Mock Test Question

Attempt all the Questions

1. As an auditor, give your opinion with explanations on the following cases (4*5=20)

a. M/s Quality Garment Pvt. Ltd. a garment manufacturing company calculated cost of finished goods
at USD 6,300 per 1000 Pcs. Due to crisis in the export market, the company could not export the
expected quantity and huge chunk of stock was lying in the company’s inventory at year end. Before
the year end, to clear the inventory and to manage the cash shortage, company collected price bids
from the international parties. It received the best offer of USD 5,750 per 1000 pcs. The company
decided to wait for some time for better price offers. The company valued its inventory at cost price
of USD 6,300 per 1000 Pcs. citing the reason that company has not sold its stock as yet and the
question of market/selling price does not arise. Give your comment.
Answer:
As per the provisions of NAS 02 “Inventories” Inventories are the assets:
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
Further, for measurement of inventories this standard states that, Inventory shall be valued at cost or
Net Realizable Value whichever is lower.
In the given case, M/s Quality Garment Pvt. Ltd. a garment manufacturing company calculated cost
of finished goods at USD 6,300 per 1000 Pcs. Due to crisis in the export market, the company could
not export the expected quantity and huge chunk of stock was lying in the company’s inventory at year
end. Before the year end, to clear the inventory and to manage the cash shortage, company collected
price bids from the international parties. It received the best offer of USD 5,750 per 1000 pcs. The
company decided to wait for some time for better price offers. The company valued its inventory at
cost price of USD 6,300 per 1000 Pcs. citing the reason that company has not sold its stock as yet and
the question of market/selling price does not arise.
Here, the realizable value of inventory (USD 5750 per 1000 pcs) is lower that it’s cost (USD 6300
PER 1000 PCS), hence the valuation of inventory should have been done on realizable value. The
valuation of inventory done by management here at cost which is higher than NRV is against the
requirement of NAS 02.

b. Mr. SP & his wife Kavita, together run a firm that works in the field of interior designing.
The firm entered into the contract with Goodwill Private Limited for designing the new
office. For this contract Mr. SP ‘s firm received NRs 5,00,000 as service fees. Also, Kavita is
the Managing Director of Goodwill Private Limited. Mrs. Kavita insisted that since she is
not involved in the activities of the firm on full time basis, there is no need to disclose the
transaction with firm as the amount is also not so material. She also emphasized similar
type of payment made in the previous year was also not disclosed.
Answer:
As per NAS 24, Related Parties and Related Party Transactions have to be disclosed in Financial
Statements irrespective of its materiality. Further NSA 550 states that, entities which are under
common control are considered to be related parties and transactions entered into between such
parties shall be appropriately disclosed in the Financial Statements. Auditor shall evaluate whether
 such disclosure is in accordance with financial reporting standards or not.
In the given case, Mr. SP & his wife Kavita, together run a firm that works in the field of
interior designing. The firm entered into the contract with Goodwill Private Limited for designing the
new office. For this contract Mr. SP’s firm received NRs 5,00,000 as service fees. Also, Kavita is the
Managing Director of Goodwill Private Limited. Mrs. Kavita insisted that since she is not involved in
the activities of the firm on full time basis, there is no need to disclose the transaction with firm as the
amount is also not so material. She also emphasized similar type of payment made in the previous
year was also not disclosed.
Here the firm of Mr. SP & Goodwill Private Limited are related entities by virtue of common
control as both the entities have control of Mrs. Kavita. The transactions between them have to be
appropriately disclosed in the notes to accounts of Financial Statements. The contention of Mrs.
Kavita of not disclosing the transactions saying that such transaction were not disclosed previous and
the transactions are immaterial is not correct.

c. M/s Sumadhur Impex is engaged in the business of manufacturing and trading of musical instruments.
A sum of NRs. 5 lakhs, received from an insurance company as an insurance claim for loss of goods in
transit costing NRs. 4 lakhs, is credited to the purchase account.
Answer:
As per the basic accounting concepts & principles, all the items of income and expense which are
recognized in a period should be included in the determination of net profit or loss for the period. The
claim for loss of goods in transit is arising out of ordinary activities of the Sumadhur Limited as a part
of its normal course of business. However, the cost of goods lost in transit is only Rs.4,00,000 while
the insurance money received is Rs.5,00,000. Purchases Account need not be credited since it would
distort the purchases done during the year and as also the gross profit. Therefore, entire amount of 5
lakhs needs to be taken to profit and loss account under an appropriate head. This is an income arising
from an ordinary activity of the enterprise but having regard to amount involved and exceptional
nature, a separate disclosure be made in the profit and loss account. Such disclosure would enable the
users to understand the performance of an enterprise for the period.
In the given case, M/s Sumadhur Impex is engaged in the business of manufacturing and trading of
musical instruments. A sum of NRs. 5 lakhs, received from an insurance company as an insurance
claim for loss of goods in transit costing NRs. 4 lakhs, is credited to the purchase account.
Here the action of the company crediting the entire insurance claim in purchase account is not correct
and against the general principles of accounting.

d. MNS Ltd. (The Company) is engaged in manufacturing business. The book value of plant &
machinery of the company was NRs. 900 million as on Ashadh end 2078 (purchased at NRs 1,000
million on 1st Shrawan 2077). It provided depreciation on straight line basis at 10% per annum based
on useful life of the plant & machinery. Imported asset of NRs. 100 million, the component of above
plant & machinery was acquired on 1st Shrawan 2078 that would be obsolete in 2 years. The company
wants to write off this asset over 2 years. Can the company do so?
Answer:
As per NAS 16, “Property, Plant & Equipment”, Depreciation is the systematic allocation of
the depreciable amount of an asset over its useful life. Each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item shall be depreciated
separately. Further, an entity may choose to depreciate separately the parts of an item that do not have
a cost that is significant in relation to the total cost of the item.
In the given case, MNS Ltd. is engaged in manufacturing business. The book value of plant &
 machinery of the company was NRs. 900 million as on Ashadh end 2078 (purchased at NRs 1,000
million on 1st Shrawan 2077). It provided depreciation on straight line basis at 10% per annum based
on useful life of the plant & machinery. Imported asset of NRs. 100 million, the component of above
plant & machinery was acquired on 1st Shrawan 2078 that would be obsolete in 2 years. The company
wants to write off this asset over 2 years.
Since NAS 16 on PPE allows component based depreciation in case of separable parts of an
item, the action taken by management depreciating substantial part of Plant & Machinery is correct.

2. Answer the following questions (4*5=20)

a. PQ Limited, a listed company having head office in Kathmandu has its branches all over
the Nepal. The company is in the business of buying paddy grown by farmers, process
them and sell the rice in domestic as well as international markets. PQ Limited appointed
it’s auditors for head office as well as branches. Your firm is appointed as the principle
auditor for auditing the head office. What are the factors to be considered while accepting
the position of principle auditor?
Answer
As per NSA 600 ”Special Considerations-Audit of Group Financial Statements (Including work
of another auditor)” factors to be considered while accepting appointment as principle
auditor are explained below:
If the group engagement partner concludes that:

a) it will not be possible for the group engagement team to obtain sufficient appropriate
audit evidence due to restrictions imposed by group management; and
b) the possible effect of this inability will result in a disclaimer of opinion on the group financial
statements, the group engagement partner shall either:
• In the case of a new engagement, not accept the engagement, or, in the case of a continuing
engagement, withdraw from the engagement, where withdrawal is possible under applicable law or
regulation; or
• Where law or regulation prohibits an auditor from declining an engagement or where
withdrawal from an engagement is not otherwise possible, having performed the audit of
the group financial statements to the extent possible, disclaim an opinion on the group
financial statements

b. Mr. Pandey, in the course of audit of PQ Limited, wants to perform external confirmation
procedures to obtain audit evidence. Guide Mr. Pandey, listing out the factors that may
assist him in determining whether external confirmation procedures are to be performed
as substantive audit procedures
Answer:
As per NSA 505, External Confirmation means the audit evidences obtained as direct responses to the
auditor from third parties to confirm certain matters.
The factors that may assist Mr. Pandey, the auditor in determining whether external confirmation
procedures are to be performed as substantive audit procedures include:

i. The confirming party’s knowledge of the subject matter – responses may be more reliable if provided
by a person at the confirming party who has the requisite knowledge about the information being
confirmed.
ii. The ability or willingness of the intended confirming party to respond –
for example, the confirming party:
 - May not accept responsibility for responding to aconfirmation request;
- May consider responding too costly or time consuming;
- May have concerns about the potential legal liabilityresulting from responding;
- May account for transactions in different currencies; or
- May operate in an environment where responding to confirmation requests is not a significant aspect
of day-to-day operations.
In such situations, confirming parties may not respond, may respond ina casual manner or may attempt
to restrict the reliance placed on the response.
iii. The objectivity of the intended confirming party – if the confirming party is a related party of the
entity, responses to confirmation requests may be less reliable.

c. CA Madhu is the statutory auditor of Lakshmi Ltd. for the Financial year 2078-79. In
respect of loans and advances of ` 75 Lakh given to Srinian Pvt. Ltd., the Company has not
furnished any agreement to CA Madhu and in absence of the same, he is unable to verify
the terms of repayment, chargeability of interest and other terms. Justify the type of
opinion which CA Madhu should give in such situation. Also, Draft an appropriate Opinion
paragraph and Basis of opinion paragraph.
Answer
As per NSA 200, Auditor shall obtain & provide reasonable assurance that financial statements are free
form material misstatements by obtaining sufficient and appropriate audit evidences. Further NSA
705 states that if the auditor is not able to obtain sufficient & appropriate audit evidences, he/she shall
express either qualified or disclaimer audit opinion based on materiality & pervasiveness of possible
misstatements that may present in the financial statements.
In the given case, with respect to loans and advances of 75 Lacs given to Sriman Pvt. Limited, the
Company has not furnished any agreement to CA Madhu. In the absence of such agreement, CA
Madhu is unable to verify the terms of repayment, chargeability of interest and other terms. For an
auditor, while verifying any loans and advances, one of the most important audit evidence is the loan
agreement. Therefore, the absence of such document, tantamount to a material misstatement in the
financial statements of the company. Considering, the inability of CA Madhu to obtain such audit
evidence is though material but not pervasive CA Madhu should give a qualified opinion
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph is
as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us, except
for the effects of the matter described in the Basis for Qualified Opinion section of our report, the
financial statements of Lakshmi Limited give a true and fair view in all material aspects.
Basis for Qualified Opinion
The Company is unable to furnish the loan agreement with respect to loans and advances of ` 75 Lacs
given to Srinian Pvt. Limited. Consequently, in the absence of such an agreement, we are unable to
verify the terms of repayment, chargeability of interest and other terms.

Note for Students: (Not to be written in exam)

Until & unless, any hint is given in question indicating that the misstatement is pervasive, students are
suggested to assume misstatement as material but not pervasive & consider giving qualified opinion
d. Annual General Meeting of Careless Limited could not appoint auditor for FY 2079/80.
What would be the procedures of appointing auditor & conduct audit in such cases?
Explain
Answer
As per Section 110 of Companies Act 2063, every company shall appoint an auditor to have its auditor accounts
audited. Further Section 111 states, Auditor in public limited companies is appointed by shareholder in annual
general meeting and auditor of private companies are appointed as per the provisions of AOA, MOA of the
company.
However, as per section 113 of Companies Act, 2063 where the annual general meeting of a company fails to
appoint an auditor for any reason or where the annual general meeting itself cannot be held or where the auditor
appointed pursuant to this Act ceases to continue his/her office for any reason, the Office of Company Registrar
may, at the request of the board of directors of the company, appoint another auditor.
Hence, above procedures shall be followed for appointment of auditor by Careless Limited if auditor could
not be appointed by normal procedures in Annual General Meeting.

3. Comment or answer as an auditor (3*5=15)

a. Gayatri Associates, Chartered Accountants has been appointed by Gandaki Bank Limited to provide
merger Consulting service. The Bank has agreed to pay fee of NRs. 1 crore if consultant can fix
merger with any top 10 banks. Comment on this in the light of ICAN Code of Ethics.
Answer:
As per the requirements of ICAN “Handbook of The Code of Ethics for Professional Accountants-
2018”, professional accountants shall not quote fees on contingent basis i.e. fees should be determined
on the basis of skill, knowledge, level of work, and time required. Further section 34(10) of Nepal
Chartered Accountants Act, 2053 states that members holding Certificate of Practice shall not base
their remuneration as a percentage on the profit or on any other uncertain results.
In the given case, Gayatri Associates, Chartered Accountants has been appointed by Gandaki Bank
Limited to provide merger consulting service. The Bank has agreed to pay fee of NRs. 1 crore if
consultant can fix merger with any top 10 banks.
Here, the agreement of paying fees of 1 crore is based on future event of fixing merger with any top
10 banks which is contingent event. As quoting of fees on contingent basis is against the requirements
of ICAN’s Code of Ethics & NCA Act, Gayatri Associates shall not accept the contingent fees.
Otherwise, on acceptance of such fees Gayatri & Associates shall be liable for disciplinary actions by
ICAN.

b. A Chartered accountant in practice appearing on television on budget proposal was introduced to

the viewers, on the basis of bio-data furnished by him as the senior partner of M/S Tick & Talk, a
leading firm of Chartered Accountants, established in Kathmandu in 2079.
Answer:
As per the guidelines issued by ICAN for it’s members on advertisement & publicity Professional accountants are
not allowed to reach out to potential clients by any means or manner of influencing, persuading or even coercing
through exaggerated unsubstantiated claims of qualification, experience and achievements. Members may appear on
TV or Radio Programs under their own name but, handing over firm’s bio-data and read-out of such bio-data along
with association with international firm and achievements of partner as tax expert tantamount to unfair
advertisement & hence held guilty of professional misconduct.

In the given case, A Chartered accountant in practice appearing on television on budget proposal was introduced to
the viewers, on the basis of bio-data furnished by him as the senior partner of M/S Tick & Talk, a leading firm of
Chartered Accountants, established in Kathmandu in 2079.
 Here, introduction of Chartered Accountant as senior partner of one of the leading firm tantamount to unfair
advertisement to persuade and solicit the potential clients which is against the guidelines issued by ICAN.

c. R.S. & Associates had conducted Audit of Welcome Limited for financial years 2077/78, 2078/79,
2079/80. Later on Bhadra 2080, Mr. Shyam, partner of the firm left the audit firm and started in
own practice through proprietorship firm. Welcome limited wants to appoint firm of Mr. Shyam as
auditor for FY 2080/81. Comment.
Answer:
As per Section 111 of Companies Act 2063, Auditor in case of public Companies shall be appointed by
Shareholder in Annual General Meeting. No auditor or his/her partner or ex-partner or employee or ex-
employee shall be appointed as auditor for more than three consecutive terms to perform the audit of a
public company. However, this restriction shall not apply to any partner who ended partnership or any
employee who left the service of such auditor three years before.
In the given case, R.S. & Associates had conducted Audit of Welcome Limited for financial years
2077/78, 2078/79, 2079/80. Later on Bhadra 2080, Mr. Shyam, partner of the firm left the audit firm
and started in own practice through proprietorship firm. Welcome limited wants to appoint firm of Mr.
Shyam as auditor for FY 2080/81.
Here, R.S. & Associates has just completed the third year of audit in Welcome Limited and
appointment of Mr. Shyam ex-partner of R.S. Associates immediately for next year results into
violation of Companies Act 2063, Hence. Mr. Shyam should not accept such appointment.

4. Answer the following (3*5=15)

a. Explain the concept of propriety audit as mentioned in section 9 of Audit Act.
Answer:
Propriety Audit is conducted to assess whether every offer has exercised the same vigilance in respect
of expenditure incurred from public money, as a person of ordinary prudence would exercise in respect
of expenditure of his own money under similar circumstances.
Some Provisions in Audit Act related to Propriety Audit are:
 On the propriety of any expenditure and its authorization, if in the opinion of the Auditor General such
expenditure is a reckless one or is an abuse of national property, whether movable or immovable, despite
that the expenditure confirms to the authorization, and
 On the propriety of all authorizations issued in respect of any grant of national property whether movable
or immovable, fixed or current, or underwriting of any revenue, or any contract, license or permits relating
to mining, forest, water resources, etc. and any other act of abandoning movable or immovable, assets of the
nation.
 On the propriety of public construction, repair and maintenance, procurement and supply,
contract relating to consultancy services, service contract, public expenditure and mobilization of
resources

b. Explain the Auditor’s independence with reference to Sec 120, Conceptual Framework of ICAN
Handbook of ethics for professional accountant.
Answer:
Section 120 of Conceptual Framework of ICAN states that, professional accountant shall
• Identify threats to compliance with the fundamental principles;
• Evaluate the threats identified; and
• Address the threats by eliminating or reducing them to an acceptable level.
i. Threat Identification: Auditor shall identify threats to compliance with fundamentals principles
such as:
• Self Interest Threats: This is the threat that a financial or other interest will inappropriately influence the
accountant’s judgment or behavior.
 • Self-Review Threat: This is the threat that professional accountant will not appropriately evaluate the
results of the previous judgment made; or an activity performed by the accountant, or by another individual
within the accountant’s firm or employing organization, on which the accountant will rely when forming a
judgment as part of performing the current activity
• Advocacy Threat: This is the threat that professional accountant will promote client’s or employing
organization’s position to the point that the accountant objectivity is hampered
• Familiarity Threat: This is the threat that will arise due to long or close relationship with the client,
employing organization, and as a result a professional accountant will be too sympathetic to their interest or
too accepting their work
• Intimidation Threat: This is the threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressure including attempts to exercise undue influence over the
accountant

ii.
Evaluating the Threats: After identifying the threats to compliance with fundamental principles,
professional accountants shall evaluate whether the threat is at acceptable lower level or not
iii. Addressing the Threats: If the professional accountant determines that identified threats are not at acceptable
level, the accountant shall address the threats by eliminating them or reducing them to an acceptable level by
• Eliminating circumstances including interests or relationship that are creating threats
• Applying safeguards, where available and capable of being applied, to reduce the threats to acceptable level
• Declining or ending the specific professional activity

c. District Education Office has appointed you as an auditor for some community schools of Humla
District. What special points do you consider while doing audit of such schools?
Answer:
Educational Institutions are engaged in the service of educational activities. Such Institutions may be
in the nature of schools, colleges, coaching centers etc. The audit procedures of educational institutes
are described below:
i. Planning Activities
• Obtain Registration Certificate to ensure entity is registered with relevant authority
• Study the AOA, MOA, minutes of various meetings of the entity
• Identify the applicability various laws & regulations and ensure it’s compliance
• Obtain an understanding of Internal Control System.
ii. Verification of Assets
• Obtain the schedule of various assets held by the company & identify its nature
• Ensure the previous year asset balances have been appropriately carried forward
• Perform Analytical Procedures to analyze the fluctuation of assets value
• Examine the classification of assets i.e. Current & Non-Current is appropriate
• In case of assets additions & disposals, examine the approval, vouchers, invoices and other relevant
documents
• Ensure newly acquired assets have been added & disposed assets have been removed from assets register
• Ensure that depreciable assets are being appropriately depreciated and for other assets, provision is being
made for possible non-recovery
• Obtain Written Representation from management & external confirmation from third parties wherever
necessary to ensure existence & ownership of assets
• For assets measured at Fair Value, examine the basis of valuation & obtain certificate of valuation

iii. Verification of Liabilities

• Obtain the schedule of various liabilities held by the company & identify its nature
• Ensure the previous year liabilities balances have been appropriately carried forward
• Perform Analytical Procedures to analyze the fluctuation
 • Examine the classification of liabilities i.e. Current & Non-Current is appropriate
• In case of current liabilities such as creditors & payables, perform ageing analysis, inquiry about long
outstanding dues and obtain external confirmation
• In case of Non-Current Liabilities such as loans & borrowings obtain agreement & understand the terms &
conditions, rate of interest, installment due and charge created in the assets if any.
• Ensure principal portion of installment has been adjusted with principal & interest portion is debited to profit
& loss account as finance expenses
• Examine whether provisions for taxes & other liabilities has been recognized
• Obtain Written Representation from management & external confirmation from third parties wherever
necessary to ensure existence of liabilities
• Ensure all the liabilities have been appropriately accounted, presented and disclosed in Financial Statements

iv. Audit of Income

a. Fees Income
• Examine the list of students and fees criteria.
• Identify the rates of: Tuition Fees Admission Fees Others Fees: Exam Fees, Extra Curricular Activities Etc.
• Ensure amount received is properly accounted & booked, advance fees have been adjusted & discount has
been authorized.
• Examine samples of fees demanded and fees collected, copies of receipts issued and the cash/ bank account,
the terms and conditions and vouch the income from students residing in hostels

b. Rental Income
• Study the rental agreement with the tenant.
• Ensure that the rental income is properly accounted
• Examine the treatment for TDS deducted on rental income.
• Check the bank/ cash account to confirm the rental receipts

c. Income from Investments

• Examine the minutes for the decision relating to investments
• Ensure that the investment made is within the objective of the company
• Inspect the securities in respect of investment held
• Vouch income from endowments and legacies, as well as interest and dividends from in investment

d. Income from Donation and Grants

• Check the nature of Grant: Whether Specific or General
• Study the grant sanction letter to identify the terms and conditions of the grant.
• Ensure that these terms and conditions have been properly complied with.
• Check the accounting entries for the grant received or refunded

v. Audit of Expenses
a. Expenses toward students
• Check the policy of the institution for prize, scholarships and similar activities.
• Verify the amount spent on such activities with proper supporting (List of events, distribution etc)
• Examine the acknowledgment by the students on receipt of prize/ scholarship money
• Examine the bills and invoices for the gift/ prize items bought

b. Administrative Expenses
• For day to day administrative expenses, the auditor should check: Authorization, Invoices, Accounting
 • For Scheduled expenses such as Salaries, Rent etc. the auditor should check: Agreement (Rental/ Employee
Contract), Terms of payment Accounting, Tax Implications (whether the tax has been properly deducted and
deposited), Mode of Payment (cash/cheque), Acknowledgement by payee (receipt/ signed slip etc.)
• The auditor has to cross check the Bank/Cash Ledger to confirm the payment

5. Comment as an auditor (2*5=10)

a. You have attended physical verification of Supreme Garments Limited and noted no discrepancies
between the physical quantity and the Store Register for the year ending the management provides a
statement of value of stocks but refuses to provide with the cost sheet and calculations regarding
how the value has been arrived. The company discloses that the value of stocks is as “certified by the
management” in the Financial Statement. The management is ready to disclose the same in the
Management Representation letter.
Answer
As per NSA 500 “Audit Evidences”, auditor shall obtain sufficient & appropriate audit evidences on which
audit conclusion will be based on. NSA 580 “Written Representations” states that written representations are
the written statement by management provided to the auditor to confirm certain matters or to support other
audit evidence. Written representations are necessary information that the auditor requires in connection
with the audit of the entity's financial statements. Although written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters
with which they deal. Further, the fact that management has provided reliable written representations does
not affect the nature or extent of other audit evidence that the auditor needs to obtains for any specific
assertions.
In the given case, auditor have attended physical verification of Supreme Garments Limited and noted no
discrepancies between the physical quantity and the Store Register for the year ending the management
provides a statement of value of stocks but refuses to provide with the cost sheet and calculations regarding
how the value has been arrived. The company discloses that the value of stocks is as “certified by the
management” in the Financial Statement. The management is ready to disclose the same in the Management
Representation letter.
Here, since the management action of not providing cost sheet and calculation to auditor amounts to
limitation of scope as per NSA 705 and disclosing in management representation letter ,the fact that valuation
of inventory is as per management certification is not sufficient evidence on it’s own. Hence auditor shall
considering modifying the audit report as per NSA 705.

b. Auditor cannot be held guilty of non-detection of all the misstatements that could be present in
Financial Statements. Comment.
Answer
An Audit is an Independent Examination of Financial Information of any entity, whether profit oriented or
not, and irrespective of its size or legal form with a view to express an opinion thereon. The primary objective
of auditor is to obtain reasonable assurance that Financial Statements are free from material misstatements &
express opinion based on such assurance. However, auditor can’t & is never expected to detect all the
misstatements present in financial statement because of inherent limitations of Audit.

Some of the inherent limitations of audit are:

i. Test Checking: Auditor selects samples of transactions to check and due to the time constraints,
auditor cannot check each and every transaction in detail thereby leaving a possibility that unchecked
items may contain misstatements
ii. Involvement of Judgment: The word "opinion" itself refers to the result of judgment of the auditor. The
Judgment of auditor depends upon his qualification and experience. The judgment of auditor may not
always be correct
iii. Nature of Audit Evidence: The audit evidences are persuasive rather than conclusive in nature. They
can only give a reasonable assurance about the validity of transaction but cannot give absolute
assurance. Sometimes the evidence may be forged by the management, which auditor may not
detect. Eg: Fake Invoices and documents

iv. Inherent Limitations of Internal Control System: The design and implementation of Internal Control
System is ultimate responsibility of management. Internal Control System (ICS) itself suffers certain
Limitations such as:
• Cost Effectiveness,
• Unusual Transactions
• Change in conditions,
• Collusion among employees
• Potential of Human Error etc.

Hence, if the auditor has conducted audit in accordance with NSA & following the fundamental principles of
Audit, auditor cannot be held guilty.

6. Write shorts notes on (4*2.5=10)

a. Compilation Engagements
Answer:

An engagement in which a practitioner applies accounting and financial reporting expertise to assist management in
the preparation and presentation of financial information of an entity in accordance with an applicable financial
reporting framework, and reports as required by this NSRS. The value of a compilation engagement performed in
accordance with this NSRS to users of financial information results from

• the application of the practitioner's professional expertise in accounting and financial reporting and
• compliance with professional standards,
• including relevant ethical requirements, and
the clear communication of the nature and extent of the practitioner's involvement with the compiled
financial information

b. Emphasis of Matter Paragraph

Answer:

A paragraph included in the auditor's report that refers to a matter appropriately presented or disclosed in the
financial statements that, in the auditor's judgment, is of such importance that it is fundamental to users'
understanding of the financial statements. If the auditor considers it necessary to draw users' attention to a matter
presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance that it is
fundamental to users' understanding of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor's report provided
• Audit Report is not modified as a result of the matter; and
• The matter has not been determined to be a key audit matter to be communicated in the auditor's report.
When the auditor includes an Emphasis of Matter paragraph in the auditor's report, the auditor shall in the section
of his report:
• Include the paragraph with heading that includes the term "Emphasis of Matter";
 • Include a clear reference to the matter being emphasized and where relevant disclosures matter can be found
in the financial statements.
• Indicate that the auditor's opinion is not modified in respect of the matter emphasized

c. Tracing & Tagging

Answer:

This is the technique;

• used for compensating the loss of audit trail
• which involves tagging the client's actual input data in such a way that relevant information is displayed at key
points
• that enables the auditor to examine transactions at the intermediate steps in processing
The hard copy, so produced is available only to the auditor for analysis
Advantage: use of actual data and elimination of the need for reversing journal entries.
Disadvantage: erroneous data may not be tagged.
For effective result, auditor may
• Use the ITF approach (integrated Test Facility) for a few hypothetical transactions and
Tagging and tracing approach to follow line data through a complex system

d. Due Diligence Audit

Answer:

The audit which is conducted for viability of potential investment is known as Due Diligence Audit. Generally DDA
are conducted for mergers and acquisitions or similar potential Investment plans.
Different categories of Due Diligence are:
a. Financial Due Diligence
• It is conducted to identify whether or not company accounts are consistent, evaluating the real situation of assets,
liabilities and tax risks.
• Financial due diligence ordinarily employs methods such as document review, conducting discussion and
interviews with senior management and key employees, comparing historical financial data and trend analysis.
b. Legal Due Diligence
It is an analysis of contracts and other documents, evaluating whether or not any hidden legal hazards or lawsuits
exist.
c. Human Resources due diligence
It is conducted for identification of the qualifications, technical ability and working initiative of the target firm's
senior management personnel and key Staff.
d. Operational Due Diligence
It is an evaluation of a target firm's business model and prospects, including identification of the existence
of a market, whether or not the firm has an attractive force, and assessing their competitive situation.

7. Distinguish the following (2*5=10)

a. Batch Processing System & Online Real Time Processing System
Answer:
 Batch Processing System
Also Known as deferred processing or offline processing
 Similar transactions are accumulated and processed in groups
Cost effective because processing transactions at once saves
time and cost instead of individual processing of transaction
Requires fewer networks as compared to the online real time
system
 Difficult to trace an error in large batches
 Suitable for processing large amounts of data on a routine Better and more economical for uncommon and
schedule

 Batch Processing is used for paychecks, sales orders or credit Used in Online Reservation systems, ATM's
card transactions
 Updating process in this system is slower as this processing is Faster updating process
schedule based
b. Internal Audit & Internal Check
Answer:
Internal Check
Internal Checks are overall bookkeeping and arrangement to
staff whereby the routine day to day transactions are handled
by more than one employee in such manner that the work of
one employee is automatically checked against the work of
another for detection of errors and irregularities
Internal check is not a specific check, but the duties of
different persons are so arranged that a person’s work is
automatically checked by another person while carrying out
the normal duty.
Internal check does the preventive job i.e. internal check is
derived so thatfrauds and errors are prevented.
It is more of process in a day to day
functioning of the business.
All the persons in the organization are involved to
maintain the internal check system.
Online Real Time Processing System
Interactive system and instant processing of data
Transactions are entered and processed at the
same time when they occur
Random access of data because of network access
Which might be little costlier
Requires high speed network & involves database
servers, files on hosting and browser to
communicate effectively and process the
transactions in prompt manner
Easy to trace errors in transactions as all
transactions are individually processed
smaller number of transactions
Internal Audit
It is the part of Internal Control System adopted
by the entity As an independent Management
function To Examine and evaluate the activities
within the entity With a view to suggest
improvements thereto & add Value to the overall
governance mechanism of the entity
Internal audit is specifically done to check that
the accounts are properly maintained and the
systems are incontrol.
Internal audit does the detective job of
identifying frauds and errors and rectifying them.
It is specific defined job.
Specific persons are appointed to theinternal
audit.