Page 96 - CA Inter MCQ Book

CA RAVI TAORI CA INTER AUDIT MCQs
(iii)Guidance notes are recommendatory in nature.
(iv) Statements are mandatory in nature.
(a). All the above statements are correct.
(b). Statements 1 & 2 are correct
(c). Statements 1, 2 & 3 are correct
(d). Statements 1,2 & 4 are correct
Author’s Note: ICAI says “d” is the correct answer, as per this point (iii) will be an incorrect statement but
point (iii) is a correct statement. So correct answer is “a”.

10 (N20M)
"Roop & Co. are the auditors of Onda group of Hotels. This is the first time the firm is auditing an industry
in food and beverage and it is day one of the audit. The engagement partner along with his team wants
to make a thorough understanding of the entity and its environment in order to identify and assess the
risks of material misstatements, whether due to fraud or error. The following are some of the points
identified by them on Day 1.

1. The hotel has two banquet halls. The documentation available for verification of banquet hall revenue
is only the invoice raised by the hotel and some mail conversations on customer enquiry and finalization
of price. On audit trial, it is found that finance approval of the transaction is only after invoice is sent to
them for accounting at final settlement. Advance paid by the clients are not vetted through finance
team. The auditor suspects a weakness in this system.
2. The auditor also finds a control deficiency in the process of procurement of stores. A goods receipt
note is not prepared at the time of receipt of goods. On enquiry with management, the auditor finds
that there exists a system control wherein goods receipt note is automatically prepared and approved
in the system once the quantity and price of goods is entered against specific vendor. This entry is on
real-time basis and system does not allow back dated entries.
3. The auditor enquires of the management as to what is risk assessment process followed by the entity
for prevention and detection of risk of material misstatement due to fraud and error. The auditor finds
there is no documented risk assessment process.

With the help of the above facts, answer the following questions by choosing the correct option."
I. " What kind of a risk is portrayed in the booking of revenue with respect to Banquet halls?

(a). Inherent risk in the class of transaction
(b). Control risk in the class of transaction
(c). Detection risk in the audit procedures
(d). Audit risk in the opinion on the financial statements."
II. " Which among the following statement is incorrect in the context of Audit Risk?

(a). The more extensive the audit procedures performed, the lower is the detection risk
(b). Greater the risk of material misstatement the auditor believes exist, less is the detection risk that
can be accepted, and accordingly more persuasive evidence is required by the auditor.
(c). Audit risk also includes the risk that the auditor may express an opinion that the financial
statements are materially misstated when they are actually not.
(d). Risk of material misstatement at the assertion level is of two kinds – control risk and inherent
risk."
III. " In the case of procurement of stores, the auditor has tested more than one control for the same
assertion. In that given case, what should be his reliance on the control? #Unique
(a). Since compensating controls are identified, if tested and evaluated to be effective, the auditor
can rely on the control.
(b). Even though compensating controls are there, since one control is ineffective, the auditor should
not rely on control for this assertion and should perform extensive procedures.
(c). Documentation in electronic medium cannot be accepted, hence, he cannot rely only on system
control.
(d). Even though compensating controls are there, since one control is ineffective, the auditor should
not rely on control for this assertion as well as associated assertions."

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