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ECO-12: Elements ofAuditing

ECO-12: Elements ofAuditing

IGNOU Solved Assignment Solution for 2021-22

If you are looking for ECO-12 IGNOU Solved Assignment solution for the subject Elements ofAuditing, you have come to the right place. ECO-12 solution on this page applies to 2021-22 session students studying in BDP, BCOMCAA courses of IGNOU.

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Assignment Code: ECO-12/TMA/2021-22

Course Code: ECO-12

Assignment Name: Elements of Auditing

Year: 2021-2022

Verification Status: Verified by Professor

Marks: 100

Q1) What is meant by the term “Internal Check”? To what extent an auditor can rely on this? Explain with examples.

Ans) Internal check is a corporate practise in which the recording of business transactions is combined in such a way that the work of one staff member is automatically examined by others while the transaction is being recorded.

Spicer and Pegler have defined an internal check system as follows:

  1. "An arrangement of staff responsibilities in which no single person is allowed to carry out and record every aspect of a transaction so that fraud is prevented and the possibility of errors is reduced to a minimum without collusion between two or more people."

  2. Internal check is characterised by De Paula as a constant internal audit conducted by the four staff members themselves, in which each individual's work is independently checked by other members of the staff."

Internal Check System and Auditor

For the auditor, the soundness of the internal control system and the manner in which it is implemented in the organisation are critical. The work of the external auditor becomes much easier if the internal check system is effective. He no longer has to review transactions in detail or on a regular basis because the internal check system does it for him. If the internal check system fails, the auditor will have to decide how much comprehensive checking he has to do to be satisfied that the business records are real.

As a result, if the auditor determines that the current system is weak or inadequate, he must conduct a thorough examination of the accounting records. If he fails to do so, he may be held accountable for all errors and frauds that go undiscovered. He should not be shirking his responsibilities. He should plan the audit programme with the system's weak points in mind. He should also advise adjustments to the management, such as enhancing the internal control system. It's worth noting that the. The existence of a sound internal check system in an organisation aids the auditor in his auditing work to a large extent, but it does not decrease his legal liability in any way.

Q2) What is meant by Vouching? What are its objectives? Explain the importance of vouching.

Ans) Vouching has been defined in a variety of ways by different authors. A couple of the more essential definitions are shown here.

According to F.R.M. De Paula, vouching encompasses the investigation of a business's transactions, as well as documentary and other evidence of sufficient validity, to satisfy an auditor that such transactions are in order, have been duly authorised, and are properly recorded in the books.

Vouching, according to Arthur W. Holmes, is the study of the underlying evidence that supports the transaction's accuracy. The purpose of the vouching procedure is to provide authority, ownership, existence, and correctness to an entry.

We may conclude from the above definitions that vouching is a form of examination used to not only support an entry in the books of account with documented evidence, but also to ensure that the evidence is adequate, dependable, and truly related to the business. To do so, the auditor should go beyond the books of account, to the source of the transaction, to ensure that it is related to the business and is duly authorised.


The main objectives of vouching are:

  1. Examine the accounting entries recorded in the books of accounts using documented evidence known as vouchers as a guide.

  2. To assess the sufficiency and trustworthiness of such documentary evidence.

  3. Examine the transactions documented in the books of account for legitimacy.


Because the concept of proof is fundamental to auditing and all audit techniques and processes are drawn from it, vouching is seen as the very basis of auditing. It aids the auditor in comprehending the various forms of documentary evidence available, gathering it using various audit techniques, and assessing its appropriateness and reliability to support accounting entries. In vouching for an auditor's success, his expertise, intelligence, critical bent of mind, observation, power of judgement, and tactfulness with which he must approach his work are all important factors.

It is important to remember that no amount of routine screening will identify severe discrepancies, principled errors, or meticulously designed scams. Only clerical and small errors can be detected using this method. There is no denying that severe disparities, principled errors, and cunning frauds can only be uncovered by competent vouching. As a result, it is critical that the auditor vouch for each and every item appearing in the books of accounts with considerable care.

The auditor can satisfy himself as to the accuracy, authenticity, and completeness of the transactions recorded in the books accounts only by vouching, and only then can he certify that the financial statements present a true and fair picture of the business's results of operations and state of affairs. As was determined in the case of Armitage vs. Brewer & Knott, if the auditor is negligent in the performance of his duties, he will be held liable. An auditor was held liable for damages in this case if he failed to notice anomalies and defalcations that were visible on the face of the vouchers.

Q3) 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 ?

Ans) The procedure followed by a firm while issuing bonus shares is as follows:

Call a meeting of the board of directors: The first step is to convene a Board of Directors meeting. The notice must be given at least 7 days before the Board Meeting, according to Section 173(3) of the Act.

Convene a Board Meeting: After that, the corporation must conduct a Board Meeting and set the agenda. The following requirements must be met in order to call the meeting:

  1. Ascertain that the meeting has a quorum of 1/3 of the Board's total membership.

  2. Place the board resolution for approving the issue on the agenda for an ordinary resolution to be approved by shareholders in a general meeting.

  3. Ascertain that the resolution is approved.

  4. The bonus share ratio must be predetermined.

  5. Decide on the general meeting's date, time, and location, and appoint a director to send out notices.

Circulate Draft Minutes: The draught minutes must be circulated to all directors for comment within the time frame specified. A board resolution in the form MGT — 14 must be submitted with the Registrar of Companies in less than 30 days for a public business.

Send Notice of General Meeting: All directors, shareholders, auditors, and members entitled to receive bonus shares must be notified of the General Meeting for the purpose of approving the issue of bonus shares, with at least 21 clear days to do so.

Convene the General Meeting: The Extraordinary General Meeting must be called, and the Board must be authorised to issue bonus shares by passing an Ordinary resolution with a simple majority, as required by section 114(1) of the Act.

Convene a Board Meeting: The corporation must hold a Board Meeting to approve the bonus share allotment and follow all applicable regulations.

File Form No. PAS -3: Within 30 days of allotment of securities of a company with a share capital, the company must file the return of allotment in Form PAS — 3. The following are the attachments that will be required:

  1. The Ordinary Resolution voted by the Extraordinary General Meeting is reproduced below.

  2. A copy of the Board resolution authorising the issuance of shares is attached.

  3. The signatory of the Form PAS-3 will certify a list of allottees that includes their name, address, occupation (if any), and the number of securities assigned to each of them.

  4. Any other documents that might be relevant.

Issue of Share Certificates: If the shares are stored in Demat form, the company must notify the depository immediately upon allotment; if the shares are held in physical form, the share certificates must be issued within two months after the date of allotment.

Q4) What do you understand by management audit'? How does it help management in improvement of its effectiveness?

Ans) A management audit is an examination and assessment of a company's management's competencies and capabilities in achieving corporate goals. A management audit's goal is to assess the management team's ability to work in the best interests of shareholders, maintain strong employee relations, and uphold reputational standards, rather than to evaluate individual executive performance. It is critical to emphasise that the management audit evaluates the company's overall management, not the performance of individual managers.

  1. A management audit evaluates how effectively a company's management team is implementing its strategies and resources.

  2. A management audit assesses whether the management team is acting in the best interests of the company's shareholders, employees, and reputation.

  3. A management audit evaluates the company's entire management in terms of its capacity to achieve its objectives, rather than individual managers.

  4. Rather than using the company's internal audit team, the board of directors will hire independent experts to conduct the management audit.

  5. Following the completion of a management audit, the external audit firm will give the board of directors with a comprehensive strategy to implement change.

Improvement in Effectiveness

A formal management audit committee does not exist on the board of directors of a corporation. Instead, board members sit on the remuneration committee and evaluate individual executives' performance based on quantitative data as well as unquantifiable or intangible factors. A management audit will be conducted by an independent consultant hired by the board of directors. The audit's scope may be limited, but in most situations it is extensive, covering many important parts of a management team's responsibilities. A management audit could take weeks or months, depending on the extent of the exercise. The audit report would seem like a report card, with high scores in areas where the management team succeeds and lower marks in areas where changes are needed.

In the same way that the management team operates the company, the board would review these proposals and compel changes where appropriate. The purpose of a management audit is to identify the management team's flaws. The audit is usually done on a company-wide level, but it can also be done on a segment-by-segment basis. The purpose is to determine how effective management is and where improvements might be made. Human resources, marketing, research, and development (R&D), budgeting, operations, finance, information systems, and corporate structure are all areas that a management audit will look into.

Interviews with management and staff will be conducted, as well as an analysis of financial statements and performance, a review of a company's policies and procedures, a review of training programmes, the hiring process, and many other aspects of the business. When the audit is finished, the external audit firm will not only present its findings to the board of directors but will also typically present a whole plan for the board of directors to adopt so that the company may run at its best. Unlike an internal audit, which is carried out by a company's internal audit department, a management audit is carried out by outside firms with specific expertise. McKinsey & Company, Bain & Company, and the Boston Consulting Group are all well-known management auditing firms.

Q5) Write short notes on the following:

(a) Continuous audit

Ans) A continuous audit is an ongoing internal examination of accounting methods, risk controls, compliance, information technology systems, and business procedures. Continuous audits are typically technology-driven, with the goal of automating mistake checks and data verification in real time. A continuous audit driven system provides alarm triggers that notify users of abnormalities and faults that the system has found. Continuous auditing necessitates a continuous evaluation of accounting procedures and risk controls. This auditing approach aids in the continuous evaluation of control efficacy. When new procedures are adopted, continuous audits are frequently used to track their efficacy.

A continuous audit is useful for detecting anomalous or non-compliant activities throughout a company's various departments and ensuring that specified protocols are followed. The continuous audit system, for example, might prevent an unlawful amount from being transmitted to a vendor in the accounts payable department. It can ensure if a mandatory filing to the Securities and Exchange Commission is set to be sent before a deadline in the accounting or legal department. The firm's computer networks can be monitored for potential cyberattacks using the continuous audit feature. These and other continuous audit tasks improve an organization's efficiency and reduce or eliminate violations of procedures or processes that could expose it to financial or legal risk. The disadvantages of a continuous audit include early setup expenses and, maybe, an over-reliance on the system in areas of a company's operations where human involvement is required.

(b) Auditor's duties regarding verification of deferred revenue expenditure

Ans) Some non-recurring and unusual expenditures, for which a large sum is paid and the benefits are spread over several years, are to be classified as capital expenditures and will be recorded as assets of the company. Every year, a portion of the spending should be deducted from the profit and loss account. For example, if a large sum is paid for product advertising, the benefits of which are predicted four years down the road, 1/4 of the amount should be debited as revenue expenses in the Profit & Loss account, while the remaining 3/4 should be reflected as assets in the Balance Sheet.

Let's look at what an auditor's responsibilities are when it comes to deferred revenue expenditures. The responsibilities are stated below:

  1. To understand how the transaction was handled, the auditor should look at the entire transaction.

  2. The auditor should examine all aspects of the transaction, including the total amount spent at the outset, the amount written off year by year, and the amount carried forward to the following year.

  3. The amount carried forward should be shown on the balance sheet.

  4. The amount of extraordinary loss should not be intermingled with the deferred revenue expenditure, according to the Auditor.

(c) Auditing Standard

Ans) GAAS (Generally Accepted Auditing Standards) are a set of systematic rules used by auditors while conducting audits on financial records of businesses. GAAS ensures that auditors' activities and reports are accurate, consistent, and verifiable. GAAS was developed by the American Institute of Certified Public Accountants Standards Board. The auditing standards known as GAAS are used to assess the quality of audits. Auditors examine and report on a company's financial records using commonly accepted auditing standards.

Auditors are in charge of determining whether public firms' financial accounts adhere to widely accepted accounting principles (GAAP). GAAP (Generally Accepted Accounting Principles) is a collection of accounting principles that corporations must adhere to when reporting their financial statements. Auditors examine a company's financial statements and accounting methods to ensure that they are accurate and in accordance with GAAP. The Securities and Exchange Commission mandates that public firms' financial statements be audited by external, independent auditors.

  1. When auditors examine a company's financial records, they follow a set of principles known as generally accepted auditing standards (GAAS).

  2. GAAS ensures that an auditor's actions and reports are accurate, consistent, and verifiable.

  3. The generally accepted auditing standards (GAAS) are divided into three sections: general requirements, fieldwork, and reporting.

General Standards

  1. To complete the audit, the auditor must have enough technical expertise and proficiency.

  2. In all aspects pertaining to the audit, the auditor must preserve mental independence.

  3. In doing the audit and preparing the auditor's report, the auditor must use due professional care.


Ans) On February 25, 2020, the MCA released the Companies (Auditor's Report) Order, 2020 (CARO 2020). This order replaces the Companies (Auditor's Report) Order, 2016, and it applies to financial statements of companies whose fiscal year begins on or after April 1, 2019. MCA published CARO 2016 as a replacement for CARO 2015. The MCA has decided to keep CARO 2020's application to businesses the same as CARO 2016.

Except for clause (xxi) of Clause 3 in relation to any qualifications or adverse remarks by the respective auditors in the Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated financial statements, the CARO 2020 will not apply to the auditor's report on consolidated financial statements. If there is any such remark, the CFS auditor must list the companies' information as well as the paragraph numbers in the CARO report that contain the qualifications or negative remarks. Small business exemptions have been withdrawn, and CARO 2020 has defined what constitutes a small business. The new CARO contains a total of 21 clauses. CARO 2020 has tightened the auditor's reporting obligations in areas including loans, short-term fund applications, and long-term fund applications, among others.

The following are the provisions of the CARO 2020:

CARO 2020 is effective for the fiscal year 2019-20, and the items listed therein must be included in each auditor's report on the account of every business to whom CARO 2020 applies, as required by Section 143 of the Companies Act, 2013.

The Central Government may mandate the insertion of a statement on a particular topic in the auditor's report for a specified class or description of firms, according to Section 143 (11) of the Act. As a result, CARO 2020 is issued in accordance with Section 143 (11) of the Companies Act 2013 in order for the topics stated therein to be included in the auditors' report. As a result, the statutory auditor of any company to whom CARO 2020 applies shall comply with it. After consulting with the National Financial Reporting Authority, which was established under section 132 of the Companies Act, 2013, CARO 2020 was released.

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