CA Inter P5 · Chapter 7
Completion and Review MCQs with Answers
12 multiple-choice questions on Completion and Review for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Kanak Traders Ltd. closes its accounts on 31 March. In May, before the financial statements are approved, a major customer is declared insolvent; its financial position had been deteriorating for months before the year-end. Under SA 560 this is:
- A) An event indicating conditions that arose after the year-end, requiring only disclosure
- B) An event that has no relevance to the financial statements
- C) An event providing evidence of conditions that existed at the year-end, requiring adjustment of the financial statements
- D) An event that should be dealt with only in the next year's financial statements
Show answer & explanation
Answer: C) An event providing evidence of conditions that existed at the year-end, requiring adjustment of the financial statements
SA 560 distinguishes events that provide evidence of conditions existing at the period end (adjusting) from those indicative of conditions arising after it (non-adjusting). The customer's insolvency confirms that the receivable was impaired at the year-end, so the allowance for credit losses should be adjusted.
Question 2
A fire destroyed a warehouse of Ojasvi Furnishings Ltd. on 20 April, after the 31 March year-end and before the financial statements were approved. The loss is material. The appropriate treatment is:
- A) No disclosure because the event occurred after the year-end
- B) Disclosure of the nature of the event and an estimate of its financial effect, without adjusting the year-end figures
- C) Adjustment of the inventory and PPE balances as at 31 March
- D) A qualified audit opinion, regardless of disclosure
Show answer & explanation
Answer: B) Disclosure of the nature of the event and an estimate of its financial effect, without adjusting the year-end figures
The fire is a condition that arose after the reporting date, so it is a non-adjusting event. If material, its nature and estimated financial effect should be disclosed. The auditor evaluates whether disclosure is adequate; a properly disclosed non-adjusting event does not require a qualified opinion, though the auditor may consider an Emphasis of Matter paragraph.
Question 3
After the date of the auditor's report but before the financial statements are issued, the auditor of Ira Cosmetics Ltd. becomes aware of a fact that might have caused the report to be amended. Under SA 560, the auditor shall:
- A) Immediately withdraw the report and resign from the engagement
- B) Ignore it, because the auditor has no obligation after the report is dated
- C) Discuss the matter with management and, where appropriate, those charged with governance, determine whether the financial statements need amendment, and inquire how management intends to address it
- D) Perform a full re-audit of all balances before taking any other action
Show answer & explanation
Answer: C) Discuss the matter with management and, where appropriate, those charged with governance, determine whether the financial statements need amendment, and inquire how management intends to address it
SA 560 states that the auditor has no obligation to perform procedures after the report date, but if a fact becomes known that might have caused amendment, the auditor shall discuss it with management and TCWG, determine whether the financial statements need amendment and, if so, inquire how management intends to address the matter in the financial statements.
Question 4
Which of the following is NOT ordinarily an event or condition that may cast significant doubt on an entity's ability to continue as a going concern under SA 570?
- A) Net liability or net current liability position
- B) A significant increase in the entity's market share
- C) Loss of key management without replacement
- D) Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment
Show answer & explanation
Answer: B) A significant increase in the entity's market share
SA 570 lists financial, operating and other indicators such as net liability positions, maturing borrowings without prospects of renewal, adverse key ratios, loss of key management, loss of a major market and non-compliance with capital requirements. An increase in market share is ordinarily a positive indicator and does not by itself cast doubt on going concern.
Question 5
The auditor of Ruhan Airlines Ltd. concludes that the use of the going concern basis is appropriate but a material uncertainty exists, and management has made adequate disclosure. Under SA 570, the auditor shall:
- A) Express a qualified opinion because a material uncertainty exists
- B) Express an unmodified opinion with an Emphasis of Matter paragraph on going concern
- C) Express an unmodified opinion and include a separate section headed 'Material Uncertainty Related to Going Concern'
- D) Express an adverse opinion because the entity may fail
Show answer & explanation
Answer: C) Express an unmodified opinion and include a separate section headed 'Material Uncertainty Related to Going Concern'
Under the revised SA 570, where the going concern basis is appropriate, a material uncertainty exists and disclosure is adequate, the auditor expresses an unmodified opinion and includes a separate section with the heading 'Material Uncertainty Related to Going Concern'. An Emphasis of Matter paragraph is not used for this purpose.
Question 6
In the case of Ruhan Airlines Ltd., suppose instead that a material uncertainty about going concern exists but management refuses to disclose it adequately in the financial statements. The auditor shall express:
- A) A qualified or adverse opinion, as appropriate, and explain in the Basis for Opinion section that a material uncertainty exists that is not adequately disclosed
- B) An unmodified opinion with a Material Uncertainty Related to Going Concern section
- C) An unmodified opinion with an Other Matter paragraph
- D) A disclaimer of opinion in all cases
Show answer & explanation
Answer: A) A qualified or adverse opinion, as appropriate, and explain in the Basis for Opinion section that a material uncertainty exists that is not adequately disclosed
SA 570 requires that if adequate disclosure about a material uncertainty is not made, the auditor shall express a qualified or adverse opinion as appropriate under SA 705. The Basis for Opinion section states that a material uncertainty exists that may cast significant doubt and that the financial statements do not adequately disclose it.
Question 7
The auditor of Sahil Mills Ltd. concludes that the company has decided to cease operations, yet the financial statements have been prepared on a going concern basis. Under SA 570, the auditor shall:
- A) Express a qualified opinion with an Emphasis of Matter paragraph
- B) Express an adverse opinion
- C) Express an unmodified opinion with a Material Uncertainty section
- D) Express an unmodified opinion because the basis of preparation is management's choice
Show answer & explanation
Answer: B) Express an adverse opinion
SA 570 provides that if the financial statements have been prepared using the going concern basis but, in the auditor's judgment, management's use of that basis is inappropriate, the auditor shall express an adverse opinion. The effect is both material and pervasive since every item is measured on an inappropriate basis.
Question 8
Under SA 580, written representations from management should be dated:
- A) On the last day of the financial year
- B) On any date after the auditor's report, before the AGM
- C) As near as practicable to, but not after, the date of the auditor's report
- D) On the date of the engagement letter
Show answer & explanation
Answer: C) As near as practicable to, but not after, the date of the auditor's report
SA 580 requires written representations to be dated as near as practicable to, but not after, the date of the auditor's report, and to be in the form of a representation letter addressed to the auditor. They must cover all financial statements and periods referred to in the report.
Question 9
During the audit of Zubin Agencies Ltd., the auditor concludes there is sufficient doubt about the integrity of management that its written representation on its responsibility for preparing the financial statements is not reliable. Under SA 580, the auditor shall:
- A) Obtain an oral representation instead and issue an unmodified opinion
- B) Issue an unmodified opinion with an Emphasis of Matter paragraph
- C) Disclaim an opinion on the financial statements
- D) Issue a qualified opinion limited to the areas affected
Show answer & explanation
Answer: C) Disclaim an opinion on the financial statements
SA 580 requires the auditor to disclaim an opinion under SA 705 if the auditor concludes that there is sufficient doubt about management's integrity such that the representations about management's fundamental responsibilities are not reliable, or if management does not provide those representations. The effect is considered pervasive.
Question 10
Under SA 450, the auditor shall accumulate misstatements identified during the audit, other than those that are:
- A) Judgmental in nature
- B) Identified by the internal auditor
- C) Below performance materiality
- D) Clearly trivial
Show answer & explanation
Answer: D) Clearly trivial
SA 450 requires accumulation of all misstatements identified during the audit other than those that are clearly trivial. Clearly trivial is a much smaller threshold than performance materiality. Judgmental and projected misstatements must also be accumulated and evaluated.
Question 11
Materiality for Kavya Sweets Ltd. is Rs. 50 lakh. Uncorrected misstatements, all overstating profit, are: factual Rs. 18 lakh, judgmental Rs. 14 lakh and projected Rs. 12 lakh. Which conclusion is most appropriate under SA 450?
- A) Aggregate uncorrected misstatements are Rs. 44 lakh, which is material, so the opinion must be qualified
- B) Aggregate uncorrected misstatements are Rs. 44 lakh; they are below materiality, but the auditor should consider whether the risk of undetected misstatements could take the total above materiality
- C) Aggregate uncorrected misstatements are only Rs. 18 lakh, since only factual misstatements are considered
- D) Aggregate uncorrected misstatements are Rs. 32 lakh, since projected misstatements are excluded
Show answer & explanation
Answer: B) Aggregate uncorrected misstatements are Rs. 44 lakh; they are below materiality, but the auditor should consider whether the risk of undetected misstatements could take the total above materiality
Aggregate = 18 + 14 + 12 = Rs. 44 lakh, which is below materiality of Rs. 50 lakh. SA 450 requires factual, judgmental and projected misstatements to be considered together. Since the total is close to materiality, the auditor should consider the risk that undetected misstatements, together with these, exceed materiality, and may need to perform more procedures or request management to correct them.
Question 12
Under SA 520, analytical procedures performed near the end of the audit are designed to:
- A) Assist the auditor in forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity
- B) Determine the audit fee for the next year
- C) Identify the risk assessment procedures to be performed
- D) Replace all substantive tests of details performed earlier
Show answer & explanation
Answer: A) Assist the auditor in forming an overall conclusion as to whether the financial statements are consistent with the auditor's understanding of the entity
SA 520 requires the auditor to design and perform analytical procedures near the end of the audit that assist in forming an overall conclusion on whether the financial statements are consistent with the auditor's understanding. If they identify a previously unrecognised risk, the auditor revises the risk assessment and planned procedures.