CH - 1 - Question Bank

Question Bank - Chapter 1 Compiled by Neeraj Arora and TEAM
Chapter 1
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
1.1 SA 200
Q1. __________refers to an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
(a) Professional skepticism
(b) Professional Judgment
(c) Integrity
(d) Objectivity
(Sample MCQs)
Correct answer : (a) Professional skepticism

Comments and Feedback:
● Direct and Easy question
● For a student’s understanding, meaning of other terms are explained below:
➢ Professional judgment means 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
➢ Integrity means that the auditor should be honest, sincere and straightforward while
performing all professional duties and business relationships,
➢ Objectivity : The principle of objectivity requires an auditor not to compromise professional
judgment because of bias, conflict of interest or undue influence of others. An auditor must
adopt an unbiased and impersonal approach.
Q2. Professional skepticism is necessary to the critical assessment of

(a) audit documentation
(b) audit evidence.
(c) audit procedures
(d) All of the above
(Sample MCQs) (MTP1, Nov 2019, 1 Mark)
Correct answer : (b) audit evidence.

● Explanation : Professional skepticism refers to an attitude that includes a questioning mind, being
alert to conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
Audit QB C1 - Page No 1 /45

Q3. As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, _________is obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to an acceptably low level.
a. absolute assurance
b. limited assurance
c. reasonable assurance
d. reasonable or absolute assurance
(Sample MCQs)
Correct answer: (c) reasonable assurance

● For a student’s understanding, meaning of absolute and reasonable assurance is explained below:
➢ Absolute assurance means that there is absolutely no misstatement in the financial
statement and thus financial statements are absolutely reliable and relevant for the user of
financial statements.
➢ On the other hand, reasonable assurance is also a high level of assurance but it means
that auditor has conducted the audit in a way that he is reasonably sure (to the best
possible extent) that financial statements are free from material misstatement but there
might be some misstatements that go undetected due to inherent limitations of an audit.
Q4. Correct/Incorrect
The objective of audit is to obtain absolute assurance and to report on the financial statements. (RTP, May
2018, NA)
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”, in conducting an audit of financial statements, the overall
objectives of the auditor are:
● To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement; and
● To report on the financial statements, and communicate as required by the SAs, in accordance
with the auditor’s findings.

● Important keywords: reasonable assurance, free from material misstatement, report on the
financial statements
● Quote SA 200 and make sure to write SA name.
Q5. The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit
procedure for which there is no alternative or to be satisfied with audit evidence that is less than
persuasive. Explain.
(RTP, May 2018, NA)
Timeliness of Financial Reporting and the Balance between Benefit and Cost:
● The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an
audit procedure for which there is no alternative or to be satisfied with audit evidence that is less
than persuasive.
● Appropriate planning assists in making sufficient time and resources available for the conduct of
the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between the reliability of information and

its cost.
● There is an expectation by users of financial statements that the auditor will form an opinion on the
financial statements within a reasonable period of time and at a reasonable cost, recognising that it
is impracticable to address all information that may exist or to pursue every matter
exhaustively on the assumption that information is in error or fraudulent until proved otherwise.

● Direct and Moderate question
● Important keywords: Appropriate planning, reliability of information and its cost, impracticable to
address all information that may exist or to pursue every matter exhaustively
● Question is from the topic- “Inherent Limitations of Audit” (Timeliness of Financial Reporting and
the Balance between Benefit and Cost)
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.
(MTP2, May 2018, 2 Marks)
The statement is correct

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, which
result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s
opinion being persuasive rather than conclusive.

● Important keywords: cannot obtain absolute assurance, free from material misstatement, fraud or
error, inherent limitations, audit evidence being persuasive rather than conclusive.
As explained in SA 200, absolute assurance is obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk.

As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, reasonable assurance is obtained when the auditor has
obtained sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor expresses
an inappropriate opinion when the financial statements are materially misstated) to an acceptably low
level. The sufficiency and appropriateness of audit evidence are interrelated.

● Direct and easy question
● Important keywords: SA 200, reasonable assurance, sufficient appropriate audit evidence,
sufficiency and appropriateness of audit evidence are interrelated.

The preparation of financial statements does not involve judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the
entity.
(RTP, Nov 2018, NA) (RTP, May 2019, NA)
The statement is Incorrect

The preparation of financial statements involves judgment by management in applying the requirements
of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. In
addition, many financial statement items involve subjective decisions or assessments or a degree of
uncertainty, and there may be a range of acceptable interpretations or judgments that may be made.

● Direct and moderate question
● Important keywords: judgment by management, entity’s applicable financial reporting
framework, subjective decisions
● Question is from the topic- “Inherent Limitations of Audit” (The Nature of Financial Reporting)
An audit is an official investigation into alleged wrongdoing.
(RTP, Nov 2018, NA) (RTP, May 2019, NA)
The statement is Incorrect.

An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given
specific legal powers, such as the power of search, which may be necessary for such an investigation.

● Important keywords: not an official investigation into alleged wrongdoing, specific legal powers,
power of search
● Question is from the topic- “Inherent Limitations of Audit” (The Nature of Audit Procedures)
The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor to omit an audit
procedure for which there is no alternative.
(RTP, Nov 2018, NA) (RTP, May 2019, NA) (RTP, Nov 2021, NA)

The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit
procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the conduct of the
audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time,
and there is a balance to be struck between the reliability of information and its cost.

● Important keywords: not in itself a valid basis, no alternative, Appropriate planning, reliability of
information and its cost.

Management of the organization is solely responsible for the compliance of auditing standards while
preparing financial statements.
(SA, Nov 2018, 2 Marks)

As per Section 143(9) of the Companies Act, 2013, every auditor shall comply with the auditing standards.

● Important keywords: auditor shall comply with the auditing standards.
● Quote section number only if you can remember exact section numbers, also make sure to quote
the name of the Act along with section number.
● For a student’s understanding, the given statement is explained in more detail.
➢ The management is responsible for the preparation of the financial statements in
accordance with the applicable financial reporting framework.
➢ Management of the organization is responsible for the compliance of accounting
standards while preparing financial statements whereas the auditor is responsible for the
compliance of auditing standards while auditing the financial statements of the entity.
Audit procedures used to gather audit evidence may be effective for detecting an intentional
misstatement.
(RTP, May 2019, NA)

Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore, audit
procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement
that involves, for example, collusion to falsify documentation which may cause the auditor to believe that
audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the
authentication of documents.

● Important keywords: sophisticated and carefully organized schemes, ineffective for detecting an
intentional misstatement, collusion, neither trained as nor expected to be an expert in the
authentication of documents.
● Question is from the topic- “Inherent Limitations of Audit” (The Nature of Audit Procedure)
Q13. Explain the overall objective of the auditor as contained in SA 200. (RTP, May 2019, NA)
Or
Explain the objectives of an Audit as per SA 200. (RTP, May 2020, NA)
As per SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, in conducting an audit of financial statements, the overall
objectives of the auditor are:
● To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement; and
● To report on the financial statements, and communicate as required by the SAs, in accordance
with the auditor’s findings.


● Important keywords: reasonable assurance, free from material misstatement, report on the
financial statements
Q14. The matter of difficulty, time, or cost involved is :

(a) not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
(b) in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative.
(c) not in itself a valid basis for the auditor to omit an audit procedure for which an alternative exists.
(d) not in itself a valid basis for the auditor to omit an audit procedure.
(MTP1, May 2019, 1 Mark)
Correct answer : (a) the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative.

The objective of audit is to obtain absolute assurance about whether the financial statements as a whole
are free from material misstatement.

Accordance with Standards on Auditing”, 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.
because there are inherent limitations of an audit.

● Important Keywords: reasonable assurance, free from material misstatement, fraud or error,
inherent limitations
● Quote SA 200 along with SA name.
It is necessary for the auditor to maintain professional skepticism throughout the audit.
(MTP1, Nov 2019, 2 Marks)
This statement is Correct.

Accordance with Standards on Auditing”, professional skepticism is an attitude that includes a
questioning mind, being alert to conditions which may indicate possible misstatement due to error or
fraud, and a critical assessment of audit evidence.
Thus, it is necessary for the auditor to maintain professional skepticism throughout the audit.


● Important keywords: SA 200, questioning mind, alert, critical assessment of audit evidence.
● Framework of the answer:
Q17. The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances
may exist that cause the financial statements to be materially misstated.
Discuss any four examples of professional skepticism. (SA, Nov 2019, 4 Marks)
OR
Professional skepticism refers to an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence. The auditor shall plan and perform an audit with professional skepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated. Explain giving
examples. (RTP, Nov 2020, NA)
Meaning of Professional Skepticism :

Professional skepticism refers to an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.
Relevant SA: SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”
Examples of professional skepticism:

The auditor shall plan and perform an audit with professional skepticism recognising that circumstances
may exist that cause the financial statements to be materially misstated.
Professional skepticism includes being alert to, for example:
● Audit evidence that contradicts other audit evidence obtained.
● Information that brings into question the reliability of documents and responses to inquiries to
be used as audit evidence.
● Conditions that may indicate possible fraud.
● Circumstances that suggest the need for audit procedures in addition to those required by the
SAs.
● Maintaining professional skepticism throughout the audit is necessary if the auditor is to reduce
the risks of:
➢ Overlooking unusual circumstances.
➢ Over generalizing when drawing conclusions from audit observations.
➢ Using inappropriate assumptions in determining the nature, timing, and extent of the
audit procedures and evaluating the results thereof.

● Important keywords : questioning mind, alert, critical assessment of audit evidence, SA 200,
contradicts, reliability of documents and responses to inquiries, possible fraud, need for audit
procedures, Overlooking unusual circumstances, Over generalising, inappropriate assumptions in
determining the NTE of the audit procedures
● Write the meaning of professional skepticism and quote SA 200 in the intro paragraph.
Q18. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
because there are inherent limitations of an audit. Explain.

(RTP, Nov 2018, NA)
because there are inherent limitations of an audit. The inherent limitations of an audit arise from:
1. The Nature of Financial Reporting:

The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable financial reporting framework to the facts and
circumstances of the entity. In addition, many financial statement items involve subjective
decisions or assessments or a degree of uncertainty, and there may be a range of acceptable
interpretations or judgments that may be made. Consequently, some financial statement items are
subject to an inherent level of variability which cannot be eliminated by the application of
additional auditing procedures.
2. The Nature of Audit Procedures:

There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For
example:
● There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and
presentation of the financial statements or that has been requested by the auditor.
● Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting
an intentional misstatement that involves, for example, collusion to falsify documentation
which may cause the auditor to believe that audit evidence is valid when it is not. The
auditor is neither trained as nor expected to be an expert in the authentication of
documents.
● An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor
is not given specific legal powers, such as the power of search, which may be necessary
for such an investigation.
3. Timeliness of Financial Reporting and the Balance between Benefit and Cost:
The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an
audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the conduct of
the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between the reliability of information and
its cost.
4. Other Matters that Affect the Limitations of an Audit:

In the case of certain assertions or subject matters, limitations on the auditor’s ability to detect
material misstatements are particularly significant. Such assertions or subject matters include: -
● Fraud, particularly fraud involving senior management or collusion. (SA 240)
● The existence and completeness of related party relationships and transactions. (SA 550)
● The occurrence of non-compliance with laws and regulations. (SA 250)
● Future events or conditions that may cause an entity to cease to continue as a going
concern. (SA 570)

● Important Keywords are highlighted in the above answer.
● Inherent limitations of the audit is an important topic, make sure to read this topic properly.

Q19. There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with
examples.
(RTP, May 2020, NA) (MTP1, Nov 2020, 3 Marks) (RTP, Nov 2021, NA)
The Nature of Audit Procedures:

There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For example:
1) There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and presentation of
the financial statements or that has been requested by the auditor.
2) Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an
intentional misstatement that involves, for example, collusion to falsify documentation which may
cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither
trained as nor expected to be an expert in the authentication of documents.
3) An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
➢ We have to clearly understand that 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 as we have already discussed, 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.
➢ Therefore, audit is never started with a preconceived notion about state of affairs; about
wrong-doing; about some wrong having been committed. The auditor seeks to report what
he finds in the normal course of examination of accounts. However, it is quite possible that
sometimes investigation results from the prima facie findings of the auditor. It may happen
that the auditor has given some findings of serious concern. Such findings may prompt for
calling an investigation.

● Important keywords: complete information not provided by the management relevant to
preparation and presentation of the financial statements, sophisticated and carefully organized
schemes, auditor is neither trained as nor expected to be an expert in the authentication of
documents, audit is not an official investigation into alleged wrongdoing, specific legal powers,
audit is distinct from investigation, critical examination of the accounts, reasonable assurance, free
from material misstatement, fraud or error, preconceived notion about state of affairs
● Question is from the topic - “Inherent limitations of Audit”
Q20. In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are
particularly significant. Explain such assertions or subject matters.
(RTP, May 2020, NA) (SA, July 2021, 3 Marks)
Other Matters that Affect the Limitations of an Audit:

In the case of certain subject matters, limitations on the auditor’s ability to detect material misstatements
are particularly significant. Such assertions or subject matters include: -
● Fraud, particularly fraud involving senior management or collusion.
● The existence and completeness of related party relationships and transactions.
● The occurrence of non-compliance with laws and regulations.
● Future events or conditions that may cause an entity to cease to continue as a going concern.


● Important keywords: senior management or collusion, related party relationships and
transactions, non-compliance with laws and regulations, Future events, going concern.
● Question is from the topic - “ Inherent limitations of Audit”
Q21. M/s KYC & Co. is a reputed Audit firm in Mumbai. They are appointed as Statutory Auditors of Blessed Ltd.
Which of the below is the responsibility of M/s KYC & Co.
(a) Preparation of financial statements
(b) Designing, implementation and maintenance of internal control system
(c) Reporting on true and fair view of financial statements
(d) Compliance with the applicable law and regulation
(RTP, Nov 2020, NA)
Correct answer : (c)Reporting on true and fair view of financial statements

● Explanation: The responsibility of M/s KYC & Co. i.e. audit firm is to express opinion as to whether
the financial statements exhibit a true and fair view of the affairs of the entity. The management is
responsible for preparation of financial statements, designing, implementation and maintenance
of internal control systems and compliance with the applicable law and regulation.
The Auditor is expected to, reduce audit risk to zero and can therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or error.
(SA, Jan 2021, 2 Marks)

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.

● Important keywords: cannot obtain absolute assurance, free from material misstatement, fraud or
error, inherent limitations
The primary responsibility for the prevention and detection of fraud rests with the statutory auditor of the
company. (MTP1, May 2021, 2 Marks)
OR
As per SA 240 the primary responsibility for the prevention and detection of fraud rests with Auditors. (RTP,
May 2021, NA)

As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”,
the primary responsibility for the prevention and detection of fraud rests with management.
An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error.


● Important keywords: management, reasonable assurance, free from material misstatement, fraud
or error
● Quote SA 240 along with SA name
There are inherent limitations of an audit, which result in most of the audit evidence on which the auditor
draws conclusions and bases the auditor's opinion being conclusive rather than persuasive.

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, which result in most of the audit evidence on
which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than
conclusive.

● Important keywords: SA 200, cannot obtain absolute assurance, free from material misstatement,
fraud or error, audit evidence being persuasive rather than conclusive.
In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to
detect material misstatement are greater.
(SA, July 2021, 2 Marks)
The statement is correct.

In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to
detect material misstatements are greater for such reasons as the following:
● Management may be unaware of the existence of all related party relationships.
● Related party relationships may present a greater opportunity for collusion, concealment or
manipulation by management.

● Important keywords: unaware of the existence of all related party relationships, collusion,
concealment or manipulation by management.
The preparation of financial statements involves judgment by management.

The preparation of financial statements involves judgment by management in applying the requirements
of the entity’s applicable financial reporting framework to the facts and circumstances of the entity. In
addition, many financial statement items involve subjective decisions or assessments or a degree of
uncertainty, and there may be a range of acceptable interpretations or judgments that may be made.


● Important keywords: judgment by management, subjective decisions, assessments, degree of
uncertainty
● Question is from the topic - “ Inherent limitations of Audit” (The Nature of Financial Reporting)
● For a student’s understanding, the given answer is explained in a simpler way.
➢ While preparing financial statements, management applies several judgments say
management makes 5% provision on doubtful debts. So, the chances of fraud are high in
judgmental areas.
1.2 SA 210
Q27. According to SA 210 “Agreeing the Terms of Audit Engagements”, The auditor shall agree the terms of the
audit engagement :
(a) with management and those charged with governance, as appropriate.
(b) with management
(c) with those charged with governance
(d) with management or those charged with governance, as appropriate.
(Sample MCQs)
Correct answer : (d) with management or those charged with governance, as appropriate.
● Please don't get confused between “and”, “or”. According to SA 210 “Agreeing the Terms of Audit
Engagements'', The auditor shall agree the terms of the audit engagement with management or
those charged with governance, as appropriate.
Q28. The agreed terms of the audit engagement shall be recorded in

(a) an audit engagement letter
(b) an audit engagement letter or other suitable form of written agreement
(c) any suitable form of written agreement
(d) None of the above
(Sample MCQs)
Correct answer : (b) an audit engagement letter or other suitable form of written agreement
Q29. If law or regulation prescribes in sufficient detail the terms of the audit engagement ,
(a) the auditor need not record them in a written agreement, except for the fact that such law or regulation
applies and that management acknowledges and understands its responsibilities.
(b) the auditor need not record them in a written agreement
(c) the auditor needs to record them in a written agreement
(d) None of the above
(Sample MCQs)
Correct answer : (a) the auditor need not record them in a written agreement, except for the fact that such
law or regulation applies and that management acknowledges and understands its responsibilities.


● Explanation: If the terms of audit engagement are governed by laws and regulations, a written
engagement letter is not compulsory except for the fact that such law or regulation applies and
that management acknowledges and understands its responsibilities.
Q30. A request from the client for the auditor to change the engagement may result from-
(a) a change in circumstances affecting the need for the service,
(b) a misunderstanding as to the nature of an audit or related service originally requested
(c) a restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
(Sample MCQs)
Correct answer : (d) All of the above

Q31. According to SA 210 “Agreeing the Terms of Audit Engagements”, The auditor shall agree the terms of the
audit engagement with :
(a) management
(b) those charged with governance
(c) management or those charged with governance, as appropriate.
(d) Audit committee
(Sample MCQs) (MTP1, Nov 2019, 2 Marks)
Correct answer : (c) management or those charged with governance, as appropriate.

Q32. If the auditor concludes that there is reasonable justification to change the engagement and if the audit
work performed complied with the SAs applicable to the changed engagement, the report issued would
be appropriate for the revised terms of engagement. In order to avoid confusion, the report would not
include reference to:
(a) the original engagement; or any procedures that may have been performed in the original
engagement.
(b) the original engagement ;
(c) any procedures that may have been performed in the original engagement
(d) the original engagement and any procedures that may have been performed in the original
engagement.
(Sample MCQs) (MTP1, May 2019, 1 Mark)
Correct answer : (a) the original engagement; or any procedures that may have been performed in the
original engagement.
● Explanation: If the auditor concludes that there is reasonable justification for changing the terms
of audit engagement then the auditor must do his work as per the new terms of engagement and
must issue a report in accordance with the new terms of engagement. In order to avoid confusion,
the report would not include reference to:
➢ the original engagement; or
➢ any procedures that may have been performed in the original engagement.

Q33. If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by
management to continue the original audit engagement, the auditor shall:
(a) Withdraw from the audit engagement where possible under applicable law or regulation;
(b)Determine whether there is any obligation, either contractual or otherwise, to report the circumstances
to other parties, such as those charged with governance, owners or regulators.
(c) Withdraw from the audit engagement where possible under applicable law or regulation and determine
whether there is any obligation, either contractual or otherwise, to report the circumstances to other
parties, such as those charged with governance, owners or regulators.
(d) Withdraw from the audit engagement where possible under applicable law or regulation or determine
whether there is any obligation, either contractual or otherwise, to report the circumstances to other
parties, such as those charged with governance, owners or regulators.
(Sample MCQs) (MTP2, May 2021, 2 Marks) (MTP2, Nov 2021, 2 Marks)
Correct answer : (c) Withdraw from the audit engagement where possible under applicable law or
regulation and determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.
● Read the options carefully and do not get confused in between Option C and Option D. The word
“and” is mentioned in option C and the word “or” is mentioned in option D.
Q34. A request from the client for the auditor to change the engagement may result from-
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally requested
3. a restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
(a) (1) only
(b) (1) and (2)
(c) (1), (2) and (3)
(d) (1) or (2) or (3)
(Sample MCQs)
Correct answer : (d) (1) or (2) or (3)

Q35. “An auditor who before the completion of the engagement is requested to change the engagement to one
which provides a lower level of assurance should consider the appropriateness of doing so.” Discuss.
(RTP, May 2018, NA)
Acceptance of a Change in Engagement:

An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides a lower level of assurance, should consider the appropriateness of doing so.
A request from the client for the auditor to change the engagement may result from
● a change in circumstances affecting the need for the service,
● a misunderstanding as to the nature of an audit or related service originally requested or
● a restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
The auditor would consider carefully the reason given for the request, particularly the implications of a
restriction on the scope of the engagement, especially any legal or contractual implications.

If the auditor concludes that there is reasonable justification for changing the terms of audit engagement
then the auditor must do his work as per the new terms of engagement and must issue a report in
accordance with the new terms of engagement. In order to avoid confusion, the report would not include
reference to-
● the original engagement; or
● any procedures that may have been performed in the original engagement, except where the
engagement is changed to an engagement to undertake agreed-upon procedures and thus
reference to the procedures performed is a normal part of the report.
The auditor should not agree to a change of engagement where there is no reasonable justification for
doing so.
If the terms of the audit engagement are changed, the auditor and management shall agree on and record
the new terms of the engagement in an engagement letter or other suitable form of written
agreement.
If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted
by management to continue the original audit engagement, the auditor shall-
● Withdraw from the audit engagement where possible under applicable law or regulation; and
● Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.

● Important keywords are highlighted in the above answer
Q36. It is important both for the auditor and client that each party should be clear about the nature of the
engagement. It must be reduced to writing and should exactly specify the scope of the work. Explain.
Legal requirement to get the accounts audited so far extends only to companies, registered societies etc. In
these cases the respective law governs the appointment of auditors and their duties. In all other cases, it is
a matter of contract. It is, therefore important, both for the auditor and client, that each party should be
clear about the nature of the engagement. It must be reduced to writing and should exactly specify the
scope of the work. The audit engagement letter is sent by the auditor to his client. The ICAI has issued
SA 210 “Agreeing the Terms of Audit Engagements” on the subject. It is in the interest of both the auditor
and the client to issue an engagement letter so that the possibility of misunderstanding is reduced to a
great extent.
In the case of partnerships, a few more precautions are needed. The appointment of the auditor is normally
governed by the partnership deed. The accountant, when he is approached for undertaking a professional
assignment by a firm or a partner of a firm, should first get a clear idea of the nature of the service required
and then ensure, with reference to the terms of partnership agreement, that his appointment is valid.
According to SA 210 “Agreeing the Terms of Audit Engagements”, The auditor shall agree the terms of the
audit engagement with management or those charged with governance, as appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement and shall include:
● The objective and scope of the audit of the financial statements;
● The responsibilities of the auditor;
● The responsibilities of management;
● Identification of the applicable financial reporting framework for the preparation of the financial
statements; and

● Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected
form and content.
If law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not
record them in a written agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities.

● Important keywords are highlighted in the above answer.
● Quote SA 210 and do not forget to mention SA name
There is no need to put the nature of engagement to writing.
OR
It is important for the auditor that each party should be clear about the nature of the engagement.
The statement is Incorrect

It is important, both for the auditor and client (management or those charged with governance, as
appropriate), that each party should be clear about the nature of the engagement. It must be reduced to
writing and should exactly specify the scope of the work.

● Important keywords: both for the auditor and client (management and those charged with
governance), nature of the engagement, writing, scope of the work.
Preconditions for an audit have not been defined in SA 210 “Agreeing the Terms of Audit Engagements.”
(RTP, Nov 2019, 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.

● Important keywords: use by management of an acceptable financial reporting framework ,
preparation of the financial statements, agreement
Q39. An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides a lower level of assurance, should consider the appropriateness of doing so. Explain stating
the factors based on which client can request the auditor to change the engagement.
(RTP, Nov 2019, NA)
An auditor who, before the completion of the engagement, is requested to change the engagement to one

which provides a lower level of assurance, should consider the appropriateness of doing so.
A request from the client for the auditor to change the engagement may result from
● a change in circumstances affecting the need for the service,
● a misunderstanding as to the nature of an audit or related service originally requested.
● a restriction on the scope of the engagement,whether imposed by management or caused by
circumstances.

● Important keywords: change in circumstances, misunderstanding, restriction on the scope of the
engagement
SA 210 does not require the auditor to agree management’s responsibilities in an engagement letter or
other suitable form of written agreement.
(RTP, May 2020, NA)

SA 210, “Agreeing the Terms of Audit Engagements”, requires the auditor to agree management’s
responsibilities in an engagement letter or other suitable form of written agreement

● Important keywords: SA 210, auditor to agree management’s responsibilities, engagement letter
or other suitable form of written agreement
The audit engagement letter is sent by the client to auditor.

As per SA 210 “Agreeing the Terms of Audit Engagements”, the Audit engagement letter is sent by the
auditor to his client.

● Important keywords: SA 210, letter sent by auditor to his client.
Even if law or regulation prescribes sufficient details of the terms of the audit engagement the auditor
should record them in a written agreement.

If law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not
record them in a written agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities.


● For a student’s understanding, the given statement is explained in a simpler way :

➢ The auditor is not required to record such terms in an agreement which are specifically
prescribed by law or regulation except the fact that the management acknowledges such
terms and understands its responsibilities.
Q43. On recurring audits, the auditor shall assess whether circumstances require the terms of the audit
engagement to be revised and whether there is a need to remind the entity of the existing terms of the
audit engagement. The auditor may decide not to send a new audit engagement letter or other written
agreement each period. Explain the factors an auditor considers to be appropriate to revise the terms of the
audit engagement or to remind the entity of existing terms.
(RTP, May 2021, NA)
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit
engagement to be revised and whether there is a need to remind the entity of the existing terms of the
audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each
period.
However, the following factors may make it appropriate to revise the terms of the audit engagement or
to remind the entity of existing terms:
● Any indication that the entity misunderstands the objective and scope of the audit.
● Any revised or special terms of the audit engagement.
● A recent change of senior management.
● A significant change in ownership.
● A significant change in nature or size of the entity’s business.
● A change in legal or regulatory requirements.
● A change in the financial reporting framework adopted in the preparation of the financial
statements.
● A change in other reporting requirements.

● Important keywords : decide not to send a new audit engagement letter or other written
agreement each period, factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms, entity misunderstands the objective and
scope of the audit, revised or special terms, change in - senior management, ownership, nature or
size, legal or regulatory requirements, financial reporting framework, other reporting requirements
Q44. Discuss preconditions for an audit as per SA 210. Explain how would an auditor proceed to establish the
presence of pre conditions for an audit.
(RTP, May 2021, NA)
OR
CA S is requested to accept the appointment as an auditor of Luck Ltd. With reference to SA 210, what
should the auditor determine in order to establish whether the preconditions for an audit are present ?
(SA, Dec 2021, 4 Marks)
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.

● Important keywords:
➢ Intro para: SA 210, use by management, acceptable financial reporting framework,
agreement,
➢ Main answer: acceptable, agreement of management, acknowledges and understands its
responsibility, financial statements in accordance with the applicable financial reporting
framework, internal control, Access to all information, Additional information, Unrestricted
access to persons
1.3 Misc Topics Related To Standards

Q45. The objective of the IAASB is to serve the public interest by setting high quality auditing standards and by
facilitating the convergence of international and national standards, thereby enhancing the quality and
uniformity of practice throughout the world and strengthening public confidence in the global auditing
and assurance profession. Advise how this objective would be accomplished.
(MTP1, May 2018, 5 Marks) (MTP1, May 2019, 4 Marks)
The IAASB functions as an independent standard-setting body under the auspices of IFAC. The objective
of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating
the convergence of international and national standards, thereby enhancing the quality and uniformity of
practice throughout the world and strengthening public confidence in the global auditing and assurance
profession. The IAASB achieves this objective by:
● Establishing high quality auditing standards and guidance for financial statement audits that are
generally accepted and recognized by investors, auditors, governments, banking regulators,
securities regulators and other key stakeholders across the world;
● Establishing high quality standards and guidance for other types of assurance services on both
financial and non-financial matters;
● Establishing high quality standards and guidance for other related services;
● Establishing high quality standards for quality control covering the scope of services addressed by
the IAASB; and
● Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance service
providers.
● Important keywords: independent standard-setting body , IFAC, high quality auditing standards,
convergence, strengthening public confidence, quality and uniformity of practice, financial
statement audits, assurance services on both financial and non-financial matters, other related
services, quality control, other pronouncements

Q46. The IAASB functions as an independent standard-setting body under the auspices of IFAC. Explain stating
the objective of IAASB and also how it achieves those objectives.
(RTP, May 2019, NA)
Objectives of International Auditing and Assurance Standards Board:

In 1977, the International Federation of Accountants (IFAC) was set up with a view to bringing harmony in
the profession of accountancy on an international scale. In pursuing this mission, the IFAC Board has
established the International Auditing and Assurance Standards Board (IAASB) to develop and issue, in the
public interest and under its own authority, high quality auditing standards for use around the world. The
IFAC Board has determined that designation of the IAASB as the responsible body, under its own authority
and within its stated terms of reference, best serves the public interest in achieving this aspect of its
mission.
The IAASB functions as an independent standard-setting body under the auspices of IFAC. The objective
of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating
the convergence of international and national standards, thereby enhancing the quality and uniformity of
practice throughout the world and strengthening public confidence in the global auditing and assurance
profession.
How IAASB achieves these objectives

● Establishing high quality auditing standards and guidance for financial statement audits that are
generally accepted and recognized by investors, auditors, governments, banking regulators,
securities regulators and other key stakeholders across the world;
● Establishing high quality standards and guidance for other types of assurance services on both
financial and non-financial matters;
● Establishing high quality standards and guidance for other related services;
● Establishing high quality standards for quality control covering the scope of services addressed by
the IAASB; and
● Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance service
providers.

● Important keywords: independent standard-setting body , IFAC, high quality auditing standards,
convergence, strengthening public confidence, quality and uniformity of practice, financial
statement audits, assurance services on both financial and non-financial matters, other related
services, quality control, other pronouncements
Q47. Standards on Auditing (SAs) apply in “audit of historical financial information” whereas Standards on
Review Engagements (SREs) apply in “review of historical financial information.” Explain in detail giving
examples.
(RTP, May 2022, NA)
It is to be understood that Standards on Auditing (SAs) apply in “audit of historical financial

information” whereas Standards on Review Engagements (SREs) apply in “review of historical financial
information”. Remember that Standards on auditing apply in “audit” of historical financial information
which is a reasonable assurance engagement whereas Standards on Review Engagements apply in
“review” of historical financial information which is a limited assurance engagement only.
“Historical financial information means” information expressed in financial terms in relation to a particular
entity, derived primarily from that entity’s accounting system, about economic events occurring in past
time periods or about economic conditions or circumstances at points in time in the past.
Here, we have to broadly understand that “audit” and “review” are two different terms. Audit is a
reasonable assurance engagement, and its objective is reduction in assurance engagement risk to an

acceptably low level in the circumstances of the engagement. However, “review” is a limited assurance
engagement, and its objective is a reduction in assurance engagement risk to a level that is acceptable in
the circumstances of the engagement,
Standards on Auditing have been issued on wide spectrum of issues in the field of auditing including (but
not limited to) overall objectives of independent auditor, audit documentation, planning an audit of
financial statements, identifying and assessing risk of material misstatement, audit evidence, audit
sampling, going concern and forming an opinion and reporting on financial statements.
Some examples of Standards on Auditing are :

i) SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing
ii) SA 230 Audit Documentation
iii) SA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment
iv) SA 500 Audit Evidence
v) Revised SA 700 Forming an Opinion and Reporting on Financial Statements
Examples of Standards on Review engagements are

i) SRE 2400 (Revised) Engagements to Review Historical Financial Statements
ii) SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the
Entity


1.4 SA 220
Q48. The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of:
(a) Adherence to professional standards and regulatory and legal requirements;
(b) Whether the quality control system has been appropriately designed and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures have been appropriately applied, so that
reports that are issued by the firm or engagement partners are appropriate in the circumstances.
(Sample MCQs)
Correct answer : (d), All of the above

Q49. The firm’s system of quality control should include policies and procedures addressing which of the
following element:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(Sample MCQs)
Correct answer : (d) All of the above

● Explanation: The firm’s system of quality control should include policies and procedures
addressing each of the following elements:
➢ Leadership responsibilities for quality within the firm.
➢ Ethical requirements.
➢ Acceptance and continuance of client relationships and specific engagements.
➢ Human resources.
➢ Engagement performance.
➢ Monitoring.
Q50. Standard on Quality Control (SQC) 1 sets out the responsibilities of the _____for establishing policies and
procedures regarding compliance with relevant ethical requirements :
(a) Firm
(b) engagement partner
(c) Senior Audit Assistant
(d) All the above
(Sample MCQs)
Correct answer : (a) Firm

● For a student’s understanding, difference between SQC 1 and SA 220 is stated below:
➢ SQC 1 deals with the firm’s responsibilities to establish and maintain its system of quality
control for audit engagements.
➢ SA 220 deals with the engagement partner’s responsibilities to ensure overall quality on
each audit engagement to which that partner is assigned.

Q51. SA 220 sets out the ____responsibilities with respect to relevant ethical requirements.
(a) firm’s
(b) Senior Audit Assistant
(c) engagement partner’s
(d) All the above
(Sample MCQs)
Correct answer : (c) engagement partner’s

● For a student’s understanding, difference between SQC 1 and SA 220 is stated below:
➢ SQC 1 deals with the firm’s responsibilities to establish and maintain its system of quality
control for audit engagements.
➢ SA 220 deals with the engagement partner’s responsibilities to ensure overall quality on
each audit engagement to which that partner is assigned.
Q52. SA 220 recognises that the ____is entitled to rely on a firm’s systems in meeting its responsibilities with
respect to quality control procedures.
(a) engagement partner
(b) engagement team
(c) firm
(d) Senior Audit Assistant
(Sample MCQs)
Correct answer : (b) engagement team

● Explanation : SA 220 sets out the engagement partner’s responsibilities with respect to relevant
ethical requirements. These include evaluating whether members of the engagement team have
complied with relevant ethical requirements. SA 220 recognises that the engagement team is
entitled to rely on a firm’s systems in meeting its responsibilities with respect to quality control
procedures.
Q53. As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should obtain information
considered necessary in the circumstances before accepting an engagement with a new client, when
deciding whether to continue an existing engagement and when considering acceptance of a new
engagement with an existing client. Explain
(RTP, May 2018, NA) (MTP2, Nov 2021, 4 Marks)

Information which assist the Auditor in accepting and continuing of relationship with Client: As per SA
220, “Quality Control for an Audit of Financial Statements” the auditor should obtain information
considered necessary in the circumstances before accepting an engagement with a new client, when
deciding whether to continue an existing engagement and when considering acceptance of a new
engagement with an existing client.
The following information would assist the auditor in accepting and continuing of relationship with the
client:
➢ The integrity of the principal owners, key management and those charged with governance of
the entity;
➢ Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources;
➢ Whether the firm and the engagement team can comply with relevant ethical requirements; and
➢ Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

● The question is from the topic, Elements of a system of a quality control - “Acceptance and
Continuance of Client Relationships and Audit Engagements”
● Important keywords :
➢ Client : integrity, principal owners, key management and those charged with governance,
➢ Auditor and engagement team : engagement team is competent, capabilities, including
time and resources, comply with relevant ethical requirements,
➢ Others: Significant matters, current or previous audit engagement, and their implications
● Quote SA 220 in the intro para and write SA name.
Q54. The firm’s system of quality control should include policies and procedures addressing each element.
Explain (RTP, Nov 2018, NA)
OR
The firm’s system of quality control should include policies and procedures addressing each and every
element of system of quality control. State those elements. (MTP1, Nov 2019, 3 Marks)
ELEMENTS OF A SYSTEM OF QUALITY CONTROL: The firm’s system of quality control should include
policies and procedures addressing each of the following elements:
● Leadership responsibilities for quality within the firm.
● Ethical requirements.
● Acceptance and continuance of client relationships and specific engagements.
● Human resources.
● Engagement performance.
● Monitoring.

As per SA 220, the engagement partner shall be responsible for the overall quality on each audit
engagement assigned to him.

As per SA 220 “Quality Control for an Audit of Financial Statements”, the engagement partner shall take

responsibility for the overall quality on each audit engagement to which that partner is assigned.

● Important keywords: SA 220 “Quality Control for an Audit of Financial Statements”, overall quality
on each audit engagement
Q56. As per SA 220, the engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned. While taking responsibility for the overall quality on each
audit engagement, analyse and explain the emphasis of the actions of the engagement partner and
appropriate messages to the other members of the engagement team. Also define engagement partner.
(MTP1, Nov 2018, 5 Marks) (RTP, Nov 2020, NA)
The action of the engagement partner and the communication of the engagement partner with the
engagement team should emphasise the importance of quality in an audit.
The importance to audit quality of:
● Performing work that complies with professional standards and regulatory and legal
requirements;
● Complying with the firm’s quality control policies and procedures as applicable;
● Issuing auditor’s reports that are appropriate in the circumstances; and
● The engagement team’s ability to raise concerns without fear of reprisals; and
● The fact that quality is essential in performing audit engagements.
Meaning of Engagement partner: the partner or other person in the firm who is a member of the
Institute of Chartered Accountants of India and is in full time practice and is responsible for the
engagement and its performance, and for the report that is issued on behalf of the firm, and who, where
required, has the appropriate authority from a professional, legal or regulatory body.
● The question is from the topic, Elements of a system of a quality control - “Leadership
Responsibilities for Quality on Audits”
➢ From the meaning of Engagement partner: partner, full time practice, engagement and
its performance, report, behalf of the firm, appropriate authority from a professional, legal
or regulatory body
➢ Emphasis of the actions of the engagement partner: professional standards and
regulatory and legal requirements, firm’s quality control policies and procedures, Issuing
auditor’s reports appropriate in the circumstances, engagement team’s ability to raise
concerns without fear, quality is essential
● Quote SA 220 along with SA name.
Engagement partner refers to the partner or other person in the firm who is responsible for the audit
engagement.

Engagement partner refers to the partner or other person in the firm who is a member of the Institute of
Chartered Accountants of India and is in full time practice and is responsible for the engagement and its
performance, and for the auditor’s report that is issued on behalf of the firm, and who, where required,

has the appropriate authority from a professional, legal or regulatory body.

● Meaning of engagement partner is to be stated in this language only
● Important keywords: partner, full time practice, performance, auditor’s report, behalf of the firm,
appropriate authority from a professional, legal or regulatory body
Q58. CA Raj, an engagement partner wants to take decision, regarding acceptance and continuance of an audit
engagement. Which informations, he should obtain before accepting an engagement?
(SA, May 2019, 3 Marks)
SQC 1 requires the firm to obtain information before accepting an engagement. Information such as the
following assists the engagement partner in determining whether the decisions regarding the acceptance
and continuance of audit engagements are appropriate:
➢ The integrity of the principal owners, key management and those charged with governance of
the entity
➢ Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources.
➢ Whether the firm and the engagement team can comply with relevant ethical requirements; and
➢ Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

● The question is from the topic, Elements of a system of a quality control - “Acceptance and
Continuance of Client Relationships and Audit Engagements”
● Important keywords: SQC 1, integrity - principal owners, key management and those charged with
governance, engagement team is competent, capabilities, including time and resources, relevant
ethical requirements, Significant matters, current or previous audit engagement, and their
implications
Q59. The firm should establish policies and procedures designed to provide it with reasonable assurance that
the policies and procedures relating to the system of quality control are relevant, adequate, operating
effectively and complied with in practice. Such policies and procedures should include an ongoing
consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a
selection of completed engagements. Explain in the above context the purpose of monitoring compliance
with quality control policies and procedures.
(RTP, Nov 2019, NA) (RTP, Nov 2020, NA)
The firm should establish policies and procedures designed to provide it with reasonable assurance that
the policies and procedures relating to the system of quality control are relevant, adequate, operating
effectively and complied with in practice.
Such policies and procedures should include an ongoing consideration and evaluation of the firm’s
system of quality control, including a periodic inspection of a selection of completed engagements.
The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of:
➢ Adherence to professional standards and regulatory and legal requirements;
➢ Whether the quality control system has been appropriately designed and effectively
implemented; and
➢ Whether the firm’s quality control policies and procedures have been appropriately applied, so
that reports that are issued by the firm or engagement partners are appropriate in the
circumstances.

➢ Follow-up by appropriate firm personnel so that necessary modifications are promptly made to
the quality control policies and procedures.

● The question is from the topic, Elements of a system of a quality control - “Monitoring”
➢ Intro para: reasonable assurance, relevant, adequate, operating effectively, ongoing
consideration and evaluation of the firm’s system, periodic inspection
➢ Purpose of monitoring compliance: professional standards and regulatory and legal
requirements, appropriately designed and effectively implemented, firm’s quality control -
appropriately applied and appropriate in the circumstances, Follow-up , necessary
modifications
Q60. The engagement partner shall take the responsibility for the overall 'quality on each audit engagement to
which that partner is assigned. Discuss with reference to SA 220 "Quality Control for an audit of financial
statements".
The action of the engagement partner and the communication of the engagement partner with the
engagement team should emphasise the importance of quality in an audit.
The importance to audit quality of:
● Performing work that complies with professional standards and regulatory and legal
requirements;
● Complying with the firm’s quality control policies and procedures as applicable;
● Issuing auditor’s reports that are appropriate in the circumstances; and
● The engagement team’s ability to raise concerns without fear of reprisals; and
● The fact that quality is essential in performing audit engagements

● The question is from the topic, Elements of a system of a quality control - “Leadership
Responsibilities for Quality on Audits”
● Important keywords: professional standards and regulatory and legal requirements, firm’s quality
control policies and procedures, auditor’s reports appropriate in the circumstances, engagement
team’s ability to raise concerns without fear, quality is essential
Q61. Mr. Salman, is an engagement partner of Khan & co. chartered accountants for an audit of Lava Ltd., he
died of a stroke on 30.09.2019 after completing the entire routine audit work of Lava Ltd. Mr. Shoaib, one of
the partners of Khan & Co. will be signing the accounts of Lava Ltd. What is the course of action to be taken
by Mr. Shoaib?
(a) Sign the accounts of Lava Ltd without reviewing the work of his partner
(b) Sign the balance sheet after reviewing the work of his partner
(c) Withdraw the audit as the person who has performed the audit is no more
(d) Issue an adverse report
(RTP, Nov 2020, NA)
Correct answer : (b) Sign the balance sheet after reviewing the work of his partner

Q62. In relation to completed engagements, procedures designed to provide evidence of compliance by

engagement teams with the firm’s quality control policies and procedures is known as :
(a) Monitoring
(b) Inspection
(c) Subsequent Audit procedures
(d) Compliance procedures
(RTP, May 2021, NA) (MTP1, May 2021, 1 Mark)
Correct answer : (b) Inspection

● For a student’s understanding, meaning of monitoring is stated below:
➢ Monitoring - a process comprising an ongoing consideration and evaluation of the firm’s
system of quality control, including a periodic inspection of a selection of completed
engagements, designed to enable the firm to obtain reasonable assurance that its system
of quality control is operating effectively
Q63. Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter-specific guidance materials. Explain
the matters to be addressed in this context.
(RTP, May 2021, NA)
Intro para
The firm should establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and legal
requirements, and that the firm or the engagement partner issues reports that are appropriate in the
circumstances.
Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter-specific guidance materials.
Matters to be addressed
● How engagement teams are briefed on the engagement to obtain an understanding of the
objectives of their work.
● Processes for complying with applicable engagement standards.
● Processes of engagement supervision, staff training and coaching.
● Methods of reviewing the work performed, the significant judgments made and the form of
report being issued.
● Appropriate documentation of the work performed and of the timing and extent of the review.
● Processes to keep all policies and procedures current.

● The question is from the topic, Elements of a system of a quality control - “Engagement
Performance”
➢ From Intro para: professional standards and regulatory and legal requirements,reports
that are appropriate in the circumstances, consistency in the quality of engagement
performance.
➢ From Matters to be addressed: briefed, understanding of the objectives of their work,
applicable engagement standards, supervision, staff training and coaching, reviewing,

significant judgments, form of report, Appropriate documentation, policies and procedures
Q64. The firm should establish policies and procedures designed to provide it with reasonable assurance that it
has sufficient personnel with the capabilities, competence, and commitment to ethical principles. Discuss
the personnel issues addressed by such policies and procedures. Also explain how addressing the
personnel issues would empower the firm.
(RTP, Nov 2021, NA)
Intro para
The firm should establish policies and procedures designed to provide it with reasonable assurance that it
has sufficient personnel with the capabilities, competence, and commitment to ethical principles
necessary to perform its engagements in accordance with professional standards and regulatory and
legal requirements, and to enable the firm or engagement partners to issue reports that are appropriate
in the circumstances.
Personnel issues addressed by such policies and procedures

a. Recruitment;
b. Performance evaluation;
c. Capabilities;
d. Competence;
e. Career development;
f. Promotion;
g. Compensation; and
h. Estimation of personnel needs.
How addressing the personnel issues would empower the firm

Addressing these issues enables the firm to ascertain the number and characteristics of the individuals
required for the firm’s engagements. The firm’s recruitment processes include procedures that help the
firm select individuals of integrity as well as the capacity to develop the capabilities and competence
necessary to perform the firm’s work.

● The question is from the topic, Elements of a system of a quality control - “Human Resources”
➢ Intro para: reasonable assurance, professional standards and regulatory and legal
requirements, reports that are appropriate in the circumstances
➢ Personnel issues addressed by such policies and procedures: Recruitment; Performance
evaluation; Capabilities; Competence; Career development; Promotion; Compensation; and
Estimation of personnel needs.
➢ How addressing the personnel issues would empower the firm: number and
characteristics of the individuals, individuals of integrity, capabilities and competence
Q65. _____requires firms to establish policies and procedures for the retention of________. The retention period for
audit engagements ordinarily is no shorter than ______from the date of the auditor’s report, or, if later, the
date of the group auditor’s report
(a) SA 220, audit evidence, six years
(b) SA 200, audit documentation, seven years
(c) SQC 1, engagement documentation, seven years
(d) SA 230, documentation, six years
(RTP, May 2022, NA)

Correct answer: (c) SQC 1, engagement documentation, seven years

1.5 SA Ethical Requirements

Q66. Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants (IESBA
Code) related to an audit of financial statements. Discuss with reference to those fundamental principles of
professional ethics. (RTP, May 2019, NA)
OR
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. (MTP2, May 2019, 3 Marks)
OR
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the
Code of Ethics for Professional Accountants (IESBA Code) related to an audit of financial statements. The
Code establishes the fundamental principles of professional ethics relevant to the auditor when conducting
an audit of financial statements. Explain. (MTP1, May 2020, 3 Marks)
OR
Explain the fundamental principles of professional ethics relevant to the auditor when conducting an audit
of financial statements in accordance with Code of Ethics issued by ICAI.
(SA, Jan 2021, 4 Marks)
OR
The IESBA Code establishes the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements. Discuss and also explain the meaning of ethics. (RTP, May
2022, NA)
Ethical Requirements Relating to an Audit of Financial Statements: The auditor shall comply with
relevant ethical requirements, including those pertaining to independence, relating to financial
statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics for
Professional Accountants (IESBA Code) related to an audit of financial statements.
First, broadly understand what are ethics? “Ethics” are the principles of conduct governing an individual
or group. Professions like law, medicine have their code of ethics. Auditing profession is no exception.
Rather, in the profession of auditing, the importance of ethics is manifold.
The Code establishes the following as the fundamental principles of professional ethics relevant to the
auditor when conducting an audit of financial statements:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior.
a) Integrity
Integrity requires an auditor to be straightforward and honest in all professional and business
relationships. It implies fair dealing and truthfulness. It effectively means that he shall not be
associated with reports, returns, communications or other information which he believes contains
a materially false or misleading statement;
b) Objectivity

The auditor must adopt an unbiased approach while conducting an audit of financial statements.
The principle of objectivity requires an auditor not to compromise professional judgment
because of bias, conflict of interest or undue influence of others.
c) Professional competence and due care

It requires that the auditor attains and maintains professional knowledge and skill so that the
auditor can render competent professional service based on current technical and professional
standards and legislation and also to act diligently and in accordance with technical and
professional standards. Diligence includes responsibility to act carefully, thoroughly and on a
timely basis in accordance with requirements of an assignment.
d) Confidentiality
Confidentiality principle requires an auditor to respect the confidentiality of information acquired
as a result of professional or business relationships. The auditor should not disclose the confidential
information to any third party except when permitted by the client or required by law.
e) Professional behavior
It requires an auditor to comply with relevant laws and regulations and avoid any conduct that he
knows or should know might discredit the profession.

● Explanation part has been recently added by ICAI
● Summary of the answer:
Q67. The Firm R K & Associates has an extensive understanding of Code of Ethics that underlies the fundamental
principles relevant to the Auditor when conducting an Audit of Financial Statements and provides a
conceptual framework for applying these principles. Which of the following does not form part of the
fundamental principle?
(a) Integrity
(b) Professional Competence and due care
(c) Professional Skepticism
(d) Professional behaviour

Correct answer : (c) Professional Skepticism

● Explanation: Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional
Accountants (IESBA Code) related to an audit of financial statements. The Code establishes the five
fundamental principles of professional ethics relevant to the auditor when conducting an audit of
financial statements.
➢ Integrity;
➢ Objectivity;
➢ Professional competence and due care;
➢ Confidentiality; and
➢ Professional behavior.
1.6 SA Independence of Auditor

Q68. Loan or guarantee to or from the concerned client is an example of
(a) Self-review threats
(b) Self-interest threats
(c) Advocacy threats
(d) Intimidation threats
(Sample MCQs)
Correct answer : (b) Self-interest threats

● Explanation :
Meaning of Self-interest threats : Threat which occur when an auditing firm, its partner or
associate could benefit from a financial interest in an audit client. Loan or guarantee to or from the
concerned client is an example of Self-interest threats.
Q69. When an auditor deals with shares or securities of the audited company is an example of :
(Sample MCQs)
Correct answer : (c) Advocacy threats

● Explanation :
Meaning of advocacy threats: Threats which occur when the auditor promotes, or is perceived to
promote, a client’s opinion to a point where people may believe that objectivity is getting
compromised. When an auditor deals with shares or securities of the audited company is an
example of Advocacy threats.
Q70. There are two interlinked perspectives of independence of auditors, one, independence of mind; and two,
(a) objectivity

(b) Professional competence

(c) Integrity
(d) independence in appearance.
(Sample MCQs)
Correct answer : (d) independence in appearance.

● There are two interlinked perspectives of independence of auditors, one, independence of mind;
and two, independence in appearance.
➢ Independence of mind – the state of mind that permits the provision of an opinion
without being affected by influences allowing an individual to act with integrity, and
exercise objectivity and professional skepticism; and
➢ Independence in appearance – the avoidance of facts and circumstances that are so
significant that a third party would reasonably conclude an auditor’s integrity, objectivity or
professional skepticism had been compromised.
Q71. Direct financial interest or materially significant indirect financial interest in a client is an example of
(Sample MCQs) (MTP1, May 2020, 2 Marks)
Correct answer : (b) Self-interest threats

Q72. _____are self-evident, and occur when auditors form relationships with the client where they end up being
too sympathetic to the client’s interests.
(a) Familiarity threats
(Sample MCQs) (MTP1, May 2019, 1 Mark)
Correct answer : (a)Familiarity threats

Q73. Mr. A, auditor and Mr. B, Finance Manager of XYZ Pvt Ltd are friends. Mr. A prepares the audit report
according to the wishes and directions of Mr. B. In this situation which essential quality of the auditor has
been compromised:
(a) Professional Competence
(b) Independence
(c) Professional Skepticism
(d) Due care
(RTP, Nov 2020, NA)

Correct answer : (b) Independence

● For a student’s understanding, meaning of different terms are explained below:
➢ Professional Competence and due care - It requires that the auditor attains and maintains
professional knowledge and skill at the level required to render competent professional
service based on current technical and professional standards and legislation and also to
act diligently and in accordance with technical and professional standards. Diligence
includes responsibility to act carefully, thoroughly and on a timely basis in accordance with
requirements of an assignment.
➢ Professional Skepticism refers to an attitude that includes a questioning mind, being alert
to conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
➢ Independence implies that the judgement of a person is not subordinate to the wishes or
direction of another person who might have engaged him. In the given question, the
auditor prepares the audit report according to the wishes and directions of Mr. B, finance
manager of the company. In this situation, Independence has been compromised.
Q74. RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its
finished products both in the domestic as well as in the international market. The company is making total
turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In the year
2017-18, proprietor of the firm is worried about the financial position of the company and is under the
impression that since he is out of India, therefore firm might run into losses. He approaches a CA about
advantages of getting his accounts audited throughout the year so that he may not suffer due to
accounting weaknesses. Advise regarding advantages of getting accounts audited. (MTP1, May 2018, 5
Marks)
OR
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be
easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these
are of considerable value even to those enterprises and organisations where audit is not compulsory.
Explain. (RTP, Nov 2018, NA)
OR
PACE is proprietorship firm of Mr Abhinav engaged in the manufacturing of textile and handloom
products. It sells its finished products both in the domestic as well as in the international market. The
company is making total turnover of Rs. 50 crores. It has also availed cash credit limit of Rs. 5 crores from
Axis Bank. In the year 2017-18, proprietor of the firm is worried about the financial position of the company
and is under the impression that since he is out of India, therefore firm might run into losses. He
approaches CA Mahesh about advantages of getting his accounts audited throughout the year so that he
may not suffer due to accounting weaknesses. Advise regarding advantages of getting accounts audited.
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may
be easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of
these are of considerable value even to those enterprises and organizations where audit is not compulsory,
these advantages are given below:
● It safeguards the financial interest of persons who are not associated with the management of the
entity. For example- partners or shareholders,bankers, Financial institutions. .
● It acts as a moral check on the employees from committing defalcations or embezzlement.
● Audited statements of account are helpful in settling liability for taxes, negotiating loans and for
determining the purchase consideration for a business.
● Audited statements are also useful for settling trade disputes for higher wages or bonuses. It also
helps in settling claims in respect of damage suffered by property, by fire or some other calamity.

● Audited accounts are of great help in the settlement of accounts at the time of admission or
death of a partner.
● An audit can also help in the detection of wastages and losses to show the different ways by
which these might be checked, especially those that occur due to the absence or inadequacy of
internal checks or internal control measures.
● Audit ascertains whether the necessary books of account and allied records have been properly
kept and helps the client in making good deficiencies or inadequacies in this respect.
● As an appraisal function, the audit reviews the existence and operations of various controls in the
organizations and reports weaknesses, inadequacies, etc., in them and provides suggestions for the
improvement, if any.
● Government may require an audited and certified statement before it gives assistance or issues a
license for a particular trade.

Q75. The Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants
(IFAC) identifies five types of threats. Explain. (MTP1, Nov 2018, 5 Marks)
OR
The auditor should be straightforward, honest and sincere in his approach to his professional work. He must
be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial
attitude and both be and appear to be free of any interest which might be regarded as being incompatible
with integrity and objectivity. Many different circumstances, or combination of circumstances, may be
relevant and accordingly it is impossible to define every situation that creates threats to independence and
specify the appropriate mitigating action that should be taken. In addition, the nature of assurance
engagements may differ and consequently different threats may exist requiring the application of different
safeguards.
Explain stating clearly the five types of threats as contained in Code of Ethics for Professional Accountants,
prepared by the International Federation of Accountants (IFAC).
OR
The Code of Ethics for Professional Accountants, prepared by the International Federation
of Accountants (IFAC) identifies five types of threats. Explain those threats in detail giving
examples.
(RTP, May 2022, NA)
The auditor should be straightforward, honest and sincere in his approach to his professional work. He
must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an
impartial attitude and both be and appear to be free of any interest which might be regarded as being
incompatible with integrity and objectivity.
Many different circumstances, or combination of circumstances, may be relevant and accordingly it is
impossible to define every situation that creates threats to independence and specify the appropriate
mitigating action that should be taken. In addition, the nature of assurance engagements may differ and
consequently different threats may exist requiring the application of different safeguards.
Types of threats to Independence

The Code of Ethics for Professional Accountants, prepared by the International Federation of
Accountants (IFAC) identifies five types of threats. These are:
1. Self-interest threats, which occur when an auditing firm, its partner or associate could benefit
from a financial interest in an audit client.

Examples include
● direct financial interest or materially significant indirect financial interest in a client,
● loan or guarantee to or from the concerned client,
● undue dependence on a client’s fees and, hence, concerns about losing the engagement,
● close business relationship with an audit client,
● potential employment with the client, and
● contingent fees for the audit engagement.
Like, in case an audit firm unduly relies on fees from a client, it may result in a threat to the
self interest of the auditor and he may not work objectively for the fear of losing the client.
2. Self-review threats, which occur during a review of any judgment or conclusion reached in a
previous audit or non-audit engagement. When non-audit services are provided to an entity by
the auditor and such entity is subject to the audit by the same person, then the auditor will be
unlikely to acknowledge errors in their work or may not identify the errors in their work.
Instances where such threats come into play are
● when an auditor having recently been a director or senior officer of the company, and
● when auditors perform services that are themselves subject matters of audit.
3. Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a
client’s opinion to a point where people may believe that objectivity is getting compromised,
Examples :
● when an auditor deals with shares or securities of the audited company, or
● becomes the client’s advocate in litigation and third party disputes.
In such situations, the auditor can be perceived as backing and championing causes of the
auditee client and it may lead to belief that the auditor is not acting and working objectively.
Remember that the auditor has not only to be independent but also appear to be acting so.
4. Familiarity threats are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests.
Examples:
● close relative of the audit team working in a senior position in the client company,
● former partner of the audit firm being a director or senior employee of the client,
● long association between specific auditors and their specific client counterparts, and
● acceptance of significant gifts or hospitality from the client company, its directors or
employees.
Provisions in Companies Act, 2013 regarding rotation of auditors mainly address these very
familiarity threats. Such provisions prescribe that an auditor is rotated after a certain
number of years so that auditors do not become too familiar with their clients.
5. Intimidation threats, which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees or being threatened with
litigation. Such threats attempt to intimidate auditors to deter them from acting objectively.

● Quote examples also

Q76. Familiarity threats are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests. Explain.
Meaning of Familiarity threats

Familiarity threats are self-evident, and occur when auditors form relationships with the client where they
end up being too sympathetic to the client’s interests.
Examples
This can occur in many ways:
● close relative of the audit team working in a senior position in the client company,
● former partner of the audit firm being a director or senior employee of the client,
● long association between specific auditors and their specific client counterparts, and
● acceptance of significant gifts or hospitality from the client company, its directors or employees.

From the meaning: self-evident, too sympathetic to the client’s interests.
From the examples: close relative of the audit team, former partner of the audit firm being a
director or senior employee of the client, long association, significant gifts or hospitality
Q77. "Independence of mind and independence in appearance are interlinked perspectives of Independence of
auditors." Explain. (SA, May 2019, 3 Marks)
OR
There are two interlinked perspectives of independence of auditors, one, independence of mind; and two,
independence in appearance. Explain.
Independence” implies that the judgment of a person is not subordinate to the wishes or direction of
another person who might have engaged him. The auditor should be independent of the entity subject to
the audit.
Independence of mind and independence in appearance are interlinked perspectives of Independence of
auditors.
The Code of Ethics for Professional Accountants issued by International Federation of Accountants (IFAC)
defines the term “Independence” as comprising both-
(a) Independence of mind implies the state of mind that permits the provision of an opinion without
being affected by influences allowing an individual to act with integrity, and exercise objectivity and
professional skepticism; and
(b) Independence in appearance implies the avoidance of facts and circumstances that are so
significant that a third party would reasonably conclude an auditor’s integrity, objectivity or
professional skepticism had been compromised.” Independence of the auditor has not only to exist in
fact, but also appears to so exist to all reasonable persons.

➢ From the meaning of Independence- judgment of a person is not subordinate to the
wishes or direction of another person
➢ Independence of mind - provision of an opinion without being affected by influences,
integrity, and exercise objectivity and professional skepticism

➢ Independence in appearance - avoidance of facts and circumstances that are so significant

that a third party would reasonably conclude an auditor’s integrity, objectivity or
professional skepticism had been compromised, appears to so exist
Q78. Judging the significance of a matter requires _____of the facts and circumstances.
(a) objective analysis
(b) subjective analysis
(c) Both subjective and objective analysis
(d) qualitative analysis
(RTP, Nov 2019, NA)
Correct answer : (a) objective analysis

Q79. The Chartered Accountant has a responsibility to remain independent by taking into account the context in
which they practice, the threats to independence and the safeguards available to eliminate the threats.
In the above context, explain the guiding principles.
(RTP, Nov 2019, NA) (MTP1, May 2020, 4 Marks) (RTP, May 2021, NA) (MTP2, May 2021, 3 Marks)
OR
Describe the guiding principles which the auditor should take into account which serves as the safeguards
to eliminate the threats to independence. (SA, Nov 2020, 4 Marks)
OR
Discuss a few guiding principles which are behind safeguards to eliminate threats to auditor’s
independence. (RTP, Nov 2021, NA)
The Chartered Accountant has a responsibility to remain independent by taking into account the context in
which they practice, the threats to independence and the safeguards available to eliminate the threats.
The following are the guiding principles in this regard: -
1. For the public to have confidence in the quality of audit, it is essential that auditors should always
be and appear to be independent while auditing the financial statements of an entity.
2. In the case of audit, the key fundamental principles are integrity, objectivity and professional
skepticism, which necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it involves threats
to his independence.
4. When such threats exist, the auditor should either desist from the task or put in place
safeguards that eliminate them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he must not
accept the work.

Q80. Write a note on “Self-review threats”

(RTP, Nov 2019, NA)
Meaning of Self-review threats:

Self-review threats, which occur during a review of any judgment or conclusion reached in a previous audit
or non-audit engagement
Meaning of non- audit services:

Non audit services include any professional services provided to an entity by an auditor, other than audit
or review of the financial statements. These include management services, internal audit, investment
advisory service, design and implementation of information technology systems etc.,
Examples:
➢ when an auditor or member of the audit team having recently been a director or senior officer of
the company, and
➢ when auditors perform services that are themselves subject matters of audit.

● Important keywords: previous audit or non-audit engagement, Non audit services- other than
audit or review of the financial statements
● State examples also.
Familiarity threats, which occur when auditors are deterred from acting objectively with an adequate
degree of professional skepticism. Basically, these could happen because of threat of replacement over
disagreements with the application of accounting principles, or pressure to disproportionately reduce work
in response to reduced audit fees.
(RTP, May 2021, NA)

Intimidation threats, which occur when auditors are deterred from acting objectively with an adequate
disagreements with the application of accounting principles, or pressure to disproportionately reduce
work in response to reduced audit fees.
Familiarity threats are self-evident, and occur when auditors form relationships with the client where they
end up being too sympathetic to the client’s interests.

● State both Intimidation and Familiarity threats.
● Important keywords: Intimidation threats, deterred from acting objectively, threat of replacement
over disagreements, pressure to disproportionately reduce work, Familiarity threats are self-evident,
too sympathetic to the client’s interests.
Q82. ………….. is the threat which occurs when auditors are deterred from acting objectively with an adequate
degree of professional skepticism.
(a) Familiarity threat
(b) Advocacy threat
(c) Self Review threat
(d) Intimidation threat
(MTP1, May 2021, 1 Mark) (RTP, Nov 2021, NA)
Correct answer : (d) Intimidation threat

● For a student’s understanding, different types of threats are explained briefly:
➢ Familiarity threats are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client’s interests.
➢ Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a

client’s opinion to a point where people may believe that objectivity is getting
compromised
➢ Self-review threats, which occur when during a review of any judgement or conclusion
reached in a previous audit or non-audit engagement
There is a very thin difference between advocacy threats and intimidation threats to an auditor while
performing his duty
(SA, July 2021, 2 Marks)

Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a client’s opinion
to a point where people may believe that objectivity is getting compromised. e.g. when an auditor deals
with shares or securities of the audited company, or becomes the client’s advocate in litigation and third
party disputes.
Intimidation threats, which occur when auditors are deterred from acting objectively with an adequate
disagreements with the application of accounting principles, or pressure to disproportionately reduce
work in response to reduced audit fees.
So, it can be concluded that there is not a very thin difference between the advocacy threats and
intimidation threats.

Q84. is the threat which occurs when the auditor promotes, or is perceived to promote, a client’s
opinion to a point where people may believe that objectivity is getting compromised
(a) Familiarity threat
(b) Advocacy threat
(c) Self Review threat
(d) Intimidation threat
(RTP, May 2022, NA)
Correct answer: (b) Advocacy threat

Comments and feedback:
1.7 Miscellaneous Topics From Basics and Chapter 1

Q85. GST & Co., a firm of Chartered Accountants has been appointed to audit the accounts of XYZ Ltd. The
partner wanted to cover principal aspects while conducting its audit of financial statements. Advise those
principal aspects. (RTP, May 2018, NA)
OR
Principal aspects to be considered by an auditor while conducting an audit of final statements of accounts.
OR
SWM is proprietorship firm engaged in the manufacturing of different kind of yarns. It sells its finished
products both in the domestic as well as in the international market. The company is making total turnover
of Rs. 30 crores. It has also availed cash credit limit of Rs.. 3 crores from Dena Bank. In the year 2018-19.

Proprietor of the firm is worried about the financial position of the company and is under the impression
that since he is out of India, therefore firm might not run well. He approaches an Internal Auditor about as
to what would be covered in Audit. Advise regarding principal aspects (any four) to be covered in getting
accounts audited.
The principal aspect to be covered in an audit concerning final statements of account are the following:
● An examination of the system of accounting and internal control to ascertain whether it is
appropriate for the business and helps in properly recording all transactions.
● Reviewing the system and procedures to find out whether they are adequate and comprehensive
and incidentally whether material inadequacies and weaknesses exist to allow frauds and errors
going unnoticed.
● Checking of the arithmetical accuracy of the books of account by the verification of postings,
balances, etc.
● Verification of the authenticity and validity of transactions entered into by making an
examination of the entries in the books of accounts with the relevant supporting documents.
● Ascertaining that a proper distinction has been made between items of capital and of revenue
nature and that the amounts of various items of income and expenditure adjusted in the accounts
corresponding to the accounting period.
● Comparison of the balance sheet and profit and loss account or other statements with the
underlying record in order to see that they are in accordance therewith.
● Verification of the title, existence and value of the assets appearing in the balance sheet.
● Verification of the liabilities stated in the balance sheet.
● Checking the result shown by the profit and loss and to see whether the results shown are true
and fair.
● Where audit is of a corporate body, confirming that the statutory requirements have been
complied with.
● Reporting to the appropriate person/body whether the statements of account examined do
reveal a true and fair view of the state of affairs and of the profit and loss of the organization.

● Summary of the answer: internal control, arithmetical accuracy, authenticity and validity of
transaction, proper distinction of capital and of revenue items, Verification of assets and
liabilities, Comparison of B/S and P/L, Checking the result of P/L, statutory requirements,
Reporting to the appropriate person/body
Q86. What constitutes a 'true and fair' view, is the matter of an auditor's judgement in the particular
circumstances of a case. In order to ensure 'true and fair' view, auditor has to review certain points. Mention
any such 5 (five) points in brief.
What constitutes a 'true and fair' view, is the matter of an auditor's judgement in the particular
circumstances of a case.
To ensure true and fair view, an auditor has to see:
● that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
● no material asset is omitted;
● the charge, if any, on assets are disclosed;
● material liabilities should not be omitted;
● the profit and loss account and balance sheet discloses all the matters required to be disclosed;
● accounting policies have been followed consistently; and

● all unusual, exceptional or non-recurring items have been disclosed separately.

● Important keywords: neither undervalued or overvalued, material asset, charge, material liabilities
, profit and loss account and balance sheet, accounting policies, consistently, unusual, exceptional
or non-recurring items
Q87. The relationship between auditing and law is very close one. Discuss.
(RTP, Nov 2018, NA) (MTP1, Nov 2019, 4 Marks)
The relationship between auditing and law is very close one.

Auditing involves examination of various transactions whether the transactions have been properly
entered into as per the requirements of law, in particular, when an entity is governed by any law, for
example companies
It necessitates that an auditor should have a good knowledge of business and corporate laws affecting
the entity. He should be familiar with the law of contracts, negotiable instruments, etc.
The knowledge of taxation laws is also inevitable as entities are required to prepare their financial
statements taking into account various provisions affected by various tax laws.
In analyzing the impact of various transactions particularly from the accounting aspect, an auditor ought to
have a good knowledge about the direct as well as indirect tax laws.

● Important keywords: business laws affecting the entity, law of contracts, negotiable instruments,
knowledge of taxation laws, good knowledge about the direct as well as indirect tax laws.
Q88. Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities.
Explain stating also the qualities of Auditor.
(RTP, May 2019, NA) (MTP1, May 2021, 4 Marks) (MTP1, Nov 2021, 4 Marks)
It is not enough to realize what an auditor should be. He is concerned with the reporting on financial
matters of business and other institutions. Financial matters inherently are to be set with the problems of
human fallibility; errors and frauds are frequent. The qualities required, according to Dicksee, are tact,
caution, firmness, good temper, integrity, discretion, industry, judgment, patience, clear headedness
and reliability. In short, all those personal qualities that go to make a good businessman contribute to the
making of a good auditor. In addition, he must have the shine of culture for attaining a great height. He
must have the highest degree of integrity and objectivity backed by adequate independence.
The auditor must have a thorough knowledge of the general principles of law of contracts and
partnership. In addition, an auditor must have sound knowledge of direct and indirect taxation laws.
He must pursue an intensive programme of theoretical education in subjects like financial and
management accounting, general management, business and corporate laws, computers and
information systems, taxation, economics, etc. Both practical training and theoretical education are
equally necessary for the development of professional competence of an auditor for undertaking any kind
of audit assignment.
The auditor should be equipped not only with a sufficient knowledge of the way in which business
generally is conducted but also with an understanding of the special features peculiar to a particular
business whose accounts are under audit. The auditor, who holds a position of trust, must have the basic
human qualities and possess effective communication skills apart from the technical requirement of

professional training and education.

He must know thoroughly all accounting principles, procedures, techniques and accounting standards.
In addition, he must have a sound knowledge of auditing principles, procedures, techniques and
standards on auditing.
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He
said, “an auditor must be honest that is, he must not certify what he does not believe to be true and
must take reasonable care and skill before he believes that what he certifies is true”.

Q89. “An audit is 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.” Explain stating clearly how the person conducting this task should take care to ensure
that financial statements would not mislead anybody. (MTP1, Nov 2019, 4 Marks)
OR
The person conducting the audit should take care to ensure that financial statements would not mislead
anybody. Explain stating clearly the meaning of Auditing.
(RTP, May 2020, NA) (MTP1, Nov 2021, 4 marks)
“An audit is 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.”
Analysis of the Definition

● Audit is an Independent examination of Financial information.
● The audit can be performed of any entity that may be profit-oriented or not and irrespective of its
size or legal form. 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.
● The objective of the audit is to express an opinion on the financial statements.
The person conducting this task should take care to ensure that financial statements would not mislead
anybody. This he can do honestly by satisfying himself that:
1. the accounts have been drawn up with reference to entries in the books of account;
2. the entries in the books of account are adequately supported by sufficient and appropriate
evidence;
3. none of the entries in the books of account has been omitted in the process of compilation and
nothing which is not in the books of account has found place in the statements;
4. the information conveyed by the statements is clear and unambiguous;
5. the financial statement amounts are properly classified, described and disclosed in conformity
with accounting standards; and
6. the statement of accounts presents a true and fair picture of the operational results and of the
assets and liabilities.

From the definition: independent examination, financial information, any entity, profit oriented or

not, size or legal form, opinion.

From the main answer: reference to entries, sufficient and appropriate evidence, omitted,
process of compilation, clear and unambiguous, properly classified, described and disclosed in
conformity with accounting standards, true and fair picture
Q90. Both accounting and auditing are closely related with each other. Explain
(RTP, Nov 2020, NA)
● Both accounting and auditing are closely related with each other as auditing reviews the financial
statements which are nothing but a result of the overall accounting process. Auditing begins
when accounting ends. It naturally calls on the part of the auditor to have a thorough and sound
knowledge of generally accepted principles of accounting before he can review the financial
statements.
● In fact, auditing as a discipline is also closely related with various other disciplines as there are a lot
of linkages in the work which is done by an auditor in his day-to-day activities. To begin with, it may
be noted that the discipline of auditing itself is a logical construct and everything done in auditing
must be bound by the rules of logic.
● Ethical precepts are the basis on which the foundation of the entire accounting profession rests.
The knowledge of language is also considered essential in the field of auditing as the auditor shall
be required to communicate, both in writing as well as orally, in day-to-day work.

● Important keywords: overall accounting process, Auditing begins when accounting ends,
generally accepted principles of accounting, logical construct , rules of logic, Ethical precepts,
knowledge of language
Q91. The auditor’s opinion helps determination of the true and correct view of the financial position and
operating results of an enterprise.
(RTP, May 2021, NA)

The auditor’s opinion helps determine the true and fair view of the financial position and operating results
of an enterprise.

● Important keywords: true and fair view
● For a student’s understanding: The auditor’s opinion helps determine the true and fair view and
not the true and correct view. As the word “correct” indicates there is absolutely no misstatement in
the financial statement and financial statements are absolutely reliable i.e. auditor’s examination is
100% correct, which is not possible due to inherent limitations of an audit. Therefore, the auditor
shall express a true and fair view of the financial position of the entity.
The terms of audit engagement can restrict the scope of an audit. ·
The statement is incorrect

The scope of an audit of financial statements will be determined by the auditor for having regard to the
terms of the engagement, the requirement of relevant legislation and the pronouncements of the
Institute.
The terms of engagement cannot, however, restrict the scope of an audit in relation to matters which are

prescribed by legislation or by the pronouncements of the Institute.

● Important keywords: auditor, requirement of relevant legislation and the pronouncements of the
Institute.
Q93. The knowledge of human behaviour is indeed very essential for an auditor so as to effectively discharge his
duties. Explain.
(RTP, Nov 2021, NA)
Intro para
● The field of auditing as a discipline involves review of various assertions; both in financial as well
as in non-financial terms, with a view to prove the veracity of such assertions and expression of
opinion by the auditor on the same. Thus, it is quite logical and natural that the function of audit
can be performed if and only if the person also possesses a good knowledge about the fields in
respect of which he is conducting such a review.
Difference between Financial and internal auditor

● The discipline of behavioral science is closely linked with the subject of auditing. The
financial/statutory auditor deals basically with the figures contained in the financial statements,
whereas the internal auditor deals with the process and controls. The financial auditor is required to
interact with a lot of people in the organization. As against the financial auditor, the internal
auditor or a management auditor is expected to deal with human beings rather than financial
figures.
Internal control system

● One of the basic elements in designing the internal control system is personnel. However, if a
sound internal control structure is designed, it cannot work until and unless the people who are
working in the organization are competent and honest. The knowledge of human behavior is
indeed very essential for an auditor so as to effectively discharge his duties.

● Indirect and moderate question
● Question is from the topic “Relationship of auditing with other disciplines” - Auditing and
Behavioral Science

CH - 1 - Question Bank

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Question Bank - Chapter 1 Compiled by Neeraj Arora and TEAM

Correct answer : (a) Professional skepticism

Q2. Professional skepticism is necessary to the critical assessment of

Correct answer : (b) audit evidence.

Audit QB C1 - Page No 1 /45

Correct answer: (c) reasonable assurance

The statement is incorrect.

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Audit QB C1 - Page No 2 /45

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The statement is correct

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The statement is incorrect.

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Audit QB C1 - Page No 3 /45

The statement is Incorrect

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The statement is Incorrect.

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The statement is incorrect.

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Audit QB C1 - Page No 4 /45

The statement is incorrect.

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The statement is incorrect.

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Audit QB C1 - Page No 5 /45

Q14. The matter of difficulty, time, or cost involved is :

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The statement is incorrect.

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This statement is Correct.

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Audit QB C1 - Page No 6 /45

Meaning of Professional Skepticism :

Examples of professional skepticism:

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Audit QB C1 - Page No 7 /45

(RTP, Nov 2018, NA)

1. The Nature of Financial Reporting:

2. The Nature of Audit Procedures:

4. Other Matters that Affect the Limitations of an Audit:

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Audit QB C1 - Page No 8 /45

The Nature of Audit Procedures:

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Other Matters that Affect the Limitations of an Audit:

Audit QB C1 - Page No 9 /45

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Correct answer : (c)Reporting on true and fair view of financial statements

The statement is incorrect.

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The statement is incorrect.

Audit QB C1 - Page No 10 /45

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The statement is incorrect.

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The statement is correct.

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The statement is correct.

Audit QB C1 - Page No 11 /45

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