House I
The primary purpose of auditing is to:
A. Detect fraud
B. Prepare accounts
C. Express an opinion on financial statements
D. Manage business
c. Express an opinion on financial statements
Which of the following is an example of internal control?
A. Auditor’s report
B. Segregation of duties
C. Trial balance
D. Ledger
B. Segregation of duties
Which audit checks the efficiency of operations?
A. Financial audit
B. Internal audit
C. Cost audit
D. Management audit
D. Management audit
Auditor is appointed by:
A. Directors
B. Managers
C. Shareholders
D. Employees
C. Shareholders
An auditor finds that sales are recorded before dispatch of goods. This violates which principle?
A. Consistency
B. Prudence
C. Revenue Recognition
D. Materiality
C. Revenue Recognition
If an auditor relies too much on management representations without evidence, it affects:
A. Efficiency
B. Independence
C. Reliability of audit
D. Cost of audit
C. Reliability of audit
A company has strong internal controls. The auditor will likely:
A. Increase detailed checking
B. Avoid audit
C. Reduce extent of checking
D. Ignore controls
C. Reduce extent of checking
Goods worth ₹50,000 are included in closing stock but are held on consignment. This leads to:
A. Understatement of profit
B. Overstatement of profit
C. No effect
D. Understatement of assets
B. Overstatement of profit
An auditor finds that expenses of next year are recorded in the current year. What is the effect?
A. Profit overstated
B. Profit understated
C. No effect
D. Assets overstated
B. Profit understated
Which situation shows strong internal control?
A. One person handles all work
B. No supervision
C. Work divided among employees
D. No documentation
C. Work divided among employees
Auditor finds that goods sold are still included in closing stock. This results in:
A. Understatement of profit
B. Overstatement of profit
C. No effect
D. Understatement of assets
B. Overstatement of profit
Which error is most difficult for an auditor to detect?
A. Arithmetical error
B. Error of omission
C. Fraud with proper documentation
D. Posting error
Answer: C. Fraud with proper documentation
Auditor notices a small error of ₹2,000 in a large company’s accounts. What should he do?
A. Ignore it completely
B. Evaluate its materiality before deciding
C. Immediately qualify the report
D. Report it as fraud
B. Evaluate its materiality before deciding
Management refuses to provide necessary documents. Auditor should:
A. Ignore the issue
B. Rely on verbal explanation
C. Modify/qualify the audit report
D. Continue audit normally
C. Modify/qualify the audit report
A transaction is legal but seems unethical. Auditor should:
A. Ignore it
B. Only check legality
C. Consider its impact on true and fair view
D. Report fraud
C. Consider its impact on true and fair view
Auditor finds error affecting both profit and assets significantly. He should:
A. Ignore if corrected later
B. Highlight and ensure correction
C. Only inform manager
D. Reduce audit work
B. Highlight and ensure correction
Aman, an auditor, is reviewing ABC Ltd. He finds that depreciation on machinery has not been charged this year. Management explains that “profits are already low, so we skipped it this year.”
What should Aman do?
A. Accept management explanation
B. Insist on charging depreciation and report if not adjusted
C. Ignore as it is a non-cash expense
D. Reduce audit work
B. Insist on charging depreciation and report if not adjusted
Neha, an auditor, is auditing PQR Ltd. She finds that a loan taken from a bank is not recorded in the books. Management says, “We will record it next year.”
What should Neha do?
A. Accept and proceed
B. Ignore since it will be recorded later
C. Only disclose in notes
D. Insist on recording and report if not adjusted
D. Insist on recording and report if not adjusted
Rahul, an auditor, observes that the same employee handles cash receipts, records transactions, and prepares bank reconciliation. Management says, “He is very trustworthy.”
What should Rahul do?
A. Identify weak internal control and increase audit procedures
B. Accept since employee is trusted
C. Ignore for small business
D. Reduce checking
A. Identify weak internal control and increase audit procedures
Priya, an auditor, notices that revenue has increased significantly at year-end, but supporting dispatch documents are missing. Management says, “Documents are delayed.”
What should Priya do?
A. Accept explanation
B. Increase audit fees
C. Verify dispatch evidence and adjust/report if needed
D. Ignore timing difference
C. Verify dispatch evidence and adjust/report if needed