Level: BA / B.Com

Semester, Autumn 2019

Passing Marks (Assignment 1): 40

Solved Assignments by Shah Rukh (www.srassignments.com)

Assignment No. 1 (Unit 1-4)

Q. 1 Define Scope of Auditing and describe its Techniques.

Audit Scope Definition:-

Audit scope, defined as the amount of time and documents which are involved in an

audit, is an important factor in all auditing. The audit scope, ultimately, establishes how deeply

an audit is performed. It can range from simple to complete, including all company

documents. Audit scope limitations can result from the different purposes listed below.

Auditing - Audit Techniques

Evidences are very important for an Auditor to form an opinion regarding financial

statements. If Auditor fails to collect proper evidence, it will reduce the reliability of audit

report. The method of collecting evidence is called audit technique. Following are a few

important audit techniques −

Vouching

When the Auditor verifies accounting transactions with documentary evidence, it is called

vouching. Through vouching, the Auditor verifies authority and authenticity of records.

Confirmation

Confirmation is a technique used by an Auditor to validate the correctness of the transactions;

for example, an Auditor obtains written statement directly from debtors to confirm the

debtors balance as appeared in the books of client.

Reconciliation

Reconciliation is a technique used by an Auditor to know the reason of differences in balances.

For example, to know the difference in the bank book of the client and the bank balance as

appeared in the bank statement or pass book, the Auditor prepares the reconciliation

statement. The same method may be used for debtors, creditors, etc.

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Testing

Testing is a technique of selecting representative transactions out of whole accounting data to

draw a conclusion about all items.

Physical Examination

Physical examination requires verification and confirmation of the physical existence of

tangible assets as appears in the Balance Sheet like cash in hand, land and building, plant and

machinery, etc.

Analysis

Analysis is technique used by an Auditor to segregate important facts and to further study

their relationship.

Scanning

By scanning of books of accounts, an experienced Auditor can identify those entries which

would require his attention. It is also called scrutiny of accounts.

Inquiry

This method is used to collect in-depth information about any transaction.

Verification of Posting

To verify posting from books of original entry to ledger account and confirm the balance, an

Auditor is required to verify the postings; for example, to verify a sale book, an Auditor may

verify postings from the sale register to the sale ledger. He may further calculate balances of

the sale register and the sale book.

Flow Chart

The Flow Chart technique is used by an Auditor to determine the stages of transaction and the

generation of documents at all levels of transactions.

Observations

Through observation, an Auditor get an idea about reliability of the process and the procedure

of an organization.

Q. 2 Define Valuation and describe main objects of correct valuation.

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Valuation:

Valuation is the analytical process of determining the current (or projected) worth of an asset

or a company. There are many techniques used for doing a valuation. An analyst placing a

value on a company looks at the business’s management, the composition of its capital

structure, the prospect of future earnings, and the market value of its assets, among other

metrics.

Fundamental analysis is often employed in valuation, although several other methods may be

employed such as the capital asset pricing model (CAPM) or the dividend discount model

(DDM).

Valuation of Assets and Liabilities of a Business:

The processes of routine checking and vouching would only substantiate transactions as they

occur from day to day and confirm the acquisition of assets or assumption of liabilities at the

first instance but the value thereof may change by the end of a financial period when the

balance sheet is prepared.

The vital significance of correct valuation of assets and liabilities for the purpose of closing of

accounts is amply demonstrated in the undernoted chart:

Evidently, in the last analysis, variation in the inter-relation assets and liabilities is the most

important factor determining profit or loss through its influence on the difference between

capitals at the commencement and at the close of a particular financial period.

Such variation may be the result of genuine factors operating in course of normal business

activities or it may be intentionally engineered by manipulation or falsification of accounts.

Besides, any inappropriate valuation of assets and liabilities, whether inadvertently or

fraudulently done, would vitiate the financial state of affairs of a business by exhibiting a

wrong picture in the balance sheet.

Basis of Valuation of Assets:

In view of the importance of valuation an auditor should always be careful to see whether

assets are valued on some reasonable and appropriate basis.

The standard methods of valuation that are usually followed in respect of different classes of

assets are enumerated below:

Nature and purpose of acquisition:

1. Fixed:

Stable in nature. Acquired for permanent or long-term retention and use in the business for

earning income.

2. Intangible:

Semi-Stable in nature. Acquired as a non-monetary identifiable asset, for use in business to

augment earnings or as a class of fixed assets with no physical or tangible existence but

valuable all the same e.g. goodwill intellectual property, or license rights.

3. Fictitious:

Semi-stable or temporary assets without any tangible form, usually expenditure or losses of

unusual nature not realizable in cash e.g. preliminary expenses, loss on issue of securities or

special advertisement cost.

4. Floating:

Subject to constant movement or changes. Acquired for temporary retention and conversion

into cash as early as possible.

Basis of valuation:

1. Fixed:

Going concern value i.e. historical cost or original cost of acquisition (including adjustments for

additions including all expenses of bringing an asset into a reasonable condition or disposals)

minus proper depreciation on a consistent basis irrespective of the market value.

2. Intangible:

Usually on the same basis as fixed assets i.e. written down value according to the policy on

amortization or fair value of benefits enjoyable on future. As per new norms from ICA,

intangible assets will have to be written-off in a maximum of 10 years.

3. Fictitious:

Cost/expenditure incurred or balance thereof less amount written-off from year to year

depending on financial policy.

4. Floating:

Realizable value, i.e. market value (net realizable value) or cost price whichever is lower.

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Q. 3 What is a fraud? Also explain its different kinds and Errors.

Fraud:

Fraud is defined as the intentional false representation or concealment of a material fact for

the purpose of inducing another to act upon it to his or her injury (as defined by the American

Institute of Certified Public Accountants).

The American Institute of Certified Public Accountants defines fraud as the intentional false

representation of material fact or its concealment with the aim of making another party act on

this information at his or her own peril. Fraud auditing is the responsibility of professionals

known as auditors. You can seek the services of these individuals through having them as part

of the staff internally at your organization or have external auditors that work on a contractual

basis. At other times, the work done by internal auditors needs to be evaluated by an

independent auditor in order to verify the work done internally. It is not every time that

auditing is done to determine the existence of fraud in the records of an individual or

organization. At times it is done as a common practice to ensure that your financial records are

being kept in the right manner and internal controls are working.

The process

Auditors have the professional responsibility to detect fraud in their line of work. Fraud

detection helps them sharpen their skills as well as teaching them new techniques that are

used in helping individuals and businesses detect financial malpractice in their ventures. When

you notice irregularities that draw your attention, you must consider the services of an auditor

to determine if there is anything that requires your immediate action. Fraud auditing is able to

confirm or dispel your worries through evaluation of the systems to determine irregularities.

The causes

Fraud arises in organizations generally because there are opportunities to do so or the people

committing the fraud are under pressure and have a rationalization for their activities. In order

to reduce the chances of fraud in your organization you need to determine the weakness in

the internal controls.

Different kinds of frauds and errors:

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The impact fraud can have on an organization can be monumental. Not only can it have a

significant financial impact, but, depending on the type and severity, it can also destroy an

organization. While there are many types of fraud, there are five that can cause the most

damage.

1. Financial statement fraud

Although it’s less common, financial statement fraud can be the most damaging to a company.

Overstating revenue, earnings and assets – along with understating liabilities (or just plain

concealing them) – are the most common activities found with this type of fraud. Enron and

WorldComm are two semi-recent, high-profile cases involving financial statement fraud.

2. Asset misappropriation

Some of the more common types of fraud fall into the category of asset misappropriation,

which closely-held businesses are most susceptible to. Skimming of cash and cash larceny

This type of asset misappropriation consists of taking cash before it even enters the company’s

accounting system.

It’s very hard to uncover because it requires finding evidence of something that hasn’t been

recorded yet. And, it doesn’t require a lot of sophistication to execute, making it a popular

choice among those that commit fraud.

Examples of asset misappropriate include, check tampering, accounts receivable skimming,

fake billing schemes, payroll schemes, fake or duplicate expense reimbursement schemes, and

inventory schemes.

Misuse of company assets

Another common type of asset misappropriation is the misuse of company assets. Not only is

it problematic since it’s the unauthorized use of company assets, but it can also open up the

company to significant liability.

3. Theft of intellectual property and trade secrets

As our world becomes increasingly driven by information and technology, an increase in the

theft of intellectual property and trade secrets is on the rise.

4. Healthcare, insurance and banking

Healthcare, insurance and banking are all industries that have billions of dollars flowing

through their systems, making them prime targets for this type of fraudulent activity.

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Bogus health insurance claims, business insurance claims, and fraudulent bankruptcies are

always individuals commit this type of fraud.

5. Consumer fraud

Individuals targeted through cons, bogus telemarketing, email, Ponzi schemes, phishing, ID

theft and other schemes, are all victims of consumer fraud. Whether it’s an organization

system breach or bogus tax returns filed for large refunds, consumer fraud is on the rise.

Companies can also be victims of email phishing scams – especially spear phishing, which

involves sending targeted, disguised emails that contain malicious links.

Fraud can take many shapes and can impact an organization in many ways – not just

financially. You should know how and where your company may be vulnerable, and take the

proper steps to protect against vulnerabilities.

Q.4 Define vouching and explain its techniques and application to the book of accounts.

Meaning:

Voucher is known as the evident for the support of a transaction in the books of account. It

may be bill, receipts, requisition form, agreement, decision, bank paying slip etc.

The act of examining documentary evidence in order to ascertain the accuracy of entries in the

account books is called "Vouching". Vouching is a technical term which refers to the inspection

by the auditor of documentary evidence supporting and substantiating a transaction. Simply

stated, vouching means a careful examination of all original evidence i.e invoices, statements,

receipts, correspondence, minutes and contracts etc. with a view to ascertain the accuracy of

the entries in the books of accounts and also to find out, as far as possible, that no entries

have been omitted in the books of accounts. Therefore, vouching is the act of testing the truth

of entries appearing in the primary books of accounts. It is initial for auditing.

Voucher:

·         · A voucher is a documentary evidence in support of a transaction in the books of account.

·         · Principles or Techniques of Vouching:

·         · At the time of vouching auditor should keep in view the following important principles in

his mind :

1. Arranged Vouchers:

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First of all auditor should check all the vouchers provided by the client are properly arranged.

These are in the same order as the entries are made in the books.

2. Checking Of Date:

The auditor should compare the date of the voucher with he date recorded in the cash book.

3. Compare The Words And Figures:

The auditor should satisfy himself amount written numbered consecutively. All the vouchers

should be properly filed. On the vouchers, its figures and words are same or not.

4. Checking Of Authority:

The auditor should examine that all the vouchers are passed by the authorized officer. If the

voucher is passed by unauthorized person it will not be correct.

5. Cutting Or Change:

If there is any cutting or change on the receipts and vouchers figures it should be signed by the

authorized officer. The auditor should satisfy himself by inquiring about it.

6. Transaction Must Relate To Business:

The auditor should carefully examine that the entries must relate to the business.

7. Case Of Personal Vouchers:

The auditor should not accept the voucher in personal name. There is a chance that an officer

of the company has purchased any item in his personal capacity.

8. Checking Of Account Head:

Auditor must be satisfied about the head of account on which cash is deposited and drawn. He

should examine the documentary evidence in this regard.

9. Revenue Stamp:

The auditor should also check that voucher bears a required revenue stamp or not?

10. Case Of Cancelled Voucher:

The auditor should not accept the cancelled voucher. Because it has already served the

purpose of payment. There will be a danger of double payment if it is accepted.

11. Important Notes:

The auditor should take some important notes about those items which need further evidence

or explanation.

12. Payment:

The auditor should check that whether payment is described partially or for complete

transaction of sale.

13.Agreements:

These provide the basic information to the auditor. He should check the agreements,

correspondence and other relevant papers.

14. Printer Vouchers:

Printer vouchers are considered true and these are legally acceptable. If these are not printed

then these are useless.

15. List Of Missing Vouchers:

Auditor should prepare the list of missing vouchers. This list will be helpful in detecting the

fraud and errors.

Q. 5 Define the internal control and also describe the system of internal control regarding various business operations or items.

A system of internal control has five components. An accountant must be aware of these five

components when designing an accounting system, as does a person who audits the system.

The components of an internal control system are as follows:

Control environment. This is the attitude of management and their employees regarding the

need for internal controls. If the controls are taken seriously, this greatly enhances the

robustness of the system of internal control.

Risk assessment. This is the process of reviewing the business to see where the most critical

risks lie, and then designing controls to address those risks. This assessment must be

conducted on a regular basis, to take into account any new risks introduced by changes in the

business.

Control activities. This is the use of accounting systems, information technology, and other

resources to ensure that appropriate controls are put in place and operating properly. For

example, there may be accounting systems in place to periodically conduct inventory audits

and fixed asset audits. In addition, there may be off-site backups to minimize the risk of lost

data.

Information and communication. Information about controls should be communicated to

management in a timely manner, so that shortfalls can be addressed promptly. The amount of

information communicated should be appropriate to the needs of the recipient.

Monitoring. This is the set of processes used by management to examine and assess whether

its internal controls are functioning properly. Ideally, management should be able to spot

control failures and make adjustments to improve the control environment.

Application of internal control system:

It is the general responsibility of all employees, officers, management of a company to follow

the internal control system.

The under-mentioned three parties have definite roles to make internal control system

effective:

1. Management:

Establishment and maintenance of effective internal control structure mainly depends on the

management. Through leadership and example or meeting, the management demonstrates

ethical behavior and integrity of character within the business.

2. Board of directors:

The board of directors possessing a sound working knowledge gives directives to the

management so that dishonest managers cannot ignore some control procedures. Board of

directors stops this sort of unfair activities. Sometimes the efficient board of directors having

access to the internal audit system can discover such fraud and forgery.

3. Auditors:

The auditors evaluate the effectiveness of the internal control structure of a business

organization and determine whether the business policies and activities are followed properly.

Communication network helps effective internal control structure in execution. And all officers

and employees are part of this communication network.

3 Objectives of Internal Control System

Internal controls system include a set of rules, policies, and procedures an organization

implements to provide direction, increase efficiency and strengthen adherence to policies.

3 objectives of internal control are;

1. financial reports are reliable,

2. operations are effective and efficient, and

3. activities comply with applicable laws and regulations.

Characteristics of a Proper Internal Control System

An effective internal control system includes organizational planning of a business and adopts

all work-system and process to fulfill the following targets:

1. Safeguarding business assets from stealing and wastage.

2. Ensuring compliance with business policies and the law of the land.

3. Evaluating functions of each employee and officer to increase efficiency in operation.

4. Ensuring true and reliable operating data and financial statements.

It is to be kept in mind, a business organization, be it’s small or large, can enjoy the benefits of

adopting an internal control system.

Prevention of stealing-plundering and wastage of assets are a part of the internal control

system.

Protection of assets

A business organization protects its assets in the following ways:

1. Segregating the duties of the employees:

Segregation of the duties of the employees means that each employee is assigned with

specific tasks. The person in charge of assets is not allowed to maintain accounts of the assets.

Some other person maintains the accounts of these assets. Since different employees perform

the same nature of transactions, the work of each is automatically checked. Segregation of the

duties of the employees of an organization reduces the possibility of stealing assets and if

stolen, detection becomes easier. For example, there is no scope for stealing cash by a cash-

receiving employee where cash receipts accounts are maintained by a different employee.

2. Assigning specific duties to each employee:

The employee assigned with a specific duty is held responsible for his assigned activities. If and

when any problem arises the manager can immediately .identify the person concerned and

holds him liable. Lost documents can easily be detected if the task of maintaining records is

assigned to a particular employee and it becomes possible to know the recording process of

transactions. An employee assigned with a particular job can easily provide necessary

information regarding that job. Moreover, an employee feels proud if he is assigned with a

particular job and tries to complete the job using die best of his skill.

3. Rotating job assignments of the employees:

Some organizations rotate job assignments of employees at intervals to avoid fraud-forgery by

the employees concerned. Under this policy, the employee concerned can easily understand

that on the placement of somebody else in his place his dishonesty if it is done, will be

detected. This ensures the honesty of an employee.

4. Using mechanical devices:

Business concerns adopt various mechanical devices to avoid stealing, destruction, and

wastage of assets. Under the mechanical system, cash register, cheque-protectors, time-clock,

mechanical-counters etc. are used as control methods. Since a cash-register contains locking-

tape, each cash sale is recorded here. The amount of cheque is written on the cheque by the

cheque-protector machine to avoid any sort of alteration. Arrival and departure of employees

are recorded properly with the help of time- clock. are recorded properly with the help of time.

i.         She will visit us this year,.......................................................................... ?

ii.        The rate of inflation is increasing day by day,............................................ ?

iii.       My sister takes much interest in her studies,............................................ ?

iv.       She wrote a complaint letter to the ministry of education,………………………….?

v.        The ratio of illiteracy can be decreased,……………………………………………………….?

         Earthquakes are the shaking and moving of the ground when energy is released in waves. These waves are called seismic waves.  These waves are similar to ocean waves, which move through water. Seismic waves, however, move through the ground. Most earthquakes are caused by the movement of large sections of the Earth’s crust, called plates. The place where two plates meet is called a fault. Faults look like large cracks in the ground. If the two plates move in different directions, they build up energy at the fault line. When enough energy builds up, the stress on the fault becomes too great and it ruptures. This releases the energy and the ground starts to shake. Earthquakes can also be caused by other natural events, such as landslides and volcanoes. Man-made earthquakes happen because of nuclear testing and mining explosions. first movement of an earthquake, called the main shock, is often followed by smaller ground trembles, called aftershocks. These aftershocks are the plates settling into their new position. Aftershocks can continue for days after the main shock. There are an estimated 500,000 earthquakes around the world each year. Most are so mild they are only recorded on scientific instruments. Only about 100,000 can be felt by humans. Of these, only about 19 a year cause major damage. Major earthquakes in populated areas can cause huge destruction. Buildings collapse, roads and bridges buckle and crack, and electrical and gas lines break and cause fi res. If the earthquake happens in the ocean, it makes a series of huge ocean waves called a tsunami. The tsunami travels until it finally reaches land, where it causes large flooding. Scientists are searching for ways to predict earthquakes. They study the historical patterns of earthquakes and monitor the movement of the plates with seismic equipment. While they cannot predict an exact date of a future earthquake, they have a better understanding of when earthquakes are more likely to happen.