CA Inter P5 · Chapter 1

Nature, Objective and Scope of Audit MCQs with Answers

10 multiple-choice questions on Nature, Objective and Scope of Audit for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.

1. Question 1

   The directors of Vaanya Agro Ltd. instruct the statutory auditor not to verify inventory held at one of its five depots, stating that the depot manager is trustworthy. Inventory at that depot is material to the financial statements. Which statement best reflects the position of the auditor?

   • A) The scope of the audit is determined by the auditor under the SAs, the applicable law and the terms of engagement, and such a restriction is a management-imposed limitation that may lead to a modified opinion
   • B) The auditor should accept a written representation from the depot manager in place of verification and issue an unmodified opinion
   • C) The directors may lawfully restrict the scope of an audit, so the auditor should exclude the depot and issue an unmodified opinion
   • D) The auditor must immediately resign without communicating with those charged with governance
   Show answer & explanation

   Answer: A) The scope of the audit is determined by the auditor under the SAs, the applicable law and the terms of engagement, and such a restriction is a management-imposed limitation that may lead to a modified opinion

   The scope of an audit is set by the requirements of the SAs, relevant law and the terms of engagement, and management cannot curtail it. A management-imposed restriction over a material item is a limitation on scope; under SA 705 the auditor should request removal, communicate with those charged with governance and consider alternative procedures. If sufficient appropriate evidence still cannot be obtained, the opinion must be modified. A representation from an interested employee is not a substitute for the evidence.

2. Question 2

   Under SA 200, the overall objective of the auditor in an audit of financial statements is to:

   • A) Provide absolute assurance that the financial statements contain no fraud or error of any amount
   • B) Certify the arithmetical accuracy of every transaction recorded in the books of account
   • C) Detect and prevent all frauds committed by employees and management during the year
   • D) Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report in accordance with the auditor's findings
   Show answer & explanation

   Answer: D) Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report in accordance with the auditor's findings

   SA 200 frames the auditor's overall objective around reasonable assurance on the financial statements as a whole and reporting on the findings. Absolute assurance is not attainable because of the inherent limitations of an audit. Prevention and detection of fraud is primarily the responsibility of management and those charged with governance, and an audit does not verify every transaction.

3. Question 3

   Reasonable assurance, as used in the Standards on Auditing, is best described as:

   • A) An absolute level of assurance obtained by testing all transactions
   • B) A moderate level of assurance expressed in negative form
   • C) A high, but not absolute, level of assurance
   • D) A low level of assurance sufficient only for internal use by management
   Show answer & explanation

   Answer: C) A high, but not absolute, level of assurance

   Reasonable assurance is a high but not absolute level of assurance, obtained when the auditor reduces audit risk to an acceptably low level. A moderate (limited) level of assurance expressed in negative form is characteristic of a review engagement, not an audit.

4. Question 4

   Mr. Kunal, a trainee, lists the following as inherent limitations of an audit. Which one is NOT an inherent limitation recognised by SA 200?

   • A) Many financial statement items involve subjective judgements and estimates by management
   • B) The audit must be completed within a reasonable period and at a reasonable cost
   • C) The auditor has no legal power to compel third parties to provide information, as in a search
   • D) The auditor lacks the competence required to apply the Standards on Auditing
   Show answer & explanation

   Answer: D) The auditor lacks the competence required to apply the Standards on Auditing

   SA 200 identifies inherent limitations arising from the nature of financial reporting (judgement and estimates), the nature of audit procedures (no legal powers of search, collusion, forgery) and the need for timeliness and cost balance. Lack of competence is not an inherent limitation; the auditor is expected to be competent, and accepting an engagement without competence would breach ethical requirements.

5. Question 5

   Kamya Traders Ltd. asks its auditor to skip confirming a large receivable from an overseas customer because obtaining the reply would take time and add cost. No alternative procedure is available to obtain evidence on that balance. Per SA 200, the auditor should recognise that:

   • A) The procedure may be omitted if management gives a written representation on the balance
   • B) The procedure may be omitted provided the matter is mentioned in an Other Matter paragraph
   • C) The procedure may be omitted because the audit must balance cost against benefit
   • D) Difficulty, time or cost involved is not in itself a valid basis for omitting an audit procedure for which there is no alternative
   Show answer & explanation

   Answer: D) Difficulty, time or cost involved is not in itself a valid basis for omitting an audit procedure for which there is no alternative

   SA 200 accepts that an audit is subject to time and cost constraints, but states that difficulty, time or cost is not in itself a valid basis for omitting a procedure for which there is no alternative or for being satisfied with less than persuasive evidence. A written representation cannot replace evidence that is expected to be available, and an Other Matter paragraph does not cure a scope gap.

6. Question 6

   Professional skepticism, as required by SA 200, includes:

   • A) Acceptance of management's explanations without corroboration where management has been honest in the past
   • B) A questioning mind, being alert to conditions that may indicate possible misstatement, and a critical assessment of audit evidence
   • C) A refusal to rely on any document provided by the entity
   • D) An assumption that management is dishonest unless proved otherwise
   Show answer & explanation

   Answer: B) A questioning mind, being alert to conditions that may indicate possible misstatement, and a critical assessment of audit evidence

   Professional skepticism is an attitude that includes a questioning mind, alertness to conditions that may indicate misstatement due to error or fraud, and critical assessment of evidence. It neither assumes dishonesty nor unquestioning honesty. Past experience of honest management does not relieve the auditor of the need to maintain skepticism.

7. Question 7

   Which of the following statements about professional judgment in an audit is correct?

   • A) It is needed only at the planning stage, when materiality is determined
   • B) It permits the auditor to depart from any requirement of an SA without documentation
   • C) It is exercised by the engagement team only after consulting management on each matter
   • D) It must be exercised throughout the audit and cannot be used to justify decisions that are not supported by the facts and circumstances of the engagement
   Show answer & explanation

   Answer: D) It must be exercised throughout the audit and cannot be used to justify decisions that are not supported by the facts and circumstances of the engagement

   SA 200 requires the auditor to exercise professional judgment in planning and performing an audit, for example on materiality, audit risk, the nature, timing and extent of procedures and the evaluation of evidence. Judgment must be applied by a person with suitable training and experience, must be appropriately documented, and is not a justification for decisions unsupported by the facts.

8. Question 8

   The managing director of Sitara Fabrics Ltd. states at a board meeting: 'Since our accounts are audited, any error in them is the responsibility of the auditor.' This view is:

   • A) Correct, because once the auditor signs the report the responsibility for the financial statements shifts to the auditor
   • B) Incorrect, because the responsibility lies solely with the shareholders who approve the accounts
   • C) Incorrect, because the audit of financial statements does not relieve management or those charged with governance of their responsibility for preparing the financial statements
   • D) Correct for errors but incorrect for frauds
   Show answer & explanation

   Answer: C) Incorrect, because the audit of financial statements does not relieve management or those charged with governance of their responsibility for preparing the financial statements

   The preparation of financial statements in accordance with the applicable financial reporting framework is the responsibility of management, with oversight by those charged with governance. The auditor's responsibility is to express an opinion on them. The audit does not relieve management of its responsibility, whether the misstatement arises from error or fraud.

9. Question 9

   A lender asks Ms. Rhea, a practising Chartered Accountant, for a report on interim financial information in which she expresses a conclusion that nothing has come to her attention that causes her to believe the information is materially misstated. This is an example of:

   • A) An agreed-upon procedures engagement in which no assurance is expressed
   • B) A review engagement providing limited assurance expressed in negative form
   • C) An investigation, which provides absolute assurance on the information
   • D) An audit engagement providing reasonable assurance expressed in positive form
   Show answer & explanation

   Answer: B) A review engagement providing limited assurance expressed in negative form

   A conclusion worded as 'nothing has come to our attention' is a negatively expressed conclusion, which is characteristic of a review engagement providing limited assurance. An audit gives reasonable assurance in the form of a positive opinion. In agreed-upon procedures, only factual findings are reported and no assurance is expressed.

10. Question 10

    After an audit conducted in accordance with the SAs, it is discovered that the accountant and an outside supplier had colluded to raise forged invoices that looked genuine. The auditor had not detected the fraud. Which statement is most appropriate?

    • A) The subsequent discovery of a material fraud does not by itself indicate that the audit was not performed in accordance with the SAs, as the auditor is not expected to be an expert in authenticating documents
    • B) The auditor is automatically guilty of gross negligence because a material fraud remained undetected
    • C) The auditor is not responsible in any case because fraud detection is never an audit objective
    • D) The auditor should have physically verified every invoice with the supplier, as required by SA 500
    Show answer & explanation

    Answer: A) The subsequent discovery of a material fraud does not by itself indicate that the audit was not performed in accordance with the SAs, as the auditor is not expected to be an expert in authenticating documents

    SA 200 and SA 240 recognise that fraud involving collusion and forgery may not be detected even in a properly planned and performed audit. A later discovery of fraud does not by itself mean the audit failed to comply with the SAs; the question is whether the auditor performed procedures appropriate in the circumstances with professional skepticism. Detecting material misstatement due to fraud is still within the auditor's objective, so the auditor is not exempt from responsibility.