CA Inter P5 · Chapter 8
Audit Report MCQs with Answers
13 multiple-choice questions on Audit Report for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under SA 700, the auditor expresses an unmodified opinion when:
- A) The entity has earned a profit during the year
- B) Management has provided all written representations, regardless of misstatements found
- C) The auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework
- D) The financial statements contain no misstatement of any amount
Show answer & explanation
Answer: C) The auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework
SA 700 requires an unmodified opinion when the auditor concludes that the financial statements are prepared in all material respects in accordance with the applicable framework. Immaterial misstatements may exist. Profitability and representations alone do not determine the type of opinion.
Question 2
Under SA 700, which section of the auditor's report must immediately follow the Opinion section?
- A) Basis for Opinion
- B) Responsibilities of Management for the Financial Statements
- C) Key Audit Matters
- D) Other Matter
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Answer: A) Basis for Opinion
SA 700 requires the Opinion section to be presented first, followed directly by the Basis for Opinion section. Other sections, such as Key Audit Matters (where applicable) and the responsibilities of management and the auditor, follow later.
Question 3
SA 701 on communicating Key Audit Matters applies to audits of complete sets of general purpose financial statements of:
- A) Listed entities, and other entities where the auditor decides to or is required by law or regulation to communicate key audit matters
- B) All entities without exception
- C) Only government companies
- D) Only private companies with borrowings from banks
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Answer: A) Listed entities, and other entities where the auditor decides to or is required by law or regulation to communicate key audit matters
SA 701 applies to audits of complete sets of general purpose financial statements of listed entities, and in circumstances where the auditor otherwise decides to communicate KAMs or is required by law or regulation to do so. Key audit matters are selected from matters communicated with those charged with governance.
Question 4
The auditor of Ilesh Power Ltd., a listed company, has decided to qualify the opinion on account of an unrecorded provision. Regarding the Key Audit Matters section, SA 701 provides that:
- A) No KAM section is required once any opinion is modified
- B) The matter giving rise to the qualified opinion is not described in the KAM section, since communicating KAMs is not a substitute for a modified opinion
- C) The KAM section replaces the need for a Basis for Qualified Opinion section
- D) The matter must be described both in the KAM section and in the Basis for Qualified Opinion section
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Answer: B) The matter giving rise to the qualified opinion is not described in the KAM section, since communicating KAMs is not a substitute for a modified opinion
SA 701 states that communicating KAMs is not a substitute for expressing a modified opinion. A matter giving rise to a modified opinion is by its nature a key audit matter but is reported in the Basis for Qualified/Adverse Opinion section, not in the KAM section. Other KAMs are still reported where applicable.
Question 5
The auditor of Neha Garments Ltd. finds that inventory is overvalued by an amount that is material but confined to inventory and not pervasive. Management refuses to correct it. The auditor should express:
- A) A disclaimer of opinion
- B) An unmodified opinion with an Emphasis of Matter paragraph
- C) A qualified opinion
- D) An adverse opinion
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Answer: C) A qualified opinion
Under SA 705, a qualified opinion is expressed when misstatements are material but not pervasive. An adverse opinion is used when misstatements are both material and pervasive. A disclaimer relates to an inability to obtain sufficient appropriate evidence where possible effects could be material and pervasive.
Question 6
The auditor of Om Ventures Ltd. is unable to obtain sufficient appropriate audit evidence regarding receivables, inventories and investments, which together represent most of the company's total assets. The possible effects could be material and pervasive. The auditor should:
- A) Express a qualified opinion
- B) Disclaim an opinion
- C) Express an adverse opinion
- D) Express an unmodified opinion with an Other Matter paragraph
Show answer & explanation
Answer: B) Disclaim an opinion
SA 705 requires a disclaimer of opinion when the auditor is unable to obtain sufficient appropriate evidence and concludes that the possible effects of undetected misstatements could be both material and pervasive. An adverse opinion is given only where the auditor has obtained evidence that misstatements exist and are material and pervasive.
Question 7
Under SA 705, which of the following describes effects that are 'pervasive'?
- A) Effects that are clearly trivial but numerous
- B) Effects that relate only to one balance sheet item
- C) Effects that exceed performance materiality in any account
- D) Effects that are not confined to specific elements, or if confined represent a substantial proportion of the financial statements, or relate to disclosures fundamental to users' understanding
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Answer: D) Effects that are not confined to specific elements, or if confined represent a substantial proportion of the financial statements, or relate to disclosures fundamental to users' understanding
SA 705 defines pervasive effects as those that, in the auditor's judgment, are not confined to specific elements, accounts or items; or if so confined, represent or could represent a substantial proportion of the financial statements; or in relation to disclosures, are fundamental to users' understanding.
Question 8
After the year-end, a major earthquake damaged the main plant of Shrey Cement Ltd. Management has appropriately disclosed this in the financial statements. The auditor considers the matter fundamental to users' understanding. Under SA 706, the auditor may:
- A) Disclaim the opinion because the full effect is unknown
- B) Include an Emphasis of Matter paragraph referring to the disclosure, without modifying the opinion
- C) Include an Other Matter paragraph to describe the plant's location
- D) Qualify the opinion because of the uncertainty
Show answer & explanation
Answer: B) Include an Emphasis of Matter paragraph referring to the disclosure, without modifying the opinion
SA 706 permits an Emphasis of Matter paragraph to draw attention to a matter appropriately presented or disclosed that is fundamental to users' understanding, such as a major catastrophe. The paragraph states that the opinion is not modified in respect of the matter. A qualified opinion is inappropriate since there is no misstatement or limitation.
Question 9
Which of the following matters would ordinarily be communicated in an Other Matter paragraph under SA 706?
- A) A statement that the report is intended solely for a specified user and should not be distributed to other parties
- B) A material uncertainty about going concern that is adequately disclosed
- C) A note in the financial statements on a major post-balance sheet catastrophe
- D) A material misstatement of trade receivables
Show answer & explanation
Answer: A) A statement that the report is intended solely for a specified user and should not be distributed to other parties
An Other Matter paragraph refers to a matter not presented or disclosed in the financial statements that is relevant to users' understanding of the audit, the auditor's responsibilities or the report, such as restriction on distribution or use. A disclosed catastrophe is dealt with by an EOM, going concern by a separate section under SA 570, and a misstatement by a modified opinion.
Question 10
After accepting the engagement, the management of Tara Pumps Ltd. imposes a limitation on the scope of the audit that the auditor believes is likely to result in a disclaimer of opinion. Under SA 705, the auditor shall FIRST:
- A) Accept a written representation in place of the restricted evidence
- B) Issue a qualified opinion without informing those charged with governance
- C) Request management to remove the limitation
- D) Withdraw from the engagement immediately without discussion
Show answer & explanation
Answer: C) Request management to remove the limitation
SA 705 requires that if management imposes a limitation after acceptance that is likely to result in a qualified opinion or disclaimer, the auditor shall request management to remove it. If management refuses, the auditor communicates with those charged with governance, determines whether alternative procedures are possible and, if pervasive effects remain, withdraws where practicable and legally permitted or disclaims an opinion.
Question 11
The Companies (Auditor's Report) Order (CARO) is issued by the Central Government under which provision of the Companies Act, 2013?
- A) Section 143(11)
- B) Section 141(3)
- C) Section 144
- D) Section 139(1)
Show answer & explanation
Answer: A) Section 143(11)
Section 143(11) empowers the Central Government, in consultation with the National Financial Reporting Authority, to direct that the auditor's report on specified classes of companies include a statement on prescribed matters; CARO is issued under this power. Section 139 deals with appointment, section 141 with eligibility and qualifications and section 144 with services auditors cannot render.
Question 12
Which of the following matters is required to be reported by the auditor under CARO?
- A) Whether the company's marketing strategy is likely to succeed
- B) Whether the company's CSR projects have achieved their social impact
- C) Whether the directors' remuneration is reasonable compared with market benchmarks
- D) Whether the title deeds of immovable properties disclosed in the financial statements are held in the name of the company
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Answer: D) Whether the title deeds of immovable properties disclosed in the financial statements are held in the name of the company
CARO requires reporting on specified matters such as property, plant and equipment records, physical verification and whether title deeds of immovable properties are held in the company's name. The auditor does not report on the commercial wisdom of strategy, the reasonableness of pay against market benchmarks or the social impact of CSR projects.
Question 13
Which of the following is reported by the auditor of a company under section 143(3) of the Companies Act, 2013, rather than under CARO?
- A) Whether the company maintains proper records showing quantitative details of property, plant and equipment
- B) Whether any director is disqualified from being appointed as a director under section 164(2)
- C) Whether the company has defaulted in repayment of loans or interest to any lender
- D) Whether physical verification of inventory has been conducted at reasonable intervals by management
Show answer & explanation
Answer: B) Whether any director is disqualified from being appointed as a director under section 164(2)
Section 143(3) requires the auditor to state, among other things, whether any director is disqualified under section 164(2), whether proper books are kept, and on the adequacy of internal financial controls. The quantitative records of PPE, physical verification of inventory and defaults in repayment of loans are matters covered by CARO.