Completion and Review - Test 2: answer key

Question 1 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. M/s V. Raman & LLP is the statutory auditor of Sunrise Ceramics Ltd for FY 2025-26. The company reported a net loss of ₹12 crore, negative operating cash flows for the third consecutive year, and defaulted on a term loan instalment of ₹4 crore due in February 2026. Current liabilities exceed current assets by ₹7 crore. A major customer accounting for 35% of revenue terminated its contract in January 2026. The company's bankers have not yet recalled the loan but have frozen further credit limits. Management prepared a cash flow forecast covering only ten months from the balance sheet date and included projected revenue from a new customer with whom no signed contract exists. The CFO provided a forecast that assumed a 25% reduction in operating costs, but no detailed cost-reduction plan was documented. The audit team also noted that the company had not paid employee salaries for two months. The engagement partner, CA Raman, requested management to extend the assessment to twelve months and to provide support for the new customer assumptions; management refused, stating the seasonal nature of the business justifies a shorter period and that the new customer is 'virtually confirmed'. Management also declined to provide a written representation on the feasibility of its cost-reduction plans. The financial statements include a note describing the loan default and cost-cutting measures, but do not state that a material uncertainty exists. CA Raman concludes that use of the going concern basis is appropriate only if adequate disclosure is made.

What is the auditor's appropriate response to management's refusal to extend the going concern assessment to twelve months?

1. Accept the ten-month period because the seasonal nature of the business justifies a shorter assessment period.
2. Issue an adverse opinion automatically because management has refused to extend the assessment.
3. Request management to extend the assessment to at least twelve months and consider the implications for the auditor's report if it refuses. (correct answer)
4. Perform no further work because management has already prepared a cash flow forecast covering ten months.

Answer: C — Request management to extend the assessment to at least twelve months and consider the implications for the auditor's report if it refuses.

Explanation. SA 570 requires the auditor to request management to extend its assessment to at least twelve months from the date of the financial statements if it covers less than twelve months. If management refuses, the auditor considers the implications for the auditor's report, including a qualified opinion or a disclaimer of opinion. Option a is a trap because seasonal business does not exempt management from the minimum period. Option b is wrong because adverse opinion is not automatic; it applies when the going concern basis is inappropriate. Option d ignores the auditor's responsibility.

Where it goes wrong. Students often accept a shorter assessment period for seasonal businesses, but SA 570 prescribes a minimum of twelve months.

Authority. SA 570

Question 2 · 2 marks · Chapter 7: Completion and Review · hard

In evaluating management's cash flow forecast, which of the following procedures is least appropriate?

1. Evaluate the reliability of the underlying data generated to prepare the forecast.
2. Determine whether there is adequate support for the assumptions underlying the forecast.
3. Consider whether additional facts or information have become available since management's assessment.
4. Accept management's representation that the new customer is virtually confirmed as sufficient support for the forecast. (correct answer)

Answer: D — Accept management's representation that the new customer is virtually confirmed as sufficient support for the forecast.

Explanation. SA 570 requires the auditor to evaluate the reliability of the data used to prepare the cash flow forecast and to determine whether there is adequate support for the assumptions underlying it. Oral or written representations that a customer is 'virtually confirmed' do not substitute for audit evidence of support. The auditor must also consider additional facts that have become available. Option d is least appropriate because it relies solely on management's assertion rather than corroborative evidence.

Where it goes wrong. Students may accept management's optimism as sufficient support; SA 570 demands evidence for assumptions.

Authority. SA 570

Question 3 · 2 marks · Chapter 7: Completion and Review · medium

If the auditor concludes that a material uncertainty exists but the financial statements do not state that a material uncertainty exists, what is the reporting implication?

1. Express a qualified or adverse opinion as appropriate and state the non-disclosure in the Basis for Opinion section. (correct answer)
2. Express an unmodified opinion with an Emphasis of Matter paragraph drawing attention to the loan default.
3. Disclaim an opinion automatically because the financial statements are incomplete.
4. Express an unmodified opinion because the note describes the loan default and cost-cutting measures.

Answer: A — Express a qualified or adverse opinion as appropriate and state the non-disclosure in the Basis for Opinion section.

Explanation. SA 570 provides that if adequate disclosure of a material uncertainty is not made in the financial statements, the auditor shall express a qualified or adverse opinion, as appropriate under SA 705, and state in the Basis for Qualified (Adverse) Opinion section that a material uncertainty exists and is not adequately disclosed. An Emphasis of Matter paragraph is used when disclosure is adequate. A disclaimer is not automatic; it applies when the auditor cannot obtain sufficient appropriate evidence.

Where it goes wrong. Students often select Emphasis of Matter or disclaimer; the correct response to inadequate disclosure is qualification or adverse opinion.

Authority. SA 570; SA 705

Question 4 · 2 marks · Chapter 7: Completion and Review · hard

Management refuses to provide a written representation on the feasibility of its cost-reduction plans. What is the auditor's most suitable response under SA 580?

1. Disclaim an opinion automatically because any refusal of written representation requires a disclaimer.
2. Discuss the matter with management, re-evaluate management integrity, and determine the effect on the reliability of representations and the audit opinion. (correct answer)
3. Ignore the refusal because written representations are not required for going concern matters.
4. Issue a qualified opinion solely due to the refusal.

Answer: B — Discuss the matter with management, re-evaluate management integrity, and determine the effect on the reliability of representations and the audit opinion.

Explanation. SA 580 requires the auditor to discuss a requested representation that is not provided, re-evaluate management's integrity, and evaluate the effect on the reliability of representations and audit evidence in general. The auditor then determines the possible effect on the opinion under SA 705. Automatic disclaimer applies only to refusal of the fundamental management-responsibility representations, not every requested representation. Ignoring the refusal is inappropriate.

Where it goes wrong. Students may think any refusal mandates disclaimer; SA 580 distinguishes fundamental and other representations.

Authority. SA 580; SA 705

Question 5 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. M/s Sharma & Associates audits Zenith Manufacturing Pvt Ltd for FY 2025-26. The company has a term loan of ₹25 crore, of which ₹8 crore is overdue. A key supplier has moved the company to cash-on-delivery terms, and a labour strike in February 2026 halted production for three weeks. The CFO resigned in March 2026 and has not been replaced. The company's major customer has also reduced orders by 50% for the next year. Management prepared a twelve-month cash flow forecast showing positive cash flows, but the auditor found that the forecast assumed a 40% increase in sales without any new orders, omitted the repayment of the overdue term loan, and used an incorrect opening cash balance. Management insists the forecast is feasible and refuses to revise it. The auditor also requested written representations regarding the feasibility of management's plans; management provided a representation but qualified it with 'to the most suitable of our knowledge and belief.' The audit partner, CA Mehta, is concerned that the forecast may not be reliable and that the going concern assumption may no longer be appropriate. The auditor concludes that the going concern basis is inappropriate because liquidation is imminent, and management has not prepared financial statements on a liquidation basis.

When the auditor finds errors in management's cash flow forecast, which of the following is the most appropriate audit procedure?

1. Evaluate the reliability of the underlying data and the adequacy of support for the assumptions, and consider additional facts. (correct answer)
2. Rely on management's written representation that the forecast is feasible.
3. Ignore the errors if the forecast still shows positive cash flows.
4. Request management to prepare a new forecast without any auditor involvement.

Answer: A — Evaluate the reliability of the underlying data and the adequacy of support for the assumptions, and consider additional facts.

Explanation. SA 570 requires the auditor, where a cash flow forecast is a significant factor, to evaluate the reliability of the underlying data and determine whether there is adequate support for the assumptions. The auditor must also consider whether additional facts have become available. Written representations do not substitute for sufficient appropriate audit evidence. Ignoring errors or delegating the forecast entirely to management would not meet the auditor's responsibilities.

Where it goes wrong. Students may over-rely on written representations or management's revised forecast; SA 570 requires auditor evaluation of data and assumptions.

Authority. SA 570

Question 6 · 2 marks · Chapter 7: Completion and Review · hard

The auditor concludes that the going concern basis is inappropriate. What opinion should be expressed?

1. An unmodified opinion with a Material Uncertainty Related to Going Concern section.
2. A qualified opinion because the financial statements are materially misstated.
3. An adverse opinion. (correct answer)
4. A disclaimer of opinion.

Answer: C — An adverse opinion.

Explanation. SA 570 states that if the financial statements have been prepared using the going concern basis but, in the auditor's judgment, management's use of that basis is inappropriate, the auditor shall express an adverse opinion. A material uncertainty section is used when the going concern basis is appropriate but a material uncertainty exists. A qualified opinion or disclaimer is not the prescribed response for an inappropriate going concern basis.

Where it goes wrong. Students may confuse an inappropriate going concern basis with a material uncertainty, leading to the wrong report modification.

Authority. SA 570

Question 7 · 2 marks · Chapter 7: Completion and Review · medium

Management provided a written representation qualified with 'to the most suitable of our knowledge and belief.' How should the auditor treat it?

1. Reject any qualified representation because written representations must be unconditional.
2. Automatically disclaim an opinion due to the qualification.
3. Require an unqualified representation under all circumstances.
4. Accept it if satisfied that it is made by those with appropriate responsibilities and knowledge of the matters. (correct answer)

Answer: D — Accept it if satisfied that it is made by those with appropriate responsibilities and knowledge of the matters.

Explanation. SA 580 recognises that management may include qualifying language such as 'to the most suitable of its knowledge and belief.' It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters. Rejection or automatic disclaimer is not required by the standard.

Where it goes wrong. Students may think qualified language invalidates a written representation; SA 580 permits it if the auditor is satisfied.

Authority. SA 580

Question 8 · 2 marks · Chapter 7: Completion and Review · hard

If management is unwilling to make or extend its assessment of going concern when requested by the auditor, what is the reporting implication under SA 570?

1. An adverse opinion is mandatory.
2. A qualified opinion or a disclaimer of opinion may be appropriate. (correct answer)
3. An unmodified opinion with an Emphasis of Matter paragraph.
4. No effect on the auditor's report.

Answer: B — A qualified opinion or a disclaimer of opinion may be appropriate.

Explanation. SA 570 states that if management is unwilling to make or extend its assessment when requested, the auditor considers the implications for the report. A qualified opinion or a disclaimer of opinion may be appropriate because it may not be possible to obtain sufficient appropriate audit evidence regarding management's use of the going concern basis. Adverse opinion applies when the going concern basis is inappropriate, not merely because management refuses to assess.

Where it goes wrong. Students often jump to adverse opinion; unwillingness to assess is an evidence limitation, not a conclusion that the basis is inappropriate.

Authority. SA 570

Question 9 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. Which of the following is an example of a financial event or condition that may cast significant doubt on an entity's ability to continue as a going concern?

Which of the following is an example of a financial event or condition that may cast significant doubt on an entity's ability to continue as a going concern?

1. Loss of key management without replacement.
2. Negative operating cash flows indicated by historical or prospective financial statements. (correct answer)
3. Emergence of a highly successful competitor.
4. Labour difficulties.

Answer: B — Negative operating cash flows indicated by historical or prospective financial statements.

Explanation. SA 570 categorises indicators into financial, operating, and other. Negative operating cash flows are a financial indicator. Loss of key management, emergence of a successful competitor, and labour difficulties are operating or other indicators. The distinction matters when identifying and evaluating going concern risk.

Where it goes wrong. Students may confuse operating indicators with financial indicators; negative cash flows are financial.

Authority. SA 570

Question 10 · 2 marks · Chapter 7: Completion and Review · hard

Scenario. Under SA 570, whose responsibility is it to assess the entity's ability to continue as a going concern?

Under SA 570, whose responsibility is it to assess the entity's ability to continue as a going concern?

1. Management's responsibility, even if the financial reporting framework does not explicitly require it. (correct answer)
2. The auditor's primary responsibility.
3. Those charged with governance only.
4. The internal auditor.

Answer: A — Management's responsibility, even if the financial reporting framework does not explicitly require it.

Explanation. SA 570 states that preparation of the financial statements requires management to assess the entity's ability to continue as a going concern, even if the financial reporting framework does not include an explicit requirement. The auditor's responsibility is to obtain sufficient appropriate audit evidence and conclude on the appropriateness of management's use of the going concern basis, not to make the assessment in the first instance.

Where it goes wrong. Students may think going concern assessment is the auditor's primary duty; management has the primary responsibility.

Authority. SA 570

Question 11 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. Which of the following is an objective of the auditor under SA 570?

Which of the following is an objective of the auditor under SA 570?

1. Guaranteeing that the entity will continue as a going concern.
2. Predicting future events that may cause the entity to cease operations.
3. Obtaining sufficient appropriate audit evidence and concluding on the appropriateness of management's use of the going concern basis. (correct answer)
4. Ensuring that the liquidation basis is used whenever any doubt exists.

Answer: C — Obtaining sufficient appropriate audit evidence and concluding on the appropriateness of management's use of the going concern basis.

Explanation. SA 570 objectives include obtaining sufficient appropriate audit evidence about, and concluding on, the appropriateness of management's use of the going concern basis, concluding whether a material uncertainty exists, and reporting in accordance with the SA. The auditor does not guarantee going concern, cannot predict future events, and does not automatically require the liquidation basis merely because doubt exists.

Where it goes wrong. Students may select the guarantee or prediction option; the auditor's role is evidence-based conclusion, not guarantee.

Authority. SA 570

Question 12 · 2 marks · Chapter 7: Completion and Review · hard

Scenario. When events or conditions are identified that may cast significant doubt on going concern, which of the following is NOT an additional audit procedure required by SA 570?

When events or conditions are identified that may cast significant doubt on going concern, which of the following is NOT an additional audit procedure required by SA 570?

1. Requesting management to make its assessment if it has not done so.
2. Evaluating management's plans for future actions.
3. Requesting written representations regarding plans and feasibility.
4. Performing a detailed audit of all transactions after the year-end. (correct answer)

Answer: D — Performing a detailed audit of all transactions after the year-end.

Explanation. SA 570 lists additional procedures including requesting management's assessment, evaluating management's plans, evaluating cash flow forecasts, considering additional facts, and requesting written representations. A detailed audit of all post-year-end transactions is not a specified requirement; the auditor performs procedures designed to obtain sufficient appropriate evidence, not a blanket detailed audit. Option d is therefore not required.

Where it goes wrong. Students may think more procedures are always required; SA 570 specifies targeted procedures, not an exhaustive audit of all transactions.

Authority. SA 570

Question 13 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. A material uncertainty exists under SA 570 when:

A material uncertainty exists under SA 570 when:

1. The magnitude of the potential impact and likelihood of occurrence is such that appropriate disclosure of the nature and implications of the uncertainty is necessary. (correct answer)
2. The entity has negative operating cash flows for the year.
3. The auditor is unable to obtain sufficient appropriate audit evidence.
4. Management refuses to provide a written representation.

Answer: A — The magnitude of the potential impact and likelihood of occurrence is such that appropriate disclosure of the nature and implications of the uncertainty is necessary.

Explanation. SA 570 defines a material uncertainty as existing when the magnitude of the potential impact and likelihood of occurrence is such that, in the auditor's judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary. Negative cash flows may be an indicator, but do not by themselves establish a material uncertainty. Inability to obtain evidence and refusal of representations are different matters.

Where it goes wrong. Students may equate any going concern indicator with a material uncertainty; the definition requires a judgment about magnitude and likelihood.

Authority. SA 570

Question 14 · 2 marks · Chapter 7: Completion and Review · hard

Scenario. If the going concern basis is appropriate, a material uncertainty exists, and adequate disclosure is made, the auditor's report should include:

If the going concern basis is appropriate, a material uncertainty exists, and adequate disclosure is made, the auditor's report should include:

1. An Emphasis of Matter paragraph.
2. A separate section headed 'Material Uncertainty Related to Going Concern'. (correct answer)
3. A qualified opinion.
4. An adverse opinion.

Answer: B — A separate section headed 'Material Uncertainty Related to Going Concern'.

Explanation. SA 570 requires a separate section under the heading 'Material Uncertainty Related to Going Concern' when the going concern basis is appropriate, a material uncertainty exists, and adequate disclosure is made. The section draws attention to the note and states that the opinion is not modified. An Emphasis of Matter paragraph is not the prescribed treatment for going concern material uncertainty.

Where it goes wrong. Students often select Emphasis of Matter; SA 570 has a specific separate section.

Authority. SA 570

Question 15 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. If the going concern basis is appropriate, a material uncertainty exists, but disclosure is inadequate, the auditor should:

If the going concern basis is appropriate, a material uncertainty exists, but disclosure is inadequate, the auditor should:

1. Express an unmodified opinion with an Other Matter paragraph.
2. Disclaim an opinion automatically.
3. Express a qualified or adverse opinion as appropriate and state the non-disclosure in the Basis for Opinion section. (correct answer)
4. Express an adverse opinion automatically.

Answer: C — Express a qualified or adverse opinion as appropriate and state the non-disclosure in the Basis for Opinion section.

Explanation. SA 570 requires a qualified or adverse opinion, as appropriate under SA 705, when adequate disclosure of a material uncertainty is not made. The Basis for Qualified (Adverse) Opinion section must state that a material uncertainty exists and that the financial statements do not adequately disclose it. Automatic disclaimer or adverse opinion is not the standard's requirement.

Where it goes wrong. Students may think inadequate disclosure always requires adverse opinion; the standard allows qualified or adverse as appropriate.

Authority. SA 570; SA 705

Question 16 · 2 marks · Chapter 7: Completion and Review · hard

Scenario. When the auditor concludes that management's use of the going concern basis is inappropriate, the auditor shall express:

When the auditor concludes that management's use of the going concern basis is inappropriate, the auditor shall express:

1. An unmodified opinion with a Material Uncertainty Related to Going Concern section.
2. A qualified opinion.
3. A disclaimer of opinion.
4. An adverse opinion. (correct answer)

Answer: D — An adverse opinion.

Explanation. SA 570 explicitly requires an adverse opinion if the financial statements have been prepared using the going concern basis but, in the auditor's judgment, management's use of that basis is inappropriate. A material uncertainty section is not used because the basis itself is inappropriate. Qualified opinion or disclaimer is not the prescribed response for this situation.

Where it goes wrong. Students may confuse inappropriate going concern basis with a material uncertainty and choose the wrong report modification.

Authority. SA 570

Question 17 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. Management's assessment of going concern covers less than twelve months from the date of the financial statements. The auditor shall:

Management's assessment of going concern covers less than twelve months from the date of the financial statements. The auditor shall:

1. Request management to extend its assessment to at least twelve months from that date. (correct answer)
2. Accept the shorter period if management provides a justification.
3. Immediately issue a qualified opinion.
4. Perform no further procedures because management has made an assessment.

Answer: A — Request management to extend its assessment to at least twelve months from that date.

Explanation. SA 570 requires the auditor to request management to extend its assessment period to at least twelve months from the date of the financial statements if management's assessment covers less than twelve months. Accepting a shorter period without extension is not permitted merely on management's justification. A qualified opinion is not automatic; the auditor first seeks extension and evaluates the response.

Where it goes wrong. Students may accept a shorter period for seasonal or other reasons; SA 570 prescribes a minimum of twelve months.

Authority. SA 570

Question 18 · 2 marks · Chapter 7: Completion and Review · hard

Scenario. Which of the following is an operating event or condition that may cast significant doubt on an entity's ability to continue as a going concern?

Which of the following is an operating event or condition that may cast significant doubt on an entity's ability to continue as a going concern?

1. Net liability or net current liability position.
2. Inability to pay creditors on due dates.
3. Loss of a major market, key customer, franchise, license, or principal supplier. (correct answer)
4. Adverse key financial ratios.

Answer: C — Loss of a major market, key customer, franchise, license, or principal supplier.

Explanation. SA 570 categorises going concern indicators. Loss of a major market, key customer, franchise, license, or principal supplier is an operating event or condition. Net liability position, inability to pay creditors, and adverse key financial ratios are financial indicators. Recognising the category helps the auditor identify and evaluate the nature of the risk.

Where it goes wrong. Students may misclassify inability to pay creditors as operating; it is a financial indicator.

Authority. SA 570

Question 19 · 2 marks · Chapter 7: Completion and Review · medium

Scenario. In evaluating management's assessment, if there is a history of profitable operations and ready access to financial resources, the auditor:

In evaluating management's assessment, if there is a history of profitable operations and ready access to financial resources, the auditor:

1. Must always perform detailed evaluation procedures.
2. Cannot rely on management's assessment.
3. Must obtain a written representation only.
4. May make the evaluation without detailed procedures if other audit procedures are sufficient. (correct answer)

Answer: D — May make the evaluation without detailed procedures if other audit procedures are sufficient.

Explanation. SA 570 states that where there is a history of profitable operations and ready access to financial resources, management may make its assessment without detailed analysis. In such cases, the auditor's evaluation may be made without performing detailed evaluation procedures if the auditor's other audit procedures are sufficient to conclude on the appropriateness of the going concern basis. Detailed procedures are not always mandatory.

Where it goes wrong. Students may think the auditor must always perform detailed evaluation procedures; SA 570 permits a more focused approach when risk is low.

Authority. SA 570

Question 20 · 2 marks · Chapter 7: Completion and Review · hard

Scenario. The auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going concern because:

The auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going concern because:

1. The auditor is not responsible for going concern.
2. Management always provides written representations.
3. Inherent limitations mean the auditor cannot predict future events or conditions. (correct answer)
4. Going concern is not relevant to the audit.

Answer: C — Inherent limitations mean the auditor cannot predict future events or conditions.

Explanation. SA 570 notes that the potential effects of inherent limitations are greater for future events or conditions that may cause an entity to cease as a going concern. The auditor cannot predict such future events or conditions. Accordingly, the absence of a reference to a material uncertainty in the auditor's report cannot be viewed as a guarantee of the entity's ability to continue as a going concern.

Where it goes wrong. Students may think the auditor guarantees going concern; inherent limitations prevent any such guarantee.

Authority. SA 570