Audit Evidence - Test 1: answer key

Question 1 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. Zenith Manufacturing Pvt Ltd manufactures industrial pumps at three plants and reports inventory of ₹62 crore for the year ended 31 March 2027. M/s Sharma & Associates is conducting the statutory audit. The stores controller downloads the year-end stock report from the ERP, but two shared administrator IDs can amend quantities and approve stock adjustments. The system-change log for January to March was disabled during a vendor migration, and management has no immutable backup for that period. The audit team attended the count at the head office warehouse on 31 March; two other warehouses, representing approximately 40% of recorded quantities, had been counted by employees three days earlier without auditor attendance. Management supplied signed count sheets for those locations, but the totals do not agree with the ERP report. Journals posted on 2 April were backdated to 31 March to record count differences. The team also selected a sample of high-value castings and found that 18% of the related goods-received-note images were missing after a document-scanning migration. The Finance Director attributes the differences to goods in transit and says the signed stock sheets are conclusive. He asks the auditors not to contact the ERP vendor or obtain restored access logs, citing cost and delay. The stores manager separately states that obsolete pump components are fully saleable, although several items have not moved for 20 months. The engagement partner must decide whether the internally generated reports and management explanations can support the inventory balance, what the count observation establishes, and how to respond to missing records and management's restriction on access.

Given the ERP access weaknesses and the missing goods-received-note images, what should the auditor do before using the stock report as audit evidence?

1. Accept the report after matching its grand total with the trial balance and management's signed count sheets.
2. Increase the sample size of ERP lines, without testing how the report was generated or whether records were omitted.
3. Treat the ERP report as reliable because it is generated electronically and obtain a written representation for missing records.
4. Check accuracy, completeness, precision and detail, then corroborate with source records and independent procedures. (correct answer)

Answer: D — Check accuracy, completeness, precision and detail, then corroborate with source records and independent procedures.

Explanation. SA 500, paragraph 9, requires the auditor to evaluate the reliability of information produced by the entity, including its accuracy, completeness, and whether it is sufficiently precise and detailed for the audit purpose. Shared administrator access, disabled logs and missing GRNs directly affect that assessment. A signed schedule or a larger sample from an unreliable population does not cure the underlying reliability problem; the auditor should obtain corroborating evidence from source records and other procedures.

Where it goes wrong. Assuming that an electronic report or management-certified schedule is inherently reliable.

Authority. SA 500

Question 2 · 2 marks · Chapter 4: Audit Evidence · hard

The audit team observed the head-office inventory count on 31 March and inspected selected castings. Which conclusion is most defensible from these procedures?

1. The count procedure operated effectively throughout the year because the auditor attended the year-end count.
2. Observation supports how the count was performed at that time, not completeness or valuation of all inventory. (correct answer)
3. Inspection of the selected castings establishes completeness and net realisable value for all inventory.
4. The head-office results may be applied to other warehouses because all locations use the same ERP and count format.

Answer: B — Observation supports how the count was performed at that time, not completeness or valuation of all inventory.

Explanation. SA 500, paragraph A17, explains that observation provides evidence about a process or procedure as performed, but is limited to the point in time observed and may be affected by the fact that the process is being observed. Paragraph A16 further clarifies that physical inspection of tangible assets may support existence, but not necessarily rights and obligations or valuation. Option c is the classic overreach: physical presence is not proof of title or recoverable value.

Where it goes wrong. Treating one observed count as proof of year-round control operation and every inventory assertion.

Authority. SA 500

Question 3 · 2 marks · Chapter 4: Audit Evidence · medium

What is the most appropriate audit response to the shared administrator IDs, disabled change logs and count differences posted through backdated journals?

1. Reassess the reliability of internal evidence, expand substantive testing and corroborate the balance with independent records. (correct answer)
2. Continue relying on the ERP because the quantities reconcile to the financial statements and the issue is only an IT matter.
3. Obtain more management explanations and signed sheets, since more internal evidence compensates for weak system controls.
4. Limit further work to recalculating inventory extensions because the issue concerns mathematical accuracy only.

Answer: A — Reassess the reliability of internal evidence, expand substantive testing and corroborate the balance with independent records.

Explanation. SA 500, paragraphs A4-A5 and A31, links evidence quality to source, nature and the controls over internally generated information. The reliability of internal evidence increases when related preparation and maintenance controls are effective; here, the shared IDs and disabled logs undermine that premise. Higher assessed risk ordinarily calls for more evidence, but paragraph A4 cautions that quantity cannot compensate for poor quality. Option c mistakes repetition of management-generated evidence for independent corroboration.

Where it goes wrong. Responding to control failure by collecting more evidence from the same compromised source.

Authority. SA 500

Question 4 · 2 marks · Chapter 4: Audit Evidence · hard

Management refuses to provide the restored ERP logs and certain source vouchers, stating that the audit team has no right to inspect vendor-hosted records. Which statement most accurately reflects the auditor's statutory position?

1. The auditor may inspect only records physically maintained at the registered office and cannot demand electronic records.
2. The auditor must accept management's restriction if the records are held by an external IT vendor under a service contract.
3. Section 143(1) gives access at all times to company books and vouchers, wherever kept, and permits necessary information from officers. (correct answer)
4. The auditor can obtain access only after a special resolution of members authorises inspection of the relevant vouchers.

Answer: C — Section 143(1) gives access at all times to company books and vouchers, wherever kept, and permits necessary information from officers.

Explanation. Section 143(1) of the Companies Act, 2013 gives the auditor a right of access at all times to the company's books of account and vouchers, whether kept at the registered office or elsewhere, and permits the auditor to require necessary information and explanations from officers. The provision is not confined to paper records or the registered office. Option b wrongly treats outsourcing of record hosting as extinguishing the auditor's statutory access right; any unresolved restriction must also be evaluated for its reporting effect under section 143(3)(a).

Where it goes wrong. Confusing the location or custody of records with the auditor's statutory right of access.

Authority. Section 143; section 143

Question 5 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. Alpha Infotech Ltd, a listed software-services company, reports cash, bank balances and fixed deposits of ₹27 crore at 31 March 2027. M/s K. Mehta & Co. is auditing the company. The audit team sent balance requests to the banks using contact details independently substantiated from bank websites. One bank replied through its statutory confirmation portal that a fixed deposit of ₹9.4 crore was subject to a lien securing a corporate guarantee; the general ledger describes the deposit as unrestricted. The Chief Financial Officer says the lien is only a routine banking notation and asks the team to accept the company's bank reconciliation. For another bank, the Finance Controller forwards a PDF said to be a confirmation, but the document is addressed to the company, not the auditor, and the response came through the Controller's mailbox. A separate email purporting to be from a bank officer uses a personal email address and does not identify the branch or the officer's authority. Management refuses permission for direct follow-up with that bank, citing ongoing negotiations. The audit team also finds a side letter modifying the sweep-facility terms with a group entity; the CFO insists that confirmations should cover closing balances only and should not ask about amendments or side arrangements. The team has access to scanned statements uploaded by the client, but not to the bank's original electronic statements. The engagement partner must assess which communications qualify as external confirmation evidence, how to resolve the conflict between the bank's response and management's records, whether confirmation can test contractual terms and side agreements, and how the source and circumstances of each response affect reliability.

Which of the communications described in the case is capable of constituting an external confirmation for purposes of audit evidence?

1. A PDF confirmation prepared by the company's accountant and signed by the Finance Controller after comparing it with the ledger.
2. A direct written response from the bank to the auditor through the bank's statutory confirmation portal. (correct answer)
3. A bank balance statement forwarded by the Finance Controller from the company's mailbox without independent verification.
4. An oral assurance given by the Chief Financial Officer that the bank has no objection to the recorded balance.

Answer: B — A direct written response from the bank to the auditor through the bank's statutory confirmation portal.

Explanation. SA 500, paragraph A18, describes an external confirmation as audit evidence obtained by the auditor as a direct written response from a third party, whether on paper, electronically or through another medium. The bank's statutory portal response fits that description. A company-prepared schedule or a document routed through management is not itself a direct response to the auditor. The key trap in option c is confusing an externally branded document with evidence received independently and directly by the auditor.

Where it goes wrong. Assuming that a document originating at a bank remains a direct confirmation even when management controls its delivery.

Authority. SA 500

Question 6 · 2 marks · Chapter 4: Audit Evidence · hard

The bank confirms that the ₹9.4 crore fixed deposit is lien-marked, while the ledger shows it as unrestricted. What is the auditor required to do under SA 500?

1. Determine what modifications or additions to audit procedures are necessary to resolve the inconsistency and consider its effect on other audit areas. (correct answer)
2. Accept management's explanation because the bank's description of a lien may not have the same meaning as the company's accounting classification.
3. Treat the difference as a timing matter and carry forward the prior-year conclusion if the fixed deposit certificate is available.
4. Obtain a fresh management representation and close the matter if the CFO confirms that the lien is only a routine notation.

Answer: A — Determine what modifications or additions to audit procedures are necessary to resolve the inconsistency and consider its effect on other audit areas.

Explanation. SA 500, paragraph 11, expressly requires the auditor, when evidence from one source conflicts with another or reliability is doubtful, to determine necessary modifications or additions to procedures and consider effects on other audit aspects. The lien may affect restrictions on cash, disclosures, guarantees and related liabilities, not merely the deposit balance. Option d is inadequate because management's repeated assertion does not resolve a contradiction with independent bank evidence.

Where it goes wrong. Treating an external-confirmation discrepancy as a routine reconciliation difference that can be cleared by representation.

Authority. SA 500

Question 7 · 2 marks · Chapter 4: Audit Evidence · medium

The CFO argues that the bank confirmation request should ask only for closing balances. Which use of external confirmation is also contemplated by SA 500?

1. Confirming the mathematical accuracy of a bank reconciliation prepared by the company's finance team.
2. Obtaining oral explanations from treasury staff about the commercial purpose of the banking facility.
3. Inspecting the company's copy of the sweep-facility agreement without seeking counterparty corroboration.
4. Confirming agreement terms and amendments, including whether side agreements exist or have been made. (correct answer)

Answer: D — Confirming agreement terms and amendments, including whether side agreements exist or have been made.

Explanation. SA 500, paragraph A18, makes clear that external confirmations are not restricted to account balances. The auditor may request confirmation of terms of agreements or transactions, including whether modifications have been made, and may seek evidence about the absence of side agreements that could affect recognition or disclosure. Option a confuses confirmation with recalculation, while option c relies only on a document held by the entity and does not independently corroborate whether the terms were amended.

Where it goes wrong. Narrowing external confirmations to balances and overlooking contractual terms or undisclosed arrangements.

Authority. SA 500

Question 8 · 2 marks · Chapter 4: Audit Evidence · hard

How should the auditor treat the email from a purported bank officer that arrived from a personal email address and does not establish the sender's authority?

1. Treat it as reliable external evidence because any communication originating outside the company is independent.
2. Reject every electronic response and require all confirmations to be printed on bank letterhead and couriered.
3. Authenticate the source and the officer's authority through independently substantiated bank channels before placing reliance on the response. (correct answer)
4. Accept the email if its balance agrees with the ledger, since numerical agreement removes source-related concerns.

Answer: C — Authenticate the source and the officer's authority through independently substantiated bank channels before placing reliance on the response.

Explanation. SA 500, paragraph A31, warns that generalisations about reliability have exceptions: even information from an external source may be unreliable if the source is not knowledgeable. Reliability depends on source, nature and circumstances of obtaining the evidence. The personal email and unclear authority require authentication through independently substantiated channels. Option a is the examiner's trap: external origin is a reliability indicator, not an irrebuttable guarantee; nor does agreement with the ledger authenticate a source.

Where it goes wrong. Equating external origin with independence, authority and reliability in every circumstance.

Authority. SA 500

Question 9 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. Suryodaya Sugar Mills Ltd operates a seasonal sugar plant and prepares its year-end accounts using a cloud-based ERP. M/s V. Raman & LLP is auditing the financial statements for the year ended 31 March 2027. Management's policy is to retain production, weighbridge and dispatch logs online for only 45 days; the files are then overwritten unless a specific archive request is made. The audit team learns this during interim work, but no preservation request has yet been issued. The Chief Financial Officer says that monthly management summaries are enough and that detailed logs can be recreated from memory if required. The company has capitalised a major turbine overhaul and has also recognised a valuation-based write-down for an idle turbine. The valuation was prepared by an engineer engaged by management. The engineer is qualified, but the engagement fee increases if the recoverable amount reported is higher; management has not explained how this incentive was considered. The audit team obtains the engineer's report but has not yet understood the valuation model or tested the key assumptions. In addition, the mill's reported output increased by 18%, while power consumption per tonne fell by 29%; management attributes the movement to better efficiency but gives no operating analysis. A monthly weighbridge-to-production reconciliation is a key control, and the finance team says it performs this control every month. The audit senior proposes independently carrying out the same reconciliation using weighbridge slips and production records. The partner must decide how to assess the expert's work, preserve electronic evidence before it becomes unavailable, investigate the unusual financial and non-financial relationship, and distinguish checking arithmetic from independently executing a control.

The engineer's valuation report is used by management to determine the idle turbine's write-down, and the engineer's fee rises with a higher recoverable amount. What must the auditor do under SA 500?

1. Accept the valuation because the engineer is qualified, experienced and has signed the final report.
2. Treat the engineer as the auditor's expert because the report is relevant to the financial statements.
3. Use the report without further work if management says the fee arrangement is commercially standard.
4. Assess competence, capability and objectivity, understand the work, and test whether it supports the relevant assertion. (correct answer)

Answer: D — Assess competence, capability and objectivity, understand the work, and test whether it supports the relevant assertion.

Explanation. SA 500, paragraph 8, requires the auditor, to the extent necessary, to evaluate a management expert's competence, capabilities and objectivity, obtain an understanding of the expert's work and evaluate its appropriateness as evidence for the relevant assertion. Paragraph A37 identifies bias, conflicts of interest and influence as matters affecting objectivity. A qualification alone does not neutralise a fee incentive; option a overlooks the specific objectivity assessment required.

Where it goes wrong. Assuming that professional credentials automatically establish an expert's objectivity.

Authority. SA 500

Question 10 · 2 marks · Chapter 4: Audit Evidence · hard

What is the most appropriate response to the ERP policy under which detailed production and dispatch logs are overwritten after 45 days?

1. Wait until final audit and request the data then, because deleted logs can be reconstructed from summaries.
2. Request preservation of relevant electronic information or perform procedures while the data remain retrievable. (correct answer)
3. Use management's monthly summaries as a substitute without assessing their completeness or precision.
4. Ignore the retention policy because electronic records are outside inspection under SA 500.

Answer: B — Request preservation of relevant electronic information or perform procedures while the data remain retrievable.

Explanation. SA 500, paragraph A13, addresses electronic information that may not be retrievable after a specified period, particularly where files are changed and backups do not exist. The auditor may need to request retention of information for review or perform procedures when it is available. Option a assumes lost logs can reliably be recreated later, which the facts do not support. Option d is incorrect because inspection expressly includes electronic records and documents under paragraph A14.

Where it goes wrong. Postponing evidence collection despite a known data-retention window.

Authority. SA 500

Question 11 · 2 marks · Chapter 4: Audit Evidence · medium

Output increased by 18% while power consumption per tonne fell by 29%. Which audit response most accurately reflects the nature of analytical procedures?

1. Treat the movement as conclusive evidence of improved efficiency because output and power consumption are both operating measures.
2. Recalculate the total power bill and regard the arithmetic accuracy as sufficient evidence for the production assertion.
3. Study the relationship between financial and non-financial data, investigate the significant deviation, and corroborate management's explanation. (correct answer)
4. Replace tests of details entirely with a ratio comparison because analytical procedures are inherently more persuasive than source records.

Answer: C — Study the relationship between financial and non-financial data, investigate the significant deviation, and corroborate management's explanation.

Explanation. SA 500, paragraph A21, defines analytical procedures as evaluating financial information through plausible relationships among financial and non-financial data and investigating significant fluctuations or relationships inconsistent with other information or predicted amounts. The unusual power-consumption movement is an investigative trigger, not proof of improved efficiency. Option a treats an unexplained relationship as a conclusion; option d wrongly assumes analytical procedures automatically replace other evidence regardless of risk or purpose.

Where it goes wrong. Treating a plausible management explanation or an unusual ratio as conclusive audit evidence.

Authority. SA 500

Question 12 · 2 marks · Chapter 4: Audit Evidence · hard

The senior independently performs the monthly weighbridge-to-production reconciliation that the finance team says it performs as a control. Which procedure is being applied?

1. Reperformance, because the auditor independently executes a control originally performed by the entity. (correct answer)
2. Recalculation, because the auditor checks only the mathematical accuracy of documents or records.
3. Observation, because the auditor watches others perform a process or procedure at the time it is performed.
4. Inspection, because the auditor examines source documents without independently executing the control.

Answer: A — Reperformance, because the auditor independently executes a control originally performed by the entity.

Explanation. SA 500, paragraph A20, defines reperformance as the auditor's independent execution of procedures or controls originally performed as part of the entity's internal control. Recalculating a total checks mathematical accuracy under paragraph A19, but independently rebuilding the reconciliation tests the control's operation. Option b is the trap because the exercise may include arithmetic, yet its defining feature is independent execution of the whole control, not merely checking a calculation.

Where it goes wrong. Confusing a complete independent re-execution of a control with recalculation of its arithmetic.

Authority. SA 500

Question 13 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. An auditor assesses a high risk of material misstatement in a large receivables balance. The team proposes doubling the number of internally generated ageing schedules tested, although the underlying customer master data can be amended by sales staff without review. Which conclusion is most appropriate?

An auditor assesses a high risk of material misstatement in a large receivables balance. The team proposes doubling the number of internally generated ageing schedules tested, although the underlying customer master data can be amended by sales staff without review. Which conclusion is most appropriate?

1. The higher risk may require more evidence, but additional quantity from an unreliable source does not by itself provide appropriate evidence. (correct answer)
2. The increased sample automatically resolves the reliability concern because sufficiency and appropriateness are interchangeable measures.
3. The ageing schedules become reliable once the sample size is statistically determined, irrespective of controls over the source data.
4. The auditor should reduce the sample because a high assessed risk affects appropriateness but never affects sufficiency.

Answer: A — The higher risk may require more evidence, but additional quantity from an unreliable source does not by itself provide appropriate evidence.

Explanation. SA 500, paragraphs A4 and A5, distinguish sufficiency as quantity from appropriateness as quality, comprising relevance and reliability. Higher assessed risk generally increases the quantity of evidence required, but paragraph A4 specifically warns that obtaining more evidence may not compensate for poor quality. The unrestricted customer-master amendments undermine the reliability of the ageing data. Option b is flawed because the two concepts are interrelated, not interchangeable.

Where it goes wrong. Assuming a larger sample or statistical selection cures unreliable underlying information.

Authority. SA 500

Question 14 · 2 marks · Chapter 4: Audit Evidence · hard

Scenario. Which item would ordinarily provide the strongest audit evidence for a bank balance, assuming no contrary indicators are identified?

Which item would ordinarily provide the strongest audit evidence for a bank balance, assuming no contrary indicators are identified?

1. A photocopy of a statement delivered by the company's cashier and agreed to the cash book.
2. An original electronic statement obtained directly from the bank through an independently authenticated channel. (correct answer)
3. An internally generated bank reconciliation approved by the finance manager using shared system credentials.
4. A verbal assurance from the treasury head that the bank balance was independently checked at year-end.

Answer: B — An original electronic statement obtained directly from the bank through an independently authenticated channel.

Explanation. SA 500, paragraph A31, states that reliability is generally increased when evidence comes from independent external sources, is obtained directly by the auditor, is documentary and is provided in original form. The authenticated bank statement combines these characteristics. The photocopy in option a and internally generated reconciliation in option c may still be useful, but are more exposed to alteration or weak controls. These are generalisations, so the auditor must still consider circumstances that could impair reliability.

Where it goes wrong. Ranking evidence by format alone while ignoring source, direct receipt and controls over preparation.

Authority. SA 500

Question 15 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. While testing completeness of trade payables, an auditor selects only balances appearing in the year-end payables ledger and vouches them to invoices. Which alternative population would be more relevant to the stated objective?

While testing completeness of trade payables, an auditor selects only balances appearing in the year-end payables ledger and vouches them to invoices. Which alternative population would be more relevant to the stated objective?

1. The list of suppliers with the highest annual purchase value, restricted to balances recorded at year-end.
2. The year-end payables ledger after excluding balances for which management has provided written explanations.
3. Subsequent disbursements, unpaid invoices, suppliers' statements and unmatched receiving reports around year-end. (correct answer)
4. The schedule of invoices already posted in the purchase register, selected according to the ledger's account codes.

Answer: C — Subsequent disbursements, unpaid invoices, suppliers' statements and unmatched receiving reports around year-end.

Explanation. SA 500, paragraph A27, explains that relevance may be affected by the direction of testing. To test understatement or completeness of payables, testing only recorded payables is not relevant enough; subsequent disbursements, unpaid invoices, supplier statements and unmatched receiving reports can reveal liabilities omitted from the ledger. Option d repeats the recorded population and therefore risks missing unrecorded obligations. The trap is failing to design the population in the direction of the assertion being tested.

Where it goes wrong. Testing only recorded liabilities when the audit objective is to find liabilities that may be missing.

Authority. SA 500

Question 16 · 2 marks · Chapter 4: Audit Evidence · hard

Scenario. During a plant visit, the auditor physically inspects a specialised machine included in property, plant and equipment. Which assertion-related conclusion is supported most directly by this procedure?

During a plant visit, the auditor physically inspects a specialised machine included in property, plant and equipment. Which assertion-related conclusion is supported most directly by this procedure?

1. The entity has legal title to the machine and it has not been pledged as security.
2. The machine is correctly valued at the amount recorded in the fixed-asset register.
3. The machine is free from impairment and will generate the expected future economic benefits.
4. The machine physically exists at the inspected location, subject to the limits of that procedure. (correct answer)

Answer: D — The machine physically exists at the inspected location, subject to the limits of that procedure.

Explanation. SA 500, paragraph A16, states that inspection of tangible assets may provide reliable evidence about existence, but not necessarily about the entity's rights and obligations or the asset's valuation. Title deeds, lien searches, contracts and impairment procedures may be needed for those other assertions. Option a incorrectly extends physical inspection to legal ownership and encumbrances. The evidence must be matched to the assertion; proving existence is not a substitute for proving rights or valuation.

Where it goes wrong. Inferring ownership, freedom from charge or correct valuation merely from physical possession.

Authority. SA 500

Question 17 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. An auditor observes a cashier performing the daily cash-count control on one selected afternoon. Which limitation should most directly influence the auditor's conclusion?

An auditor observes a cashier performing the daily cash-count control on one selected afternoon. Which limitation should most directly influence the auditor's conclusion?

1. Observation is limited to the time at which it occurs, and the cashier may perform differently because the auditor is present. (correct answer)
2. Observation is documentary evidence and therefore establishes the control's operation throughout the entire year.
3. Observation provides no audit evidence unless the auditor also obtains a written representation from the cashier.
4. Observation proves the mathematical accuracy of the cash book but cannot provide evidence about a process.

Answer: A — Observation is limited to the time at which it occurs, and the cashier may perform differently because the auditor is present.

Explanation. SA 500, paragraph A17, describes observation as looking at a process or procedure performed by others. It provides evidence about performance at the time observed, but its value is limited by that timing and by the possibility that being observed changes behaviour. Option b reverses the limitation by treating a single observation as year-round evidence. The auditor may need other procedures, such as inspection of records or reperformance, to test operation over the period.

Where it goes wrong. Generalising one observed performance to the entire audit period.

Authority. SA 500

Question 18 · 2 marks · Chapter 4: Audit Evidence · hard

Scenario. The entity's accounts team prepares a monthly bank reconciliation. The auditor independently obtains the bank statement and ledger and carries out the reconciliation afresh using the entity's stated reconciling-item process. Which procedure is this?

The entity's accounts team prepares a monthly bank reconciliation. The auditor independently obtains the bank statement and ledger and carries out the reconciliation afresh using the entity's stated reconciling-item process. Which procedure is this?

1. Recalculation, because the auditor checks the arithmetic in the reconciliation prepared by the entity.
2. Reperformance, because the auditor independently executes a control originally performed by the entity. (correct answer)
3. Inspection, because the auditor only examines a document and does not execute a process.
4. Analytical procedures, because the auditor compares bank balances with cash-flow expectations.

Answer: B — Reperformance, because the auditor independently executes a control originally performed by the entity.

Explanation. SA 500, paragraph A20, defines reperformance as the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control. The auditor is rebuilding the reconciliation rather than merely checking the arithmetic of management's completed schedule. Recalculation under paragraph A19 would be appropriate if the auditor only checked mathematical accuracy. Option a is therefore an attractive but incomplete description of the work actually performed.

Where it goes wrong. Calling every recalculation-containing audit test 'recalculation' even when the whole control is independently re-executed.

Authority. SA 500

Question 19 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. The Finance Director and the internal auditor both state that user-access reviews were performed every month. The auditor has not inspected any review evidence or tested the control. What can be concluded from these inquiries alone?

The Finance Director and the internal auditor both state that user-access reviews were performed every month. The auditor has not inspected any review evidence or tested the control. What can be concluded from these inquiries alone?

1. The control operated effectively because two knowledgeable persons have independently confirmed its performance.
2. There is no need for additional work if the responses are consistent and have been recorded in the audit file.
3. Inquiry is useful, but alone ordinarily does not establish absence of misstatement or control effectiveness. (correct answer)
4. The auditor should disregard all inquiry evidence because only documentary evidence is admissible under SA 500.

Answer: C — Inquiry is useful, but alone ordinarily does not establish absence of misstatement or control effectiveness.

Explanation. SA 500, paragraph A2, recognises inquiry as an important audit procedure but states that inquiry alone ordinarily does not provide sufficient evidence of the absence of a material misstatement at the assertion level or of the operating effectiveness of controls. Consistent responses may be corroborative, yet they do not show that reviews actually occurred or were properly performed. Option a confuses consistent representations with independently tested evidence; inspection or reperformance is needed as appropriate.

Where it goes wrong. Treating repeated or consistent management statements as proof that a control operated.

Authority. SA 500

Question 20 · 2 marks · Chapter 4: Audit Evidence · hard

Scenario. An auditor uses an entity-generated spreadsheet to select high-value sales invoices for testing. Which additional work is required before relying on the spreadsheet for this purpose?

An auditor uses an entity-generated spreadsheet to select high-value sales invoices for testing. Which additional work is required before relying on the spreadsheet for this purpose?

1. Obtain a management representation that the spreadsheet was downloaded from the ERP and contains all invoices.
2. Agree the spreadsheet's grand total to revenue in the trial balance and presume its individual rows are complete.
3. Check only the formatting and formula cells because the auditor will separately inspect selected invoices.
4. Evaluate whether the information is accurate and complete and sufficiently precise and detailed for the purpose of selecting items. (correct answer)

Answer: D — Evaluate whether the information is accurate and complete and sufficiently precise and detailed for the purpose of selecting items.

Explanation. SA 500, paragraph 9, requires the auditor to evaluate whether information produced by the entity is sufficiently reliable for the auditor's purpose, including evidence about accuracy and completeness and whether it is sufficiently precise and detailed. A spreadsheet used as a selection population must not omit or duplicate invoices or obscure the relevant attributes. Option b is flawed because a matching grand total cannot establish row-level completeness or accuracy; the quality of the population itself affects the test.

Where it goes wrong. Assuming that agreement of a report's total proves the completeness and accuracy of its underlying data.

Authority. SA 500

Question 21 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. A supplier statement contradicts the company's payable ledger, and the auditor also doubts the authenticity of a scanned delivery note. What is the auditor required to do?

A supplier statement contradicts the company's payable ledger, and the auditor also doubts the authenticity of a scanned delivery note. What is the auditor required to do?

1. Determine necessary modifications or additions to audit procedures to resolve the matter and consider any effects on other audit areas. (correct answer)
2. Choose whichever document is more consistent with management's explanation and document the selection as professional judgment.
3. Obtain a fresh written representation from management and retain the existing procedures if the amount is below materiality.
4. Classify the matter as a sampling difference and project it to the population without further investigation.

Answer: A — Determine necessary modifications or additions to audit procedures to resolve the matter and consider any effects on other audit areas.

Explanation. SA 500, paragraph 11, applies both when evidence from one source is inconsistent with another and when the auditor has doubts about reliability. The auditor must determine what modified or additional procedures are necessary to resolve the issue and consider its effect, if any, on other parts of the audit. A management representation does not authenticate a questionable delivery note or explain a supplier contradiction. Option b substitutes preference for evidence evaluation and risks ignoring contradictory information.

Where it goes wrong. Selecting the evidence that supports management rather than resolving the inconsistency.

Authority. SA 500

Question 22 · 2 marks · Chapter 4: Audit Evidence · hard

Scenario. In the prior year, an auditor tested an automated purchase-approval control and found it effective. The entity has since migrated to a new ERP but management says the approval logic is unchanged. When may the prior-year evidence be used in the current audit?

In the prior year, an auditor tested an automated purchase-approval control and found it effective. The entity has since migrated to a new ERP but management says the approval logic is unchanged. When may the prior-year evidence be used in the current audit?

1. Whenever the control description remains identical in the policy manual, regardless of changes in the system.
2. Only after procedures establish that earlier evidence remains relevant and that no changes undermine it. (correct answer)
3. Whenever the prior-year audit opinion was unmodified, because that opinion validates the control for subsequent periods.
4. Only when the auditor repeats the full prior-year test on the same transactions and obtains identical results.

Answer: B — Only after procedures establish that earlier evidence remains relevant and that no changes undermine it.

Explanation. SA 500, paragraph A1, and paragraph A11 permit evidence from previous audits to be used in certain circumstances, provided the auditor establishes its continuing relevance. A system migration is a potential change affecting the automated control and related IT environment; the auditor should examine change documentation and relevant controls before deciding how much current-year testing is needed. Option a relies on an unchanged policy description rather than testing whether the control actually continued to operate in the changed system.

Where it goes wrong. Assuming that a prior-year control conclusion automatically carries forward after a system change.

Authority. SA 500

Question 23 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. During physical verification of inventory, the auditor of a company covered by CARO 2020 notes aggregate discrepancies of 11% in one class of inventory. Which reporting threshold is relevant under CARO 2020?

During physical verification of inventory, the auditor of a company covered by CARO 2020 notes aggregate discrepancies of 11% in one class of inventory. Which reporting threshold is relevant under CARO 2020?

1. Any discrepancy above 5% in an individual inventory item must be reported under the inventory clause.
2. Only discrepancies exceeding 15% of the value of total inventory across all classes trigger reporting.
3. Discrepancies of 10% or more in the aggregate for each inventory class are specifically addressed. (correct answer)
4. Reporting is triggered only when the total discrepancy exceeds 10% of the company's net worth.

Answer: C — Discrepancies of 10% or more in the aggregate for each inventory class are specifically addressed.

Explanation. CARO 2020, paragraph 3(ii)(a), requires reporting on whether inventory was physically substantiated at reasonable intervals, whether coverage and procedures were appropriate, and whether discrepancies of 10% or more in the aggregate for each class were noticed and properly dealt with in the books. The 11% class-level difference crosses the stated threshold. Options b and d incorrectly substitute an overall inventory or net-worth threshold for the clause's class-wise aggregate measure.

Where it goes wrong. Applying the 10% threshold to total inventory or net worth instead of the aggregate for each class.

Authority. CARO 2020

Question 24 · 2 marks · Chapter 4: Audit Evidence · hard

Scenario. During the audit of a listed company, the auditor has reason to believe that an officer committed fraud involving ₹1.20 crore against the company. Which statement most accurately combines the statutory reporting threshold and the consequence of non-compliance?

During the audit of a listed company, the auditor has reason to believe that an officer committed fraud involving ₹1.20 crore against the company. Which statement most accurately combines the statutory reporting threshold and the consequence of non-compliance?

1. The auditor reports only to the Board because the Central Government threshold is ₹5 crore; non-compliance attracts a warning from ICAI.
2. The auditor reports every fraud, regardless of amount, directly to the Central Government; non-compliance attracts a penalty of ₹1 lakh.
3. The auditor reports to the Audit Committee because the fraud is below ₹2 crore; non-compliance attracts a penalty linked to audit remuneration.
4. At ₹1 crore or above, section 143(12) and Rule 13 require Central Government reporting; a listed-company auditor's failure attracts ₹5 lakh under section 143(15). (correct answer)

Answer: D — At ₹1 crore or above, section 143(12) and Rule 13 require Central Government reporting; a listed-company auditor's failure attracts ₹5 lakh under section 143(15).

Explanation. Section 143(12) of the Companies Act, 2013, read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, requires Central Government reporting where the suspected fraud by officers or employees involves or is expected to involve individually ₹1 crore or more; below the specified amount, reporting is to the Audit Committee or Board, as applicable. Section 143(15) prescribes a ₹5 lakh penalty for a listed-company auditor who fails to comply. Option b wrongly removes the threshold and understates the listed-company penalty.

Where it goes wrong. Confusing the ₹1 crore threshold with the lower-amount Board/Audit Committee route or using the non-listed-company penalty.

Authority. Section 143

Question 25 · 2 marks · Chapter 4: Audit Evidence · medium

Scenario. After appointment as statutory auditor, the engagement partner learns that the partner's spouse has acquired shares in the audit client with a face value of ₹1.25 lakh. What is the appropriate independence-related action?

After appointment as statutory auditor, the engagement partner learns that the partner's spouse has acquired shares in the audit client with a face value of ₹1.25 lakh. What is the appropriate independence-related action?

1. Ensure corrective action to bring the relative's holding within the prescribed ₹1 lakh face-value limit within 60 days of the acquisition. (correct answer)
2. Take no action because the statutory threshold is measured by market value and the shares are held by a relative, not the partner.
3. Resign immediately in every case because a relative is prohibited from holding even a nominal amount of the client's securities.
4. Disclose the shareholding only in the audit report because Rule 10 permits the relative to retain any holding after appointment.

Answer: A — Ensure corrective action to bring the relative's holding within the prescribed ₹1 lakh face-value limit within 60 days of the acquisition.

Explanation. Section 141(3)(d)(i) of the Companies Act, 2013, read with Rule 10(1) of the Companies (Audit and Auditors) Rules, 2014, permits an auditor's relative to hold securities of face value not exceeding ₹1 lakh. Where a relative acquires securities above the prescribed threshold, Rule 10 requires corrective action to maintain the limit within 60 days of acquisition. The issue also engages the objectivity and independence principles in ICAI's Code of Ethics, 13th edition, applicable from 1 April 2026. Option c ignores the prescribed relative-holding allowance and cure period.

Where it goes wrong. Applying the partner's absolute securities prohibition to a relative, or confusing face value with market value.

Authority. ICAI Code of Ethics; Section 141