IGNOU Solved Question Papers: ECO - 12 (June' 2012)

Term-End Examination June’ 2012
Time: 2 hours
Maximum Marks: 50 (Weightage 70%)
Time: 2 hours Maximum Marks: 50 (Weightage 70%)
Note: Attempt any five questions. All questions carry equal marks.
1. Define Auditing and state its objectives. 2+8
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. Explain the salient features of an Internal Check System usually adopted for sales in a business unit. 10
3. Define Vouching. What points need to be taken care by an auditor while examining a voucher? 2+8
4. Write short notes on the following: 4+6
(a) Vouching of Contingent Liabilities.
(b) Duties of an auditor regarding distribution of capital profits.
5. How would you make the valuation of the following assets?
(a) Freehold Property
(b) Patents
6. Describe the duties of a Company Auditor as per the provisions of Companies Act. 10
Ans: Duties and Liabilities of a Company Auditor
1. Duties towards the shareholders:
  1. Report shareholders about true and fair state of affairs of the company;
  2. State that balance sheet and profit and loss a/c give all information required by law;
  3. State that balance sheet and profit and loss a/c agree with the books of account;
  4. State that balance sheet and profit and loss a/c agree with accounting standards;
  5. State that he has obtained all the necessary information ;
  6. State whether the company has maintained all books as required by law;
  7. State the reasons of qualification in his report;
  8. State that he has received the audit report on the branch accounts audited by other auditor and how he has dealt with the same in preparing his report;
2. Duties towards Company:
  1. The auditor is required to certify profits or losses, assets & Liabilities and dividend paid etc in the prospectus.
  2. The auditor has to certify the statutory report.
  3. The auditor is required to report about whether the company has followed all rules and guideline of RBI in regard to public deposits or not.
  4. It is duty of auditor to sign on his report.
  5. If the company wants itself to be declared insolvent, it is duty of auditor to prepare profit and loss a/c for the current period.
3. Duties towards government:
  1. CARO − 2003: The auditor has to report para-wise that the company has fulfilled all the requirements of CARO − 2003.
  2. It is duty of auditor to assist the investigation ordered by the CG u/s 237.
4. Duties towards General Public:
  1. His office is of confidence and faith. He must be reliable in all respects.
  2. He should reveal all material information regarding the state of affairs of the company to the company as well as to the general public.
  3. While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading information or material.

7. What are the duties of an Auditor with regard to the following: 5+5
(a) Issue of shares at Premium
Ans: Auditor’s Duty regarding issue of share at a premium
  1. The auditor should examine the Prospectus, the Articles and the Minutes of the Directors to see whether the issue of shares at a premium is duly authorized or not. He should confirm the rate of premium.
  2. The receipt of the premium is vouched with the entries in the Cash Book and the supporting documents.
  3. He should see that the provisions of section 78 have been complied with.
  4. The auditor should not have any objection so far as the utilization of the amount of premium is concerned. However, he should see that the sum available has been utilized in the manner as laid down by the Articles.
  5. The auditor should confirm that the securities premium is properly disclosed under the head reserves and surplus of the company’s balance sheet.

(b) Forfeiture of Shares
Ans: Auditor’s Duty regarding forfeiture of shares
  1. Check whether articles authorize BOD to forfeit the shares and the board has exercised the power in the best interest of the co.
  2. Verify the amount of call out standing in respect of shares of shares forfeited from call in arrears register
  3. Check whether procedure prescribed in AOA has been followed i.e. 14 days has been given to defaulting share holders.
  4. Verify the journal entry debiting to share capital a/c and entry made to forfeited shares a/c and calls in arrears a/c
  5. Forfeited shares a/c shall not been credited to P/L a/c since it is a capital nature. However it can be used for meeting any loss on a/c of Reissue of forfeited shares.
8. What is auditor report ? Describe its form and contents. 2+8
Ans: Audit Report: Audit report is a statement on financial position of the company which is issued after the conclusion of audit. It is a medium through which an auditor expresses his opinion on the financial statements under audit.  It generally shows the nature and scope of audit conducted by the auditor and his opinion on the final accounts of the company. It is an important part of audit because it provides the results of the audit conducted by the auditor. The audit report is the final and ultimate report of audit process.
TYPES OF AUDIT REPORT: There are four types of audit report which are given below:
  1. Clean Report: It is also known as Unqualified Report. It is given by the auditor if he is satisfied with the fairness of Balance Sheet and Profit and Loss account with all the contents of the financial statements and he is satisfied with evidences, documents and explanation given by his clients.
  2. Qualified Report: When the auditor is not satisfied with the accounts presented to him if he finds any discrepancy in the recording of the transaction, if he thinks that the Balance Sheet and P&L account do not exhibit true and fair view of the business then he submits Qualified Report.
  3. Adverse Opinion: The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented.
  4. Disclaimer of Opinion: On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.
Contents of Audit Report:
1. Title: It is given a title of '' Audit Report''.
2. Address to whom: Audit report should address to someone. For example the audit report on company affairs can be addressed to Central government or to Shareholders.
3. Observation:  In his Audit report the auditor is required to report:
  • Whether he has obtained all the explanations and information which to the best of his knowledge and belief were necessary for the purpose of his audit.
  • Whether proper books of accounts as required by law have been kept by the company;
  • Whether Balance sheet and Profit and loss a/c give a true and fair view of the state of affairs of the company;
  • Whether the Balance sheet and Profit and loss a/c are in agreement in books of accounts.
  • Whether the Balance sheet and Profit and loss a/c give the information in the manner as required by law;
  • Whether the provisions of the Company's Act have been complied.
  • Whether the provisions of CARO 2003 have been complied;
4. Auditing Standards: The auditor should report whether he has complied with all the auditing standards in conducting and concluding the audit.
5. Opinion: After conducting and concluding the audit, the auditor must express his opinion. His opinion may be qualified, unqualified, adverse or negative.
9. What is meant by Management Audit? State the points to be considered before commencing Management Audit. 2+8