The main object of an audit is ___ a) Expression of opinion b) Detection and Prevention of fraud

1. The main object of an audit is _ a) Expression of opinion b) Detection and Prevention of fraud and error c) Both (a) and (b) d) Depends on the type of audit.
2. The title of AAS­2 issued by Council of ICAI is _ a) Objective and Scope of the Financial Statements b) Objective and Scope of the Audit of Financial Statements c) Objective and Scope of Business of an Entity d) Objective and Scope of Financial Statements Audit
3. Which of the following is not true about opinion on financial statements? a) The auditor should express an opinion on financial statements. b) His opinion is no guarantee to future viability of business c) He is responsible for detection and prevention of frauds and errors in financial statements d) He should examine whether recognised accounting principle have been consistently
4. A sale of Rs. 50.000 to A was entered as a sale to B. This is an example of _ a) Error of omission b) Error of commission c) Compensating error d) Error of principle
5. ‘Goods sent on approval basis’ have been recorded as ‘Credit sales’. This is an example of _ a) Error of principle b) Error of commission c) Error of omission d) Error of duplication
6. Which of the following statements is not true? a) Management fraud is more difficult to detect than employee fraud b) Internal control system reduces the possibility of occurrence of employee fraud and management fraud c) The auditor’s responsibility for detection and prevention of errors and frauds is similar. d) All statements are correct.
7. As per AAS­4 if auditor detects an error then – a) He should inform the management. b) He should communicate it to the management if it is material c) The auditor should ensure financial statements are adjusted for detected errors. d) Both (b) and (c)
8. Which of the following is not a limitation of audit as per AAS­4? a) Objectivity of auditor’s judgment b) Selective testing c) Persuasiveness of evidence d) Limitations of internal control system.
9. How many principles are listed in AAS­1 which govern auditor’s professional obligation? a) Nine b) Fourteen c) Seven d) Eight
10. Both auditing and accounting are concerned with financial statements. Which of the following a) Auditing uses the theory of evidence to verify the financial information made available by Accountancy b) Auditing lends credibility dimension and quality dimension to the financial statements prepared by the accountant. c) Auditor should have through knowledge of accounting concepts and convention to enable him to express an opinion on financial statements d) All of the above.

The correct answer and explanation is:

Answers:

1. a) Expression of opinion
2. b) Objective and Scope of the Audit of Financial Statements
3. c) He is responsible for detection and prevention of frauds and errors in financial statements
4. b) Error of commission
5. a) Error of principle
6. c) The auditor’s responsibility for detection and prevention of errors and frauds is similar.
7. d) Both (b) and (c)
8. a) Objectivity of auditor’s judgment
9. c) Seven
10. d) All of the above

Explanations:

1. Expression of opinion
   The primary objective of an audit is to express an independent opinion on whether the financial statements present a true and fair view of the financial position and performance of the entity. Detection and prevention of fraud and errors are secondary objectives.
2. Objective and Scope of the Audit of Financial Statements
   AAS-2 outlines the objectives and scope of auditing, emphasizing the auditor’s responsibility to express an opinion on the financial statements while adhering to ethical and professional standards.
3. Auditor’s Opinion on Financial Statements
   While auditors provide an opinion on financial statements, their role is not to guarantee business viability or detect all frauds/errors. Their opinion is based on reasonable assurance, not absolute assurance.
4. Error of Commission
   Recording a sale to the wrong party is an error of commission, where the transaction is entered incorrectly but does not violate accounting principles.
5. Error of Principle
   Treating goods sent on approval as credit sales violates accounting principles, representing an error of principle.
6. Management vs. Employee Fraud
   Management fraud is harder to detect due to their control over processes. However, internal controls help reduce fraud risks. The auditor’s responsibilities for detection differ between management and employee fraud.
7. Material Errors and Adjustments
   AAS-4 mandates the auditor to report material errors to management and ensure adjustments are made to reflect accurate financials.
8. Objectivity of Auditor’s Judgment
   Auditor judgment is critical but not a limitation of audit. Limitations include selective testing and the inherent limitations of internal controls.
9. Seven Principles
   AAS-1 lists seven principles governing an auditor’s professional obligations, including independence, objectivity, and due care.
10. Auditing and Accounting Relationship
    Auditing complements accounting by verifying and enhancing the credibility of financial information. Auditors must understand accounting concepts to evaluate financial statements effectively.