CA Inter P5 · Chapter 9
Special Features of Audit of Different Type of Entities MCQs with Answers
12 multiple-choice questions on Special Features of Audit of Different Type of Entities for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The duties and powers of the Comptroller and Auditor General of India are laid down in:
- A) The Chartered Accountants Act, 1949
- B) The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971
- C) The Banking Regulation Act, 1949
- D) The Companies Act, 2013
Show answer & explanation
Answer: B) The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971
Article 148 of the Constitution provides for the appointment of the CAG, and Article 149 provides that the CAG shall perform duties and exercise powers prescribed by Parliament. Parliament enacted the CAG's (Duties, Powers and Conditions of Service) Act, 1971 for this purpose.
Question 2
In the audit of a government department, the auditor examines whether expenditure incurred was not prima facie more than the occasion demanded and whether public money was used for the benefit of a particular person. This is known as:
- A) Performance audit
- B) Audit against provision of funds
- C) Propriety audit
- D) Audit against rules and orders
Show answer & explanation
Answer: C) Propriety audit
Propriety audit looks beyond legality to whether expenditure meets canons of financial propriety: no more than the occasion demands, exercising the same vigilance as a person of ordinary prudence would with his own money, no sanction for one's own benefit, and public money not used for a particular person or section. It is an important feature of government audit.
Question 3
Performance audit in government organisations primarily examines:
- A) Only whether expenditure is supported by vouchers
- B) Whether programmes and activities are carried out with economy, efficiency and effectiveness
- C) Only the arithmetical accuracy of accounts
- D) Whether the department has earned a profit
Show answer & explanation
Answer: B) Whether programmes and activities are carried out with economy, efficiency and effectiveness
Performance audit assesses whether government programmes, schemes and organisations achieve their objectives economically, efficiently and effectively (the three Es). It goes beyond regularity and propriety to evaluate results against intended outcomes.
Question 4
Under section 139(5) of the Companies Act, 2013, the statutory auditor of a government company (other than its first auditor) is appointed by:
- A) The Board of directors, within 30 days of the AGM
- B) The Comptroller and Auditor General of India, within 180 days from the commencement of the financial year
- C) The Central Government, within 60 days of the year-end
- D) The shareholders at the AGM, for a term of five years
Show answer & explanation
Answer: B) The Comptroller and Auditor General of India, within 180 days from the commencement of the financial year
Section 139(5) provides that in a government company, or a company owned or controlled directly or indirectly by the Central and/or State Governments, the auditor is appointed by the CAG within 180 days from the commencement of the financial year. The appointed auditor holds office till the conclusion of the AGM.
Question 5
The statutory auditor of Bharat Utilities Ltd., a government company, submits the audit report. Under section 143(6) of the Companies Act, 2013, the CAG may:
- A) At any time, order the auditor to withdraw and reissue the report
- B) Within 60 days of receiving the audit report, conduct a supplementary audit and comment upon or supplement the audit report
- C) Within 180 days, replace the auditor's report with its own opinion
- D) Only conduct a test audit, without making any comments
Show answer & explanation
Answer: B) Within 60 days of receiving the audit report, conduct a supplementary audit and comment upon or supplement the audit report
Section 143(6) permits the CAG, within 60 days from the date of receipt of the audit report, to conduct a supplementary audit through persons authorised by it, and to comment upon or supplement the audit report. Such comments are sent by the company to every person entitled to copies of audited financial statements and placed before the annual general meeting. Test audit is separately provided for in section 143(7).
Question 6
Which of the following is a typical feature of the audit of a local body such as a municipal corporation?
- A) Checking that expenditure is within the budget sanctioned and incurred in accordance with the applicable Act, rules and bye-laws
- B) Ensuring that the local body pays dividends to citizens
- C) Issuing an opinion under SA 701 on key audit matters
- D) Verifying that the local body has earned a return on equity
Show answer & explanation
Answer: A) Checking that expenditure is within the budget sanctioned and incurred in accordance with the applicable Act, rules and bye-laws
Local bodies operate under statutes and budgets approved by their councils. Their audit typically checks budgetary control, sanctions, compliance with the governing Act and rules, collection of revenues such as taxes and fees, and proper use of grants. Profit, return on equity and dividends are not relevant objectives for such bodies.
Question 7
Akshar Foundation, an NGO, receives a grant from a donor agency to be used exclusively for a rural literacy project. The auditor's key concern regarding this grant is to verify that:
- A) The grant has been treated as general revenue available for any activity
- B) The grant has been distributed among the trustees
- C) The grant has been utilised for the specified purpose in accordance with the grant conditions and is accounted for separately
- D) The grant has been invested in shares to generate returns
Show answer & explanation
Answer: C) The grant has been utilised for the specified purpose in accordance with the grant conditions and is accounted for separately
Restricted grants must be used only for the purposes and under the conditions specified by the donor. The auditor examines the grant agreement, separate accounting for restricted funds, utilisation certificates and supporting documents for expenditure. Treating restricted funds as general income or diverting them would breach the conditions.
Question 8
A distinctive feature of the audit of co-operative societies under many State Co-operative Societies Acts is that the auditor:
- A) Is required to report Key Audit Matters under SA 701
- B) Classifies the society into an audit class based on its working and performance
- C) Is always appointed by the Comptroller and Auditor General of India
- D) Issues a report only on internal financial controls
Show answer & explanation
Answer: B) Classifies the society into an audit class based on its working and performance
Co-operative audit is governed by the relevant State Co-operative Societies Act and rules (or the Multi-State Co-operative Societies Act, 2002 for multi-State societies). A typical special requirement is the award of an audit classification (for example, classes such as A, B, C and D, with the classes and criteria varying from State to State) based on criteria such as financial position, management and recovery performance. The CAG does not appoint co-operative auditors, SA 701 is aimed at listed entities, and reporting on internal financial controls alone is not the function of a co-operative audit.
Question 9
In the audit of a co-operative credit society, the auditor finds loans given to members in excess of the limits in the society's bye-laws. This should be:
- A) Reported in the audit report or audit memorandum as a non-compliance with the bye-laws
- B) Reported only to the borrowing members
- C) Ignored, because bye-laws are internal rules of no audit relevance
- D) Adjusted by the auditor by reducing the loan balances in the books
Show answer & explanation
Answer: A) Reported in the audit report or audit memorandum as a non-compliance with the bye-laws
A special feature of co-operative audit is the examination of compliance with the Co-operative Societies Act, rules and the society's bye-laws, including restrictions on loans to members. Non-compliance is reported in the audit report or memorandum. The auditor does not make entries in the books.
Question 10
Under the Limited Liability Partnership Act, 2008 and the rules made under it, which of the following persons would NOT be eligible for appointment as auditor of a Limited Liability Partnership whose accounts are required to be audited?
- A) A firm of Chartered Accountants in which all partners are in practice
- B) A Chartered Accountant in full-time practice with no relationship with the LLP
- C) A partner or employee of that LLP
- D) A Chartered Accountant who audits other unrelated LLPs
Show answer & explanation
Answer: C) A partner or employee of that LLP
Under the LLP Rules, 2009, the accounts of an LLP that are required to be audited must be audited by chartered accountants in practice. A partner or employee of the LLP, or a person who is a partner of, or in the employment of, such a partner or employee, is not eligible to be its auditor, because the auditor would be examining accounts of a business in which he is involved. A practising chartered accountant or a firm of practising chartered accountants with no such relationship can be appointed, and auditing other unrelated LLPs is no bar.
Question 11
In the audit of a partnership firm, the document the auditor should study first to understand the rights and obligations of partners, such as profit-sharing ratio and interest on capital, is:
- A) The partnership deed
- B) The memorandum of association
- C) The bye-laws of the firm
- D) The register of members
Show answer & explanation
Answer: A) The partnership deed
A partnership firm is governed by the Indian Partnership Act, 1932 and its partnership deed. The deed sets out capital contributions, profit-sharing ratio, interest on capital and drawings, salaries and other terms that the auditor must verify. The memorandum of association and register of members relate to companies.
Question 12
During the audit of a government department, the auditor finds that a purchase was sanctioned by an officer whose delegated financial powers were lower than the value of the purchase. This finding relates primarily to:
- A) Performance audit, since the purchase may not be economical
- B) Audit against provision of funds, since the budget was exceeded
- C) Audit against sanction, since the expenditure was not sanctioned by the competent authority
- D) Propriety audit, since the officer may have benefited personally
Show answer & explanation
Answer: C) Audit against sanction, since the expenditure was not sanctioned by the competent authority
Audit against sanction verifies that every item of expenditure is sanctioned, either specially or generally, by an authority competent to do so. Here, the sanctioning officer lacked the delegated power, so the expenditure is irregular. There is no indication of personal benefit or budget excess in the facts.