CA Inter P5 · Chapter 4
Audit Evidence MCQs with Answers
14 multiple-choice questions on Audit Evidence for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under SA 500, 'sufficiency' and 'appropriateness' of audit evidence refer respectively to:
- A) The cost of obtaining evidence, and its relevance to management
- B) The number of auditors involved, and the time spent on evidence
- C) The quality of evidence, and the quantity of evidence
- D) The quantity of evidence, and its quality in terms of relevance and reliability
Show answer & explanation
Answer: D) The quantity of evidence, and its quality in terms of relevance and reliability
SA 500 defines sufficiency as the measure of the quantity of audit evidence and appropriateness as the measure of its quality, that is, its relevance and reliability in supporting the auditor's conclusions. More evidence does not compensate for poor quality evidence.
Question 2
Which of the following items of evidence is ordinarily the most reliable?
- A) A photocopy of a bank statement provided by the accountant
- B) A bank reconciliation statement prepared by the company's accounts team
- C) A bank balance confirmation sent and received directly by the auditor
- D) An oral explanation from the finance manager about the bank balance
Show answer & explanation
Answer: C) A bank balance confirmation sent and received directly by the auditor
Evidence is generally more reliable when obtained from independent sources outside the entity, when obtained directly by the auditor, when in documentary form and when in original form. A confirmation received directly from the bank meets all these conditions. Photocopies, oral explanations and internally prepared documents are less reliable.
Question 3
The auditor of Oorja Electricals Ltd. selects goods dispatch notes issued in the last week of the year and traces them to sales invoices and the sales ledger. This procedure primarily tests which assertion for sales?
- A) Classification
- B) Occurrence
- C) Completeness
- D) Presentation
Show answer & explanation
Answer: C) Completeness
Tracing from source documents (dispatch notes) to the accounting records tests whether all transactions that occurred have been recorded, which is the completeness assertion. Testing in the opposite direction, from ledger entries back to supporting documents, tests occurrence.
Question 4
The auditor selects entries from the purchases account and vouches them to supplier invoices and goods received notes. The primary assertion tested is:
- A) Valuation of inventory
- B) Completeness of purchases
- C) Cut-off of sales
- D) Occurrence of purchases
Show answer & explanation
Answer: D) Occurrence of purchases
Vouching from recorded entries back to supporting evidence checks that the recorded purchases actually took place and pertain to the entity, which is the occurrence assertion. It cannot detect unrecorded purchases, so it does not test completeness.
Question 5
Management of Tanvi Exports Ltd. refuses to allow the auditor to send a confirmation request to a major customer. Under SA 505, the auditor shall FIRST:
- A) Accept the refusal and rely on a written representation about the balance
- B) Immediately issue a disclaimer of opinion
- C) Inquire into management's reasons for the refusal and seek audit evidence about their validity and reasonableness
- D) Send the confirmation request anyway without informing management
Show answer & explanation
Answer: C) Inquire into management's reasons for the refusal and seek audit evidence about their validity and reasonableness
SA 505 requires the auditor to inquire as to management's reasons, seek evidence as to their validity and reasonableness, evaluate the implications for risk assessment including fraud risk, and perform alternative procedures. If the refusal is unreasonable or alternative evidence cannot be obtained, the auditor communicates with those charged with governance and considers the effect on the opinion under SA 705.
Question 6
SA 505 permits negative confirmation requests as the sole substantive procedure for an assertion only when certain conditions are all present. Which of the following is one of those conditions?
- A) The recipients are likely to disregard the requests
- B) The population consists of a large number of small, homogeneous account balances
- C) A high exception rate is expected
- D) The assessed risk of material misstatement is high
Show answer & explanation
Answer: B) The population consists of a large number of small, homogeneous account balances
Negative confirmations provide less persuasive evidence than positive ones. SA 505 allows them as the sole substantive procedure only where the risk of material misstatement is low and controls are tested, the population is a large number of small homogeneous balances, a very low exception rate is expected, and there is no reason to believe recipients will disregard them.
Question 7
When inventory is material, SA 501 requires the auditor to attend the physical inventory count, unless impracticable, in order to:
- A) Take over the count from the client's staff and value the inventory personally
- B) Sign the inventory sheets as a certificate of quantities and values
- C) Ensure that the count is conducted only on the last day of the financial year
- D) Evaluate management's instructions, observe the count procedures, inspect the inventory and perform test counts
Show answer & explanation
Answer: D) Evaluate management's instructions, observe the count procedures, inspect the inventory and perform test counts
SA 501 requires attendance at physical inventory counting to evaluate management's instructions and procedures, observe their performance, inspect the inventory and perform test counts. The count remains management's responsibility. The count can be at a date other than the year-end, with procedures to cover movements in between.
Question 8
The auditor of Pankhuri Minerals Ltd. is unable to attend the inventory count at a remote mine because it is in an area declared unsafe due to flooding. Inventory there is material. Under SA 501, the auditor should:
- A) Accept a certificate from the mine manager as conclusive evidence
- B) Perform alternative audit procedures to obtain evidence on existence and condition, and modify the opinion under SA 705 if this is not possible
- C) Issue an unmodified opinion because the reason for non-attendance is beyond the auditor's control
- D) Withdraw from the engagement immediately
Show answer & explanation
Answer: B) Perform alternative audit procedures to obtain evidence on existence and condition, and modify the opinion under SA 705 if this is not possible
Where attendance is impracticable, for example due to safety concerns, SA 501 requires the auditor to perform alternative procedures such as inspecting subsequent sales documents for specific items. If that is not possible, the auditor modifies the opinion under SA 705. A certificate from an interested official is weak evidence, and mere inconvenience does not justify non-attendance.
Question 9
The auditor of Riddhi Pharma Ltd. assesses a risk of material misstatement regarding pending litigation and wishes to communicate with the company's external legal counsel. Management refuses permission. Under SA 501, the auditor shall:
- A) Modify the opinion in accordance with SA 705 if management refuses permission and alternative procedures do not provide sufficient appropriate evidence
- B) Contact the counsel directly without management's permission
- C) Report the matter to the Central Government
- D) Rely on the management's internal legal department's list and issue an unmodified opinion
Show answer & explanation
Answer: A) Modify the opinion in accordance with SA 705 if management refuses permission and alternative procedures do not provide sufficient appropriate evidence
SA 501 requires direct communication with external legal counsel through a letter of inquiry prepared by management and sent by the auditor where there is a risk of material misstatement. If management refuses permission, or counsel refuses to respond and alternative procedures do not provide sufficient evidence, the auditor shall modify the opinion under SA 705.
Question 10
Using monetary unit sampling on trade receivables of Rs. 6 crore, the auditor selects 120 items using a fixed sampling interval. One selected balance with a book value of Rs. 2,00,000 has an audited value of Rs. 1,50,000. What is the projected misstatement for this sampling interval?
- A) Rs. 2,00,000
- B) Rs. 50,000
- C) Rs. 1,50,000
- D) Rs. 1,25,000
Show answer & explanation
Answer: D) Rs. 1,25,000
Sampling interval = Rs. 6,00,00,000 / 120 = Rs. 5,00,000. Misstatement = Rs. 2,00,000 - Rs. 1,50,000 = Rs. 50,000, so tainting = 50,000 / 2,00,000 = 25%. Because the item is smaller than the interval, projected misstatement = 25% x Rs. 5,00,000 = Rs. 1,25,000. Rs. 50,000 is only the actual misstatement, which SA 530 requires to be projected.
Question 11
The auditor tests a sample of inventory items with a book value of Rs. 40 lakh and finds an audited value of Rs. 38 lakh. Total inventory book value is Rs. 5 crore. Using ratio estimation, the projected misstatement for the population is:
- A) Rs. 25 lakh overstatement
- B) Rs. 50 lakh overstatement
- C) Rs. 2 lakh overstatement
- D) Rs. 20 lakh overstatement
Show answer & explanation
Answer: A) Rs. 25 lakh overstatement
Misstatement in sample = Rs. 40 lakh - Rs. 38 lakh = Rs. 2 lakh, a ratio of 2/40 = 5%. Projected misstatement = 5% x Rs. 500 lakh = Rs. 25 lakh overstatement. Rs. 2 lakh ignores projection required by SA 530, Rs. 20 lakh uses 4%, and Rs. 50 lakh uses 10%.
Question 12
Swara Software Ltd. had 250 employees throughout the year, each paid Rs. 30,000 per month. A uniform 8% increment was given with effect from 1 October; the financial year ends on 31 March. Using a substantive analytical procedure, what is the auditor's expected annual salary cost? (Ignore other components.)
- A) Rs. 9.72 crore
- B) Rs. 9.00 crore
- C) Rs. 9.18 crore
- D) Rs. 9.36 crore
Show answer & explanation
Answer: D) Rs. 9.36 crore
Monthly cost before increment = 250 x Rs. 30,000 = Rs. 75 lakh; for April to September: 75 x 6 = Rs. 450 lakh. Monthly cost after increment = 75 x 1.08 = Rs. 81 lakh; for October to March: 81 x 6 = Rs. 486 lakh. Expected cost = 450 + 486 = Rs. 936 lakh, i.e. Rs. 9.36 crore. Rs. 9.72 crore applies the increment for the full year, Rs. 9.00 crore ignores it, and Rs. 9.18 crore applies it for only three months.
Question 13
The auditor of Ojas Infra Ltd. engages a valuer as an auditor's expert to value land. The auditor issues a qualified opinion relating partly to the land valuation and wishes to mention the expert. Under SA 620:
- A) Reference to the expert transfers responsibility for the land valuation to the expert
- B) The auditor may refer to the expert's work if relevant to understanding the modification, but must indicate that the reference does not reduce the auditor's responsibility for the opinion
- C) The auditor must always name the expert in the auditor's report, whether or not the opinion is modified
- D) The auditor may never refer to an expert in any auditor's report
Show answer & explanation
Answer: B) The auditor may refer to the expert's work if relevant to understanding the modification, but must indicate that the reference does not reduce the auditor's responsibility for the opinion
SA 620 states that the auditor has sole responsibility for the opinion, which is not reduced by the use of an auditor's expert. In an unmodified report, the auditor shall not refer to the expert unless required by law or regulation. If reference is made because it is relevant to understanding a modification, the report must state that the reference does not reduce the auditor's responsibility.
Question 14
During the audit of Chaitra Retail Ltd., the auditor finds a significant transaction with an entity controlled by a director's spouse, which management had not disclosed as a related party. Under SA 550, the auditor shall:
- A) Ignore it because identifying related parties is solely management's responsibility
- B) Record it in the working papers but take no further action as long as the amount is at arm's length
- C) Promptly communicate the information to the engagement team, request management to identify all such transactions, and reconsider the risk of other undisclosed related parties
- D) Report it immediately to the Registrar of Companies
Show answer & explanation
Answer: C) Promptly communicate the information to the engagement team, request management to identify all such transactions, and reconsider the risk of other undisclosed related parties
SA 550 requires the auditor, on identifying previously unidentified or undisclosed related parties or significant related party transactions, to communicate this to the engagement team, request management to identify all such transactions, inquire why controls failed, perform appropriate substantive procedures and reconsider the risk that other related parties exist. If non-disclosure appears intentional, the auditor evaluates the implications for the audit.