ECO 12 Solved Assignment 2022 – 23 (IGNOU)

ECO 12 Solved Assignment 2022 – 23
IGNOU B.Com Free Solved Assignment 2022 – 23
Mercantile Law ECO 12 Solved Assignment 2022 – 23
Maximum Marks: 100

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ECO 12 Solved Assignment 2022 - 23

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1. Explain the terms “Internal Control”, “Internal Check” and “Internal Audit”. What are the requisites of a good internal control system?(20)

Ans: Internal Control: Internal Control is a Systematic measure such as reviews, checks and balances, methods and procedures instituted by an organization to conduct its business in an orderly and efficient manner, safeguard its assets and resources, determine and detect errors, fraud, and theft, ensure accuracy and completeness of its accounting data, produce reliable and timely financial and management information, and ensure adherence to its policies and plans.

According to W.W. BIGG: “Internal Control is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of a business, including internal check, internal audit and other forms of control.”

Thus, Internal control is the process, affected by an entity’s Board of Trustees, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objectives:

1.    To detect and prevent commission of errors and frauds.

2.    To promote accuracy and reliability in accounting and reporting data.

3.    To safeguard resources of the organisation against undue wastage or other such inefficiencies.

4.    To help in attaining sound company policies and measuring compliance with such policies.

5.    To help management in formulation of plans and policies regarding the working of the company.

6.    To promote and judge efficiency of all operations in all division of the organisation.

Internal Check: 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 other’s.

Internal Auditing: Internal auditing may be defined as a service to the management regarding independent evaluation of various activities of organization. More clearly, Internal auditing is an independent appraisal activity within an organization for the review of operations as a service to the management.

Internal audit is a regular activity performed by the employees of the organization, to ensure correctness of accounting data and to detect fraud by way of periodical review of organization system, procedures and policies. Internal audit is systematic and continuous process of examining and reporting the operations and records of a firm by its employees.

Elements, features characteristics principles of a good Internal Control System

An effective internal control system should have the following factors:

1.    Competent and trust worthy staff: people in charge of internal control system must be reliable and highly competent about the work. Lack of knowledge and dishonesty will spoil the efficiency of the system.

2.    Records of financial and other organizational plans: A good internal control system must have good documentation system. Filing, recording, classifying, etc will help in this regard.

3.    Segregation of duties: normally, there should be a separate department for internal control this reduces frauds, bias etc. normally, a clerk in charge of accounting function should not be in charge of assets also.

4.    Supervision: proper reviewing of the operations of the company regularly makes the control system effective.

5.    Authorization: all transactions must be properly authorized. In other words, the authority of each person should be well defined.

6.    Sound practices: the company should have well established procedures, policies, delegation’s organizational manuals etc.

7.    Internal Audit: it’s a part of internal control and it should be independent of internal check.

8.    Accounting Controls: proper accounting information systems should be established so that the information relating to accounts is properly collected, recorded and accounts prepared.

2. Discuss the process of verification and valuation of investments in a company.          (20)

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

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4. What is cost audit? What are its objectives? State the advantages and limitations of cost audit.(20)

Ans: Cost Audit: It is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company.In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting.

As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”

The ICWAI defines cost audit as ” system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries”

From above definition of cost audit, it is clear that cost audit is a systematic examination of cost accounts to verify correctness of cost accounting records.

Objectives of cost audit:

From the point of view of Government:

1. To determine whether differential pricing within the industry is desirable.

2. To assist the tariff board to consider the extension or removal of protection.

3. To reduce the cost of essential commodities.

From the point of view of manufacturers

1. To aid the management to regulate production.

2. To enable the management to choose economic methods of operations and thus earn profits to satisfy the shareholders.

3. To check wastage of material.

4. To fix the responsibility of an individual or of the management wherever inefficiency or wastage of found.

5. To get the up-to-date information whenever required for any purpose.

Following are the advantages of cost audit

To The Management

a)      Cost audit helps in detection of errors and frauds.

b)      The management gets accurate and reliable data based on which they can make day-to-day decisions like price fixation.

c)       It helps in cost control and cost reduction.

d)      It facilitates the system of standard costing and budgetary control.

e)      It helps the management in inter-unit / firm comparison.

f)       It enables the management to identify loss making propositions.

To The Government

a)      Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy competition among the different companies and paves a path for fast progress.

b)      It helps in identification of sick units and enables the Government to make relevant decisions.

c)       It helps in fixing prices in the case of essential commodities and checking undue profiteering.

d)      It enables to take decisions as to granting of subsidies, incentives and protection to various industries.

e)      It helps to take decisions as to levies, duties and taxes.

To the Society

a)      Cost audit enables the Government to fix prices of essential commodities. This safeguards the interests of the society.

b)      Cost audit enables the Government to keep a check on undue profiteering by the manufacturers and avoids artificial price rise due to monopolistic tendencies.

To the Shareholders

a)      Cost audit reveals whether any of the products of the company are making losses. Thus though the company making an overall profit, a loss making line may be eating up the company’s profits. This is brought to the notice of the shareholders and the management is forced to take remedial measures, thereby making optimum utilisation of resources.

b) Cost audit ensures that the shareholders get a fair return on their investments.

5. Write short notes on the following:             (4×5)

(a) Auditing Standards.

Ans: The Institute of Chartered Accountants of India has issue from time to time many statements/guidance notes/standards on matters of accounting and auditing. The statements have been issue with a view to securing compliance by auditors. Hence, auditing standards are mandatory in character. Auditing Standards are mandatory to be by followed by practitioners under the direction issued by the Council of ICAI.

Section 143(9) of the Companies Act, 2013 requires every auditor to comply with the Auditing Standards.If not complied with Auditing Standards in performing Assurance Engagement, CA shall be held guilty of Professional misconduct under Schedule-II to the Chartered Accountants Act, 1949.

(b) Clear Report and Qualified Report.

Ans: 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.

Qualified Audit Report: A qualified report means an audit report which is not clean. In case auditor has any reservation in respect of certain methods mentioned in the financial statements he may qualify his report. A qualified opinion shall be expressed as being subject of or except for the effects of the matter to which the qualification matters. If the accounting standards issued by Institute of Chartered Accounts of India is not followed by the company, the auditor may qualify his report.

The company Act doesn’t lay down any specific requirement regarding the manner in which the auditor should qualify his report. It should not lead any confusion to the reader. Before submitting a qualified report, he should discuss the issued with that of the management. He should see that qualified report is free from ambiguity, vague statements etc.

(c) Continuous Audit.

Ans: 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.”

Where this audit is applicable: In the following cases continuous audit is applicable.

(i) Where there are enormous transactions in a big organizations and continuous monitoring of accounts are required.

(ii) If there is no internal check system in the organization or the system is not very much effective.

(iii) When the company wants to declare interim dividend and for this purpose interim accounts are to be prepared.

(iv) In case of financial institutional and insurance companies, where it is necessary to get the final accounts just after the end of the financial year.

(v) If the management of the company are to get statement of accounts at regular intervals.

(d) Importance of Vouching.

Ans: 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.

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