PROJECT REPORT

ON
SPECIAL CONSIDERATIONS IN AUDIT
MASTER OF COMMERCE
ACCOUNTANCY
PART II (SEMESTER-III)
(2016-2017)
INTERNAL ASSESSMENT
ADVANCED AUDITING
SUBMITTED BY:-

KARTIK JEEVAN PATEL

ROLL NO: - 44
UNDER THE GUIDEANCE OF PROF. NITIN AGARWAL
K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE
VIDYAVIHAR (EAST)

AFFILIATED TO UNIVERSITY OF MUMBAI

K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE

VIDYAVIHAR (EAST)

CERTIFICATE
(2016-2017).
This is to certify that the project entitled SPECIAL CONSIDERATIONS IN
AUDITS is a project work done by KARTIK JEEVAN PATEL, ROLL NO: - 44 in
fulfillment of the requirements for the MCOM in ACCOUNTANCY (PART-II)
(SEMESTER-III) FOR THE SUBJECT OF ADVANCED AUDITING During the
academic year 2016-2017 is the original work done of the candidate and completed
under guidance of PROF. NITIN AGARWAL.
Date: Place: - MUMBAI

..
Internal Examiner

..
External Examiner

..
(Mrs. Sonali Deogirikar)
MCOM Coordinator

.
(Dr. SUDHA VYAS)
Principal

DECLARATION BY STUDENT

I, KARTIK JEEVAN PATEL, ROLL NO: - 44, the student of MCOM in

ACCOUNTANCY (Part-II) (SEMESTER-III) (2016-2017) hereby declares that I have
completed the project on SPECIAL CONDERATIONS IN AUDITS under the
supervision of the internal guidance of PROF. NITIN AGARWAL and that the
contents of the project are not copied from any other source such as earlier projects
etc.

The information submitted is true and original to best of my knowledge.

Thank you,

Yours faithfully,

KARTIK JEEVAN PATEL

ROLL NO: - 44

ACKNOWLEDGEMENT
I would like to thank all the people who helped me in undertaking the
study and completing the project, by imparting me with valuable information and
guidance that was required at every stage of my project work.

I would like to thank our principal, Dr.SUDHA VYAS and MCOM Coordinate, for giving me an opportunity and encouragement to prepare the project.

Last but not the least; I would like to thanks my project guide PROF.NITIN
AGARWAL for guiding and helping me throughout the preparation of my project,
right from selection of the topic till its completion.

KARTIK JEEVAN PATEL

ROLL NO: - 44

INDEX
SR.NO

PARTICULAR

1.

Introduction

2.

Meaning and Definition

3.

Features or Important of Auditing

4.

Advantages and Disadvantages of Auditing

5.

Verification of Important Items

6.

Cash
Balance With RBI
Balance With Other Banks
Balance in Account Of Foreign banks
Money At Call and Short Notice
Nostro and Vostro Account
Investment
Bills Receivable
Bills Payable
Saving Bank Deposits
Stationery and Stamps
Current Account
Concurrent Audit
Non-Performing Assets
Conclusion

7.

References

INTRODUCTION
Auditing is an important professional to carrying heavy responsibility & more skill
with proper judgment. In olden days the methods of maintenance of account was not
properly because size of the business is very small with small amount of capital for that
purpose the number of transaction to be recorded by each individual himself.
The auditing may be introduced in the period of 18th century when the practice of
large scale production was developed with a result of industries revolution after the
industrial revolution the number of business concern like sole trading, partnership firm
& joint stock co developed in a greater extent.
This will be lead to compulsory maintaining of account of a business concern then
the need of auditing will be aroused in 18th century.

MEANING OF AUDITING
Every business or institution should maintain proper records of its business
transactions. Different types of transections under different situation take place
regularly during the business. For this purpose, it is necessary to verify the accuracy of
the accounting statements.
Auditing is an examination of accounting records undertaken with a view to
establish an opinion whether they correctly and completely reflect the transactions of
the business organization.
Audit is an examination of the books of accounts and other recordsa such as
documents, voucher, invoices, etc., which will confirm the correctness of the entries in
the books of accounts of the business.

DEFINITION OF AUDIT
Spicer and Pegler: "Auditing is such an examination of books of accounts and
vouchers of business, as will enable the auditors to satisfy himself that the balance sheet
is properly drawn up, so as to give a true and fair view of the state of affairs of the
business and that the profit and loss account gives true and fair view of the profit/loss
for the financial period, according to the best of information and explanation given to
him and as shown by the books; and if not, in what respect he is not satisfied."
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FEATURE OR ASPECTS OR IMPORTANT OF AUDITING

Audit is a systematic and scientific examination of the books of accounts of a

business;

Audit is undertaken by an independent person or body of persons who are duly

qualified for the job.

Audit is a verification of the results shown by the profit and loss account and the
state of affairs as shown by the balance sheet.

Audit is a critical review of the system of accounting and internal control.

Audit is done with the help of vouchers, documents, information and explanations
received from the authorities.

The auditor has to satisfy himself with the authenticity of the financial statements
and report that they exhibit a true and fair view of the state of affairs of the
concern.

The auditor has to inspect, compare, check, review, scrutinize the vouchers
supporting the transactions and examine correspondence, minute books of
shareholders, directors, Memorandum of Association and Articles of association
etc., in order to establish correctness of the books of accounts.

Audit of a accounts in business made thought the year or periodically

Auditing always provides true and fair report of financial statement.

The scope of audit is not only limited to the business concern but also extended
non business concerns such as educational institutions. Health department,
charitable trust etc.

ADVANTAGES OF AUDITING

Verification of Books and Statement:-The main object of audit is the verification

of the books and the financial statements of the company concerned.

Discover and Prevention of Error:-While examining the books, auditors detect

some errors. These are various kinds of errors. So audit is very useful in
preventing and detecting the errors.

Discovery and Prevention of Fraud:-Fraud means false representation made

intentionally with a view to defraud somebody. It is the duty of the auditor that
he should detect the fraud. So audit main object and advantage is that fraud may
be detected and prevented. Auditor may also suggest various methods of internal
check which will prevent fraud.

Moral Check:-When each staff of the company knows that this financial
transactions will be examined by the auditor then he fears to do that fraud. The
fear of their detection acts as a moral check on the staff of the company.

Independent Opinion:-Auditing is very useful to obtain the independent opinion

of the auditor about the business condition. If the accounts are audited by the
independent auditor, the report, of the auditor will be a true picture and it will be
very important for the management. Keeping in view the report, owner of the
business will be able to prevent frauds and errors in future.

Protects the Interest of Share Holder:-Audit protects the interest of

shareholders in the case of Joint Stock Company. Through audit shareholders are
assured that the accounts of the company are maintained properly and their
interest will not suffer.

Check on Directors:-Audit acts a check upon the directors and precaution

against fraud on the part of the management.

Proper Supervision:-Sometimes owner of the business can not look after the
business personally. Audit acts as a check on employees and it saves the owner
from losses.

Valuable Advice:-The auditor has expert knowledge about the accounts and
finance problems, so he may be consulted about these problems.

Disputes Settlement:-In case of partnership, audit is very useful in settling the

disputes among the partners. If any partner dies, or retires, the audited balance
sheet will be very useful in estimating the value of goodwill.

Correct Information about Business:-Due to the fear of audit work accounting

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DIS-ADVANTAGES OF AUDITING
It is true that auditing as many advantages, but it as some limitations as such

Non-detection of errors/frauds: - Auditor may not be able to detect certain

frauds which are committed with malafide intentions.

Dependence on explanation by others:- Auditor has to depend on the

explanation and information given by the responsible officers of the company.
Audit report is affected adversely if the explanation and information prove to be
false.

Dependence on opinions of others: - Auditor has to rely on the views or opinions

given by different experts viz Lawyers, Solicitors, Engineers, Architects etc. he
cannot be an expert in all the fields

Conflict with others: - Auditor may have differences of opinion with the
accountants, management, engineers etc. In such a case personal judgment plays
an important role. It differs from person to person.

Effect of inflation: - Financial statements may not disclose true picture even
after audit due to inflationary trends.

Corrupt practices to influence the auditors: - The management may use

corrupt practices to influence the auditors and get a favorable report about the
state of affairs of the organization.

No assurance: - Auditor cannot give any assurance about future profitability and
prospects of the company.

Inherent limitations of the financial statements: - Financial statements do not

reflect current values of the assets and liabilities. Many items are based on
personal judgement of the owners. Certain non-monetary facts cannot be
measured. Audited statements due to these limitations cannot exhibit true
position.

Auditing is a postmortem examination: auditing work begins where accounting

ends then the auditor is fully depends upon the accounting transaction provided
by the accountant in the throughout the year. So auditing work is not suitable for
the current position of the business. But it is useful to the future business
situation.

Detailed checking not possible: - Auditor cannot check each and every
transaction. He may be required to do test checking.

Qualification & qualities of an auditor:

Qualification of an auditor:
An auditor should be a chartered accountant, without obtaining the
certificate of chartered account any person cannot be appointed as an auditor of a public
company. For this purpose the person is required to pass the examination conducted by
the institution of chartered accountant.
Quality of an auditor:
Now a day an auditor must have some qualities for his efficient work. Some of the
qualities for inherent, and rest of other quality acquired from other. The qualities of an
auditor are mainly classified into two types. Namely
Professional qualities:The important professional qualities of successful auditor are
Knowledge of accounting: the auditor should have the accounting knowledge
among various system of accounting and its function for the purpose of proper
checking of a financial statement.

Knowledge of principles of accounting: the auditor should be familiar with the

various accounting concept and convention, income & expenditure, revenue and
capital etc.

Knowledge of Taxation Law:-Various types of taxes are imposed by the

government on the business. For example in some countries Income tax, sales tax,
gift tax is imposed. So if auditor has not a considerable knowledge about the
taxation. He cannot perform his services properly.

Knowledge of Auditing:-An auditor's knowledge of auditing must be up to date.

He must know the techniques of auditing. He must have the knowledge of other
subjects relating to auditing.

Computer Expert:-The auditor must be able to operate the computer. Today the
business organizations are using computers. If auditor does not know to use
computer, he cannot work efficiently.

General Qualities of an auditor:

Honest and integrity:-It is also very important quality of an auditor. Justice
Hindley says "An auditor must be honest. He must not certify what he does not
believe to be true and he must take a reasonable care and skill before he believes
that what he certifies is true.

Intelligent:-It is also important quality of an auditor that he should be

intelligent. He must be able to understand the technical details of any business.

Communication: the auditor should communicate the actual fact to his client
through the audit report, if he fails to communicate the actual fact, the auditor is
fully responsible for that remarks.
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VERIFICATION OF IMPORTANT ITEMS

1. CASH
In a business concern, cash book is maintained to account for receipts and payments
of cash. It is an important financial book for a business concern. Errors and frauds
arise mostly in connection with receipts and payments of cash by making
misappropriations wherever possible. Hence the auditor should see whether all receipts
have been recorded in cash book and no fictitious payment appears on the payment
side of cash book.

Internal Check System: Before starting the vouching of cash book, the auditor
should enquire about the internal check system in operation If there is no wellorganized internal check system, there are lot of chances of misappropriation of
cash. He should study carefully the internal check systems regarding cash sales
and other receipts.

Examination of Test Checking: As far as possible, all cash transactions are to

be checked elaborately. However, if the auditor is satisfied that there is an efficient
internal check system, he can resort to test checking. In such a case, he may check
a few items at random and if he finds that they are all in order and free from
irregularities, he has reason to assume that the remaining transactions will be
correct.

Comparison of Rough Cash Book with the Cash Book: Usually, cash receipts
are entered first in the rough cash book before they are entered in the cash book.
The auditor should examine the entries in the rough cash book and main cash
book and then compare them to detect whether there is any error or irregularity.

Examine the Method of Depositing Cash Receipts Daily: The auditor should
examine the method adopted for depositing daily cash receipts in bank. The pay
in slip should invariably be used for this purpose.

Preparing of Bank Reconciliation Statement: The auditor should prepare a

Bank Reconciliation Statement verifying the bank balance with cash book and
pass book and find out the reasons for the difference between the bank balance as
per Pass Book and that of in the Cash Book.

Verification of Cash in Hand: The auditor should verify the cash in hand by
actually counting it and see whether it agrees with cash book balance.

He should compare the particulars as regards to date, amount, name, etc. with
cash book entries. If there are certain entries in cash book for which receipts have been
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issued, they should be carefully checked. The receipts have to be signed by a responsible
officer, and not by the cashier.
The unused receipt book should be kept in safe custody with some responsible
officials. Along with cash receipt, the rule for granting cash discount should be examined.
If there is a system under which a receipt accompanies the receipt of cash, such a receipt,
usually known as delivery note should be properly signed and returned to the customer.

2. BALANCE WITH RBI

Auditors should

Balance: verify the ledger balances in each account with reference to the
bank confirmation certificates and reconciliation statements as at the yearend.

Reconciliation Items: Review the reconciliation statements.He should pay

special attention to the following items appearing in the reconciliation
statements:
i. Cash transactions remaining un-responded;
ii. Revenue items requiring adjustments/write-offs; and
iii. Old outstanding balances remaining unadjusted for over one year.

3. BALANCES WITH OTHER BANKS

The balances with banks outside India should also be verified in the manner, the
auditor should pay attention to the following;

Examine that,
i. No debit for charges and no credit for interest is outstanding
ii. No cheque sent or received in clearing is outstanding
iii. All Bills or outstanding cheques sent for collection and outstanding as
on the closing date have been credited subsequently.

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4. BALANCE IN ACCOUNT OF A FOREIGN BANK

i. Verify the ledger balances in each account with reference to the bank
confirmation certificates and reconciliation statements as at the year end.
ii. Examine the large transactions in inter-bank accounts, particularly towards the
year end, to ensure that no transactions have been put through for window
dressing.
iii. Check whether the balances are converted into the Indian currency at the
exchange rates prevailing on the balancesheet date and ensure compliance with
AS-11 on Accounting for the effects of changes in Foreign Exchange Rates.

5. MONEY AT CALL & SHORT NOTICE

i. Authorization: The auditors should examine whether there is a proper

authorization for lending of the money at call or short notice.
ii. Documents: call loans should be verified with the certificates of the borrowers
and the call loan receipts held by the banks.
iii. Tally: The auditors should examine whether the aggregate balances
comprising this item as shown in the relevant register tally with accounts as per
the general ledger.
iv. No Netting: it may be noted that call loans made by a bank cannot be nettedoff against call loans received.

6. NOSTRO AND VOSTRO ACCOUNTS

NOSTRO Account
Italian word 'nostro' means 'ours'. Hence, Nostro account points at - "Our
account with you" Nostro accounts are generally held in a foreign country (with
a foreign bank), by a domestic bank (from our perspective, our bank). It obviates that
account is maintained in that foreign currency.
For example, SBI account with HSBC in U.K. (may be)
VOSTRO Account
Italian word 'vostro' means 'yours'. Hence, Vostro account points at - "Your
account with us"Vostro accounts are generally held by a foreign bank in our country
(with a domestic bank). It generally maintained in Indian Rupee (if we consider India)
For example, HSBC account is held with SBI in India. (may be)

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7. INVESTMENTS
The auditor can verify investment in the following manner:

Review of internal control system: The auditor should understand &

review the system of internal control with respect to purchase and sale of
investment.

Physical verification: the auditor should check the physical statements,

certification of investment, demat statement, etc. to ensure that all the
investments disclosed in the books are genuine.

Ownership: the auditor should confirm that the investment are legally
owned by the organization. If the investment are not in the name of the
organization the auditor should investigate further and such investments
cannot firm a part of assets of the company.

Valuation: Auditor should verify whether current investments are to be

valued at cost or fair market value as on balance sheet date whichever is
lower.

Profit/Loss on Sale: The auditor should examine whether the profit or

loss on sale of investment has been computed properly.

Verify Investment Register: Every company has to maintain a

investment register as per the companies Act. It is a statutory requirement
of the Act. The auditor should verify if such register has been properly
maintained.

Foreign Exchange: In case foreign exchange is involved in purchase or

sale of investment auditor should see that the amounts are converted in
rupees in a proper manner.

Event After Balance Sheet Date: Auditor should ascertain whether any
event after the balance sheet has affected the value of any investments as
at the year end.

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8. BILLS RECEIVABLE:
While vouching the bill receivable book auditor should take the following steps :
1. Verification Of Balance :-Auditor should verify the balance of the bills receivable
with the bills in hand and the bills not over due.
2. Verify The Posting :- Auditor should verify the posting of bills receivable in the
book.
3. Check The Proceeds :-Auditor should trace the proceeds of matured and
discounted bills which have been paid or discounted through cash book.
4. Checking Of Bank Certificate :-Auditor should check the certificate obtained
from the bank for the collections of bills sent to the bank.
5. General Checking :-Auditor should check the casts, cross casts and carry
forwards.
6. Tracing Of Contingent Liability :- In respect of discounted receivable bills
auditor should trace contingent liability.

9. BILLS PAYABLE
Following work will be performed by the auditor while vouching the bills payable
book :
1. Checking Against Cash Book :- Auditor should check the bills paid during the
period and compare to with the cash book and bill returned.
2. Checking Of Bills Not Matured :- Auditor should check the total bills not
matured and should see also these should agree with the credit balance on the bills
payable account in the ledger.
3. General Checking :-Auditor should check the postings of the bill payable. He
should also check the casts, cross casts and carry forwards.

10. SAVING BANK DEPOSIT

1. Reconciliation: the auditor should verify the balances in individual accounts in
a sampling basis. He should also examine whether the balances as per
subsidiary ledgers tally with the general ledger.
2. Interest: the auditor should also check the calculations of Interest on sampling
basis.

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11. STATIONERY AND STAMPS:

The auditor should physically verify the stationery and stamps on hand as at the
year end, especially stationery of security items.

The auditor should examine whether the cost of stationery and stamps
consumed during the year has been properly charged to the profit & loss a/c for
the year.

The item stationery and stamps should include only exceptional items of
expenditure on stationery like bulk purchase of security papers, loose leaf or
other ledgers, etc. which are shown as quasi-asset to be written off over a period
of time.

Internal controls over stationery of security items (like term deposit receipts,
drafts, pay orders, cheque books, travellers cheques, gift cheques, etc.) assume
special significance in the case of banks as their loss or misuse could eventually
lead to a misappropriation of the most valuable physical asset of a bank, viz.
cash.

12. CURRENT ACCOUNTS

Current Accounts are basically meant for businessmen and are never used for the
purpose of investment or savings. These deposits are the most liquid deposits and
there are no limits for number of transactions or the amount of transactions in a
day. Most of the current accounts are opened in the names of firm / company
accounts. No interest is paid by banks on these accounts. On the other hand, a bank
charges certain service charges, ledger page charges, sms facility charges. However, in
recent times some banks have introduced special current accounts where interest (as
per banks own guidelines) is paid .The current accounts do not have any fixed
maturity as these are on continuous basis accounts.

Area of concern:
KYC norms should be complied with. So examine a few of the documents
relating to the current accounts opened during the year. The documents should
clearly establish the antecedents of the account holder to be identified by an old
current account holder of the bank.

Debit balance in current account should be examined in detail and the

outstanding exceeding 90 days should be provided for.

Accounts transfer from other branches followed by heavy transactions should be

taken care of.

Ensure that debit balance in current account are not netted out on liabilities
side but are included under head advances
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Examine unusual trend in account opening or account closing, dormant

accounts that have suddenly been reactivated by heavy cash withdrawals or
deposits, over drawings, etc.

The auditor should verify the balances in individual accounts and he should also
examine whether the balances as per ledger is tally or not. In case of differences,
the auditor should examine the reconciliation prepared by the branch.

The auditor should ensure that debit balances in current accounts are not netted
out on the liabilities side but are appropriately included under the head of
advances.

13. CONCURRENT AUDIT

The Word concurrent itself defines its meaning, Concurrent means happening at
the time. Concurrent audit means doing the examination of the financial at the time of
happening or parallel with the transaction.
Concurrent audit is an examination, which is contemporary to the occurrence of
transaction or is carried out as near to it as possible. Thus concurrent audit is a
regular process that has to be carried out round the year at a branch on an ongoing
basis. Concurrent audit is an independent appraisal activity conceived as a systematic
examination of all financial transactions at a branch to ensure accuracy and
compliance of internal systems and procedures as laid down by the bank. It aims at
minimizing the incidence of serious errors and fraudulent manipulations.
Areas required to be covered under concurrent audit Concurrent Auditors are required
to check the entire working of the branch covering 100% transactions. An illustrative
list of the areas covered under concurrent audit is as under;
Cash
Deposits
Advances
Foreign Exchange Transactions
Contingent liabilities

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14. NON-PERFORMING ASSETS

A loan or lease that is not meeting its stated principal and interest payments. Banks
usually classify as non-performing asset any commercial loans which are more than 90
days overdue and any consumers loans which are more than 180 days overdue. More
generally, as asset which is not producing income.

How advances are classified as NPA (Non performing Assets)

As we have discuss different type of bank advances given by the bank, Bank is
determining the list of NPA of advances as per their norms, we auditor has to cross
check the list as per below details(A) Term Loan: Term loan will be treated has an NPA if amount (Principal and
interest) are not recovered in 90 days
(B) Cash credit and Overdraft facility: A CC and OD account will be treated as NPA
if outstanding balance in that accounts is more than sanctioned limit for a continuous
period of 90 days orIf outstanding balance in that accounts is more than drawing
power for a continuous period of 90 days CC limit will go for renewal every year, default
in renewal for a 180days period than account will be treated as NPA.

(C) BILLS PURCHASED AND DISCOUNTED: Bill purchased and discounted will be
treated as an NPA if they are overdue for more than 90 days.

(D) AGRICULTURE ADVANCES: Loan granted for short duration crops will be
classified as NPA if payment not received for 2 Crop season. Loan granted for long
duration crops will be classified as NPA if payment not received for 1 crop seasons

(E) ADVANCES TO STAFF: In case of loan granted by the banks to staff under a
condition that interest repayment should be done after the repayment of principal
amount. Than staff advances will be considered as NPA when default in payment of
interest on due date

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CONCLUSION:
From The above topic i conclude that , Auditing means examination of the
books of accounts and other records. The main objective of auditing is to report
whether the balance sheet and profit and loss accounts presents a true and fair view of
the business.
While performing his work, auditor keeps in his mind the possibility of
existence of fraud and errors. Such irregulaties in the financial statement affect the
result of the business. Therefore, other objectives of auditing include detection and
prevention of such frauds and errors.
While conducting the audit the auditor has to vouch the transactions, verify
the assets and liabilities and study internal control. During such procedure, an auditor
may come across error or frauds. Then he must take action to rectify such errors. He
should advise the management hoe the accounting system and internal control are to
be strengthened to prevent such errors or frauds in future.

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REFERENCES

www.wikipedia.org

www.caclubindia.com

www.investopedia.com

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