IGNOU Solved Question Papers: ECO - 12 (June' 2013)

Term-End Examination June, 2013
Time: 2 hours
Maximum Marks: 50 (Weightage 70%)
Note: Attempt any five questions. All questions carry equal marks.
1. What do you mean by the term ‘audit’? What are its objectives? 4, 6
Ans: The word audit is derived from the Latin word “AUDIRE” which means to hear. Initially auditor was a person appointed by the owners to check account whenever the suspected fraud, he was to hear explanation given by the person responsible for financial transactions. Emergence of joint stock companies changed the approach of auditing as ownership was pestered from management. The emphasis now is clearly on the verification of accounting date with a view on the reliability of accounting statement.
In the words of Montgomery, “Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and report upon the facts regarding its financial operation and the result thereof”. 

In the words A.W. Hanson, “An audit is an examination of such records to establish their reliability and the reliability of statement drawn from them”. 
From the above definitions it is clear that the auditor’s basic duty is to examine the accounts and its arithmetical accuracy. He must ensure than the financial statements depicts true and fair view of the state of affairs of the business. Since, Auditing is a full and critical examination of the books of accounts to find out their accuracy.
Objectives of Auditing:
  1. Reporting: The objective of an audit of financial statement is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects in accordance with an identified financial reporting frame work. The phrases used to express the auditor's opinion are given a true and fair view or present fair in all material respects, which are equivalent terms.
  2. Purpose of Audit: The purpose of audit is to check the proper accounting to policies. For the better accounting system it is necessary to follow the accounting policies. Only by this way we can get the effective result.
  3. Opinion: The purpose of the audit is to get the correct opinion about the business so for this the auditor should be honest, confident and he must have the ethical standard for his work.
  4. True and Fair View: The purpose of the auditing is to determine the correctness of statement. After auditing the financial statement has the correct and true view about the business.
  5. Detection and Prevention of Errors: The audit is committed for the detection and prevention of errors. These errors can be prevented through internal check also.
  6. Detection and Prevention of Fraud: The detection and prevention of fraud is another purpose of auditing. It consists of the omission of the effect of transaction, recording or transaction without substance etc.
  7. Profit Verification: Audit is concern to check the profit verification in a business concern. Profit has to main position in any type of business, only the expert auditors can check the fluctuation of the Profit.
  8. Admission of Partners: For the admission of the new partner the audit plays an important role. It provides information to new as well as old partner for the settlement of the new terms according to the volume of assets and liabilities.
  9. Purchasing Price: For the buyers and sellers of a certain business concern it is necessary to know the real value of the business assets and liabilities. The audit is helpful in finding out the real value of the business.
2. What do you mean by test checking? State the various precautions that are to be taken in respect of test checking.4, 6
3. "An auditor is not a valuer but he is intimately connected with values". Explain and state the auditor's position in respect of valuation of assets. 10
4. How would you vouch the following: 5, 5?
(a) Payment of wages
(b) Credit sales
5. State the auditor's duties in relation to: 5, 5
(a) redemption of preference shares
(b) shares issued for consideration other than cash.
6. How is a company auditor? 5, 5
(a) appointed and
(b) removed
7. Explain the concepts of a 'clean report' and a 'qualified report' with examples. 5, 5
8. Distinguish between 'cost audit and 'financial audit'. 10
9. Write short notes on any two of the following: 5, 5
(a) Audit Programme
(b) Detection and Prevention of Frauds
(c) Management Audit Report
(d) Verification and Valuation of Goodwill