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January 14, 2020
481 AIOU Solved Assignment 1 Autumn 2019-Free 100%
AIOU SOLVED ASSIGNMENT AUTUMN 2019
By Shah Rukh
Level: BA / B.Com
Semester, Autumn 2019
Passing Marks (Assignment
1): 40
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.
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