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1. TUTOR MARKED ASSIGNMENT
Course Code : ECO - 12
Course Title : Elements of Auditing
Assignment Code : ECO – 12/TMA/2014-15
Coverage : All Blocks
Maximum Marks: 100
Attempt all the questions.
Answer of Q.N.1.
The word auditisderivedfromthe Latinword “AUDIRE” which means to hear. Initially auditor was a person
appointedbythe owners to check account whenever the suspected fraud, he was to hear explanation given by the
personresponsible forfinancial transactions.Emergence of joint stock companies changed the approach of auditing
as ownership was pestered from management. The emphasis now is clearly on the verification of accounting date
with a view on the reliability of accounting statement.
In the words of Spicierand Pegler,“Anauditis suchan examinationof the books,accountsandvouchersof a
businessasitenable the auditorto satisfy that the Balance Sheets is properly drawn up, so as to give a true and fair
viewof the state of the affairsof the business and whether the profit and loss accounts gives a true and fair view of
the profitor lossfor the financial periodaccordingtothe bestof hisinformationandexplanationsgiventohimandas
shown by the books, and if not, in what respects he is not satisfied”.
In the words of Montgomery,“Auditingisasystematicexaminationof the booksandrecordsof a businessor
otherorganization,inordertoascertainor verifyand report upon the facts regarding its financial operation and the
result thereof”.
From the above definitions it is clear that the auditor’s basic duty is to examine the accounts and its
arithmetical accuracy.He must ensure thanthe financial statements depicts true and fair view of the state of affairs
of the business.
ObjectivesofAuditing.
Auditors are basically concerned with verifying whether the account exhibit true and fair view of the
business.The objectivesof auditingdependuponthe purposeof his appointment. There are two main objectives of
auditing.
1. Primary objective and
2. Secondary or incidental objective.
Primary Objective.
The primaryobjective of anauditoristo respectto the ownersof hisbusinessexpressinghisopinionwhether
account exhibitstrue andfairview of the state of affairs of the business. It should be remembered that in case of a
company,he reportsto the shareholderswhoare the ownersof the companyand not tot the director. The auditor is
alsoconcernedwithverifyinghowfarthe accountingsystemissuccessful in correctly recording transactions. He had

2. to see whether accounts are prepared in accordance with recognized accounting policies and practices and as per
statutory requirements.
Secondary Objective:
The following objectives are incidental to the main objective of auditing:
A) Detection and preventionof errors: errors are mistakescommittedunintentionally because of ignorance,
carelessness. Errors are of many types:
a. Errors of Omission:These are the errorswhicharise onaccountof transaction into being recorded in the
booksof accounts eitherwhollypartially.If a transaction has been totally omitted it will not affect trial balance and
hence itis more difficultto detect. On the other hand if a transaction is partially recorded, the trial balance will not
agree and hence it can be easily detected.
b. Errors of Commission:Whenincorrectentriesare made in the books of accounts either wholly, partially
such errorsare knownas errorsof commission.E.g.:wrong entries, wrong Calculations, postings, carry forwards etc
such errors can be located while verifying.
c. CompensatingErrors:whentwo/more mistakesare committedwhichcounterbalances each other. Such
an error isknownas CompensatingError.E.g.:if the amountis wrongly debited by Rs 100 less and Wrongly Credited
by Rs 100 such a mistake is known as compensating error.
d. Error of Principle: These are the errors committed by not properly following the accounting principles.
These arise mainlydue tothe lackof knowledgeof accounting.E.g.: Revenue expenditure may be treated as Capital
Expenditure.
e. Clerical Errors;A clerical errorisone whicharises on account of ignorance, carelessness, negligence etc.
f. Location of Errors: It is not the duty of the auditor to identify the errors but in the process of verifying
accounts, he may discover the errors in the accounts. The auditor should follow the following procedure in this
regard:
i. Check the trial balance.
ii. Compare list of debtors and creditors with the trial balance.
iii. Compare the names of account appearing in the ledger with the names of accounting in the trial
balance.
iv. Check the totals and balances of all accounts and see that they have been properly shown in the trial
balance.
v. Check the posting of entries from various books into ledger.
B) Detection and Preventionof Fraud: A fraud isan Error committedintentionallyto deceive/ to mislead/ to
conceal the truth/ the material fact. Frauds may be of 3 types.
a. MisappropriationofCash: Thisisone of the majoredfraudsin any organisation it normally occurs in the
cash department.This kind of fraud is either by showing more payments/ less receipt. The cashier may show more
expensesthanwhatisactuallyincurredandmisuse the extracash.E.g.: showing wages to dummy workers. Cash can
alsobe misappropriatedbyshowinglessreceiptsE.g.:notrecordingcashsales.Notallowing discounts to customers.
The cashiermay alsomisappropriate the cashwhenitisreceived.Cashreceived from 1st customer is misused when
the 2nd customer pays it is transferred to the 1st customer’s account. When the 3rd customer pays it goes forever.

3. Such a fraudis knownas “TeamingandLading”.To preventsuchfraudsthe auditormust checkindetail all books and
documents, vouchers, invoices etc.
b. Misappropriation of Goods: Here records may be made for the goods not purchase not issued to
production department, goods may be used for personal purpose. Such a fraud can be deducted by checking stock
records and physical verification of goods.
c. ManipulationofAccounts: thisisfinalizingaccountswiththe intention of misleading others. This is also
known as “WINDOWS DRESSING”. It is very difficult to locate because it is usually committed by higher level
management such as directors. The objective of WD may be to evade tax, to borrow money from bank, to increase
the share price etc.
To conclude itcan be saidthat,it isnot the mainobjective of the auditortodiscoverfraudsandirregularities.
He isnot an insurance againstfraudsanderrors.But if he findsanythingof asuspicious nature, he should probe it to
the full.
Answer of Q.N.2.(a).
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Answer of Q.N.2.(b).
COMPLETE SOLVED ASSIGNMENTS ARE AVAILABLE FOR ONLINE MEMBERS ONLY.
BECOME ONLINE LEARNING MEMBER BY PAYING A NOMINAL FEE OF Rs.300 ONLY.
SOME SOLVED QUESTION PAPERS WILL ALSO BE PROVIDED.
FOR DETAILS CONTACT:
KUMAR NIRMAL PRASAD, TINSUKIA (ASSAM)
CONTACT NO. 9577097967
EMAIL: KUMARNIRMALPRASAD@GMAIL.COM
WEBSITE: WWW.DYNAMICTUTORIAL.BLOGSPOT.COM

4. Answer of Q.N.3.
(i) Preliminary Expenses: This term is applied to expenses incurred in connection with the formation of a
limited company. They generally include the following expenses:
a) Legal costs in drafting the memorandum and articles of association;
b) Capital duty and other fees on registration of the company;
c) Cost of printing the memorandum and articles of association;
d) Cost of statutory books and the companies seal, etc; and
e) Any other expense incurred to bring into existence the statutory books of the company.
Preliminary expenses in so far as they have not been written off to date must be shown separately in the
balance sheet of the company under the heading "Miscellaneous Expenditure". The auditor should verify these
expenseswithreferencetosupportingdocuments such as invoices and contracts relating to these expenses. In the
case of a company, the auditor should also examine that the reimbursement of such expenses to promoters is in
accordance withthe disclosuresmade inthe prospectus. Compliance withlegal provisionsregardingreimbursement
of the promoters' expenses should be specifically examined.
The following are the audit steps to audit/vouch/verify the preliminary expenses:
(a) CheckBoard’s minute’s bookcontainingthe resolutionapprovingthe expenses claimed by promoters as
having been spent in formation of the company.
(b) Examine supportingpapersandvouchers,contracts,agreements, etc. to support the promoters’ claims.
Alsocheckbillsandreceiptsissuedbythe printerof the memorandumand articles of association, share certificates,
etc.
(c) Check bills and receipts issued by the printer of the memorandum and articles of association, share
certificates, etc.
(d) Check receipts for the registration fee paid for registration of the company
(e) Verify rates of stamps required to be affixed on the memorandum and articles of association
(f) AscertainBoard’sminute bookforthe decisiontowrite off the preliminary expenses over a period. The
quantumthereof whichhasnotbeenwrittenoff for these expenses should be carried forward in the balance sheet
under the heading miscellaneous expenditure (to the extent not written off or adjusted) over a period of years
(g) Check that no expenses other than those that constitute preliminary expenses are booked under this
heading e.g. underwriting commission and brokerage fees.
(ii) Receipts from Debtors: Auditor can vouch receipts from debtors by the carbon copy receipts or
counterfoil receipts in support of the entries appearing in the receipt of the cash book should be examined. The
method of allowing the discount to a customer against prompt payment should also be inquired into. Any unusual
discountshouldbe notedandsatisfactoryexplanationshouldbe obtainedfromthe responsibleofficial. The following
are the audit steps to audit/vouch/verify the preliminary expenses:
(a) RECEIPTS ISSUED: The auditor can vouch the receipt issued to debtors for collection of money. The
counterfoil orcarbon copiescan be comparedwithentriesmade incashbook.The amount of receiptmusttally with
cash book.
(b) RECEIPT DATE: The auditor can note the date of receipt. The date can be compared with date in cash
book. There should be no difference in date on receipt and cash book. The chance of fraud can be checked.

5. (c) DAILY LIST: The auditor can vouch the daily list of cash collected from debtors in case of large-scale
business. The receipt and amount can be recorded in it. The total must be shifted to the cash book on daily basis.
(d) SALESMEN COLLECTION: The salesmenmaycollectcashthroughsale of goods.They-mustnotbe allowed
to keep cash. The cash must be collected by responsible person and .deposited with the cashier.
(e) SALES RETURN: The salesreturnsmustbe deductedfromdebtorsbut incase of cash salesthe amountof
cash should be given to them. Anyhow credit sales can reduce the amount of debtors.
(f) DISCOUNT ALLOWED: Discount allowed is a deduction from debtors account. It must be deducted in
order to find out the net amount receivable from debtors.
(g) SALESMEN COMMISSION: The salesman commission is deducted from cash collected by them. The
commission on monthly basis should be paid to the salesmen. But total amount of cash sales should be collected
from them.
(h) BAD DEBTS RECOVERED: The auditor can vouch the bad debt recovered. The cash is debited and bad
debtrecoverediscredited.The amountcollectedischeckedwithcashbookentry.The bad debtrecoveredasincome
can be transferred to profit and loss account.
Answer of Q.N.4.
COMPLETE SOLVED ASSIGNMENTS ARE AVAILABLE FOR ONLINE MEMBERS ONLY.
BECOME ONLINE LEARNING MEMBER BY PAYING A NOMINAL FEE OF Rs.300 ONLY.
SOME SOLVED QUESTION PAPERS WILL ALSO BE PROVIDED.
FOR DETAILS CONTACT:
KUMAR NIRMAL PRASAD, TINSUKIA (ASSAM)
CONTACT NO. 9577097967
EMAIL: KUMARNIRMALPRASAD@GMAIL.COM
WEBSITE: WWW.DYNAMICTUTORIAL.BLOGSPOT.COM
Answer of Q.N.5.
Appointmentof a Company Auditor (Section224)
According to Section 224 of the Companies Act, every company whether private or public must appoint an
Auditoror auditorstoauditthe final accounts. The provisions relating to the appointment of auditor are as follows:
1. Appointment by Board of Directors:
The firstauditorof the companyis to be appointed by BOD within 30 days from the date of incorporation of
company.Note here thatthisis notfrom the date of commencementof business. First auditor shall hold office upto
the conclusion of first AGM. If BOD fails to appoint the first auditor, the auditor can be appointed in first general
meeting. If no auditor is appointed in general meeting, the CG will appoint the first auditor.
The directorsare alsoempoweredtofill a casual vacancy of an auditor if it is not caused by resignation. The
auditor so appointed shall hold office till the conclusion of the next annual general meeting. But in case, if the
vacancy iscausedby the resignationof anauditor,itshall onlybe filledbythe companyinitsannual general meeting.

6. 2. Appointment in Annual General Meeting:
The auditor or auditors are appointed in the annual general meeting under the following circumstances:
1. If the board of directors fails to appoint an auditor, the shareholders shall make an appointment in the
annual general meeting.
2. Every company shall at each annual general meeting appoint an auditor to hold office from the
conclusion of that meeting until the conclusion of the next annual general meeting.
3. The company has to give intimation to the auditor so appointed within seven days of his appointment.
4. The auditorso appointedshall within30daysof the receiptof intimationfromthe companyregarding his
appointment, has to inform the registrar of the company in writing whether he has accepted or refused the
appointment.
In everyannual general meetingthe appointmentof the company’sauditorismade bythe simple majorityof
votes by the present members.
3. Appointment by Central Government:
According to section 224 (3), if the auditor has not been appointed in the annual general meeting, the
company has to inform within seven days to the Regional Director to whom the Central Government’s power to
appoint an auditor in such an event has been delegated under section 637.
The said application must disclose in sufficient detail the reasons why the company could not appoint the
auditorat its general meeting.Inthe case of default,the companyandeveryofficerof the companywho is in default
shall be punishable with a fine which may extend to Rs.500 as per section 224(4).
4. Appointment of Auditor by Special Resolution.
In 1974, CompaniesAct1974 wasamendedbyaddingsubsectionA to section224. Afterthat, in some cases,
the appointment of auditors or auditor requires special resolution. That is in case of a company, in which not less
than 25% of the subscribed share capital is singly or jointly held by.
1. A public financial institution or a government company or the central government or any state
government or
2. Anyfinancial orotherinstitution established by any provincial or state Act in which a state government
holds not less than 51% of the subscribed share capital or
3. A nationalized bank or an insurance company carrying on general insurance business.
In the above mentioned circumstances, the appointment of an auditor shall me made by passing a special
resolution(thatis75% or more of the members present should agree for the resolution). If not, it shall be deemed
that the appointment has not been made and the central government will get the right under section 224(3) of the
Companies Act to make an appointment.
5. Compulsory Reappointment.

7. Section 619 of the Companies Act specifies that in the case of government companies, the appointment or
reappointment of an auditor by the central government can be made only on the advice of the comptroller and
Auditor General of India.
In other cases, that is, whether auditors are appointed by the board of directors in the annual general
meeting or by the central government, the retiring auditors are compulsorily reappointed, unless
1. He is not qualified for reappointment.
2. He has given a notice in writing to the company of his unwillingness, to be reappointed
3. Where a notice has been given or an intended resolution to appoint some other person in the place of
the retiringauditorand by reason of death, in capacity or disqualification of that person or of all the persons as the
case may be, the resolution cannot be proceeded with or
4. A resolutionhasbeenpassedatthat meeting,appointing somebody instead of providing expressly that
he shall not be reappointed. This is as per section 224(2) of the Companies Act.
6. FillingofCasual Vacancies [Section224(6)]
1. A vacancy causedbythe resignationof anauditorshall onlybe filledbythe membersinthe annual
general meeting.
2. If a casual arisesforany otherreason(that is,death,insanityorinsolvency)itcanonlybe filledbythe
board of directors.
3. An auditorappointedtofill upthe casual vacancyshall holdoffice until the conclusionof the nextannual
general meetingof the company.
Rights and Powers of Company Auditors
COMPLETE SOLVED ASSIGNMENTS ARE AVAILABLE FOR ONLINE MEMBERS ONLY.
BECOME ONLINE LEARNING MEMBER BY PAYING A NOMINAL FEE OF Rs.300 ONLY.
SOME SOLVED QUESTION PAPERS WILL ALSO BE PROVIDED.
FOR DETAILS CONTACT:
KUMAR NIRMAL PRASAD, TINSUKIA (ASSAM)
CONTACT NO. 9577097967
EMAIL: KUMARNIRMALPRASAD@GMAIL.COM
WEBSITE: WWW.DYNAMICTUTORIAL.BLOGSPOT.COM