Hello everyone!! Welcome back to the TAX DESTINATION blog.Thanks for your continuous support & tremendous response to our blogs. Check out the Previous series if you haven’t read the same where we have given questions that can be asked in HR Round.
In this series, we would like to give questions that can be asked in Technical Round for CA Freshers & Experienced Candidates.
CA Job Profile according to CA Final subjects into different profiles:
FR: Controllership, IND AS, Finance and Accounts
SFM: Valuation, Private Equity, IB Analyst etc.
Audit: Statutory, Internal Audit
Law: Companies Act and Other Act Compliances
SCMPE: Cost Optimisation, Budgeting, Forecasting, FP&A
Elective: Correlate with your expertise
DT: Direct tax and IT, Consultancy
IDT: GST, Custom, litigation.
In this blog, we would like to highlight the questions & Replies to the questions that can be asked in Audit & Accounts Role.
Questions that can be asked in Audit Profile
– Audit Procedures
01. What is the first step you take when you start an Audit of a new client?
The first step in the audit process is planning.
Planning an audit involves: (a) Establishing the overall audit strategy (b)
Developing an audit plan.
“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business”.
Plans should be made to cover, among other things:
❖ acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
❖ establishing the expected degree of reliance to be placed on internal control;
❖ determining and programming the nature, timing, and extent of the audit procedures to be performed; and
❖ coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of the audit.
02. What are Audit Assertions/Financial Statements Assertions/Balance sheet and Profit and Loss statement Assertions?
DEFINITION OF ASSERTION: It refers to the representations by management,
explicit or otherwise, that are embodied in the financial statements, as used by
the auditor to consider the different types of potential misstatements that may
occur.
In preparing financial statements, Company’s management makes implicit or
explicit claims (i.e. assertions) regarding (Memory Technique-CEACVOP)
A. Completeness;
B. Existence/ occurrence;
C. Accuracy
D. Cut-off;
E. Valuation/ measurement;
F. Rights and Obligations; and
G. Presentation and disclosure
of Assets, Liabilities, Equity, Income, Expenses and Disclosures in accordance
with the applicable accounting standards.
03. What is RAP (Risk Assessment Procedure)?
Risk assessment procedures: Risk assessment procedures refer to the audit
procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels.
04. What is included in Risk Assessment Procedures?
The risk assessment procedures shall include the following:
(a) Inquiries of management and of others within the entity who in the auditor’s judgment may have information that is likely to assist in identifying risks of material misstatement due to fraud or error.
(b) Analytical procedures.
(c) Observation and inspection
05. What is the Risk of Material Misstatements? What would you do when you identify any material misstatement?
Risk of material misstatement: It may be defined as the risk that the financial statements are materially misstated prior to the audit. This consists of two components described as follows at the assertion level:
● Inherent risk—The susceptibility of an assertion to a misstatement that could be material before consideration of any related controls
● Control risk—The risk that a misstatement that could occur in an assertion that could be material will not be prevented or detected and corrected on a timely basis by the entity’s internal control.
06. What is Audit Risk? Types of Audit Risk?
Audit risk means the risk that the auditor might give an inappropriate audit opinion when the financial statements are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk.
Audit Risk = Inherent Risk x Control Risk x Detection Risk
Risk of material misstatement may be defined as the risk that the financial statements are materially misstated prior to the audit.
This consists of two components- Inherent risk and control risk.
Inherent risk is the susceptibility of an assertion to a misstatement before consideration of any related controls.
Control risk is the risk that a misstatement that could occur in an assertion that will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Detection risk refers to the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
07. What are substantive Audit Procedures?
A substantive procedure may be defined as an audit procedure designed to detect material misstatements at the assertion level.
Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), (ii) Substantive analytical procedures.
The analytical procedure is the process of analyzing plausible relationships among data including both financial and non-financial data. Likewise, substantive analytical procedures are the audit procedures that auditors perform to obtain evidence about the reasonableness of amounts shown in the financial statements by using such plausible relationships among data
08. Difference Between Vouching & Verification
09. What do you understand by Materiality? How and on what basis does an auditor assesses materiality? Components of Materiality? Why Performance Materiality is set? What do you understand by clearly Trivial Threshold? (Go through entire SA-320)
Materiality in audit means information included in the financial statements which can influence the economic decision of users of financial statements.
Economic decisions mean financial decisions.
Performance materiality – The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.
Materiality may need to be revised as a result of a change in circumstances that occurred during the audit. For example: – A decision to dispose of a major part of the entity’s business, new information, or a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures.
Factors/ aspects that determine Materiality – there are many factors that influence materiality level.
The important ones are –
a) Requirement of Law – In many countries law defines materiality level. In India, Revised Schedule VI sets materiality level at 1% of the revenue from operations or 100,000 Rs whichever is higher. This is the materiality level we use in accounting for disclosing material transactions separately. We can consider this when we want to set materiality levels in the audit.
b) Size & nature of the business – Larger the size of the company higher the materiality level and vice-versa.
c) In many cases we come across misstatements that are insignificant in value – but they are quality misstatements. For example, Accounting Standards are not followed or Revised Schedule VI is not followed etc. → Such misstatement, though small in size, becomes material and needs to be considered by the auditor. This holds particularly true in the case of India because Compliance with Accounting Standards and Revised Schedule VI is compulsory and if it is not complied with, the auditor has to report the same.
d) Complexity of transactions – increases the materiality level
e) In the case of statutory dues even one rupee will be material (irrespective of the size of the company) – For example law requires certain dues to be collected (like indirect taxes) and deposited in banks on behalf of the Government. In such cases even small amounts become material. Make sure that the dues are properly collected and deposited by the auditor.
f) There are some misstatements that are not material individually but are material when aggregated. Therefore, the auditor should consider materiality both individually and in aggregate (total). For Example, a misstatement of say Rs 100,000 may not be material for a big company individually. But if the same misstatement is repeated say 50 times the amount comes to Rs 5,000,000 which may be material. Therefore, the auditor should consider materiality both individually and in aggregate.
g) Inherent and controls risk – Inherent risk refers to the risk that there may be some misstatements in financial statements. Whereas control risks refer to the risk of misstatements even when the internal controls are implemented by the management. It means that due to these risks there is a possibility of misstatements. The auditor should consider such risks when he wants to set materiality levels in an audit.
Benchmarks in Determining Materiality for the Financial Statements as a Whole
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark include the following:
The elements of the financial statements. Example:- Assets, liabilities, equity, revenue, expenses;
Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused. Example:- For the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets;
The nature of the entity, where the entity is in its life cycle, and the industry and economic environment in which it operates;
The entity’s ownership structure and the way it is financed. Example: – If an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings;
The relative volatility of the benchmark.
10. What is sampling? How do you choose samples? Sampling Methods?
‘Audit sampling’ refers to the application of audit procedures to less than 100% of items within a population relevant under the audit, such that all sampling units (i.e. all the items in the population) have an equal chance of selection. This is to ensure that the items selected represent the entire population which enables the auditor to draw conclusions and express his opinion based on a predetermined objective
11. What do you mean by Nature, Timing and Extent of Audit?
Nature covers what audit procedures will be performed for the company. Changing the nature of an auditor’s substantive testing requires the auditors to take an effective approach to testing.
The timing indicates when the audit procedures will be performed. Changing the timing of the auditor’s substantive testing ensures reliable evidence such as interim, or year-end.
Extent is how the audit will be performed on a test basis of large or small sample sizes to gather evidence
Questions Relating to Internal Audit & Internal Control
01. What is Internal Audit?
Internal Audit means “An independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity’s strategic risk management and internal control system
02. What are controls? How are they different from Procedures? Procedures are the systems that are set in place to meet the established standards of the organization.
1. Processes are the actions performed by accounting personnel that are not controls. Controls, on the other hand, are the actions that ensure safety and accuracy.
2. A process is what is being done while Controls ensure accuracy and lessen fraud.
03. What are the objectives of the entity behind the imposition of controls? Benefits of Understanding of Internal Control? Limitations of Internal Control?
Internal Controls Are the policies and procedures that a company implements to ensure the efficiency of business operations, reliability of financial reporting, compliance with laws & regulations, safeguarding of assets and prevention of fraud.
Objectives of Internal Control
A. Transactions are executed in accordance with management’s general or specific authorization;
B. all transactions are promptly recorded in the correct amount in the appropriate accounts and in the accounting period in which executed so as to permit preparation of financial information within a framework of recognized accounting policies and practices and relevant statutory requirements, if any, and to maintain accountability for assets;
C. assets are safeguarded from unauthorised access, use or disposition; and
D. The recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with regard to any differences.
Benefits of Understanding of Internal Control
An understanding of internal control assists the auditor in:
i. identifying types of potential misstatements;
ii. identifying factors that affect the risks of material misstatement, and
iii. designing the nature, timing, and extent of further audit procedures.
Limitations of Internal Control:
1. Internal control can provide only reasonable assurance: Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving the entity’s financial reporting objectives. The likelihood of their achievement is affected by inherent limitations of internal control.
2. Human judgment in decision-making: Realities that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human error. Example There may be an error in the design of, or in the change to, a control.
3. Lack of understanding the purpose: Equally, the operation of control may not be effective, such as where information produced for the purposes of internal control (for example, an exception report) is not effectively used because the individual responsible for reviewing the information does not understand its purpose or fails to take appropriate action.
4. Collusion among People: Additionally, controls can be circumvented by the collusion of two or more people or inappropriate management override of internal control. For example, management may enter into side agreements with customers that alter the terms and conditions of the entity’s standard sales contracts, which may result in improper revenue recognition. Also, edit checks in a software program that are designed to identify and report transactions that exceed specified credit limits may be overridden or disabled.
5. Judgements by Management: Further, in designing and implementing controls, management may make judgments on the nature and extent of the controls it chooses to implement, and the nature and extent of the risks it chooses to assume.
6. Limitations in the case of Small Entities: Smaller entities often have fewer employees due to which segregation of duties is not practicable. However, in a small owner-managed entity, the owner-manager may be able to exercise more effective oversight than in a larger entity. This oversight may compensate for the generally more limited opportunities for segregation of duties. On the other hand, the owner-manager may be more able to override controls because the system of internal control is less structured. This is taken into account by the auditor when identifying the risks of material misstatement due to fraud.
04. What are the deficiencies of control (Specifically asking about Design Deficiency and Operating Effectiveness)?
A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
A deficiency in design exists when
(a) a control necessary to meet the control objective is missing or
(b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when a properly designed control does not operate as designed, or when the person performing the control does not possess the necessary authority or competence to perform the control effectively.
05. What are preventive, Detective Control? Give an example.
Preventive controls include security mechanisms, tools, or practices that can mitigate undesired actions. An example of preventive control firewalls, anti-virus software etc.
Detective controls are designed to find and verify whether the preventive or corrective controls are working. Detective controls are designed to detect errors. Examples include audit trails, logs and CCTVs
06. What is IFCR (Internal Financial Control Over Reporting)?
Section 143(3)(i) of the Act requires the auditors’ report to state whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls. The auditor’s objective in an audit of internal financial controls over financial reporting is, “to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting.” It is carried out along with an audit of the financial statements.
Internal financial controls are “the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.”
Questions Relating to Audit Report
01. Explain in brief what is Audit opinion and the types of Audit Opinion?
An auditor’s opinion is a certification that accompanies financial statements. It is based on an audit of the procedures and records used to produce the statements and delivers an opinion as to whether material misstatements exist in the financial statements.
The auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
A. Qualified Opinion: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
B. Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
C. Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements
02. Types of Audit Report? Difference between General Purpose Audit Report and Special Purpose Audit Report?
Types of Audit Reports:
1. Unqualified Audit Report: The auditor issues an unqualified audit report to financial statements when auditors found no material misstatements after their testing. Therefore, this report contains an unqualified opinion from an independent auditor.
2. Qualified Audit Report:
The qualified Audit report is the reported issue by auditors to the financial statements that found material misstatements. But those material misstatements are not pervasive.
3. Adverse Audit Report:
An adverse Audit Report is a type of audit report issued to the financial statements when auditors found material misstatements in the financial statements. The misstatements found here are different from the material misstatements found in qualified audit reports. They are materially misstated for themselves and affect others’ accounts and items in the whole financial statements. These are called pervasive.
4. Disclaimer Audit Report: The disclaimer audit report is the report that issues the financial statements where there is a matter to auditor’s independence and those matters cause auditors not be able to obtain sufficient audit evidence to support their opinion.
Special Purpose Report: A special-purpose financial report is intended for presentation to a limited group of users or for a specific purpose. For example, special-purpose financial statements are prepared for tax reporting, bank reporting, and industry-specific reporting. Most SME’s (Small to Medium Enterprises) and not-for-profit entities will produce a simple profit and loss and balance sheet, in any format that the business requires or desires them to be in by following specific guidelines or reporting requirements established by the directors, owners or members.
General Purpose Report: General purpose financial reports provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. General-purpose financial statements are issued throughout the year and includes a balance sheet, income statement, statement of owner’s equity/retained earnings, and statement of cash flows.
03. As an Auditor how will you report fraud?
Reporting of fraud by an Auditor:
Reporting to CG: As per Section 143 of the Companies Act, 2013 if the auditor has reason to believe that the offence of fraud involves an amount Rs 1 Cr or more by a Companies employee, it is to be reported to the CG.
Reporting to Audit Committee: In case of fraud for less than Rs 1 Crore, the auditor shall report to the audit committee.
04. What is EOM para? Does mention of this lead to a qualification?
As per SA 706, EOM is a paragraph included in the auditors report that relates to the matters appropriately presented or disclosed in the financial statement and in auditors’ judgement is of importance for users of financial statements.
Examples where it is necessary to include EOM paragraph- An uncertainty relating to the future outcome of exceptional litigation or regulatory action, a significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.
An emphasis of matter paragraph does not modify the audit opinion. Such a paragraph is also not a substitute for expressing a qualified or adverse opinion, or for disclaiming an opinion, where they are appropriate. It is instead used to draw the reader’s attention to a specific matter relating to the audit.
05. What is CARO? No. of clauses in CARO 20? New Additional clauses in CARO 20? Fixed Asset clause in CARO 20?
To enhance the scope of the audit, the MCA in consultation with the National Financial Reporting Authority (NFRA) released the CARO 2020. It lists out the subject matters on which the applicable companies are mandatorily required to report. CARO 2020 is applicable for all statutory audits commencing on or after 1 April 2021 corresponding to the financial year 2020-21.
CARO 2020 shall apply to every company including a foreign company, except:
1. a banking company defined under Section 5(c) of Banking Regulation Act, 1949
2. an insurance company defined under Section 2 of the Insurance Act, 1938
3. company licensed to operate under section 8 of the Companies Act
4. One Person Company defined under section 2(62) of the Companies Act, 2013 and a small company as defined under section 2(85) of the Companies Act, 2013
5. a private limited company, not being a subsidiary or holding company of a public company, having
paid-up capital and reserves and surplus <= Rs 1 crore (on balance sheet date) &
total borrowings from any bank or FI <= Rs 1 crore (at any point during the FY) &
total revenue as disclosed in Schedule III to the Companies Act, 2013 (including revenue from discontinuing operations) <= Rs 10 crore (as per financial statements
CARO 2020 comprises 21 reporting clauses in Paragraph 3.
Details of tangible and intangible assets
● Whether the records maintained by the company display the complete particulars on the details, quantity and situation of tangible and intangible assets.
● Whether the management has carried out physical verification of the assets at different intervals reasonable with the size of the company.
● Whether the material discrepancies, if any, noticed on physical verification have been accounted for in the books of accounts.
● Whether the title deeds pertaining to the immovable properties (except properties which are leased by the company with duly executed lease agreements in the company’s favour) disclosed in the financial statements are held in the name of the company.
● If the title deeds are not held in the name of the company, the below details should be provided: Description of a property Gross carrying value Held in the name of Whether promoter, director or their relative or employee Period held: indicate a range, where appropriate Reason for not being held in the name of company* *also indicate if in dispute
● Whether a revaluation has been done by the company of its property, plant and equipment (including the right of use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer.
● In case of a change in values upon revaluation, specify the amount of change, if the change is 10% or more in the aggregate of the net carrying value of each class of property, plant and equipment or intangible assets.
● Whether any proceedings have been initiated or are pending against the company for holding any Benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder. If yes, whether the company has appropriately disclosed the details in its financial statements.
New clauses Inserted
Clause viii – Reporting on Unrecorded Income: requires auditors to report whether previously unrecorded income has been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, has been properly recorded in the books during the year.
Clause xiv – Reporting on Internal Audit
A new clause has been inserted in CARO 2020.
Clause 14 requires auditors to report whether:-
1. The company has an internal audit system that is commensurable with the size and nature of its business.
2. the reports of the Internal Auditors for the period under audit were considered by the statutory auditor
Clause xvii – Reporting on Cash Losses
A new clause has been inserted in CARO 2020.
Clause xvii requires auditors to report whether the company has incurred cash losses in the financial year and in the immediately preceding financial year and if so, the amount of cash losses is to be disclosed.
Clause xviii – Reporting on Auditor’s Resignation
A new clause has been inserted in CARO 2020, which requires reporting on:-
1. resignation of the statutory auditors during the year, if any
2. whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors
Clause xix – Reporting on Financial Position
A new clause has been inserted in CARO 2020, which requires the auditor to report on whether a material uncertainty exists or not. Disclosure is required that the auditor is of the opinion that the company is capable of meeting its liabilities existing on the balance sheet date as and when they fall due within a period of one year from the balance sheet date.
Clause xx – Reporting on CSR Compliance
A new clause has been inserted in CARO 2020, which requires the auditor to report on whether unspent CSR amount has been transferred to:-
1. a fund as specified in Schedule VII (where no specific project has been carried out or assigned) or,
2. a special designated bank account (related to any ongoing project)
So Friends,Here are the technical round questions for auditing role. Soon we will release for all roles & blog on TAX Saving tips for FY 21-22. Stay tuned for more updates.
Thanks!!
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