CA Intermediate Auditing and Ethics Mock Test Group II

CA Intermediate Auditing and Ethics Mock Test Group II

Maximum Marks: 100
Time: 3 Hours

Instructions:

  1. Answer all questions.
  2. Show detailed workings and reasoning wherever applicable.
  3. Use relevant auditing standards (SA) and ethical principles in answers.

Section A: Theory & Conceptual Questions (20 Marks)

Answer any 4 questions. Each carries 5 marks.

  1. Explain the key objectives of an external audit and how they differ from internal audit objectives.
  2. Discuss the principles of professional ethics for auditors under the Companies Act and ICAI Code of Ethics.
  3. Explain the concept of audit risk and its components. Provide examples for each component.
  4. Differentiate between vouching and verification. Why are both important in auditing?
  5. Describe the duties and responsibilities of an auditor in relation to fraud detection.

Section B: Problem-Solving / Numerical Questions (50 Marks)

Answer any 5 questions. Each carries 10 marks.

  1. The trial balance of XYZ Ltd. shows the following: ParticularsDebit (₹)Credit (₹)Cash50,000Accounts Receivable1,50,000Inventory2,00,000Fixed Assets5,00,000Accounts Payable1,00,000Capital7,00,000Revenue3,00,000Expenses2,50,000 As an auditor, identify areas of potential risk and procedures you would perform to verify balances.
  2. ABC Ltd. has 3 divisions. The following data relates to internal control weaknesses identified:
    • Unauthorized cash withdrawals
    • Delayed bank reconciliations
    • Inventory misstatements
    Required: Suggest audit procedures and ethical considerations for each weakness.
  3. A company received a letter from a customer claiming a material loss due to faulty goods. The total claim is ₹ 12 lakh. The company has not made any provision in the accounts. Required: As an auditor, discuss:
    • The impact on the financial statements
    • Relevant audit procedures to verify the claim
    • Ethical issues involved in reporting
  4. The following is part of a depreciation schedule of a fixed asset: YearCost (₹)Depreciation Rate (%)Accumulated Depreciation (₹)110,00,000101,00,000210,00,000102,00,000310,00,000103,00,000 During verification, you find asset impairment of ₹ 50,000.
    Required: Show how you would record the adjustment and describe audit procedures for verifying depreciation and impairment.
  5. A client’s bank reconciliation statement shows a balance of ₹ 1,00,000. On verification, you find:
    • Outstanding cheques: ₹ 12,000
    • Deposits in transit: ₹ 8,000
    • Bank charges not recorded: ₹ 500
    Required: Prepare the adjusted bank balance and outline audit checks you would perform.

Section C: Case Study / Analytical Questions (30 Marks)

Answer any 2 questions. Each carries 15 marks.

  1. Case Study: Related Party Transactions ABC Ltd. entered into transactions with entities owned by its directors. These transactions are material but not disclosed in the financial statements. Required:
    a) Identify the audit risks associated with related party transactions.
    b) Suggest audit procedures to verify disclosure and valuation.
    c) Discuss the ethical considerations for the auditor in this scenario.
  2. Case Study: Fraud Detection During the audit of XYZ Ltd., the auditor notices:
    • Large round sum payments to vendors with no proper documentation
    • Manipulation in inventory counts
    • Management pressure to avoid reporting contingent liabilities
    Required:
    a) Identify the types of fraud risk.
    b) Explain audit procedures to detect and address each.
    c) Discuss the auditor’s ethical obligations in reporting.
  3. Case Study: Audit Report Qualification A company’s financial statements are materially misstated due to non-provision for pending litigation of ₹ 25 lakh. Management refuses to adjust. Required:
    a) Discuss the audit report options according to SA 705.
    b) Explain ethical dilemmas faced by the auditor.
    c) Draft a sample qualified audit report paragraph.

Solutions – Group II: Auditing and Ethics

Section A: Theory & Conceptual Questions (20 Marks)

  1. Objectives of External Audit vs Internal Audit
    • External Audit:
      • Express opinion on financial statements’ fairness and truthfulness.
      • Ensure compliance with accounting standards and laws.
      • Detect material misstatements.
    • Internal Audit:
      • Review internal controls.
      • Improve operational efficiency.
      • Evaluate risk management.
    • Key difference: External audit focuses on reporting to stakeholders; internal audit focuses on process improvement.
  2. Professional Ethics Principles for Auditors:
    • Integrity
    • Objectivity
    • Professional competence and due care
    • Confidentiality
    • Professional behavior
    • Avoid conflicts of interest; maintain independence.
  3. Audit Risk and Components:
    • Audit Risk (AR): Risk auditor may express unqualified opinion on materially misstated financial statements.
    • Components:
      • Inherent Risk (IR): Risk of error without considering controls. Example: complex valuation.
      • Control Risk (CR): Risk internal controls fail. Example: weak segregation of duties.
      • Detection Risk (DR): Risk audit procedures fail. Example: sample testing misses misstatement.
  4. Vouching vs Verification: AspectVouchingVerificationMeaningCheck authenticity of transactionsConfirm existence, ownership, valuePurposePrevent fraudPrevent misstatementExampleSales invoices, paymentsFixed assets, stock, investments
  5. Duties and Responsibilities of Auditor in Fraud Detection:
    • Examine unusual transactions.
    • Assess management bias and override of controls.
    • Report fraud under SA 240.
    • Maintain professional skepticism.

Section B: Problem-Solving / Numerical Questions (50 Marks)

Q1: Trial Balance – Risk Areas & Audit Procedures

  • Risk Areas:
    • Accounts Receivable: Overstatement, doubtful debts
    • Inventory: Valuation, existence
    • Fixed Assets: Existence, impairment
    • Revenue: Completeness, fictitious sales
    • Expenses: Cut-off errors, understatement
  • Audit Procedures:
    • Accounts Receivable: Confirm balances with debtors
    • Inventory: Physical verification
    • Fixed Assets: Verify ownership, depreciation calculation
    • Revenue: Vouch invoices to delivery documents
    • Expenses: Check supporting bills and cutoff

Q2: Internal Control Weaknesses

  • Unauthorized cash withdrawals:
    • Procedure: Review bank statements, authorize signatures
    • Ethical consideration: Report material fraud
  • Delayed bank reconciliations:
    • Procedure: Reconcile monthly, investigate delays
    • Ethics: Maintain integrity, ensure accurate reporting
  • Inventory misstatements:
    • Procedure: Surprise stock counts, review valuation
    • Ethics: Avoid management bias, report misstatements

Q3: Customer Claim – Impact & Audit Procedures

  • Financial Statements Impact:
    • Pending claim is contingent liability → disclosure under AS 29 (or Ind AS 37)
    • Not making provision may understate liabilities
  • Audit Procedures:
    • Review correspondence with customer
    • Evaluate management’s legal opinion
    • Assess probability and estimate potential loss
  • Ethical Issues:
    • Auditor must report material misstatement
    • Ensure objectivity, avoid client pressure

Q4: Depreciation & Impairment

  • Original accumulated depreciation: ₹ 3,00,000
  • Impairment: ₹ 50,000

Journal Entry:

Dr. Loss due to Impairment 50,000
Cr. Accumulated Depreciation 50,000

Audit Procedures:

  • Verify cost and depreciation calculations
  • Inspect asset for physical impairment
  • Check supporting documents for impairment loss

Q5: Bank Reconciliation & Audit Checks

  • Adjusted bank balance:
  • Bank balance as per books: 1,00,000
    Less: Outstanding cheques: 12,000
    Add: Deposits in transit: 8,000
    Less: Bank charges not recorded: 500
    Adjusted balance = 95,500
  • Audit checks:
    • Verify bank statements
    • Confirm outstanding cheques
    • Recompute reconciling items

Section C: Case Study / Analytical Questions (30 Marks)

Q1: Related Party Transactions

  • Audit Risks:
    • Non-disclosure of material transactions
    • Conflict of interest
    • Improper valuation
  • Audit Procedures:
    • Review board minutes, contracts
    • Confirm related party relationships
    • Test transactions for arm’s length terms
  • Ethical Considerations:
    • Maintain independence
    • Report material non-disclosures
    • Avoid conflict of interest

Q2: Fraud Detection

  • Types of Fraud:
    • Misappropriation of assets (vendor payments)
    • Inventory manipulation
    • Financial statement fraud (avoiding contingent liabilities)
  • Audit Procedures:
    • Review supporting documentation
    • Conduct surprise stock counts
    • Evaluate legal contingencies
  • Ethical Obligations:
    • Maintain professional skepticism
    • Report material fraud to those charged with governance
    • Avoid collusion or bias

Q3: Audit Report Qualification

  • Audit Report Options (SA 705):
    • Qualified opinion
    • Adverse opinion (if misstatement pervasive)
  • Ethical Dilemmas:
    • Management pressure to avoid qualification
    • Responsibility to users of financial statements
  • Sample Qualified Paragraph:

“In our opinion, except for the non-provision of ₹ 25 lakh pending litigation, the financial statements present fairly, in all material respects, the financial position of XYZ Ltd. as at 31st March 2026…”

Disclaimer:
This mock test is created for educational purposes only. Questions and solutions are original and inspired by typical exam patterns; they are not copied from any official exam papers.