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 2022-23 session students studying in BDP, BCOMCAA courses of IGNOU.
ECO-12 Solved Assignment Solution by Gyaniversity
Assignment Code: ECO-12/TMA/2022-23
Course Code: ECO-12
Assignment Name: Elements of Auditing
Verification Status: Verified by Professor
Attempt all the questions:
Q1) Explain the terms “Internal Control”, “Internal Check” and “Internal Audit”. What are the requisites of a good internal control system?
Internal control refers to a system of policies, procedures, and practices established by an organization to ensure that its operations are carried out effectively and efficiently, its assets are safeguarded, and its financial reporting is accurate and reliable. It is a process implemented by management to provide reasonable assurance that the organization's objectives are achieved. Internal control is an essential part of any organization's management process. It provides a framework for managing risk, ensures compliance with laws and regulations, and helps to maintain the integrity of financial reporting. Effective internal control helps organizations to achieve their objectives, such as improving performance, safeguarding assets, and ensuring compliance with laws and regulations.
Internal check is a part of the internal control system. It refers to the checking of transactions and records by one person or department to verify that they have been properly recorded and processed by another person or department. The aim is to ensure that no single person has complete control over a transaction from start to finish, thus minimizing the risk of errors or fraud. Internal check is an important component of the internal control system, as it provides a means of verifying the accuracy and completeness of financial information. Internal check can take various forms, including physical inspections, reviews of documents, and reconciliations. By providing an independent check on transactions, internal check helps to detect and prevent errors and fraud.
Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal audit provides an independent and objective evaluation of an organization's operations, risk management, and control processes. The internal audit function is typically responsible for assessing the effectiveness of the organization's internal control system, identifying areas of risk, and recommending improvements to processes and procedures. Internal audit also provides assurance to management and stakeholders that the organization's operations are being conducted in accordance with established policies and procedures.
Requisites of a good internal control system:
Separation of Duties: It is essential to segregate duties and responsibilities to prevent any single person from having complete control over a transaction. This can help reduce the risk of errors or fraud.
Authorization and Approval Procedures: Clearly defined policies and procedures should be established to ensure that transactions are authorized and approved by appropriate individuals.
Adequate Documentation and Record-Keeping: There should be a proper documentation and record-keeping system to ensure that all transactions are recorded accurately and completely.
Physical Controls: Physical controls such as locks, security cameras, and access controls should be put in place to safeguard assets and prevent unauthorized access.
Regular Monitoring and Review: The internal control system should be continuously monitored and reviewed to ensure that it is working effectively and efficiently.
Competent Personnel: The organization should have competent and qualified personnel responsible for implementing and maintaining the internal control system.
Adequate Training and Communication: Adequate training and communication should be provided to employees to ensure they understand their roles and responsibilities in the internal control system.
Q2) Discuss the process of verification and valuation of investments in a company.
Ans) Investments are an important component of a company's assets, and they need to be verified and valued periodically to ensure accuracy in financial statements. The process of verification and valuation of investments involves several steps that are essential for determining the true value of investments held by a company.
Verification of Investments
The verification process involves the following steps:
Obtaining Investment Statements: The company should obtain investment statements from the broker or investment manager to confirm the number of shares or units held in each investment. These statements should be compared with the company's own records to ensure accuracy.
Confirming Ownership: The company should confirm that it is the rightful owner of the investments by verifying the ownership of the shares or units. This can be done by reviewing stock certificates or investment statements.
Reconciliation of Investments: The company should reconcile its own records with the investment statements to ensure that all transactions are accurately recorded. Any discrepancies should be investigated and resolved.
Physical Verification: In some cases, physical verification may be necessary, especially for tangible investments such as real estate. The company should inspect the property or asset to confirm its existence, location, and condition.
Valuation of Investments
The valuation process involves the following steps:
Determining Fair Value: The fair value of an investment is the amount that would be received if the investment were sold in an arm's length transaction between knowledgeable, willing parties. The company should determine the fair value of each investment held in accordance with applicable accounting standards.
Valuation Methodology: The company should determine the appropriate valuation methodology to be used for each investment. The valuation methodology will depend on the nature of the investment, market conditions, and other factors.
Inputs to Valuation: The company should identify the inputs used in the valuation process, such as market prices, interest rates, and financial statements. These inputs should be based on observable market data, where possible.
Third-Party Valuation: In some cases, the company may need to obtain a third-party valuation of an investment. This may be necessary for investments that are difficult to value, or for which market data is not readily available.
Review of Valuation: The company should review the valuation of investments periodically to ensure that it remains accurate and up to date. Any changes in the valuation should be documented and disclosed in the financial statements.
The verification and valuation of investments are critical processes in determining the true value of a company's assets. These processes should be conducted regularly to ensure that the financial statements accurately reflect the value of investments held by the company. The verification and valuation processes should be conducted in accordance with applicable accounting standards and best practices to ensure accuracy and reliability of the financial statements. By verifying and valuing investments, the company can ensure transparency and accountability in financial reporting.
Q3) What is the status of the auditor in a company? How can he protect the rights of the shareholders of the company.
Ans) An auditor is an independent professional appointed by the shareholders of a company to examine the financial statements and provide an opinion on their accuracy and completeness. The role of an auditor is to provide assurance to the shareholders that the financial statements present a true and fair view of the company's financial performance and position. The auditor's status is that of an independent third party who has a duty to act in the best interests of the shareholders.
The auditor can protect the rights of the shareholders in several ways:
Ensuring Compliance with Regulations: The auditor is responsible for ensuring that the company's financial statements comply with accounting standards and relevant regulations. By verifying the accuracy and completeness of the financial statements, the auditor can ensure that the shareholders are provided with reliable and relevant financial information.
Detecting Fraud and Mismanagement: The auditor has a responsibility to detect fraud and mismanagement within the company. By conducting a thorough examination of the financial statements and reviewing the internal control systems of the company, the auditor can identify any irregularities and bring them to the attention of the shareholders. This helps protect the rights of the shareholders by ensuring that their investments are not being misused or subject to fraud.
Reporting to Shareholders: The auditor is required to provide a report to the shareholders on the financial statements of the company. This report includes an opinion on the accuracy and completeness of the financial statements and any issues that the auditor has identified. By providing this report, the auditor can inform the shareholders of any concerns or issues that may impact their investments.
Challenging Management: The auditor has the authority to challenge management on any issues or concerns that may impact the financial statements. This includes questioning management on their accounting policies and practices, internal controls, and any unusual transactions. By challenging management, the auditor can ensure that the financial statements are accurate and provide a true and fair view of the company's financial performance and position.
Providing Advice and Recommendations: The auditor can provide advice and recommendations to the shareholders on financial reporting, internal control systems, and corporate governance. By providing guidance and recommendations, the auditor can help the shareholders to make informed decisions and protect their investments.
The auditor plays a critical role in protecting the rights of the shareholders by ensuring that the financial statements provide a true and fair view of the company's financial performance and position. By detecting fraud and mismanagement, reporting to shareholders, challenging management, and providing advice and recommendations, the auditor can help to safeguard the interests of the shareholders. It is important that auditors act with integrity, independence, and objectivity, and that they comply with professional standards and ethical principles. By doing so, they can maintain the trust and confidence of the shareholders and ensure the integrity of the financial reporting process.
Q4) What is cost audit? What are its objectives? State the advantages and limitations of cost audit.
Ans) Cost audit is an independent and systematic examination of a company's cost accounting records and practices. It involves evaluating the methods and systems used by a company to determine the cost of producing its products or services, and verifying that they are accurate, reliable, and consistent with applicable accounting standards and laws.
Objectives of Cost Audit
The primary objectives of cost audit are as follows:
Determining the Accuracy of Cost Accounting Records: The primary objective of cost audit is to determine the accuracy and reliability of cost accounting records. This involves examining the methods used to allocate costs to products or services, verifying that costs are properly classified, and checking the accuracy of calculations.
Ensuring Compliance with Accounting Standards and Laws: Another objective of cost audit is to ensure compliance with accounting standards and laws. The cost auditor examines the company's cost accounting practices to verify that they follow applicable regulations and standards.
Identifying Areas for Cost Reduction: Cost audit also aims to identify areas where costs can be reduced without compromising the quality of the products or services. This can be achieved by identifying areas where there is a high degree of waste or inefficiency and making recommendations for improvement.
Enhancing Management Decision Making: Cost audit can provide valuable information to management to make better decisions about pricing, production, and investment. By providing accurate and reliable cost data, management can make informed decisions that can improve the company's profitability and competitiveness.
Advantages of Cost Audit
Improved Cost Management: Cost audit provides a systematic way of evaluating a company's cost accounting practices, identifying areas of inefficiency and waste, and making recommendations for improvement. This can lead to better cost management, increased profitability, and greater competitiveness.
Compliance with Regulations and Standards: Cost audit ensures that a company's cost accounting practices follow applicable regulations and standards. This can help the company to avoid penalties and legal issues related to non-compliance.
Improved Decision-Making: Cost audit provides accurate and reliable cost data that can be used by management to make informed decisions about pricing, production, and investment. This can lead to better decision-making and improved profitability.
Increased Stakeholder Confidence: Cost audit can increase stakeholder confidence in a company's financial reporting and cost management practices. This can help to attract investors and improve the company's reputation.
Limitations of Cost Audit
Costly and Time-Consuming: Cost audit can be costly and time-consuming, especially for small and medium-sized companies. The cost of hiring a cost auditor and the time required to conduct the audit can be a significant burden for companies with limited resources.
Limited Scope: Cost audit has a limited scope and does not cover all aspects of a company's financial management. It focuses primarily on cost accounting practices and does not address broader financial management issues.
Limited Effectiveness: Cost audit may not be effective in identifying all areas of inefficiency and waste. Some cost-saving opportunities may be missed due to the limited scope of the audit or the auditor's lack of expertise in certain areas.
Resistance from Management: Cost audit may be resisted by management, especially if the audit identifies areas where management practices need to be improved. This can result in a lack of cooperation from management and make it difficult to implement the auditor's recommendations.
Cost audit plays an important role in ensuring the accuracy of cost accounting records, compliance with regulations and standards, and the identification of cost-saving opportunities. However, cost audit has its limitations and may not be suitable for all companies. The decision to conduct a cost audit should be based on an evaluation of the company's needs, resources, and objectives. Companies that do decide to conduct a cost audit should ensure that they engage a qualified and independent cost auditor who has the necessary expertise to conduct the audit effectively.
Q5) Write short notes on the following:
(a) Auditing Standards
Ans) Auditing standards are a set of guidelines and principles established by professional organizations and regulatory bodies that auditors must follow when conducting audits. These standards provide a framework for auditors to plan and perform their work, and help ensure that audit reports are consistent, reliable, and credible. Some common auditing standards include the Generally Accepted Auditing Standards in the United States, International Standards on Auditing issued by the International Auditing and Assurance Standards Board, and the Standards on Auditing issued by the Institute of Chartered Accountants of India. Adherence to these standards is critical to maintaining the integrity and reputation of the auditing profession and helps ensure that auditors are able to provide accurate and meaningful information to stakeholders.
(b) Clear Report and Qualified Report
Ans) A clear report is an audit report issued by an auditor when they are satisfied that the financial statements of a company are free from material misstatements and are presented fairly in all material respects in accordance with the applicable financial reporting framework. A clear report indicates that the auditor has conducted a thorough audit and found no significant issues that require modification or qualification of the report. It is considered the ideal outcome of an audit and provides stakeholders with a high level of assurance regarding the accuracy and completeness of the financial statements.
A qualified report is an audit report issued by an auditor when they have identified a material misstatement in the financial statements of a company, or they are unable to obtain sufficient evidence to support certain aspects of the financial statements. A qualified report indicates that the auditor is not fully satisfied with the financial statements and that there are issues that require modification or qualification of the report. It is a less favourable outcome of an audit and provides stakeholders with a lower level of assurance regarding the accuracy and completeness of the financial statements. The auditor's opinion in a qualified report is modified to reflect the nature and extent of the issues identified.
(c) Continuous Audit
Ans) Continuous audit is a type of auditing process that involves the continuous monitoring of financial transactions and other activities of a company. Unlike traditional auditing, which is typically conducted on an annual or periodic basis, continuous auditing involves the use of automated tools and techniques to continuously monitor the financial data and transactions in real-time. This allows auditors to detect and address issues as they arise, rather than waiting until the end of a reporting period to conduct an audit. Continuous audit is often used in larger companies with complex financial transactions, where there is a greater risk of fraud or errors. By continuously monitoring financial data, auditors can identify potential issues quickly and take immediate corrective action to prevent or mitigate any negative impacts.
(d) Importance of Vouching
Ans) The important aspects of vouching are:
Verification of Transactions: Vouching helps auditors to verify the authenticity of the financial transactions recorded in the company's books of accounts. By examining documentary evidence, such as invoices, receipts, bank statements, and contracts, auditors can verify that transactions are valid, properly authorized, and accurately recorded.
Detection of Errors and Fraud: Vouching is an effective way of detecting errors and fraudulent activities in financial transactions. By examining supporting documents, auditors can identify discrepancies or inconsistencies in the financial records and trace any anomalies to their source. This can help auditors to identify potential fraud or errors in financial statements.
Compliance with Accounting Standards: Vouching ensures that financial statements comply with accounting standards, legal regulations, and company policies. By examining supporting documents, auditors can ensure that financial transactions are recorded in accordance with the Generally Accepted Accounting Principles and other relevant accounting standards.
Providing Assurance to Stakeholders: Vouching provides stakeholders, such as shareholders, creditors, and investors, with assurance that the financial statements are accurate and reliable. This enhances the credibility of the company's financial information and can improve stakeholder confidence in the company's financial performance.
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