Special Features of Audit of Different Types of Entities - Test 2: answer key

Question 1 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. M/s Sharma & Associates, Chartered Accountants, has been appointed as the statutory auditor of St. Xavier's College, a private educational institution affiliated to a state university, for the financial year 2025-26. The college receives government grants for specific purposes, student fees (tuition, hostel, and examination), donations, and income from endowments. During the audit planning, the engagement partner, CA Priya, identified several control weaknesses. Fee concessions were granted to 200 students during the year, but the concession register was not maintained; approvals were verbal. A government grant of ₹50 lakh received for the purchase of laboratory equipment was utilised to pay salaries of teaching staff due to a cash crunch. The hostel mess operates on a cash basis, and collections are deposited in the bank only once a week; the mess accounts are not reconciled with the college's general ledger. Salary payments to 15 staff members were made without attendance records for the months of January to March 2026. The college purchased library books worth ₹8 lakh during the year, but these were not entered in the library inventory register. Digital fee payments through UPI and card swipes are reconciled manually by an accountant without any supervisory review. The management has requested the auditor to complete the audit quickly as the grant renewal is due, and has hinted that raising too many issues may delay the process.

Regarding fee concessions granted without proper authorization and no concession register, what is the auditor's primary concern?

1. The concessions may be invalid, affecting revenue recognition and compliance with fee regulations. (correct answer)
2. The concessions are a management prerogative and the auditor should not question them.
3. The concessions only affect the income statement, not the balance sheet, so they are immaterial.
4. The auditor should report the matter to the university immediately.

Answer: A — The concessions may be invalid, affecting revenue recognition and compliance with fee regulations.

Explanation. Under SA 500, the auditor must obtain sufficient appropriate evidence regarding authorization of transactions. Fee concessions reduce revenue and require proper approval; absence of a concession register and verbal approvals increases risk of unauthorized concessions and misstatement of fee income. Option (b) is wrong because management prerogative does not override the need for evidence. Option (c) is incorrect as concessions affect revenue recognition and may be material. Option (d) is premature; reporting to the university is not the primary audit response.

Where it goes wrong. Students often assume fee concessions are internal management decisions and not subject to audit verification.

Authority. SA 500

Question 2 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

The government grant of ₹50 lakh for laboratory equipment was used for salary payments. How should the auditor respond?

1. The auditor should treat it as a violation and report it in the audit report.
2. The auditor should report the diversion as non-compliance with grant conditions and consider its effect on the financial statements. (correct answer)
3. The auditor should adjust the grant against salary expenses and reclassify as revenue.
4. The auditor should ignore it because the grant was received and spent.

Answer: B — The auditor should report the diversion as non-compliance with grant conditions and consider its effect on the financial statements.

Explanation. SA 250 requires the auditor to consider non-compliance with laws and regulations, including conditions of government grants. Diversion of a specific grant is non-compliance and may result in liability or refund. The auditor should report the matter and assess its impact on the financial statements. Option (a) is incomplete because it does not consider the financial statement effect. Option (c) is wrong as mere adjustment does not address non-compliance. Option (d) is incorrect because ignoring is not permissible.

Where it goes wrong. Students may think grant utilization is a management decision, not an audit issue.

Authority. SA 250

Question 3 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Hostel mess cash collections are deposited in the bank only once a week. Which financial statement assertion is most at risk?

1. Existence
2. Valuation
3. Completeness (correct answer)
4. Rights and obligations

Answer: C — Completeness

Explanation. SA 315 emphasizes completeness of revenue. Weekly deposits of hostel mess cash increase the risk of unrecorded collections (completeness). Existence is also a concern but completeness is more directly affected because cash could be misappropriated before deposit. Valuation and rights are less relevant. The auditor should verify daily collection records and reconciliations.

Where it goes wrong. Students often confuse existence (cash missing) with completeness (unrecorded cash), but completeness is the primary assertion at risk when collections are not deposited promptly.

Authority. SA 315

Question 4 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Salary payments were made to 15 staff members without attendance records for three months. What audit procedure is most appropriate?

1. Verify the existence of employees by physical verification and examine payroll records.
2. Rely on management representation that all employees are genuine.
3. Check the bank statements for salary transfers only.
4. Examine payroll records, attendance registers, and perform surprise verification of employees. (correct answer)

Answer: D — Examine payroll records, attendance registers, and perform surprise verification of employees.

Explanation. SA 500 requires the auditor to obtain evidence of existence and authorization of expenses. Salary payments without attendance records raise doubts about existence of employees (ghost employees) and authorization. The auditor should examine payroll records, attendance registers, and perform surprise verification. Option (a) is a procedure but option (d) is more comprehensive. Option (b) is insufficient as management representation alone is not sufficient appropriate evidence. Option (c) is partial; bank statements show payment but not existence.

Where it goes wrong. Students may rely on bank statements or management representations without corroborating existence.

Authority. SA 500

Question 5 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. M/s K. Mehta & Co., Chartered Accountants, is conducting the statutory audit of City Care Hospital, a 200-bed multi-specialty hospital, for the year ended 31st March 2026. The hospital has an inpatient department (IPD), outpatient department (OPD), a medical store, and a pharmacy. Revenue comes from patient billing (surgeries, room rent, consultations), insurance claims, and over-the-counter medicine sales. During the audit, CA Mehta observed that inpatient billing is done manually by ward clerks; some patients are discharged without a final bill being generated. The medical store maintains inventory of medicines and surgical items, but the physical stock verification is done annually by the store manager without any independent observer. Expired medicines are not written off regularly. Doctors are paid a share of revenue from patients they treat, but there are no formal contracts or patient referral records. Cash collections from OPD are deposited in the bank every alternate day; some receipt books are missing. Digital payments via UPI and credit cards are reconciled by a junior clerk, and the reconciliation statements are not reviewed by a senior. Insurance claims of ₹10 lakh were rejected by the insurance company, but no adjustment was made in the accounts. The management is pressuring the auditor to issue the report before the bank loan renewal.

Some patients are discharged without a final bill being generated. Which assertion is most affected?

1. Completeness (correct answer)
2. Occurrence
3. Accuracy
4. Cut-off

Answer: A — Completeness

Explanation. Inpatient billing not generated for discharged patients means revenue for services rendered is not recorded. This affects the completeness assertion (all transactions that should be recorded are recorded). Occurrence deals with recording of transactions that did not occur; here they occurred but are unrecorded. Accuracy and cut-off are secondary. The auditor should verify discharge summaries and billing records.

Where it goes wrong. Students may confuse completeness with occurrence; unrecorded revenue is a completeness issue.

Authority. Section 143(5); LLP Act 2008

Question 6 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

The medical store's physical stock verification is done annually by the store manager without any independent observer. What should the auditor do?

1. Accept the store manager's verification as sufficient.
2. Perform independent physical verification or observe the verification and check valuation. (correct answer)
3. Rely on the annual stock statements prepared by the store manager.
4. Check only the purchases and sales records.

Answer: B — Perform independent physical verification or observe the verification and check valuation.

Explanation. SA 501 requires the auditor to attend physical inventory counting when inventory is material. The store manager's verification alone is not independent. The auditor should perform independent verification or observe and check valuation. Option (a) is insufficient due to lack of independence. Option (c) relies on management's stock statements. Option (d) ignores existence and valuation.

Where it goes wrong. Students may accept management's physical verification as sufficient without independent corroboration.

Authority. SA 501

Question 7 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Doctors are paid a share of revenue from patients they treat, but there are no formal contracts or patient referral records. What is the primary audit concern?

1. The payments may be excessive and affect profitability.
2. The payments are a tax matter only.
3. The payments lack proper authorization and may be unrecorded liabilities. (correct answer)
4. The payments are not material.

Answer: C — The payments lack proper authorization and may be unrecorded liabilities.

Explanation. SA 500 and SA 550 require proper documentation and authorization for payments to doctors. Without contracts or referral records, the auditor cannot verify occurrence, accuracy, or authorization of revenue-share payments. This increases risk of unrecorded liabilities or improper payments. Option (a) focuses on profitability but misses the authorization issue. Option (b) is tax-focused. Option (d) ignores materiality.

Where it goes wrong. Students may focus on the amount rather than the lack of documentation.

Authority. SA 500; SA 550

Question 8 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Cash collections from OPD are deposited every alternate day, and some receipt books are missing. Which control is most important to address this risk?

1. Monthly bank reconciliation.
2. Annual audit of cash.
3. Insurance of cash.
4. Daily reconciliation of cash collections with receipts and bank deposits. (correct answer)

Answer: D — Daily reconciliation of cash collections with receipts and bank deposits.

Explanation. SA 315 and internal control principles emphasize daily reconciliation of cash collections with receipts and bank deposits as a key control. Depositing every alternate day and missing receipt books increase risk of misappropriation. Monthly bank reconciliation (option a) is too infrequent. Annual audit (option c) is not a control. Insurance (option d) does not prevent misstatement.

Where it goes wrong. Students may think monthly reconciliation is adequate, but daily controls are necessary for cash.

Authority. SA 315

Question 9 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. In the audit of a club, how should the auditor verify arrears of subscriptions and irrecoverable member dues?

In the audit of a club, how should the auditor verify arrears of subscriptions and irrecoverable member dues?

1. Verify arrears with member register, assess recoverability, and report irrecoverable amounts. (correct answer)
2. Ignore arrears as they are not part of financial statements.
3. Only check cash receipts.
4. Rely on management representation.

Answer: A — Verify arrears with member register, assess recoverability, and report irrecoverable amounts.

Explanation. As per audit of clubs, the auditor should verify arrears of subscriptions from the register of members and assess recoverability. Irrecoverable dues should be reported. Option (b) is wrong because arrears are part of receivables. Option (c) is incomplete. Option (d) is insufficient as management representation alone is not enough. The auditor should also check subsequent receipts.

Where it goes wrong. Students may ignore arrears as they are not cash receipts, but they affect the balance sheet.

Authority. Section 143(5); LLP Act 2008

Question 10 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. In a club, what internal control is most relevant to ensure proper pricing and recording of food and drinks supplied to members and guests?

In a club, what internal control is most relevant to ensure proper pricing and recording of food and drinks supplied to members and guests?

1. Physical inventory counts only.
2. Segregation of duties between ordering, serving, and billing. (correct answer)
3. Member credit limits.
4. Bank reconciliation.

Answer: B — Segregation of duties between ordering, serving, and billing.

Explanation. Proper segregation of duties between ordering, serving, and billing reduces the risk of unrecorded or misappropriated food and beverage sales. Physical inventory counts (option a) are important but do not ensure pricing accuracy. Credit limits (c) and bank reconciliation (d) are not directly related to pricing and recording of sales.

Where it goes wrong. Students may focus on inventory control rather than segregation of duties.

Authority. Section 143(5); LLP Act 2008

Question 11 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. While auditing a club's investments in shares and securities, what audit procedure is essential?

While auditing a club's investments in shares and securities, what audit procedure is essential?

1. Only confirm with broker.
2. Rely on management's valuation.
3. Inspect share scrips, compare with investment register, check valuation. (correct answer)
4. Check dividend receipts only.

Answer: C — Inspect share scrips, compare with investment register, check valuation.

Explanation. SA 501 requires physical inspection of investments and comparison with investment register. Valuation must be checked. Broker confirmation alone (option a) is not sufficient. Management valuation (b) lacks independence. Dividend receipts (d) are only one aspect. The auditor should also verify proper custody.

Where it goes wrong. Students may rely on broker confirmations without physical inspection.

Authority. SA 501

Question 12 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. In a hotel, what control most suitable ensures completeness of room revenue?

In a hotel, what control most suitable ensures completeness of room revenue?

1. Monthly physical inventory of rooms.
2. CCTV monitoring.
3. Guest feedback.
4. Daily reconciliation of occupancy reports with guest bills and key card logs. (correct answer)

Answer: D — Daily reconciliation of occupancy reports with guest bills and key card logs.

Explanation. For hotels, daily reconciliation of occupancy reports (from housekeeping) with guest bills and key card logs ensures completeness of room revenue. Monthly inventory (a) is irrelevant. CCTV (b) and guest feedback (c) do not ensure revenue completeness. The auditor should test these reconciliations.

Where it goes wrong. Students may think CCTV or feedback are sufficient, but they do not reconcile revenue.

Authority. Section 143(5); LLP Act 2008

Question 13 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. During the audit of a hotel's food and beverage operations, what is the auditor's primary procedure for cost control?

During the audit of a hotel's food and beverage operations, what is the auditor's primary procedure for cost control?

1. Compare gross profit ratios with previous periods and investigate deviations. (correct answer)
2. Only verify purchases.
3. Rely on chef's certification.
4. Check portion sizes.

Answer: A — Compare gross profit ratios with previous periods and investigate deviations.

Explanation. Analytical procedures comparing gross profit ratios with previous periods help identify unexplained deviations in food and beverage costs. Option (b) is only purchases. Option (c) relies on chef. Option (d) is too detailed. The auditor should also verify inventory movements and sales records.

Where it goes wrong. Students may focus on individual transactions rather than analytical review.

Authority. Section 143(5); LLP Act 2008

Question 14 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. In a hotel, what should the auditor verify regarding commissions paid to travel agents?

In a hotel, what should the auditor verify regarding commissions paid to travel agents?

1. Only the commission expense account.
2. Verify commission agreements, calculations, and subsequent recovery from agents. (correct answer)
3. Oral agreements.
4. Bank statements.

Answer: B — Verify commission agreements, calculations, and subsequent recovery from agents.

Explanation. The auditor should verify commission agreements, calculations, and subsequent recovery from travel agents. Option (a) only checks expense. Option (c) oral agreements are insufficient. Option (d) bank statements alone do not verify calculations. The auditor should also check credit terms and outstanding balances.

Where it goes wrong. Students may only verify the commission expense without checking agreements.

Authority. Section 143(5); LLP Act 2008

Question 15 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. What is the most important control over ticket sales in a cinema hall?

What is the most important control over ticket sales in a cinema hall?

1. Physical count of tickets at end of day.
2. CCTV in ticket counter.
3. Serially numbered tickets issued through a central system, reconciled with cash collections. (correct answer)
4. Employee background checks.

Answer: C — Serially numbered tickets issued through a central system, reconciled with cash collections.

Explanation. Serially numbered tickets issued through a central system and reconciled with cash collections is the most important control for cinema ticket sales. Physical count (a) is after the fact. CCTV (b) and background checks (d) do not ensure completeness of revenue. The auditor should test reconciliation of tickets issued with cash collected.

Where it goes wrong. Students may think physical counts or CCTV are sufficient, but reconciliation is key.

Authority. Section 143(5); LLP Act 2008

Question 16 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. In the audit of a cinema hall, what should the auditor verify regarding advertisement slides revenue?

In the audit of a cinema hall, what should the auditor verify regarding advertisement slides revenue?

1. Only cash receipts.
2. Number of slides shown.
3. Customer complaints.
4. Verify register of slides exhibited, agreements with advertisers, and revenue recognition. (correct answer)

Answer: D — Verify register of slides exhibited, agreements with advertisers, and revenue recognition.

Explanation. The auditor should verify the register of slides exhibited, agreements with advertisers, and revenue recognition. Cash receipts (a) are not enough. Number of slides (b) is only part. Customer complaints (c) are irrelevant. The auditor should also check whether revenue is recognized in the correct period.

Where it goes wrong. Students may ignore agreements and only check cash receipts.

Authority. Section 143(5); LLP Act 2008

Question 17 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. In an educational institution, library books purchased were not entered in the inventory register. What audit procedure is most appropriate?

In an educational institution, library books purchased were not entered in the inventory register. What audit procedure is most appropriate?

1. Physical verification of library books on test basis and reconciliation with purchase records. (correct answer)
2. Rely on librarian's statement.
3. Only verify purchase invoices.
4. Check classification in financial statements.

Answer: A — Physical verification of library books on test basis and reconciliation with purchase records.

Explanation. SA 501 requires physical verification of library books on a test basis and reconciliation with purchase records to ensure existence and completeness. Relying on librarian's statement (b) is insufficient. Purchase invoices (c) only show acquisition, not existence. Classification (d) is not the main issue. The auditor should also check valuation.

Where it goes wrong. Students may think purchase invoices are sufficient evidence of existence.

Authority. SA 501

Question 18 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. In a hospital, digital payments are reconciled by a junior clerk without supervisory review. What risk does this pose?

In a hospital, digital payments are reconciled by a junior clerk without supervisory review. What risk does this pose?

1. No risk as digital payments are automated.
2. Fraud and error in recording digital receipts due to lack of segregation and review. (correct answer)
3. Only timing differences.
4. Risk of overstatement of revenue.

Answer: B — Fraud and error in recording digital receipts due to lack of segregation and review.

Explanation. Lack of segregation of duties and supervisory review over digital payment reconciliation increases risk of fraud or error. Option (a) is wrong as digital payments are not immune to fraud. Option (c) only timing differences is too narrow. Option (d) overstatement may not be the primary risk; misappropriation is. The auditor should test reconciliation controls.

Where it goes wrong. Students may think digital payments are automated and safe.

Authority. Section 143(5); LLP Act 2008

Question 19 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · medium

Scenario. An educational institution received a government grant for a specific purpose but did not spend it fully by year end. What should the auditor verify?

An educational institution received a government grant for a specific purpose but did not spend it fully by year end. What should the auditor verify?

1. Ignore if not material.
2. Treat as income.
3. Verify unspent grant is shown as liability or refundable, and compliance with conditions. (correct answer)
4. Report to government.

Answer: C — Verify unspent grant is shown as liability or refundable, and compliance with conditions.

Explanation. SA 250 and grant accounting principles require that unspent specific grants be shown as liabilities or refundable, and conditions complied with. Ignoring (a) or treating as income (b) is incorrect. Reporting to government (d) is not the auditor's primary duty. The auditor should verify the terms of the grant.

Where it goes wrong. Students may treat grants as income regardless of conditions.

Authority. SA 250

Question 20 · 2 marks · Chapter 9: Special Features of Audit of Different Types of Entities · hard

Scenario. Which of the following is a special audit consideration for a hotel?

Which of the following is a special audit consideration for a hotel?

1. Valuation of inventory of raw materials.
2. Depreciation on building.
3. Employee payroll.
4. Verification of occupancy-in-progress at year end. (correct answer)

Answer: D — Verification of occupancy-in-progress at year end.

Explanation. As per the study material, a special audit consideration for hotels is verification of occupancy-in-progress at the balance sheet date. Options a, b, c are generic audit procedures applicable to many entities. The auditor should also consider the transient nature of hotel records and reliance on gross margins.

Where it goes wrong. Students may choose generic audit procedures instead of hotel-specific ones.

Authority. Section 143(5); LLP Act 2008