MCQs on Guidance Note on the Companies (Auditor’s Report) Order, 2020: ICAI

MCQs on Clause (i)

Select True/ False:

1. Reporting on title deeds of immovable properties is not required where the company is lessee and lease agreement is duly executed in favour of the company.

True.

2. Transfer Development Rights (TDRs), plant and machinery embedded in the land, etc., are not considered as immovable property.

True.

3. The auditor using the work of registered valuer tantamount to using the work of an auditor’s expert as laid out in SA 620, “Using the Work of an Auditor’s Expert”.

False.

4. The reporting under clause 3(i)(e) is not applicable where the notice is received by the company as a beneficial owner.

True.

5. Investment property and Non-current Assets Held for Sale will not be considered by the auditor for reporting under clause 3(i)(a)(A).

False.

6. What constitutes proper records is a matter of professional judgement made by the auditor after considering the facts and circumstances of each case.

True.

7. The purpose of showing the situation of PPE is to make verification possible.

True.

8. Immovable property shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth.

True.

9. The auditor cannot obtain the support of any legal expert in case there is any dispute or litigation as to the title of the immovable property.

False.

10. Where the proceedings under Prohibition of Benami Property Transactions Act 1988 are initiated post balance sheet date but before the signing of the auditor’s report, the auditor should consider the requirements of SA 560, “Subsequent Events”.

True.

11. It is to be ensured that the information contained in the electronic records remains accessible and unaltered and its origin, destination, date, etc. can be identified.

True.

12. When details of disposals are not available, it may be assumed that the asset sold is the asset that was acquired earliest in point of time.

True.

13. If the PPE register is not maintained by the company, it is not necessary to be mentioned by the auditor while reporting under clause 3(i)(a)(A).

False.

14. Reporting under clause 3(i)(e) is limited to the adequacy of disclosure in the financial statements and to cases where proceedings are initiated with the company being treated as a benamidar.

True

15. The auditor should review the minutes of meetings of the Board of Directors, Audit Committee, Risk Management Committee and other secretarial records to verify whether any reference to proceedings against the company under Prohibition of Benami Property Transactions Act 1988 has been made.

True

16. “Reasonable intervals” does not depend upon the circumstances of each case.

False

17. Revaluation need not be performed every year or in every reporting period.

True

Choose the correct option(s):

18. While reporting under clause (i), the auditor has to report on which of the following aspects:

a) Benami properties

b) Physical verification

c) Title deeds

d) All of the above

Answer: d

19. The auditor may accept PPE register in electronic form if:

a) The controls and security measures in the company are such that once finalized, the PPE register cannot be altered without proper authorization and audit trail

b) The PPE register is in such a form that it can be retrieved in a legible form

c) Both (a) & (b)

d) Neither (a) nor (b)

Answer: c

20. The records relating to a property, plant, and equipment should contain the following details:

a) Situation

b) Original cost

c) Component-wise breakup

d) All of the above

Answer: d

21. The auditor may have to consider the applicable documentation requirements of intangible assets as laid down in:

a) Designs Act, 2000

b) Patents Act, 1970

c) Information Technology Act, 2000

d) All of the above

Answer: d

22. Physical verification of the assets is the responsibility of the ___________

a) auditor

b) those charged with governance

c) management

d) shareholders

Answer: c

MCQs on Clause (ii)

Select True/ False:

1. While reporting under this clause, the auditor is required to comment on whether the management has conducted physical verification of inventory at reasonable intervals and whether the coverage and procedure of such verification by the management is appropriate.

True.

2. Only in cases where a discrepancy of 10% or more arises in quantity, for any class of inventory, the auditor has to report the fact and also report whether they have been properly dealt with in the books of account.

False

3. Reporting under this clause requires the auditor to comment on whether the management has conducted physical verification of inventory at reasonable intervals and such reasonable intervals can be over a period of three years for entities having a large number of items spread across various geographical locations.

False

4. The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages within all the classes of an inventory based on value.

False 

5. Physical verification of inventory is the responsibility of the management of the company who should verify all material items at least once in three years and more often in appropriate cases.

False 

6. The auditor should determine the reasonableness and adequacy of procedures adopted for physical verification of inventories and its coverage having regard to the nature of inventories, their locations, quantities, value, and feasibility of conducting the physical verification.

True

7. Reporting under this clause requires the auditor to report where working capital limits are unsecured or sanctioned on the basis of assets other than current assets.

False 

8. It may be noted that for the purpose of reporting under this clause, the auditor is required to check the working capital sanctioned limit and also its utilization.

False 

9. While reporting under this clause, the auditor should determine the sanctioned limit with reference to the sanction letter issued by banks or financial institutions and relevant agreements executed with them. Where the utilization is less than the sanctioned limit of five crore rupees, such cases will not be covered for the purpose of reporting.

False 

10. The auditor is also required to audit such quarterly returns/statements submitted to banks/financial institutions with reference to books of account and relevant records and report disagreement if any.

False 

11. Reporting on returns/statements would include stock statements, book debt statements, credit monitoring arrangement reports, statements on aging analysis of the debtors/other receivables, and other financial information to be submitted in a stipulated format on a quarterly basis to lenders.

True

12. Reporting under this clause will include the only fund based credit facilities availed by the company. Non-fund based credit facilities availed by the company may be ignored.

False

13. It is also pertinent to note that the threshold of five crore rupees should be examined for any day during the year for which the reporting is to be made, and not as at the end of the financial year.

True 

Choose the correct option(s):

14. While reporting under this clause, which of the following is correct:

a) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and shortages within the class of an inventory and must be based on value for each class of Inventory

b) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and shortages within the class of an inventory and must be based on value for all classes of Inventory

c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages within the class of an inventory and must be based on value for each class of Inventory

d) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and shortages within the class of an inventory and must be based on value for all classes of Inventory

Answer: c

15. For the purpose of reporting under this clause, which of the following is correct:

a) The auditor is required to check the working capital sanctioned limit and not its utilization

b) The auditor is required to check the working capital sanctioned limit and also its utilization

c) The sanctioned limit may be less than five crore rupees but due to excess withdrawals/ levy of interest/ temporary overdrawing, the balance may exceed five crore rupees. Such cases are also in the scope of reporting under this clause

d) The auditor is not required to check in case utilization is less than the working capital sanctioned limit

Answer: a

MCQs on Clause (iii)

Select True/ False:

1. Reporting under this clause is required for all companies. There are no exemptions for NBFCs.

False

2. Whether an advance is in the nature of a loan would depend upon the circumstances of each case.

True

3. Reporting under sub-clause (a) of clause (iii) extends to all forms of guarantees.

False

4. In case of loans/advances in the nature of loans, the “terms and conditions” would primarily include the rate of interest, security, terms and period of repayment and restrictive covenants, nature of the entity, etc.

True

5. Auditors can identify whether a transaction is prejudicial in nature merely by checking compliance with laws and regulations and where such compliance is ensured no further audit procedures are required to be performed.

False

6. Reporting under clause (iii)(c), (d), and (e) cover the loans and advances in the nature of loans granted during the year and also all loans and advances in the nature of loans having opening balances.

True

7. An amount is considered to be overdue when the payment has not been received on the due date as per the lending arrangement.

True

8. Clause (iii)(e) is a new clause and requires reporting in respect of loan or advance in the nature of loan granted which has fallen due during the year and has been renewed or extended or fresh loans granted to settle the overdue of existing loans given to the same parties.

True

9. The scope of clause (iii) in CARO 2020 is very wide vis-àvis clause (iii) in CARO 2016.

True

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