CA Final Audit and Professional Ethics MCQs

Audit and ethics MCQs for Paper 3 that test what the auditor should do, not just what the Standard says.

4 full-length tests. Each has 23 questions for 30 marks in 30 minutes. MCQ 1 is free.

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Try 3 questions from MCQ 1

Work each one out, then open the answer to see why every option is right or wrong.

Question 1, 1 mark

A chartered accountant in practice is appointed liquidator of a company and agrees to be paid a percentage of the assets realised. Is that professional misconduct?

  1. Yes, under Clause (10) of Part I of the First Schedule, since fees based on a percentage may never be charged for any professional work

    Wrong. The prohibition in Clause (10) is expressly subject to the regulations, and Regulation 192 is written for exactly this case.

  2. Yes, but under Clause (11) of Part I of the First Schedule, acting as a liquidator being an occupation other than the profession of chartered accountancy

    Wrong. Regulation 191 permits a member in practice to act as liquidator, so the occupation itself is unobjectionable.

  3. No, provided the percentage is approved by the members in general meeting before the appointment takes effect

    Wrong. No approval by members is required or relevant; the exemption comes from the Regulation.

  4. No. Regulation 192 exempts a receiver or a liquidator, whose fees may be based on a percentage of the realisation or disbursement of the assets

    Correct answer

    Correct.

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Why

Clause (10) prohibits fees that are based on a percentage of profits or contingent on the findings or results of the employment, except as permitted under regulations made under the Act. Regulation 192 supplies those exceptions, and the first of them covers a receiver or liquidator, whose fees may be based on a percentage of the realisation or disbursement of the assets. Other exemptions cover an auditor of a co-operative society, a valuer for direct taxes, certain management consultancy services, fund raising, debt recovery and cost optimisation.

Reference: Clause (10) of Part I of the First Schedule read with Regulations 191 and 192 of the Chartered Accountants Regulations, 1988; Study Material Ch. 19.

Question 2, 1 mark

Management asks the auditor not to send a confirmation request to a particular customer. What should the auditor do first?

  1. Accept the request where management offers an alternative source of evidence, the choice of procedure resting with the auditor

    Wrong. Acceptance comes only after the reasons have been tested; taking the alternative straight away skips the step that might reveal a fraud risk.

  2. Inquire into management's reasons for the refusal and seek audit evidence as to whether those reasons are valid and reasonable

    Correct answer

    Correct. Inquiry into the reasons comes first, and their validity governs what happens next.

  3. Treat the refusal as a scope limitation and modify the opinion, management having interfered with a procedure the auditor considered necessary

    Wrong because it jumps to the end. Modification may follow, but not before the reasons have been inquired into and alternative procedures attempted.

  4. Send the request regardless, the auditor's statutory right of access to information overriding any objection management raises

    Wrong. Overriding management without inquiry misses the point of the step, which is to learn what the refusal itself indicates.

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Why

SA 505 sets out a sequence. The auditor first inquires into management's reasons for the refusal and seeks evidence about whether those reasons are valid and reasonable. The auditor then evaluates the implications for the assessment of risk, including fraud risk, and performs alternative procedures designed to obtain relevant and reliable evidence. Only where the reasons are found unreasonable, or alternative procedures cannot supply the evidence, does the auditor communicate with those charged with governance and consider the effect on the opinion.

Reference: SA 505, External Confirmations, on management's refusal to allow the auditor to send a confirmation request; Study Material Ch. 5.

Question 3, 1 mark

After the auditor's report has been dated but before the financial statements are issued, the auditor learns a fact that, had it been known earlier, would have caused the report to be amended. What is the first step?

  1. Discuss the matter with management or those charged with governance and determine whether the financial statements need amendment

    Correct answer

    Correct. Discuss, then determine whether amendment is needed.

  2. Withdraw from the engagement and notify the regulator, the report having been issued on a basis now known to be incomplete

    Wrong, and it skips every step the standard requires. Withdrawal is not the starting point.

  3. Issue a fresh report dated the same day as the original, so that the two reports are consistent with one another on their face

    Wrong. Where a new report is issued its date reflects the further work done; repeating the original date would misrepresent when the procedures were performed.

  4. Take no action at all, the auditor's responsibility to the entity having ended on the date the report was signed and dated

    Wrong. The absence of a duty to search is not the absence of a duty to respond to what the auditor actually learns.

Show answer
Why

This is SA 560's second period. The auditor has no obligation to perform procedures after the report is dated, but where such a fact comes to light the auditor discusses it with management or those charged with governance, determines whether the financial statements need amendment and, if so, inquires how management intends to address the matter. Where management amends them, the auditor extends the audit procedures over the amendment and either amends the report with a date restricted to that amendment, or issues a new or amended report containing an appropriate statement.

Reference: SA 560, Subsequent Events, on facts which become known to the auditor after the date of the auditor's report but before the financial statements are issued; Study Material Ch. 6.

That is the review you get on every question after a full test, with your marks broken down by topic, weakest first, so you know what to revise next.

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What the Audit tests cover

Audit MCQs are rarely about recalling a Standard. They ask what the auditor should do first, which opinion follows, or whether conduct is misconduct, and the wrong options are usually things a careful auditor might do, just not first or not here.

The tests put the Standards to work on case scenarios: attending an inventory count, relying on negative confirmations, an event after the reporting date, choosing between a qualified opinion and a disclaimer, classifying a stressed loan at an NBFC, and reviewing an automated control.

Standalone questions cover the Standards on Auditing, SQC 1, review and agreed-upon procedures engagements, group audits, internal and public sector audit, forensic accounting, and the Schedules to the Chartered Accountants Act, 1949 with the Regulations.

The questions are new, written from the Acts, the Standards and the study material, and are not reprints of ICAI papers.

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