Auditing Notes – Merit Batch

Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes

December 29, 2022

Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for below mentioned reasons:

Wear and tear: For example, an auto will decrease in value because of the mileage, wear on tires, and other factors related to the use of the vehicle.
Obsolescence: Assets also decrease in value as they are replaced by newer models. Last year’s car model is less valuable because there is a newer model in the marketplace.
Keeping idle for prolonged period: when a machine is not used for a long time then it becomes potentially useless
Depletion: Various assets like mines etc. gets depleted because with the extraction mine is getting exhausted.

→ Characteristics of Depreciation
Depreciation has the following characteristics:

Depreciation is charged in case of fixed assets only, e.g., Building, Plant and Machinery, Furniture etc. There is no question of depreciation in case of current assets-such as Stock, Debtors, Bills Receivable etc.
Depreciation causes perpetual, gradual and continuous fall in the value of asset
Depreciation occurs till the last day of the estimated working life of asset
Depreciation occurs on account of use of asset In determined cases, however, depreciation may occur even if the assets are not used, e.g., Leasehold Property, Patent right, Copyright etc.
Depreciation is a payment against profits of an accounting period.
Depreciation does not depend on fluctuations in shop value of asset
Depreciation is caused due to functional and physical factors
Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).

Objectives of providing Depreciation:
→ To ascertain correct cost of production: The object of providing depreciation is to find out the correct cost of production. The asset loses its value due to its use in the business. Decrease in value is likely any other expense which must be debited to Profit and Loss account before profits are arrived at. It is like a factory expense which must be added to the cost of production. If it is not provided, the cost of production will not be correct.

→ To present true and fair view: If the depreciation is not provided, the assets will be shown at the higher value in the Balance Sheet than their real value. They will thus be overvalued. This will not show a true and fair view of the state of affairs of the business concern.

→To keep the Capital intact: The purpose of providing depreciation is to set aside a certain sum of money every year to replace that asset later on when it is discarded and thus to keep the capital intact.

→ Depreciation is a kind of expenditure, it should, therefore, be debited to the Profit & Loss Account to determine correct amount of profit or loss.

→ To Comply legal provisions: Legally it is also necessary to make provision for depreciation

→ Replacement of asset: When depreciation is provided it reduces the profit. The amount so saved, if set aside every year, is able to produce at the end of the life of the asset the amount required to replace it.

→ Saving in Taxes: Though depreciation is not a cash cost, it is permitted to be deducted from profits for tax purposes.

→ Evaluation of an asset: At the end of each year all the fixed assets should be properly valued. Their value decreases every year due to constant use. Hence to ascertain the correct value of asset providing of depreciation is necessary.

→ Factors which affect measurement of depreciation
Factors are:

Original cost of asset
estimated amount of expenditure on repairs during the beneficial life
estimated beneficial life of asset
estimated residual or scrap value
obsolescence
skill of operator who operated on the asset
legal provision related to depreciation

Journal entries for Depreciation:
(1) When depreciation is directly charged to asset account

(2) When Provision for Depreciation Account is opened

→ In this method asset account is not affected by depreciation. Depreciation charged every year is accumulated in Provision for Depreciation Account. In Balance sheet asset account is shown assets original cost less the accumulated provision for depreciation account. Alternatively the asset account can be shown at its original cost on the assets side and provision for depreciation can be shown on the liabilities side.

→ Various methods of providing depreciation
Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets. There are several methods for providing depreciation. These are
I. Uniform Charge Methods
II. Declining Charge Methods
III. Other Methods

I. Uniform Charge Methods – Depreciation is charged uniformly every year
A. Fixed Installment Method
B. Annuity Method
C. Insurance Policy Method
D. Depreciation fund Method

(A) Fixed Installment Method
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting years to obtain depreciation expense per accounting year.

Formula: The formula to calculate the straight-line depreciation of an asset for a full accounting period is: Depreciation = (Cost – Residual value)/Useful life

Journal Entries

→ Merits

Straight line method or fixed installment method is very easy to employ because of its simplicity.
The asset can be written off to zero value under this method.
This method is useful for providing depreciation on lease hold property, patent right, trade mark, copyright etc.

→ Demerits
There are two major objections to the straight line method. These are:

This method assumes the same economic usefulness of the asset each year.
The repair and maintenance expenses are essentially same each period.

(B) Annuity Method
Under annuity method of depreciation the cost of asset is regarded as investment and interest at fixed rate is calculated thereon. Had the proprietor invested outside the business, an amount equal to the cost of asset, he would have earned some interest. So as a result of buying the asset the proprietor loses not only cost of asset by using it, but also the above mentioned interest. Hence depreciation is calculated in such a way as will cover both the above mentioned losses. The amount of annual depreciation is determined from annuity table.

Annuity method is particularly applicable to those assets whose cost is heavy and life is long and fixed, e.g. Leasehold property, land and building etc.

Journal Entries:
Under annuity method, journal entries have to be made in respect of interest and depreciation. As regards interest, it has to be calculated on the debit balance of the asset account at the commencement of the period, at the given rate. The entry that is passed:

1.	Asset account
	To Interest account
	(Being interest on capital sunk in asset)

With regard to depreciation the amount found out from the depreciation annuity table, the following entry is passed:

2.	Depreciation account
	To Asset account
	(Being the depreciation of asset)

It should be remembered that the interest is charged on the diminishing balance of the asset account, the amount of interest goes on declining year after year. But the amount of depreciation remains the same during the life time of the asset.

→ Merits

Useful method to use in respect to long-term lease which generally involve considerable capital outlay
Interest on capital investment is taken into account. This method is perceived to the most exact, precise and scientific form from the point of view of calculations.

→ Demerits

Though interest is taken into consideration that the rate is still arbitrary and not based on law
Computation using this method becomes more complicated where there are frequent additions, dismantling, etc taking place. Not so suitable for assets like Plant & Machinery.

C. Insurance policy Method
Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium. The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement.

Journal Entries:
Every years two entries will be made:
1. In the beginning:
Depreciation insurance policy account
To Cash account
(Being the payment of premium on depreciation policy)

2. At the end of the year:
Profit and loss account
To Depreciation fund account
(Being the amount of depreciation charged to profit and loss account)
When the policy will mature i. e., to say the amount of the policy will be received. The entry is:

3. Cash account
To Depreciation insurance policy account (Being the policy amount realized)
The depreciation insurance policy account will show some profit. This will be transferred to depreciation fund account, the entry being.

4. Depreciation insurance policy account
To Depreciation fund account (Being the policy amount realized)
The asset account will have been shown throughout at its original cost. It now be written off by transfer to

→ Merit: The advantage of insurance policy method is that risk of loss on the sale of investment and the trouble and expense of buying investment are avoided.

→ Demerit – The disadvantage lies that the interest received on the premiums paid is comparatively very low.

D. Depreciation Fund Method
Under depreciation fund method or sinking fund method, a fund is created with the amount of annual depreciation. An amount equal to annual depreciation is invested each year in government papers or in some other gilt-edged 1 securities outside the business. The income earned from investment is deposited into the fund and immediately reinvested. This process is carried out throughout the life of the asset and at the end of its life a sum equal to the cost of i the asset is accumulated in the fund. Then the whole investment is sold and a new asset is acquired with the sale proceeds.

The special feature of this method is that the sum required to buy the new asset is available from depreciation or sinking fund. As. a result, the working capital of business is preserved. Sinking fund method is specially applicable to ‘ costly machines in large scale industries.

Journal Entries

First Year
(1) When the asset is purchased:
Asset Account Dr.* * *
To Bank Account * * *

(2) For Providing depreciation at the end of first year:
Depreciation Account Dr.* * *
To Sinking Fund Account * * *

(3) For investing the amount:
Sinking Fund Investment Account Dr.* * *
To Bank Account * * *

Subsequent Years
(1) For Receipt of Interest on Investment:
Bank Account Dr.* * *
To Sinking Fund Account * * *

(2) For Transferring Interest to Sinking Fund:
Interest on Sinking Fund Account Dr.* * *
To Sinking Fund Account * * *

(3) For Providing Depreciation:
Depreciation Account Dr.* * *
To Sinking Fund Account * * *

(4) For Investing the Amount:
Sinking Fund Investment Account Dr.* * *
To Bank Account * * *

Last Years
(1) For Receipt of Interest on Investment:
Bank Account Dr.* * *
To Sinking Fund Account * * *

(2) For Transferring Interest to Sinking Fund Account:
Interest on Sinking Fund Account Dr.* * *
To Sinking Fund Account * * *

(3) For Providing Depreciation:
Depreciation Account Dr.* * *
To Sinking Fund Investment Account * * *

(4) For Sale of Investment:
Bank Account Dr.* * *
To Sinking Fund Investment Account * * *

(5) For Transferring Profit and Sale of Investment:
Sinking Fund Investment Account Dr.* * *
To Sinking Fund Account * * *

(6) For Transferring Loss on Sale of Investment:
Sinking Fund Account Dr.
To Sinking Fund Investment Account

(7) For Closing the Asset Account by Transferring Balance of Sinking Fund Account to Asset Account:
Sinking Fund Account Dr.
To Asset Account

→ Merit: A separate sum is provided for replacing the asset

→ Demerit: Depreciation fund method assumes a constant rate of return on investments in identical securities. This is hardly true, because rates of interest do vary every now and then. Moreover the burden on profit and loss account goes on increasing as years pass by since the amount of depreciation every year remains same but the amount spent on repairs goes on increasing as the asset becomes old.

II. Declining Charge Methods
(a) Diminishing Balance Method
(b) Sum of years Digits Methods
(c) Double Declining Method

(a) Diminishing Balance Method – Diminishing balance method is also known as written down value method or reducing installment method. Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation.

→ Rate of depreciation
r = 1 – (S/C)1/n where:
r = Rate of depreciation
n = Estimated useful life of asset
S = Residual value after the expiry of useful life
C = Original cost of asset

Journal Entries:
→ The entries in this case will be identical to those discussed in the case of the fixed installment method. Only the amount will be differently calculated.

→ Merits

This method is accepted by Income Tax Authorities.
Impact of obsolescence will be reduced at minimum level.
Fresh calculation is not required when additions are made.
Under this method the depreciation amount is gradually decreasing and it will affect the smoothing out of periodic profit.

→ Demerits

Residual Value of the asset cannot be correctly estimated.
It ignores interest on investment on opportunity cost which will lead to difficulty while determining the rate of depreciation.
It is difficult to ascertain the true profit because revenue contribution of the asset are not constant.
The original cost of the asset cannot be brought down to zero.

(b) Sum of years Digits Method – Sum of the years’ digits method of depreciation is one of the accelerated depreciation techniques which are based on the assumption that assets are generally more productive when they are new and their productivity decreases as they become old. The formula to calculate depreciation under SYD method is
S = n (n + 1)/2 where:
S = Sum of years
n = number of years of useful life of assets.
Applying it when n = 8 years.
S = 8 (8 + 1)/2 = 72/2 or 36

(c) Double Declining Balance Method – Double declining balance method is another type of accelerated depreciation method. It is a depreciation method in which the depreciation rate is applied double to that in straight line method. The depreciation in this method is charged on the complete purchase price of asset rather than the net of salvage value price in straight line method. In other words we can say that double declining depreciation method uses double the rate of straight line method.

III. Other Methods
(a) Depletion Method – Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc.
According to it the cost of the asset is divided by the total workable deposits. In this way, rate of depreciation per unit of output is ascertained. Depreciation in any particular year is charged on the basis of the output during that year.
Rate of depreciation = total cost of mine/total units
Depreciation = rate of depreciation x quantity extracted during the year

(b) Group Depreciation Method – In this method assets having similar age life are grouped together for charging depreciation. Depreciation is not charged for individual asset.

(c) Machine Hour Rate Method -The machine hour method of depreciation estimates the useful life of an asset in machine hours, so, it is commonly applied on a machine. The useful life is based on the numbers of hours of a machine that can be utilized

Formula:
Rate of Depreciation = Original cost of asset – Scrap value/Life of the asset in Hours Depreciation = actual Number of hours × Rate of depreciation

(d) Inventory System of Depreciation: The inventory method (often called the appraisal system) is used to value small tangible assets such as hand tools or utensils. A tool inventory, for example, might be taken at the beginning and the end of the year. Then, the amount of depreciation expense could be calculated by using the value of the beginning inventory plus the cost of tools acquired for the year less the value of the ending inventory.

→ Change of method of Depreciation: The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.

When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed . In respect of past years, the deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus is credited to the statement of profit and loss.

Depreciation Accounting MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Which of the following is NOT a feature of depreciation?
a. Permanent
b. Continuous
c. Gradual
d. Temporary
Answer:
d. Temporary

Question 2.
In the trial balance the balance on the Provision for Depreciation Account is:
a. Shown as a credit item
b. Shown as a debit item
c. Sometimes shown as a credit, sometimes as a debit
d. Not shown, as it is part of depreciation
Answer:
a. Shown as a credit item

Question 3.
A boiler was purchased by a company for Rs 20 lakh after 2 years its cost came down to Rs10 lakh at present its cost is Rs15 lakh. How will we calculated the depreciation for this asset?
a. It will be calculated on the basis of its original cost 20 lakh rupees.
b. It will be calculated on the basis of 15 lakh rupees worth cost
c. It will be calculated on the basis of Rs. 10 lakh cost.
d. It will be calculated by taking the average of all three costs.
Answer:
a. It will be calculated on the basis of its original cost 20 lakh rupees.

Question 4.
Pick the odd one out.
a. Depreciation happens
b. By atmosphere
c. By company policies
d. Both a & b
Answer:
d. Both a & b

Question 5.
As per law enterprise is required to make provisions for depreciation
a. Joint stock company
b. Sole proprietor
c. Partnership
d. All of the above
Answer:
a. Joint stock company

Question 6.
For an asset NOT to be depreciable it
a. Must have limited useful size
b. Be of some technical importance
c. Must be used for production
d. None of the above
Answer:
b. Be of some technical importance

Question 7.
Depreciation amount is to be debited against
a. Revenues earned through it
b. Revenues earned
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 8.
Sum of years digits method is ______________ type of depreciation providing method.
a. Uniform change method
b. Declining change method
c. Depletion method
d. Group depreciation method
Answer:
b. Declining change method

Question 9.
Process of becoming out of date or obsolete is termed as:
a. Physical deterioration
b. Depletion
c. Obsolescence
d. Amortization
Answer:
c. Obsolescence

Question 10.
Some of the benefits you receive with depreciation are
a. Income tax saving
b. Customs tax saving
c. Sales tax saving
d. Excise duty saving
Answer:
a. Income tax saving

Question 11.
Providing depreciation is compulsory as it reflects
a. true financial position
b. makes provision so that in future the replacement asset could be purchased
c. both a & b
d. none of the above
Answer:
c. both a & b

Question 12.
An additional purchase of Rs. 2000 was made for a machine. Under straight line method of depreciation
a. Depreciation will be done for half of the year
b. Depreciation will be done from the beginning of the year.
c. Both a & b
d. None of the above
Answer:
a. Depreciation will be done for half of the year

Question 13.
An additional purchase was made for machine on 15.06.2009, under straight line method.
a. Depreciation will be changed from the date of purchase
b. Depreciation will be charged from the beginning of the year
c. Both a & b
d. None of the above
Answer:
a. Depreciation will be changed from the date of purchase

Question 14.
This is not the disadvantage of straight the method of depreciation
a. Cost of repairs keep increasing over the passage of time
b. The effective utilization of the asset is not taken in account
c. Value of the asset can be completely written off
d. It is difficult to make any asset useful in a systematic pattern
Answer:
c. Value of the asset can be completely written off

Question 15.
When depreciation fund account closes it transfers its balance to
a. Sinking fund
b. New asset account
c. Old
d. None of the above
Answer:
c. Old

Question 16.
Which is not the salient feature of sinking fund method?
a. Interest is an integral part
b. Amount released is affected by fractionations in interest rate
c. Investment in securities
d. Premium is paid in advance at the beginning of year
Answer:
d. Premium is paid in advance at the beginning of year

Question 17.
It is common in sinking fund method
a. The amount received at the end of the life of an asset is fixed
b. The amount received at the end of the life of an asset is not fixed
c. The amount received at the beginning of the life of an asset is fixed.
d. None of the above
Answer:
b. The amount received at the end of the life of an asset is not fixed

Question 18.
If an accumulated provision for depreciation account is in use then the entries for the year’s depreciation would be:
a. Debit Asset Account, credit Profit and Loss Account
b. Credit Profit and Loss Account, debit Provision for Depreciation Account
c. Credit Asset Account, debit Provision for Depreciation Account
d. Credit Provision for Depreciation Account, debit Profit and Loss Account
Answer:
d. Credit Provision for Depreciation Account, debit Profit and Loss Account

Question 19.
In annuity method interest is calculated
a. On the value of the asset at the time of purchase
b. On the value of the asset at the beginning of each year.
c. On the value of asset as expected at the end value of asset
d. Both a & b
Answer:
b. On the value of the asset at the beginning of each year.

Question 20.
Interest is credited to profit and loss account in
a. Annuity method
b. Sinking fund method
c. Insurance policy method
d. All of the above
Answer:
b. Sinking fund method

Question 21.
Select the depreciation method identified by income tax department
a. Diminishing balance method
b. Annuity
c. Sinking fund
d. None of the above
Answer:
a. Diminishing balance method

Question 22.
In diminishing balance method
a. Amount of depreciation value keeps on decreasing over the passage of time
b. Amount of depreciation value remains same over the passage of time
c. Calculation of rate of depreciation is early
d. Depreciation is charged on the original cost of asset
Answer:
a. Amount of depreciation value keeps on decreasing over the passage of time

Question 23.
For a machine that needs no maintenance or very little maintenance that also in the end year of asset the depreciation method that suits best is
a. Straight line method
b. Diminishing balance method
c. Annuity method
d. None of the above
Answer:
a. Straight line method

Question 24.
Invariably in diminishing balance method
a. Book value becomes zero
b. Book value never becomes zero
c. Book value is negative
d. Book value is infinite
Answer:
b. Book value never becomes zero

Question 25.
From a coal mine, 200 tons of coal was extracted dining the year and rate of depreciation is 10%. Depreciation charged as per depletion method will be
a. 2000
b. 20
c. 200
d. None of the above
Answer:
a. 2000

Question 26.
The depreciation method that is best suited for a machine that is being used on an hourly basis will be
a. Depletion method
b. Double declining method
c. Declining method
d. Service house method
Answer:
d. Service house method

Question 27.
In an enterprises some tools were purchased worth Rs. 2000 and later after 5 months additional tools worth 4000 were purchased it was presumed that the value of the total tools at the end of the year will be 2000 what will be the depreciation value?
a. 4000
b. Nil
c. 2000
d. 6000
Answer:
a. 4000

Question 28.
The standard given by ICAI for calculation of
a. Accounting standard – 5 depreciation accounting
b. Accounting standard – 6 depreciating accounting
c. Accounting standard – 7 depreciating accounting
d. Accounting standard – 4 depreciating accounting
Answer:
b. Accounting standard – 6 depreciating accounting

Question 29.
For changing the method of calculation of depreciation an enterprise should not
a. Calculate the value of asset by old method on the date of change
b. Calculate the depreciation of the past period of asset by new method
c. Calculate the depreciation of past
d. Find out the cost value of asset
Answer:
a. Calculate the value of asset by old method on the date of change

Question 30.
Which is the method that is not being recognized by the income tax department as a depreciation method to be used by an enterprise?
a. Fixed installment method
b. Straight line method
c. Written down value method
d. Depreciation and replacement of assets
Answer:
d. Depreciation and replacement of assets

Question 31.
To meet the additional fund that will be required for purchasing when a new asset is purchased in replacement to an old one some amount
a. May be transferred to profit and loss appropriation account
b. Must be transferred to profit and loss appropriation account
c. May to be transferred to depreciation account
d. Must to be transferred to depreciation account
Answer:
a. May be transferred to profit and loss appropriation account

Question 32.
Change in depreciation method requires
a. Change in consistency
b. An explanatory paragraph
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 33.
Change in the estimated life of our asset require
a. Consistency modification
b. Explanatory paragraph
c. Both a & b
d. Neither a nor b
Answer:
c. Both a & b

Question 34.
Eva has purchased a machine for Rs300, 000. She will depreciate it either at 20% on the straight-line basis or at 30% on the reducing- balance basis. Which method will lead to the highest combined profits in the first two years that the machine is owned?
a. The straight-line basis will lead to the highest combined profits.
b. The reducing-balance basis will lead to the highest combined profits.
c. The choice of depreciation method will not affect the combined profit figures.
d. Both the straight line basis at 20% per annum are the reducing balance basis at 30% per annum will lead to the same combined profit figure for the first two years.
Answer:
a. The straight-line basis will lead to the highest combined profits.

Question 35.
When Provision for Depreciation Account is maintained, the annual charge for depreciation shall be ____________ .
a. debited to Provision for Depreciation Account and credited to Profit and loss Account
b. debited to Asset Account and credited to Profit and loss Appropriation Account
c. debited to Asset Account and credited to Profit and Loss Appropriation Account
d. debited to Profit and loss Account and credited to provision for Depreciation Account
Answer:
d. debited to Profit and loss Account and credited to provision for Depreciation Account

Question 36.
For an asset owned for more than one year, the depreciation charge for the year calculated using the reducing-balance basis at the rate of 35% would be arrived at as follows:
a. 35% × cost of the asset.
b. 35% × (cost of the asset- accumulated depreciation)
c. 35% × accumulated depreciation.
d. 35% × (cost of the asset + accumulated depreciation)
Answer:
b. 35% × (cost of the asset- accumulated depreciation)

Question 37.
Depreciation arises because of:
a. Fall in the market value of an asst.
b. Physical wear and tear.
c. Fall in the value of asset
d. None of them.
Answer:
b. Physical wear and tear.

Question 38.
The straight line method of providing depreciation it:
a. Increase every year
b. Remain constant every year.
c. Decreases every year
d. None of them.
Answer:
b. Remain constant every year.

Question 39.
Under the diminishing balance method depreciation:
a. Increases every year.
b. Decreases every year.
c. Remain constant every year.
d. None of them.
Answer:
c. Remain constant every year.

Question 40.
Under the fixed installment method of providing depreciation it is calculated on
a. Original cost
b. On balance amount
c. On scrap value
d. None of them
Answer:
a. Original cost

Question 41.
Sinking fund is created in
a. Depreciation fund method
b. Defletion method
c. Fixed installment method
d. Annuity method
Answer:
a. Depreciation fund method

Question 42.
The amount of depreciation charged on a machinery will be debited to:
a. Machinery account
b. Depreciation account
c. Cash account
d. Repair account
Answer:
b. Depreciation account

Question 43.
Loss on sale of plant and machinery should be written off against:
a. Share premium
b. Depreciation fund account
c. Sale account
d. Profit & loss account
Answer:
b. Depreciation account

Question 44.
Loss on sale of machinery will be:
a. Debited on machinery A/c
b. Credited to machinery A/c
c. Credited to profit and loss A/c
d. None of them
Answer:
b. Credited to machinery A/c

Question 45.
Asset that has a limited useful life are termed as:
a. Limited assets
b. Depreciation assets
c. Unlimited asset ,
d. None of these
Answer:
b. Depreciation assets

Question 46.
Under the diminishing balance method, depreciation is calculated on:
a. Scrap value
b. On original value
c. On book value
d. None of them
Answer:
c. On book value

Question 47.
Which of the term is used to write off in reference to tangible fixed assets?
a. Depreciation
b. Depletion
c. Amortization
d. Both (b) and (c)
Answer:
a. Depreciation

Question 48.
The economic factors causing depreciation is/are
a. Time facto,
b. Obsolescence and inadequacy
c. Wear and tear
d. Money valuation
Answer:
b. Obsolescence and inadequacy

Question 49.
Total depreciation cannot exceed its:
a. Scrap value
b. Cost value
c. Market value
d. Depreciable value
Answer:
d. Depreciable value

Question 50.
Depreciation value of an asset is equal to:
a. Cost + Scrap value
b. Cost + Market price
c. Cost – Scrap value
d. None of these
Answer:
c. Cost – Scrap value

Question 51.
Depreciation does not depend on fluctuations as:
a. Market value of asset
b. Cost of price of asset
c. Scrap value of asset
d. None of these
Answer:
a. Market value of asset

Question 52.
Depreciation is:
a. An income
b. An asset
c. A loss
d. A liability
Answer:
c. A loss

Question 53.
The book value of an asset is obtained by deducting depreciation from its
a. Market value
b. Scrap value
c. Market + Cost price
d. Cost
Answer:
d. Cost

Question 54.
Depreciation fund method is also known as:
a. Sinking fund method
b. Annuity method
c. Sum of years digits method
d. None of these
Answer:
a. Sinking fund method

Question 55.
The method is specially suited to natural resources (mines, quarries, sand, pits etc.) is said to be:
a. Annuity method
b. Depletion method
c. Revaluation method
d. Sum of digits method
Answer:
b. Depletion method

Question 56.
Double – declining method is often used in the:
a. Singapore
b. South Africa
c. Japan
d. India
Answer:
d. India

Question 57.
In the provision method of depreciation the asset always appears at:
a. Cost price
b. Market Price
c. Scrap Value
d. None
Answer:
a. Cost price

Question 58.
Depreciable value of an asset is equal to:
a. Cost + scrap value
b. Cost + market price
c. Cost – scrap value
d. None of the given options
Answer:
c. Cost – scrap value

Question 59.
Which of the following depreciated?
a. Factory Buildings
b. Office Equipment
c. Plant & Machinery
d. Land
Answer:
d. Land

Question 60.
The allocation of the cost of a tangible plant asset to expense in the periods, in which services are received from the asset, is termed as:
a. Appreciation
b. Depreciation
c. Fluctuation
d. None of the given options
Answer:
b. Depreciation

Question 61.
The primary objective of providing depreciation is:
a. To calculate true profit
b. To show the asset on market value
c. To reduce tax Burden
d. To provide funds for replacement
Answer:
d. To provide funds for replacement

Question 62.
Under the diminishing balance method, depreciation amount is:
a. Payment
b. Receipt
c. Expenditure
d. None of these
Answer:
c. Expenditure

Question 63.
In considering a special order situation that will enable a company to make use of currently idle capacity, which of the following cost will be irrelevant:
a. Materials
b. Depreciation
c. Direct labour
d. Variable factory overhead
Answer:
a. Materials

Question 64.
Depreciation is based on:
a. Economic life of asset
b. Declared life of asset by supplier
c. Normal life of asset
d. None of these
Answer:
a. Economic life of asset

Question 65.
The Amount changed to deprecation goes on declining in:
a. Depreciation fixed method
b. Annuity method
c. Written-down value method
d. Straight line depreciation method
Answer:
c. Written-down value method

Question 66.
Which of the following is the main cause of depreciation?
a. Fall in the market value of money
b. Fall in the market value of an asset
c. Physical wear and tear
Answer:
b. Fall in the market value of an asset

Question 67.
Depreciation is _____________ of an asset
a. Valuation
b. Allocation
c. Sale value
d. All of the above
Answer:
b. Allocation

Question 68.
The estimated value of an asset after the expiry of its useful life is called as:
a. Written Down value
b. Residual Value (Right Answer)
c. Accumulated depreciation
d. Sales value
Answer:
c. Accumulated depreciation

Question 69.
On a worksheet, the adjusting entry to account for depreciation of equipment consists of
a. debit to Depreciation Expense and a credit to Equipment.
b. debit to Depreciation Expense and a credit to Accumulated Depreciation.
c. debit to Equipment and a credit to Accumulated Depreciation.
d. debit to Accumulated Depreciation and a credit to Equipment.
Answer:
b. debit to Depreciation Expense and a credit to Accumulated Depreciation.

Question 70.
In which depreciation method Depreciation remains constant?
a. Reducing balance method
b. Reducing balance method
c. Reducing balance method
d. Reducing balance method
Answer:
a. Reducing balance method

Question 71.
What impact does depreciation have on the cash account?
a. Depreciation only impacts the cash account if inflation has occurred.
b. Depreciation has no impact on the cash account.
c. Depreciation results in an increase to cash.
d. Depreciation results in a decrease to cash.
Answer:
b. Depreciation has no impact on the cash account.

Question 72.
At the balance sheet date the balance on the , Accumulated Provision for Depreciation Account
is:
a. Transferred to Depreciation Account
b. Transferred to the Asset Account
c. Transferred to Profit and Loss Account
d. Simply deducted from the asset in the Balance Sheet
Answer:
d. Simply deducted from the asset in the Balance Sheet

Question 73.
Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?
a. Increased operating costs
b. Overhaul of equipment
c. Salvage value of equipment when project is complete
d. Depreciation expense
Answer:
d. Depreciation expense

Question 74.
The value of an asset is Rs. 50,000. Its working life is 10 years. Firm uses sum of years digits method for providing depreciation. What wilt be the amount of depreciation for second year?
a. Rs. 5,000
b. Rs. “9,091
c. Rs. 4,500
d. Rs. 8,181
Answer:
Rs. 8,181

Hint:
S = n (n + 1)/2 where:
S = Sum of years
n = number of years of useful life of assets
S = 10(10 + 1)/2
= 110/2
= 55
Depreciation for second year = 9/55 x50000= Rs 8,181.

Question 75.
Decrease in value of a fixed asset due to normal wear and tear is known as¬
a. Depreciation
b. Obsolescence
c. Appropriation
d. Spoilage.
Answer:
Depreciation

Hint:
Depreciation is a non-cash expense that reduces the value of an asset over time.

Question 76.
Dinesh Garments purchased a machine for Rs.50,000 and spent Rs. 6,000 on its erection. On the date of purchase, it was estimated that effective life of the machine will be ten years and after ten years its scrap value will be Rs. 60,000. The amount of depreciation for second year on straight line basis is:-
a. Rs. 5,000
b. Rs. 6,000
c. Rs. 5,600
d. Rs. 6,200
Answer:
a. Rs. 5,000

Hint:
Depreciation as per straight line = \(\frac{\text { Cost – Residual value }}{\text { Useful life }}\)
Useful life
= 56000 – 6000/10 = 5000

Question 77.
A firm charges depreciation on straight line method. The rate of depreciation is reduced from 25% to 10%. What will be the impact of this change on profits?
a. Decrease in profits
b. Increase in profits
c. Decrease in assets
d. Increase in expenses.
Answer:
b. Increase in profits

Hint:
Depreciation is transferred to debit side of profit & loss A/c. If depreciation rate is reduced from 25% to 10%, depreciation charged will be less than previous years.
Thus the amount of depreciation transferred to profit and loss A/c will be less
The less amount of depreciation will be transferred to profit & loss A/c which will result in increase in profits.

Question 78.
Under straight line method, depreciation is calculated on:
a. Written Down Value
b. Salvage Value
c. Original Cost
d. Market Value
Answer:
c. Original Cost

Hint:
Depreciation is calculated on Original Cost in case of straight line method.
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting years to obtain depreciation expense per accounting year.

Question 79.
Which of the following assets are shown at written down value in Balance Sheet?
a. Current Assets
b. Floating Assets
c. Floating Assets
d. Fixed Assets Questions of June 2013
Answer:
d. Fixed Assets Questions of June 2013

Hint:
Diminishing balance method is also known as written down value method or reducing installment method. Under this method the asset is depreciated at fixed percentage calculated on the debit balance of the asset which is diminished year after year on account of depreciation.

Question 80.
On 1st April, 2012 in Sethi’s Ledger, furniture account showed a balance of Rs. 2,00,000. On 1st October, 2012 Sethi purchased new furniture by paying Rs. 5,000 and giving old furniture whose book value on 1st April, 2012 was Rs. 12,000 to the seller. Sethi provides depreciation on furniture @ 10% per annum on diminishing balance method. The net value of furniture in Sethi’s books as on 31st March, 2013 would be:
a. Rs. 1,85,080
b. Rs. 1,83,960
c. Rs. 1,84,780
d. Rs. 2,04,400.
Answer:
c. Rs. 1,84,780

Hint:
Cost of new asset purchased

Depreciation

Balance as per furniture A/c – 2,00,000
Cost of new asset purchased – 5000
Less: depreciation – 19620
Less: depreciation – 600
(12000 × 10% × 6/12)
Net value of furniture – 184780

Question 81.
The written down value of machine on 31 st March, 2013 is Rs. 72,900. The machine was purchased on 1st April, 2010. Depreciation is being charged @ 10% p.a. by diminishing balance method. The cost price of the machine would be:
a. Rs. 1,00,000
b. Rs. 81 ,000
c. Rs. 90,000
d. Rs. 72,900.
Answer:
a. Rs. 1,00,000

Hint:
Cost price of machine = \(\frac{72,900}{(1-10)^{3}}\) = 72900/9³
= Rs. 1,00,000

Question 82.
A company purchased plant for 50,000. The useful life of the plant is 10 years and the residual value is 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
a. 8%
b. 9%
c. 10%
d. None of the above
Answer:
b. 9%

Hint:
Depreciation = \(\frac{50,000-5,000}{10}\) = 4 500/-
Rate of depreciation = \(\frac{4,500_{000}}{50,000}\) × 100 = 9% p.a.

Question 83.
Madhur and Company purchases a machine for a certain sum. The company has a policy of charging 8% depreciation on written down value. The depreciated value of the machine after three years in the books of Madhur and Company is Rs. 3,89,344. What was the purchase value of machine.
a. Rs. 5,00,000
b. Rs. 4,60,000
c. Rs. 4,23,000
d. Rs. 5,52,000.
Answer:
a. Rs. 5,00,000

Hint:
W.D.V. at machine at the end of 3rd year = Rs. 3,89,344
W.D.V. of machine at the beginning of 3rd year will be = 389344/100 – 8% = 389344/92% = 423200
W.D.V. of machine at the beginning of 2nd year will be = 423200/92% = 4,60,000
W.D.V. of machine at the beginning of 1st year will be (or purchase value) = 4,60,00/92%
= 5,00,000

Question 84.
The value of a fixed asset after deducting depreciation is known as its-
a. Book value
b. Market Value
c. Face Value
d. Realisable value.
Answer:
a. Book value

Hint:
For assets, the book value is based on the original cost of the asset less any depreciation.

Question 85.
Dinesh Garments purchased a machine for Rs. 50,0oo and spent Rs. 6,000 on its creation. On the date of purchase it was estimated that the effective life of the machine will be ten years and after ten years its scrap value will be Rs. 6,000. The amount of depreciation for each year on straight line basis is –
a. Rs. 5,000
b. Rs. 5,600
c. Rs. 6,000
d. None of the above.
Answer:
a. Rs. 5,000

Hint:
Depreciation = (Cost – Residual value)/Useful life
Depreciation = 56000 – 6000/10 = 5000
Cost = 50,000 + 6000

Question 86.
An equipment was purchased on 1st January, 2012 for Rs. 25,000 and is to be depreciated at 30% based on reducing balance method. If the company closes its books of account on 31st March every year, what would be the net book value-of the equipment as at 31st December, 2013-
a. Rs. 12,250
b. Rs. 17,750
c. Rs. 10,000
d. Rs. 12,545.
Answer:
a. Rs. 12,250

Hint:

Question 87.
Coalmine is which type of asset
a. Fixed Asset
b. Current Asset
c. Wasting Asset
d. Fictitious Asset.
Answer:
c. Wasting Asset

Hint:
An asset that has a limited life and thus decreases in value (depreciates) over time is wasting asset. Also applies to consumed assets, such as oil or gas.

Question 88.
If the original and current price of machinery is given, it will be recorded at which value?
a. Historical value
b. Realisable value
c. Market value
d. Original cost.
Answer:
d. Original cost.

Hint:
Due to the cost concept, we record the fixed assets at cost price & not at market price.

Question 89.
An equipment was purchased on 1st January, 2012 for Rs. 25,000 & is to be depreciated at 30% based on WDV method. If the company closes its books of account on 31 st March every year. What would be the net book value of the equipment as at 3-1 st December 2013:
a. 12,250
b. 10,000
c. 17,750
d. 12,545
Answer:
a. 12,250

Hint:

Question 90.
Which of the following are amortised:
a. Patent
b. Copyright
c. Goodwill
d. All of these.
Answer:
d. All of these.

Hint:
Amortization means depreciation but it is used for write off of intangible assets such as goodwill, patents, copyright etc.

Question 91.
The WDV of machine is Rs. 72,900, rate of depreciation @ 10%, period 3 years. Calculate the original cost of machinery.
a. 72,900
b. 80,000
c. 1,20,000
d. 1,00,000.
Answer:
d. 1,00,000.

Hint:
cost of machinery = 72900/(1 – 10)³
= 1,00,000

Question 92.
Valueless assets are treated as:
a. Tangible Asset
b. Intangible Asset
c. Fictitious Asset
d. Current Asset.
Answer:
c. Fictitious Asset

Hint:
Assets, which have no market value, are called fictitious assets. Examples of fictitious assets are preliminary expenses etc.

Question 93.
A company purchased a mine of Rs. 50,000. Its scrap value is Rs. 5,000 and expected working life is 9 years. 1,00,000 units were expected to be produced during its working life . Units produced in first 3 years are 7,000, 15,000 and 19,000 respectively, Calculate the amount of depreciation for the third year by using depletion method .
a. Rs. 3,150
b. Rs. 8,550
c. Rs. 3,000
d. Rs. 6,750
Answer:
b. Rs. 8,550

Hint:
Rate of depreciation = total cost of mine/total units
= 50,000 – 5000/1,00,000 = 45 = 45%
Depreciation = rate of depreciation × quantity extracted during the year = 45 ×19000 = 8,550

Question 94.
The value of a fixed asset after deducting depreciation is known as its …………………….
a. Face Value
b. Market Value
c. Realisable Value
d. Book Value
Answer:
d. Book Value

Hint:
For assets, the book value is based on the original cost of the asset less any depreciation.

Question 95.
Samar purchased a machinery worth Rs. 1,00,000 and spent Rs. 20,000 on its repairs and Rs. 15,000 on its carriage. He decided to sell the machinery at 25% margin on selling price. What will be the expected sale value of machinery?
a. Rs. 1,25,000
b. ‘Rs. 1,53,090
c. Rs. 1,80,000
d. Rs. 1,33.000
Answer:
c. Rs. 1,80,000

Hint:
Cost of machinery = Rs. 1,00,000 + 20,000 + 15,000 = Rs. 1,35,000
25% on selling price = \(\frac{25}{100-25}\) on cost of machinery
= 25 × 135000/75 = 45,000
Rs. 1,35,000 + Rs. 45,000 = Rs. 1,80,000

Question 96.
A decrease in value of fixed asset due to age, wear and tear:
a. Appreciation
b. Written down value
c. Depreciation
d. Accumulated depreciation.
Answer:
c. Depreciation

Hint:
Depreciation is a non-cash expense that reduces the value of an asset over time. Assets depreciate for below mentioned reasons:

Wear and tear
Obsolescence
Keeping idle for prolonged
Depletion

CS Foundation Fundamentals of Accounting and Auditing Notes

Accounting Process – II – CS Foundation Fundamentals of Accounting and Auditing Notes

December 29, 2022

Accounting Process – II – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Error:
An accounting error is a non-ffaudulent discrepancy in financial documentation. The term is used in financial reporting. A Trial Balance is said to be a statement of proof done arithmetically to prove that proper double was observed in making accounting entries. The assumption is that the Trial balance totals will not agree whenever there is an accounting error. There are several errors in fact which will not affect the agreement of the trial balance totals. This means that there are two basic types of accounting errors:

Errors which do not affect the Trial balance totals
Errors which do affect the trial balance totals

The correction of all accounting errors must be journalized by way of the General Journal. Accounting errors not detected by the trial balance are listed below.

→ Clerical Errors
Below mentioned three errors are also called clerical errors

Errors of Omission
Error of Commission
Compensating Errors

1. Errors of Omission: The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake. The Errors of Omission may happen as partial or complete. The partial errors may happen in relation to any subsidiary books. This is the result of when a transaction is entered in the subsidiary book but not posted to the ledger. For example, cash paid to the suppliers has been entered in the payment side of the cash book but it will not be entered in the debit side of the suppliers account. The complete omission may happen the transaction is completely omitted from the books of accounts. For example, an accountant fails to enter a specific invoice from the sales day book.

2. Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong amount. The Errors of Commission may happens because of ignorance or negligence of the accountant.

3. Compensating Errors: These occur where two or more accounting errors cancel out their effect on the trial balance.

→ Errors of Principles
This kind of errors are occurs when the entries are made against the principle of accounting. These Errors are made because of the following reasons:

Errors happens due to the inability to make a distinction between the revenue and capital items.
Errors happens due to the inability to make a difference between the business expenses and personal expenses.
Errors happens because of the inability to make a distinction between the productive expense and
nonproductive expenses
When the accounting principle is disregarded e.g. A capital item is taken as revenue item and vice versa, i.e. purchase of furniture posted to Purchases Account.

→ Errors disclosed by the Trial Balance:
A Trial Balance will not agree on account of the following errors:

Wrong posting of entries e.g. A debit entry of Rs. 1,000 for purchase of furniture wrongly posted as Rs.100 in the account.
Omission of posting of debit or credit e.g. A debit entry of Rs. 1,000 for purchase of furniture is not posted at all.
Duplication of posting e.g. When debit entry of Rs. 1000 for purchase of furniture has been posted twice in the account.
Wrong side of posting e.g. When debit entry is posted on the credit side or credit entry is posted on the debit side, e.g. When a debit entry of Rs. 1000 is posted on the credit side, i. e. When debit entry of Rs.1000 is posted on the credit side and vice versa.
Errors in casting the totals of debit or credit side of the Trial Balance.
Wrong transfer of balances in the Trial Balance.
Omission of entering the balance of account in the Trial Balance.
Balance of cash book omitted to be recorded in the Trial Balance.
Wrong balancing of account.
Errors in the total or posting or entries of subsidiary book.
Wrong carry forward of balance in the various books, i. E. Day books, cash book, etc.

→ Errors not disclosed by Trial Balance
The following errors do not affect the agreement of the Trial Balance:

Errors or omission; omission to record any transaction
Posting of wrong amount both debit and credit side of the account
Error made in posting of debit or credit entry is compensated by an identical error of equal amount. These errors are known as compensating errors.
Errors made in posting a transaction on the correct side of wrong account.
Recording a transaction twice erroneously. These are known as errors of duplication.

→ Steps to locate errors

The first step in finding an error is to simply add the credit and debit columns again to check your math
Opening balances of all the accounts are properly brought down in the current year’s books of account.
Recheck the totals of the subsidiary books
Check that there is no mistake in balancing of various accounts
Ledger accounts have been properly balanced and the balances of ledger accounts have been correctly shown in the trial balance.
If the difference is large one, compare the figures with the trial balance of corresponding trial balance of previous year

→ Stages of correction of accounting errors
All types of errors in accounts can be rectified at two stages:

before the preparation of the final accounts; and
after the preparation of final accounts.

→ Errors rectified within the accounting period
The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:
(a) Correction of errors affecting one side of one account: Such errors do not let the trial balance agree as they effect only one side of one account so these can’t be corrected with the help of journal entry, if correction is required before the preparation of final accounts. So required amount is put on debit or credit side of the concerned account, as the case may be. For example For example, Sales Book is overcast by Rs.1000. In this case only Sales Ale is wrongly credited by excess amount of Rs.1000 while the corresponding account of the various debtors have been correctly debited.

(b) Correction of errors affecting two sides of two or more accounts: As these errors affect two or more accounts, rectification of such errors, if being done before the preparation of final accounts can often be done with the help of a journal entry. While correcting these errors the amount is debited in one account/accounts whereas similar amount is credited to some other account/accounts. Example of such error is purchase of machinery for Rs.1000 has been entered in the Purchases Book. In this case, Purchases A/c is wrongly debited while Machinery A/c has been omitted to be debited. So two accounts i.e. Purchases A/c and the Machinery A/c are affected.

→ Rectification of error after the preparation of trial balance but before Final Accounts
Sometimes errors are detected after preparation of trial balance. The errors detected after the completion of accounting year may be one-sided and two-sided errors. Rectification of the errors seen after preparation of trial balance can be made by preparing rectifying journal entries in the subsequent year only.

→ Double entry system is followed to rectify the errors detected after preparation of trial balance. Two accounts are affected by the two-sided errors. Therefore, one account is debited and another affecting account is credited for such errors. But one-sided errors are rectified by opening ‘Suspense Account’. Suspense account is opened in two cases:

To balance the disagreed total of trial balance
To post some of the items whose proper and correct information is not available so in such case temporarily it is posted in suspense account.

If debit total exceeds the credit total then the difference will be put to credit totals as suspense account and vice versa.

→ Rectification of error in next accounting period: If errors are identified in the next accounting period then they are rectified the moment they are identified in usual manner but if the errors affect trading and profit and loss account then a Profit & Loss Adjustment account is opened. When making adjustments all the nominal accounts are replaced by Profit & Loss Adjustment Account. If Profit & Loss Account reveal profit then Profit & Loss account of the previous year is rectified and the additional profit is added to find the correct profit and vice versa.

Accounting Process – II MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Which of the following errors will affect agreement of trial balance?
a. Repairs on building have been debited to building account.
b. The total of purchase book is short by Rs. 10
c. Freight paid on new machinery has been debited to freight account.
d. Sales of Rs. 500 to Ram has been debited to Shyam’s account.
Answer:
b. The total of purchase book is short by Rs. 10

Hint:
The total of purchase book is short by Rs. 10.
Due to this error the total of debit side of trial balance will be short by Rs. 10 than the total of credit side of Trial Balance.
The other 3 errors will not cause disagreement of trial balance because due to these errors the debit side and credit side of trial balance will remain unchanged.

Question 2.
After preparing the Trial Balance, the accountant finds that the total of the debit side of Trial Balance is short by Rs. 1,000. This difference will be:
a. Credited to suspense account
b. Debited to suspense account
c. Adjusted to any of account having debit balance
d. Adjusted to any of account having credit balance
Answer:
b. Debited to suspense account

Hint:
Suspense account is opened in two cases:

To balance the disagreed total of trial balance
To post some of the items whose proper and correct information is not available so in such case temporarily it is posted in suspense account.

If debit total exceeds the credit total then the difference will be put to credit totals as suspense account and vice versa.
If total of the debit side of Trial Balance is short by Rs. 1,000 the difference will be debited to suspense account.

Question 3.
Overcasting of sAlcs book by Rs. 1,000 is a type of.
a. One sided error
b. Two Sided error
c. Compensating error
d. Error of principle
Answer:
a. One sided error

Hint:
Overcasting of sales book by Rs 1,000 is a one sided error because due to this error only credit side of trial balance will be increased by Rs 1,000

Question 4.
Which one of the following is correct about errors?
a. Errors always have impact on profits
b. Errors do not have any impact on profits
c. Errors mayor may not have impact on profits
d. Errors always lead to decrease in profit.
Answer:
c. Errors mayor may not have impact on profits

Hint:
An accounting error is a non-fraudulent discrepancy in financial documentation. The assumption is that the Trial balance totals will not agree whenever there is an accounting error. There are several errors in fact which will not affect the agreement of the trial balance totals. This means that there are two basic types of accounting errors:

Errors which do not affect the Trial balance totals
Errors which do affect the trial balance totals Thus, errors mayor may, may not have impact an profits.

Question 5.
Whitewash charges of building Rs. 500 have been wrongly debited to building account. It is an example of:
a. Compensating error
b. Error of principle
c. Error of omission
d. Error of commission
Answer:
b. Error of principle

Hint:
Errors of Principles -This kind of errors are occurs when the entries are made against the principle of accounting

Question 6.
If the effect of an error is cancelled by the effect of some other errors, the errors are known as:-
a. Error of principle
b. Compensating Error
c. Error of omission
d. Error of commission Questions of June 2013
Answer:
b. Compensating Error

Hint:
Compensating Errors – These occur where two or more accounting errors cancel out their effect on the trial balance.

Question 7.
Which of the following errors will not cause the disagreement of Trial Balance?
a. Rs. 821 received from Ravi has been debited to Kavi.
b. A purchase of Rs. 281 Irorn Sanju has been debited to his account as Rs. 281
c. An invoice for Rs. 480 is entered in the SA/cs Book as Rs. 840.
d. All of the above.
Answer:
c. An invoice for Rs. 480 is entered in the SA/cs Book as Rs. 840.

Hint:
Errors not disclosed by Trial Balance
The following errors do not affect the agreement of the Trial Balance:

Errors or omission; omission to record any transaction
Posting of wrong amount both debit and credit side of the account
Error made in posting of debit or credit entry is compensated by an identical error of equal amount. These errors are known as compensating errors.
Errors made in posting a transaction on the correct side of wrong account.
Recording a transaction twice erroneously. These are known as errors of duplication

Hence An invoice of Rs. 480 is entered in the sales book as Rs.840 will not be disclosed by trial balance as due to this error the sales A/c will be credited by. Rs. 840 and debtor A/c will be debited by Rs. 840 and hence the trial balance will match.

Question 8.
Error of principle will not permit:
a. Correct total of the balance sheet
b. Correct total of the trial balance
c. The trial balance to agree
d. None of the above
Answer:
d. None of the above

Hint:
Errors of Principles:
This kind of errors are occurs when the entries are made against the principle of accounting. Error of principle has no impact on the agreement of trial balance

Question 9.
Which of the following errors is an error of omission
a. SA/c of Rs. 1,000 was recorded in the purchase journal
b. Salary paid to Mohan and Vikas have been debited to their personal – accounts
c. The total of sA/cs journal has not been posted to the sA/cs account
d. Repairs to building have been debited to building account,
Answer:
c. The total of sA/cs journal has not been posted to the sA/cs account

Hint:
Errors of Omission: The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake. The Errors of Omission may happen as partial or complete.
Thus the total of sales journal has not been posted to the sales A/c’ is an error of omission.

Question 10.
Which of the following errors are reveA/cd by the trial balance
a. Errors of principle
b. Errors of omission
c. Errors of commission
d. None of the above
Answer:
c. Errors of commission

Hint:
Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong account. The Errors of Commission may happens because of ignorance or negligence of the accountant.
The error will be revealed by the Trial Balance.

Question 11.
Which of the following errors will result into non-agreement of the trial balance?
a. Totaling the returns inwards journal as Rs. 11,400 instead of Rs. 12,600
b. Recording a sA/cs invoice for Rs. 5,600 as Rs. 6.500 in the SA/cs Journal
c. Failing to record a purchase invoice for Rs. 54,000 in the Purchases Journal
d. Recording in the Purchases Journal, an invoice, for acquiring a non current asset for Rs. 60,000.
Answer:
a. Totaling the returns inwards journal as Rs. 11,400 instead of Rs. 12,600

Hint:
A Trial Balance will not agree on account of wrong posting of entries . Totaling the return inwards journal as Rs. 11,400 instead of Rs. 12,600 is an error which means that the return inward account will be posted with wrong amount and this mistake will be reflected in the Trial Balance as the Trial Balance will not agree.

Question 12.
Rs.1,000 was paid as rent to the landlord Krishna. This amount was debited to Krishna’s personal account. This error will
a. Affect agreement of the trial balance.
b. Not affect agreement of the trial balance
c. Affect the suspense account
d. None of the above.
Answer:
b. Not affect agreement of the trial balance

Hint:
Errors of Principles
This kind of errors are occurs when the entries are made against the principle of accounting. Error of principle has no impact on the agreement of trial balance

Question 13.
It SA/cs is done and by mistake A’s account is transferred to Purchase A/c in such a case which accounts are affected?
a. Purchase a/c
b. A’s a/c
c. Both (a) and (b)
d. None of the above.
Answer:
c. Both (a) and (b)

Hint:
It affects both, Purchases’ A/c and A’s A/c.
The accounting entry for the transaction of sales to A should be ( Right entry)

Question 14.
The credit side of trial balance show:
a. Bank
b. Cash
c. Equipment
d. None of the above.
Answer:
d. None of the above.

Hint:
Credit side of trial balance resembles the liabilities & income.

Question 15.
A sold goods of t 500/- to Z which is entered in purchase book as 5,000. What will be the entry after rectification?

Answer:

Hint:
The accounting entry for the transaction should be

Question 16.
‘Wrong Casting of subsidiary book” is which type of error?
a. Error of Omission
b. Error of Commission
c. Error of Principle
d. Compensating Errors.
Answer:
b. Error of Commission

Hint:
Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong account.

Question 17.
When two or more errors are committed in such a way that effect of one error is compensated by another error. Which type of error is this?
a. Error of Commission
b. Compensating Error
c. Error of Principle
d. None of these.
Answer:
b. Compensating Error

Hint:
Compensating Errors: These occur where two or more accounting errors cancel out their effect on the trial balance.

Question 18.
If there is any error in trial balance which is not effecting its total, will it affect any accounting procedure?
a. Yes
b. No
c. Don’t know
d. Partly Yes.
Answer:
b. No

Hint:
If there is any error in trial balance which is’ not affecting its total there will be no effect on accounting procedure.

Question 19.
A Sale of Rs. 100 to ‘A’ recorded in the Purchase Book would affect:
a. Purchases Account and A’s Personal Account Only
b. Sale Account and A’s Personal Account Only
c. A’s Personal Account Only
d. Sales Account, Purchases Account & A’s Personal Account
Answer:
d. Sales Account, Purchases Account & A’s Personal Account

Hint:
Correct entry

Question 20.
If a credit sale of Rs. 15,400 to Pram had been entered as Rs. 14,500. The Journal entry for rectifying the error would be:
a. Debit Cash Account and Credit Sale Account with Rs. 900
b. Debit Prem Account and Credit Sales Account with Rs. 900
c. Debit Sales Account and Credit Pram Account with Rs. 900
d. Debit Prem, Account and Credit Saless Account with Rs. 15,400
Answer:
b. Debit Prem Account and Credit Sales Account with Rs. 900

Hint:
Wrong entry passed

Question 21.
Legal expenses paid to Mohan is debited to his personal account. This is an example of error
a. Duplication
b. Omission
c. Commission
d. Principle
Answer:
c. Commission

Hint:
Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong account.

Question 22.
Commission received Rs. 2,500 correctly entered in the cash book but posted to the debit side of commission account. In the Trial Balance:
a. The credit total will be greater by Rs. 5,000 than the debit total
b. The debit, total will be greater by Rs. 2,500 than the credit total
c. The debit total will be greater by Rs. 5,000 than the credit total
d. The credit total will be greater by Rs. 2,500 than the debit total
Answer:
b. The debit, total will be greater by Rs. 2,500 than the credit total

Hint:
In trial balance the debit total will be greater by Rs 2500.
Correct entry

Question 23.
Which of the following errors are reveA/cd by the trial balance?
a. Errors in balancing account
b. Errors of principle
c. Errors of complete omission
d. Compensatory Errors.
Answer:
a. Errors in balancing account

Hint:
A Trial Balance will not agree on account of the following errors:

Wrong posting of entries e.g. A debit entry of Rs. 1,000 for purchase of furniture wrongly posted as Rs. 100 in the account.
Omission of posting of debit or credit e.g. A debit entry of Rs. 1,000 for purchase of furniture is not posted at all.
Duplication of posting e.g. When debit entry of Rs.1000 for purchase of furniture has been posted twice in the account.
Wrong side of posting e.g. When debit entry is posted on the credit side or credit entry is posted on the debit side, e.g. When a debit entry of Rs.1000 is posted on the credit side, i. e. When debit entry of Rs.1000 is posted on the credit side and vice versa.
Errors in casting the totals of debit or credit side of the Trial Balance.
Wrong transfer of balances in the Trial Balance.
Omission of entering the balance of account in the Trial Balance.
Balance of cash book omitted to be recorded in the Trial Balance.
Wrong balancing of account.
Errors in the total or posting or entries of subsidiary book.
Wrong carry forward of balance in the various books, i. E. Day books, cash book, etc.

CS Foundation Fundamentals of Accounting and Auditing Notes

Types of Audit – CS Foundation Fundamentals of Accounting and Auditing Notes

December 29, 2022

Types of Audit – CS Foundation Fundamentals of Accounting and Auditing Notes

→ In the earlier times audit implies the auditing of accounts but later various types of audit came into existence. Audit can be divided into two categories on the basis of law

Audit which is prescribed by a state/legislation e.g. Company audit as per Companies Act, audit of Banking Companies, electricity supply companies, public and charitable trust, co-operative schemes which have been set up under the Act of Parliament and other audits required as per law
Audit done voluntarily such as audit of proprietorship, partnership firm, HUF etc.
Moreover audit can again be divided on the basis of scope of work such as management audit, internal audit etc.

→ Various Types of audit
(a) Internal audit
(b) Cost audit
(c) Tax audit
(d) Financial audit
(e) Secretarial audit
(f) Bank audit
(g) Co-operative Societies Audit
(h) Trust audit
(i) Insurance audit
(j) Partnership audit
(k) Sole Proprietorship audit
(l) Government audit
(m) Management audit
(n) Functional audit
(o) Propriety audit
(p) Efficiency audit

→ Internal audit
Section 138 of the Companies Act, 2013 contains provisions regarding internal audit. As per Companies Act, 2013, certain class or classes of company as may be prescribed shall appoint an internal auditor who will conduct an audit of the functions and activities of the company and make a report thereon to the Board of Directors.The role of internal audit is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively.

→ According to Rule 13 of The Companies (Accounts) Rules, 2014 following class or classes of companies shall be required to appoint an internal auditor or firm of internal auditors
(a) Every listed company;

(b) Every unlisted public company having:

Paid up share capital of 50 crore rupees or more during the preceding financial year; or
Turnover of 200 crore rupees or more during the preceding financial year; or
Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or
Outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and

Turnover of 200 crore rupees or more during the preceding financial year; or
Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year.

→ Objectives of Internal audit

Internal audit is an independent appraisal function established by the management of an organisation
It helps in keeping a control over the business activities. The examination and evaluation of the adequacy and effectiveness of internal control systems provide the reasonable assurance to managers and help them to improve the effectiveness of governance.
It helps to determine whether controls over financial and operating data provide managers with reasonable assurance that the financial and operating data is accurate and reliable
It helps to perform special administrative requests, special projects, investigations due to allegations of fraud, theft, waste, abuse etc as requested by management and recommend control improvement.
Purpose of internal audit is To report all internal audit findings to the appropriate level of management and Audit Committee.
It evaluates so there is Proper economic and effective use of resources.
It helps to determine whether controls over compliance with policies, procedures, plans, laws and regulations provide managers with reasonable assurance that proper compliance actually occurs
To coordinate Internal Audit services with the external auditors
To keep the Audit Committee and management aware of emerging trends regarding internal controls, risk management and governance
To check if any errors in the accounting records
To define the duties and liabilities of the staff so that a proper check can be placed if any negligence
to determine whether controls over assets provide managers with reasonable assurance that assets exist and are protected against loss that could result from theft, fire,
to determine whether controls over operations and programs provide managers with reasonable assurance that the operations and programs are being carried out as planned,
to determine whether controls over compliance with policies, procedures, plans, laws and regulations provide managers with reasonable assurance that proper compliance actually occurs
to do performance appraisal
to give new ideas relating to procedures, marketing etc.

→ Benefits of Internal Audit

an internal audit can help to identify risks, which may lead an entity to fail in achieving its performance and profitability targets
It helps in reviewing the progress of the entity
Auditing begins when accounting ends thus auditing helps in finding out the errors in accounting
It aid in preventing a loss of assets and resources
It ensures reliable financial reporting
helps in complying with laws and regulations
is to provide assurance to management and a level of comfort to the Audit Committee, Boards of Directors and external stakeholders that the company has a strong control environment
it helps in investigating any matter which owners or management may be doubtful about
internal auditing helps to encompass all areas of risk management
Companies can assess whether the controls and procedures they have put in place are adequate to mitigate the identified risks
Allows for professional development of people
When management extends the internal audit scope to include evaluation of enterprise risks, this can enhance the effectiveness and efficiency of processes by identifying duplication and redundant activities.
To identify strengths and weaknesses within departments and recommend corrective action
To prevent potential risk of Fraud, Waste and Abuse
Limitations of Internal audit
Staff size limitations may obstruct efforts to properly segregate duties. If adequate staff is not there then the implementation of compensating controls to ensure that objectives are achieved can not be done
A limitation in any system is the element of human error, misunderstandings, fatigue and stress.
The cost of implementing a specific control should not exceed the expected benefit of the control.
A time lag is also a hindrance for effective internal control. As it is known that auditing starts when accounting ends, thus there is a time lag between recording and checking which makes the work a little difficult

→ Financial Audit or Statutory Audit

Statutory Audit is often called financial Audit.
Sections 139 to 147 under chapter X of the Companies Act, 2013 contain provisions regarding statutory audit and auditors.
Section 139 contains that at the first annual general meeting every company shall appoint an individual or firm as it auditor who will hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting
Section 141 contains that a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant and in case of a firm whereof majority of partners practising in India are qualified for appointment
It uses an independent body to examine a business’ financial transactions and statements
The ultimate purpose of this form of auditing is to present an accurate account of a company’s financial business transactions.
Determines if there are sufficient controls over cash and other assets and if adequate process controls exist for the acquisition and use of resources.
Section 143 which contains provisions regarding powers and duties of auditors

→ Cost Audit
According to Chartered Institute of Management Accountants, London (CIMA), cost audit is “the verification of the correctness of cost accounts and of the adherence to the cost accounting plan”. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. Ministry of Corporate affairs has made cost audit compulsory for companies engaged in fertilizer, bulk drug, sugar, telecommunication, industrial alcohol and electricity & petroleum

→ Duties of cost auditor

Whether the planned expenditure is designed to give optimum results
Whether the return from expenditure on capital and current operations could be improved if some other alternate plan of action is used
Whether the size and channels of expenditure used produced the best results
Examine the correctness of the cost records maintained by the concern

→ Secretarial Audit
Secretarial audit is a compliance audit. It is a process to check compliances made by the Company under Corporate Law & other laws, rules, regulations, procedures
A Company Secretary in Practice has been assigned the role of Secretarial Auditor in section 2(2)(c)(v) of The Company Secretaries Act 1980.

→ Features of secretarial audit

Determines if departments are complying with applicable laws, roles and regulations, and maintaining various records and registers
It assures the owners that management and affairs of the company are being conducted in accordance with requirements of laws, and that the owners’ stake is not being exposed to undue risk.
Recommendations from these audits usually require improvements in processes and controls used to ensure compliance with regulations
The secretarial audit can assist bodies like SEBI, Stock Exchanges, Financial Institutions, Banks, etc. to gauge or measure the levels of compliance and non-compliance by the companies
To provide comfort to investors that the company has been conducting its affairs in accordance with laws

→ Regulations regarding secretarial audit
As per section 204 of the Companies Act, 2013 read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, following companies are required to obtain ‘Secretarial Audit Report’ form independent practicing company secretary:

Every listed company
Every public company having a paid-up share capital of Fifty Crore rupees or more; or
Every public company having a turnover of Two Hundred Fifty Crore rupees or more.

→ “Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)]

→ Secretarial Audit is also mandatory to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies

→ Other Audits
(1) Tax audit:
In India tax audit is compulsory for certain assessee whose turnover or receipts exceed the specified limit, of Tax audit are

Audit of accounts of assessees having total sales, turnover or gross receipts exceeding the specified Rs. 1 crore for business and Rs.25 lakhs for profession for previous year is compulsory
Objective of this audit is to assist the tax authorities in making the correct tax liability
Tax auditor has to specify transactions which have an effect on tax liability
For availing certain deductions and exemptions audit report is required to be submitted.

(2) Bank Audit
A large amount of public funds are handled by banks thus it is required to assess that statement of accounts reveal a true picture. Features of Bank audit are

auditors have to certify that statement of accounts of the bank as at the closure of the half year/financial year reveal true and fair view of the Bank’ financial position
every provision for non performing asset/bad debts has been made and there is no hidden NPA
Banking Regulation Act, 1949 contains the provisions relating to the maintenance of accounts and their audit.
It acts as a regulatory measure on Banks

(3) Co-Operative Society Audit
Co-Operative Society are just like companies and have separate ownership from its members. Since only a small number of members are managing the Society thus an audit of the accounts is compulsory as per Law. Features of audit are

An auditor Has to check whether provisions related to Co-Operative Act Rules and bye-laws have been followed
As affairs of the society are often handled by non technical people thus auditor is required to report on this aspect also.

(4) Trust Audit
An independent financial audit gives an assurance to the people who create trust that the purpose for which they have created trust is being fulfilled and no fraud is going on. Features of Trust Audit are

In India as per Income Tax Act, 1961 some of the income earned by trust is not included while computing the income earned for tax purpose, thus a true and fair accounts is required so no fraud is done regarding the payment of Income Tax.
Auditor Verifies the accuracy and appropriateness of individual trust accounts
Just to safeguard the interest of the trust beneficiary sometimes a compulsory audit of the trust is mentioned in the trust deed itself

(5) Insurance Audit
The insurance audit is a process common to the insurance industry Features are

An audit to ensure customer has paid no more than the appropriate premium for his exposure
Auditor should be conversant with IRDA,1999
An audit is an examination of insurance company’s operation, records and books of account

(6) Partnership Firm Audit
Audit of partnership firm is not compulsory & even the Partnership Act 1932 is silent about this. Features of audit are

Auditing the accounts of a partnership firm helps in detecting errors & frauds & verification of financial statements
Banks & financial institutions lend money to the firms only on the basis of audited accounts thus an audit is beneficial
Helps in proper calculation of goodwill
Audit should be done as per the partnership deed and Partnership Act

(7) Sole Proprietorship Audit

Audit is not required to be done by an independent auditor
No legal requirement to get the audit done
Audit assures that accountant has managed the books and prepared accounts in a proper way

(8) Government audit
Auditing is essential to government accountability to the public. Features of audit are

Audits provide an independent, objective, nonpartisan assessment of the financial transactions of the Government.
It is the duty of Comptroller and Auditor General of India (C&AG) to audit the receipts and expenditure of the Union Government and Sate Government.
Government audit also includes the audit of Government Companies conducted by C&AG in accordance with the Companies Act, 2013 and other relevant legislations
As Government officials entrusted with public resources are responsible for carrying out public functions legally, effectively, efficiently, economically, ethically, audit provides a check on it.

(9) Management Audit
A management audit can be defined as an audit which analyzes the effectiveness of the management team of a company
Features of audit are:

Evaluation of actual performance with targeted performance
Some of the events that call for a management audit are top management changes, mergers and acquisitions etc.
The objective of a management audit is not to appraise individual executive performance, but to evaluate the management team in relation to their competition.

(10) Functional audit
The objective of a functional audit is to provide an independent evaluation of a function, with respect to system, process, input and output.
Features of audit are:

It is to evaluate the effectiveness of the department process and find out the shortfall.
corrective measures are taken to remove the shortfalls

(11) Propriety audit
It is a form of management audit which helps the management to find the inefficiency in the system.
Features of this audit are:

Expenditure is analyzed so that improper and unnecessary expenditure colud be identified although the expenditure has been done in conformity to rules and regulations

(12) Efficiency audit
Efficiency audit is related to that whether corporate plans are effectively executed.
Features of audit are:

It assess how efficiently the system is being performed
It is also known as performance audit
Auditor investigates the reasons of variances in actual performance and planned performance.
It also investigates that capital resources of company are properly utilized or not.
To identify unprofitable practices, the performance audit is helpful. It may analyze one department or the whole organization as per the requirement
Efficiency audit might analyze the, maintenance and implementation of resources, such as equipment, to identify areas that require improvement.
Program audits analyze performance to determine whether a program or department is effectively accomplishing its goals

Types of Audit MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Statutory audit is to be done by
a. A practicing Chartered Accountant or a firm of practicing Chartered Accountants
b. A practicing Company Secretary or a firm of practicing Company Secretaries.
c. A practicing Cost Accountant or a firm of practicing Cost Accountants
d. None of the above
Answer:
a. A practicing Chartered Accountant or a firm of practicing Chartered Accountants

Hint:
Section 141 contains that a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant and in case of a firm whereof majority of partners practising in India are qualified for appointment.

Question 2.
Balance sheet audit includes verification of:
a. Assets
b. Liabilities
c. Income accounts and expenses accounts wherever appropriate
d. All of the above
Answer:
d. All of the above

Hint:
Balance Sheet audit involves the verification of all the balance sheet items which involves both assets and liabilities as well as verification of income and expenses accounts whenever required.

Question 3.
The audit conducted by Comptroller and Auditor General of India is a form of
a. Bank Audit
b. Financial Audit
c. Routine Audit
d. Government Audit
Answer:
d. Government Audit

Hint:
Government audit also includes the audit of Government Companies conducted by C&AG in accordance with the Companies Act, 2013 and other relevant legislations.

Question 4
……………………………….. is useful for the purpose of cost control, cost reduction and proper utilization of scarce resources
a. Financial Audit
b. Cost Audit
c. Secretarial Audit
d. Tax Audit
Answer:
b. Cost Audit

Hint:
The term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. Ministry of Corporate affairs has made cost audit compulsory for companies engaged in fertilizer, bulk drug, sugar, telecommunication, industrial alcohol and electricity & petroleum

Question 5.
Who can order management audit?
a. Workers of a company
b. Central Government
c. Board of Directors
d. Securities and Exchange Board of India
Answer:
c. Board of Directors

Hint:
A management audit can be defined as an audit which analyzes the effectiveness of the management team of a company. Thus, the Board of Directors in whose hands the management of the company rests can order the management audit.

Question 6.
Cost Audit is
a. Mandatory for all companies
b. Mandatory for manufacturing companies covered by Cost Audit Report Order
c. Mandatory for all trading companies
d. Mandatory for all manufacturing companies
Answer:
b. Mandatory for manufacturing companies covered by Cost Audit Report Order

Hint:
Ministry of Corporate affairs has made cost audit compulsory for companies engaged in fertilizer, bulk drug, sugar, telecommunication, industrial alcohol and electricity & petroleum

Question 7.
Statutory audit of a company is
a. Mandatory
b. Voluntary
c. Recommendatory
d. Voluntary but recommendatory
Answer:
a. Mandatory

Hint:
The ultimate purpose of Statutory audit is to present an accurate account of a company’s financial business transactions. Statutory audit is mandatory for companies.

Question 8.
Who appoints an internal auditor?
a. Shareholders of the company
b. Statutory auditor
c. Institute of the Internal auditors of India
d. Board of Director of the company
Answer:
d. Board of Director of the company

Question 9.
Ram is a chartered accountant working as proprietor. His gross receipts are Rs. 50 Lakhs for the year. Which type of audit will necessarily be applicable for him?
a. Statutory audit
b. Tax audit.
c. Internal audit
d. None of the above.
Answer:
b. Tax audit.

Hint:
As per the Income tax act every person carrying on the business whose turnover or gross receipts exceeds Rs. 1,00,00,000 (Rs. 25,00,000 in case of profession) in the previous year shall get his accounts audited.

Since, Ram is a chartered Accountant which means Ram is carrying on a profession and is gross receipt i.e. Rs. 50,00,000 exceed the limit of Rs. 25,00,000, he is required to get Tax Audit done.

Question 10.
In comparison to the independent auditor, an internal auditor is more likely to be concerned with:
a. Cost accounting system
b. Internal control system
c. Legal compliance
d. Accounting system.
Answer:
b. Internal control system

Hint:
The role of internal audit is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively.

Question 11.
Which of the following is primarily carried out to ascertain the cases of improper, avoidable and infructuous expenditure?
a. Propriety aud.
b. Statutory audit
c. Tax audit
d. Functional audit.
Answer:
a. Propriety aud.

Hint:
Under propriety audit, the expenditure is analysed with a view to ascertain the cases of improper, avoidable and infructuous expenditure. There is no legal requirement to get the audit done but Audit assures that accountant has managed the books and prepared accounts in a proper way.

Question 12.
In general, the scope of management audit is
a. Flexible
b. Rigid
c. Prescribed by law
d. Prescribed by the appointing authority.
Answer:
a. Flexible

Hint:
It is not mandatory but is recommendatory. Thus, its scope is flexible.

Question 13.
The statutory auditor of a company can act as
a. Internal Auditor
b. Cost Auditor
c. Tax Auditor
d. None of the above.
Answer:
c. Tax Auditor

Hint:
Tax auditor and statutory auditor means one and the same thing. Thus, statutory auditor of a company can acts as a tax auditor.

Question 14.
In general, what is the period covered in a statutory audit?
a. 1 Year
b. 2 Year
c. 3 Year
d. Depending upon the auditor’s wish.
Answer:
a. 1 Year

Hint:
Statutory audit covers the period of one financial year thus a period of one year.

Question 15.
As per the Company Act, 2013, which of the following audit is voluntary for all companies in India:
X. Secretarial Audit
Y. Statutory Audit
Z. Cost Audit
W. Internal Audit
Correct option is
a. X and Y
b. X and W
c. X and Z
d. X, Y, Z andW.
Answer:
b. X and W

Hint:
As per Companies Act, 2013, certain class or classes of company as may be prescribed shall appoint an internal auditor who will conduct an audit of the functions and activities of the company.
Statutory Audit is mandatory for the public companies.
Secretarial audit is voluntary
Ministry of Corporate affairs has made cost audit compulsory for companies engaged in fertilizer, bulk drug, sugar, telecommunication, industrial alcohol and electricity & petroleum

Question 16.
Who appoints the auditor for government company
a. Comptroller and Auditor
b. Shareholders
c. Central Government
d. Directors.
Answer:
a. Comptroller and Auditor

Hint:
“Comptroller and Auditor General of India” appoints the auditor for Government company.

Question 17.
Statutory Audit is to be done by
a. A practicing Chartered Accountant or a firm of practicing CA.
b. A practicing CS or a firm of practicing CS
c. A practicing cost accountant or a firm of practicing cost accountant
d. None of the above.
Answer:
a. A practicing Chartered Accountant or a firm of practicing CA.

Hint:
Eligible person to be appointed as auditor – Section 141 contains that a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant and in case of a firm whereof majority of partners practising in India are qualified for appointment.
Statutory audit is done by Chartered accountant.

Question 18.
Which of the following is voluntary audit.
a. Internal Audit
b. Tax Audit
c. Cost Audit
d. Statutory Audit
Answer:
a. Internal Audit

Hint:
Internal audit is voluntary as there is no obligation to conduct this audit. Although As per Companies Act, 2013, certain class or classes of company as may be prescribed shall appoint an internal auditor who will conduct an audit of the functions and activities of the company and make a report thereon to the Board of Directors.

Question 19.
Income tax Audit is conducted under
a. Income Tax Act
b. Banking Regulation Act
c. Companies Act
d. Insurance Act.
Answer:
a. Income Tax Act

Hint:
Tax audit is the audit of accounts required under the Income Tax Act, 1961.

Question 20.
Who can do a Bank Audit?
a. C.A.
b. C.S.
c. CMA
d. All of the above.
Answer:
a. C.A.

Hint:
Bank audit is done by chartered Accountant.

Question 21.
The given statement regarding bank audit “Adequate Provision for nonperforming assets/ Bad debts has to be made in the books” is
a. True
b. False
c. Partly True
d. Partly False.
Answer:
a. True

HInt:
Features of Bank audit are

auditors have to certify that statement of accounts of the bank as at the closure of the half year/financial year reveal true and fair view of the Bank’ financial position
every provision for non performing asset/bad debts has been made and there is no hidden NPA
Banking Regulation Act, 1949 contains the provisions relating to the maintenance of accounts and their audit.
It acts as a regulatory measure on Banks

Question 22.
Tax audit is conducted ……………………… number of times in a year.
a. 1
b. 2
c. 3
d. ‘n’ no. of times.
Answer:
a. 1

Hint:
Tax audit is done for one financial year i.e. one year.

Question 23.
Which type of audit may be conducted by organisation’s staff?
a. Internal Audit
b. External Audit
c. Cost Audit
d. Tax Audit.
Answer:
a. Internal Audit

Hint:

Internal audit is an independent appraisal function established by the management of an organisation
It helps in keeping a control over the business activities. The examination and evaluation of the adequacy and effectiveness of internal control systems provide the reasonable assurance to managers and help them to improve the effectiveness of governance.
It is conducted by internal auditors

Question 24.
Who will be responsible for errors in audit report if external auditor relies on the work of internal auditor?
a. External Auditor
b. Internal Auditor
c. Both (a) and (b)
d. Management.
Answer:
a. External Auditor

Hint:
The opinion of the external auditor, an independent expert assures the owners about the reliability of the financial statements. To prove his utility an external auditor needs to check all the details of the financial statements and will be considered responsible for any errors.

Question 25.
Cost Audit is compulsory for
a. Fertilization Company
b. Sugar Company
c. Tele Communication
d. All of the above.
Answer:
d. All of the above.

Hint:
Ministry of Corporate affairs has made cost audit compulsory for companies engaged in fertilizer, bulk drug, sugar, telecommunication, industrial alcohol and electricity & petroleum.

Question 26.
Why auditing cannot be done by internal audit staff?
a. (a) Biased nature
b. Incapable staff
c. Both (a) & (b)
d. None of the above.
Answer:
a. (a) Biased nature

Question 27.
Provisions related to bank audit is given in:
a. Banking Regulation Act, 1949
b. Companies Act, 2013
c. Income Tax Act, 1961
d. None of the above.
Answer:
a. Banking Regulation Act, 1949

Question 28.
Audit is:
a. Internal
b. External
c. Both (a) and (b)
d. None of the above.
Answer:
c. Both (a) and (b)

Hint:
Audit are Internal as well as External. Internal audit is when the management appoints auditor while external audit comprises of statutory audit, etc as demanded by law.

Question 29.
Which of following audits are done every year?
(i) Tax Audit
(ii) Statutory Audit
(iii) Concurrent Audit
a. (i) & (ii)
b. (ii) & (iii)
c. (i) & (iii)
d. All of the above:
Answer:
a. (i) & (ii)

Hint:
The Tax Audit and Statutory Audit are the audits which are done every year while concurrent audit is voluntary.

Question 30.
The cost auditor is to Judge whether the planned expenditure is designed to give optimum result. This exercise may be categorised as:
a. Operation audit
b. Financial audit
c. Efficiency audit
d. Management audit
Answer:
c. Efficiency audit

Hint:
The cost auditor is to judge whether the planned expenditure is designed to give optimum result. This exercise may be categorised as efficiency audit which refers to comparing the actual results with the desired/projected results.

Question 31.
For a tax audit, the specified limit given under Income tax Act, 1961 for a person carrying on business shall be:
a. Turnover exceeds Rs. 40,00,000 in the previous year
b. Turnover exceeds Rs.1,00,00,000 in the previous year
c. Turnover is below Rs.40,00,000 in the previous year
d. Turnover is below Rs.60,00,000 in the previous year
Answer:
b. Turnover exceeds Rs.1,00,00,000 in the previous year

Hint:
As per the Income Tax Act, 1961, every person carrying on business whose turnover or gross receipts exceeds Rs. 1,00,00,000 (Rs. 25,00,000 if carrying on profession) in the previous year shall get his accounts audited.

Question 32.
Consider the following statements about Bank Audit in India? (X) The Bank audit may be done by any person who possesses the prescribed qualification Le. CA, CS and CMA (Y) one of the objectives of Bank audit is to ascertain the adequacy of the provisions of Non-performing assets in Bank. On the basis of above.
a. Statement X is false and statement Y is true
b. Statement X and statement Y both are false
c. Statement X is true and statement Y is false
d. Statement X and statement Y both are true.
Answer:
a. Statement X is false and statement Y is true

Hint:
Features of Bank audit are

auditors have to certify that statement of accounts of the bank as at the closure of the half year/financial year reveal true and fair view of the Bank1 financial position
every provision for non performing asset/bad debts has been made and there is no hidden NPA
Banking Regulation Act, 1949 contains the provisions relating to the maintenance of accounts and their audit.
It acts as a regulatory measure on Banks

Question 33.
An auditor of a partnership firm is appointed as per ……………………………..
a. Status
b. Agreement
c. Convention
d. Government Orders.
Answer:
b. Agreement

Hint:
Presently partnership firms in India are not legally bound to get their financial statements audited. Thus partnership firm can appoint an auditor for auditing as per their agreement.

Question 34.
Cost audit is useful for the purpose of proper utilization of scarce resources through (i) cost control (i1) cost reduction (iii) cost minimisation. The options are:
a. II and III
b. I and II
c. I, II and III
d. I and III
Answer:
b. I and II

Hint:
Benefits of Cost audit:

It ensures that cost control and cost reduction techniques are followed.
It ensures efficient utilization of scarce resources.
It ensures that unit has been running economically and efficiently
It ensures that proper cost records are maintained.

Question 35.
The statutory auditor is duty bound to enquire whether ……………………………. expenses have been charged to ……………………………… Account.
a. Fixed, Revenue
b. Personal, Revenue
c. Personal, Capital
d. Capital, Profit and Loss
Answer:
c. Personal, Capital

Question 36.
For a tax audit, the specified limit given under Income Tax Act, 1961 for a person carrying on business shall be:
a. Turnover exceeds (Rs. 1,00,00,000 in the previous year
b. Turnover exceeds (Rs.40,00,000 in the previous year
c. Turnover is below (Rs.40,00,000 in the previous year
d. Turnover is below (Rs.60,00,000 in the previous year.
Answer:
a. Turnover exceeds (Rs. 1,00,00,000 in the previous year

Hint:
As per Income Tax Act, every person carrying on business whose turnover or gross receipts exceeds Rs. 1,00,00,000 (25,00,000 if. carrying profession) in previous year shall get his accounts audited.

Question 37.
In India, the audit of co-operative society:
a. Voluntary
b. Mandatory
c. Mandatory on satisfying certain criterion
d. Mandatory for some specified class of societies.
Answer:
b. Mandatory

Hint:
Audit which is prescribed by a state/legislation e.g. Company audit as per Companies Act, audit of Banking Companies, electricity supply companies, public and charitable trust, co-operative schemes which have been set up under the Act of Parliament and other audits required as per law

Question 38.
The audit conducted by CAG (Comptroller Auditor General of India) is a form of:
a. Propriety Audit
b. Statutory Audit
c. Bank Audit
d. Routine Audit
Answer:
b. Statutory Audit

Hint:
Government audit includes the audit of Government Companies conducted by C&AG in accordance with the Companies Act, 2013 and other relevant legislations. It is a statutory audit.

CS Foundation Fundamentals of Accounting and Auditing Notes

Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting and Auditing Notes

December 29, 2022

Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Bank is “an establishment authorized by a government to accept deposits, pay interest, clear cheques, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.”

→ Bank account has gone through many changes over the past half century. With many different types of account, offering a variety of benefits, it’s important to select the account that best suits your needs.

→ Types of Bank Account
A. Savings Accounts: These are intended to provide an incentive for individual to save money. You can make deposits and withdrawals, but there is a restriction on the number of amounts and amount of withdrawal that can be made. They pay interest on the deposits that are made. Because of its restriction regarding the withdrawal it does not suit the businessmen but is popular with individuals

B. Current account: Current Accounts are basically meant for businessmen. No interest is paid in current account but any number of transactions without limit can be made. On the other hand, banks charges certain service charges, on such accounts. Sometimes businessman is allowed to withdraw amount more then what is deposited balance available in their account. Such a facility of withdrawing more than the available balance money in their account is called overdraft

C. Fixed Deposit Account: Fixed deposits are bank accounts that require the account holder to make a deposit and agree to leave funds in the account for a specific amount of time. In return for this agreement, the financial institution pays interest to the account. Often, the interest paid on a FD is higher than the rate paid on other types of bank account.

D. Recurring Deposit Account: These are popularly known as RD accounts and are special kind of Term Deposits and are suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month. Normally, such deposits earn interest on the amount already deposited (through monthly installments) at the same rates as are applicable for Fixed Deposits/Term Deposits.

→ Bank Deposit: Bank Deposit refers to an amount of money in cash or check form or sent via a wire transfer that is placed into a bank account. The target bank account for the Bank Deposit can be any kind of account that accepts deposits. Deposits can be made by filling up a form called pay-in-slips which is deposited with the cashier of the bank and an acknowledgement is taken. Money deposited with the bank is debited to bank account.

→ Withdrawals: Withdrawal of money from the bank account can be made with the help of withdrawal slip provided by banks. Moreover withdrawal of money can be made by cheques which mentions the name of the person to whom the bank should pay money. Money withdrawn from the bank is credited to bank account.

→ Bank Pass Book: A Bank pass book is similar to a small notebook that contains your name, account number and certain other personal information about you. This book records all deposits and withdrawals.

→ Bank Reconciliation Statement: A company’s cash balance at bank and its cash balance according to its accounting records usually do not match. This is due to the fact that, at any particular date, checks may be outstanding, deposits may be in transit to the bank, errors may have occurred etc. Therefore companies have to carry out bank reconciliation process which prepares a statement accounting for the difference between the cash balance in company’s cash account and the cash balance according to its bank statement.

→ Following are the transactions which usually appear in company’s records but not in the bank statement:

Deposits in Transit: Deposits which have been sent by the company to the bank but have not been received by the bank at proper time before the issuance of bank statement.
Checks Outstanding: Checks which have been issued by the company but were not presented or cleared before the issuance of bank statement.
Service Charges: Service charges may have been deducted by the bank. Such charges are usually not known to the company before the issuance of bank statement.
Interest Income: If any interest income has been earned by the company on its bank account, it is not usually \ entered in company’s cash account before the issuance of bank statement.
Dishonour of Cheques: when cheques deposited with the bank but are dishonoured then such cheque amount is debited in the company books but not given any effect in company’s cash book
Direct payment made by the bank: For certain payments like insurance premium, electricity bills etc. Company given instructions to bank that they be paid by the bank at their own end. Such payments are shown in cash book but company account books forgets to show such payments made
Cheques received but not honoured: sometimes cheques are received and their entry is made in the books of company but they are not deposited with bank which shows the difference in the statement.
Errors: sometimes there may be errors in making the entry either by the company employee or bank employee

→ Need for a Bank Reconciliation statement: ‘Reconciliation’ between the cash book and the bank statement final balance simply means an explanation of the differences. This identification of the difference can prevent frauds, it shows the actual position of the Bank balance, highlights the causes of difference.

→ Procedure for preparation of Bank Reconciliation Statement: Cash book is the record of cash and bank transaction prepared by the entrepreneur and the pass book is the statement of accounts prepared by the bank. There are a lot of reasons due to which the balances of cash book and pass book do not match, and then bank reconciliation statement is prepared to reconcile both the balances.

→ Step 1: Adjusting the Balance as per Bank (Pass Book)
Balance as per Bank Statement on date, 2013
Adjustments:
Add : Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted or corrected Balance per Bank

→ Deposits in transit – are amounts already received and recorded by the company, but are not yet recorded by the bank. Because deposits in transit are already included in the company’s Cash account, there is no need to adjust the company’s records. However, deposits in transit are not yet on the bank statement. Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in order to report the true amount of cash.

→ Outstanding cheques- are cheques that have been written and recorded in the company’s Cash account, but have not yet cleared the bank account .Because all checks that have been written are immediately recorded in the company’s Cash account, there is no need to adjust the company’s records for the outstanding checks. However, the outstanding checks have not yet reached the bank and the bank statement.

→ Therefore, outstanding checks are listed on the bank reconciliation as a decrease in the balance per bank.

→ Bank errors: are mistakes made by the bank. Bank errors could include the bank recording an incorrect amount, entering an amount that does not belong on a company’s bank statement, or omitting an amount from a company’s bank statement. The company should notify the bank of its errors. Depending on the error, the correction could increase or decrease the balance shown on the bank statement.

→ A helpful rule of thumb is “put it where it isn’t.”

→ Step 2. Adjusting the Balance per Cash Book
The second step of the bank reconciliation is to adjust the balance in the company’s Cash account so that it is the true, adjusted, or corrected balance Balance per Books on date, 2013 Adjustments
Deduct: Bank Service charges
Deduct: NSF cheques & fees
Deduct: Cheque printing charges
Add: Interest earned
Add: Notes receivable collected by bank
Add or Deduct: Errors in Company’s Cash Account

→ Adjusted or Corrected Balance per Book
Bank service charges are fees deducted from the bank statement for the bank’s processing of the checking account activity. Other types of bank service charges include the fee charged when a company overdraws its checking account and the bank fee for processing a stop payment order on a company’s cheque. The bank might deduct these charges or fees on the bank statement without notifying the company. When that occurs the company usually learns of the amounts only after receiving its bank statement.

→ An NSF cheque or bounced cheque is a cheque that was not honored by the bank of the person or company writing the cheque because that account did not have a sufficient balance. As a result, the cheque is returned without being honored or paid. (NSF is the acronym for not sufficient funds. Often the bank describes the returned cheque as a return item. Because the bounced cheque and the related bank fee have already been deducted on the bank statement, there is no need to adjust the balance as per the bank. However, if the company has not yet decreased its Cash account balance for the returned cheque and the bank fee, the company must decrease the balance in cash book in order to reconcile.

Add the interest earned by the company and not recorded in cash book but included in bank pass book.
Errors or omissions in the cash book can lead to a difference between the balance as per bank statement and the balance as per cash book
A helpful rule of thumb is “put it where it isn’t.”

→ Step 3. Comparing the Adjusted Balances:
After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2), the two adjusted amounts should be equal. If they are not equal, you must repeat the process until the balances are identical. The balances should be the true, correct amount of cash as of the date of the bank reconciliation.

→ Step 4. Preparing bank reconciliation statement when overdraft balance is given – Sometimes a businessman withdraws excess amount from the bank account and the closing bank balance of a month is a debit balance. This balance amount is called ‘overdraft balance’ as per Pass Book. This is shown in the cash book as a credit balance. Overdraft balance is to be shown in the minus column of statement as the starting point. The other steps shall remain same.

→ Step 5. Preparing Bank Reconciliation statement when extract of cash book and pass book are given – when extracts of cash book and pass book are given then while preparing the reconciliation statement firstly the heading should be given mentioning the name of the business and the period for which cash book and pass book are prepared. After this the bank reconciliation statement be prepared.

Bank Reconciliation Statement MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
For withdrawal of money from account, what is to be submitted?
a. Fixed deposit receipt
b. Fixed deposit account receipt
c. Deposit receipt
d. Receipt
Answer:
a. Fixed deposit receipt

Question 2.
Bank does not pay interest on the following account
a. Recurring deposit account
b. Fixed deposit account
c. Savings account
d. None of the above
Answer:

Question 3.
Pay in slips are NOT used for depositing money in
a. Current account
b. Saving account
c. Fixed deposit account
d. None of the above
Answer:
c. Fixed deposit account

Question 4.
X deposited rupees 500 in Bank account
a. Bank account will be credited
b. Bank account will be debited
c. Saving account will be debited
d. All of the above
Answer:
b. Bank account will be debited

Question 5.
The purpose of preparing a Bank Reconciliation Statement is to:
a. Ascertain that the difference between the Cash book balance and the Bank Statement balance has been accounted for
b. Correct errors in the Cash book or errors in the Bank statement
c. Amend the balance of the Bank Statement of the firm
d. Amend the balance in the Cash book of the firm
Answer:
c. Amend the balance of the Bank Statement of the firm

Question 6.
For keeping the bank pass book up to date the responsibility is passed on to
a. Bank
b. Client
c. Creditor
d. All of the above
Answer:
b. Client

Question 7.
It is not true for bank reconciliation statement
a. That the bank balance as per cash book and pass book able some
b. Prepared on a particular date .
c. A single transaction is recorded both in bank pass book as well as bank cash book.
d. The transaction in the cash book one recorded as per client new point.
Answer:
a. That the bank balance as per cash book and pass book able some

Question 8.
Bank reconciliation sometimes points to the need for adjusting entries. Invariably how should it be done?
a. The reconciliation of the ending balance per the bank statement to the adjusted cash balance.
b. The reconciliation of the cash balance per the company records to the adjusted cash balance.
c. Both a and b
d. None of the above.
Answer:
a. The reconciliation of the ending balance per the bank statement to the adjusted cash balance.

Question 9.
At the happening of below mentioned event what will happen. A cheque is deposited with bank
a. Bank pass book will be credited
b. Bank pass book will be debited
c. Bank’s column in cash book is debited
d. Bank’s column in cash book is credited
Answer:
c. Bank’s column in cash book is debited

Question 10.
Collection charges and incidental charges are first reflected in
a. Pass book
b. Cash book
c. Bank statement
d. None o the above
Answer:
a. Pass book

Question 11.
The proper treatment of unrecorded deposits (deposits in transit) on a bank reconciliation is to show them as an
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
c. addition per bank statement balance

Question 12.
Some of the transaction that is dependent on bank statement are
a. Collection charges
b. Dividends received
c. Rent received
d. All of the above
Answer:
d. All of the above

Question 13.
Bank reconciliation statement points out
a. Credibility of the balance shown in pass book.
b. Savings account
c. Fixed deposit account
d. Recurring deposit account.
Answer:
a. Credibility of the balance shown in pass book.

Question 14.
Bank reconciliation statement is prepared on
a. Yearly basis from Jan to December
b. Certain period basis
c. As on particular date
d. Both a & b
Answer:
d. Both a & b

Question 15.
Base of reconciliation statement is
a. Balance shown in cash book
b. Balance shown in pass book
c. Either a or b
d. Nor a nor b
Answer:
c. Either a or b

Question 16.
An enterprise take cash book balance as the base for preparation of bank reconciliation statement. Some of the bank charges have been put. These charges will be
a. Added in cash book
b. Deducted in cash book
c. Nothing is to be done for this entry
d. None of the above
Answer:
b. Deducted in cash book

Question 17.
In case of on enterprise having an overdraft facility the bank reconciliation statement treats all the cheques deposited but not cleared in the cash book to be
a. Added
b. Deducted
c. To be revealed only in pass book
d. To be revealed only in cash book
Answer:
a. Added

Question 18.
Overdraft balance as per cash book will be
a. Shown in minus column of bank reconciliation statement
b. Shown in ‘plus’ column of bank reconciliation statement
c. Will be carried forward for next period
d. None of the above
Answer:
b. Shown in ‘plus’ column of bank reconciliation statement

Question 19.
Banks objective is to
a. Collect money on behalf of client
b. Give loans to client
c. Accept deposits of clients
d. All of the above
Answer:
d. All of the above

Question 20.
The proper treatment of outstanding cheques on a bank reconciliation is to show them as a
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
d. deduction per bank statement balance

Question 21.
Favourable balance of cash book implies the
a. Credit balance of cash book
b. Debit balance of cash book
c. Bank overdraft
d. Adjusted balance of cash book
Answer:
b. Debit balance of cash book

Question 22.
A check returned by bank marked “NSF” means that
a. Bank can’t verify your identify
b. There are not sufficient funds in your account
c. Check has been forged.
d. Check can’t be cashed being illegal
Answer:
b. There are not sufficient funds in your account

Question 23.
In the Bank reconciliation statement “Deposit in transit” is usually
a. Subtracted from bank balance
b. Added to bank balance
c. Added to cash book balance
d. Subtracted from cash book balance
Answer:
b. Added to bank balance

Question 24.
Bank reconciliation statement is prepared by
a. Accountant of the business
b. Manager of the business
c. Controller of the bank
d. Accountant of the bank
Answer:
a. Accountant of the business

Question 25.
Which of the following error results in unadjusted cash book balance?
a. Outstanding cheques
b. Unpresented cheques
c. Deposit in transit
d. Omission of Bank charges
Answer:
d. Omission of Bank charges

Question 26.
Bank charges amounting to Rs 5000 was not entered in the cash book. Identify the correct adjustment in accounts
a. Bank charges will be debited in cash book.
b. Bank charges will be added to cash book balance
c. Bank charges will be credited in cash book
d. Bank charges need no adjustment in cash book
Answer:
c. Bank charges will be credited in cash book

Question 27.
Unpresented cheques are also referred as
a. Uncollected cheques
b. Uncredited cheques
c. Outstanding cheques
d. Bounced cheques
Answer:
c. Outstanding cheques

Question 28.
_____________ are cheques that are issued by the business but not yet presented to bank
a. Uncollected cheques
b. Uncredited cheques
c. Outstanding cheques
d. Bounced cheques
Answer:
c. Outstanding cheques

Question 29.
A record of transaction between the bank and the holder _____________ of is bank statement
a. A foreign currency account
b. A current account
c. A saving account
d. All of the given options
Answer:
d. All of the given options

Question 30.
What is true about a reconciliation Statement? It is a statement:-
a. Sent by the bank when we have made and error
b. Sent by the bank when we the account is overdrawn
c. Drawn up by the bank to verify the cash book
d. Drawn up by us to verify our cash book balance with the bank statement balance
Answer:
d. Drawn up by us to verify our cash book balance with the bank statement balance

Question 31.
Which is the statement that is uncommon for a Bank Reconciliation Statement?
a. Part of the double entry system
b. Not part of the double entry system
c. Sent by the firm to the bank
d. Posted to the ledger accounts.
A (i), (iii) and (iv)
B (i), and (ii)
C (i), (ii) and (iv)
D (i), (iii) and (iv)
Answer:
c. Sent by the firm to the bank

Question 32.
The recording of financial transactions and events manually or electronically is called
a. Bookkeeping
b. Information technology
c. Reporting
d. Auditing
Answer:
d. Auditing

Question 33.
The cash account on the balance sheet should not include which of the following, items:
a. Travel advances to employees
b. Currency
c. Money orders
d. Deposits in transit
Answer:
a. Travel advances to employees

Question 34.
How would deposits in transit be handled when reconciling the ending cash balance as per the bank statement to the correct adjusted cash balance?
a. Added to be balance per the bank statement.
b. Subtracted from the balance per the bank statement
c. Added to the balance per company records.
d. Ignored.
Answer:
b. Subtracted from the balance per the bank statement

Question 35.
A cash deposit made by business appears on the bank statement as ____________ balance
a. Debit
b. Credit
c. Expense
d. Liability
Answer:
b. Credit

Question 36.
The trading securities owned by a company are:
a. Reported on the balance sheet as a current asset.
b. Reported on the balance sheet as a noncurrent asset.
c. Reported on the balance sheet as a contraequity asset.
d. Reported on the balance sheet as a reduction of liabilities.
Answer:
a. Reported on the balance sheet as a current asset.

Question 37.
When a person who is maintaining accounts is not able to differentiate between capital expenditure and revenue expenditure it is
a. Errors of Principle
b. Errors of ommission
c. Errors of commission
d. All of the above
Answer:
a. Errors of Principle

Question 38.
Adjusted profit and loss are used in
a. Budgetary control technique
b. Information technique
c. Financial accounts preparation technique
d. For bounced cheques
Answer:
a. Budgetary control technique

Question 39.
An account used for carrying temporarily doubtful receipts or disbursements and discrepancies is
a. Suspense account
b. Debit balance
c. Bank overdraft
d. Adjustment account
Answer:
a. Suspense account

Question 40.
Standing orders are
a. Credited in the cash book
b. Debited in the cash book
c. Entered in the bank statement
d. Entered in the petty cash balance
Answer:
a. Credited in the cash book

Question 41.
A company was entered in hire purchase agreement and had to pay Rs1000 per month. Three payment we accounted but no entry was found in cash book. Indentify the correct adjustment in cash book.
a. Rs 1000 will be added to cash book balance
b. Rs2000 will be deducted from cash book balance
c. Rs3000 will be added to cash book balance
d. Rs3000 will be subtracted from cash book balance.
Answer:
a. Rs 1000 will be added to cash book balance

Question 42.
Bank sent debit advice of Rs500 to company on overdraft. It wasn’t entered in cash book. What will be the adjustment in cash book.
a. Rs 500 will be debited
b. Rs 500 will be credited
c. Non-adjustable
d. Rs 1000 will be subtracted
Answer:
b. Rs 500 will be credited

Question 43.
In bank reconciliation statement the account of outstanding checks is added to ______________ balance of cash
a. Book adjusted
b. Unadjusted
c. Understand
d. Overstated
Answer:
a. Book adjusted

Question 44.
Balance as per cash book (adjusted) = Rs 1000, unpresented checks = Rs. 2000, uncredited checks = Rs. 500, compute the balance as per bank statement
a. Rs 2000
b. Zero
c. Rs 3000
d. Rs 2500
Answer:
a. Rs 2000

Question 45.
A discount of Rs2000 was given to a supplier on his prompt repayment of debt but the cashier did not enter in the cash book. What should be the adjustment in cash to work out the correct balance of cash book?
a. Rs2000 will be debited in cash book
b. Rs 2000 will be credited in cash book
c. Rs 4000 will be debited in cash book
d. Rs4000 will be credited in the cash book
Answer:
b. Rs 2000 will be credited in cash book

Question 46.
If a cheque written by a firm is not canceled by the bank and returned with the month’s bank statement, the firm should
a. adjust the balance in the firm’s checkbook to reflect the data that appears in the bank’s records.
b. immediately notify the bank requesting that it correct its records.
c. consider this check as outstanding when preparing the bank reconciliation.
d. Consider this check to be lost and issue a replacement check.
Answer:
c. consider this check as outstanding when preparing the bank reconciliation.

Question 47.
Bank reconciliation statement is the comparison of the bank statement with
a. Cash receipt Journal
b. Cash payment Journal
c. Cash book
d. Financial statements
Answer:
c. Cash book

Question 48.
The proper treatment on the bank reconciliation of a debit memorandum issued by the bank is to show it as an
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
b. deduction per book balance of cash

Question 49.
The proper treatment on the bank reconciliation of a note collected by the bank for the depositor is to show it as an
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
a. addition per book balance of cash

Question 50.
The proper treatment on the bank reconciliation of an NSF cheque of a customer that is returned with the bank statement is to show it as a(an)
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
b. deduction per book balance of cash

Question 51.
If the bookkeeper recorded a bank deposit of Rupees 450, but the bank recorded the deposit at its correct amount of Rupees 540. The bank reconciliation will require a/an
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
a. addition per book balance of cash

Question 52.
The bookkeeper recorded a cheque at Rupees 340.56 for store supplies. The cheque was recorded by the bank at its correct amount of Rupees 430.65. The bank reconciliation will require a/an
a. addition per book balance of cash
b. deduction per book balance of cash
c. addition per bank statement balance
d. deduction per bank statement balance
Answer:
b. deduction per book balance of cash

Question 53.
Who prepares Bank Reconciliation Statement?
a. Bank employee
b. Customer of bank or his representative or his accountant
c. Both (a) and (b)
d. None of the above.
Answer:
b. Customer of bank or his representative or his accountant

Hint:
Companies do bank reconciliation process which prepares a statement accounting for the difference between the cash balance in company’s cash account and the cash balance according to its bank statement.

Question 54.
For the purpose of bank reconciliation statement, only the Rs. column of the cash book is to be considered.
a. Cash
b. Bank
c. Cash and Bank
d. Discount
Answer:
b. Bank

Hint:
‘Reconciliation’ between the cash book and the bank statement is the purpose of Bank reconciliation.

Question 55.
Bank balance as per” cash book of ABC Enterprises as on 31 st March, 2013 is f 1,500. Cheques deposited with bank but not cleared amount to f 100 and cheques issued but not presented for payment amount to f 150. The bank allowed interest amounting to Rs.50 and collected dividend Rs.50 on behalf of ABC Enterprises. Balance as per pass book should be:
a. Rs. 1,600
b. Rs. 1,850
c. Rs. 1,450
d. Rs. 1,650.
Answer:
d. Rs. 1,650.

Hint:

Question 56.
Which of the following is true about bank reconciliation statement
a. Bank reconciliation statement need not to be prepared where the balance of cash book and pass book matches
b. Bank reconciliation statement is to be prepared necessarily as per the Income tax Act, 1961
c. Bank reconciliation statement is prepared on yearly basis
d. Bank reconciliation statement is to be prepared and supplied by bank
Answer:
a. Bank reconciliation statement need not to be prepared where the balance of cash book and pass book matches

Hint:
‘Reconciliation’ between the cash book and the bank statement final balance simply means an explanation of the differences. If there is no difference that there is no need fo the preparation of reconciliation statement.

Question 57.
Cash book shows Dr. balance Rs. 10,000, cheque issued Rs. 4,000 and cheques presented Rs. 3,000. calculate the balance as per pass book.
a. 13,000
b. 7,ooo
c. 6,000
d. 10,000
Answer:
b. 7,ooo

Hint:

Question 58.
If the cheque is not .presented for the payment upto the date of the preparation of the Bank Reconciliation Statement then the balance as per pass book will be:
a. Higher than the balance shown by the cash book by the amount of unpresented cheque.
b. Same as shown by the cash book
c. Twice the balance shown by the cash book
d. Lower than the balance shown by the cash book by the amount of unpresented cheque
Answer:
a. Higher than the balance shown by the cash book by the amount of unpresented cheque.

Hint:
Checks Outstanding: Checks which have been issued by the company but were not presented or cleared before the issuance of bank statement.

In such case the difference in the bank statement and the balance shown in the pass book is more than the balance shown by the Cash book because entry in the cash book is made the time cheque is issued by the company but since the cheque has not been presented bank statement doesn’t reflect it.

Question 59.
The pass book shows and overdraft of Rs. 2,000. It was discovered that cheques of Rs. 200, Rs. 40 and Rs. 37 respectively has not been presented for payments and a cheque of Rs. 100 paid into account had not been cleared. The balance as per the cash book will be:
a. Rs. 2,177 (Cr.)
b. Rs. 1,977 (Cr.)
c. ‘ Rs. 1,977 (Dr.)
d. Rs. 2,177 (Dr.)
Answer:
d. Rs. 2,177 (Dr.)

hint:

Question 60.
Bank Balance as per cash book of ABC Enterprises as on 31 SI March, 2013 is Rs. 1, SOJ cheques deposited with bank but not cleared amount to Rs. 100 and cheques issued but not presented for payment amount to Rs. 150. The bonk allowed interest amounting Rs. 50 and collected dividend Rs. 50 on behalf Gf ABC Enterprises, Balance as per pass book should be:
a. Rs. 1,600
b. Rs. 1,850
c. Rs. 1,450
d. Rs. 1,650.
Answer:
d. Rs. 1,650.

Hint:

Question 61.
A credit balance in the bank statement indicates:
a. Cash at bank
b. Cash in hand
c. Bank overdraft
d. Overpayment to creditors.
Answer:
a. Cash at bank

CS Foundation Fundamentals of Accounting and Auditing Notes

Concept of Auditing – CS Foundation Fundamentals of Accounting and Auditing Notes

December 29, 2022

Concept of Auditing – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Meaning of audit: Audit is originated from Latin word ‘audire’ which means to hear. In earlier times accounts were heard by auditors and were verified and certified. In those days, the audit is done to find out whether the payments and receipt are properly accounted or not. Over the time the auditing procedure has changed tremendously.

→ An audit is the examination and verification of the financial report of an organization. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes. The goal of a financial statement audit is to form an opinion regarding whether financial statements are or aren’t free from error.

→ Traditionally auditing was confined to financial statements but now auditing is being done in other areas too like safety, environment, security, information etc.

→ Definition of auditing: Auditing is an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements which have been prepared by the end of accounting is the beginning of auditing.

→ Objectives of Auditing: Auditing main purpose or object is to find the opinion of an auditor about correctness and reliability of accounts and the financial position of the business concern.

→ Definitions of auditing given by different person
1 According to Lawrence R. Dicksee, “an audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some instances, it may be necessary to ascertain whether the transactions themselves are supported by authority.”

2 According to A.W. Hanson “An audit is an examination of accounting records to establish their reliability and the reliability of statements drawn there from.”

3 According to R.B. Bose “Audit may be said to the verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts.”

→ There are differences between accounting and auditing:

accounting is recording all the financial transactions, preparing trial balance, balance sheet, profit and loss account while auditing is checking correctness of these records.
Moreover an auditor who is preparing financial statements is working as an accountant while an auditor doing auditing is checking the correctness of the records.
it is not required that all the accountants be auditor but all the auditors are required to be accountants.

→ Principle aspects to be covered in Auditing:
Effective audit is critical to the quality of financial reporting and the proper conduct of business. Thus some of the aspects to be covered when doing audit are

First is to understand the system and procedure adopted by the entity
Before beginning the auditing determine whether, and to what extent, to use specific work of the internal auditors
If using the specific work of internal auditors, to determine whether that work is adequate for the purposes of the audit and how effective is the internal control system.
To check the arithmetic calculations to trace out if any error in the books of accounts
to monitor the integrity of the financial statements of the company and any formal announcements
relating to the company’s financial performance
auditor has to ascertain that items of capital nature are identified and differentiated from items of revenue nature
Should review the clarity and completeness of disclosures in the financial statements and consider whether the disclosures made are set properly in context.
a proper adjustment has been made for income and expenditure of a particular period
to report to the board on how it has discharged its responsibilities.
if auditor is not satisfied with any aspect of the proposed financial reporting by the company, it shall report its views to the board.
Should ensure all statutory compliance related to income tax, companies Act etc. has been complied by entity
Should review and approve the statements included in the annual report in relation to internal control and the management of risk.
Should physically assess all the assets of the entity
Should inspect the documents to find whether liabilities have been correctly mentioned

→ Benefits of Audit:
The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organization at a given date, some of the benefits of auditing are

An audit helps to identify weaknesses in the accounting systems and enables us to suggest improvements
An audit assures directors not involved in the accounting functions on a day-to-day basis that the business is running in accordance with the information they are receiving, and helps reduce the scope for fraud and poor accounting
It helps to maintain books of accounts up to date
Auditing is also a legal requirement for some companies
An audit facilitates the provision of advice which can cover anything from the tightening of internal controls, to reducing the risk of fraud or tax planning
An audit adds credibility to published information for employees, customers, suppliers, investors and tax authorities
It helps in strengthening the internal system
An audit provides assurance to shareholders (if they are not directors closely involved in the business) that the figures in the accounts show a true and fair view

Limitations of audit:
→ Due to the inherent limitations of audit, auditors are only able to offer ‘reasonable assurance’ over the truth and fairness of the financial statements

→ Due to high cost auditor limits his scope of work to selective testing

→ Audit involves the use of judgment in the identification of audit risks. Although auditing standards provide guidelines to assist auditors in forming sound professional judgments, it is inevitable that an auditor may at times misjudge a situation which may cause the auditor to overlook a misstatement in the financial statement.

→ Generally an auditor is required to give audit report within specified time which doesn’t give him enough time to check all the records

→ they have to rely on the representations of management in order to assess the reasonableness of the matters concerning financial statements.

→ By their very nature, frauds are intended to be concealed which makes the work of auditors a little difficult

→ The perceived independence of an auditor is for instance impaired where a client accounts for the revenue of the audit firm

→ Investigation: Investigation is an examination of books and records for any specified purpose, sometimes differing in scope from the ordinary audit. Investigation implies an examination of and record for some special purpose. Investigation is carried out not in substitution of audit, but in addition to audit.

→ Difference between Audit and Investigation: Following are the important distinctive features in both the term.

Audit which is conducted for a particular object is called investigation while auditing is the examination of financial statements of any entity
Investigation is carried out on behalf of the outsiders who want to know the financial position of the business.
While audit is conducted on behalf of the share holders.
Audit of annual financial statements is compulsory under the law but Investigation is not compulsory under law but voluntary, depending upon necessity.
Investigation can be conducted by anyone and he may not be an auditor while auditing can be done only by auditor
The report of the investigation is submitted to the party appointing him for investigation while the report of audit is submitted to the share holders.
Investigators are appointed by management or owners or any third party but auditors are appointed by shareholders or owners of the entity.
Investigation may cover a period more then a financial year while auditing covers the period of one financial year.
Investigation is conducted for a particular purpose or object while the object of auditing is to find out the correctness of statements and exhibit a true and fair view about the affairs of the business.
Investigation seeks conclusive and corroborative evidence while most of the auditing evidences are persuasive

Concept of Auditing MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
…………………………….. are not legally required to get their financial statements audited
a. Companies
b. Banks
c. Partnership firm
d. Insurance companies
Answer:
c. Partnership firm

Question 2.
In audit, investigation exercise is
a. Mandatory
b. Recommendatory
c. Voluntary
d. Voluntary but recommendatory in all cases
Answer:
c. Voluntary

Hint:
Audit of annual financial statements is compulsory under the law but Investigation is not compulsory under law but voluntary, depending upon necessity.

Question 3.
The format of investigation report is
a. Prescribed by law
b. Not prescribed by any law
c. Standardized
d. Neither standardized nor prescribed by any law
Answer:
d. Neither standardized nor prescribed by any law

Hint:
The report of the investigation is submitted to the party appointing him for investigation while the report of audit is submitted to the share holders.
The format of audit report has been prescribed by law whereas there is no statutory form of investigation report neither any form has been prescribed by law.

Question 4.
Which of the following is true about audit?
a. Audit starts after accounting ends
b. Accounting starts after auditing ends
c. Accounting and auditing exercise are parallel
d. Accounting is complementary to auditing
Answer:
a. Audit starts after accounting ends

Hint:
Definition of auditing: Auditing is an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements which have been prepared by the end of accounting is the beginning of auditing.

Question 5.
Which of the following is a type of persuasive audit evidence for the auditor?
a. Client’s Bank statements
b. Documents obtained by auditor directly from third parties
c. Carbon copies of sales invoices
d. Computations made by the auditor himself
Answer:
c. Carbon copies of sales invoices

Hint:
Audit evidence is information obtained by the auditor to draw conclusions to support opinion on the Financial statements. Persuasive audit evidence will be those evidence which are good at persuading someone to do or believe something through reasoning or the use of temptation.
A, b, d are conclusive evidence . Only c is persuasive evidence.

Question 6.
For an auditor, to check arithmetical accuracy is
a. Not required
b. Mandatory
c. Voluntary
d. Recommendatory
Answer:
b. Mandatory

Hint:
To check the arithmetic calculations to trace out if any error in the books of accounts is one of the important aspect of auditing.

Question 7.
Verification of assets is done to ascertain
(X) Existence of asset
(Y) Ownership of asset
(Z) Possession of asset The correct option is:
a. (X) and (Y)
b. (Y)and(Z)
c. (X)and(Z)
d. (X), (Y) and (Z)
Answer:
d. (X), (Y) and (Z)

Hint:
It is the duty of the auditor to physically inspect the assets and their recording in the books of accounts and verify the legal and official documents to ascertain the existence, ownership, possession, classification and valuation of assets of an entity.

Question 8.
Which of the following is not correct about investigation?
a. Investigation may be done by any person having the knowledge of entity’s business
b. Investigation is mandatory in nature and needs to be done on yearly basis
c. The scope of investigation is decided by the appointing authority
d. There is no standard format of investigation report.
Answer:
b. Investigation is mandatory in nature and needs to be done on yearly basis

Hint:
Investigation: Investigation is an examination of books and records for any specified purpose, sometimes differing in scope from the ordinary audit. Investigation implies an examination of and record for some special purpose. Investigation is carried out not in substitution of audit, but in addition to audit. Investigation is carried out on behalf of the outsiders who want to know the financial position of the business. Investigation can be conducted by anyone and he may not be an auditor. There is no format of investigation report.

Question 9.
Principal aspects to be covered in an audit involves:
(X) Review of system and procedures
(Y) Review of internal control system
(Z) Ensuring statutory compliance The correct option is:
a. (X) and (Y)
b. (Y) and (Z)
c. (X) and (Z)
d. (X). (Y) and (Z)
Answer:
d. (X). (Y) and (Z)

Hint:
Principle aspects to be covered in Auditing
Effective audit is critical to the quality of financial reporting and the proper conduct of business. Thus some of the aspects to be covered when doing audit are

First is to understand the system and procedure adopted by the entity
Before beginning the auditing determine whether, and to what extent, to use specific work of the internal auditors
If using the specific work of internal auditors, to determine whether that work is adequate for the purposes of the audit and how effective is the internal control system.
To check the arithmetic calculations to trace out if any error in the books of accounts
to monitor the integrity of the financial statements of the company and any formal announcements relating to the company’s financial performance
auditor has to ascertain that items of capital nature are identified and differentiated from items of revenue nature
Should review the clarity and completeness of disclosures in the financial statements and consider whether the disclosures made are set properly in context.
a proper adjustment has been made for income and expenditure of a particular period
to report to the board on how it has discharged its responsibilities.
if auditor is not satisfied with any aspect of the proposed financial reporting by the company, it shall report its views to the board.
Should ensure all statutory compliance related to income tax, companies Act etc. has been complied by entity
Should review and approve the statements included in the annual report in relation to internal control and the management of risk.
Should physically assess all the assets of the entity
Should inspect the documents to find whether liabilities have been correctly mentioned

Question 10.
Detection and prevention of fraud is the ……………………… objective of auditing activity.
a. Primary
b. Secondary
c. Single
d. Specific
Answer:
b. Secondary

Hint:
Auditing is an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements which have been prepared by the end of accounting is the beginning of auditing.

Auditing main purpose or object is to find the opinion of an auditor about correctness and reliability of accounts and the financial position of the business concern.
Thus detection and prevention of fraud is the secondary objective of auditing.

Question 11.
Quality of auditor to be free from influence is defined by which term?
a. Independence
b. Confidentiality
c. Skill
d. Integrity
Answer:
a. Independence

Hint:
According to R.B. Bose “Audit may be said to the verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts.”
Thus, quality of auditor to be free from influence is defined by Independence.

Question 12.
Auditing exercise includes:
(i) Checking of accounts
(ii) Verification of accounts
(iii) Examination of accounts The options are:
a. I and III
b. I, II and III
c. I and II
d. Hand 11.1
Answer:
b. I, II and III

Hint:
Auditing exercise includes:

Checking of accounts
Verification of accounts
Examination of accounts
Investigation of some statements
Examination of evidence

Question 13.
In case of investigation, the period of investigation coverage
a. Is 2 years
b. Is 1 year
c. Differs on case to case basis
d. Is 6 months.
Answer:
c. Differs on case to case basis

Hint:
Investigation may cover a period more than a financial year as it depends on case to case basis while auditing covers the period of one financial year.

Question 14.
The primary objective of statutory auditing is to – (x) detect errors (y) prevent errors (z) express an opinion. The options are:
a. (x) and (y)
b. (z) only
c. (y) only
d. (x), (y) and (z).
Answer:
b. (z) only

Hint:
Auditing main purpose or object is to find the opinion of an auditor about correctness and reliability of accounts and the financial position of the business concern.

Question 15.
Audit working papers are the property of
a. Income Tax Department
b. Auditor
c. Owner
d. Government.
Answer:
b. Auditor

Question 16.
Which of the following is disqualified for appointment as auditor of a company?
a. An Officer or Employee of the company
b. A limited liability partnership
c. A Chartered Accountant holding a certificate of practice
d. A firm of Chartered Accountants.
Answer:
a. An Officer or Employee of the company

Hint:
According to Sec. 141(3) there are some persons who are disqualified or not eligible for appointment as an auditor namely:

an officer or employee of the company
a body corporate other than LLP registered under LLP Act, 2008.
A person who IS a partner

Question 17.
Which of the following best describes the primary purpose of audit programme preparation?
a. To detect errors or fraud
b. To assets audit risk
c. Together sufficient appropriate evidence
d. To comply with GAAP.
Answer:
c. Together sufficient appropriate evidence

Hint:
The main purpose of audit programme is that every material area has been audited appropriately and sufficient appropriate audit evidence has been obtained in respect of every important areas of audit.

CS Foundation Fundamentals of Accounting and Auditing Notes

Accounting Process – III – CS Foundation Fundamentals of Accounting and Auditing Notes

December 29, 2022

Accounting Process – III – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Capital Expenses or Expenditures:
These are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business, like rent, utilities, and insurance. Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year.

→ For example, if you buy office supplies for your business, that purchase is an operating expense, because office supplies don’t typically last more than one year (although you may have those boxes of staples lying around for a long time). On the other hand, if you buy office furniture, it is expected that it will last longer than a year, so you are buying a fixed asset, and that purchase is considered a capital expense. The cost of alterations, are normally capital expenditure as they involve improving or changing an asset and so providing an enduring benefit to the business.

→ The following are the capital expenditures Examples:

Cost of goodwill.
Cost of freehold land and building and the legal charges incurred in this connection,
Cost of lease.
Cost of machinery, plants, tools, fixtures, etc.
Cost of trade marks, patents, copy rights, designs, etc.
Cost of car, lorry etc.
Cost of installation of lights and fans,
Cost of any other assets acquired by way of equipment,
Erection cost of plant and machinery,
Cost of addition to existing assets.
Structural improvements and alteration in the existing assets,
Expenses for developments in case of mines and plantations.
Expenses for administration incurred during construction and equipment of any industrial enterprise,
Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights.

→ Revenue Expenditure
Revenue expenditure is expenditure concerned with the costs of doing business on a day to day basis. When companies make a revenue expenditure, the expense provides immediate benefits, rather than long term ones. This is contrasted with capital expenditures, which are long term investments intended to help a business grow and thrive. Revenue expenditures include things like maintenance, wages and salaries, and costs for utilities. The revenue expenditure consists of expenses which must be covered immediately to keep the business running and which provide immediate benefits. A repair to an asset restores it to what it originally had been and is normally an allowable revenue expense.

→ Following are the examples of revenue expenditure :

Wages or salaries paid to factory workers.
Machine Oil to lubricate.
Electricity or Power required to run machinery or motor.
Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.
Repair and maintenance expenses incurred on fixed assets.
Cost of saleable goods.
Depreciation of fixed assets used in the business.
Interest on borrowed money.
Freight, cartage, octroi duty, transportation, insurance paid on saleable goods. ‘
Petrol or diesel consumed in motor vehicles.
Service charges to motor vehicles.
Bad debts.

→ Deferred Revenue Expenditure – Sometimes, some expenditure is of revenue nature but its benefit likely to be derived over a number of years generally 3 to 5 years. Such expenditure is called deferred revenue expenditure. Example of deffered revenue expenditure are :

heavy advertisement expenditure
discount on debentures
insurance premiums
Advertisement
Licensing

→ Revenue Receipts: It is related to normal activities of the business Credited as revenue to Trading and Profit & Loss Account of the organisation Examples: receipts from sales of goods and services, rent etc. Revenue receipts are considered as business income and it is arises because of business transactions. While calculating net income only the expenses in revenue nature are allowed to deducted

→ Capital Receipts – Receipts which are non-recurring (not received again and again) by nature and whose benefit is enjoyed over a long period are called “Capital Receipts”. Capital receipts are non-business income and it arises independently, that are not considered as business income and is treated as capital gain.

→ Distinction between Capital Receipt and Revenue Receipt:

Revenue Receipt	Capital Receipt
1. It has short-term effect. The benefit is enjoyed within one accounting period.	1. It has long-term effect. The benefit is enjoyed for many years in future.
2. It occurs repeatedly. It is recurring and regular.	2. It does not occur again and again. It is nonrecurring and irregular.
3. It is shown in profit and loss account on the credit side.	3. It is shown in the Balance Sheet on the liability side.
4. It does not produce capital receipt.	4. Capital receipt, when invested, produces revenue receipt e.g. When capital is invested by the owner, business gets revenue receipt (i. E. Sale proceeds of goods etc.).
5. This does not increase or decrease the value of asset or liability.	5. The capital receipt decreases the value of asset or increases the value of liability e.g. Sale of a fixed asset, loan from bank etc.
6. Sometimes, expenses of capital nature are to be incurred for revenue receipt, e.g. purchase of shares of a company is capital expenditure but dividend received on shares is a revenue receipt.	6. Sometimes expenses of revenue nature are to be incurred for such receipt e.g. On obtaining loan (a capital receipt) interest is paid until its repayment.

→ Capital Profit
It is the profit which is earned on the sale of fixed assets, or issuing shares at premium etc. This profit generated is either transferred to capital account or is transferred to capital Reserve Account. Capital Loss is also not shown in Profit & Loss account but shown only in balance sheet. If the loss is negligible then it is debited to profit and loss account of the year in which it occur but if the loss is huge then they are distributed over the years and a portion of loss is debited to profit and loss account of every year. Generally capital losses are set off against capital profit.

→ Revenue Profit
It is the profit which is earned during the ordinary course of business. Revenue Profit is shown in Profit & Loss account which can be used for creating reserves or for distribution or being used in the business. Revenue loses are the loss that occur in the ordinary course of business and is show in Profit & Loss account.

→ Capital losses
Capital loss occurs due to the sale of assets, share and debentures at a price less than their face value or book value. Capital losses are not shown in profit and loss account but are shown in balance sheet on the assets side. A capital loss cannot be offset against income from other sources but must be offset against capital gains and may be carried forward to offset against future capital gains

→ Revenue Losses
Revenue loss occurs due to heavy amount of operating expenses and low turnover or sales. Revenue loss is shown on the debit side of the trading and profit and loss account and asset side of balance sheet as accumulated loss.

→ Contingent Liabilities: Contingent liabilities are costs that the organization will have to face if a particular event occurs, or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements. Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims.

→ Contingent Assets: a contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. The amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.

Accounting Process – III MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Which of the following should be the first action
when making a prime entry for a transaction?
a. Study the voucher to identify the nature of the transaction
b. Post the transactions to the appropriate Ledger accounts
c. Decide on the Ledger account to be debited and the one to be credited
d. Enter the transaction in the appropriate book of prime entry
Answer:
a. Study the voucher to identify the nature of the transaction

Question 2.
Journalizing is
a. Process of having the source of transactions
b. Process of recording transactions in the journal
c. Process of having the sources of transactions for journal
d. None of the above
Answer:
b. Process of recording transactions in the journal

Question 3.
Generally journal is kept in a
a. Mathematical method
b. Columnar method
c. Straight method
d. None of the above
Answer:
b. Columnar method

Question 4.
Which of the following will disturb the balancing of the trial balance?
a. Error in adding up a book of prime entry
b. Entering an acquisition of an asset, on credit terms, in the Purchases Day Book
c. Posting to an asset account instead of an expenditure account
d. Entering a wrong amount in a book of prime entry.
Answer:
a. Error in adding up a book of prime entry

Question 5.
The data and month of the first entry are written
a. On the next line of the data column
b. On the same line of the data column
c. On a line above the data column
d. At the left of the data column
Answer:
a. On the next line of the data column

Question 6.
In the particulars account the name of the account to be credited is entered at ___________ place with a prefix ‘To’
a. In confirmation of the name of the account to be debited
b. Next line to the account name that is to debited
c. Any where in the journal
d. None of the above
Answer:
a. In confirmation of the name of the account to be debited

Question 7.
Location of the debit column is
a. In contravention with particulars
b. In front of the particulars column where the amount is debited
c. In front of the particulars column where the amount is credited
d. Not present anywhere in the journal
Answer:
b. In front of the particulars column where the amount is debited

Question 8.
For every entry in journal the transaction can be
a. Personal
b. Real
c. Nominal
d. All of the above
Answer:
d. All of the above

Question 9.
The information that is not provided in the ledger is
a. Information regarding debtors
b. Every information is provided with narration
c. Information regarding creditors
d. Information regarding purchases
Answer:
b. Every information is provided with narration

Question 10.
The rules of debit and debit are applied to of accounts
a. Personal
b. Nominal
c. Real
d. All of the above
Answer:
d. All of the above

Question 11.
c/f indicates
a. Credit
b. Ledger folio
c. Carry forward
d. Journal name
Answer:
c. Carry forward

Question 12.
The reason for totaling at the end of the page of a journal is
a. It makes whole system more convenient
b. As the calculations are lengthy it is more comfortable
c. It is a general practice
d. All of the above
Answer:
d. All of the above

Question 13.
When does a entry termed as a combined entry
a. If two transactions of one company are involved
b. If there is debit and credit both
c. Transactions are of the same nature and they take place on the same day.
d. All the accounts are debited the very same day
Answer:
c. Transactions are of the same nature and they take place on the same day.

Question 14.
This is NOT the function of ledger
a. To classify all the items
b. To put all the items at application accounts
c. Both a & b
d. None of the above
Answer:
d. None of the above

Question 15.
Pick out the wrong one
a. In ledger account debit is one left hand side and credit on sight hand side
b. Ledger takes care of only real and nominal accounts of an enterprise
c. Name of the account in ledger is written in the top middle of the account
d. Ledger account is divided into two sides
Answer:
b. Ledger takes care of only real and nominal accounts of an enterprise

Question 16.
In ledger J.F. denotes
a. Page number
b. Folio
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 17.
Book of analytical record is
a. Balance sheet
b. Journal
c. Ledger
d. All of the above
Answer:
c. Ledger

Question 18.
Posting is
a. The process of displaying results in balance sheet
b. The process of displaying results in profit and loss account
c. The process of recording the transactions in journal
d. The process of recording the transactions in ledger
Answer:
d. The process of recording the transactions in ledger

Question 19.
What is uncommon in ledger?
a. Name of the accounts used in journal are different from ledger
b. Account which is credited in journal is debited in ledger
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 20.
What is NOT required for ledger?
a. Data
b. Using ‘To’ and ‘By’
c. In folio column page number of journal
d. None of the above
Answer:
d. None of the above

Question 21.
If there is a debit balance in ledger accounts than
a. debit side of an account exceeds the credit side
b. credit side of an account exceeds the debit side
c. total of the debit side is more
d. both a & c
Answer:
a. debit side of an account exceeds the credit side

Question 22.
Which is NOT a subsidiary book?
a. Sales book
b. Salary book
c. Purchase book
d. Cash book
Answer:
b. Salary book

Question 23.
Pick the odd one
a. Entries for purchases of goods are done
b. Entries for purchases of goods on credit are done
c. Entries for purchase of goods on cash are done
d. All of the above
Answer:
c. Entries for purchase of goods on cash are done

Question 24.
Whether for purchase book or sales book ________________ is required
a. Invoices
b. Credit
c. Cash
d. Both a & b
Answer:
d. Both a & b

Question 25.
The book in which two columns are present one for cash and other for discount is
a. Sales book
b. Purchase book
c. Cash book
d. None of the above
Answer:
c. Cash book

Question 26.
When cash is withdrawn from bank it is recorded
a. On debit side in cash column and on credit side of bank column
b. On debit side in cash column and on the debit side of bank column
c. On the debit side of ash bank column and on cred it side of cash col umn.
d. None of the above
Answer:
a. On debit side in cash column and on credit side of bank column

Question 27.
Which of the following statements is incorrect?
a. In emergency the Petty Cashier may give staff loans of small amounts
b. The Petty Cash Book could be either a subsidiary book or a main book of accounts
c. Every payment made by the Petty Cashier should be supported by evidence
d. Regularly Petty Cashier is reimbursed to make up his cash balance to the imprest
Answer:
a. In emergency the Petty Cashier may give staff loans of small amounts

Question 28.
Float is
a. money given at the beginning of month to cashier
b. Money left at the end of the month with cashier
c. Both a & b
d. None of the also
Answer:
a. money given at the beginning of month to cashier

Question 29.
Petty cash book can be treated as
a. Register
b. Memoranda book
c. Part of double entry system
d. Non of the above
Answer:
c. Part of double entry system

Question 30.
Which of the following statements is incorrect?
a. In the double entry accounting system maintained manually, a journal entry A should always end with a narration explaining the need for it
b. is needed only in the absence of other suitable book of prime entry for the transaction
c. should be substantiated by appropriate voucher and authorized at proper level
d. should always consist of a single debit entry matched by a corresponding credit entry
Answer:
d. should always consist of a single debit entry matched by a corresponding credit entry

Question 31.
Worn out assets on sale are recorded in
a. Soles journal
b. Cash journal
c. Petty cash journal
d. General journal
Answer:
d. General journal

Question 32.
XYZ company purchase an asset that turns out to be defective and was required to be sold as a worn out item. The entry will be made in:
a. Worn out journal
b. Cash journal
c. General journal
d. None of the above
Answer:
c. General journal

Question 33.
Function of the ledger is
a. to calculate the total debit and credit of the company
b. to prepare the summary of each account
c. to record all the transactions in a period.
d. All of the above
Answer:
b. to prepare the summary of each account

Question 34.
A business transaction cannot be recorded unless ____________ is present
a. Sales bill
b. Purchase bill
c. Memo
d. All of the above
Answer:
d. All of the above

Question 35.
What is possible if the trail balance of a company agrees?
a. There are two mistakes in the recordings made
b. There may be some mistakes in the recording of books
c. Both a and b
d. None of the above
Answer:
c. Both a and b

Question 36.
Invariably errors in the trial balance are due to
a. Recording in wrong books
b. Omitting the transactions that should be recorded
c. Both a and b
d. None of the above
Answer:
c. Both a and b

Question 37.
An accountant forgot to enter a sales entry in the subsidiary register the impact will be
a. Trial balance will not be affected
b. Trial balance will be affected
c. Debit side enhanced of the trial balance will be
d. Credit side enhanced of the trial balance will be
Answer:
a. Trial balance will not be affected

Question 38.
The mistakes in the total of the subsidiary book will
a. Not affect the personal account of customers
b. Will affect the personal account of customers
c. Both a and b
d. None of the above
Answer:
a. Not affect the personal account of customers

Question 39.
Because of the lack of proper accounting knowledge ______________ type of error is done
a. Partial omission error
b. Compensating error
c. Error of commission
d. All of the above
Answer:
c. Error of commission

Question 40.
If the sum of the debit column equals the sum of credit column in a trial balance, it indicates
a. no errors have been made.
b. no errors can be discovered.
c. The mathematical equality of the accounting equation.
d. That all accounts reflect correct balances.
Answer:
a. no errors have been made.

Question 41.
The feature of errors of principle
a. affect trial balance
b. affect profit and loss account
c. Both a and b
d. None of the above
Answer:
b. affect profit and loss account

Question 42.
Commission is paid for a purchase of land. It will be
a. Disclosed in trial balance
b. Not disclosed in trial balance
c. Will be disclosed in profit and loss account
d. Will be disclosed in balance sheet
Answer:
b. Not disclosed in trial balance

Question 43.
Office was renovated and renovation charges were 5000. They were put in purchase book account. It is
a. Error of complete omission
b. Error of principle
c. Error of commission
d. All of the above
Answer:
b. Error of principle

Question 44.
A new accountant did credit Rs500 instead of Rs50,000. It is an error of
a. Error of commission
b. Error of complete omission
c. Error principle
d. Error of duplication
Answer:
a. Error of commission

Question 45.
The following comments all relate to the recording process. Which of these statements is correct?
a. The general journal is a chronological record of transactions.
b. The general ledger is posted from transactions recorded in the general journal.
c. The trial balance provides the primary source document for recording transactions into the general journal.
d. Transposition is the transfer of information from the general journal to the general ledger.
Answer:
a. The general journal is a chronological record of transactions.

Question 46.
It is irrelevant to check below mentioned to trace the error in trial balance
a. Check the total of debit and credit column
b. Totals of subsidiary books
c. No mistakes in the balancing of various accounts
d. None of the above
Answer:
d. None of the above

Question 47.
One sided errors are
a. Errors affecting purchase account only
b. Errors affecting only balance sheet
c. Errors affecting any one account
d. Errors affecting only balance sheet
Answer:
c. Errors affecting any one account

Question 48.
For rectification of one sided error
a. Journal entry is to be corrected
b. Relevant account entry in the ledger to be corrected
c. Both a and b
d. None of the above
Answer:
b. Relevant account entry in the ledger to be corrected

Question 49.
Accidently Shyam’s account was credited by Rs. 2000 instead of Amit. What corrections should be done.
a. Debit the account of Shyam
b. Credit the account of Amit
c. Both a and b
d. None of the above
Answer:
c. Both a and b

Question 50.
Company purchased furniture worth Rs. 1 Lakh but it was wrongly recorded remedy to this problem will affect
a. One account
b. Two account
c. It is an independent account
d. It can not be rectified
Answer:
c. It is an independent account

Question 51.
Suspense account is a special account as it records
a. All the uncertain items entry
b. After correction in trial balance it shows no balance
c. If trial balance shows debit than debit is shown in debit side of suspense account
d. All of the above
Answer:
d. All of the above

Question 52.
When an error is found in the trial balance of last year which affects the profit of the company then
a. suspense’s account is prepared
b. profit and loss adjustment account is prepared
c. it is left undisturbed
d. Balance sheet adjustment account is prepared
Answer:
b. profit and loss adjustment account is prepared

Question 53.
A correction in the profit & loss adjustment account of the company was detected at later stage the correct treatment of this will be
a. Ignore accounts have already been prepared and nothing can be done
b. Show it as an additional balance sheet
c. Both a & b
d. None of the above
Answer:
d. None of the above

Question 54.
In case the accountant is unable to differentiate between capital expenditure and revenue expenditure it is type of error
a. Accounting error
b. Errors of principle
c. Errors of omission
d. Errors of commission
Answer:
b. Errors of principle

Question 55.
Purchase of goodwill is
a. Revenue expenditure
b. Capital expenditure
c. Deferred revenue expenditure
d. revenue receipts
Answer:
b. Capital expenditure

Question 56.
Expenses were made to keep the machine in running condition such expenses are
a. Capital expenditure
b. Revenue expenditure
c. Both a & b
d. None of the above
Answer:
b. Revenue expenditure

Question 57.
Transactions that a business doesn’t record in any specialized journal are recorded in which journal or book?
a. Cash payments journal
b. Cash receipts journal
c. Purchases return journal
d. General journal
Answer:
d. General journal

Question 58.
Money is paid to a lawyers ‘X’ for checking the papers of an industrial land purchased but after purchase some legal issues are there for which the lawyer ‘Y’ is appointed. Money paid to
a. ‘X’ is capital expenditure and ‘Y’ is revenue expenditure
b. Both are revenue expenditure
c. Both are capital expenditure
d. ‘X’ is revenue expenditure while ‘Y’ is capital expenditure
Answer:
a. ‘X’ is capital expenditure and ‘Y’ is revenue expenditure

Question 59.
It is not uncommon in deferred revenue expenditure
a. That benefit may last for few years, 3-5 years
b. That it is an accidental expenditure with heavy amount
c. It is recurring expenditure
d. Both a & b
Answer:
d. Both a & b

Question 60.
It is NOT a revenue receipt
a. Lamp sum payment received in installment
b. Amount received by the sale of goods
c. Both a & b
d. All of the above
Answer:
a. Lamp sum payment received in installment

Question 61.
A building purchased for rupees 200,000 was sold for Rs 20,000. The treatment of the capital loss will be in manner.
a. It will be shown in profit and loss account
b. It will be spreader over a number of years and a portion will be shown in profit and loss statement
c. It will be spreaded over a number of years and a portion will be shown in balance sheet
d. It will be shown in balance sheets
Answer:
b. It will be spreader over a number of years and a portion will be shown in profit and loss statement

Question 62.
The nature and extent of the contingent liabilities is
a. Shown as a footnote of balance sheet
b. Shown in the financial statement notes
c. Are not shown at
d. all none of the above
Answer:
a. Shown as a footnote of balance sheet

Question 63.
Shares of an enterprise were given at a premium of rupees 20. This money will be put in
a. capital loss
b. capital account
c. capital reserve account
d. both a & b
Answer:
d. both a & b

Question 64.
Everything except _________________ is capital receipt
a. Loans
b. Money from debenture holders
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 65.
Invariably revenue receipts
a. Are set off against revenue expenses
b. Have no effect on profit and loss account
c. Both a & b
d. None of the above
Answer:
a. Are set off against revenue expenses

Question 66.
Company’s paid up capital is rupees 50,000. It will be put in
a. Capital account
b. Capital receipts
c. Revenue receipts
d. Deferred revenue account
Answer:
b. Capital receipts

Question 67.
When closing stock is given in trial balance, there, it will effect:
a. Trading account only
b. Balance sheet only
c. Owner’s equity only
d. Both Trading account and Balance sheet
Answer:
b. Balance sheet only

Question 68.
Which of the following is an item of a debtors control account?
a. Cash sale
b. Credit sales
c. Credit purchase
d. Cash purchases
Answer:
c. Credit purchase

Question 69.
Which of the following is an item of a creditors control account?
a. Cash purchases
b. Cash sales
c. Credit sales
d. Credit purchase
Answer:
a. Cash purchases

Question 70.
The following comments below relate to the recording of journal entries. Which statement is true?
a. For any given journal entry, debits must exceed credits.
b. It is customary to record credits on the left and debits on the right.
c. The chart of accounts reveals the amount to debit and credit to the affected accounts.
d. Journalization is the process of converting transactions and events into debit/credit format.
Answer:
d. Journalization is the process of converting transactions and events into debit/credit format.

Question 71.
The following comments all relate to the recording process. Which of these statements is correct?
a. The general ledger is a chronological record of transactions.
b. The general ledger is posted from transactions recorded in the general journal.
c. The trial balance provides the primary source document for recording transactions into the general journal.
d. Transposition is the transfer of information from the general journal to the general ledger.
Answer:
b. The general ledger is posted from transactions recorded in the general journal.

Question 72.
The basic sequence in the accounting process can best be described as:
a. Transaction, journal entry, source document, ledger account, trial balance.
b. Source document, transaction, ledger account, journal entry, trial balance.
c. Transaction, source document, journal entry, trial balance, ledger account.
d. Transaction, source document, journal entry, ledger account, trial balance.
Answer:
d. Transaction, source document, journal entry, ledger account, trial balance.

Question 73.
The trial balance:
a. Is a formal financial statement.
b. Is used to prove that there are no errors in the journal or ledger.
c. Provides a listing of every account in the chart of accounts.
d. Provides a listing of the balance of each account in active use.
Answer:
d. Provides a listing of the balance of each account in active use.

Question 74.
The journal entry to account for the acquisition on credit of factory machinery from Millet pic should require which of the following:
a. Debit Factory account and credit Millet pic account
b. Debit Machinery account and credit Millet pic account
c. Debit Millet pic account and credit Machinery account
d. Debit Machinery account and credit Cash account
Answer:
b. Debit Machinery account and credit Millet pic account

Question 75.
Amit commenced business introducing as his capital furniture worth Rs. 21,000, a car valued at
Rs. 30,000 and Rs. 48,000 in cash. The journal entry for recording this would require:
a. Debit in the three asset accounts, including cash and a credit in the Capital Account
b. No journal entries
c. Debit in the two asset accounts other than cash and a credit in the Capital Account
d. Debit in the cash Account and credit in the Capital Account
Answer:
c. Debit in the two asset accounts other than cash and a credit in the Capital Account

Question 76.
The prime entry for the acquisition of a cash book, ledgers and a journal for Rs 240 from X Ltd, on credit would be in the:
a. Journal
b. purchases Day Book
c. Cash Book
d. None of the above
Answer:
a. Journal

Question 77.
If an amount paid for servicing vehicles has been posted in error to Motor Vehicles account the journal entry necessary to correct this error should require which of the following:
a. Debit Vehicle maintenance account and credit Motor Vehicles account
b. Debit Cash account and credit Motor vehicles account
c. Debit Vehicle maintenance account and credit Cash account
d. Debit Motor vehicles account and credit Vehicle maintenance account
Answer:
a. Debit Vehicle maintenance account and credit Motor Vehicles account

Question 78.
The invoice relating to the acquisition on credit of an Office Equipment for Rs24,500 from Globe Ltd was entered in the Purchases Journal. To correct this error which of the following needs to be done?
a. A Journal entry: Debit Office Equipment ale and credit Purchases ale with Rs24,500
b. No journal entry is needed
c. Journal entry: Debit Office Equipment ale and credit Globe Ltd ale with Rs24,500
d. Journal entry: Debit Globe Ltd ale and credit Office Equipment ale with Rs24,500
Answer:
a. A Journal entry: Debit Office Equipment ale and credit Purchases ale with Rs24,500

Question 79.
Which of the following should be the first action when making a prime entry for a transaction?
a. Enter the transaction in the appropriate book of prime entry
b. Study the voucher to identify the nature of the transaction
c. Decide on the Ledger account to be debited and the one to be credited
d. Post the transactions to the appropriate Ledger accounts
Answer:
b. Study the voucher to identify the nature of the transaction

Question 80.
Financial statements are prepared directly from the
a. general journal
b. ledger
c. trial balance
d. adjusted trial balance
Answer:
d. adjusted trial balance

Question 81.
Monthly and quarterly time periods are called
a. fiscal period
b. calendar period
c. quarterly period
d. interim period
Answer:
a. fiscal period

Question 82.
Which of the following best describes a trial balance?
a. It is a list of balances on the books
b. Shows the financial position of a business
c. Shows all the entries in the books
d. It is a special account
Answer:
c. Shows all the entries in the books

Question 83.
Which of the following is not a book of prime entry?
a. Cash book
b. Returns Inwards Day Book
c. The Petty Cash Book
d. The Ledger
Answer:
d. The Ledger

Question 84.
Which of the following statements is incorrect in relation to accounting for a Credit Note received from a supplier?
a. Post the amount on the Credit Note to the debit of the supplier’s personal account
b. Enter the particulars in a Purchases Returns Day Book
c. Post periodical total of amounts on Credit Notes to the credit of Returns Outwards a/c
d. Debit the amount of the Credit Note to the Purchases account
Answer:
d. Debit the amount of the Credit Note to the Purchases account

Question 85.
Which of the following statements is not correct when accounting for a credit sale?
a. A Post the amount of the individual invoice to the credit of the Sales account
b. Post the periodical total of the amounts of sale to the credit of Sales account
c. Enter the particulars from the invoice in the Sales Journal
d. Post the amount of the individual invoice to the debit of the relevant Customer’s account
Answer:
a. A Post the amount of the individual invoice to the credit of the Sales account

Question 86.
When using a petty cash system, the replenishment of the fund would normally include a debit to:
a. Cash.
b. Petty Cash.
c. Revenues.
d. None of the above
Answer:
d. None of the above

Question 87.
The correct way of accounting an amount received from a credit customer is:
a. Credit Cash account and debit the individual customer’s account
b. Debit Cash account and credit Capital account
c. Debit Cash account and credit Sales account
d. Debit Cash account and credit the individual customer’s account
Answer:
d. Debit Cash account and credit the individual customer’s account

Question 88.
Which of the following describes the practical framework of bookkeeping?
a. Classifying, recording and summarizing
b. Reporting, analyzing and interpreting
c. Classifying, analyzing and interpreting
d. Recording, summarizing and reporting
Answer:
a. Classifying, recording and summarizing

Question 89.
Which of the following highlights the correct order of the stages in the accounting cycle?
a. Journalizing, final accounts, posting to the ledger and trial balance
b. Journalizing, posting to the ledger, trial balance and final accounts
c. Posting to the ledger, trial balance, final accounts and journalizing
d. Posting to the ledger, journalizing, final accounts and trial balance
Answer:
b. Journalizing, posting to the ledger, trial balance and final accounts

Question 90.
In considering the effectiveness of evidence gathering procedures, it was found that most companies have adjustments. Research also shows that:
a. Both receivables and payables are usually overstated.
b. Receivables are usually overstated and payables are usually understated.
c. Receivables are usually understated and payables are usually overstated.
d. Both receivables and payables are usually understated
Answer:
c. Receivables are usually understated and payables are usually overstated.

Question 91.
Another name of journal is
a. Specialized journal
b. Day book
c. Cash book
d. Record book
Answer:
b. Day book

Question 92.
A subsidiary record is a book
a. of subsidiary entry.
b. containing the final account.
c. of final entry.
d. of original entry.
Answer:
d. of original entry.

Question 93.
Pending the location of errors in the books of accounts that affect the agreement of the Trial Balance, the difference disclosed is normally posted to ______________
a. Adjustment Account.
b. Holding Account.
c. Control Account.
d. Suspense Account.
Answer:
d. Suspense Account.

Question 94.
When a buyer returns damaged goods to the seller, the buyer receives
a. credit note.
b. pro forma invoice.
c. debit note.
d. consignment note.
Answer:
a. credit note.

Question 95.
Which ONE of the following, in a classified form, contains permanent records of all transactions?
a. Cash Book.
b. Sales Day Book.
c. Journal.
d. Ledger.
Answer:
d. Ledger.

Question 96.
Pending the location of errors in the books of accounts that affect the agreement of the Trial Balance, the difference disclosed is normally posted to _______________
a. Adjustment Account.
b. Holding Account.
c. Control Account.
d. Suspense Account.
Answer:
d. Suspense Account.

Question 97.
Users of subsidiary books of accounts are;
a. Financial Journalists.
b. Risk Analysts.
c. Cost Accountants.
d. Financial Consultants.
Answer:
d. Financial Consultants.

Question 98.
An office equipment bought on credit would first be entered by the purchaser in the
a. Returns Outward Book .
b. Purchase Day Book.
c. Journal Proper.
d. Sales Day Book returns Inward Book.
Answer:
c. Journal Proper.

Question 99.
Which of the following is type of cash receipt journal + cash payment journal?
a. Bank statement
b. Statement of cash flow
c. Cash book
d. Cash documents
Answer:
c. Cash book

Question 100.
If there is a non agreement of trial balance the possible reasons could be
a. Complete omission of the posting
b. Due to transposition of the posting
c. There has been a wrong posting either on debit side or credit side
d. All of the above
Answer:
d. All of the above

Question 101.
The characteristic feature of imprest system is
a. Fixed amount of cash is allocated to petty cash fund
b. Cash distributed from petty cash fund is documented with receipts
c. Both a&b
d. Petty cash disbursement receipts are everyday replenishments of the petty cash fund
Answer:
c. Both a&b

Question 102.
A company draws cash from United Bank. The entries in the Company’s accounts should be:

Debit	Credit
1. United bank account	Cash account
2. Purchases	Cash Account
3. Income	Bank Account
4. Cash account	United bank account

a. 1
b. 3
c. 2
d. 4
Answer:
d. 4

Question 103.
Discount allowed is
a. Expense of business
b. Income of business
c. Loss of business
d. Abnormal loss of business
Answer:
a. Expense of business

Question 104.
The last month of the fiscal year is 113. A journal entry in which two or more account is
a. March debited or credited is referred as
b. December
c. April
d. None of the above
Answer:
a. March debited or credited is referred as

Question 105.
Which of the following will a supplier send to customer whose invoice was under cast?
a. Notification Note
b. Way Bill
c. Credit Note
d. Debit Note
e. Invoice
Answer:
d. Debit Note

Question 106.
The process of recording is done
a. Two times a year
b. Once a year
c. Frequently during the accounting period
d. At the end of a accounting period
Answer:
c. Frequently during the accounting period

Question 107.
General Journal is a book of _______________ entries
a. First
b. Original
c. Secondary
d. Generic
Answer:
b. Original

Question 108.
The process of recording transaction in different journals is called
a. Posting
b. Entry making
c. Adjusting
d. Journalizing
Answer:
d. Journalizing

Question 109.
A Company makes a purchase on 10th may some office equipment. The correct journal entry will be

Debit	Credit
1. Office equipment	Supplies
2. Purchases	Office equipment
3. Accounts payable	Office equipments
4. Office equipment	Accounts payable

a. 1
b. 2
c. 3
d. 4
Answer:
a. 1

Question 110.
Every business transaction affects at least ___________ accounts
a. One
b. Two
c. Three
d. Infinite
Answer:
b. Two

Question 111.
Discount allowed is a kind of deduction from
a. Account payable
b. Account receivable
c. Cash account
d. Discount account
Answer:
b. Account receivable

Question 112.
The other name of journal fs
a. Ledger
b. T account
c. Day book
d. cash book
Answer:
c. Day book

Question 113.
A journal entry in which two or more account is
debited or credited is referred as
a. Journal entry
b. Multi entry
c. Additional entry
d. Compound entry
Answer:
d. Compound entry

Question 114.
The term 2/10-n/30 implies that _________________ % discount will be given if the payment made within _______________ day is receivable within 30 days
a. 2, 10
b. 10, 2
c. 10, 30
d. 3, 15
Answer:
a. 2, 10

Question 115.
Goods returned by customer should be debited to which of the following accounts?
a. Sales income account
b. Sales account
c. Return inward account
d. Expenses account
Answer:
c. Return inward account

Question 116.
Which of the following is a double column cash book?
a. One column for cash and another for bank
b. One column for cash and another for discount
c. One for bank and another for discount
d. All of the above
Answer:
d. All of the above

Question 117.
Which of the following specialized journals records “’good returned by customers”?
a. Purchase journal
b. Sales journal
c. Purchases return journal
d. Sales return journal
Answer:
d. Sales return journal

Question 118.
Sales on credit is recorded in which of the following journal?
a. Purchases journal
b. Sales journal
c. Purchases return journal
d. Sales return journal
Answer:
b. Sales journal

Question 119.
Which of the following specialized journals will record “goods returned by the business”?
a. Purchase journal
b. Sales journal
c. Purchases return journal
d. Sales return journal
Answer:
c. Purchases return journal

Question 120.
Sales and purchase journal don’t record
a. credit sales
b. credit purchases
c. credit sales and purchases
d. cash sales and purchases
Answer:
d. cash sales and purchases

Question 121.
Cash received from debtor is recorded in which of the following specialized journals?
a. Purchase journal
b. Sales journal
c. Cash receipts
d. Cash payments journal
Answer:
c. Cash receipts

Question 122.
Cash purchases is recorded in which of the following specialized journals?
a. Purchase journal
b. Sales journal
c. Purchases return journal
d. Cash payments journal
Answer:
d. Cash payments journal

Question 123.
A brief explanation recorded in every entry in general is commonly known as
a. Narration
b. Explanation
c. Summary
d. Other information
Answer:
a. Narration

Question 124.
Which of the following should be entered in the Journal?
(i) Payment for purchases
(ii) Fixtures bought on credit
(iii) Credit sale of goods
(iv) Sale of surplus machinery.
a. (i) and (iii)
b. (i) and (iv)
c. (ii) and (iv)
d. (iii) and (iv)
Answer:
c. (ii) and (iv)

Question 125.
Which of the following are not errors of principle?
(i) Motor expenses entered in Motor Vehicles account
(ii) Purchases of machinery entered in Purchases account
(iii) x Sales of Rs. 250 to Varun completely omitted from books
(iv) Sales to a Varun entered in Amit’s account.
a. (i) and (iv)
b. (ii) and (iii)
c. (i) and (ii)
d. (i) and (iv)
Answer:
a. (i) and (iv)

Question 126.
Errors are corrected via the Journal because:
a. It saves entering them in the ledger
b. It is much easier to do
c. It provides a good record explaining the double entry records
d. It saves the bookkeeper’s time
Answer:
c. It provides a good record explaining the double entry records

Question 127.
Which of these errors would be disclosed by the trial balance?
a. Credit sales of Rs300 entered in both double entry accounts as Rs30
b. A purchase of Rs250 was omitted entirely from the books
c. Selling expenses had been debited to Sales Account
d. Cheque Rs 95 from C Smith entered in Smith’s account as Rs 59
Answer:
d. Cheque Rs 95 from C Smith entered in Smith’s account as Rs 59

Question 128.
What should happen if the balance on a Suspense Account is of a material amount?
a. Should be written off to the balance sheet
b. Write it off to Profit and Loss Account
c. Carry forward the balance to the next period
d. Find the error(s) before publishing the final accounts
Answer:
d. Find the error(s) before publishing the final accounts

Question 129.
What is an analytical petty cash book
a. Petty cash book formed in columnar form
b. Petty cash book formed in tabular form
c. Petty cash book formed in arithmetic form
d. None of the above
Answer:
a. Petty cash book formed in columnar form

Question 130.
Ahmad Industries want to make payment to supplier in the form of a pay order. The bank deducted Rs.160 as service charges without its knowledge. The error is known as:
a. Error of commission
b. Error of omission
c. Error of original entry
d. Error of principle
Answer:
a. Error of commission

Question 131.
Which of the following account(s) will be affected, while rectifying the error of a purchase return of Rs.200 to Mr. “A” entered in sales book instead of purchase return book?
a. A’s account only
b. Sales account only
c. Purchase returns account and sales account
d. Purchases account only
Answer:
a. A’s account only

Question 132.
Which of the following account(s) will be affected, while rectifying the error of an amount Rs.200 received from Mr. “P” wrongly credited to Mr. “Q’s” account?
a. Only Cash Account
b. Only P’s account
c. Only Q’s account
d. Both of Mr. P’s & Mr. Q’s Account
Answer:
d. Both of Mr. P’s & Mr. Q’s Account

Question 133.
Which of the following will disturb the balancing of the trial balance?
a. A Posting to an asset account instead of an expenditure account
b. Entering a wrong amount in a book of prime entry
c. Entering an acquisition of an asset, on credit terms, in the Purchases Day Book
d. Error in adding up a book of prime entry.
Answer:
d. Error in adding up a book of prime entry.

Question 134.
If the totals of two columns of trial balance are equal it means
a. Ledger posting is correct
b. No outstanding debit
c. No outstanding credit
d. All of the above
Answer:
a. Ledger posting is correct

Question 135.
Trial balance proves only the accuracy of ledger posting
a. Debit
b. Accounting
c. Arithmetical
d. Credit
Answer:
c. Arithmetical

Question 136.
One of the objective of preparing Trial Balance is to help locate
a. Accounting errors
b. Financial statements
c. Difference between ledger and journal
d. None of the above
Answer:
a. Accounting errors

Question 137.
Which of the following expenditures is of capital nature?
a. Purchase of goods
b. Cost of repairs
c. Wages paid for installation of machinery
d. Rent of a factory.
Answer:
c. Wages paid for installation of machinery

Question 138.
A liability which arises only on the happening of some event is called:-
a. Current liability
b. Contingent liability
c. Outstanding liability
d. Fixed liability
Answer:
b. Contingent liability

Hint:
Contingent Liabilities – Contingent liabilities are costs that the organization will have to face if a particular event occurs, or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements. Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims.

Question 139.
Heavy amounts were spent by Saroj for addition to machinery in order to increase the production capacity. The amount is-
a. Revenue Expenditure
b. Deferred Revenue Expenditure
C. Capital Expenditure
d. Liability
Answer:
C. Capital Expenditure

Hint:
Capital Expenses or Expenditures
These are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business. . Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year.

Question 140.
What is the nature of expenses incurred on the issue of shares?
a. Revenue
b. Capital
c. Neither (a) nor (b)
d. Both (a) and (b)
Answer:
b. Capital

Hint:
Capital Expenses or Expenditures
These are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business. Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year.

Expenses incurred on issue of shares is capital in nature as shares are issued for lifetime of company and are not day to day expenses.

Question 141.
Which of the following is not a capital expenditure?
a. Cost of issuing shares and debentures
b. Wages paid for construction of a new office
c. Purchase of a new spark plug for Rs. 10
d. Repair of a second hand vehicle purchased.
Answer:
c. Purchase of a new spark plug for Rs. 10

Hint:
Revenue Expenditure
Revenue expenditure is expenditure concerned with the costs of doing business on a day to day basis. When companies make a revenue expenditure, the expense provides immediate benefits, rather than long term ones.

Question 142.
The cost of supplying uniform to employees is a:
a. Capital expenditure
b. Revenue expenditure
c. Deferred revenue expenditure
d. None of the above.
Answer:
b. Revenue expenditure

The cost of supplying uniform to employees is a revenue expenditure as it is an immediate benefit to employees and there is no long term benefit of this expenditure.

Question 143.
Expenses incurred for obtaining a license for starting a factory are
a. Capital Expenditure
b. Revenue Expenditure
c. Deferred Revenue Expenditure
d. Prepaid Expenses.
Answer:
a. Capital Expenditure

Hint:
Capital Expenses or Expenditures
These are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business. Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year.

Question 144.
Which of the following is not a capital expenditure?
a. Purchase of land & building
b. Amount paid for wages.
c. Improving permanent assets.
d. None of the above.
Answer:
b. Amount paid for wages.

Examples of revenue expenditure are Wages or salaries paid to factory workers,Machine Oil to lubricate

Question 145.
When we get the property registered, then what type of expenditure it is?
a. Capital
b. Revenue
c. Deferred Revenue
d. None.
Answer:
a. Capital

Hint:
Capital Expenses or Expenditures
These are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business. Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year.

Question 146.
Insurance received by the company is what for the company?
a. Capital expenditure
b. Revenue expenditure
c. Capital receipt
d. Revenue receipt.
Answer:
c. Capital receipt

Hint:
Capital Receipts: Receipts which are non-recurring (not received again and again) by nature and whose benefit is enjoyed over a long period are called “Capital Receipts”. Capital receipts are non-business income and it arises independently, that are not considered as business income and is treated as capital gain.

Question 147.
Interest on drawings to be treated IS:
a. Revenue Expenditure
b. Capital Expenditure
c. Revenue Income
d. Capital Income.
Answer:
c. Revenue Income

Hint:
Revenue Receipts: It is related to normal activities of the business Credited as revenue to Trading and Profit & Loss Account of the organisation.
Interest on drawings is the interest charged on day to day routine drawings made.
Since, it is the income of the firm of recurring nature it will be treated as revenue income.

Question 148.
At the time o: commencement of business, preliminary expenses incurred are treated as:
a. Revenue Expenditure
b. Capital Expenditure
c. Deferred Revenue Expenditure.
d. None of the above.
Answer:
c. Deferred Revenue Expenditure.

Hint:
Deferred Revenue Expenditure – Sometimes, some expenditure is of revenue nature but its benefit likely to be derived over a number of years generally 3 to 5 years. Such expenditure is called deferred revenue expenditure. Example of deffered revenue expenditure are:
heavy advertisement expenditure
discount on debentures
insurance premiums
Advertisement Licensing
Preliminary expenses

Question 149.
The expired portion of capital expenditure is shown in the:
a. An expense
b. An income
c. An asset
d. A liability
Answer:
a. An expense

Hint:
An expired cost is a cost that has been recognized as an expense. This happens when a business entity fully consumes or receives benefit from a cost. An expired cost may also be construed as the total loss in value of an asset.

Question 150.
A business entity distributed goods worth Rs. 15,000 as free sample. The, adjustment to be made is:
a. Subtracted from purchases A/c and credited to Profit and Loss A/c
b. Added to Purchase Ne and credited to Profit and Loss A/c r
c. Added to Purchase Ne and debited to Profit and Loss A/c
d. Subtracted from Purchases A/c and debited to Profit and Loss A/c.
Answer:
d. Subtracted from Purchases A/c and debited to Profit and Loss A/c.

Hint:
Journal entries will be

Question 151.
Sriram purchased a furniture for Rs. 6,000, the accounts affected from this transaction will be:
a. Capital account and cash account
b. Furniture account and cash account
c. Furniture account and capital account
d. Capital account and bank account.
Answer:
b. Furniture account and cash account

Question 152.
Rs.25,000 spent on tile overhaul of second hand purchased machines would be (x) Revenue expenditure (y) Capital expenditure (z) Deferred revenue expenditure. The options are:
a. (x) and (y)
b. (x) only
c. (y) only
d. (z) only.
Answer:
c. (y) only

Hint:
The overhauling expenses incurred on second hand machine purchased in order to bring it to use are not day to day expenses. These are one time expense whose useful life is more than 1 year so capital expenditure.

CS Foundation Fundamentals of Accounting and Auditing Notes

Audit Plan – CS Foundation Fundamentals of Accounting and Auditing Notes

November 22, 2022

Audit Plan – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Audit planning procedures are the first and perhaps the most important step in carrying out a successful audit. While developing an audit plan auditor should see that audit procedures should compliy with the Standard on Auditing (SAs) Matters to be considered before planning an audit are

The auditor should check the nature of the engagement and the client’s business and industry trends at the beginning of planning.
Should keep a check on various responsibilities levied on him under various legislations
Auditor should determine the form and timing of the report
The auditor should check about recent developments like merger etc. in the company that may cause the audit to differ from prior years.
If accounting policies followed by company do affect the audit plan then confirm if there has been any change in the policy
Prepare a complete list of items needed from the client
Identify the areas which have greater audit risk so that the planning can be done accordingly
Prepare drafts of footnotes for new accounting standards so that there is smooth working while doing the audit and it becomes easy to explain the client regarding the new standards.
As each and every accounting entry can not be checked thus make some materiality level for example examining all entries where expense is more than Rs 10000.
To assess the internal control so that auditor can decide how much reliable is the information that is provided to him
Review the work of internal auditors
Auditor has to assess how much staff is required and how much time is required from each staff.

→ Audit Program: An audit program is a set of policies and procedures that dictate how an evaluation of a business is done. This generally involves specific instructions as to what, and how much, evidence must be collected and evaluated, as well as who will collect and analyze the data and when this should be done. Audit program depends on the size of the organization and there is no standard audit program. Audit plan is followed by audit program which has the set of instructions to be followed when doing audit. Audit program is documented in the audit working papers.

→ Advantages of Audit Program

Every essential part of the work of audit can be duly carried on and there is less chance of its being overlooked or omitted.
It gives a set of instructions to the audit team
It gives specific responsibility to each of the staff doing audit
It is a mean to control and record the proper execution of the audit work and also to review the audit work.
Complete coverage of audit work without any duplication.
Supervision and control of the work can be undertaken in a planned manner.
It serves as a guide for future references.
On completion of audit it works as audit record
It serves as a ready checklist of procedures to be applied

→ Disadvantages of Audit Program

The audit work conducted becomes too mechanical.
Auditors may have covered the whole field but it can not be said with certainty that all the necessary work have been done
It kills the initiative of capable persons assistant can not suggest any improvement in the plan.
It needs change every year and if changes not made it may become too rigid in nature
Audit program is suitable only for large audits
New areas may be overlooked.

→ Remedy of disadvantage

To introduce flexibility in the audit program
To encourage audit staff to tell if any defects in the audit program
To encourage audit staff to explore unusual transactions when required and not to adhere literally to the audit program

→ Audit evidence: Audit evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria. The amount and type of auditing evidence considered varies considerably based on the type of firm being audited as well as the required scope of the audit.

→ Essentials of good evidence: some of the essential requirements which make evidence good enough are

Sufficient – Sufficiency is a measure of the quantity of audit evidence required, thus evidence that are obtained should be sufficient
Relevant – must pertain to the audit objective being tested.
Independent – evidence from outside the client is a stronger form of evidence
Appropriate- The quality of all audit evidence is affected by the quality and reliability of the information it is based on.
Effectiveness of client internal controls – good internal controls can mean better information
Auditor direct knowledge – auditor determinations are stronger that client comnts
Degree of objectivity – objective evidence is stronger than subjective evidence

→ Rules that determine the appropriateness of the evidence

Documentary evidence are better than testimonial evidence
Original documents are better than photocopy
Information from audited organizations is more reliable
Evidences from creditworthy third party is better than evidence generated within the organization.
Evidences obtained by auditor are better than evidence obtained indirectly

→ Techniques of obtaining evidence

enquiry – seeking information from knowledgeable people within and outside the entity, ranging from formal written enquiries to informal discussions
observation – observing the information
inspection – examining records or documents in paper or electronic form observation—looking at a process or procedure being performed by others
external confirmation – obtaining a written confirmation directly from a third party, such as a bank or debtor
recalculation – checking the mathematical accuracy of documents or records
Independent execution – independently re-performing procedures or controls that were originally performed as part of the entity’s internal control
analytical procedures – evaluating financial information made by a study of plausible relationships among both financial and non-financial data.

→ Working Papers: Audit working papers contain information from accounting and statistical records, personal observations, the results of interviews and inquiries, and other available sources. These papers are support to the audit work and provide assurance that audit was performed with the relevant auditing standards. Audit working papers are generally prepared at the time audit work is performed. Audit papers are link between clients records and audited accounts. Information in working papers is required to be kept confidential and if disclosed then it is a professional misconduct.

→ Importance of working papers

Working papers are important because they are necessary for audit quality control purposes
provide assurance that the work delegated by the audit partner has been properly completed as per audit programme.
in future if client files any suit against the auditor for negligence then such papers are useful for auditor to defend himself as working papers are the property of auditor and remains with him.
provide evidence that an effective audit has been carried out ,
increase the economy, efficiency, and effectiveness of the audit
contain sufficiently detailed and up-to-date facts which justify the reasonableness of the auditor’s conclusions
retain a record of matters of continuing significance to future audits

→ Types of working papers
There are two types of Working papers
A. Permanent Audit file
B. Current Audit file

→ Permanent files composed of documents, scheduled and other data that will be of continuing significance to several years audit. It is kept to record all data of a permanent nature which provides the necessary background information to the auditor from year to year.

→ Whereas current Audit files composed of the evidence gathered and conclusions reached in the audit for that year. It is kept to record all audit work programs and working papers for the year under review.

→ Documents contained in each file
A. Permanent audit file- Below mentioned are permanent audit file

the memorandum and Articles of Association.
The nature of the business.
Loan agreements
Documents related to internal control
The management set up.
The organization’s major Accounting policies
Leases
Significant audit observation of earlier years
Copies of important documents including title deed, agreements,, debentures deeds and letters of engagement.

B. Current Audit file – Below mentioned are current audit file

An index to the file which guides its orderly compilation.
A copy of the duly signed financial statement being Audited and the trial balance.
Extract of minutes of meetings and correspondences relevant to the year under review.
adjusting journal entries
completion check list.
Letter of representation of attorneys
Audit programs
Internal control questionnaires
A scheduled of each major items in the balance sheet.
A schedule of each major items in the profit and loss account.
List of queries and their dispositions.

Recommended Reading On: Banking and Insurance Notes

Audit Plan MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Auditing should be
a. Independent
b. Compulsory
c. On the request of government
d. None of the above
Answer:
a. Independent

Question 2.
Function of audit is to
a. Detect errors
b. Detect fraud
c. t Safeguard the interest of now management persons
d. All of the above
Answer:
d. All of the above

Question 3.
Which of the following is least likely to be required in an audit?
a. Test appropriateness of journal entries and adjustment
b. Review accounting estimates for biases
c. Evaluate the business rationale for significant, unusual transactions
d. Make a legal determination of whether fraud has occurred
Answer:
d. Make a legal determination of whether fraud has occurred

Question 4.
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
a. Supervise members of the audit team less closely and rely more upon judgment.
b. Use less predictable audit procedures.
c. Only use certified public accountants on the engagement.
d. Place increased emphasis on the audit of objective transactions rather than subjective transactions
Answer:
b. Use less predictable audit procedures.

Question 5.
Responsibility fixing is a feature of
a. Audit plan
b. Audit
c. Audit programme
d. All of the above
Answer:
c. Audit programme

Question 6.
Auditing gives ___________ regarding the financial statements
a. True & fair view
b. Correct view
c. Fair view
d. Completely true
Answer:
a. True & fair view

Question 7.
Which is NOT the function of an auditor?
a. To give a true & fair view
b. To take care of ail the statutory acts applicable
c. To do arithmetic checking
d. To prepare accounts
Answer:
d. To prepare accounts

Question 8.
It is not uncommon in auditing
a. Giving the satisfaction to the owner regarding the profits made.
b. Protecting the rights of shareholders
c. Helping to give true & fair profits of the organization
d. All of the above
Answer:
d. All of the above

Question 9.
The basic requirement which is absent in auditing is
a. Exact accounts
b. Certainty in financial statements
c. Conclusive evidence
d. All of the above
Answer:
d. All of the above

Question 10.
To check a lapse that is present in the reports _____________ is done.
a. Auditing
b. Investigation
c. Checking
d. Correction
Answer:
b. Investigation

Question 11.
It is always voluntary
a. Auditing
b. Investigating
c. Both a & b
d. None of the above
Answer:
b. Investigating

Question 12.
Auditing is done to protect the interest of
a. Shareholders
b. Owners of the company
c. Directors of the company
d. Both a & b
Answer:
d. Both a & b

Question 13.
Auditing has all features except
a. Done every financial year
b. Based on conclusive evidence
c. Mandatory for companies
d. None of the above
Answer:
b. Based on conclusive evidence

Question 14.
Verification of assets in case of auditing is the work of
a. Chartered accountant
b. Management
c. Accounts department
d. None of the above
Answer:
a. Chartered accountant

Question 15.
Investigation is
a. For specific purpose
b. Systematic
c. Voluntary
d. All of the above
Answer:
d. All of the above

Question 16.
GAAP tells
a. Accounting policies
b. Accounting procedures
c. Accounting statements
d. Both a & b
Answer:
d. Both a & b

Question 17.
The area of work is determined by registration pattern of the company. It is
a. Co-operative society audit
b. Insurance audit
c. Internal audit
d. Both a & b
Answer:
d. Both a & b

Question 18.
The area of work is determined by management.
a. Insurance audit
b. Sole proprietorship audit
c. Internal audit
d. Bank audit
Answer:
c. Internal audit

Question 19.
Internal audit is required for below mentioned areas of an enterprise.
a. Financial statements
b. Business practices
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 20.
Internal audit has an objective
a. to the see the effectiveness of the internal control
b. to check on the organizational business process
c. to detect any fraud in the financial system
d. all of the above
Answer:
d. all of the above

Question 21.
Internal audit is
a. Negative in nature
b. positive in nature
c. a liability for an organization
d. a compulsion for all enterprise
Answer:
b. positive in nature

Question 22.
Internal audit is a helpful tool as
a. it pinpoint the place where the lacuna is there
b. it helps the external auditor
c. it determines the liability of an employee
d. all of the above
Answer:
d. all of the above

Question 23.
_______________ audit helps in finding out the weak points of an organization by other auditor
a. Financial audit
b. Internal audit
c. Cost audit
d. Tax audit
Answer:
b. Internal audit

Question 24.
_______________ audit assists the management in finding out new ideas for marketing and other business areas.
a. Secretarial audit
b. Insurance audit
c. Internal audit
d. Tax audit
Answer:
c. Internal audit

Question 25.
The first general standard rule observed is that regardless of how capable an individual may be in other fields, the individual can not meet the requirements of the auditing standards without the proper
a. Business and finance course.
b. Quality control and peer review.
c. Education & experience in auditing.
d. Supervision and review skills.
Answer:
c. Education & experience in auditing.

Question 26.
_________________ audit assists in the maximunrv utilization of assets
a. Internal audit
b. Secretarial audit
c. Cost audit
d. None of the above
Answer:
a. Internal audit

Question 27.
Audit papers are
a. Documents showing audit was adequately supervised
b. Documents given by company to auditors
c. Documents.that show vouchers
d. Documents showing trial balance and belong to company
Answer:
a. Documents showing audit was adequately supervised

Question 28.
Internal audit starts
a. When the year ends
b. When accounting ends
c. When year begins
d. All of the above
Answer:
b. When accounting ends

Question 29.
Financial audit is good tool as it assists in
a. Investment from inventory
b. Taking loans from banks
c. Both a & b
d. Good management control
Answer:
c. Both a & b

Question 30.
Auditors can only be appointed by
a. Shareholders
b. Directors
c. Government
d. All of the above
Answer:
d. All of the above

Question 31.
Which Act deals regarding the appointment of auditor?
a. Companies Act 2013
b. Chartered Accountants Act 1952
c. ICAI
d. All of the above
Answer:
a. Companies Act 2013

Question 32.
Which amongst the below mentioned is not a compulsory audit.
a. Cost audit
b. Secretarial audit
c. Both a & b
d. Tax audit
Answer:
b. Secretarial audit

Question 33.
The auditor must have a thorough understanding of the entity, the client’s business strategies, processes, and measurement indicators for critical success. This analysis helps the auditor
a. Decide if they want to accept the engagement.
b. identify risks associated with the client’s strategy that could affect the financial statements.
c. assess the level of materiality that is appropriate for the audit.
d. identify the potential for fraud in the financial reporting process.
Answer:
b. identify risks associated with the client’s strategy that could affect the financial statements.

Question 34.
Cost audit is compulsory for
a. Sugar Industry
b. Bulk drugs
c. Soap
d. Both a & b
Answer:
d. Both a & b

Question 35.
Tax audit is compulsory if turnover or gross receipts of a business are
a. Rs. 60,000
b. Exceeds Rs. 60,000
c. Rs. 50,000
d. Net compulsory
Answer:
b. Exceeds Rs. 60,000

Question 36.
It is a compliance audit. Select from the below mentioned.
a. Cost audit
b. Tax audit
c. Secretarial audit
d. None of the above
Answer:
c. Secretarial audit

Question 37.
For an auditor doing the bank audit following are of significant importance
a. Bad assets of the bank
b. NPA
c. Fair view of financial books
d. All of the above
Answer:
d. All of the above

Question 38.
Co-operative society
a. has a separate legal identity
b. has no separate legal identity
c. owners have the ultimate authority
d. none of the above
Answer:
a. has a separate legal identity

Question 39.
Management of the co-operative society is in the hands of
a. elected members
b. all members
c. government
d. all of the above
Answer:
a. elected members

Question 40.
Auditor auditing the financial statement has to report ____________ for co-operative society
a. management skills of the elected members
b. technical skills of the management
c. accounting skills of the management
d. all of the above
Answer:
d. all of the above

Question 41.
The factor that makes the audit of co-operative society a compulsion is
a. Management is in the lands of governments
b. Management is in the hands of elected members
C. Management is in the hands of selected members
d. Management is in the hands of all members
Answer:
b. Management is in the hands of elected members

Question 42.
Who all are benefited from the audit of the trust?
a. Beneficiary
b. Trusted
c. Both a & b
d. Employees
Answer:
c. Both a & b

Question 43.
Auditor doing the audit of insurance company should be aware of
a. Companies Act
b. Insurance Act 1999
c. Insurance Regulatory and Development Act 1999
d. Insurance Regulatory Act 1999
Answer:
c. Insurance Regulatory and Development Act 1999

Question 44.
Insurance audit checks whether insurance company
a. has made appropriate number of insurance policies for a financial year
b. No of insurance policies issued during the financial year are not less than prescribed
c. Insurance premium has been received
d. All of the above
Answer:
c. Insurance premium has been received

Question 45.
Which of the following is least likely to be required in an audit?
a. Test appropriateness of journal entries and adjustment
b. Review accounting estimates for biases
c. Evaluate the business rationale for significant, unusual transactions
d. Make a legal determination of whether fraud has occurred
Answer:
d. Make a legal determination of whether fraud has occurred

Question 46.
Partnership audit assists in
a. Getting loans
b. Proper distribution of profits amongst partners
c. Valuation of goodwill
d. All of the above
Answer:
d. All of the above

Question 47.
Which is not true for partnership audit?
a. It is done on financial year basis
b. It is compulsory
c. It is carried out as per the terms of partnership deed.
d. Useful for raking loans.
Answer:
b. It is compulsory

Question 48.
Which is of relevance in case of partnership audit?
a. Partnership deed
b. Partnership
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 49.
For proprietor, audit gives him
a. Moral support
b. That financial statement are property prepared
c. He has done all the work
d. None of the above
Answer:
b. That financial statement are property prepared

Question 50.
Which of the following is least likely to be included in an auditor’s inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
a. Are financial reporting operations controlled by and limited to one location?
b. Does it have knowledge of fraud or suspect fraud?
c. Does it have programs to mitigate fraud risks?
d. Has it reported to the audit committee the nature of the company’s internal control?
Answer:
a. Are financial reporting operations controlled by and limited to one location?

Question 51.
Union government audit is the duty of
a. ICAI
b. Chartered accountants association
c. Cost accountants associations
d. Comptroller and auditor general of India.
Answer:
d. Comptroller and auditor general of India.

Question 52.
Secretarial audit is most useful for
a. Independent directors
b. Shareholders
c. Management
d. All of the above
Answer:
d. All of the above

Question 53.
C & AG are doing audits for
a. State government
b. Union government
c. Government companies
d. All of the above
Answer:
d. All of the above

Question 54.
Actual performance versus targeted performance of management is the part of
a. Internal audit
b. Management audit
c. Functional audit
d. All of the above
Answer:
b. Management audit

Question 55.
Audit which helps in finding fractious expenditure is
a. Functional audit
b. Propriety audit
c. Efficiency audit
d. Management audit
Answer:
b. Propriety audit

Question 56.
For finding out the efficiency of a system _____________ type of audit is not uncommonly done.
a. Efficiency audit
b. Functional audit
c. Management audit
d. None of the above
Answer:
a. Efficiency audit

Question 57.
The work of an auditor is
a. To prepare the statement
b. To check the management policies
c. To plan the audit
d. All of the above
Answer:
c. To plan the audit

Question 58.
Auditor doing any audit should check all of the below mentioned except
a. Time schedule of the audit
b. To streamline the area only on that area and leave the other areas
c. To keep a track on all the rules and regulations applicable
d. To keep a track if there has any changes in the accounting policies and standards.
Answer:
b. To streamline the area only on that area and leave the other areas

Question 59.
_________________ is an effective tool for audit plan
a. Internal control of company
b. Amount of work load
c. Both a & b
d. None of the above
Answer:
a. Internal control of company

Question 60.
Only test check is required if
a. Internal control is good in a company
b. Internal control is not good in a company
c. Statutory auditors are able and efficient people
d. None of the above
Answer:
a. Internal control is good in a company

Question 61.
Audit programme is
a. Detailed audit plan
b. Instructions for the audit
c. People involved in audit
d. Mental ability of people doing audit
Answer:
b. Instructions for the audit

Question 62.
Pick the odd one
a. Audit programme helps in distribution of work amongst the people doing audit
b. Audit programme is mechanical
c. Audit programme acts as a evidence against change of negligence
d. Audit programme helps in covering all the areas where audit is required
Answer:
b. Audit programme is mechanical

Question 63.
It is uncommon in audit programme
a. That the staff gives any improvement plan
b. It ignores internal control of the organization
c. It is rigid
d. All of the above
Answer:
d. All of the above

Question 64.
Audit programme is a failure if
a. Instructions are not followed property
b. Audit plan is not made correctly
c. The instructions are ambiguous
d. All of the above
Answer:
d. All of the above

Question 65.
Strategy development is the part of
a. Audit plan
b. Audit programme
c. Auditing
d. Making the financial statements
Answer:
a. Audit plan

Question 66.
Pick the odd one
a. Checking the vouchers
b. Preparation of vouchers
c. Evaluation of internal control
d. None of the above
Answer:
b. Preparation of vouchers

Question 67.
For a good evidence of audit it should have following characteristic
a. Source of evidence reliable
b. Evidence is relevant
c. Evidence is immaterial in nature
d. Both a & b
Answer:
d. Both a & b

Question 68.
Pick the most appropriate. Auditing evidence is more reliable when
a. Received from third party
b. Received from reliable third party
c. Received from audited organization resources
d. Both a & b
Answer:
b. Received from reliable third party

Question 69.
Which is NOT a technique of obtaining evidence?
a. Correction
b. Computation
c. Confirmation
d. Both a & b
Answer:
a. Correction

Question 70.
Accounting is BEST described as:
a. The use of financial data
b. The collection of financial data
c. The collection and use of financial data only
d. The collection and use of financial and non- financial data
Answer:
d. The collection and use of financial and non- financial data

Question 71.
Audit papers are
a. Documents that belong to auditors
b. Evidence showing the procedure used by the auditor for doing auditing
c. Both a & b
d. Papers prepared by company for the auditors
Answer:
c. Both a & b

Question 72.
Checking the internal control of an organization is
a. Compulsory
b. Aids in the auditing
c. Is the wish of auditor
d. Both a & c
Answer:
d. Both a & c

Question 73.
Loan agreement are the integral parts of
a. Permanent audit file
b. Current audit file
c. Temporary audit file
d. None of the above
Answer:
a. Permanent audit file

Question 74.
Working trial balance is the part of
a. Permanent audit
b. Current audit file
c. Temporary audit file
d. None of the above
Answer:
b. Current audit file

Question 75.
Which is NOT a current audit file?
a. Audit report
b. Leases
c. Letters of attorneys
d. Record of audit exceptions
Answer:
b. Leases

Question 76.
The first standard of field work recognizes that early appointment of the independent auditor has many advantages to the auditor and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditor?
a. The auditor will be able to complete the audit work in less time.
b. The auditor will be able to perform the examination more efficiently.
c. The auditor will be able to better plan for the observation of the physical inventories.
d. The auditor will be able to plan the audit work so that it may be done expeditiously.
Answer:
a. The auditor will be able to complete the audit work in less time.

Question 77.
The primary objective of the ordinary examination of financial statement by an auditor is the expression of an opinion on
a. The competence of management in accounting matters which is implied by whether the opinion is qualified or not.
b. The conformity of the statements with the book of account.
c. The conformity of the financial statements with generally accepted auditing standards applied on a basis consistent with that of the prior year.
d. The fairness with which the financial statements present cash flows and results of operations.
Answer:
d. The fairness with which the financial statements present cash flows and results of operations.

Question 78.
Auditing firms should establish quality control policies and procedures for personnel management in order to provide reasonable assurance that
a. Employees promoted possess the appropriate characteristics to perform competently.
b. Personnel will have the knowledge required to fulfill responsibilities assigned.
c. The extent of supervision and review in a given instance will be appropriate.
d. All of the above are reasons.
Answer:
b. Personnel will have the knowledge required to fulfill responsibilities assigned.

Question 79.
In pursuing its quality control objectives with respect to independence, an auditing firm may use policies and procedures such as
a. Emphasizing independence of mental attitude in firm training programs and in supervision and review of work.
b. Prohibiting employees from owning stock of public companies.
c. Suggesting that employees conduct their banking transactions with banks that do not maintain accounts with client firms.
d. Assigning employees who may lack independence to research positions that do not require participation in field audit work:
Answer:
a. Emphasizing independence of mental attitude in firm training programs and in supervision and review of work.

Question 80.
Which of the following is an element of quality control?
a. Supervision
b. Inspection
c. Personnel management
d. Consultation
Answer:
c. Personnel management

Question 81.
Adequate planning and design of an audit is necessary for an auditor to restrict which type of audit risk?
a. Control Risk
b. Detection Risk
c. Sufficiency Risk
d. Inherent Risk
Answer:
a. Control Risk

Question 82.
Which of the following is most likely to be presumed to present a fraud risk on an audit?
a. Capitalization of repairs and maintenance expense into the property, plant and equipment asset account
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products
Answer:
b. Improper revenue recognition

Question 83.
An audit plan is a:
a. Detailed plan of analytical procedures and all substantive tests to be performed in the course of the audit.
b. document that provides an overview of the company and a general plan for the audit work to be accomplished, timing of the work, and other matters of concern to the audit.
c. Generic document that auditing firms have developed to lead the process C) of the audit through a systematic and logical process.
d. Budget of the time that should be necessary to complete each phase of the audit procedures.
Answer:
b. document that provides an overview of the company and a general plan for the audit work to be accomplished, timing of the work, and other matters of concern to the audit.

Question 84.
Which statement best describes the interaction of the systems and substantive approaches in the audit plan?
a. The systems approach focuses on testing controls to make sure they are effective, while the substantive approach is the detailed testing of specific accounts for accuracy.
b. The systems approach focuses on detailed testing of specific accounts for accuracy, while the substantive approach is the testing controls to make sure they are effective.
c. The systems approach focuses on the use of computer systems to aid in the audit while the substantive approach focuses on more manual tests.
d. A thoroughly designed systems approach to auditing can eliminate
Answer:
a. The systems approach focuses on testing controls to make sure they are effective, while the substantive approach is the detailed testing of specific accounts for accuracy.

Question 85.
Tracing from source documents to journals, most directly addresses which financial statement assertion?
a. Completeness
b. Existence
c. Valuation
d. Rights
Answer:
b. Existence

Question 86.
Internal sources of audit evidence for an entity includes the following EXCEPT:
a. associated companies of the entity
b. Accounting systems, records and documents
c. Non-financial data and records
d. Management representation and discussion
Answer:
b. Accounting systems, records and documents

Question 87.
Which of the following is NOT true about the procedure for the final audit?
a. Comparisons
b. Reviews
c. investigation
d. Representations
Answer:
c. investigation

Question 88.
The principal objective of an audit is the examination of financial statements of an enterprise with a view for the auditor to form and express an independent opinion on the truth and fairness for the benefit of which one of the following?
a. The members
b. Corporate Governance
c. The Corporate Affairs Commission
d. Government authorities
Answer:
a. The members

Question 89.
Which of the following is NOT a matter to be considered in determining whether confidential information may be disclosed?
a. When disclosure is authorized
b. When disclosure is required by law
c. When there is a professional duty or right to disclose
d. Public duty demands it
Answer:
b. When disclosure is required by law

Question 90.
The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to
a. both management and the auditor equally.
b. management for the statements and the auditor for the notes.
c. the auditor
d. management.
Answer:
d. management.

Question 91.
The factor which distinguishes an error from fraud and other irregularity is
a. whether it is a dollar amount or a process.
b. Intent.
c. materiality.
d. whether it is a caused by the auditor or the client.
Answer:
b. Intent.

Question 92.
XYZ Limited decided that it wanted to improve earnings. To do this, they understated their expenses by omitting unpaid expenses from the accrued liabilities account at year end. Which management assertion has been violated?
a. rights and obligations
b. completeness
c. existence
d. disclosure
Answer:
b. completeness

Question 93.
After testing a client’s internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client’s internal controls. Under these circumstances the auditor most likely would
a. Issue a disclaimer of opinion about the internal controls as part of the auditor’s report.
b. Increase the assessment of control risk and increase the extent of substantive tests.
c. Issue a qualified opinion of this finding as part of the auditor’s report.
d. Withdraw from the audit because the internal controls are ineffective.
Answer:
b. Increase the assessment of control risk and increase the extent of substantive tests.

Question 94.
Which of the following procedures would be most effective in reducing attestation risk?
a. Discussion with responsible individuals.
b. Examination of evidence.
c. Inquiries of senior management.
d. Analytical procedures.
Answer:
b. Examination of evidence.

Question 95.
Which of the following is an inherent imitation in internal control?
a. Incompatible duties.
b. Lack of segregation of duties.
c. faulty human judgment.
d. Lack of an audit committee.
Answer:
c. faulty human judgment.

Question 96.
Secretarial Audit is
a. compulsory in companies having paid-up share capital of less than Rs. 50 lakhs
b. compulsory where the statutory audit reveals inadequacy of internal check in secretarial department
c. optional and would help the Board of Directors and the Registrar of Companies in regard to compliance aspects, mainly under the Companies Act, 1956
d. compulsory in such companies as may be notified by the Central Government
Answer:
c. optional and would help the Board of Directors and the Registrar of Companies in regard to compliance aspects, mainly under the Companies Act, 1956

Question 97.
Various types of quality audits are:
a. process
b. management (system)
c. registration (certification)
d. All of above
Answer:
d. All of above

Question 98.
When the auditor is an employee of the organization being audited, the audit is classified as a quality audit.
a. internal
b. external
c. compliance
d. Both A & B
Answer:
a. internal

Question 99.
The most comprehensive of audit is the system audit, which examines suitability and effectiveness of the system as a whole.
a. Quantity
b. quality
c. Preliminary
d. Sequential
Answer:
b. quality

Question 100.
Each of the three parties involved in an audit ____________. plays a role that contributes to its
success.
a. the client, the auditor, and the auditor
b. the client, the auditor, and the audite
c. the client, the moderator, and the audite
d. the client, the auditor, and the audite
Answer:
d. the client, the auditor, and the audite

Question 101.
Audit is usually conducted in three steps:
1. a pre-examination or opening meeting with the audite marks the beginning of the process.
2. involves a suitability audit of the documented procedures against the selected reference standard.
3. the auditor examines in depth the implementation of the quality system.
a. True
b. False
c. partially false
d. none of the above
Answer:
a. True

Question 102.
The time required and costs involved in an external audit are much higher as compared to internal audits.
a. True
b. False
c. Not known
d. Irrelevant
Answer:
a. True

Question 103.
Audit is a fact-finding process that compares actual results with
a. Specified standards and plans
b. expected results
c. premature results
d. preliminary results
Answer:
a. Specified standards and plans

Question 104.
Which of the following statement is TRUE?
a. An external auditor is required for all types of entity
b. External auditors are appointed by an entity’s management
c. Staff auditors make a report for the baseline employees
d. Staff auditors work is to identify potential risk areas for a company
Answer:
d. Staff auditors work is to identify potential risk areas for a company

Question 105.
The risk for the company that an auditor may issue an unqualified report due to auditor’s failure to detect some misstatement either due to fraud or error is
a. Financial accounting risk
b. Analytical risk
c. Taxation risk
d. Audit risk
Answer:
d. Audit risk

Question 106.
From the initial client interview to the preparation of audit report an auditor must keep a record of all the work you do in
a. Audit file
b. Audit report
c. Audit papers
d. None of the above
Answer:
a. Audit file

Question 107.
The small audit firms provide the following services EXCEPT:
a. Liquidation and receivership work, fraud auditing
b. financial management and system consultancy
c. Financial system planning and preparation
d. Tax management and statutory form filling
Answer:
c. Financial system planning and preparation

Question 108.
Which of the following is one of the major professional accountancy bodies in the India?
a. Institute of Chartered Accountants of India
b. Chartered Association of Accountants
c. Indian Institute of Chartered Accountants
d. Institute of Company Accountants
Answer:
a. Institute of Chartered Accountants of India

Question 109.
Which of the following activities is not an accounting function?
a. Auditing
b. Costing
c. Annual general meeting
d. Taxation
Answer:
c. Annual general meeting

Question 110.
Auditing should be done by
a. A professional accountant.
b. a certified management accountant
c. a competent and independent person.
d. a chartered accountant.
Answer:
c. a competent and independent person.

Question 111.
Which of the following characteristics of accounting information primarily allows user of financial statements to generate predictions about an organization?
a. Reliability
b. Timeliness
c. Neutrality.
d. relevance.
Answer:
d. relevance.

Question 112.
An accountant records information. But an auditor requires, the abilities such as
a. requirement to possess education beyond the bachelor’s degree.
b. accumulation and interpretation of evidence.
c. ability to interpret generally accepted accounting principles.
d. organize and summarize economic events
Answer:
b. accumulation and interpretation of evidence.

Question 113.
A reason for private companies to be audited is
a. having a professional accountant perform their bookkeeping
b. facilitating access to capital.
c. complying with the laws requiring them to be audited.
d. ensuring that their financial statement do not contain errors.
Answer:
b. facilitating access to capital.

Question 114.
Amit is recording sales transactions in the accounting system so that they can be summarized in a logical manner for the purpose of providing financial information for decision-making. Amit is doing
a. management consulting.
b. review.
c. accounting.
d. auditing
Answer:
c. accounting.

Question 115.
What type of organizations use auditing services?
a. Non-for-profit organizations
b. Businesses
c. Governments
d. All of the above
Answer:
d. All of the above

Question 116.
To operate effectively, an internal auditor must be independent of
a. the line functions of the organizations.
b. the employer-employee relationship, which exists for other employees in the organization.
c. the entity
d. all of the above
Answer:
a. the line functions of the organizations.

Question 117.
The internal auditor typically reports directly to
a. the management of the company
b. the audit committee and the management of the company
c. the audit committee and the board of director
d. the board of director and the external auditor
Answer:
c. the audit committee and the board of director

Question 118.
Which of the following functions listed below is NOT the role of an accountant?
a. Directing and co-coordinating the work of book-keeping staff.
b. Taking vital decisions within the organization.
c. Providing periodic financial statements for decision making.
d. Safeguarding and controlling the assets of an organization
Answer:
b. Taking vital decisions within the organization.

Question 119.
The overall responsibility for the accounting information contained in the financial statements of a business organization rests with the
a. Financial Controller
b. Auditor
c. Managing Director
d. Board of Directors
Answer:
d. Board of Directors

Question 120.
All of the following refer to an internal auditor’s competence except
a. The party in the entity to which the internal Auditor reports
b. The quality of internal audit documents and reports
c. Professional certification
d. Supervision and review of internal audit activities
Answer:
a. The party in the entity to which the internal Auditor reports

Question 121.
Which of the following is not a typical analytical procedure?
a. Study of relationships of the financial information with relevant nonfinancial information
b. Comparison of the financial information with similar information regarding the industry in which the entity operates
c. Comparison of recorded amounts of major disbursements with appropriate invoices
d. Comparison of the financial information with budgeted amounts
Answer:
c. Comparison of recorded amounts of major disbursements with appropriate invoices

Question 122.
Select the main object of an audit
a. to show the exact position of the company
b. Detection and Prevention of fraud and error
c. Both (a) and (b)
d. Depends on the type of audit
Answer:
d. Depends on the type of audit

Question 123.
For better assessing the audit risk, auditor inquires different groups in the organizations EXCEPT:
a. Board of governance and top level management
b. Legal counsel
c. Middle level management
d. Stakeholders
Answer:
d. Stakeholders

Question 124.
internal sources of audit evidence for an entity includes the following EXCEPT:
a. associated companies of the entity
b. Accounting systems, records and documents
c. Non-financial data and records
d. Management representation and discussion
Answer:
a. associated companies of the entity

Question 125.
The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually does exist is
a. Audit risk
b. Sampling risk.
c. Control risk
d. Detection risk.
Answer:
d. Detection risk.

Question 126.
Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been
a. Authorized
b. Implemented
c. Tested
d. Monitored
Answer:
b. Implemented

Question 127.
Prior to commencing field work, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time?
a. The specific matters to be included in the communication with the audit committee.
b. The minimum amount of misstatements that may be considered to be reportable conditions.
c. The schedules and analyses that the client’s staff should prepare.
d. The effects that inadequate controls may have over the safeguarding of assets.
Answer:
c. The schedules and analyses that the client’s staff should prepare.

Question 128.
Which of the following is NOT part of the planning phase of auditing?
a. Internal control review
b. Evaluation of audit risk
c. Developing the audit programme
d. Audit testing
Answer:
d. Audit testing

Question 129.
Which of the following is the least concern to an auditor regarding the client’s internal control system?
a. efficiency and effectiveness of operations
b. Controls related to the reliability of financial reporting
c. Controls over classes of transactions
d. Auditors are equally concern with each of the given issues
Answer:
a. efficiency and effectiveness of operations

Question 130.
For measuring the quality of audit evidence auditors used the tool of appropriateness; in case if auditor wants to measure quantity of audit evidence which tools from the following should be adopted?
a. Relevance
b. Reliability
c. Sufficiency
d. Effectiveness
Answer:
c. Sufficiency

Question 131.
Which of the following is NOT a compulsory audit?
a. Co-operative societal audit
b. Audit of HUF
c. Both a&b
d. None of the above
Answer:
b. Audit of HUF

Question 132.
Cost audit pinpoints at
a. Lacunae at the production point
b. Efficiency of a unit
c. Optimum utilization of expenditure
d. All of the above
Answer:
d. All of the above

Question 133.
Primary responsibility for the adequacy of financial statements disclosures rests with-
a. Auditor
b. Management
c. Auditor’s Staff
d. Central Government
Answer:
b. Management

Hint:
The primary responsibility for the adequacy of disclosure in the financial statements of a company rests with the management, Matters to be considered before planning an audit are

The auditor should check the nature of the engagement and the client’s business and industry trends at the beginning of planning.
Should keep a check on various responsibilities levied on him under various legislations
Auditor should determine the form and timing of the report
The auditor should check about recent developments like merger etc. in the company that may cause the audit to differ from prior years.
If accounting policies followed by company do affect the audit plan then confirm if there has been any change in the policy
Prepare a complete list of items needed from the client
Identify the areas which have greater audit risk so that the planning can be done accordingly
Prepare drafts of footnotes for new accounting standards so that there is smooth working while doing the audit and it becomes easy to explain the client regarding the new standards.
As each and every accounting entry can not be checked thus make some materiality level for example examining all entries where expense is more than Rs 10000.
To assess the internal control so that auditor can decide how much reliable is the information that is provided to him
Review the work of internal auditors
Auditor has to assess how much staff is required and how much time is required from each staff

Question 134.
Which one shall be kept in mind while carrying out audit?
a. High risk areas should be checked as others
b. High risk areas should be checked in detail
c. High risk areas should not be checked
d. High risk areas should be checked briefly
Answer:
c. High risk areas should not be checked

Hint:
Techniques of obtaining evidence

enquiry
observation
inspection
external confirmation
recalculation
Independent execution
analytical procedures

Question 135.
Which of the following is not a method of obtaining evidence
a. Observation
b. Confirmation
c. Declaration
d. Analytical review
Answer:
a. Observation

Hint:
Permanent files composed of documents, scheduled and other data that will be of continuing significance to several years audit. It is kept to record all data of a permanent nature which provides the necessary background information to the auditor from year to year.
Permanent audit file – Below mentioned are permanent audit file

the memorandum and Articles of Association.
The nature of the business.
Loan agreements
Documents related to internal control
The management set up.
The organization’s major Accounting policies
Leases
Significant audit observation of earlier years
Copies of important documents including title deed, agreements,, debentures deeds and letters of engagement,

Question 136.
Articles of Association of a company should be stored in a ………………………………..
a. Permanent audit file
b. Current audit’ file
c. System audit file
d. None of the above
Answer:
c. System audit file

Hint:
At the planning stage, the auditor sets the materiality levels.

Question 137.
In audit assignment, who among the following set the level of materiality?
a. Shareholders
b. Board of Directors
c. Auditor
d. Manager of the entity/department concerned.
Answer:
c. Auditor

Question 138.
Audit working papers are the property of:
a. Owner
b. Government
c. Auditor
d. Income Tax Department.
Answer:
c. Auditor

Question 139.
Primary responsibility for the adequacy of financial statement disclosures rest with The:
a. Auditor
b. Management
c. Auditor’s staff
d. Central Government.
Answer:
b. Management

Hint:
The primary responsibility for the adequacy of disclosure in the financial statements of a company rests with the management,

Question 140.
Which of the following is not an advantage of the preparation of audit working paper?
a. To provide a basis for review of audit work
b. To provide a basis for subsequent audits
c. To ensure audit work is being carried out as per program
d. To provide a guide for advising another client on similar issues.
Answer:
d. To provide a guide for advising another client on similar issues.

Hint:
Importance of working papers

Working papers are important because they are necessary for audit quality control purposes
provide assurance that the work delegated by the audit partner has been properly completed as per audit programme.
in future if client files any Suit against the auditor for negligence then such papers are useful for auditor to defend himself as working papers are the property of auditor and remains with him.
provide evidence that an effective audit has been carried out
increase the economy, efficiency, and effectiveness of the audit
contain sufficiently detailed and up-to-date facts which justify the reasonableness of the auditor’s conclusions
retain a record of matters of continuing significance to future audits

Question 141.
Which of the following is not true about audit plan?
a. Audit plan lays out the strategies to be followed to conduct an audit
b. Audit plan is made to ensure that audit assignment is done smoothly
c. Audit plan is not made from audit programme
d. Audit plan is prepared considering the terms of engagement and statutory responsibilities.
Answer:
c. Audit plan is not made from audit programme

Hint:
Audit planning procedures are the first and perhaps the most important step in carrying out a successful audit.
Audit plan is followed by audit program which has the set of instructions to be followed when doing audit.
Following are the features of audit plan:

It lays out the strategies to be followed to conduct an audit.
Audit plan is made to ensure that audit assignment is done smoothly
Audit plan is prepared considering the terms of engagement and statutory responsibilities.

Question 142.
The nature, time and extent of audit procedure are covered under –
a. Audit Programme
b. Audit Execution
c. Audit Plan
d. None of the above.
Answer:
c. Audit Plan

Hint:
Audit Plan covers, the nature, timing and extent of audit procedure for conducting audit by engagement of team members.

Question 143.
Which of the following technique is used to ascertain the correctness of debtors balance in books?
a. Observation
b. Enquiry
c. Computation
d. Confirmation.
Answer:
d. Confirmation.

Hint:
Confirmation is a technique to obtain audit evidences.
External confirmation: obtaining a written confirmation directly from a third party, such as a bank or debtor.

Question 144.
For auditors, which of the following document generally contains the scope of work
a. Appointment letter
b. Terms of engagement
c. Offer letter
d. None of the above.
Answer:
b. Terms of engagement

Hint:
Before planning for an audit, the auditor form the terms of engagement.

Question 145.
Which of the following are techniques of gathering audit evidence?
X. Inspection
Y. Enquiry
Z. Observation
Correct option is
a. X and Y
b. Y and Z
c. X and Z
d. X, Y and Z.
Answer:
d. X, Y and Z.

Hint:
Techniques of obtaining evidence

enquiry
observation
inspection
external confirmation
recalculation
Independent execution
analytical procedures

Question 146.
Who is the custodian authority for audit working papers?
a. Shareholders
b. Managing Director
c. Company Secretary
d. Auditor.
Answer:
d. Auditor.

Hint:
Audit working papers are the property of auditor.

Question 147.
Audit working papers acts as a link between
a. Client records and audit reports
b. Audit report and financial statements
c. Auditor and his staff
d. None of these.
Answer:
a. Client records and audit reports

Hint:
Importance of working papers

Working papers are important because they are necessary for audit quality control purposes
provide assurance that the work delegated by the audit partner has been properly completed as per audit programme.
in future if client files any suit against the auditor for negligence then such papers are useful for auditor to defend himself as working papers are the property of auditor and remains with him

Question 148.
Which of the following is not recorded in current Audit Working file?
a. Financial statement in audit report
b. Audit programme
c. Confirmation responses
d. Articles of Incorporation
Answer:
d. Articles of Incorporation

Hint:
Current Audit file -Below mentioned are current audit file

An index to the file which guides its orderly compilation.
A copy of the duly signed financial statement being Audited and the trial balance.
Extract of minutes of meetings and correspondences relevant to the year under review.
adjusting journal entries
completion check list.
Letter of representation of attorneys
Audit programs
Internal control questionnaires
A scheduled of each major items in the balance sheet.
A schedule of each major items in the profit and loss account.
List of queries and their dispositions

Question 17.
Which of the following is dis-advantage of Audit programme?
a. Reduces scope of misunderstanding
b. Serve as evidence
c. Against charge of negligence
d. New area may be overlooked.
Answer:
d. New area may be overlooked.

Hint:
Disadvantages of Audit Program:

The audit work conducted becomes too mechanical.
Auditors may have covered the whole field but it can not be said with certainty that all the necessary work have been done
It kills the initiative of capable persons assistant can not suggest any improvement in the plan.
It needs change every year and if changes not made it may become too rigid in nature
Audit program is suitable only for large audits
New areas may be overlooked

Question 18.
Terms of engagement between auditor and client are given in
a. Audit Engagement Letter
b. Audit Plan
c. Audit Programme
d. None of these.
Answer:
a. Audit Engagement Letter

Hint:
The auditor and the client should agree on the terms of the engagement. The agreed terms would need to be recorded in an audit engagement letter

Question 19.
Which of the following is an example of external:
a. Carbon Copies of cheques
b. Bank statements
c. Employees time reports
d. Purchase order of company purchases
Answer:
b. Bank statements

Hint:
Bank statements are the statement which are given by the bank of a customer of his banking transactions. So, it is an example of external source.

Question 20.
Which of the following factors would least likely affect the quantity and content of an auditors working papers.
a. The nature of auditors report
b. The assessed level of control risk
c. The possibility of peer review
d. The content of management representation letter
Answer:
a. The nature of auditors report

Hint:
Audit working papers contain information from accounting and statistical records, personal observations, the results of interviews and inquiries, and other available sources. These papers are support to the audit work and provide assurance that audit was performed with the relevant auditing standards. Audit working papers are generally prepared at the time audit work is performed. Audit papers are link between clients records and audited accounts. Information in working papers is required to be kept confidential and if disclosed then it is a professional misconduct

Question 21.
An audit plan is an integral part of which of the:
a. Closing
b. Initiation
c. Reporting
d. Preparation
Answer:
b. Initiation

Hint:
Audit planning procedures are the first and perhaps the most important step in carrying out a successful audit. While developing an audit plan auditor should see that audit procedures should compliy with the Standard on Auditing (SAs)

Question 22.
The format of Audit programme is:
a. Prescribed in Companies Act
b. Prescribed in Chartered Accountants Act
c. Prescribed by appointing authority
d. Not prescribed in any law.
Answer:
d. Not prescribed in any law.

Hint:
Audit program depends on the size of the organization and there is no standard audit program.

Question 23.
The evidence gathered during investigation exercise are:
a. Corroborative
b. Corroborative and conclusive
c. Persuasive
d. Corroborative and Persuasive.
Answer:
b. Corroborative and conclusive

Question 24.
The methodology of audit planning is:
a. Not prescribed in any law
b. Prescribed in Companies Act, 2013
c. Prescribed in Chartered Accountants Act, 1949
d. Prescribed by the appointing authority.
Answer:
a. Not prescribed in any law

Question 25.
Which of the following are techniques of gathering audit evidence? (x) Inspection (y) Enquiry (z) Observation. Correct option is:
a. x and z only
b. y and z only
c. x and y only
d. x, y and z.
Answer:
d. x, y and z.

Hint:
Techniques of obtaining evidence

enquiry
observation
inspection
external confirmation
recalculation
Independent execution
analytical procedures

Tag: Auditing Notes

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