Course: Auditing (481)
Semester: Spring, 2019
Level: B. A / B. Com
ASSIGNMENT No. 1
AIOU Solved Assignments 1 & 2 Code 481 Autumn 2019
Q. 1 Define valuation and describe main objects of correct valuation. (20)
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.
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:
Stable in nature. Acquired for permanent or long-term retention and use in the business for earning income.
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.
Semi-stable or temporary assets without any tangible form, usually expenditure or losses of unusual nature not realisable in cash e.g. preliminary expenses, loss on issue of securities or special advertisement cost.
Subject to constant movement or changes. Acquired for temporary retention and conversion into cash as early as possible.
Basis of valuation:
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.
Usually on the same basis as fixed assets i.e. written down value according to the policy on amortisation 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.
Cost/expenditure incurred or balance thereof less amount written-off from year to year depending on financial policy.
Realisable value, i.e. market value (net realisable value) or cost price whichever is lower.
AIOU Solved Assignments 1 Code 481 Autumn 2019
Q. 2 Define Audit and describe its types in detail. (20)
Definition of ‘Audit’
is the examination or inspection of various books of accounts by an auditor
followed by physical checking of inventory to make sure that all departments
are following documented system of recording transactions. It is done to
ascertain the accuracy of financial statements provided by the
Description: Audit can be done internally by employees or heads of a particular department and externally by an outside firm or an independent auditor. The idea is to check and verify the accounts by an independent authority to ensure that all books of accounts are done in a fair manner and there is no misrepresentation or fraud that is being conducted.
Describe its types in detail.
In general, an audit is an investigation of an existing system, report, or entity. There are a number of types of audits that can be conducted, including the following:
- Compliance audit. This is an examination of the policies and procedures of an entity or department, to see if it is in compliance with internal or regulatory standards. This audit is most commonly used in regulated industries or educational institutions.
- Construction audit. This is an analysis of the costs incurred for a specific construction project. Activities may include an analysis of the contracts granted to contractors, prices paid, overhead costs allowed for reimbursement, change orders, and the timeliness of completion. The intent is to ensure that the costs incurred for a project were reasonable.
- Financial audit. This is an analysis of the fairness of the information contained within an entity’s financial statements. It is conducted by a CPA firm, which is independent of the entity under review. This is the most commonly conducted type of audit.
- Information systems audit. This involves a review of the controls over software development, data processing, and access to computer systems. The intent is to spot any issues that could impair the ability of IT systems to provide accurate information to users, as well as to ensure that unauthorized parties do not have access to the data.
- Investigative audit. This is an investigation of a specific area or individual when there is a suspicion of inappropriate or fraudulent activity. The intent is to locate and remedy control breaches, as well as to collect evidence in case charges are to be brought against someone.
- Operational audit. This is a detailed analysis of the goals, planning processes, procedures, and results of the operations of a business. The audit may be conducted internally or by an external entity. The intended result is an evaluation of operations, likely with recommendations for improvement.
- Tax audit. This is an analysis of the tax returns submitted by an individual or business entity, to see if the tax information and any resulting income tax payment is valid. These audits are usually targeted at returns that result in excessively low tax payments, to see if an additional assessment can be made
AIOU Solved Assignments 2 Code 481 Autumn 2019
Q. 3 Explain the following: (20)
i. Scope and objects of auditing.
Scope of Audit
The scope of an audit is the determination of the range of the activities and the period of records that are to be subjected to an audit examination.
The scope of an audit are;
- Legal Requirements.
- Entity Aspects.
- Reliable Information.
- Proper Communication.
The auditor can determine the scope of an audit of financial statements in accordance with the requirements of legislation, regulations or relevant professional bodies.
The state can frame rules for determining the scope of audit work. In the same way, professional bodies can make rules to conduct the audit.
The audit should be organized to cover all aspects of the entity as far as they are relevant to the financial statements being audited.
A business entity has many areas of working. A small entity may have few functions while a large concern has many functions. The auditor has the duty to go through all the functions of the business.
The audit report should cover all functions so that the reader may know about all the working of a concern.
The auditor should obtain reasonable assurance as to whether the information contained in the underlying accounting records and other source data is reliable and sufficient as the basis for preparation of the financial statements.
The auditor can use various techniques to test the validity of data. All auditors while doing the audit work usually apply the compliance test and substance test. The auditor can show such information in the report.
The auditor should decide whether the relevant information is properly communicated in the financial statements.
Accounting is an information system so facts and figures must be so presented that the reader can get information about the business entity. The auditor can mention this fact in his report.
The principles of accounting can be applied to decide about the disclosure of financial information in the statements.
The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source data by making a study and evaluation of accounting system and internal controls to determine the nature, extent, and timing of other auditing procedures.
The auditing assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source data by carrying out other tests, inquiries and other verification procedures of accounting transactions and account balances as he considers appropriate in the particular circumstances.
The auditor determines whether the relevant information is properly communicated by comparing the financial statements with the underlying accounting records and other source data to see whether they properly summarized the transactions and events recorded therein.
The auditor determines whether the relevant information is properly communicated by considering the judgment that management has made in preparing the financial statements, accordingly.
ii. What are the major qualities of an auditors?
Characteristics of an Auditor
The work of an auditor is to check the financial records of a company and ensure all cash related operations are running smoothly. Auditing can be done by an internal auditor, external or independent auditor. The internal auditor is an employee of the company who on a regular basis checks cash activities in the firm. An independent auditor works for a company he does not have any personal attachment. Here are five characteristics of an auditor that are vital in the trade.
1. Have the Required Experience
Certifications are key academic qualifications for an auditor. An auditor should have the required knowledge on accounting, business and taxation law. It is also necessary that he or she has computer operation skills because most of the operations will require one. Knowledge of management systems will also be an added advantage. Skills are not enough because experience is what makes one knowledgeable in the field. The more audits he has completed, the sharper he gets in the field.
2. Ability to Make Independent Decisions
An auditor’s decision should not be wavered or influenced by anyone. Their actions, decisions, and reports should be as a result of careful analysis of the company’s operations. They should not have any personal interests or favoritism. Even when he or she has to unearth sensitive information, they should do this and table the results confidently without fear. When some findings are not clear, they should not settle until they gets to the bottom of the issue. Where they need to ask questions or have points clarified, they can face the authorities without shame. This is a key characteristic of an auditor.
3. Auditors Have the Ability to Understand Different Business Needs
Another characteristic of an auditor is the ability to work with different company setups. To come up with a successful audit, they must first understand what the business entails. An auditor can quickly analyze a company set up and find a working strategy no matter how big the organization is. If they have people working under them, their organization skills help them to work smoothly and lead their team confidently.
Can the auditor keep to the designated schedule? Can they attend meetings on time and offer prompt feedback on the work progress? These are important auditor characteristics to look for. The work of the auditor may affect some inside operations, therefore, following the set guidelines and ensuring the work is complete on time is important. On the same note, an auditor should be trustworthy and decisive. They should not share company information with third parties. Sometimes, auditors come across sensitive information. They should only disclose this to the concerned parties.
5. Effective Communication Skills
An auditor cannot be effective if they have not mastered excellent communication skills. They should be assertive and at the same time have people skills. They can be a skilled auditor when it comes to compiling reports, but if they cannot convincingly communicate when called upon to present their work, the effort will be futile. They should be patient and have skills to elaborate points to the satisfaction of the auditee.
AIOU Solved Assignments Code 481 Autumn 2019
- aiou solved assignments code 481
Q. 4 What are the relationship between internal auditor and statutory auditor? Also describe internal auditor report. (20)
The relationship of the internal auditor and statutory auditor can be summed up as follows: –
- As per manufacturing and other companies order 1988 issued under section 227 of the companiesâ€™ act the statutory auditor has to comment upon the effectiveness and suitability of internal audit system laid down be the management.
- To discharge this responsibility: statutory auditor should evaluate the internal audit system he should evaluate the strength of the internal audit staff, their qualification and experience
3. Evaluation of the actual work of internal auditor â€“ After studying the internal audit system and structure actual work of the internal auditor should also be evaluated. Statutory auditor has to make use of the work of internal auditor. This he can do only when he himself puts faith in the work of internal auditor.
4. Relying on the work of internal auditor â€“ statutory auditor has to decide that up to what extant he can rely upon the work of the internal auditor. This will decide the extent of his own checking. If he feels that internal auditor has properly done his work he can reduce the extent of his checking.
5. No reduction in responsibility â€“ Relying on work of internal auditor in no way reduces the responsible for the discharge of his duties as statutory auditor.
An internal auditor (IA) is a trained professional employed by companies to provide independent and objective evaluations of financial and operational business activities, including corporate governance. They are tasked with ensuring that companies comply with laws and regulations, follow proper procedures and function as efficiently as possible.
Accountants use audit reports to publish the data they collect during their fieldwork of a company or organization. A widely used report template is the standard audit report, which must include seven elements to be complete. These basic elements are report title, introductory paragraph, scope paragraph, executive summary, opinion paragraph, auditor’s name and auditor’s signature.
The report title must include date of the audit and the addressee of the report. The date of the report is usually the accountant’s last day of fieldwork, and the addressee is usually the board of directors or stockholders of the organization. It is also important to include the work independent in the title to set it apart from internal audits within an organization.
This is usually a boilerplate text that states an audit has been carried out, identifies the financial documents used to perform the audit and places the important caveat that the company’s management team is responsible for the accuracy of the financial statements. It also determines what time frame is covered by the audit.
This paragraph says the audit followed the rules and methods set by the Generally Accepted Audit Standards and was designed to provide reasonable assurances that the claims made by the financial statements are accurate. It also indicated the test methods used by the auditors to test the accounting methods used by the company.
This section includes a summary of the audit’s findings. The content of this summary is determined by what the auditor considers to be important for the executive echelons of the company. Unlike the next section, the executive summary does not provide much opinion but focuses instead on expressing clearly the findings of the audit.
The opinion paragraph is used to report on the financial situation of the company or individual audited and the methods and procedures used to reach a conclusion. It then offers the auditor’s opinion on the financial health of the organization and its conformity or nonconformity with the Generally Accepted Accounting Principles.
The auditor must identify himself as the author of the audit by printing his name at the end of the audit. If the auditor works for a specific firm, he must also include the name of the company or certified accountant he works for.
The auditor is held accountable for the results of his audit up to the date stated in the audit’s title. This accountability is acknowledged by the signature of the auditor below his name.
AIOU Solved Assignments 1 & 2 Autumn 2019 Code 481
- aiou solved assignments code 481
Q. 5 Define the internal control and also describe the system of internal control regarding various business operations or items. (20)
Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Besides complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.
Internal Control System
The internal control structure of a company consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved.
In small business organizations, generally, the owner-manager controls the total activities of his business by his personal supervision and direct participation.
The owner generally purchases required business materials and other properties.
He himself gives the appointment of employees, completes the contract with them through discussion and also keeps, constant watch over their activities.
He himself signs cheques for payments in different heads.
Since the signs all the cheques, he can easily have an idea what commodities, assets, and services he is signing for.
But with the expansion of business, the appointment of additional employees and officers is needed and the scope of business also widens.
Under such condition, it becomes almost impossible on the part of the manager to perform all the activities of the business alone for which he is to delegate authority and so his overall control tends to decrease.
In such circumstances introduction of internal control becomes essential.
Internal control system differs from one business organization to another depending on the nature and size of the business.
To achieve the objective of a business proper execution of business activities in the light of prevailing laws and socio-economic condition of the country is called internal control system or structure.
The internal control system is introduced to avoid errors and frauds and for systematic control of business activities.
American Institute of Certified Public Accountants (AlCPA) says; the plan of organization and all of the coordinate methods and measures adopted within a business safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to preserved managerial policies.
Three elements of the internal control system are:
- Environment control: The attitude, alertness, and work-zeal of directors, managers and shareholders are reflected through environment control.
- Accounting system: Accounting system means some procedures and recordings with which identification of business transactions, classification, summarization, statement preparation and analysis for timely presentation of correct information are performed.
- Control procedure: The additional policies and procedures adopted by the business authority for ensuring achievement of the specific goal of a business organization are the controlling procedures.
These control procedures are:
- Proper delegation of power,
- Segregation of responsibility,
- Preparation and use of documents,
- Adoption of adequate security measures to protect the properties, and
- Independent control over the execution of activities.
An internal control system, not only prevent fraud forgery but also fulfills other objects:
- The business organization implements its policies complying with the prevailing laws of the country.
- Employees and officers discharge their assigned responsibilities to increase efficiency in execution of work.
- Financial statements provide correct and reliable information maintaining proper accounts.
In the light of above discussion, it can be briefly stated that the overall policies and plans adopted by the management for proper execution of business activities are called internal control system.
5 Components of Internal Control System
- Controlling the environment: Control environment is the basis of other elements of all other components of the internal control system. Moral values, managerial skill, the honesty of employees and managerial direction etc. are included in controlling environment.
- Risk assessment: After setting up the objective of business, external and internal risks are to be assessed. The management determines risk controlling means after examining the risks related to every objective.
- Control activities: The management establishes a controlling activities system to prevent risk associated with every objective. These controlling activities include all those measures that are to be followed by the employees.
- Information and communication: Relevant information for taking decision are to be collected and reported in proper time. The events that yield data may originate from internal or external sources. Communication is very important for achieving management goals. The employees are to realize what is expected of them and how their responsibilities are related to the activities of others. Communication of the owners with outside parties’ like’s suppliers is also very important.
- Monitoring: When the internal control system is in practice, the organization to monitor its effectiveness so that necessary charges can be brought if any serious problem arises.
Responsibility for 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:
- 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.
- 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.
- 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.
No two systems of internal controls are identical, but many core philosophies regarding financial integrity and accounting practices have become standard management practice. While internal controls can be expensive, properly implemented internal controls can help streamline operations and increase operational efficiency, in addition to preventing fraud.
- Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud.
- Besides complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.
- Internal audits play a critical role in a company’s internal controls and corporate governance, now that the Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of its financial statements.
- aiou solved assignments code 481