Question 1

Professional/disciplinary liability arises from:

Accepted Answer

Professional bodies can discipline auditors for misconduct.

Question 2

A common fraud in balance sheet items is:

Accepted Answer

Overvalued stock inflates profits and assets.

Question 3

Lapping of receivables refers to:

Accepted Answer

Lapping is a cash misappropriation technique involving delayed crediting of receipts.

Question 4

A common fraud detected by vouching cash receipts is:

Accepted Answer

Cash received may be not recorded (suppressed).

Question 5

Which is a self-review threat?

Accepted Answer

Self-review arises when the auditor audits their own work.

Question 6

Contingent liabilities are generally:

Accepted Answer

Contingent liabilities are usually disclosed unless probable and estimable.

Question 7

Professional confidentiality means:

Accepted Answer

Auditor keeps confidentiality unless disclosure is legally required.

Question 8

Professional competence and due care primarily requires:

Accepted Answer

Due care requires skill, diligence, planning and proper evidence.

Question 9

Independence in appearance refers to:

Accepted Answer

It is about public perception of independence.

Question 10

Primary responsibility for prevention of fraud lies with:

Accepted Answer

Management is responsible to design and maintain internal controls to prevent/detect fraud.

Question 11

Which is NOT an audit procedure?

Accepted Answer

Advertising is not an audit procedure.

Question 12

Audit provides:

Accepted Answer

Audit provides reasonable assurance, not guarantee.

Question 13

A key reserve in insurance is related to:

Accepted Answer

Outstanding claims reserve is crucial for correct liability measurement.

Question 14

Qualified opinion is issued when misstatement is:

Accepted Answer

Qualified = material but not pervasive (or limitation not pervasive).

Question 15

Fraudulent financial reporting primarily involves:

Accepted Answer

It is intentional misstatement in financial statements (e.g., fictitious revenue).

Question 16

External vouchers are generally:

Accepted Answer

External evidence is usually more reliable.

Question 17

Cut-off test is related to:

Accepted Answer

Cut-off ensures correct period recognition.

Question 18

Special institution audits require strong focus on:

Accepted Answer

Regulatory compliance and control systems are key.

Question 19

Substantive procedures are mainly aimed to:

Accepted Answer

Substantive procedures directly detect misstatements.

Question 20

Vouching means:

Accepted Answer

Vouching verifies transactions by examining documentary evidence.

Question 21

What is BRS?

Accepted Answer

**BRS** is **Bank Reconciliation Statement**.

Question 22

State one ethical requirement for auditor.

Accepted Answer

Auditor must maintain **independence**.

Question 23

Define verification.

Accepted Answer

**Verification** means checking **existence and ownership** of balance sheet items.

Question 24

What is confidentiality?

Accepted Answer

**Confidentiality** means not disclosing or misusing client information without proper authority.

Question 25

Define internal control.

Accepted Answer

**Internal control** is the system of policies and procedures to **safeguard assets** and ensure **reliable accounting records**.

Question 26

What are substantive procedures?

Accepted Answer

**Substantive procedures** are audit procedures to detect **material misstatements** directly.

Question 27

What is civil liability of auditor?

Accepted Answer

**Civil liability** means auditor may have to pay **damages** for negligence causing loss.

Question 28

Define audit planning.

Accepted Answer

**Audit planning** is deciding in advance the nature, timing and extent of audit work to be performed.

Question 29

What are tests of controls?

Accepted Answer

**Tests of controls** are procedures to check whether internal controls are operating effectively.

Question 30

What is professional skepticism?

Accepted Answer

**Professional skepticism** is a **questioning mind** and critical assessment of audit evidence.

Question 31

Explain objectives/importance of audit planning (any five).

Accepted Answer

Objectives of **audit planning** (any five):
- Proper **time and staff allocation**.
- Identify **risk areas** and focus on them.
- Decide appropriate **audit procedures**.
- Better **coordination and supervision**.
- Reduce **audit risk** and improve audit quality.

Thus, planning ensures efficient and effective audit.

Question 32

Explain verification of cash and bank balance (brief).

Accepted Answer

For **cash**, auditor performs **physical cash count** and matches with cash book. For **bank**, auditor checks bank statements, obtains **bank confirmation**, and verifies **BRS** for reconciling items.

This ensures existence and correct balance of cash/bank.

Question 33

Differentiate between internal audit and external audit.

Accepted Answer

**Internal audit** is done for management to improve controls and operations; it is continuous and internal in nature.

**External audit** is done by an independent auditor to express opinion on financial statements, often to meet statutory requirements.

Thus internal audit is managerial tool; external audit provides assurance to outsiders.

Question 34

Explain types of errors (any three) with examples.

Accepted Answer

Types of errors (any three):
- **Omission**: transaction not recorded (e.g., invoice not entered).
- **Commission**: wrong recording/posting (e.g., ₹9,500 posted as ₹5,900).
- **Principle**: wrong classification (capital treated as revenue).
- **Compensating**: errors cancel each other.

Always add a short example for full marks.

Question 35

Explain safeguards to maintain independence (any three).

Accepted Answer

Safeguards (any three):
- **Rotation** of partner/team
- **Independent review** (quality control)
- avoiding financial interests/relationships
- firm policies on gifts and conflicts
- communicate with governance

If threats remain high, auditor should withdraw.

Question 36

Explain audit planning and its importance. Add a simple flowchart.

Accepted Answer

**Audit planning** means deciding in advance **what**, **when**, **who**, and **how** the audit will be performed. It acts as the **roadmap** for the audit.

### **Objectives/importance**
- Proper **time and staff allocation**
- Focus on **high-risk areas**
- Selection of suitable **audit procedures**
- Better **coordination and supervision**
- Reduction of **audit risk** and improvement in audit quality

```text
Understand client → Risk & materiality → Plan procedures → Prepare programme → Perform & document → Report
```

Thus, planning makes audit efficient and effective.

Question 37

Differentiate between errors and frauds with examples and a table/flow.

Accepted Answer

### **Differentiate between Errors and Frauds**

**Errors** are **unintentional** mistakes due to **oversight**, **negligence**, or lack of knowledge. **Frauds** are **intentional** acts of **deception** to misappropriate assets or misstate results.

| Basis | **Error** | **Fraud** |
|---|---|---|
| **Intention** | Unintentional | Intentional |
| **Nature** | Mistake in recording/classification | Deceit/misappropriation/manipulation |
| **Examples** | wrong totalling, wrong posting | fictitious sales, lapping, fake vendors |
| **Detection** | usually easier | harder (especially **management override**) |

```text
No intention → Error
Intention to deceive → Fraud
```

**Conclusion**: In exams, clearly write **intention** as the main basis and add 2–3 examples.

Question 38

Explain verification and valuation of inventory (stock). Add key checks in a table.

Accepted Answer

### **Audit of Inventory (Stock)**
Auditor verifies both **existence** and **valuation** of inventory.

#### **Verification (existence)**
- attend/observe **stock count** (where possible)
- check stock records and reconciliation with physical count
- verify goods in transit and stock at third parties

#### **Valuation**
- ensure stock valued at **Cost or NRV whichever is lower**
- verify pricing method (FIFO/weighted average) is consistent
- check cut-off at year end (purchase/sales cut-off)

| Check area | Key documents/steps |
|---|---|
| Existence | stock sheets, count records |
| Ownership | invoices, GRN, delivery challans |
| Valuation | costing sheets, NRV basis |

Thus correct stock verification prevents profit manipulation via over/undervaluation.

Question 39

Explain auditor’s responsibility for detection of fraud. Add a flowchart.

Accepted Answer

### **Auditor’s responsibility for detection of fraud**

Auditor’s duty is to obtain **reasonable assurance** that financial statements are free from **material misstatement** due to **error or fraud**.

**Key responsibilities**:
- Maintain **professional scepticism** throughout the audit.
- Assess **fraud risk** and design procedures accordingly.
- Evaluate **internal controls** and test key controls.
- Perform substantive tests (vouching, verification, confirmations, analytical review).
- When fraud is suspected: increase testing, obtain more evidence, and communicate with those charged with governance.

```text
Understand business → Assess fraud risk → Test controls → Substantive tests
→ Investigate red flags → Conclude materiality → Report/communicate
```

**Important point**: Prevention and detection of fraud is primarily management’s responsibility, but auditor must plan the audit to detect material frauds.

Question 40

Explain duties of company auditor and basic contents of auditor’s report with a table.

Accepted Answer

### **Duties of company auditor**
The company auditor must:
- plan audit and follow **auditing standards**
- obtain **sufficient appropriate evidence**
- verify books and check compliance with applicable rules
- report whether statements show **true and fair view**
- maintain **working papers**, **confidentiality**, and **independence**

### **Auditor’s report (basic contents)**
| Element | Meaning |
|---|---|
| Scope | what was audited |
| Opinion | unmodified/modified |
| Basis for opinion | key reasons/evidence |
| Responsibilities | management vs auditor |
| Signature/date/place | authentication |

Thus, auditor’s duty ends with a well-supported and clearly communicated audit opinion.

Auditing and Assurance — Question Paper

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