Principles and Practice of Auditing V Sem B.

Com

Principles and Practices of Auditing

Important Questions
Module-01
Introduction to Auditing
Multiple Choice Questions:
1. What is the primary purpose of audit planning?

(A) To finalize the audit report

(B) To determine the client's profitability
(C) To identify the audit approach and objectives
(D) To assess the auditor's qualifications
Answer: (C)
2. In the audit planning process, what is the first step an auditor typically takes?
(A) Reviewing financial statements
(B) Identifying risks and objectives
(C) Drafting the audit report
(D) Evaluating internal controls
Answer: (B)
3. What is the role of an audit strategy in the audit process?

(A) It outlines the specific procedures to be performed during the audit.

(B) It details the financial statements of the client.
(C) It identifies the client's weaknesses and strengths.
(D) It provides an overview of the audit approach and scope.
Answer: (D)

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4. Which of the following is NOT a typical component of an audit strategy?

(A) Scope of the audit

(B) Audit timeline
(C) Materiality thresholds
(D) Client's contact information
Answer: (D)
5. When does the audit engagement officially begin?

(A) After the audit report is issued

(B) When the auditor signs the client's financial statements
(C) With the auditor's acceptance of the client's engagement
(D) When the audit plan is drafted
Answer: (B)

6. Which of the following is a key consideration when formulating an audit

strategy?
(A)The number of audit team members
(B)The auditor's personal preferences
(C)The client's internal controls
(D)The company's marketing strategy
Answer: [c]
7. In an audit engagement, what is the primary responsibility of the audit team
members?

(A)Marketing the audit firm's services

(B)Maximizing profits for the client
(C)Following the audit plan and executing audit procedures
(D)Preparing the client's financial statements
Answer: [c]

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8. Who typically signs the engagement letter that outlines the terms and scope
of the audit engagement?

(A)The client's CEO

(B)The audit team leader
(C)The engagement partner
(D)The regulatory authority

Answer: [c]
9. What is the general rule for retaining audit documentation?
(A)One year after the engagement is completed
(B)Two years after the engagement is completed
(C)Three years after the engagement is completed
(D)Five years after the engagement is completed
Answer: [c]
10. Which of the following is NOT a primary purpose of audit documentation?
(A)Providing evidence of the auditor's work
(B)Facilitating tax preparation for the client
(C)Supporting the audit report's conclusions
(D)Assisting in quality control reviews
Answer: [b]
Conceptual Type (2 Marks):

1. Define the term auditing.

2. What is audit notebook?
3. Give the meaning of cost audit.
4. Define auditing and its objectives.
5. Explain the concept of materiality in auditing.
6. Define vouching and explain its importance in auditing.
7. Briefly explain the concept of audit evidence.
8. Define fraud and error in the context of auditing.

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Analytical type (4 Marks):

1. Explain the characteristics of auditing.

2. Explain the objectives of auditing.
3. Explain the advantages and disadvantages of auditing.
4. Discuss the importance of audit planning in the auditing process.
5. Explain the significance of audit sampling in auditing.
6. Discuss the types of audit evidence and their reliability.
7. Describe the duties and responsibilities of an auditor regarding fraud
detection.
8. Explain the concept of management representation in auditing.

Essay Type (12 Marks):

1. Discuss the importance of auditing.

2. Explain various types of audit.
3. Discuss preparation before commencement of new audit.
4. Explain the process of audit planning and its significance in conducting an
audit effectively.
5. Explain the auditor's responsibility in detecting and reporting fraud during an
audit engagement.
6. Describe the process of obtaining audit evidence and evaluating its
sufficiency and appropriateness.
7. Explain the different types of audit procedures and their application in
auditing financial statements.

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Module No. 2
Risk Assessment and Internal Control

Multiple Choice Questions:

1. Cash sales should ideally be recorded by:

(A) Only the cashier

(B) Only the sales manager
(C) Both the cashier and sales manager
(D) The customer
Answer: (C)
2. To minimize the risk of theft and miscounting in cash sales, businesses
should implement:

(A) Surprise cash counts

(B) Cash sales without receipts
(C) Daily reconciliation with suppliers
(D) Monthly external audits
Answer: (A)

3. Which of the following is NOT an internal control measure for cash

purchases?

(A) Requiring multiple approvals for purchases

(B) Maintaining a petty cash fund
(C) Implementing purchase orders
(D) Allowing employees to make cash purchases without documentation
Answer: (D)
4. To prevent errors and fraud in cash purchases, businesses should:

(A) Keep purchase records confidential

(B) Allow any employee to make cash purchases
(C) Avoid reviewing invoices and receipts
(D) Only reconcile purchases annually
Answer: (A)
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5. Which internal control helps ensure that individuals who authorize cash
transactions are different from those who record or reconcile them?

(A) Segregation of duties

(B) Collusion
(C) Centralized control
(D) Cross-training

Answer: (A)

6. Which internal check principle involves reconciling the cash balance in the
company's books with the balance in the bank statement?
(A)Dual authorization
(B)Segregation of duties
(C)Bank reconciliation
(D)Internal audit
Answer: [c]

7. What is the primary goal of internal checks in relation to inventory

management?

(A)To minimize inventory turnover

(B)To prevent employees from accessing the inventory
(C)To ensure accurate recording of inventory transactions
(D)To increase the storage capacity of the warehouse

Answer: [c]
8. Which type of internal check involves periodically comparing physical
counts of inventory with recorded inventory balances?
(A)Segregation of duties
(B)Dual authorization
(C)Stocktaking
(D)Bank reconciliation
Answer: [c]

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9. Internal check measures are primarily used for:

(A)Detecting external fraud

(B)Ensuring compliance with tax laws
(C)Safeguarding assets and preventing errors
(D)Evaluating employee performance
Answer: [a]
10. In the context of wage payment, which internal control helps prevent paying
fictitious or ghost employees?
(A)Segregation of duties
(B)Cross-training employees
(C)Background checks on employees
(D)None of the above
Answer: [c]
Conceptual Type (2 Marks):
1. What do you mean by cash sales and cash purchases?
2. State any two fundamental principles of internal check.
3. What is internal control?
4. Define audit risk and explain its components.
Analytical type (4 Marks):

1. Discuss various features of internal control.

2. Explain the concept of internal check.
3. Discuss various objectives of internal check
4. Discuss the advantages and limitations of internal audit.
5. Explain the procedure for the verification of cash transactions.

Essay Type (12 Marks):

1. Explain fundamental principles of internal check.

2. Discuss internal check as regards cash sales/ purchases/ wage payments.

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3. Discuss the concept of risk-based auditing and its application in modern

auditing practices.
4. Discuss the principles of internal control and their significance in the audit
process.

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Module No. 3
Verification and Valuation of Assets and Liabilities
Multiple Choice Questions:
1. What is the primary concern when auditing contingent liabilities?

(A) To maximize the reported liabilities for better financial ratios

(B) To ensure that all contingent liabilities are recorded as definite obligations
(C) To evaluate their impact on financial statements and disclose them
appropriately
(D) To reduce the reported contingent liabilities to improve the company's
financial position
Answer: (C)

2. When auditing plant and machinery, what is the primary concern regarding
depreciation?
(A) Assessing the resale value of machinery
(B) Confirming the age of the machinery
(C) Evaluating the accuracy of depreciation calculations
(D) Verifying the current market demand for machinery
Answer: (C)

3. What method is commonly used to calculate depreciation for plant and

machinery?

(A) Straight-line method

(B) Random selection method
(C) Market value method
(D) Historical cost method
Answer: (A)

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4. How does goodwill typically arise in a company's financial statements?

(A) Through the sale of tangible assets

(B) Through the acquisition of another business a
(C) Through the issuance of new shares
(D) Through the retention of earnings
Answer: (B)
5. What is a key consideration when verifying the valuation of investments in
financial statements?
(A) Confirming the political stability of the country
(B) Ensuring the investments are held for the long term
(C) Assessing the market value and impairment of investments
(D) Evaluating the interest income earned on investments
Answer: (C)
6. What is the primary objective of auditing investments?
(A)To assess the potential tax benefits of investments
(B)To determine the fair market value of investments
(C)To confirm the existence and ownership of investments
(D)To evaluate the performance of investment managers
Answer: [c]
7. How investments are typically valued in financial statements?

(A)At their original purchase price

(B)At their fair market value
(C)At their replacement cost
(D)At their historical cost
Answer: [b]

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8. In the context of stock in trade, why is it important to verify quantities

condition?

(A)To assess employee performance

(B)To calculate the cost of goods sold
(C)To confirm the existence and condition of inventory
(D)To evaluate market demand for products

Answer: [c]

9. What are "sundry creditors" in financial statements, and why are they
important to verify?
(A)Sundry creditors are miscellaneous expenses that do not need verification
(B)Sundry creditors are amounts owed to various suppliers, and verifying them
ensures completeness
(C)Sundry creditors represent contingent liabilities
(D)Sundry creditors are always recorded at their fair market value
Answer: [b]

10. What distinguishes contingent liabilities from other liabilities in financial

statements?

(A)Contingent liabilities are certain obligations that must be settled

(B)Contingent liabilities are not disclosed in financial statements
(C)Contingent liabilities are potential obligations that depend on future events
(D)Contingent liabilities are always recorded at their fair market value
Answer: [c]
Conceptual Type (2 Marks):
1. What is intangible asset?
2. Give the meaning of verification and valuation.
3. What is wasting asset?
4. What is the difference between verification and valuation?
5. Explain the term "going concern" assumption in auditing.

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Analytical type (4 Marks):

1. State various objects of verification.

2. Explain verification of stock-in-trade.
3. Explain various types of assets.

Essay Type (12 Marks):

1. Explain procedures of verification of assets.

2. Explain procedures of verification of liabilities.
3. Discuss valuation of assets.
4. Describe the steps involved in the audit of inventory and the procedures for
verifying inventory balances.

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Module No. 4
Company Audit and Audit of Other Entities
Multiple Choice Questions:

1. What power does an auditor have in terms of accessing company records and
documents?

(A) Auditors can access all records without any restrictions.

(B) Auditors can only access financial records, not operational records.
(C) Auditors can access records with the permission of the company’s CEO.
(D) Auditors have the legal right to access all records relevant to their audit.
Answer: (D)
2. What is a primary duty of an auditor when conducting a financial statement
audit?
(A) To maximize the company’s profits
(B) To provide tax advice to the company
(C) To provide assurance on the accuracy of the financial statements
(D) To manage the company’s financial operations
Answer: (C)

3. In many jurisdictions, what is a potential liability that auditors may face for
professional negligence?

(A) Criminal charges

(B) Civil lawsuits
(C) Fines imposed by the government
(D) Loss of professional certification
Answer: (B)

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4. What type of liability arises when an auditor fails to detect material

misstatements in a company’s financial statements, resulting in financial losses
to third parties who relied on those statements?

(A) Criminal liability

(B) Civil liability
(C) Regulatory liability
(D) Disciplinary liability
Answer: (B)

5. How often should the appointment of auditors be made for a company under
most corporate regulations?
(A) Every two years
(B) Every three years
(C) Every year at the annual general meeting (AGM)
(D) Only when there is a change in ownership
Answer: (C)

6. Which of the following qualifications is typically NOT required for an

auditor?

(A) A valid driver’s license

(B) Membership in a recognized professional accounting body
(C) Adequate experience in auditing
(D) Knowledge of auditing standards and regulations
Answer: (A)

7. What is the purpose of an auditor’s right to obtain written representations

from the company’s management?
(A) To confirm the auditor’s independence from the company
(B) To verify the accuracy of the company’s financial records
(C) To document management’s acknowledgment of its responsibilities.
(D) To request additional audit fees
Answer: (C)

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8. In the context of auditor liability, what is meant by “joint and several

liabilities”?

(A) Auditors are jointly responsible for all audit findings.

(B) Auditors are only responsible for their own audit work.
(C) Auditors are responsible for the actions of their clients.
(D) Auditors may be held fully responsible for the entire loss, even if they are
only partially at fault.
Answer: (D)
9. What is a key focus of the audit procedure for NGOs?
(A) Ensuring maximum profit
(B) Compliance with tax regulations
(C) Verification of the utilization of funds and donations
(D) Assessing inventory management
Answer: (C)
10. What is the primary objective of auditing NGOs?

(A) Ensuring maximum profit for stakeholders

(B) Verifying compliance with labour laws
(C) Assessing the effectiveness of marketing campaigns
(D) Confirming the appropriate use of funds for charitable activities
Answer: (D)
Conceptual Type (2 Marks):

1. What is Company Auditor?

2. State the circumstances under which an extraordinary general meeting
(EGM) might be called to appoint auditors.
3. State the roles and responsibilities of a company' shareholders in the
appointment of auditors.

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Analytical type (4 Marks):

1. Explain the appointment of auditors.

2. Briefly explain the qualifications of auditor.
3. Explain the Civil Liabilities of an auditor.
4. Explain the concept of audit trail and its importance in auditing.
5. Describe the responsibilities of an auditor under the Companies Act, 2013.

Essay Type (12 Marks):

1. What are the fundamental rights of auditors in the context of conducting

audit?
2. Explain the duties of an auditor.
3. Explain the Audit Procedure for the following Entities:
a. NGOs
b. Educational Institutions
c. Government
d. Banks
e. Cooperative Societies

4. Discuss the auditor's responsibility in assessing the entity's ability to continue

as a going concern.

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Module No. 05
Audit Report and Professional Ethics
Multiple Choice Questions:
1. How do professional ethics differ from legal requirements?

(A) Professional ethics are more rigid and inflexible.

(B) Professional ethics are legally binding.
(C) Professional ethics go beyond legal requirements and set higher standards of
conduct.
(D) Professional ethics are determined by government regulations.
Answer: (C)
2. What is the primary purpose of a professional's commitment to continuous
professional development?
(A) To meet legal requirements
(B) To earn higher salaries
(C) To maintain professional competence and knowledge
(D) To avoid ethical conflicts
Answer: (C)

3. What is the primary purpose of a Code of Ethics for Professional

Accountants?

(A) To provide guidelines for tax planning

(B) To establish rules for financial reporting
(C) To guide ethical behaviour and conduct of accountants
(D) To set accounting standards
Answer: (C)

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4. Which organization is responsible for issuing the International Code of Ethics

for Professional Accountants (including International Independence Standards)?

(A) World Bank

(B) International Monetary Fund (IMF)
(C) International Federation of Accountants (IFA(C)
(D) United Nations (UN)

Answer: (C)

5. According to the Code of Ethics, what is the fundamental principle that

requires professional accountants to be straightforward and honest in all
professional and business relationships?
(A) Professional competence and due care
(B) Integrity
(C) Objectivity
(D) Confidentiality
Answer: (B)

6. Which ethical principle emphasizes being truthful and honest in professional

dealings?

(A)Confidentiality
(B)Objectivity
(C)Integrity
(D)Independence
Answer: (C)

7. In a professional context, what does the principle of “confidentiality”

require?
(A)Sharing sensitive information with colleagues for professional growth
(B)Maintaining the privacy and confidentiality of client or patient information
(C) Disclosing all information to the public for transparency
(D)Using confidential information for personal gain
Answer: (B)

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8. Which ethical principle relates to the duty of professionals to act impartially

and avoid conflicts of interest?

(A)Accountability
(B)Independence
(C)Professional competence
(D)Whistleblowing

Answer: (B)
9. What is the role of “whistleblowing” in professional ethics?
(A)Encouraging professionals to keep information confidential
(B)Punishing professionals who report ethical violations
(C)Protecting individuals who report unethical behaviour within their
organization or profession
(D)Promoting loyalty to the organization above all else
Answer: (C)
10. What does the principle of “accountability” mean in professional ethics?

(A)Professionals are exempt from responsibility for their actions.

(B)Professionals must explain and justify their actions and decisions.
(C)Professionals are not responsible for the welfare of their clients or the public
(D)Professionals must avoid being accountable for their work.
Answer: (B)
Conceptual Type (2 Marks):

1. What is qualifies audit report?

2. What is audit report?
3. What do you mean by professional ethics?
4. What is the role of auditor's independence in ensuring audit quality?
Analytical type (4 Marks):

1. What factors might lead to a qualified opinion in an audit report?

2. Differentiate between qualified and unqualified opinion of an auditor.

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3. Explain fundamental principles for professional accountants.

4. Discuss the different types of audit reports and when each type is issued.

Essay Type (12 Marks):

1. Draft a clean audit report with imaginary particulars.

2. Draft a qualified audit report with imaginary particulars.
3. Explain the role of professional accountants in business.
4. Discuss the importance of audit independence and objectivity in ensuring
audit quality.
5. Discuss the role of audit committee in corporate governance and its impact
on audit quality.

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