Page 178 - CA Inter MCQ Book

CA RAVI TAORI CA INTER AUDIT MCQs
II. The company’s products are getting outdated in the market. Which of the following is an audit
risk?
(a) The company should devise strategies to sell products in the market.
(b) Inventories may be understated in such a scenario.
(c) Inventories may be overstated in such a scenario.
(d) The company should launch a 1+1 free offer for its customers.
III. A large customer has failed to pay to the company. Identify audit risk from below:
(a) Receivables may be misstated if irrecoverable debt is not written off.
(b) Receivables may be overstated if irrecoverable debt is not written off.
(c) Writing off irrecoverable debt would impact profits of company adversely.
(d) Failure to recover outstanding debt would impact cash flows of company adversely.
IV. Identify audit risk involved when inventory holding period has increased from 30 days to 90 days.
(a) There is a risk of overstatement of inventories.
(b) There is a risk relating to existence of inventories.
(c) There is a risk that slow movement of stocks would increase tax liability when GST rates are
increased.
(d) There is a risk relating to holding and storage cost of inventories.
V. Part of inventories are lying with third parties. Identify audit risk involved.
(a) There is a risk that third parties do not manufacture according to specifications of the
company.
(b) There is a risk that by getting job work done from third parties, company is increasing its
costs.
(c) There is a risk that sufficient and appropriate evidence would not be available in respect of
quantity and condition of inventories lying with third parties.
(d) There is a risk that sufficient and appropriate evidence would not be available for quality
control in respect of inventories lying with third parties.

81 (SM23)
CA Piyush is understanding internal controls as part of audit exercise of a company. It is a new client.
He has studied controls in place in various operational areas of the company. After studying and gaining
an understanding of such controls, he has decided to test few controls to actually see whether these are
operating as intended by the management.

Till now, he has studied controls over inventories and bank. Few of such controls are listed below: -

Nature of Control Control description
Control over inventories Inventories of the company lying at each
location should be insured.
Control over inventories There should be inventory counts on a regular
basis for each location of the company.
Control over Bank operations Bank reconciliations are to be performed at
regular intervals.

I. Which of the following most appropriately describes test of control regarding insurance of
inventories?
(a) Inspect insurance policies to verify that inventories at each location are insured for fire and
burglary. The sum insured and period of validity of policy are not relevant.
(b) Inspect insurance policies to verify that inventories at each location are comprehensively
insured. Ensure adequacy of sum insured by comparing it with value of inventories. Also
ensure policy period has not expired.
(c) Inspect insurance policies to verify that inventories at each location are comprehensively
insured. Ensure policy period has not expired.

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