Question Bank - Chapter 0 Compiled by Neeraj Arora and TEAM

Chapter 0
Question Bank

This question bank is not for sale, this is compiled for the benefit of students and can also be used by the teachers.
All the questions are from ICAI Publications - Source ICAI Publications as uploaded on www.icai.org

0.1 Meaning of Audit

Q1. Define Audit.
(SELF)

Meaning of Audit :
An audit is an independent examination of financial information of any entity, whether profit oriented
or not, and irrespective of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.

Comments and Feedback:

● Direct and Easy question
● Important keywords: independent examination, financial information, any entity, profit oriented
or not, size or legal form, opinion

Q2. Correct / Incorrect

Audit is required to be conducted only in case of profit oriented entities
(SELF)

The statement is incorrect.

An audit is defined as an independent examination of financial information of any entity, whether profit
oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a
view to expressing an opinion thereon.

The audit can be performed of any entity that may be profit-oriented or not. For example, An audit can be
performed of a listed company engaged in the business i.e. a profit-oriented entity and an audit can also be
conducted of an NGO working for the welfare of the society i.e., not a profit-oriented entity.

Hence, the statement is incorrect that the audit is required to be conducted only in case of profit oriented
entities .

Comments and Feedback:

● Direct and Easy question
● Important keywords: independent examination, financial information, any entity, profit oriented
or not, size or legal form, opinion

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0.2 Overall Objective of Auditor

Q3. ____________ refers to a difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.
a. Misstatement
b. Error
c. Fraud
d. Any of the above
(Sample MCQs) (MTP2, May 2019, 1 Mark)
OR
A difference between the amount, classification, presentation, or disclosure of a reported financial
statement item and the amount, classification, presentation, or disclosure that is required for the item to be
in accordance with the applicable financial reporting framework is :
e. Misstatement
f. Error
g. Fraud
h. Any of the above
(MTP1, Nov 2019, 1 Mark)

Correct answer: Option A, Misstatement

Comments and Feedback:
● Direct and Moderate question
● For a student’s understanding, the concept of misstatement is explained below:
➢ Misstatement refers to a difference between the amount, classification, presentation, or
disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the
applicable financial reporting framework.
➢ Misstatements in the financial statements can arise from either fraud or error.
➢ Fraud can be committed by anyone such as management, TCWG, employees and third
parties. Such an act has been committed using unfair means and is an intentional activity
(deliberate action) to gain personal benefit directly or indirectly illegally.
➢ While errors are acts of unintentional mistakes or negligence which can be detected easily.

Q4. Correct / Incorrect

Misstatements in the financial statements can arise from fraud only.
(MTP1, May 2018, 2 Marks) (MTP1, Nov 2018, 2 Marks) (MTP2, Nov 2018, 2 Marks)
OR
Misstatement in the financial statement is always because of fraud
(SA, July 2021, 2 Marks)

The statement is incorrect.

Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor
between fraud and error is whether the underlying action that results in the misstatement of the financial
statements is intentional or unintentional
The ‘fraud’ deals with intentional misrepresentation but, ‘error’, on the other hand, refers to unintentional
mistakes in financial information.

Comments and Feedback:

● Direct and Moderate question

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● Important keywords : either fraud or error, distinguishing factor, intentional or unintentional

Q5. One of your junior audit team members is confused with the term ‘material misstatement’. You explain to
him that a material misstatement is untrue information in a financial statement that could affect the
financial decisions of one who relies on the statement. Which of the following would constitute material
misstatement?
(1) An error of Rs.5,000 in relation to assets of Rs.20 lakhs.
(2) A payroll fraud of Rs.100 in a company where profit before tax is Rs.11,000.
(3) Non-disclosure of a material uncertainty.
(4) Financial statements have been prepared on a going concern basis when the company is in the process
of being liquidated.
a. 1 and 2
b. 3 and 4
c. 2 and 3
d. 1 and 4
(MTP2, May 2019, 2 Marks)

Correct answer: Option B, 3 and 4

Explanation:
An error of Rs 5,000 i.e. an unintentional mistake in the financial information does not constitute a material
misstatement. Payroll fraud of Rs 100 is immaterial.
However, Non-disclosure of a material uncertainty and financial statements have been prepared on a going
concern basis when the company is in the process of being liquidated would constitute material
misstatement as such misstatements can impact the economic decisions of the users of the financial
statements.

Comments and Feedback:

● Indirect and moderate question
● For a student’s understanding, the concept of material misstatement is explained below briefly.
➢ A material misstatement is information in the financial statements that is sufficiently
incorrect that it may impact the economic decisions of the users of the financial
statements.
➢ There are some factors that can be considered while deciding if a misstatement is material
or not. Factors are: the comparative size of the misstatement, the nature of the
misstatement, the relationship to other misstatements, the inherent character of the
mistake.

Q6. Correct / Incorrect

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error.
(MTP2, May 2019, 2 Marks)

The statement is correct.

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error. This is because fraud may involve sophisticated and carefully organized
schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional
misrepresentations being made to the auditor. Such attempts at concealment may be even more difficult
to detect when accompanied by collusion.

Comments and Feedback:

● Direct and Moderate question
● Important keywords: carefully organized schemes, conceal, deliberate failure, intentional

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misrepresentations, collusion.
● Do read the language of the question carefully

0.3 TCWG
Q7. The persons with responsibility for overseeing the strategic direction of the entity and obligations related to
the accountability of the entity are :
a. Management
b. those charged with governance
c. audit committee
d. board of directors
(RTP, May 2021, NA) (MTP1, May 2021, 1 Mark ) (RTP, Nov 2021, NA)

Correct answer: Option B, Those charged with governance

Comments and Feedback:
● Direct and Easy question
● For a student’s understanding, difference between management and TCWG is stated below:
➢ Management : The person(s) with executive responsibility for the conduct of the entity’s
operations. Management is responsible for the day to day work and implementing the
policies framed by TCWG.
➢ Those charged with governance: TCWG are responsible for strategic decisions. TCWG
supervises the work done by the management and is responsible for approving the
financial statements. TCWG is a higher authority. For example - Board of Directors,
corporate trustee
➢ Management and TCWG can be the same in some entities, say in small organisations.

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0.4 Management
Q8. Correct / Incorrect
Management and TCWG can be same
(SELF)

The statement is correct.

The management can be defined as the person(s) with executive responsibility for the conduct of the
entity’s operations whereas,
Those charged with governance are the person(s) or organisation(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. This includes overseeing the financial reporting process.

For some entities, those charged with governance may include management personnel, for example,
executive members of a governance board of a private or public sector entity, or an owner-manager.

Comments and Feedback:

● Direct and easy question
● Important keywords:
➢ From the meaning of management : executive responsibility for the conduct of the
entity’s operations.
➢ From the meaning of TCWG: overseeing the strategic direction of the entity, obligations,
accountability of the entity, financial reporting process.

0.5 Preconditions for an Audit

Q9. Discuss preconditions for an audit as per SA 210. Explain how an auditor would proceed to establish the
presence of pre conditions for an audit.
(RTP, May 2021, NA)

As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit may be defined as
the use by management of an acceptable financial reporting framework in the preparation of the
financial statements and the agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.

In order to establish whether the preconditions for an audit are present, the auditor shall:
1. Determine whether the financial reporting framework is acceptable; and
2. Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial
reporting framework;
(ii) For the internal control as management considers necessary; and
(iii) To provide the auditor with:
● Access to all information such as records, documentation and other matters;
● Additional information that the auditor may request from management for the purpose of
the audit; and
● Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.

Comments and Feedback:

● Direct and Moderate question

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● Important keywords: use by management, acceptable financial reporting framework, where

appropriate, those charged with governance, acceptable, agreement, acknowledges and
understands, preparation of the financial statements in accordance with the applicable financial
reporting framework, internal control, Access to all information, Additional information,
Unrestricted access
● Quote SA 210 along with SA name in the intro paragraph.

Meaning of Internal Control

Q10. Define Internal Control
(SELF)

Meaning of Internal control

As per SA-315, “Identifying and Assessing the Risk of Material Misstatement Through Understanding
the Entity and its Environment”, the internal control may be defined as the process designed,
implemented and maintained by those charged with governance, management and other personnel
to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability
of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and
compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or
more of the components of internal control.
The auditor shall obtain an understanding of the entity’s internal control relevant to the audit.

Comments and Feedback:

● Direct and Easy question
● Important keywords are highlighted in the above answer.
● Quote SA 315 and make sure to write SA name
● Summary of the answer:

Test Checking and Judgement

Q11. "Professional judgment is essential to the proper conduct of an audit." Discuss.
(MTP1, Nov 2020, 3 Marks) (SA, Nov 2018, 5 Marks)

Meaning of Professional Judgment : The application of relevant training, knowledge and experience,
within the context provided by auditing, accounting and ethical standards, in making informed decisions
about the courses of action that are appropriate in the circumstances of the audit engagement.

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Relevant SA : SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”

The auditor shall exercise professional judgment in planning and performing an audit of financial
statements.
Professional judgment is essential to the proper conduct of an audit. This is because interpretation of
relevant ethical requirements and the SAs and the informed decisions required throughout the audit
cannot be made without the application of relevant knowledge and experience to the facts and
circumstances. Professional judgment is necessary in particular regarding decisions about:

● Materiality and audit risk.

● The nature, timing, and extent of audit procedures used to meet the requirements of the SAs
and gather audit evidence.
● Evaluating whether sufficient appropriate audit evidence has been obtained, and whether more
needs to be done to achieve the objectives of the SAs and thereby, the overall objectives of the
auditor.
● The evaluation of management’s judgments in applying the entity’s applicable financial reporting
framework.
● The drawing of conclusions based on the audit evidence obtained, for example, assessing the
reasonableness of the estimates made by management in preparing the financial statements.

Comments and Feedback:

● Direct and Moderate question
● Important keywords are highlighted in the above answer.
● Meaning of professional judgment and SA 200 is added in the intro paragraph.

Risk assessment and Risk Assessment Procedures

Q12. Correct / Incorrect
Risk assessment procedures involve testing of accounts for checking of assertions.
(SELF)

The statement is incorrect.

Risk assessment procedures refer to the audit procedures performed to obtain an understanding of the
entity and its environment, including the entity’s internal control, to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and assertion levels.

Substantive procedures involve testing of accounts for checking of assertions.

Comments and Feedback:

● Direct and Easy question
● Important keywords : understanding of the entity and its environment, including the entity’s
internal control, assess, due to fraud or error, Substantive procedures

Further Audit Procedures

Q13. Correct/Incorrect
‘Test of Control’ may be defined as an audit procedure designed to detect material misstatements at the
assertion level.
(MTP1, Nov 2019, 2 Marks)

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The statement is incorrect

‘Substantive procedure’ may be defined as an audit procedure designed to detect material misstatements
at the assertion level

whereas ‘tests of controls’ is an audit procedure designed to evaluate the operating effectiveness of
controls in preventing, or detecting and correcting, material misstatements at the assertion level.

Comments and Feedback:

● Direct and Easy question
● Important keywords : ‘Substantive procedure’, operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements

Assertions
Q14. Which of the following is not an assertion about presentation and disclosure?
a. Occurrence and rights and obligations
b. Completeness
c. Classification and understandability
d. Existence
(Sample MCQs)

Correct answer : Option D, Existence

Comments and Feedback:
● Direct and Moderate question
● The explanation of the question is stated below:
➢ Existence is not an assertion about presentation and disclosure. It is an assertion for
account balance.
➢ Assertions about presentation and disclosure:
■ Occurrence and rights and obligations – disclosed events, transactions, and other
matters have occurred and pertain to the entity.
■ Completeness – all disclosures that should have been included in the financial
statements have been included.
■ Classification and understandability – financial information is appropriately
presented and described, and disclosures are clearly expressed.
■ Accuracy and valuation – financial and other information are disclosed fairly and
at appropriate amounts.

Q15. Which of the following Assertion is not related to assertion about presentation and disclosure:
a. Occurrence and rights and obligations
b. Completeness
c. Classification and understandability
d. Valuation and allocation
(Sample MCQs)

Correct answer : Option D, Valuation and allocation

Comments and Feedback:
● Direct and Moderate question
● The explanation of the question is stated below:
➢ Valuation and allocation is not related to assertion about presentation and disclosure. It is

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an assertion for account balance.

➢ Assertions about presentation and disclosure:
■ Occurrence and rights and obligations – disclosed events, transactions, and other
matters have occurred and pertain to the entity.
■ Completeness – all disclosures that should have been included in the financial
statements have been included.
■ Classification and understandability – financial information is appropriately
presented and described, and disclosures are clearly expressed.
■ Accuracy and valuation – financial and other information are disclosed fairly and
at appropriate amounts.

Q16. Name the assertions for the following audit procedures:

i. Year end inventory verification.
ii. Depreciation has been properly charged on all assets.
iii. The title deeds of the lands disclosed in the Balance Sheet are held in the name of the company.
iv. All liabilities are properly recorded in the financial statements.
v. Related party transactions are shown properly.
(SA, May 2018, 5 Marks) (MTP2, May 2021, 5 Marks)

(i) Year end inventory verification:

Existence Assertion i.e. Inventory recognized in the balance sheet actually existed as at the period end.

(ii) Depreciation has been properly charged on all assets:

Valuation Assertion i.e. all the assets have been valued appropriately and as per generally accepted
accounting policies and practices.

(iii) Title deed of lands disclosed in the Balance Sheet are held in the name of the Company: Rights &
Obligations Assertion i.e. the entity has valid legal ownership rights over the land claimed to be held by
the entity and recorded in the financial statements

(iv) All liabilities are properly recorded in the financial statements:

Completeness assertion i.e. all the liabilities that were supposed to be recorded have been recognized in
the financial statements.

(v) Related party transactions are shown properly:

Presentation & Disclosure i.e. whether related party transactions have been disclosed appropriately as per
the requirements of AS 18 – Related Party Disclosures.

Comments and Feedback:

● Direct and Moderate question
● In ICAI suggested answers, only the assertion name is mentioned. However, the assertion can be
explained briefly.

Q17. State assertions that are implied in the extract of financial statement given below:
Plant & Machinery (At Cost) 4,00,000
Less: Depreciation
Up to Previous Year 1,40,000
For the Year 26,000 (1,66,000)
2,34,000

(i) Indicate assertions in respect of transactions and events for the period relating to PPE.

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(ii) State specific assertions relating to the above extract of financial statements.
(MTP2, May 2019, 6 Marks) (MTP1, May 2021, 6 Marks)

(i) Assertions about transactions and events for the period relating to fixed assets :
● Occurrence—transactions and events relating to fixed assets have been recorded, have occurred
and pertain to the entity.
● Completeness—all transactions and events relating to fixed assets that should have been
recorded have been recorded.
● Accuracy—amounts and other data relating to recorded transactions and events have been
recorded appropriately.
● Cut-off—transactions and events have been recorded in the correct accounting period.
● Classification—transactions and events have been recorded in the proper accounts.

(ii) The specific assertions are as follows:

● Rights and Obligation assertion:
➢ the firm owns the plant and machinery;
➢ the asset is being utilised in the business of the company productively;
● Completeness : the historical cost of plant and machinery is Rs. 4 lacs;
● Valuation assertion:
➢ total charge of depreciation on this asset is Rs. 1,66,000 to date on which Rs. 26,000 relates
to the year in respect of which the accounts are drawn up; and
➢ the amount of depreciation has been calculated on recognised basis and the calculation is
correct
● Existence assertion: the plant and machinery physically exists;

NOTE : ICAI has not mentioned the assertion names in the suggested answers of (ii) part

Comments and Feedback:

● Direct and Moderate question
● Important keywords are highlighted in the above answer.

Q18. What are the obvious assertions in the following items appearing in the Financial Statements?
(i) Statement of Profit and Loss
Travelling Expenditure Rs. 50,000

(ii) Balance Sheet

Trade receivable Rs. 2,00,000
(MTP1, Nov 2019, 3 Marks)

(i) Travelling Expenditure Rs. 50,000

● Occurrence: Expenditure has been actually incurred for the purpose of travelling.
● Completeness: Total amount of expenditure incurred is Rs. 50,000 during the year.
● Cut-off: Travelling has been undertaken during the year under consideration.
● Classification: It has been treated as revenue expenditure and charged to Statement of Profit and
Loss.

NOTE : ICAI has not written anything about Accuracy Assertion

(ii) Trade receivable Rs. 2,00,000

● Completeness:

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➢ These have been recorded properly, they actually exist and occurred during the year.
➢ These include all sales transactions that occurred during the year.
● Rights and Obligations : These constitute assets of the entity.
● Valuation: These have been shown at proper value, i.e. after showing the deduction on account of
provision for bad and doubtful debts.

Comments and Feedback:

● Direct and Moderate question
● Important keywords are highlighted in the above answer
● In ICAI suggested answers, the assertion name is not mentioned.

Q19. Correct/Incorrect
Assertions refer to the representations by the auditor to consider the different types of the potential
misstatements that may occur.
(MTP1, Nov 2020, 2 Marks) (SA, July 2021, 2 Marks)

The statement is incorrect.

Assertions refer to representations by management that are embodied in the financial statements as
used by the auditor to consider the different types of the potential misstatements that may occur.

Comments and Feedback:

● Direct and easy question
● Important keywords : representations by management , used by the auditor

Q20. ……………. refer to representations by management, explicit or otherwise, that are embodied in the financial
statements, as used by the auditor to consider the different types of potential misstatements that may
occur.
a. Assertions
b. Positive Confirmation
c. Written representation
d. Audit Evidence.
(MTP1, May 2021, 1 Mark)

Correct answer : Option A

Explanation: Assertions refer to representations by management, explicit or otherwise, that are embodied
in the financial statements as used by the auditor to consider the different types of the potential
misstatements that may occur.

Comments and Feedback:

● Direct and easy question

Audit Evidence
Q21. Define Audit Evidence.
(SELF)

As per SA 500 “Audit evidence”, the objective of the auditor is to design and perform audit procedures in
such a way as to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.

Meaning of Audit evidence :

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● Audit evidence is information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based.
● It includes both information contained in the accounting records underlying the financial
statements and other information.

Comments and Feedback:

● Direct and easy question
● Important keywords are highlighted in the above explanation.
● Quote SA 500 and make sure to write SA name.

Audit Risk
Q22. The auditor is expected to, and can, reduce audit risk to zero and can therefore obtain absolute assurance.
(MTP1, Nov 2021, 2 Marks)
or
The auditor is expected to and can reduce audit risk to zero (MTP1, May 2020, 2 Marks)

The statement is Incorrect

As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”,
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or error. This is
because there are inherent limitations of an audit.
The objective of audit is to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement. In auditing, reasonable assurance can be given which is high
level assurance but not absolute assurance.

Comments and Feedback:

● Direct and easy question
● Important keywords : free from material misstatement, fraud or error, obtain reasonable assurance
, inherent limitations of an audit
● Quote SA 200 and make sure to write SA name.

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