ECO 12 Solved Assignment 2021 – 22
IGNOU FREE SOLVED ASSIGNMENT 2021 – 22
TUTOR MARKED ASSIGNMENT (TMA)
COURSE CODE: ECO-12
COURSE TITLE: ELEMENTS OF AUDITING
ASSIGNMENT CODE: ECO-12/TMA/2021-22
COVERAGE: ALL BLOCKS
Maximum Marks: 100
Attempt all the questions:
1. What is meant by the term “Internal Check”? To what extent an auditor can rely on this? Explain with examples. (20)
Ans: Internal Check (IC) : The term internal check implies that the work of various members of the staff is allocated in such a way that the work done by one person is automatically checked by another. It is defined as “such an arrangement of book keeping routine where in errors and frauds are likely to be prevented or discovered by the very occupation of book keeping itself’.
Internal check is a system under which accounting methods and details of an establishment are laid out that the accounts and procedures are not under the absolute and independent control of any one person or the contrary the work of one employee is complementary to that of another. The system of IC is based upon the principle of division of labour; where in performance of each individual is automatically checked by another. This is possible by properly allocation the work and integration of function of the employees in such a manner their work complements each others.
Objectives of Internal Check
1. To exercise moral pressure over staff.
2. To ensure that the accounting system produces reliable and adequate informations.
3. To provide protection to the resources of the business against fraud, carelessness and inefficiency.
4. To distribute the work in such a manner that no business transaction is left unrecorded.
5. To allocate duties and responsibilities of each clerk in such a way that he may be held responsible for particular fraud or error.
6. To minimise the chances of errors, frauds or irregularities in the business.
7. To increase the efficiency of clerks because the allocation of duties is based on the principle of division of labour.
8. To detect errors and frauds easily if it is committed, because in an efficient internal check system, there is a provision for independent checking.
Advantages of Internal check
Some of the widely accepted advantages of an efficient system of internal check are as follows:
1. Detection of errors and frauds: Since no individual worker is allowed to handle a job completely from the beginning to the end, and the work of each clerk is automatically checked by the other, this helps in the early detection and discovery of errors and frauds and the possibilities of the commission of errors and frauds can be minimised.
2. Increased efficiency coupled with economy: A good system of internal check increases the efficiency of work among the staff and leads to overall economy.
3. Moral check: Knowledge of subsequent checking of each employee’s work by others, acts as a great check to commission of errors and frauds.
4. Quick preparation of final accounts: The profit & Loss Account and the Balance Sheet are prepared without any loss of time.
5. Convenience to auditor: Where an organisation is operating system of internal check, the statutory auditor may conveniently avoid detailed checking of the transactions. He may apply a few tests here and there and can relieve himself from detailed checking.
6. Accuracy of the accounts can be relied upon: If there is a good system of internal check the owner of the concern may rely upon the genuineness and accuracy of the accounts.
Disadvantages of Internal Check
Though internal check is very much useful for auditors, it suffers from various disadvantages. Following are some of the disadvantages of a system of internal check.
1. Quality is sacrificed for promptness: In an internal check system quality of work declines because the clerks of the business attach greater importance to become quick and do not care if in the process their work gets sub-standardised.
2. Carelessness among high officials: The possibility of some of the responsible and high officials being complacent increases as they believe, though not always rightly, that under a sound system of internal check nothing can go wrong.
3. Disorder in the working of a business: In the absence of a properly organised system of internal check there will be chaos and disorder in the working of business.
If the auditor does not apply tests and procedures of his own and if he relies on the output of the system his work cannot be free from irregularities if the system itself proves to be defective. It is very much desirable that system of internal check should be adopted very carefully and continuously. Precautions, tactfulness and the skill of the auditor can overcome all these disadvantages and it can be turned into an effective and useful method of checking the accounting records.
2. What is meant by Vouching? What are its objectives? Explain the importance of vouching. (20)
Ans: Vouching: The act of examining vouchers is referred to as vouching. It is the practice followed in an audit, with the objective of establishing the authenticity of the transaction recorded in the primary books of account. It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of transaction on its inclusion in the final statements of account. After examination, each voucher is marked in a manner to ensure that it may not be presented again in support of another entry.
Objectives of Vouching
Vouching is a substantive audit procedure which aims at verifying the genuineness and validity of a transaction contained in the accounting records. It involves examination of documentary evidence to support the genuineness of transaction. Main object of vouching the payments is not only to find out that money has been duly paid but also to vouch payments for the following purposes. Some of the objectives of vouching are mentioned below:
(a) To verify that all transactions have been duly authorized.
(b) To check that there is no omission of any entry and all transactions relate to the period under audit.
(c) To check that all transaction and related to the nature of business and expenditures are proper business charge.
(d) To verify cash in hand and a Bank.
(e) To detect if there is any misappropriation of cash or goods.
(f) To see that the payments have been duly received by the correct payees.
(g) The vouching in support of the entries are legally valid with regard to its date, authority, related to business concern etc.
It is through vouching that the auditor comes to know the genuineness of transactions recorded in the client’s books of account wherefrom the financial statements are drawn up. Apart from genuineness, vouching also helps the auditor to know the regularity and validity of the transaction in the context of the client’s business, nature of the organisation and organisational rules.
Importance of vouching
Vouching of transactions is the most important audit step in any type of auditing. Voucher is the document which describes any transaction and whole building of accounting stands on vouchers. Such is the importance of voucher and vouching. The importance and objectives of vouching are given below:
1. Back bone of auditing: Vouching is first step in detailed auditing. It gives grounds and reasons for further investigation. It is primary activity to know the worth of any business.
2. Careful vouching helps the auditor to detect fraud, misappropriation of money, errors, falsification etc.
3. Detailed vouching acts as a moral check on employees.
4. Vouching helps in separation of revenue with capital items.
5. Vouching helps in ascertaining whether the transaction is in relation to business or some other activity outside the business.
6. It is the foundation stone for any accounting process.
7. Effective vouching makes the rest of audit easy and fast.
8. Vouching helps the auditor to determine whether the voucher belongs to the period of audit.
From the above discussion, it is clear that vouching is the essence of audit.
Also Read: IGNOU B.Com Solved Assignment 2021 – 22
3. What is the procedure followed by a company while making an issue of bonus shares? What are the duties of an auditor in respect thereof? (20)
Ans: Procedure for issue of fully paid-up bonus shares [SEC 63(2)] and SEBI Guidelines
(i) A company can issue bonus shares if its Articles expressly authorise to do so.
(ii) A resolution is required to be passed by the Board of Directors recommending its decision to issue bonus shares.
(iii) A resolution is required to be passed by the members in the general meeting to approve the Board’s resolution recommending the issue of bonus shares. Members’ resolution
a) Must have an intention to capitalize the profits or reserves, and
b) Must mention the amount of profits or reserves to be capitalized.
(iv) The company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
(v) The Company has not defaulted in respect of payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus.
(vi) The partly-paid shares, if any, outstanding on the date of allotment are made fully paid-up.
(vii)A Company must comply with Prescribed Conditions. The bonus shares shall not be issued in lieu of dividend.
SEBI GUIDELINES on the issue of bonus shares
There are no guidelines for issuing bonus shares by the private companies or unlisted public companies have been issued by the SEBI. However, the listed public companies for issuing bonus shares to the shareholders must comply with the guidelines issued by the SEBI. The requirements of the guidelines of SEBI are given below:
1. Resolution in the absence of provisions in AOA: The articles of association of the company must contain a provision for capitalisation of reserves, etc.; – If there is no such provision in the articles the company must pass a resolution at its general meeting making provision in the articles of association for capitalization;
2. No default in payment of debt: The company has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption;
3. No default in payment of dues: The company has not defaulted in payment of statutory dues of the employees such as contribution to provident fund, gratuity etc.
4 Fully paid shares: The partly-paid shares, if any, outstanding on the date of allotment are required to be made fully paid-up.
5. (a) No company shall, pending conversion of FCDs/PCDs, issue any by way of bonus unless similar benefit is extended to the holders of such FCDs/though reservation of shares in proportion to such convertible part of FCDs or PCDs.
(b) The shares so reserved may be issued at the time of conversion(s) of such debentures on the same terms on which the bonus issues were made.
6. Free reserves: The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium collected in cash.
7. Revaluation reserve cannot be capitalised: Reserves created by revaluation of fixed assets shall not be capitalised.
8. No bonus in lieu of dividends: The declaration of bonus issue, in lieu of dividend, shall not be made.
9. A company which announces its bonus issue after the approval of the Board of directors must implement the proposal within a period of 15 days from the date of such approval (if Shareholders’ approval is not required) or 2 months (if Shareholders’ approval is required).
10. Non-withdrawal: Once the decision to make a bonus issue is announced, the same cannot be withdrawn.
Auditor’s Duties regarding issue of bonus shares
a a) The auditor should examine the Articles of Association to ascertain that the issue of Bonus shares is duly authorized.
b) It is to be noted that Bonus Shares can only be issued out of the premium received on issue of shares, heavy accumulated reserves, undistributed profits, capital redemption etc., if such an issue is permitted by Articles.
c) He should inspect the Minute Book of Shareholders for the resolution declaring the bonus and also the Director’s Minute Book to examine the resolution under which profits have been appropriated.
d) He should ensure that sanction of Controller of Capital Issues has been obtained.
e) He should check the Allotment Book, Share Register and Reserve Account to ensure that proper entries have been made wherever necessary and the allotments are regular.
f) If to increase the Share Capital, alterations are effected in the Memorandum and Articles of Association, it should be seen that the requirements of law in this respect have been duly complied with.
g) He should vouch the entries passed in connection with the issue of Bonus Shares.
h) Lastly, he should examine the Balance Sheet of the company to note the change made by the issue of shares.
4. What do you understand by management audit’? How does it help management in improvement of its effectiveness? (20)
Ans: Management Audit: 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.”
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
(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: (4 x 5) = 20
(a) Continuous audit
Ans: CONTINUOUS AUDIT: Continuous audit: Continuous audit is a system of audit where the auditor and his staff Examines all the transactions and books of accounts in details continuously throughout the year at regular intervals i.e. weekly or fortnightly or monthly etc.
According to Spicer and Pegler, “a continuous audit is one where the auditor’s staff is occupied continuously on the accounts the whole year round, or where the auditor attends at intervals, fixed or otherwise, during the currency of the financial year and performs an interim audit; such audits are adopted where the work involved is considerable and have many points in their favour although they are subject to certain disadvantages.”
(b) Auditor’s duties regarding verification of deferred revenue expenditure
Ans: Deferred Revenue Expenditure: Such expenses are of non-recurring type which affects the financial benefit of number of accounting years. Deferred revenue expenses are those where benefit is spread over a number of accounting years. Generally, expenditure is heavy. The benefit of which will be derived in subsequent years. Examples of such expenses are: –
(1) Discount allowed on issue of debentures.
(2) Expenditures of advertisement campaign.
(3) Research and development expenditure.
(4) Heavy repairs of non-recurring nature.
(5) Development expenditure on mines.
(6) Experimental expenditure.
(7) Preliminary expenses.
A portion of the above expenses is carried forward to be written off in the future. It is an outstanding asset and also a fictitious asset. The auditor while checking such expenditure should see that only proper and legitimate account is carried forward. Expenditures which are of capital nature shall not be treated as deferred revenue expenditure. For example, renovation and expansions of building should not be treated as heavy repairs to be written off over a number of years. The whole of deferred revenue expenditure shall not be charged to one year i.e. the year of spending. This will unnecessarily reduce the profits of the year. The auditor should see that the unwritten off portion of the deferred revenue expenditure is shown on the asset side of the balance sheet until it is completely written off.
Following are some of the examples of deferred revenue expenditure and now we will discuss how to treat such items in the books of accounts.
1. Preliminary expenses: when a new company is incorporated or a new department is established some promotional expenses are incurred. The whole of such expenditure shall not be debited to profit and loss a/c of year but it should be written off over a period of 3 to 7 years. No doubt, such expenditure is of capital nature but it is not represented by any assets. So it must be written off over a number of years.
2. Heavy repairs and alterations to the plant: To improve and increase the earning capacity of business, sometimes heavy expenditure is incurred on alterations and overhauling of plant. Such expenditure is not of recurring nature: hence whole of the expenditure shall not be debited to profit and loss a/c of year in which it is incurred. But it should be spread over in an appropriate number of years.
3. Advertising and sales promotions: When a new department or business is established or a new product is introduced in the market, exceptionally heavy expenditure is incurred on advertising and sale promotions. Such expenditure should be spread over a number of accounting years and profit and loss a/c should be debited with the amount to be written off every year. The balance of such expenditure should be shown as an asset in the balance sheet till it is completely wiped off.
(c) Auditing Standard