choice Questions 
1. (a)
2. (c)
3. (a)
4. (b)
5. (b)
6. (d)
7. (c)
8. (a)
9. (b)
10. (a)
11. (b)
12. (b)
13. (c)
14. (b)
15. (b)
Part II -Descriptive Answers 
1. (a)  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. One of the factors to be taken into consideration while 
establishing audit strategy relates to ascertaining of reporting objectives 
of engagement to plan the timing of the audit and the nature of the 
communications required. Some of the instances are given under:  
• The entity’s timetable for reporting
• Organization of meetings to discuss of nature, timing and extent of
audit work with management
• Discussion with management regarding the expected type and
timing of reports to be issued including the auditor’s report
• Discussion with management regarding the expected
communications on the status of audit work throughout the
engagement.
• Expected nature and timing of communications among
449
engagement team members, including the nature and timing of 
team meetings and timing of the review of work performed. 
In the given case, working paper highlights that auditor has taken into 
account expected timelines to plan the audit and nature of the 
communications required. Since the working paper relates to the 
statutory audit of a company, the ascertaining of reporting objectives of 
engagement helps the auditor to plan timing of different audit procedures 
and also nature of communications.  
(b) (i) In the given case, risk of material misstatement has been assessed 
as high in respect of assertions relating to revenue and various 
direct expenses due to increase in gross profit ratio of company 
from 14% in year 2022-23 to 24% in year 2023-24.  
Few possible reasons which could have led to abnormal jump in 
gross profit ratio include: - 
• Overvaluation of inventories
• Overstatement of revenues
• Understatement of direct expenses
(ii) SA 200, “Overall Objectives of the Independent auditor and the
conduct of an audit in accordance with Standards on Auditing”
defines detection risk as the risk that the procedures performed by
the auditor to reduce audit risk to an acceptably low level will not
detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
Tisha is of a view that detection risk in this engagement should be
kept at high level whereas in the given situation, risk of material
misstatement has been assessed as high for assertions relating to
revenue and direct expenses. Therefore, detection risk has to be
kept at low level so that a material misstatement in these assertions
does not remain undetected.
Therefore, view of Ms. Tisha is not proper.
(c) As per SA 500, “Audit Evidence”, if the entity has employed or engaged
experts, the auditor may rely on the works of experts, provided he is
satisfied that sufficient and appropriate audit evidence is obtained with
reasonable assurance to form an opinion on the financial statements.
When information to be used as audit evidence has been prepared using
the work of a management’s expert, the auditor shall, to the extent
necessary, having regard to the significance of that expert’s work for the
auditor’s purposes: -
(a) Evaluate the competence, capabilities and objectivity of that expert
(b) Obtain an understanding of the work of that expert and
(c) Evaluate the appropriateness of that expert’s work as audit
evidence for the relevant assertion.
450
Before using the work of PQR Associates, management’s expert, auditor 
should ensure that the criteria mentioned above are fulfilled. 
2. (a)  As per SA 570, “Going Concern”, going concern is one of the
fundamental accounting assumptions. The enterprise is normally viewed 
as a going concern, that is, as continuing in operation for the foreseeable 
future. It is assumed that the enterprise has neither the intention nor the 
necessity of liquidation or of curtailing materially the scale of the 
operations. 
Under the going concern basis of accounting, the financial statements 
are prepared on the assumption that the entity is a going concern and 
will continue its operations for the foreseeable future. General purpose 
financial statements are prepared using the going concern basis of 
accounting, unless management either intends to liquidate the entity or 
to cease operations, or has no realistic alternative but to do so. 
In the given situation, company has reflected net losses in financial 
statements of last two years but is able to meet its financial commitments 
signifying its ability to carry on business/trade.  The revenue of company 
is also expected to grow in the coming period. It shows that management 
has neither the intention nor the necessity of liquidation or of curtailing 
materially the scale of operations. Therefore, view of the management 
for following going concern basis of accounting in current year is 
appropriate.  
Further, the significance of going concern is due to its effect on the 
preparation of financial statements. Ability or otherwise of an enterprise 
to be viewed as going concern affects its preparation of financial 
statements. When the use of the going concern basis of accounting is 
appropriate, assets and liabilities are recorded on the basis that the 
entity will be able to realise its assets and discharge its liabilities in the 
normal course of business. When an enterprise is not viewed as a going 
concern, the financial statements are prepared on liquidation basis. For 
example, inventories may need to be written down as these may be sold 
for a lower price. Assets may have to be recorded at the likely prices 
they will fetch. 
(b) In accordance with SA 299, “Joint Audit of financial statements”, before
the commencement of the audit, the joint auditors should discuss and
develop a joint audit plan. In developing the joint audit plan, PQR &
Associates and MNO & Co., the joint auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that
are significant in directing the engagement team’s efforts;
(d) consider the results of preliminary engagement activities, or similar
engagements performed earlier
451
Page 4


ANSWERS OF MODEL TEST PAPER 4 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
 Part I - Multiple Choice Questions 
1. (a)
2. (c)
3. (a)
4. (b)
5. (b)
6. (d)
7. (c)
8. (a)
9. (b)
10. (a)
11. (b)
12. (b)
13. (c)
14. (b)
15. (b)
Part II -Descriptive Answers 
1. (a)  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. One of the factors to be taken into consideration while 
establishing audit strategy relates to ascertaining of reporting objectives 
of engagement to plan the timing of the audit and the nature of the 
communications required. Some of the instances are given under:  
• The entity’s timetable for reporting
• Organization of meetings to discuss of nature, timing and extent of
audit work with management
• Discussion with management regarding the expected type and
timing of reports to be issued including the auditor’s report
• Discussion with management regarding the expected
communications on the status of audit work throughout the
engagement.
• Expected nature and timing of communications among
449
engagement team members, including the nature and timing of 
team meetings and timing of the review of work performed. 
In the given case, working paper highlights that auditor has taken into 
account expected timelines to plan the audit and nature of the 
communications required. Since the working paper relates to the 
statutory audit of a company, the ascertaining of reporting objectives of 
engagement helps the auditor to plan timing of different audit procedures 
and also nature of communications.  
(b) (i) In the given case, risk of material misstatement has been assessed 
as high in respect of assertions relating to revenue and various 
direct expenses due to increase in gross profit ratio of company 
from 14% in year 2022-23 to 24% in year 2023-24.  
Few possible reasons which could have led to abnormal jump in 
gross profit ratio include: - 
• Overvaluation of inventories
• Overstatement of revenues
• Understatement of direct expenses
(ii) SA 200, “Overall Objectives of the Independent auditor and the
conduct of an audit in accordance with Standards on Auditing”
defines detection risk as the risk that the procedures performed by
the auditor to reduce audit risk to an acceptably low level will not
detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
Tisha is of a view that detection risk in this engagement should be
kept at high level whereas in the given situation, risk of material
misstatement has been assessed as high for assertions relating to
revenue and direct expenses. Therefore, detection risk has to be
kept at low level so that a material misstatement in these assertions
does not remain undetected.
Therefore, view of Ms. Tisha is not proper.
(c) As per SA 500, “Audit Evidence”, if the entity has employed or engaged
experts, the auditor may rely on the works of experts, provided he is
satisfied that sufficient and appropriate audit evidence is obtained with
reasonable assurance to form an opinion on the financial statements.
When information to be used as audit evidence has been prepared using
the work of a management’s expert, the auditor shall, to the extent
necessary, having regard to the significance of that expert’s work for the
auditor’s purposes: -
(a) Evaluate the competence, capabilities and objectivity of that expert
(b) Obtain an understanding of the work of that expert and
(c) Evaluate the appropriateness of that expert’s work as audit
evidence for the relevant assertion.
450
Before using the work of PQR Associates, management’s expert, auditor 
should ensure that the criteria mentioned above are fulfilled. 
2. (a)  As per SA 570, “Going Concern”, going concern is one of the
fundamental accounting assumptions. The enterprise is normally viewed 
as a going concern, that is, as continuing in operation for the foreseeable 
future. It is assumed that the enterprise has neither the intention nor the 
necessity of liquidation or of curtailing materially the scale of the 
operations. 
Under the going concern basis of accounting, the financial statements 
are prepared on the assumption that the entity is a going concern and 
will continue its operations for the foreseeable future. General purpose 
financial statements are prepared using the going concern basis of 
accounting, unless management either intends to liquidate the entity or 
to cease operations, or has no realistic alternative but to do so. 
In the given situation, company has reflected net losses in financial 
statements of last two years but is able to meet its financial commitments 
signifying its ability to carry on business/trade.  The revenue of company 
is also expected to grow in the coming period. It shows that management 
has neither the intention nor the necessity of liquidation or of curtailing 
materially the scale of operations. Therefore, view of the management 
for following going concern basis of accounting in current year is 
appropriate.  
Further, the significance of going concern is due to its effect on the 
preparation of financial statements. Ability or otherwise of an enterprise 
to be viewed as going concern affects its preparation of financial 
statements. When the use of the going concern basis of accounting is 
appropriate, assets and liabilities are recorded on the basis that the 
entity will be able to realise its assets and discharge its liabilities in the 
normal course of business. When an enterprise is not viewed as a going 
concern, the financial statements are prepared on liquidation basis. For 
example, inventories may need to be written down as these may be sold 
for a lower price. Assets may have to be recorded at the likely prices 
they will fetch. 
(b) In accordance with SA 299, “Joint Audit of financial statements”, before
the commencement of the audit, the joint auditors should discuss and
develop a joint audit plan. In developing the joint audit plan, PQR &
Associates and MNO & Co., the joint auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that
are significant in directing the engagement team’s efforts;
(d) consider the results of preliminary engagement activities, or similar
engagements performed earlier
451
(e) ascertain the nature, timing and extent of resources necessary to
accomplish the engagement.
(c) Audit is distinct from investigation. Investigation is a critical examination
of the accounts with a special purpose. For example, if fraud is
suspected and it is specifically called upon to check the accounts
whether fraud really exists, it takes character of investigation. The
objective of audit, on the other hand, is to obtain reasonable assurance
about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor
to express an opinion.
The scope of audit is general and broad whereas scope of investigation
is specific and narrow.
In the given situation, management of company suspects that some of
its employees may be involved in making fraudulent payments on
account of dummy workers at its different plants in the country.  Such an
assignment is in the nature of “investigation”.
Therefore, Mr. P is right in objecting the use of word “audit” in the
proposed assignment.
3. (a)  CARO 2020 shall apply to every company including a foreign company
as defined in clause (42) of section 2 of the Companies Act, 2013, 
except–  
(i) a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949;
(ii) an insurance company as defined under the Insurance Act,1938;
(iii) a company licensed to operate under section 8 of the Companies
Act;
(iv) a One Person Company as defined in clause (62) of section 2 of
the Companies Act and a small company as defined in clause (85)
of section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding
company of a public company, having a paid up capital and
reserves and surplus not more than one crore rupees as on the
balance sheet date and which does not have total borrowings
exceeding one crore rupees from any bank or financial institution
at any point of time during the financial year and which does not
have a total revenue as disclosed in Scheduled III to the
Companies Act (including revenue from discontinuing operations)
exceeding ten crore rupees during the financial year as per the
financial statements.
(b) Audit procedures to be followed by the statutory auditor of Zed Limited
to ensure that only the inventories held by entity have been recorded in
the ?nancial statements and do not include any inventories that belong
to third parties but does include inventories owned by the entity and lying
with a third party are as under: -
452
Page 5


ANSWERS OF MODEL TEST PAPER 4 
INTERMEDIATE: GROUP – II   
PAPER – 5: AUDITING AND ETHICS
SUGGESTED ANSWERS / HINTS
 Part I - Multiple Choice Questions 
1. (a)
2. (c)
3. (a)
4. (b)
5. (b)
6. (d)
7. (c)
8. (a)
9. (b)
10. (a)
11. (b)
12. (b)
13. (c)
14. (b)
15. (b)
Part II -Descriptive Answers 
1. (a)  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. One of the factors to be taken into consideration while 
establishing audit strategy relates to ascertaining of reporting objectives 
of engagement to plan the timing of the audit and the nature of the 
communications required. Some of the instances are given under:  
• The entity’s timetable for reporting
• Organization of meetings to discuss of nature, timing and extent of
audit work with management
• Discussion with management regarding the expected type and
timing of reports to be issued including the auditor’s report
• Discussion with management regarding the expected
communications on the status of audit work throughout the
engagement.
• Expected nature and timing of communications among
449
engagement team members, including the nature and timing of 
team meetings and timing of the review of work performed. 
In the given case, working paper highlights that auditor has taken into 
account expected timelines to plan the audit and nature of the 
communications required. Since the working paper relates to the 
statutory audit of a company, the ascertaining of reporting objectives of 
engagement helps the auditor to plan timing of different audit procedures 
and also nature of communications.  
(b) (i) In the given case, risk of material misstatement has been assessed 
as high in respect of assertions relating to revenue and various 
direct expenses due to increase in gross profit ratio of company 
from 14% in year 2022-23 to 24% in year 2023-24.  
Few possible reasons which could have led to abnormal jump in 
gross profit ratio include: - 
• Overvaluation of inventories
• Overstatement of revenues
• Understatement of direct expenses
(ii) SA 200, “Overall Objectives of the Independent auditor and the
conduct of an audit in accordance with Standards on Auditing”
defines detection risk as the risk that the procedures performed by
the auditor to reduce audit risk to an acceptably low level will not
detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
Tisha is of a view that detection risk in this engagement should be
kept at high level whereas in the given situation, risk of material
misstatement has been assessed as high for assertions relating to
revenue and direct expenses. Therefore, detection risk has to be
kept at low level so that a material misstatement in these assertions
does not remain undetected.
Therefore, view of Ms. Tisha is not proper.
(c) As per SA 500, “Audit Evidence”, if the entity has employed or engaged
experts, the auditor may rely on the works of experts, provided he is
satisfied that sufficient and appropriate audit evidence is obtained with
reasonable assurance to form an opinion on the financial statements.
When information to be used as audit evidence has been prepared using
the work of a management’s expert, the auditor shall, to the extent
necessary, having regard to the significance of that expert’s work for the
auditor’s purposes: -
(a) Evaluate the competence, capabilities and objectivity of that expert
(b) Obtain an understanding of the work of that expert and
(c) Evaluate the appropriateness of that expert’s work as audit
evidence for the relevant assertion.
450
Before using the work of PQR Associates, management’s expert, auditor 
should ensure that the criteria mentioned above are fulfilled. 
2. (a)  As per SA 570, “Going Concern”, going concern is one of the
fundamental accounting assumptions. The enterprise is normally viewed 
as a going concern, that is, as continuing in operation for the foreseeable 
future. It is assumed that the enterprise has neither the intention nor the 
necessity of liquidation or of curtailing materially the scale of the 
operations. 
Under the going concern basis of accounting, the financial statements 
are prepared on the assumption that the entity is a going concern and 
will continue its operations for the foreseeable future. General purpose 
financial statements are prepared using the going concern basis of 
accounting, unless management either intends to liquidate the entity or 
to cease operations, or has no realistic alternative but to do so. 
In the given situation, company has reflected net losses in financial 
statements of last two years but is able to meet its financial commitments 
signifying its ability to carry on business/trade.  The revenue of company 
is also expected to grow in the coming period. It shows that management 
has neither the intention nor the necessity of liquidation or of curtailing 
materially the scale of operations. Therefore, view of the management 
for following going concern basis of accounting in current year is 
appropriate.  
Further, the significance of going concern is due to its effect on the 
preparation of financial statements. Ability or otherwise of an enterprise 
to be viewed as going concern affects its preparation of financial 
statements. When the use of the going concern basis of accounting is 
appropriate, assets and liabilities are recorded on the basis that the 
entity will be able to realise its assets and discharge its liabilities in the 
normal course of business. When an enterprise is not viewed as a going 
concern, the financial statements are prepared on liquidation basis. For 
example, inventories may need to be written down as these may be sold 
for a lower price. Assets may have to be recorded at the likely prices 
they will fetch. 
(b) In accordance with SA 299, “Joint Audit of financial statements”, before
the commencement of the audit, the joint auditors should discuss and
develop a joint audit plan. In developing the joint audit plan, PQR &
Associates and MNO & Co., the joint auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that
are significant in directing the engagement team’s efforts;
(d) consider the results of preliminary engagement activities, or similar
engagements performed earlier
451
(e) ascertain the nature, timing and extent of resources necessary to
accomplish the engagement.
(c) Audit is distinct from investigation. Investigation is a critical examination
of the accounts with a special purpose. For example, if fraud is
suspected and it is specifically called upon to check the accounts
whether fraud really exists, it takes character of investigation. The
objective of audit, on the other hand, is to obtain reasonable assurance
about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor
to express an opinion.
The scope of audit is general and broad whereas scope of investigation
is specific and narrow.
In the given situation, management of company suspects that some of
its employees may be involved in making fraudulent payments on
account of dummy workers at its different plants in the country.  Such an
assignment is in the nature of “investigation”.
Therefore, Mr. P is right in objecting the use of word “audit” in the
proposed assignment.
3. (a)  CARO 2020 shall apply to every company including a foreign company
as defined in clause (42) of section 2 of the Companies Act, 2013, 
except–  
(i) a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949;
(ii) an insurance company as defined under the Insurance Act,1938;
(iii) a company licensed to operate under section 8 of the Companies
Act;
(iv) a One Person Company as defined in clause (62) of section 2 of
the Companies Act and a small company as defined in clause (85)
of section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding
company of a public company, having a paid up capital and
reserves and surplus not more than one crore rupees as on the
balance sheet date and which does not have total borrowings
exceeding one crore rupees from any bank or financial institution
at any point of time during the financial year and which does not
have a total revenue as disclosed in Scheduled III to the
Companies Act (including revenue from discontinuing operations)
exceeding ten crore rupees during the financial year as per the
financial statements.
(b) Audit procedures to be followed by the statutory auditor of Zed Limited
to ensure that only the inventories held by entity have been recorded in
the ?nancial statements and do not include any inventories that belong
to third parties but does include inventories owned by the entity and lying
with a third party are as under: -
452
• Perform analytical procedures (comparison tests with industry
averages, budgets, prior years, trend analysis, etc.).
— Compute inventory turnover ratio (COGS/ average inventory) 
— Perform vertical analysis (inventory/ total assets) 
— Compare budgetary expectations vis-à-vis actuals 
• Examine non-financial information related to inventory, such as
weights and other measurements.
• Perform purchase and sales cut-off tests. Trace shipping
documents (bills of lading and receiving reports, warehouse
records, and inventory records) to accounting records immediately
before and after year-end.
• With respect to tagged inventory, perform tests for omitted
transactions and tests for invalid transactions.
• Verify the clerical and arithmetical accuracy of inventory listings.
• Reconcile physical inventory amounts with perpetual records.
• Reconcile physical counts with ledger control totals.
• Reconcile inventories which belong to client but are held with third
parties like transporters, warehouses, port authorities etc.
• Goods received on a consignment basis have been properly
segregated from other items of inventory.
(c) SQC 1 requires firms to establish policies and procedures designed to
promote an internal culture based on the recognition that quality is
essential in performing engagements. Therefore, such leadership
responsibilities are required for all engagements and not for audit
engagements only.
Such policies and procedures should require the firm’s chief executive
officer or the firm’s managing partners to assume ultimate responsibility
for the firm’s system of quality control. The example set by firm’s
leadership encourages an inner culture that recognizes high quality audit
work. Further, persons assigned operational responsibilities for the firm’s
quality control system by the firm’s chief executive officer or managing
partners should have sufficient and appropriate experience, ability and
the necessary authority to assume that responsibility.
4. (a)  In accordance with SA 505, “External Confirmations”, the auditor shall
not use negative confirmation requests as the sole substantive audit 
procedure to address an assessed risk of material misstatement at the 
assertion level unless all of the following are present:  
(i) The auditor has assessed the risk of material misstatement as low
and has obtained sufficient appropriate audit evidence regarding
the operating effectiveness of controls relevant to the assertion.
453