Saturday, February 22, 2020

IGNOU FREE SOLVED ASSIGNMENT: ECO - 12 ELEMENTS OF AUDITING (2019 - 2020)


Bachelor’s Degree Programme (BDP)
ASSIGNMENT (2019-20)
Elective Course in Commerce
ECO – 12: Elements of Auditing
Elective Course in Commerce
Dear Students,
As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.
Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.
This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:
1)         Those who are enrolled in July 2019, it is valid up to June 2020.
2)         Those who are enrolled in January 2020, it is valid up to December 2020.
You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

TUTOR MARKED ASSIGNMENT
Course Code : ECO - 12
Course Title : Elements of Auditing
Assignment Code : ECO - 12/TMA/2019-20
Coverage : All Blocks
Maximum Marks: 100
Attempt all the questions
1. Distinguish between Internal Audit and Statutory Audit. Can the statutory auditor rely upon the internal audit in carrying out his functions as a statutory auditor?                                              (20)
Ans: Difference between Internal audit and Statutory/External audit
An internal audit is conducted by the permanent staff of the same office to detect weakness in system, procedures and for the improvement. But statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account; detect errors and frauds even though they have certain differences which are as follows:
1. Appointment: An internal auditor is generally appointed by the management but statutory auditor is appointed by the shareholders or Annual General Meeting.
2. Legal Requirement: Internal audit is the need of management but it is not legal obligation but statutory audit is the legal requirement.
3. Qualification: An internal auditor does not required specific qualification as per the provision of law but qualification of statutory auditor is specified.
4. Conducting Of Audit: Internal audit is of regular nature but final audit is conducted after the preparation of final account.
5. Status: An internal auditor is a staff who is appointed by the management but statutory auditor is an independent person appointed by the shareholders.
6. Scope Of Work: Internal audit is related to the examination of books of accounts and other activities of an organization but statutory audit checks the books of accounts and related evidential documents. So, scope of internal audit is vague but scope of statutory audit is limited.
7. Removal: Internal auditor can be removed by the management but statutory auditor can be removed by the annual general meeting only.
8. Remuneration: Internal auditor is appointed by the management; so remuneration is fixed by the management but remuneration of statutory auditor is fixed by the shareholders.
Reliability of Internal Audit
Internal audit is an independent appraisal activity within the organization by the staff of the entity or by an independent professional appointed for that purpose, for review of accounting, financial and other operations and controls established within an organization as a service to the organization. The objective of internal audit is to furnish the analysis, appraisals, suggestions and information concerning the activities reviewed to the management for promoting effective control at reasonable cost.
 According to the Institute of Internal Auditors New York, “Internal audit is an independent appraisal activity within the organization for the review of financial, accounting and other operations done as a basis of service to the management. It is a managerial control which functions by measuring and evaluating the effectiveness of other controls”.
Internal Audit under section 138 of Companies Act, 2013: Internal Audit is required by:
(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.
(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.
According to the Institute of Internal Auditors, internal audit involves five areas of operations:
i. Reliability and integrity of financial and operating information: Internal auditors should review the reliability and integrity of financial and operating information and the means used to identify, measures, classify and report such information.
ii. Compliance with laws, policies, plans, procedures and regulations: Internal auditor should review the systems established to ensure compliance with those policies, plan and procedures, law and regulations which could have a significant impact on operations and reports and should determine whether the organization is in compliance thereof.
iii. Safeguarding of Assets: Internal auditors should verify the existence of assets and should review the means of safeguarding assets.
iv. Economic and efficient use of resources: Internal auditor should ensure the economic and efficient use of resources available.
v. Accomplishing of established objectives and goals for operations: Internal auditor should review operation or programmes to ascertain whether results are consistent with established objectives and goals and whether the operations or programmes are being carried out as planned.
From the above discussion, we can say that internal audit is an important tool in the hands of statutory auditor. It helps the statutory auditor in the following ways:
i. It evaluates the internal control system, so the statutory auditor can reduce the number of tests that he may have had to conduct in case there was no internal audit
ii. It carries out physical stock taking procedures, so reliance on stock valuation is increased.
iii. It helps in timely completion of accounts and accuracy of records.
iv. It evaluates the contingent liability existing at the year end.
v. It ensures correctness of financial statements through a system of pre-audit or continuous audit.
2. What do you understand by “outstanding assets” and “outstanding liabilities”? What are the duties of an auditor in relation to outstanding liabilities?                                          (20)
Ans: Outstanding assets and auditors duties
Outstanding assets are those which are receivable at the end of the accounting year. These assets are short term in nature and shown as current assets in the balance sheet. Example of outstanding assets are rent receivable, prepaid expenses, accrued interest.
Auditor’s duties in case of outstanding liabilities:
1. The auditors should check that all the outstanding assets are included in current year’s balance sheet.
2. The auditor should see that necessary adjustments of all accrued income are made in income statement.
3. The auditor should check entries for some weeks after the balance sheet date to ensure that they are not related to the under audit period.
4. The auditors should ensure that all outstanding assets have been duly realised.
5. He should compare the expenses shown as unpaid during the current year with those of the last year and if he finds any difference, the same should be enquired into.
Outstanding liabilities and auditors duties:
Outstanding liabilities are those which are remain unpaid at the end of the accounting year. These liabilities are short term in nature and shown as current liabilities in the balance sheet. Example of outstanding expenses are rent unpaid, salaries payable, unpaid electricity bill etc.
Auditor’s duties in case of outstanding Liabilities:
1.       The auditor should obtain a certificate from a responsible official to the effect that all outstanding expenses have been included in the current year’s accounts. Examples of expenses which should be debited to the current year are rent of twelfth month or salaries payable or electricity charges for the last month, etc. Further,
2.       The auditor should check entries for some weeks after the Balance Sheet date to ensure that they are not related to the under audit.
3.       The auditor should ensure that outstanding expenses have been subsequently paid.
4.       He should see whether necessary provision for all the outstanding expenses have been made by checking receipts and other vouchers.
5.       He should compare the expenses shown as unpaid during the current year with those of the last year and if he finds any difference, the same should be enquired into.


3. What is the status of the auditor in a company? How can he protect the rights of the shareholders of the company? (20)

4. What do you understand by management audit? How does it help management in improvement of its effectiveness? (20)
Ans: Management audit is a method of independent and systematic evaluation of the management activities at .all levels of management to ascertain the functions, efficiency and achievement of' the management (i.e. policies) as compared to standards set by the company.
According to L. R. Howard, "Management audit is an investigation of business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with outside world and smooth running of internal organization."
As per Taylor and Perry; "Management auditing is a method to evaluate the efficiency of management at all levels throughout the organization, or more specifically, it comprises the investigation of a business by an independent body from the highest executive level downwards, in order to ascertain whether sound management prevails through and to report as to its efficiency or otherwise with recommendations to ensure its effectiveness where such is not the case."
Significance of Management Audit for the management
Objectives of management audit: Management audit is the total audit of the management i.e. reviews how the policies of the management have been implemented and its efficiency to execute the policy. Therefore, the scope is much greater than financial audit, as it examines the all aspects of the management. Management audit has some objectives. These are discussed below:
(i) Verifying the efficiency: Management audit aims at to asses the efficiency at all levels of management and implementation of policies.
(ii) Gives suggestion for increase in efficiency: Management audit highlights the inefficiencies in different areas of management and gives his valuable suggestions and means to improve the efficiencies.
(iii) Asses the effectiveness of Planning and policies: Management audit examine and evaluates the plans and policies and judge whether planning and policies are properly implemented.
(iv) Helps to increase profitability: Management audit helps the management to increase profitability by giving remedies to maximize the organization's resources in an efficient way.
(v) Helps to co-ordinate activities: Management audit detects the interrelationship among the activities, evaluates the authority and responsibility and gives valuable suggestions for improvement of co- ordination among the activities and the employees. .
(vi) Gives valuable advice: By scanning the management efficiency and detecting the weak spots of different levels of management, the management auditor gives valuable advice to the top management regarding different policies and future course of action
ADVANTAGES OR IMPORTANCE OF MANAGEMENT AUDIT:
There are several advantages of conducting management audit of an organization. When an organization grows in its volume and activities, there is a need for management audit for evaluating efficiency and effectiveness of the management at all levels of the organization. The advantages and importance of management audit are discussed below:
(i) Evaluates efficiency of the management: Management audit is a method of independent and 'systematic evaluation of the management activities at all levels of management to ascertain the functions, efficiency and achievement of the management (i.e. policies) as compared to standards set by the company.
(ii) Scrutiny of the plans, policies and procedure: Management audit helps to determine how the management has implemented their plans, policies and procedure to reach the organizations goal.
(iii) Helps for correction of plans, policies and procedure: Through management audit, it is possible to change or revise the plans, policies and procedure as per needs of the company.
(iv) Aids for decision making: Management audit asses the ability of the managers to take important decisions and helps them to rectify the defects.
(v) Helps to get loan: Financial institutions who gives huge loan to the organizations are interested to know the efficiency of the management and the profitability. Management audit certainly gives a guide to them.
(vi) Helps to get subsidy: Before granting subsidy by the government, to any entity they are interested to know the efficiency and functioning of the management. Management audit helps in this matter.
(vii) Helps to increase profitability: Management audit helps the management to increase profitability by giving remedies to maximize the organization's resources in an efficient way.

5. Write short notes on the following :                  (4x5)
a)      Errors of Commission
Ans: Errors of Commission: These errors arise at the time of recording transactions in the journal, ledger and / or subsidiary books. Agreement of trial balance may or may not be affected by these errors. Some of the errors of commission affect the two sides of trial balance, while others do not affect. Few examples are given below when the trial balance does not agree due to errors of commission:
Examples of errors of commission:
a)         Wrong totaling of subsidiary books.
b)         Posting the same amount on wrong side.
c)          Errors in balancing at the time of balancing the ledger accounts.
d)         Posting the wrong amount. If a wrong amount is posted in the ledger account, the two sides of trial balance will not reconcile.
e)         Errors in carrying forward of total. Errors may be committed while carrying forward the total of one page to another page.
f)          Errors of duplication. Such errors arise when a transaction is recorded twice in the original books and posted twice in ledger accounts. These errors do not affect the agreement of trial balance.

b)      Contingent Liabilities
Ans: Certain liabilities may or may not arise after the preparation of the Balance Sheet. These are called contingent liabilities. In the words of Montgomery, “The term ‘contingent liability’ should be used in the accounting sense to designate a possible liability of presently determinable or indeterminable or indeterminable amount which arise from past circumstances or action which may or may not become a legal obligation in the future, and which, if paid, gives rise ot cost or an expenses or an asset of doubtful value” A contingent liability is different from an actual liability.
Types of Contingent Liabilities
1.       Liabilities on Bills Receivable Discounted and not Matured.
2.       Liability for Calls on Partly Paid Shares
3.       Liability under a Guarantee.
4.       Liability for Cases against the Company not Acknowledged as Debts.
5.       Liability for Penalties under Forward Contracts.
6.       Liability in respect of Arrears of Dividend on Cumulative Preference Shares.
Auditor’s Duties
1.       Check the various contingent liabilities named above.
2.       Some liabilities may have no provision made in the books but merely a note made at the foot of the Balance Sheet, e.g., bills receivable which have been discounted and which have not matured at the date of the balance Sheet, arrears of fixed accumulated dividends, etc. In case for liabilities in respect of which provision has to be made on the Balance Sheet, e.g., liability which may arise in connection with a suit, etc., the auditor should examine such cases and ascertain the amount to be specifically reserved for the purpose.
3.       Examine the Directors Minute Book, correspondence made with the legal advisers and the information obtained from the officials of the business. Ensure that proper provision has been made for all such liabilities and if he is not satisfied mention the fact in the report. The requirements of the Companies Act regarding the contingent liability should be complied with in the Balance Sheet on the liabilities side.

c)       Divisible Profits
Ans: The term “Divisible Profit” is a very complicated term because all profits are not divisible profits. Only those profits are divisible profits which are legally available for dividend to shareholders. Dividends cannot be declared except out of profits, i.e. excess of income over expenditure; ordinarily capital profits are not available for distribution amongst shareholders because such profits are not trading profits. Thus, profits arising from revaluation or sale of fixed assets or redemption of fixed liabilities should not be available for distribution as dividend amongst shareholders. The principles of determination of the divisible profit are given below:
1)      According to Section 123 of the Companies Act, 2013 no dividends can be declared unless:
Ø  Depreciation has been provided for in respect of the current financial years for which dividend is to be declared;
Ø  Arrears of depreciation in respect of previous years have been deducted from the profits; and
Ø  Losses incurred by the company in the previous years.
2)      Section 123 of the Companies Act, 2013 provides that before any dividend is declared or paid a certain percentage of profits for that financial year depending upon the rate of dividend to be paid or declared should be transferred to the reserves of the company.
Provided that nothing in this sub-section shall be deemed to prohibit the voluntary transfer by a company of a higher percentage of its profits to the reserves in accordance with such rules as may be made by the Central Government in this behalf.
3)      No dividend shall be payable except in cash;
4)      There is no prohibition on the company for the capitalization of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time unpaid on any shares held by the members of the company.

d)      Audit report
Ans: 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.
Elements of Audit Report or Essentials of Good Audit Report
1. Title: An auditor report must have appropriate title, such as "Auditor's Report".
2. Addressee: The addressee may be shareholder or board of director of a company.
3. Date of Report: The report should be dated.
4. Identification: The audit report should identify the financial statement that have audited.
5. Reference to Auditing Standards: The audit report should indicate the auditing standard or practice followed in conducting the audit.
6. Opinion: The auditor's report should clearly state the auditor's opinion on the presentation in the financial statement of the entity's financial position and the result of its operations.
7. Signature: The audit report should be signed in the name of the audit firm, the personal name of the auditor or both as appropriate. 
8. Auditor's Address: The address of auditor is stated in the audit report. The name of city is stated in the report for information of the readers. 
Importance of Audit Report       
In case of a company management is separated from the ownership share holders appoint the auditor to check the accounts and submit a report to them. However, the report doesn’t guarantee accuracy of the accounts. The auditor is neither a guarantor nor an insurer. In one of the cases it was held that “the auditor must not be held liable for not tracing fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by the trusted servants of the company”.
The auditor is expected to act honestly with reasonable skill and care. Audit report is an extremely significant document as share holders rely upon it. The auditor will be guilty of professional misconduct if he deliberately fails to disclose material facts known to him. Conceals misstatements and fails to obtain necessary information to complete his audit.



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2 comments:

  1. only 1st question answer ? rest of question answer where did get ?

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    1. available in our mobile application. download from the link given above you will get all the solved assignments for free.

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