CA Inter – Auditing and Assurance Additional Questions for Practice (Chapter 1)

9
Chapter Audit of Items of Financial Statements

Q.1 ABC Limited has a closing balance of work in progress of inventories aggregating Rs. 850
lakhs in their balance sheet as at March 31, 2020.
As Statutory Auditor of ABC Limited, explain various audit procedures which need to be
performed to confirm Work-in-progress of inventories have been valued appropriately and
as per generally accepted accounting policies and practices.
[Jan. 21 – New Syllabus (3 Marks)]

Ans.: Audit procedures to be performed to confirm Work-in-progress of inventories:

Audit procedure which needs to be performed to confirm work in progress has been valued
appropriately and as per generally accepted accounting policies and practices is as follows:
(1) Ascertain how the various stages of production/ value add are measured and in case
estimates are made, understand the basis for such estimates.
(2) Ascertain what elements of cost are included. If overheads are included, ascertain the
basis on which they are included and compare such basis with the available costing and
financial data/ information maintained by the entity.
(3) Ensure that material costs exclude any abnormal wastage factors.

Q.2 From the auditing point of view, the auditor should verify that a proper disclosure about
contingent liabilities is made in financial statements as required by AS 29. What type of
disclosures should be made for each class of contingent liability as at the balance sheet
date? [MTP – March 21]

Ans.: Disclosure for each class of Contingent Liability:

From the auditing point of view, the auditor should verify that a proper disclosure about
contingent liabilities is made in financial statement as required by AS 29. As per, AS 29 an
enterprise should disclose for each class of contingent liability at the balance sheet date.
(i) A brief description of the nature of the contingent liability and where practicable.
(ii) An estimate of the amount as per measurement principle as prescribed for provision in
AS 29.
(iii) Indication of the uncertainty relating to outflow.
(iv) The possibility of any reimbursement.
Where any of the information as required above is not disclosed because it is not practicable
to do so, that fact should be stated.

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CA Inter – Auditing and Assurance Additional Questions for Practice (Chapter 1)

Q.3 Auditor of ABC Ltd while auditing its financial statements wants to ensure whether the
disclosures regarding sales has been made as required under Schedule III (Part 1) to
Companies Act, 2013. Explain such disclosure requirements. [MTP – March 21]

Ans.: Disclosure requirements of Sales as per Schedule III:

With respect to sales of the client entity, the auditor is required to ensure whether the
following disclosures as required under Schedule III (Part 1) to Companies Act, 2013 have
been made:
• Whether disclosure of sales in respect of each class of goods has been made.
• Whether revenue from operations is disclosed separately in the notes as revenue arising
from:
 Sale of products (including excise duty)
 Sale of services
 Other operating revenues.
• Whether brokerage and discount on sales other than usual trade discount has been
disclosed.
• Whether the transactions with related parties are appropriately disclosed in notes to
accounts.

Q.4 CA Amar wants to verify the payments made by XYZ Ltd. on account of building rent during
the FY 2020-21. The rent amounts to ₹ 50,000 per month for the year. The monthly rent
payments are consistent with the rent agreement. However, the other companies in the
similar industry are paying rent of ₹ 10,000 per month for a similar location. How will
applying the analytical procedures impact the verification process of such rental payments
by XYZ Ltd.? [MTP – April 21]

Ans.: Applying analytical procedures for verification of rental payments:

• If CA Amar checks in detail the monthly rent payments, he may find that such payments
are consistent with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/ - per month as rent
and the same is getting reflected in the rent agreement. Here, CA Amar may not be able to
find out the inconsistency in the rent payment with respect to rent payment prevalent in
the similar industry for rent of the similar location.
• If CA Amar applies analytical procedure i.e. compares the rent payment by XYZ Ltd. with
the similar payments made by companies in similar industry and similar area, he will
notice an inconsistency in such rent payments as the other companies are paying a very
less monthly rent in similar industry for similar area.
• However, if CA Amar does not make such comparison and only checks the monthly
payments and rent agreement of XYZ Ltd., he would not have found such inconsistency
and as such the misstatement may remain undetected.

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CA Inter – Auditing and Assurance Additional Questions for Practice (Chapter 1)

Q.5 List out the steps to be taken by auditor while vouching/ verifying the 'Refund of General
Insurance premium paid'. [RTP – May 21]

Ans.: Refund of General Insurance Premium paid:

The refund of insurance premium may be because of earlier provisional payment of premium
or may be a policy might have been cancelled at a later date. The auditor should take
following steps while vouching such refunds:
(i) Ascertain the reasons for refund of insurance premium.
(ii) Examine insurance policy or cover note to find out the amount of premium.
(iii) Verify advice of refund received from the insurance company. When refund is
admitted, the insurance company sends the advice. This will be evidence as a covering
letter to the cheque for the refund. Sometimes, a cheque is issued after a receipt is sent
in advance to the insurance company.
(iv) Scrutinise correspondence between the insurance company and the client.
(v) Check entries in the bank book or the bank statement. If necessary, the counterfoil of
the pay-in-slips can also be verified.

Objective Type Questions (Correct/Incorrect)

Q.1 If the purpose of an audit procedure is to test for understatement in the existence or
valuation of accounts payable then testing the recorded accounts payable may be relevant
audit procedure. [Jan. 21 – New Syllabus (2 Marks)]
Ans: Statement is Incorrect.
• If the purpose of an audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable may be a relevant
audit procedure.
• On the other hand, when testing for understatement in the existence or valuation of
accounts payable, testing the recorded accounts payable would not be relevant, but
testing such information as subsequent disbursements, unpaid invoices, suppliers’
statements, and unmatched receiving reports may be relevant.
Q.2 As per AS 26, internally generated goodwill is not recognised as an asset. [MTP – March 21]
Ans.: Statement is Correct.
As per AS 26, Intangible Assets, internally generated goodwill is not recognised as an asset
because it is not an identifiable resource controlled by the enterprise that can be measured
reliably at cost.
Q.3 No entry is passed for cheques received by the auditee on the last day of the year and not
yet deposited with the Bank. [MTP – March 21]
Ans.: Statement is Incorrect:
The person who is controlling the trade receivables should ensure that proper accounting
entries have been passed by crediting respective trade receivables account. The balance of
cheque in hand should be disclosed along with the cash and bank balances in the financial
statements.

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CA Inter – Auditing and Assurance Additional Questions for Practice (Chapter 1)

Q.4 It is the function of an audit to establish that payments have been made validly to the
persons who are shown to be recipients. [MTP – April 21]
Ans.: Statement is Correct.
It is the function of audit to establish that payments have been made validly to persons who
are shown to be recipients. For checking the validity of a transaction, it is usually necessary
to refer to documentary evidence.
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