Special Features of Audit of Different Types of Entities - Test 3: answer key

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

Scenario. M/s V. Raman & LLP, Chartered Accountants, has been appointed as the statutory auditor of Bharat Infra Ltd., a wholly-owned Government company engaged in highway construction, for the financial year 2025-26. The appointment was made by the Comptroller and Auditor General of India (C&AG) under Section 139(5) of the Companies Act, 2013. During the audit, the engagement partner, CA Raman, observed that the company had capitalized certain revenue expenses on a project that was stalled for over two years. There were also significant delays in project execution, cost overruns, and a lack of proper documentation for variation orders. When CA Raman raised these issues, the management argued that the project delays were due to land acquisition problems and that the capitalization was approved by the board. The auditor also found that the company had not maintained proper records for a government grant of ₹20 crore received for a specific bridge project. The C&AG issued directions to the auditor to report on specific aspects of project cost and compliance with grant conditions. CA Raman is unsure whether he should report the irregularities directly to the shareholders or to the C&AG. Additionally, the C&AG has indicated that it may conduct a supplementary audit and a test audit of the company's accounts. The management is pressuring CA Raman to finalize the audit report quickly for the upcoming annual general meeting.

In the audit of Bharat Infra Ltd., a government company, to whom should CA Raman report the irregularities observed during the audit?

1. To the Comptroller and Auditor General of India, as the auditor is appointed by the C&AG. (correct answer)
2. Directly to the shareholders in the annual general meeting.
3. To the Ministry of Corporate Affairs.
4. To the board of directors only.

Answer: A — To the Comptroller and Auditor General of India, as the auditor is appointed by the C&AG.

Explanation. Under Section 143(5) of the Companies Act, 2013, in the case of a government company, the auditor is appointed by the C&AG, and the audit report must be submitted to the C&AG. The C&AG may conduct a supplementary audit and comment upon or supplement the audit report. Option (a) is incorrect because the auditor's report goes to the C&AG, who then places it before Parliament. Option (c) is not the primary recipient; the C&AG is the authority. Option (d) is incomplete as the report must go to the C&AG.

Where it goes wrong. Students may think the auditor reports directly to shareholders or the board, ignoring the special C&AG oversight for government companies.

Authority. Section 143

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

The C&AG has issued directions to the auditor regarding specific aspects of project cost and grant compliance. What is the auditor's responsibility regarding these directions?

1. The auditor may ignore the directions if they are not material.
2. The auditor must comply with the directions and include a statement in the audit report on the action taken and its impact. (correct answer)
3. The auditor should refer the directions to the board for approval before acting.
4. The auditor should report the directions to the shareholders.

Answer: B — The auditor must comply with the directions and include a statement in the audit report on the action taken and its impact.

Explanation. Under Section 143(5) read with Section 143(6) of the Companies Act, 2013, the C&AG directs the manner in which the accounts of a government company are to undergo statutory audit. The auditor must comply and submit a copy of the audit report to the C&AG, including the directions issued, action taken, and impact on accounts. Option (a) is wrong as directions are mandatory. Option (c) is incorrect as the auditor must follow the C&AG's directions. Option (d) is not the correct channel.

Where it goes wrong. Students may treat C&AG directions as optional or subject to management approval.

Authority. Section 143

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

The C&AG decides to conduct a supplementary audit of Bharat Infra Ltd. What is the primary purpose of such a supplementary audit?

1. To replace the statutory auditor's report.
2. To conduct a performance audit of the company's projects.
3. To review the audit report submitted by the statutory auditor and to comment upon or supplement it. (correct answer)
4. To investigate fraud separately.

Answer: C — To review the audit report submitted by the statutory auditor and to comment upon or supplement it.

Explanation. Under Section 143(6) of the Companies Act, 2013, the C&AG has the right to conduct a supplementary audit and to comment upon or supplement the audit report submitted by the statutory auditor. This is not a replacement (option a). Performance audit (option b) is a different concept. Fraud investigation (option d) is not the primary purpose of supplementary audit.

Where it goes wrong. Students may confuse supplementary audit with test audit or performance audit.

Authority. Section 143

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

The management argues that the project delays were due to land acquisition problems. As an auditor, what is the most appropriate response?

1. Accept the explanation and drop the issue.
2. Ignore the delays as they are not financial matters.
3. Report the matter to the C&AG without further verification.
4. Verify the reasons for delays, assess whether costs are still capitalizable, and evaluate the need for impairment or disclosure. (correct answer)

Answer: D — Verify the reasons for delays, assess whether costs are still capitalizable, and evaluate the need for impairment or disclosure.

Explanation. Under SA 500 and SA 570, the auditor must obtain sufficient appropriate evidence regarding the reasons for delays and whether capitalization is still appropriate. If the project is stalled, impairment may be required. Option (a) is too permissive. Option (c) is premature without verification. Option (d) is incorrect as delays affect financial statements.

Where it goes wrong. Students may accept management explanations without corroborating evidence.

Authority. SA 500; SA 570

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

Scenario. M/s Sharma & Associates, Chartered Accountants, is conducting the statutory audit of Hope Foundation, an NGO registered under the Societies Registration Act, 1860. The Foundation receives foreign contributions, government grants, and domestic donations. It is registered under the Foreign Contribution (Regulation) Act, 2010, and has obtained income tax exemption under Sections 12A and 80G of the Income Tax Act, 1961. During the audit for the year ended 31st March 2026, CA Sharma found that a foreign contribution of USD 50,000 was received in a domestic bank account instead of the designated FCRA account. The amount was subsequently transferred to the FCRA account after two weeks. Additionally, unspent government grant of ₹15 lakh for a specific project was transferred to the general fund. The Foundation has not maintained separate books of account for each project, and donation receipts were issued without serial numbers. Some donations were received in cash exceeding the prescribed limit. The management has requested the auditor to ignore these issues as they are 'technical' and to issue the audit report in the prescribed FCRA format quickly. CA Sharma is also required to submit the audit report to the Ministry of Home Affairs within the prescribed time.

Hope Foundation received a foreign contribution in a domestic bank account instead of the designated FCRA account. What is the most significant compliance issue?

1. Violation of Section 17 of the FCRA, 2010, which requires foreign contributions to be received only in the designated FCRA account. (correct answer)
2. No issue, as the amount was later transferred to the FCRA account.
3. It is a minor procedural lapse and can be ignored.
4. The issue is only relevant for income tax purposes.

Answer: A — Violation of Section 17 of the FCRA, 2010, which requires foreign contributions to be received only in the designated FCRA account.

Explanation. Section 17 of the Foreign Contribution (Regulation) Act, 2010, mandates that all foreign contributions must be received in a designated bank account (FCRA account) and not in any other account. Receiving in a domestic account is a violation, even if later transferred. Option (a) is wrong because the initial receipt is non-compliant. Option (c) is incorrect as it is a serious violation. Option (d) is incomplete; FCRA compliance is separate.

Where it goes wrong. Students may think subsequent transfer rectifies the violation, but the law requires receipt in the designated account.

Authority. Section 17

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

Unspent government grant of ₹15 lakh for a specific project was transferred to the general fund. How should the auditor view this?

1. It is acceptable as the grant was received.
2. It is a violation of grant conditions and may require refund; the auditor should report it. (correct answer)
3. It is a tax matter only.
4. It should be treated as income.

Answer: B — It is a violation of grant conditions and may require refund; the auditor should report it.

Explanation. Government grants are often subject to specific conditions. Diversion of unspent grant to the general fund without approval is a violation and may require refund. Under SA 250, the auditor should consider non-compliance with grant conditions and report the matter. Option (a) is too permissive. Option (c) is incomplete. Option (d) is incorrect as specific grants are not unrestricted income.

Where it goes wrong. Students may treat grants as general income without considering conditions.

Authority. SA 250

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

Hope Foundation has not maintained separate books of account for each project. What is the auditor's primary concern?

1. It is acceptable for small NGOs.
2. It is only a disclosure issue.
3. It affects the ability to verify project-wise utilization of funds and compliance with donor conditions. (correct answer)
4. It does not affect the audit opinion.

Answer: C — It affects the ability to verify project-wise utilization of funds and compliance with donor conditions.

Explanation. Separate books for each project enable verification of utilization of funds and compliance with donor restrictions. Without them, the auditor cannot ascertain whether funds were used for intended purposes. This may lead to a qualification if sufficient appropriate evidence cannot be obtained. Option (a) is incorrect as even small NGOs should maintain project-wise records if funds are restricted. Option (c) understates the issue. Option (d) is wrong as it can affect the opinion.

Where it goes wrong. Students may think project-wise accounting is optional, but it is essential for restricted funds.

Authority. Section 143(5); LLP Act 2008

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

The auditor is required to submit the FCRA audit report to the Ministry of Home Affairs. Within what time frame must this be done after the close of the financial year?

1. 30 days
2. 120 days
3. 90 days
4. 60 days (correct answer)

Answer: D — 60 days

Explanation. Under the Foreign Contribution (Regulation) Act, 2010, and the rules thereunder, the auditor must submit the audit report in the prescribed format to the Ministry of Home Affairs within 60 days from the close of the financial year (i.e., by May 30). Option (a) is too short. Option (c) and (d) are beyond the prescribed limit.

Where it goes wrong. Students may confuse the FCRA deadline with income tax or other regulatory deadlines.

Authority. Section 143(5); LLP Act 2008

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

Scenario. Under the Constitution of India, what is the tenure of the Comptroller and Auditor General (C&AG)?

Under the Constitution of India, what is the tenure of the Comptroller and Auditor General (C&AG)?

1. 6 years or until age 65, whichever is earlier. (correct answer)
2. 5 years or until age 62.
3. Until age 60.
4. At the pleasure of the President.

Answer: A — 6 years or until age 65, whichever is earlier.

Explanation. Article 148 of the Constitution provides that the C&AG shall hold office for a term of 6 years or until attaining the age of 65 years, whichever is earlier. The C&AG can be removed only by impeachment, similar to a Supreme Court judge. Option (b) is incorrect. Option (c) is incorrect. Option (d) is wrong as removal is not at pleasure.

Where it goes wrong. Students may confuse the tenure with that of other constitutional authorities.

Authority. Section 143(5); LLP Act 2008

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

Scenario. Which of the following is NOT a duty of the C&AG under the C&AG's (Duties, Powers and Conditions of Service) Act, 1971?

Which of the following is NOT a duty of the C&AG under the C&AG's (Duties, Powers and Conditions of Service) Act, 1971?

1. Audit of all expenditure from the Consolidated Fund of India.
2. Framing the financial rules for government departments. (correct answer)
3. Audit of receipts and expenditure of bodies substantially financed by government grants.
4. Audit of government companies as per the Companies Act.

Answer: B — Framing the financial rules for government departments.

Explanation. The C&AG audits government expenditure and receipts, and audits bodies substantially financed by government (Section 14 of the C&AG Act). The C&AG does not frame financial rules; that is the function of the executive. Option (a) is a duty. Option (b) is a duty. Option (d) is a duty under Section 143 of the Companies Act. Thus, option (c) is not a duty.

Where it goes wrong. Students may think the C&AG prescribes rules, but it only audits compliance with rules framed by the executive.

Authority. Section 14; Section 143

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

Scenario. In the context of government audit, what does 'performance audit' primarily assess?

In the context of government audit, what does 'performance audit' primarily assess?

1. Only compliance with laws and rules.
2. Accuracy of financial statements.
3. Economy, efficiency, and effectiveness of government programs and schemes. (correct answer)
4. Propriety of individual transactions.

Answer: C — Economy, efficiency, and effectiveness of government programs and schemes.

Explanation. Performance audit assesses the three Es: economy (acquiring resources economically), efficiency (relationship between outputs and resources), and effectiveness (achievement of objectives). Option (a) is regularity audit. Option (c) is financial audit. Option (d) is propriety audit. Performance audit goes beyond compliance to evaluate value for money.

Where it goes wrong. Students may confuse performance audit with regularity or propriety audit.

Authority. Section 143(5); LLP Act 2008

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

Scenario. Who is responsible for the audit of municipal accounts in most states?

Who is responsible for the audit of municipal accounts in most states?

1. The C&AG directly.
2. The State Finance Commission.
3. The Ministry of Urban Development.
4. The Local Fund Audit Wing of the State Government or auditors appointed by the municipality as permitted. (correct answer)

Answer: D — The Local Fund Audit Wing of the State Government or auditors appointed by the municipality as permitted.

Explanation. The audit of municipal accounts is generally conducted by the Local Fund Audit Wing of the State Government. Some larger municipal corporations (e.g., Delhi, Mumbai) have powers to appoint their own auditors for regular external audit. The C&AG does not directly audit municipalities. The State Finance Commission recommends devolution of funds but does not audit. The Ministry of Urban Development is a policy body.

Where it goes wrong. Students may think the C&AG audits all local bodies, but municipalities are examined under statutory audit by state agencies or their own auditors.

Authority. Section 143(5); LLP Act 2008

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

Scenario. A charitable trust registered under the Societies Registration Act, 1860, receives a donation of ₹2 lakh in cash. What is the auditor's primary concern?

A charitable trust registered under the Societies Registration Act, 1860, receives a donation of ₹2 lakh in cash. What is the auditor's primary concern?

1. Cash donations above ₹2,000 are prohibited under the Income Tax Act, and the auditor should verify compliance. (correct answer)
2. Cash donations are prohibited for all trusts.
3. Cash donations are acceptable if receipt is issued.
4. Only foreign contributions are regulated.

Answer: A — Cash donations above ₹2,000 are prohibited under the Income Tax Act, and the auditor should verify compliance.

Explanation. Under Section 80G of the Income Tax Act, 1961, donations in cash exceeding ₹2,000 are not eligible for deduction. For trusts, cash donations above the prescribed limit may also attract scrutiny. The auditor should verify compliance with these limits and ensure proper accounting. Option (a) is too broad. Option (c) is incomplete. Option (d) is incorrect as domestic cash donations are also regulated.

Where it goes wrong. Students may think cash donations are always allowed or only foreign contributions are regulated.

Authority. Section 80G

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

Scenario. An NGO receives a foreign contribution. What is the primary legislation governing such contributions?

An NGO receives a foreign contribution. What is the primary legislation governing such contributions?

1. Companies Act, 2013
2. Foreign Contribution (Regulation) Act, 2010 (correct answer)
3. Societies Registration Act, 1860
4. Income Tax Act, 1961

Answer: B — Foreign Contribution (Regulation) Act, 2010

Explanation. The Foreign Contribution (Regulation) Act, 2010, specifically regulates the acceptance and utilization of foreign contributions by NGOs and other entities. The Companies Act, Societies Act, and Income Tax Act may also apply for other purposes, but FCRA is the primary legislation for foreign contributions.

Where it goes wrong. Students may choose the Income Tax Act due to exemptions, but FCRA is the specific governing law.

Authority. Section 143(5); LLP Act 2008

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

Scenario. Under the Companies Act, 2013, the C&AG has the power to conduct a test audit of a government company. What is the primary purpose of a test audit?

Under the Companies Act, 2013, the C&AG has the power to conduct a test audit of a government company. What is the primary purpose of a test audit?

1. To replace the statutory audit.
2. To conduct a performance audit.
3. To verify the reliability of the statutory auditor's work and to examine specific areas. (correct answer)
4. To audit the company's tax returns.

Answer: C — To verify the reliability of the statutory auditor's work and to examine specific areas.

Explanation. Under Section 143(7) of the Companies Act, 2013, the C&AG may cause a test audit of the accounts of a government company to verify the reliability of the statutory auditor's work and to examine specific areas. It does not replace the statutory audit (option a). It is not a performance audit (option c). It is not tax audit (option d).

Where it goes wrong. Students may confuse test audit with supplementary audit or performance audit.

Authority. Section 143

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

Scenario. In the audit of a charitable institution, the auditor finds that a trustee has taken an interest-free loan from the trust. What is the auditor's primary concern?

In the audit of a charitable institution, the auditor finds that a trustee has taken an interest-free loan from the trust. What is the auditor's primary concern?

1. It is acceptable as the loan is interest-free.
2. It is a tax matter.
3. It is only a disclosure issue.
4. The loan may be a breach of trust and should be reported if not authorized by the trust deed. (correct answer)

Answer: D — The loan may be a breach of trust and should be reported if not authorized by the trust deed.

Explanation. Trustees have a fiduciary duty. Any loan to a trustee may be a breach of trust unless expressly authorized by the trust deed or by the Charity Commissioner. The auditor should verify authorization and report if not permitted. Option (a) is incorrect as even interest-free loans can be a breach. Option (c) understates the issue. Option (d) is incomplete.

Where it goes wrong. Students may think interest-free loans to trustees are harmless, but they can be a breach of fiduciary duty.

Authority. Section 143(5); LLP Act 2008

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

Scenario. What is the primary objective of audit of local bodies (municipalities)?

What is the primary objective of audit of local bodies (municipalities)?

1. To report on fairness of financial statements, strengths/weaknesses of financial control, and adherence to legal requirements. (correct answer)
2. To increase revenue collection.
3. To detect fraud only.
4. To prepare the budget.

Answer: A — To report on fairness of financial statements, strengths/weaknesses of financial control, and adherence to legal requirements.

Explanation. As per the study material, the objectives of audit of local bodies include reporting on the fairness of financial statements, strengths and weaknesses of financial control, adherence to legal and administrative requirements, and whether value for money is received. Option (a) is a management objective. Option (c) is too narrow. Option (d) is not an audit objective.

Where it goes wrong. Students may think audit of local bodies is only about fraud detection or revenue, but it is broader.

Authority. Section 143(5); LLP Act 2008

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

Scenario. The C&AG's report on the accounts of the Union Government is submitted to which authority?

The C&AG's report on the accounts of the Union Government is submitted to which authority?

1. The Prime Minister
2. The President of India (correct answer)
3. The Parliament directly
4. The Ministry of Finance

Answer: B — The President of India

Explanation. Article 151 of the Constitution requires the C&AG to submit reports relating to the accounts of the Union to the President, who shall cause them to be laid before each House of Parliament. Option (a) is incorrect. Option (c) is not direct; it goes through the President. Option (d) is incorrect.

Where it goes wrong. Students may think the report goes directly to Parliament, but it is submitted to the President first.

Authority. Section 143(5); LLP Act 2008

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

Scenario. Which of the following is a key audit consideration for an NGO receiving foreign contributions?

Which of the following is a key audit consideration for an NGO receiving foreign contributions?

1. Only the amount received.
2. Only the income tax exemption.
3. Verification of FCRA registration, designated bank account, and utilization for the specified purpose. (correct answer)
4. Only the donor's identity.

Answer: C — Verification of FCRA registration, designated bank account, and utilization for the specified purpose.

Explanation. For NGOs receiving foreign contributions, the auditor must verify FCRA registration, receipt in the designated FCRA account, and utilization for the purpose for which the contribution was received. Option (a) is too narrow. Option (c) is only one aspect. Option (d) is also important but not sufficient.

Where it goes wrong. Students may focus only on the amount or tax exemption, ignoring FCRA compliance.

Authority. Section 143(5); LLP Act 2008

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

Scenario. In the context of government audit, 'propriety audit' primarily focuses on:

In the context of government audit, 'propriety audit' primarily focuses on:

1. Whether expenditure is authorized by law.
2. Whether performance targets are met.
3. Whether accounts are mathematically accurate.
4. Whether expenditure is wise, faithful, and economical, even if it complies with rules. (correct answer)

Answer: D — Whether expenditure is wise, faithful, and economical, even if it complies with rules.

Explanation. Propriety audit goes beyond regularity to examine whether expenditure is prudent, economical, and free from waste, even if it conforms to rules. Option (a) is regularity audit. Option (c) is arithmetical accuracy. Option (d) is performance audit. Propriety audit addresses financial propriety and public interest.

Where it goes wrong. Students may equate propriety audit with regularity audit, but propriety examines wisdom and economy.

Authority. Section 143(5); LLP Act 2008