Auditing — Part 1 MCQs with Explanations

The correct answer is Option D: All of the above . Let's break down why: Option A: Auditing uses the theory of evidence to verify the financial information made available by accountancy Think of it like this: Accountants create financial statements, and auditors act like detectives. They use evidence to check if those statements are accurate and follow the rules. Option B: Auditing lends credibility dimension and quality dimension to the financial statements prepared by the accountant Auditing adds trust and quality to financial statements. When a company's financial statements are audited, people have more confidence in them because an independent expert has checked them. Option C: Auditor should have a thorough knowledge of accounting concepts and convention to enable opinion on financial statements To give an opinion on the fairness of financial statements, an auditor needs to understand accounting very well. They need to know the rules and principles that accountants follow. Since all three statements are true about the relationship between auditing and accounting, the answer is All of the above .

According to section 139 of the Companies Act of 2013, the First Auditor of a business other than an agency of the government must be chosen by the Board within 30 days after incorporation

Section 224(8) of the Companies Act, 1956 deals with the remuneration of auditors. According to this section , the remuneration of the auditor is determined depending on the type of appointment. For the first auditor , the remuneration is fixed by the Board of Directors. For subsequent auditors , the remuneration is fixed by the shareholders of the company at a general meeting or in the manner prescribed therein. Thus , the correct section of the Companies Act, 1956 that discusses the remuneration of auditors is Section 224(8). Note: This provision has changed in the Companies Act, 2013 , where the remuneration of auditors is now dealt with under Section 142 .

Correct Answer: A: The fairness of the financial statements Let's break down why this is the right answer and why the others aren't the best fit: Option A: The fairness of the financial statements - This is the primary goal of an audit. Auditors want to determine if the financial statements present a fair view of the company's financial position and performance, meaning they are free from material misstatement and comply with accounting standards. Option B: The accuracy of the financial statements - While accuracy is important, an audit focuses more on 'fairness' rather than absolute accuracy. It's impractical and often impossible to guarantee that every single transaction is 100% accurate. Auditors focus on material misstatements, which are errors that could influence decisions. Option C: The accuracy of the annual report - The annual report contains more than just financial statements. It also includes management's discussion and analysis, and other information. Audits specifically target the financial statements. Option D: The balance sheet and income statement - While the balance sheet and income statement are important components, an audit covers all the financial statements which also includes the statement of cash flows and statement of changes in equity (or retained earnings). The audit opinion applies to the complete set of financial statements. In summary: The core objective of an audit is to provide an opinion on whether the financial statements 'fairly present' the company's financial position and performance.

Section 141 of the Companies Act, 2013 contains provisions regarding the remuneration of auditors. This section specifies various aspects related to the appointment, remuneration, and terms of auditors' services for companies governed by the Act. It outlines the eligibility criteria for auditors, their appointment by shareholders, the determination of their remuneration, and the limitations on additional services they can provide to the company. Therefore, the correct option is Section 141 .

The correct answer is Option B: 3, 2, 1 Let's break down why this is the correct sequence for an auditor's activities: 1. Vouching: This comes first. Vouching means examining documents to support transactions. The auditor checks the original documents (like invoices, receipts) to confirm that the transactions actually happened and were recorded correctly. Think of it as the foundation: You need to prove a transaction happened before you can assess its value or verify its existence. 2. Verification: This comes second. Verification is about confirming the existence, ownership, and possession of assets and liabilities. The auditor obtains evidence (not just documents) to confirm what the company owns and owes. For example, physically inspecting inventory or confirming bank balances directly with the bank. You first want to make sure it is actually there before valuing it. 3. Valuation: This is the final step. Valuation means determining the correct monetary value of assets and liabilities. Only after the auditor has vouched for the transactions and verified the existence of the assets/liabilities can they assess whether they are recorded at the correct value according to accounting standards. Think of it this way: you need to know *what* exists (verification) and *that* it happened (vouching) before you can determine *how much* it's worth (valuation). Therefore, the logical sequence is Vouching → Verification → Valuation (3, 2, 1).

Misfeasance is the wrongful or improper performance of a lawful act that causes loss or damage. In an audit context, if an auditor performs duties incorrectly and that wrongful performance results in a financial loss to the company, the auditor is guilty of misfeasance . Negligence means failing to exercise reasonable care or skill. It can be the underlying cause of misfeasance but describes careless omission or lack of due care rather than the improper execution of a duty that directly causes loss. Criminal act implies deliberate, illegal conduct with criminal intent (for example, fraud or embezzlement). A wrongful audit error without such intent is normally a civil/professional wrong, not a criminal offence. Therefore, the most accurate legal characterization when an auditor wrongfully performs duties resulting in financial loss (without criminal intent) is Misfeasance , so the correct option is Option B .

The correct answer is Option D: No time limit . Management audits are internal reviews aimed at improving efficiency and effectiveness. Unlike statutory audits with fixed deadlines, management audits do not have a legally mandated time limit for submitting the report. The timeframe for completing and submitting a management audit report depends on factors like: -The scope and complexity of the audit. -The availability of information . -The resources allocated to the audit team. -The urgency of the issues being addressed. Therefore, the organization determines a reasonable and practical timeframe for each management audit based on its specific needs and circumstances.

Primary vouchers are those original documents that serve as the main and direct evidence of a business transaction. They are the first or original source documents that record the occurrence of a transaction and provide proof for entries made in the books of accounts. An invoice is a classic example of a primary voucher because it is the original document issued by the seller to the buyer showing details such as the goods sold, quantity, price, and total amount payable. Carbon copies of receipts and counterfoils are not primary vouchers; they are considered secondary vouchers since they are duplicates or internal copies used for record-keeping and reference purposes. Therefore, the document that qualifies as a primary voucher is the invoice . Hence, the correct answer is Option A: Invoice .

Civil negligence occurs when a person, such as an auditor, fails to exercise the level of care and skill that a reasonably competent professional would be expected to apply in similar circumstances. In the case of an auditor, if he performs his duties carelessly or without following proper auditing standards, and such negligence results in financial loss to the company , he can be held guilty of civil negligence . This type of negligence does not imply criminal intent but represents a failure to meet professional obligations and due care expected under civil law. Breach of duty is a broader concept that includes any failure to fulfill assigned responsibilities, whereas civil negligence specifically refers to such a failure caused by lack of due diligence or professional care . Criminal negligence involves reckless or intentional misconduct leading to harm, which is more severe and not typically applicable to auditing errors. Financial irregularities refer to errors or frauds in financial records, not the auditor’s failure to detect them. Therefore, when an auditor’s improper actions or omissions cause financial loss to the company, he is held guilty of civil negligence . Hence, the correct answer is Option A: Civil Negligence .

Routine checking refers to the process of verifying the regular or recurring transactions that take place in the normal course of business. It involves examining routine accounting records such as cash receipts, payments, purchases, sales, and journal entries to ensure that all entries are correctly recorded, casted, and posted in the ledger. The main objective of routine checking is to detect clerical errors, omissions, and frauds of a simple nature that may occur during day-to-day recording of transactions. It does not include critical examination or detailed investigation of accounts; rather, it focuses on checking routine items for accuracy and correctness. Option A (Daily checking of transactions) is too narrow because routine checking is not limited to daily verification only. Option B (Internal inspection system) refers to internal audit procedures, which are broader in scope. Option C (Provisional check of accounts) does not correctly describe the systematic nature of routine checking. Therefore, the correct meaning of routine checking is checking routine items . Hence, the correct answer is Option D: Checking routine items .

Under the Companies Act, 1956 , the removal of an auditor before the expiry of his term was covered under Section 224(7) . According to this section, an auditor could be removed before the completion of his tenure only with the prior approval of the Central Government and after passing a special resolution in the general meeting of the company. This was introduced to protect the independence of auditors and prevent arbitrary removal by company management. Under the Companies Act, 2013 , the relevant provision is Section 140 . As per Section 140(1), an auditor appointed under Section 139 may be removed from his office before the expiry of his term only by passing a special resolution in a general meeting and obtaining the previous approval of the Central Government . Therefore: - In the 1956 Act → Removal of auditor = Section 224(7) - In the 2013 Act → Removal of auditor = Section 140

According to Section 141(3)(g) of the Companies Act, 2013 , a person or a firm shall be disqualified from being appointed as an auditor of a company if such person or firm is already auditing more than 20 companies at the date of appointment. This provision has been included in law to ensure that auditors are not overburdened with too many audit assignments. The quality of audit work may deteriorate if an auditor takes on excessive engagements. Hence, the cap of 20 audits has been set to maintain efficiency, independence, and effectiveness of the auditing process. Important Clarification: - While counting the number of 20 company audits, private companies with paid-up share capital less than Rs. 100 crore are excluded. - Thus, the limit mainly applies to audits of public companies and large private companies. Why not other options? - Option A: 12 → Not mentioned in law. - Option C: 25 → Incorrect, limit is 20 not 25. - Option D: 28 → Incorrect, no such provision. Conclusion: A company cannot appoint a person or a firm as its auditor if such auditor is already holding audit assignments of 20 or more companies . Therefore, the correct answer is Option B: 20 .

Analytical procedures used at the substantive stage are specifically intended to detect potential material misstatements in the financial statements. During this stage, auditors compare recorded figures with expected values based on analytical relationships. Any unusual or unexpected variations indicate areas where misstatements may exist. Hence, Option B correctly reflects the primary purpose of analytical procedures at the substantive testing level. Why the Other Options Are Incorrect: Option A: "It helps to study relationship among balance sheet accounts" This reflects the purpose of analytical procedures during the planning stage , where auditors study relationships to understand the entity and identify risky areas. It does not specifically relate to detecting misstatements during substantive testing. Option C: "It helps to identify possible oversights" This is associated with the overall review stage at the end of the audit, where auditors use analytical procedures to ensure the financial statements are consistent and reasonable. It is not the main objective of substantive analytical procedures. Option D: "It helps to accumulate evidence supporting the validity of a specific account balance" This describes tests of details , not analytical procedures. Analytical procedures examine trends and relationships, whereas validating a specific account balance requires detailed audit techniques such as vouching, verification, or confirmations. Final Conclusion: Only Option B correctly states the primary purpose of analytical procedures at the substantive stage—identifying material misstatements.

Errors of omission occur when a transaction is completely or partially left out of the accounting records. They are not classified as technical errors, errors of principle, or compensating errors. Technical errors arise from incorrect application of accounting methods, errors of principle involve violation of fundamental accounting principles, and compensating errors offset each other. Since errors of omission do not fall under any of these categories, the correct answer is Option D .

Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. It represents the reduction in value of a fixed asset due to wear and tear, passage of time, or obsolescence. Even if a machine is well maintained , its value still decreases over time because maintenance only preserves its working condition; it does not prevent loss of value due to usage and aging . The Companies Act and Generally Accepted Accounting Principles (GAAP) mandate that depreciation must be charged on all fixed assets except land (unless impaired). If management refuses to charge depreciation, it would lead to an overstatement of assets and profits , thereby misrepresenting the company’s true financial position. Therefore, the auditor should reject the management’s argument and insist that depreciation be charged as per accounting standards. Hence, the correct answer is Option C: Reject it .

2, 1, 3, 4, 5 is the correct answer to “Consider the following elements: 1. Scope of audit 2. Validity of appointment 3. Knowledge about business 4. Instruction to client 5. Division of work among audit clerks The correct sequence of these elements for the commencement of a new audit will be”. This question is standard in competitive examination syllabi for Auditing.

Preparation is the correct answer to “What is the first stage of energy audit”. This question is standard in competitive examination syllabi for Auditing.

All of the above is the correct answer to “Which of the following can be accepted as a supporting document”. This question is standard in competitive examination syllabi for Auditing.

Understanding of the system is the correct answer to “A flow chart, made by the auditor, of an entity's internal control system is a graphic representation that depicts the auditor's:”. This question is standard in competitive examination syllabi for Auditing.

Public limited company is the correct answer to “Who requires a legal audit”. This question is standard in competitive examination syllabi for Auditing.

Has the responsibility of notifying financial statements, users through the auditor's report is the correct answer to “If the auditor believes that the financial statements are fairly stated or is unable to reach and conclusion because of insufficient evidence, the auditor”. This question is standard in competitive examination syllabi for Auditing.

At the planning state, the auditor considers materiality at the financial statement level only is the correct answer to “Which of the following statements is not correct about materiality”. This question is standard in competitive examination syllabi for Auditing.

Test procedures for distributing paycheques is the correct answer to “An auditor conducts a surprise check on the pay day, i.e., the day wages and salaries are paid. The primary purpose of this audit procedure is to”. This question is standard in competitive examination syllabi for Auditing.

Unqualified opinion is the correct answer to “The management of a company, to which AS3 is not applicable, does not include statement of cash flows in its annual report. The auditor should express:”. This question is standard in competitive examination syllabi for Auditing.

Chartered accountant is the correct answer to “Who is qualified to be a company auditor”. This question is standard in competitive examination syllabi for Auditing.

Statement I is correct is the correct answer to “Statement I: Safety audit is a risk management tools. Statement II: Management audit is a part of traditional auditing.”. This question is standard in competitive examination syllabi for Auditing.

Management audit is the correct answer to “The audit conducted to check and examine the efficiency and effectiveness of management is called”. This question is standard in competitive examination syllabi for Auditing.

Qualified report is the correct answer to “Which report will be submitted by an auditor, if he is dissatisfied regarding the facts and informations”. This question is standard in competitive examination syllabi for Auditing.

All of the above is the correct answer to “When an independent auditor relies on the work of an internal auditor, he should”. This question is standard in competitive examination syllabi for Auditing.

3, 2 and 1 is the correct answer to “Consider the following activities and choose the correct sequence of these activities undertaking by auditor: 1. Valuation 2. Verification 3. Vouching”. This question is standard in competitive examination syllabi for Auditing.

Directors is the correct answer to “The cost auditor gives his report to the”. This question is standard in competitive examination syllabi for Auditing.

Auditor is the correct answer to “The person who conducts audit is called”. This question is standard in competitive examination syllabi for Auditing.

Till the conclusion of the first annual general meeting is the correct answer to “The first auditor of a company will hold office”. This question is standard in competitive examination syllabi for Auditing.

Vouching is the correct answer to “. . . . . . . . is the backbone of auditing.”. This question is standard in competitive examination syllabi for Auditing.

Vouching is the correct answer to “Process of checking the evidence of the entries called . . . . . . . .”. This question is standard in competitive examination syllabi for Auditing.

Board of directors is the correct answer to “The cost auditor submits the report to the”. This question is standard in competitive examination syllabi for Auditing.

Any Qualified Person is the correct answer to “Management audit is done by”. This question is standard in competitive examination syllabi for Auditing.

Authorisation of transactions is the correct answer to “The objective(s) of vouching is/are”. This question is standard in competitive examination syllabi for Auditing.

Internal audit system is the correct answer to “Concurrent audit is a part of:”. This question is standard in competitive examination syllabi for Auditing.