Audit of Banks

chapter
AUDIT OF BANKS
14
1. CHARACTERISTICS OF BANKS DIFFERENT FROM MOST COMMERCIAL ENTERPRISES
4 Custody of large volumes of monetary items including cash and negotiable
instruments, whose physical security has to be ensured.
4 Engagement in a large volume and variety of transactions which requires
complex accounting and IC systems and widespread use of IT.
4 Operation through a wide network of geographically dispersed Branches and
departments necessitating decentralization of authority and dispersal of
accounting and control functions.
4 Assumption of significant commitments without any transfer of funds. (Off-
B/S items)
4 Engagement in transactions that are initiated at one location, recorded at a
different location and managed at another location.
4 Direct initiation & completion of transactions by customer without any
intevention by bank’s employees. For e.g. ATM.
4 Integration and linkages of national and international settlement systems.
4 Regulatory requirements by governmental authorities

2. SPECIAL AUDIT CONSIDERATIONS

Special audit considerations arise in the audit of banks because of:

4 Nature of risks associated with the transactions undertaken;
4 The scale of banking operations & resultant significant exposures ;
4 Extensive dependence on IT to process transactions.
4 Statutory and regulatory requirements;
4 Continuing development of new products and services and banking practices
which may not be matched by the concurrent development of accounting princi-
ples and auditing practices.
4 Evolution of technology and providing services through Net Banking and Mobiles.
4 Various applications used involving cross data flow.
4 Auditor to consider above factors in deciding his audit approach.
4 Auditor to obtain detail knowledge of products offered & risk involved and address
it in the Audit Plan.

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Audit of Banks
3. LEGAL FRAMEWORK FOR BANKS IN INDIA

Banking Companies (Acquisition and

Banking Regulation Act, 1949 Transfer of Undertakings) Act, 1980

State Bank of India Act, 1955 Information Technology Act, 2000

Prevention of Money Laundering Act, 2002

Reserve Bank of India Act, 1934
& Directions issued by RBI Securitisation and Reconstruction of
Financial Assets and Enforcement
Companies Act, 2013 of Security Interest Act, 2002

Banking Companies
(Acquisition & Transfer of Credit Information Companies
Undertakings) Act, 1970 (Regulation) Act, 2005

Payment and Settlement Systems Act, 2007

Regional Rural Banks
Act, 1976 Co-operative Societies Act, 1912
for Co-operative Banks

4. FORM AND CONTENT OF FINANCIAL STATEMENTS

Applicability: Schedule III to Banking Regulation Act, 1949.
Form A: Balance Sheet
Form B: Profit and Loss A/C. (Schedule III to Companies Act, 2013 is not applicable
to Banks)
4 Every banking company needs to comply with disclosure requirements u/s 133 of
Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules 2014.
4 Implementation of Ind AS has been deferred by RBI for all scheduled commercial
banks presently.
4 It is pertinent to state that preparation of B/S of a bank usually involves preparation
of SFS and CFS.
4 In case of a nationalized bank/public sector bank- preparation of SFSs involve
consolidation of branch a/cs and incorporation of various verticals/departments of
bank
4 In case of private banks, the processes of accounting are centralized and there is
no concept of mandatory branch audit as per RBI guidelines.

2 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN
 Audit of Banks
4 Public sector banks and private banks are listed on recognized stock exchange &
required to comply with SEBI Reg. + LODR

4.1 Audit of Accounts & Appointment of Auditor

(a) Audit of Accounts

Section 30 (1) of the Act requires FSs to be audited by a
person duly qualified to be an auditor of companies.

(b) Appointment of Auditor

 Banking company - appointed at the AGM of shareholders.
 Nationalised bank - concerned bank acting through its BOD.
In either case-approval of the RBI is required.
 Auditors of SBI - appointed by the C&AG of India in consultation with CG.
 Auditor of RRB - appointed by the concerned bank with the approval of
the CG.
 Most Banks appoint 4 or more firms of CA to act jointly as Statutory Cen-
tral Auditors (SCA). Branch Auditor to be single firm.

Appointment letter of SCA contains

Period of Particulars of: Procedural requirements like:

appointment l Other central l Letter of acceptance,

auditors l Statement of division of work and review and

l Previous reporting responsibilities amongst joint audi-

auditors tors in case of nationalised banks,
l Scope of assignment which includes any spe-
cial reports or certificates to be given by the
SCAs in addition to the main report.

 In case of statutory branch auditors (SBAs), appointment letter is given on

similar lines except in regard to particulars of other auditors and statement
of division of work.

5. CONDUCTING AN AUDIT
Initial  Acceptance & Continuance
 Declaration of Indebtedness
Considerations  Internal Assignments in Banks by Statutory Auditors
 Terms of Audit Engagements
 Communication with Previous Auditor
 Planning
 Establish Engagement Team

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Audit of Banks
Understanding  Understanding the Bank and Its Environment including Internal
Control
 Understand the Bank’s Accounting Process
 Understanding the Risk Management Process
Risk Assessment  Identifying and Assessing the Risks of Material Misstatements
(SA-315)
 Assess the Risk of Fraud including money laundering
 Assess Specific Risks
 Risk Associated with Outsourcing of Activities
Execution  Engagement Team Discussions
 Prepare response to the Assessed Risks
 Establish the Overall Audit Strategy
 Audit Planning Memorandum
 Determine Audit Materiality
 Consider Going Concern
Reporting  Independent Auditor’s Report
 Long Form Audit Report (LFAR)
 Report any other matters to Bank, Regulator or Government

Stage 1 Initial Considerations

4 Acceptance & Continuance:
Assessment of engagement risk is a critical part of the audit process and should
be done prior to the acceptance of an audit engagement.
4 Declaration of Indebtedness:
 RBI has advised that the banks, before appointing their statutory central//
branch auditors, should obtain a declaration of indebtedness i.e., a written
confirmation that auditor/firm/partners/family members have not been de-
clared as wilful defaulters by any bank/financial institution.
 This is in addition to the declaration regarding absence of disqualifications
stipulated in Section 141 of the Companies Act 2013.
4 Internal Assignments in Banks by Statutory Auditors:
RBI decided that the audit firms should not undertake statutory audit assignment
while they are associated with internal assignments in the bank during the same
year.

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 Audit of Banks
4 Terms of Audit Engagements:
SA 210 requires that for each period to be audited, the auditor should agree on the
terms of the audit engagement with the bank before beginning significant portions
of fieldwork.

4 Communication with Previous Auditor:

As per Clause (8) of the Part I of the First Schedule to the Chartered Accountants
Act, 1949, a CA in practice cannot accept position as auditor previously held by
another CA without first communicating with him/her in writing.

4 Planning:
The audit plan needs to be properly documented with respect to timing,
extent of checking, audit procedures to be followed at assertion level and should be
flexible and updated or changed, as and when necessary.

4 Establish the Engagement Team:

Assignment of qualified and experienced professionals is an important component
of managing engagement risk. The size and composition of the engagement team
would depend on the size, nature, and complexity of the bank’s operations.

Stage II Understanding

4 Understanding the Bank and Its Environment including Internal Control:

An understanding of the bank and its environment, including its IC, enables the au-
ditor:
 to identify and assess risk;
 to develop an audit plan to determine the operating effectiveness of the con-
trols, and to address the specific risks.

4 Understand the Bank’s Accounting Process:

 The accounting process produces financial and operational information for
management’s use and also contributes to the bank’s IC.
 Thus, understanding of the accounting process is necessary to identify and
assess the risks of material misstatement whether due to fraud or not, and to
design and perform further audit procedures.

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Audit of Banks
4 Understanding the Risk Management Process:
Management develops, controls and uses performance indicators to aid in manag-
ing key business and financial risks. An effective risk management system in a bank
requires the following:

Oversight by TCWG Identification,

4 TCWG (BOD/CEO) should approve measurement and
written risk management policies. monitoring of risks
4 Policies should be consistent with:
 Bank’s business objectives and 4Risks that could significantly
strategies, impact the achievement of bank’s
 Capital strength,
goals should be identified, meas-
 Management expertise,
ured and monitored against pre-
 Regulatory requirements
 Types and amounts of risk con approved limits and criteria.
sidered regards as acceptable.

Monitoring Reliable information

Control activities
activities systems
4 Bank should have appro- 4 TCWG (BOD/CEO) 4Banks require
priate controls to manage should approve writ-
its risks, including reliable information
ten risk manage- systems that provide
 Effective segregation
ment policies. adequate financial,
of duties (particularly, 4 Policies should be
between front and operational and com-
consistent with: pliance information on
back offices),  Bank’s business
 Accurate measurement
a timely and consist-
objectives and ent basis.
and reporting of posi- strategies, 4TCWG and manage-
tions,  Capital strength,
Verification and ap- ment require risk
 Management ex-

proval of transactions, management infor-
pertise, mation that is easily
 Reconciliation of posi-
 Regulatory
tions and results, understood and ena-
requirements bles them to assess
 Setting of limits,
 Types and
 Reporting and approval
the changing nature
amounts of risk of the bank’s risk
of exceptions, considered re-
 Physical security and
profile.
gards as accept-
contingency planning. able.

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 Audit of Banks
Stage III Risk Assessment

4 Identifying and Assessing the Risks of Material Misstatements:

SA 315 requires auditor to identify and assess the risks of material misstatement
at the FS level and assertion level for classes of transactions, account balances,
and disclosures to provide a basis for designing and performing further audit
procedures.
4 Assess the Risk of Fraud including Money Laundering:
 As per SA 240, auditor’s objective is to identify and assess the risks of material
misstatement in the FS due to fraud, to obtain sufficient appropriate audit
evidence on those identified misstatements and to respond appropriately.
 The attitude of professional skepticism should be maintained by the auditor to
recognise the possibility of misstatements due to fraud.
 RBI has issued KYC-Anti ML Standards for Banks to deter-recognise-report ML
activities.
4 Assess Specific Risks:
Auditors should identify and assess specific risks of material misstatement at the
FS level which refers to risks that relate to the banking industry and the use of IT
therein.
4 Risk Associated with Outsourcing of Activities:
Outsourcing is extensively used as a means of both reducing costs as well as
making use of services of an expert not available internally.
However, there are certain risks associated with outsourcing of activities which
should be managed effectively.

Stage IV Execution
4 Engagement Team Discussions:
Engagement team should hold discussions to gain better understanding of bank
and its environment, including IC, and to assess the potential for material
misstatements of the FS.

4 Response to the Assessed Risks:

 SA 330 requires auditor to design and implement overall responses to address
the assessed risks of material misstatement at the FS level.

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Audit of Banks
 Auditor should design and perform further audit procedures whose nature,
timing and extent are based on and are responsive to the assessed risks of
material misstatement at the assertion level.

4 Establish the Overall Audit Strategy:

 SA 300 states that the objective of the auditor is to plan the audit so that it
will be performed in an effective manner.
 Audit engagement partner should:
l establish the overall audit strategy, prior to the commencement of an
audit; and
l involve key engagement team members and other appropriate specialists.

4 Audit Planning Memorandum:

Auditor should summarise the team’s audit plan by preparing an audit planning
memorandum in order to:
 Describe the expected scope and extent of the audit procedures to be performed
by the auditor.
 Highlight all significant issues and risks identified during their planning and risk
assessment activities, as well as the decisions concerning reliance on controls.
 Provide evidence that they have planned the audit engagement appropriately and
have responded to engagement risk, pervasive risks, specific risks, and other
matters affecting the audit engagement.

4 Determine Audit Materiality:

 Auditor should consider the relationship between the audit materiality and
audit risk when conducting an audit.
 Determination of audit materiality is a matter of professional judgment
and depends upon the knowledge of the bank, assessment of engagement
risk, and the reporting requirements for the FS.
 Judgments about materiality are made in light of surrounding circumstances
and affected by the size or nature of a misstatement, or combination of both.

4 Consider Going Concern:

In obtaining an understanding of the bank, auditor should consider whether there

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 Audit of Banks
are events and conditions which may cast significant doubt on the bank’s ability
to continue as a going concern.

Stage V Reporting

Refer topic Auditor’s Report

5.1 Special Considerations in IT Environment

(a) Considering the importance of IT systems in preparation and presentation of FS, it is

imperative that bank should share following detailed information with auditors:
 Overall IT policy, structure and environment of Bank’s IT system
 Data processing and data interface under various systems
 Data integrity and data security
 Business Continuity plans and disaster control plans
 Accounting manual and critical accounting entries, their processes and in
volvement of IT systems.
 Controls over key aspects, use of various account heads, expense booking,
overdue identification, etc.
 Controls on recording of various e-banking and related products/channels
 MIS reports being generated and their periodicity.
 Major exception reports and process of generation including embedded logic.
 Process of generating various info. related to FS disclosures & involvement of
IT systems.

(b) The key security control aspects that an auditor needs to address when undertaking
audit in a computerised bank include:
 Ensure that authorised, accurate and complete data is available for processing.
 Ensure in case of failures, system restarts without distorting data.
 Ensure system prevents unauthorised amendments to the programmes.
 Verify whether “access controls” assigned to the staffworking match with the
responsibilities as per manual. Ensure that access and authorisation rights
given to employees are appropriate.
 Verify that segregation of duties is ensured while granting system access to
users and user activities are monitored by performing an activities log review.
 Verify that changes made in the parometers or user levels are authenticated.

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Audit of Banks
 Verify that charges calculated manually for accounts when function is not
regulated through parameters are properly accounted for and authorised.
 Verify that exceptional transaction reports are being authorised and verified on
a daily basis by the concerned officials. Auditor should understand the nature of
exception and its impact on financials.
 Verify A/C master balance cannot be modified/amended/altered except by
authorised personnel.
 Verify all general ledger accounts codes authorised by HO are in existence in the
system.
 Verify that balance in general ledger tallies with balance in subsidiary book.

5.2 Internal Audit and Inspection

4 Central audit and inspection department in banks is a combination of centralized

function with some level of decentralization which is usually headed by a Chief Au-
dit Executive.
4 It is responsible for undertaking Risk-Based Internal Audit (RBIA) as per the frame-
work stipulated by RBI.
4 It is also responsible for identification of branches for revenue audit, appointment of
concurrent auditors, deciding their scope, meeting the concurrent auditors, discussing
their issues, conducting trainings if needed, and review of work of concurrent audi-
tors. The primary function is to ensure that the audit function is handled smoothly,
effectively & efficiently.
4 Risk-based Internal audit is conducted based upon the risk assessment of business and
control risks of branches. The risk assessment process includes:
 Identification of inherent business risks in various activities undertaken by
branches (Business risk)
 Assessment of effectiveness of control systems for monitoring inherent risks of
business activities of branch (Control risk)
 Making an assessment of level and direction of various risk areas and assess
level and direction of overall business risk and control risk.
 Drawing up of risk matrix taking into account factors viz. Risk of branch.

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 Audit of Banks
6. INTERNAL CONTROL IN CERTAIN SELECTED AREAS
Bank required to implement & maintain IC system to:
 Mitigate risks  Maintain good governance  Meet regulatory
requirements

Below are the example of ICs that are implemented in a bank:

Area of Focus Suggested Audit Procedures
General  Staff/officers of a bank should be shifted from one to another position
frequently and without prior notice.
 Work of one person to be always checked by another.
 Arithmetical accuracy of the books should be proved independently every day.
 All bank forms should be kept in possession of an officer and another
responsible officer to verify the issuance & stock of such stationery.
 The mail should be opened by a responsible officer. Signatures on all
the letters and advices received from other branches of the bank or its
correspondence should be checked by an officer with the signature book.
 Signature book and telegraphic code book be kept with responsible officers and
access should be allowed only to authorised officers.
 Bank should take out insurance policies against loss due to all the risks such
as fire, natural calamities, theft and employees’ infidelity.
 Financial powers of different officer grades should be clearly defined.
 There should be surprise inspection of H.O and branches at periodic intervals
by the internal audit department. The irregularities pointed out in the
inspection reports should be promptly rectified.
Cash  It should be kept in joint custody of two responsible officers.
 In addition to normal checking, it should be test checked daily and counted in full
occasionally by a responsible officer unconnected with the cash department.
 Actual cash in hand should agree with balance shown by day book every day.
 Cashier should have no access to customer’s ledger accounts and day book.
 Counterfoil of cash receipt vouchers (e.g. counterfeits of pay-in slips lodged by
depositors) should be signed by an officer in Cash Department, in addition to the
receiving cashier.
 Payments to be made only after vouchers have been passed by authorised officer
and have been entered in the customer’s account.
 Receipt and payment scrolls or their totals should be compared with cash column
of the Day-Book by independent persons.
 High value cash receipts and payments should be verified by a higher officer
branch manager & excess cash balance should be remitted to currency chest
according to branch’s retention limit on daily basis.
Clearings  Under the Cheque Truncation System (CTS) implemented by RBI, an
electronic image of the cheque is transmitted to the paying branch
through clearing house, along with relevant information. This eliminates
the associated cost of movement of the physical cheques, reduces the time
required for their collection.

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Audit of Banks
 Branch is required to either call/email the customer for Cheque received of
`5 lakh and above in respect of inward clearings. Auditor may verify the
compliance on test check basis.
 Auditor is required to check whether signature of the drawer of the cheque is
being verified by the staff or not as else there will be liability of the paying
bank under all circumstances.
 Unpaid cheques received in outward clearing should be either sent to customers
or inform the customers to collect the same from bank branch.
Bills for collection  All the documents accompanying the bills should be received and entered in
the register by a responsible officer. At the time of dispatch, officer should
also see that all the documents are sent along with the bills.
 Accounts of customers or principles should be credited only after bills have
been collected or advice to that effect received from the bank branch or
agent to which they were sent for collection.
 Ensure that bills sent by one branch for collection to another branch should
not be taken twice in the amalgamated B/S of the bank.
Bills purchased  Verify documents of title are properly assigned to the bank.
 While purchasing/discounting a bill, sufficient margin is kept to cover any
decline in value of security, etc.
 If bank is unable to collect bill on due date immediate steps should be taken
to recover the amount from the drawer against the security provided.
 Report to H. O all irregular outstanding accounts.
 Apportion discount received properly between 2 years, in case bills O/S at the
close of the year.
Loans & Advances  Bank should make advances only after satisfying itself to the credit
worthiness of borrowers and after obtaining sanction from the proper
authorities of the bank.
 All necessary documents must be executed before advances are made.
 Sufficient margin should be kept against securities taken to cover any decline
in value & to comply with Reserve Bank directives.
 All the securities should be received and returned by responsible officer. They

should be kept in the joint custody of two such officers.

 All the accounts which exceed the sanctioned limit or drawing power or are
against unapproved securities or are otherwise irregular etc. should be brought to
the notice of the MGT/HO regularly.
 The operation in each advance account should be reviewed at least once

every year.
Demand drafts  Signature on demand draft should be checked by an officer with signature
book.
 All the D.Ds. sold/ issued by a branch should be immediately confirmed by an

advice to the paying branch.

 If paying branch do not receive proper confirmation or any Cr. in it’s A/C with

the issuing branch, it should take immediate steps to ascertain the reasons.
Inter-Branch Ac-  The accounts should be adjusted only on the basis of advices received from
counts other branches.
 Prompt action should be taken preferably by central authority, if any entries
are not responded to any branch within a reasonable time.

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 Audit of Banks
Credit Card  Effective screening of applications with reasonably good credit assessment.
Operations  Strict control over storage & issue of cards.
 Confirmation of unutilised limit of credit card holder, before settlement in case it
exceeds a specified % of the total limit.
 There should be a sytem of prompt reporting by merchants of all settelments
accepted by them throught credit cards.
 Reimbursement to merchants should be made only after verification of the validity
of merchants’ acceptance of cards.
 Reimbursement (gross of commission) charges to customer’s A/C.
 Statements to be sent regularly & promptly to customer.
 Monitor & follow-up customers payments.
 Identify & attend overdue over a reasonable time. For defaulting customers, credit
should be stopped by informing the merchants through periodic bulletins, as early
as possible, to avoid increased losses.
 Periodic review of credit card holders accounts. Limit can be revised if necessary.
It should determine doubtful amounts & provisioning thereof.

7. COMPLIANCE WITH CRR & SLR REQUIREMENTS

A Cash Reserve Ratio

Meaning: A specified minimum fraction of the total deposits of customers, which commer-
cial banks have to hold as reserves either in cash or as deposits with the central bank.
Maintenance:
Banking company as required by Schedule bank as required
Banking Regulation Act, 1949 by RBI Act, 1934

RBI reviews liquidity situation, accordingly decide CRR requirement by scheduled

commercial banks.

B Statutory Liquidity Ratio (SLR) Requirements

Meaning: SLR is the requirement that every scheduled commercial bank in India is required
to maintain in the form of certain liquid assets such as gold, cash and government approved
securities before providing credit to the customers.
Objective: To have an amount in the form of liquid assets which can be used to handle a
sudden increase in demand for the amount from the depositors.
Compliance:

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Audit of Banks

of 12 odd
verify
Central compliance dates in Resultant sent Report of
report Top
auditor different Statutory
mgmt.
of months of Central
of bank
banks Fiscal Year Auditor to
& RBI
(excluding cover
FRIDAY)

I. Correctness of compilation of DTL (Demand & Time Liabilities)

position &
II. Maintenance of liquid assets.

C Audit Approach & Procedures

Area of Focus:
Compliance with CRR and SLR requirements :
4 Obtain an understanding of the relevant circulars/ instructions of the RBI, par-
ticularly regarding composition of items of DTL.
4 Request the branch auditors to send their weekly trial balance as on Friday and these
are consolidated at the head office.
4 Based on this consolidation, the demand & time liability (DTL) position is determined
for every reporting Friday.
4 The Statutory Central Auditor should request the branch auditors to verify the
correctness of the trial balances relevant to the dates selected by him/her.
4 The branch auditors should also be specifically requested to examine the cash balance
at the branch on the selected dates.
4 Examine, on a test basis, consolidations regarding DTL position prepared by the bank
with reference to the related returns received from branches. Auditor should examine
whether the valuation of securities done by the bank is in accordance with RBI
guidelines.
4 Examine the following items have been excluded from demand & time liabilities as per
RBI guidelines:

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 Audit of Banks

Paid up Share Recoveries Amounts Un-adjusted Margins

Capital, from the received deposits/balances held and
reserve, Cr. borrowers against lying in link kept in
bal. in P&L, in respect import branches for agency sundry
loan taken of debts bills held business like deposits
from RBI & considered in sundry dividend warrants, for funded
Refinance bad and deposits interest warrants, facilities.
taken from doubtful pending refund of application
EXIM bank, of receipts of money etc. In
NHB, SIDBI & recovery. final rates. respect of shares/
NABARD debentures to the
extend of payment
made by other
branches but not
adjusted by link
branches.

4 Examine the following items have been included in demand & time liabilities as per RBI
guidelines :

(a) (b) (c)

Net credit Borrowings from The reconciliation of Nostro accounts
balance abroad by needs to be scrutinized carefully to
in branch banks in India analyse and ascertain if any inwards
adjustment needs to be remittances received on behalf of
accounts. considered customers / bank constituents and have
as ‘liabilities remained unaccounted and / or any
to other’ other debit (inward) entries have
and thus, remained unaccounted and pertaining to
considered at any liabilities for the bank.
gross level.

4 Examine whether the consolidations prepared by the bank include the relevant information
in respect of all the branches.
4 It may be noted that, even though interest accrues daily, it is recorded in the books
only at periodic intervals. Thus, examine whether such interest accrued but not
accounted for in books is included in the computation of DTL.
4 Auditor should apply the audit procedures to the overall consolidation prepared

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Audit of Banks
for the bank as a whole. Where such procedure is followed, the central auditor should ad
equately describe the same in report.
4 While reporting on compliance with SLR requirements, the auditor should specify the number
of unaudited branches and state that he/she has relied on the returns received from the unau-
dited branches in forming an opinion.
4 Recently, there has been intoductionof Automated Data Flow (ADF) for CRR & SLR reporting
and the auditors should develop necessary audit procedures around this.

8. VERIFICATION OF ASSETS
1 Cash, Bank Balances and Money at call and Short Notice
The Third Schedule to the Banking Regulation Act, 1949, requires disclosures in B/S regarding:
4 Cash
4 Balances with RBI
4 Balances with other banks
4 Money at call & short notice

Audit Approach :
4 The auditor’s basic objective in verification of these items is their existence and com-
pleteness as on the date of B/S.
4 Cash would be appearing in B/S of almost all branches. However, there will be no bank
account requiring reporting except in branches with treasury operations.
4 Activity pertaining to money at call and short notice is handled by treasury department
of the bank at H.O level.
4 Banks have a robust system of IC pertaining to cash.
4 Similarly, the balance with other banks are reconciled periodically.
4 The auditor has to be satisfied about effective operation and implementation of internal
controls in this area.

Audit Procedures:
Area of Focus Suggested Audit Procedures
Cash n Carry out the physical verification of cash [including foreign
currency, ATM & Cash Deposit Machines (CDM)] as close to
the B/S date as possible.
n The cash balance must be agreed with the balance shown in
the cash register/balance in CBS.

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 Audit of Banks
n Applicable only to branches having account with the RBI.
Balance with
n Verify the ledger balances in each account with reference to the bank
RBI confirmation certificates and reconciliation statements as at year end.
n Review the reconciliation statements, pay attention to following items of
reconciliation statements:
(a) Cash transactions remaining un-responded,
(b) Revenue items requiring adjustments / write-offs; and
(c) Other Cr. & Dr. entries originated in the statement provided by RBI
remaining unresponded for more than 15 days.

Balance with n Examine, no debit for charges or credit for interest is outstanding and all the
items which-ought to have been taken to revenue for the year have been so
Banks taken.
(other than n Examine that no cheque sent or received in clearing is outstanding.
RBI) n Examine all bills or outstation cheques sent for collection and outstanding as on
closing date have been credited subsequently.
n Examine large transactions to ensure that no transactions have been put through
for window-dressing.
n Balances with banks outside India should also be verified and should be
converted into Indian currency at the exchange rates prevailing on the B/S
date.
n Examine, whether there is proper authorisation for lending of the money at call
Money at Call or short notice.
Compliance with the instructions/guidelines laid down by the branch’s H. O/
and Short
controlling office, including the limits on lending’s in inter-bank call money mar
Notice ket should also be examined.
n Call loans should be verified with the certificates of the borrowers and the call
loan receipts held by the bank.
n Examine whether aggregate balances tally with the control accounts, as per
general ledger.
n Examine subsequent repayments received from borrowing banks to verify the
amounts shown as at the year-end. It may be noted that call loans made by a
bank cannot be netted-off against call loans received.
n Verify interest has been properly accrued and accounted for on year-end
outstanding balances of call/short notice money.

Investments

Audit approach:
4 The primary objective of the auditor in audit of investments is to satisfy himself as to
their existence, ownership and valuation.
4 Examine compliance with statutory and regulatory requirements.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 17

Audit of Banks
4 Auditor should design his audit procedures keeping in view these compliances.
4 Every bank has their own investment policy, which is drawn strictly in conjunction with
RBI Master circular on investments. The entire compliance needs to be evaluated in terms
of requirements of investment policy read with RBI master circular.

Audit Procedures:
Area of Focus Suggested Audit Procedures
Internal Control n Ascertain that the policy conforms, in all material respects, to the
Evaluation and RBI’s guidelines & statutory provisions.
Review of In- n It should clearly outline the broad investment objectives
vestment Policy separately for the investments on its own account and
investments on behalf of customers.
Separation of Check segregation of duties within the bank staff in terms of executing
Investment trades, settlement and monitoring of such trades, and accounting of
Functions the same.
Examination of Physically verify the securities on hand, obtain confirmations from
Reconciliation counter-party banks for Bank Receipts (BRs) issued by such banks
and on hand, obtain confirmation of Subsidiary General Ledger (SGL)
balances with Public Debt Office (PDO), and examine control and
reconciliation of BRs issued by the bank.
Examination of n Ascertain whether investments made are within banks authority.
Documents n Ensure that any other covenants or conditions which restrict quality
or abridge the right of ownership and/or disposal of investments,
have been complied with by the bank.
n Acquisition/disposal of investments should be verified with reference
to the broker’s contract note, bill of costs, receipts and other similar
evidence.
Physical Verifi- n Verify investments scrips physically at the close of business on the
cation B/S date.
n Verify investments held with Public Debt Office of RBI, custodians
& depository with statement of holdings as on date of B/S.
Independent balance confirmation requests can be made in
accordance with SA-505. If not received back, alternative audit
procedures like getting bank personnel to download investment

18 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
statement from E-Kuber (CBS platform of RBI) for government
securities in auditor’s presence can be designed.
n Verify confirmations of counterparty banks in respect of BRs.
Where any BRs have been outstanding for an unduly extended
period, auditor should obtain written explanation from the
management for the reasons thereof. Auditor should examine the
reconciliation of BRs issued by the bank. BRs should not be issued
in respect of transactions in government securities for which SGL
facility is available.
n Securities held in the names of nominees, auditor should examine
whether there are proper transfer deeds signed by the holders and
undertaking from them that they hold the securities on behalf of
the bank.
Examination n Examine that entire investment portfolio of bank is classified under three
of categories i.e.HTM, HFT and AFS and shifting of securities is as per regu-
classification latory norms and laid down policy.
and shifting n Whether shifting of investment from ‘available for sale’ to ‘held to
maturity’ is duly approved by BOD of the Bank.
Examination n Examine appropriateness of method of accounting followed in
of Valuation respect of investments and year end valuation.
n Whether investments have been properly classified into three
categories at the time of acquisition as evidenced by the decision
of competent authority (BOD, Asset Liability Committee (ALCO) or
Investment Committee).
n Examine compliance with RBI guidelines relating to valuation of
investments.
n Verify that investments are classified as Non-Performing Investments
(NPI) as per applicable RBI guidelines. In such cases, banks have not
to reckon income on securities and are required to make provisions for
depreciation in value of investment.
n Examine whether income from investment is properly accounted
for. (Specially when income is received through electronic or online
medium).
n Verify whether adequate disclosure of any change in method of

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 19

Audit of Banks
valuation of investment is made.
n Examine whether profit or loss on sale from investment has
been properly computed and accounted for.
n Verify whether there is a proper system for recording &
maintenance of TDS certificates received by the bank.
Dealings in Securities n Examine, whether prior approvals obtained?
on Behalf of Others n Examine, whether bank’s income from such activities has
been recorded and fairly stated in the bank’s FS.
n Consider whether bank has any material undisclosed
liability from a breach of its fiduciary duties, including the
safekeeping of assets.
Special-purpose n Examine, whether separate accounts have been maintained
Certificates Relating for :
to Investments I. Investments made by bank on their own investment
account.
II. PMS client’s account.
III. Investment on behalf of other constituents (including
brokers).
n RBI guidelines : Banks are required to get their investments
under PMS separately audited by external auditors.

Audit, Review and Reporting:

4 Banks should undertake half-yearly reviews (as of 30th September and 31st­ March) of their in-
vestment portfolio.
4 These half yearly reviews should not only cover the operational aspects of the investment portfo-
lio but also clearly indicate amendments made to the investment policy and certify the
adherence to laid down internal investment policy and procedures and RBI guidelines.
4 Internal auditors are required to separately conduct concurrent audit of treasury transactions and
their report should be placed before the CMD once every month.
4 Major irregularities observed in internal audit report and position of compliance thereto may be
incorporated in the half yearly review of the investment portfolio, and need not to be forwarded to
RBI.

20 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
III Advances
The Third Schedule to the Act requires classification of advances made by a bank from three
different angles, viz.,

Nature of advance Nature and extent Place of making advance

(like cash credit, of security (i.e. Whether in India or
overdrafts or term (like secured by outside India)
loans or bills pur- tangible assets Note: Advances in India
chased or covered by are also to be classified
and discounted) bank/govt guar- on sectoral basis (like
antees) priority sector or public
sector).

In India further classification on sectoral basis (Public Sector or Priority Sector)

also required.

Audit Approach:
4 Amounts included in the B/S in respect of advances are o/s at the date of B/S
4 Advances represent amounts due to the bank.
4 Amounts due to the bank are appropriately supported by loan documents.
4 There are no unrecorded advances.
4 The stated basis of valuation of advances is appropriate and properly applied and
recoverability of advances is recognized in their valuations.
4 Advances are disclosed, classified and described as per recognised A/C policies
& practices and statutory & regulatory requirements.
4 Check appropriate provisioning towards advances -as per RBI norms, AS and GAAP.

There exists elaborate and detailed control system & procedure in banks pertaining to ap-
praisal, sanctioning, documentation, disbursal, review, monitoring and supervision of ad-
vances. Audit approach of advances should encompass designing appropriate audit
procedures to obtain audit evidence in all these areas.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 21

Audit of Banks
Audit Procedures:

A. B. C.
EVALUATION SUBSTANTIVE RECOVERABILITY
OF INTERNAL AUDIT OF ADVANCES
CONTROLS OVER PROCEDURES
ADVANCES

n Examine area of credit appraisal and n Verify correctness of master data n Review periodic
verify whether laid down procedures of loan accounts updated in CBS. statements
regarding credit appraisals including Check parameters like instalments, submitted
loan applications, preparation of EMI, rate of interest, tenure of loans by borrowers
praposals obtaining satisfaction about etc. indicating
credit worthiness of borrowers are the extent of
n Verify that each customer of bank
being followed. compliance
is tagged under single customer
Examine advances are sanctioned with terms and
n id in respect of all its accounts
according to delegated authority. conditions.
including those in which credit
n Examine all necessary loan documents
facilities are granted. n Review
latest FS of
have been executed after sanction but n Examine all large advances and
before disbursals. borrowers.
others on a sample basis.
n Review reports
n Examine compliance with stipulated n Examine accounts identified to
on inspection
terms of sanction and end use of be problem accounts but not yet
of security.
funds. (Particulary, for loans) slipped into NPA.
n Review
n Examine existence, enforceability and This can be done by obtaining list
auditor’s
valuation of securities. of SMA1 and SMA2 borrowers from
reports in case
the bank.
n Examine validity of the recorded of borrowers
amounts. n Examine those A/Cs which have having credit
been adversely commented upon by facilities from
n Review operations of the A/C's and look
concurrent auditors/bank’s internal the banking
for adverse features like unauthorised
inspection/RBI inspection team. system beyond
over drawings beyond limits.
n Examine list of restructured A/Cs to a cut-off limit
n Examine whether system laid down in fixed by BODs
ensure that restructure is as per RBI
bank for review/renewals of advances of bank.
guidelines.
is being followed.
n Examine quick/early mortality
n Review whether drawing power is being
accounts (i.e.Any advance slippage
calculated properly on basis of stock/
to NPA within 12 months of its
book debt statements received from
sanction)
borrowers as stipulated in respective
sanction letters. n Verify completeness and accuracy
of interest being charged.
n Ensure compliance with Loan Policy
Carry out appropriate analytical
n
of Bank as well as prudential norms
procedures.
of RBI including appropriate asset
classification and provisioning.
22 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN
 Audit of Banks
IV Verification of asset classification, income recognition and provision for NPA’s
An important aspect of audit of advances relates to their asset classification and provision-
ing. This implies that advances are classified in accordance with prudential norms on as
set classification, income is recognized on actual record of recovery and a proper provision
should be made in respect of advances where the recovery is doubtful.

Audit Approach:
4 RBI has prescribed objective norms for determining the quantum of provisions re-
quired in respect of advances.
4 Auditors must download the latest Master Circular of RBI to familiarize himself fully
with the norms prescribed by RBI in this regard.
4 Circulars issued by RBI after the date of issue of Master Circular and till the date of
audit should also be reviewed by the auditors for its adherence.
4 These norms lay down the minimum provisioning requirements. However, higher pro-
vision should be made wherever necessary.
4 The provisions of Section 15 of the Act, which applies to banking companies, nation-
alised banks, State Bank of India and regional rural banks, requires the bank to
make adequate provision for bad debts to the satisfaction of its auditor before
paying any dividends on its shares.
4 It may be noted that verification of applicable prudential norms on asset classifica-
tion, income recognition and provisioning is an important responsibility of Statutory
Branch Auditor as well as Statutory Central Auditor.

Area of Focus Suggested Audit Procedures

Classification n Verify whether bank has a system of ongoing identification and
and classification of advances through CBS without manual intervention
Provision and its accuracy in crystallizing date of NPA.
n Examine whether classification made by branch is appropriate
Examine classification of advances where there are threats to recovery.
n Examine whether secured & unsecured portions of advances
segregated correctly & provisions calculated properly.
n Review and compare the date of NPA of loan A/C’s mentioned in C.Y.
statements with that of P.Y. & reasons for any change should be
ascertained.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 23

Audit of Banks
Accounts regular- n As per RBI guidelines, if an account has been regularised before
ised near Balance
sheet date the B/S date by payment of overdue amount through genuine
sources, the account need not be treated as NPA.
n Where, subsequent to repayment by the borrower (which makes
the account regular),

Branch has provided further funds to the borrower,

Auditor should carefully assess whether repayment was out of

genuine sources or not.
Evaluate whether account indicates inherent weakness, based on data
available,

If Yes, If No,
account (other genuine cases)
should be Furnish satisfactory evidence to the Statutory
deemed as NPA Auditors about the manner of regularisation
of the account to eliminate doubts on their
performing status.
n Ensure that classification is made as per the position as on
date & hence, classification of all standard A/C’s be reviewed
as on B/S date based on concepts of Past Due/ Overdue concept,
and not based on B/S date.
n NPA should be recognised only based on concept of Past Due/
Overdue concept, and not based on B/S date.
Drawing Power n Ensure that drawing power is calculated as per extant guidelines (i.
Calculation e. credit policy of the bank ) formulated by the BOD of respective
bank & agreed upon by the concerned statutory auditors.
n Special consideration should be given to proper reporting of sundry
creditors & stocks covered under LCs/guarantees for calculating
drawing power.
n Ensure that declared stocks shall not cover borrower’s liability
outstanding in form of sundry creditors for goods or covered by
LCs/guarantees availed for procurement of material.
n In case where credit facility is provided by the bank against
primary security of book debts, net value of debtors is to be arrived
at

24 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
n Note:
l Drawing power is calculated net of stipulated margin.
l In case of consortium A/C's, drawing power calculate an
allocation made by lead bank is binding on member banks.
n In case of working capital advances to companies engaged in
construction business, the valuation of work in progress should be
ensured in consistent and proper manner. It also to be ensured that
mobilization advance being received by the contractors is reduced
while calculating drawing power.
n The stock audit including audit of book debts should be carried out
by the bank for all accounts having funded exposure of more than
stipulated limit.
n Report submitted by the stock auditors should be reviewed during
the course of the audit and special focus should be given to the
comments made by the stock auditors on valuation of security and
calculation of drawing power.
Accounts with n Banks should not classify an advance account as NPA merely due to
temporary defi- existence of some temporary deficiencies such as-
ciencies
l Non-availability of drawing power based on latest stock state

ment.
l Balance O/S exceeding the limit temporarily.

l Non-renewal of limits on due date.

n Stock statements relied upon by the banks for calculating drawing

power should not be older than 3 months.
n If older than 3 months, the account is considered as irregular.
Limits not re- n Accounts where regular/ad-hoc limits are not reviewed within
viewed 180 days from the due date/date of ad-hoc sanction, should be
considered as NPA.
n Auditors should also ensure that the ad-hoc/short reviews are
not done on repetitive basis. In such cases, auditor can consider
the classification of account based on other parameters and
functioning of the account.
Asset classifica- n Ensure that all the facilities granted by a bank to borrower will
tion to be bor- have to be treated as NPA and not particular facility which has
rower wise and
become irregular.
not facility wise
n if debits arising out of devolvement of LC or invoked guarantees

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 25

Audit of Banks
are kept in separate account, the O/S balance should be treated as
part of borrower’s principal account for purpose of application of pru-
dential norms on asset classification, income recognition and provi-
sioning.
Government n If government guaranteed advance becomes NPA, then interest on such
Guaranteed
advance should not be taken to income unless interest is realised.
Advances
n Only treat as NPA when Central Government repudiates its guarantee,
when invoked.
n In case of State Govt. guaranteed advances classify as NPA if overdue for
> 90 days (usual provisions apply).
n If CG guarantee hasn’t been invoked by the bank for long periods, the
reasoning for the same should be taken and reported in LFAR.
Agricultural n Ensure that NPA norms have been applied in accordance with crop season
Advances
determined by the State Level Bankers’ Committee in each State.
n Depending upon the duration of crops – short term/ long term - raised
by an agriculturist, the NPA norms would also be made applicable to
agricultural term loans availed of by them.
n These norms applicable to all direct agricultural advances listed in
Master Circular on landing to priority sector.
n In respect of agricultural loans, other than those specified in circular,
ensure that identification of NPAs has been done on the same basis as
non-agricultural advances.
Provisioning n Check the latest circulars of RBI in this regard.
towards n It is be understood that provision for standard assets is also required to be
Standard
made at variable rates in respect of different sectors for the funded o/s as
Assets
per RBI norms as a matter of prudence.
n The provisions of bifurcation of standard advances under relevant category
for proper calculation of provision should be checked and certified at
branches level.
Restructured n Restructuring is an act in which a lender, for economic or legal reasons
Advances
relating to borrower’s financial difficulty, grants concessions to the
borrower.
It may involve modification of terms of advances including alteration of
amount of instalments/repayment period/rate of interest/sanction of

26 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
additional credit facilities, etc. to help in curing of default.
n RBI has given revised guidelines for treatment of restructured accounts by
its circular.
n Auditor should verify compliance with the requirements of the circular
issued in this regard.
n Banks may restructure the accounts classified under standard,
substandard or doubtful categories. Banks cannot restructure accounts with
retrospective effect.
n Once bank receives an application/proposal in respect of an A/C for
restructuring, it implies it is intrinsically weak.
n Auditors need to take a view whether provision needs to be made for
the accounts remaining pending for restructuring in respect of accounts
pending approval for restructuring.
n On restructuring, the account will be downgraded from Standard to
substandard. NPAs will remain in the same category on restracturing.
Upgradation of n Examine all the accounts upgraded from NPA to standard Category during
Account the year, to ensure upgrading of each account is strictly in terms of RBI
guidelines.
n There can be a possibility of incorrect upgradation of A/C on the basis of
partial recoveries made in the account and overdue portion might not have
wiped out completely.
n There can also be a possibility of recoveries being made in the account
after cut-off date and account being upgraded as on date of B/S.
Sale/ Purchase of Examine:
NPAs n The policy laid down by BOD in this regard relating to procedures, valuation

and delegation of powers including non performing financial assets that

may be purchased/sold, norms or such purchase/sale, valuation procedure
and accounting policy.
n Only such NPAs to be sold which remained NPA in the BoA of bank for at

least 2 years.
n The assets have been sold/purchased “without recourse” only i.e.

the entire credit risk associated with NPA should be transferred to the
purchasing bank.
n Subsequent to the sale of NPA the bank does not assume any legal,

operational or any other type of risk relating to sold NPAs.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 27

Audit of Banks
n The NPA has been sold on cash basis only. Under no circumstances,
NPA can be sold to another bank at a contingent price .The entire sale
consideration has to be received on upfront basis.
n The bank has not purchased an NPA which it had originally sold.
n Auditor to ensure that (in case of sale of NPA):
l On the sale of NPA - removed from BoA of selling bank on transfer.
l If sale is at a price below the Net Book Value (NBV)- the shortfall
should be charged to P&L A/C.
NBV = Book value - Provisions held
l If sale value is higher than NBV, the excess provision shall not
be reversed but will be utilised to meet shortfall/loss on A/C
of other non-performing financial assets.
n Auditor to ensure (in case of purchase of NPA):
l Provisioning requirement in respect of purchase as appropriate to the
classification status in the books of purchasing bank.
l Any recovery to be adjusted from acquisition cost first, then
recognised to P&L.
l For the purpose of capital adequacy, banks have assigned 100% risk
weights to the NPAs purchased from other banks.

V Fixed Assets
The Third schedule to the Banking Regulation Act, 1949 requires fixed assets to be classified into
two categories in the B/S, viz., Premises and Other Fixed Assets.
Note:
4 Assets taken on lease and intangible assets should be shown separately for proper classification
and disclosure and also to comply with the requirements of the AS.
4 Section 9 of the Act prohibits a Banking Company from holding any immovable prop-
erty acquired for a period exceeding 7 years from the date of acquistion, except required
for its own use.
Audit Approach :
4 In most of the banks,
n fixed assets are generally purchased by the H. O or regional/zonal offices.
4 Statutory branch auditor has to ascertain the procedure followed and plan accord-
ingly.

28 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
n Maintenance of records is centralized at H. O level.
n Sale / purchase information of fixed assets is accounted for with help of
Fixed asset management software. The audit procedures have to be
designed accordingly.
Audit Procedures :
Area of Focus Suggested Audit Procedures
Internal Examine the system of ICs broadly covering the following:
Controls n Control over expenditures incurred on fixed assets acquired or self-
constructed.
n Accountability and utilisation controls.
n Information controls for ensuring availability of reliable informa-
tion about fixed assets.
n Ascertain whether the accounts in respect of fixed assets are
maintained at the branch or centrally.
n Ascertain location of documents of title or other documents evi-
dencing ownership of various items of fixed assets.
n Examine whether acquisitions, disposals, etc. effected at the branch
during the year have been properly communicated to the H. O.
Premises n Verify opening balance of premises with reference to schedule/
ledger/register of fixed assets.
n Verify authorisation/title deed/record of payment, etc of newly
acquired premises.
n Verify self-constructed assets with reference to authorisation &
documents such as contractor’s bills, work order records & record
of payments.
n Check reconciliation of fixed assets register with ledger and final
statements.
n Examine capitalisation and amortisation of lease premium in
case of lease hold premises. Any improvements to lease hold
premises should be amortised over their balance useful life.
n In case title deeds are held at the H. O or some other location,
branch auditor should obtain a WR to this effect form branch
management and bring this fact to the notice of Central Statutory
Auditor through mention in report. This fact should also be reported
in LFAR.
AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 29
Audit of Banks
n Where premises are under construction, disclosure should be
made under a separate heading e. g. “premises under construc-
tion”.
n Advances / payments to contractors should be shown under a
separate item under the head “fixed assets”.
n Check appropriatness of revaluation of premises or any other
fixed assets.
n Auditor should examine whether:
l treatment of resultant revaluation surplus or deficit; or
l impairment, if any
is in accordance with AS.
n Examine that no immovable properties (other than those held
by bank for own use including residential premises provided to
employees) have been included in fixed assets. Branch audi-
tor should also obtain a WR in respect of the same from branch
management.
n In respect of moveable fixed assets, auditor should pay particular
Other Fixed
attention to the system of recording the movements & other con-
Assets
trols over such fixed assets e.g. their physical verification at periodic
intervals by branch management and/or inspection/internal/con-
current audit team.
In case of any discrepancy, examine whether the same has been
properly dealt with in the books of account and adequate provi-
sion in respect of damaged assets has been made with appropriate
approvals.
n In case of transfer of fixed assets, from one branch to another,
auditor should examine whether accumulated depreciation is also
transferred.
n In case of intangible assets, verify whether the relevant guidelines
given by RBI & AS 26 have been followed.
n Examine whether fixed assets have been properly classified & fixed
assets of similar nature grouped together.
Example, items like safe deposit vaults should not be clubbed to-
gether with office equipment’s or theft alarm system of the bank.

30 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
n Examine whether any expenditure incurred on a fixed asset after it
has been brought to its working condition for its inteded use, has
been dealt with properly.
n Auditor at H.O level should examine if consolidated fixed assets
schedule matches in all respect and all transfers in/out, are tallied.
n A broad check on the depreciation amount vis-a-vis the guoss block
of assets be reviewed with special emphasis on computer hardware/
software.
Verify the copy of sale deed and receipt of the sale value, in re-
Sale of Fixed
n

spect of fixed assets sold during the year.

Assets
n Ensure that profit/ loss on sale of assets has been
properly accounted for.
Leased As- n Verify accounting and provisioning norms to be followed by banks
sets undertaking leasing activity as per RBI circulars & guidelines.
n The auditor, in respect of leased assets, should also have regard to
the requirements of AS 19, “Leases”.
Impairment Verify whether the guidelines given by RBI’s circular on compliance
of Assets with AS & the requirements of AS 28 have been followed.

VI Other Assets
The auditor may corry out the auditor of various items appearing under the head “Other
assets” in the following manner:

Audit Procedures:

Area of Focus Suggested Audit Procedures

Inter Office n Examine whether Inter-branch accounts are normally reconciled at

Adjustments the central level.
n Auditor should report on the year – end status of inter-branch
accounts indicating the dates up to which all or any segments of the
accounts have been reconciled.
n Auditor should also indicate the number and amount of O/S

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 31

Audit of Banks
entries in the inter branch accounts, giving the relevant info.
separately for Dr. & Cr. entries.
n Auditor should ensure that any discrepancies found have been
properly dealt in books. The auditor can obtain relevant information
from branch audit reports.
Interest Accrued n Examine whether the interest has been accrued on the entire loans
and advances portfolio of the bank.
n Special consideration should be given to the overdue bills purchased/
discounted.
n Ensure that only such interest as can be realised in the ordinary
course of business should be shown under this head (AS-9).
Tax paid in n Ensure that the certificates for such TDS is collected by the branch &
Advance/Tax original copy is sent to the H.O. along with the transfer of such TDS
Deducted at amount to H.O on periodic basis as defined.
Source n TDS Certificates / credits in the Form 26AS, and claim of the same
in ITR filed should be checked.
n At H.O level, the availability of all the TDS Certificates / credits in the
Form 26AS, and claim of the same in ITR filed should be checked to
ensure the justification of the claim.
Stationary and n Ensure that the item “Stationery and Stamps” includes only
Stamps exceptional items of expenditure on stationery like bulk purchase of
security paper which is to be written off over a period of time.
n Such items should be valued at cost. Normal expenditure on
stationery is charged to P&L a/c.
n Evaluate existence, effectiveness and continuity of ICs over these
items in the normal course of audit.
n Branch auditor is required to specifically comment on the adequacy
of the relevant ICs in LFAR.
n Physically verify the stationary and stamps on hand as at the year
end. Any shortage should be inquired information into.
n Examine whether the cost of stationery and stamps consumed
during the year has been properly charged to P&L A/C as per
accounting policy/instructions from H.O regarding treatment of cast
of stationery and stamps.

32 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
Non-Banking n Ensure that the heading includes those immovable properties/tangible
Assets Acquired assets which bank has acquired in satisfaction of debts due or its
in Satisfaction of other claims and these are being held with intention of being disposed
Claims off.
n Verify such assets with reference to the relevant documentary
evidence, e.g. terms of settlement with party, order of the court or
the award of arbitration, etc.
n Check that the ownership of the property is legally vested with the
Bank.
If there is any dispute or other claim about property, auditor should
examine whether the recording of the asset is appropriate or not.
If dispute arises subsequently,

auditor should examine whether provision for liability or disclosure of

a contingent liability is appropriate (AS-29).
n Ensure compliance with Section 9 of Banking Regulation Act, on
holding period of such assets.
n Ensure that as at date of acquisition, the assets should be recorded at
lower of NBV of advance or NRV of asset acquired.

Vii. Others

This is the residual head which includes those items not covered under other sub-heads.
e.g. claims which have not been received, debit items representing additions to as-
sets or reductions in liabilities which have not been adjusted for technical reasons or
want of particulars, etc., may also be included under this head.

Audit Approach and Procedures:

Area of Focus Suggested Audit Procedures
Non-Interest n Examine it with reference to the relevant documentation and the
Bearing staff policy framed by the bank.
Advances n The availability, enforceability and valuation of security, if any,
should also be examined.
n Ensure that the same relates to employees on the rolls of the bank
on the date of the preparation of FS.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 33

Audit of Banks
Loans and n Auditor should verify that loans have been ordinarily sanctioned by the
Advances to next higher sanctioning authority as compared to recipient of loan.
Officials and n Loans to senior officers or of higher amount should have been reported
Relatives to the Board.
Security n Examine security deposits with-
Deposits l Various authorities (e.g., on account of telephone, electricity,
etc); and
l Others (e.g. deposits in respect of premises taken on rent) With ref-
erence to documents containing relevent terms and conditions, and
receipts obtained from the parties concerned.
n Ensure that deposit amount has not become due as per the terms and
conditions. If it is so, then consider the recoverability of the same in
detail and make appropriate provision against the doubtful amount.
Suspense n Obtain from the management details of old O/S entries in suspense A/C
Account along with reasons for delay in adjustment
n Where the O/S balances comprised in suspense A/C require a provision/
write-off, auditor should examine whether the necessary provision has
been made/write-off.
Prepaid n Examine whether the basis of allocation of expenditure to different
Expenses periods is reasonable.
n Examine whether allocation of discunting and re-discounting charges
paid by the bank to different accounting periods is in consonance with
the accounting policy followed for the bank as a whole.
Misc.Debit n Review the ageing statements pertaining to these items.
Balances on n Examine the recoverability of old O/S items.
Government n Examine whether claims for reimbursement have been lodged by the
Account branch as per relevant terms and conditions.
n Net balances of amount recoverable at H.O level should also be taken
along with the age-wise analysis of the same.
In case of old O/S balances without any confirmation or proper
justification, should be provided for in accounts.
n For major variance as compared to the previous year figures, verify
whether reasons for the same have been recorded and reviewed.

34 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
9. VERIFICATION OF CAPITAL & LIABILITIES
1 Capital
Auditor may carry out audit of various items under, ‘Share Capital’ in the
following manner:

Audit Approach and Procedure :

4 Auditor should verify the opening balance of capital with reference to audited B/S
of P. Y.
4 In case there has been an increase in capital during the year, auditor should exam-
ine relevent documents supporting the increase.
For e.g.

INCREASE IN : DOCUMENTS TO BE
EXAMINED :
l Authorised capital l Special resolution
of shareholder
l MOA

l Subscribed and l Prospectus/other

offer document
paid-up capital l Reports received
from Registrars to
the issue
l Bank statement
l Returns filed with
Registrar of Com-
panies etc.

Stress Testing

4 Framework :
n RBI required all commercial banks (excluding RRBs & LABs) shall put in place
a board approved ‘Stress Testing framework’ to suit their individual
requirements which would integrate into their risk management systems.
n Stress tests are designed to understand whether a bank has enough capital to
survive plausible adverse economic conditions and to maintain enough buffer
to stay afloat under extreme scenarios.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 35

Audit of Banks
4 Basel III framework
n Basel III norms relate to the Capital Adequacy requirement compliance which
bank has to achieve.
n These norms are meant for the protection of depositors and shareholders
by prescriptive rules for measuring capital adequacy, thereby evolving methods
of determining regulatory capital and ensuring efficient use of capital.
n It strengthens the regulation, supervision and risk management of the
banking sector
n It is global regulatory standard on capital adequacy of banks stress testing
as well as market liquidity risk. The Basel III accord, aims at:
l Improving the banking sector’s ability to absorb shocks arising from
financial and economic stress, irrespective of reasons thereof;
l improving risk management and governance practices; and
l strengthening banks’ transparency and disclosure standards.

Capital Adequacy
4 The term ‘capital adequacy’ is used to describe the adequacy of capital resources of
a bank in relation to the risks associated with its operations.
4 The basic approach of capital adequacy framework is that a bank should have
sufficient capital to provide a stable resource to absorb any losses arising from the
risks in its business.
4 For supervisory purposes, capital is split into two categories :
n Tier – I Capital consists mainly of share capital and disclosed reserves and it is
fully available to cover losses.(it is a bank’s highest quality capital)
n Tier-II – Capital consists of certain reserves and certain types of subordinated
debt. The loss absorption capacity of Tier II capital is lower that Tier I capital.

Components of Capital

The Master Circular on Capital Adequacy discusses the Capital Funds in two
categories – capital funds for Indian banks and capital funds of foreign banks
operating in India.
(CRAR) = Eligible total Capital Funds × 100
Risk Weighted Assets and Off-balance Sheet Items

36 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
RBI requires that banks to maintain a minimum CRAR of 9% on an ongoing basis.
Example :-
For secured housing laons upto ` 75 lakh, the risk weight, subject to some
conditions is 50%. For those above ` 75 lakhs, it is 75%, for loans to commercial
real estate, it is 100%.
Thus for a housing loan of ` 60 lakh given by the bank, the risk. Weight asset
will be taken at 60 x 50% = ` 30 lakhs for the purpose of the denominator in the
above formula.

2 Reserves & Surplus

Disclosure:
The following are required to be disclosed in the B/S under the head ‘Reserves and Surplus’.
4 Statutory Reserves*
4 Capital Reserves*
4 Share Premium*
4 Revenue & Other Reserves including Investment Fluctuation Reserve*
4 Balance in Profit and Loss Account
*Opening balance, additions & deductions during the year are to be shown separately.

Audit Approach and Procedure:

4 Auditor should verify the opening balances of various reserves with reference to
the audited B/S of the PY.
4 Additions to or deductions from reserves should also be verified e.g. with reference to
board resolution.
4 In the case of statutory reserves and share premium, compliance with legal require-
ments should also be examined.
4 Examine whether the requirements of the governing legislation regarding transfer of
the prescribed percentage of profits to reserve fund have been complied with.
In case of exemption from such transfer, examine relevent documents granting such
exemption.
4 Verify :
n Whether appropriations from share premium account conform to relevant
legal requirements.
n Compliance with foreign laws in respect of overseas branches.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 37

Audit of Banks
3 Deposits
Audit Approach:
The following areas should be considered when auditing Deposits:
4 Deposits accepted by banks are primarily of two types i.e those repayable on
demand and those repayable after a fixed term.
4 Current and saving accounts are the most common form of demand deposits. Term
deposits are repayable after a specified period of time ranging from 7 days at pre-
sent to say 1 year or 5 years.
4 Recurring deposits are also an important variant of term deposits in which a speci-
fied sum is deposited in the account at regular intervals for a predetermined period. At
maturity, proceeds are repaid to depositors along with interest.
4 Deposits designated in foreign currencies e.g. Foreign currency non-resident
deposits (FCNR) are accounts which are opened by Non-resident Indians in form of
fixed deposit only.
4 There are some accounts like NRE and NRO.

NRE NRO

l Non-Resident l Non-Resident
(External) Rupee Ordinary Rupee
account Scheme account Scheme
l Opened by Non- l Opened by all
Resident Indians non-residents.
& persons of
Indian origin.

These accounts may be in the form of savings, current, recurring or fixed deposit & denomi-
nated in Indian Rupees.

Audit Procedures:

Current and Deposits

Term designated in
saving deposits Others General
accounts foreign cur-
rencies

38 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
Current and saving accounts

4 Verify on a sample basis Current A/C and Saving A/C opened during the year for adherence
to KYC norms. Verify that saving accounts are opened in name of individuals, HUF, ap-
proved institutions like trusts, educational institutes, etc. Remember that saving accounts
are not opened for business or professional concern. The business transactions are carried
in current accounts which can be opened for all customers like companies, individuals, part-
nership firms, etc.
4 Verify the balances in individual accounts on a sample basis.
4 Check the calculations of interest on a test check basis.
4 Examine whether procedure obtaining balance confirmation periodically has been followed
consistently. Examine confirmations received on sample basis.
4 Ensure the debit balances in current accounts are not netted out on liabilities side & are
shown under advances.
4 Verify on a sample basis some of inoperative accounts revived/closed during the year.
Ensure that inoperative accounts are revived only with proper authority and where
there is significant reduction in balances of such accounts as compared to P.Y,
examine authorisation for withdrawals.

Term deposits

4 Examine whether the deposit receipts and cash certificates are issued serially & are
accounted for in registers.
4 Verify in case of bulk deposits (`2 crore & above for scheduled commercial banks
presently), correct rate of interest has been offered.
4 In case of closure of term deposit, test check whether required foreclosure penalty
deducted from applicable rate of interest payable.
4 Verify on sample basis some of recurring deposit A/C opened during the year.
4 Verify correctness of rate of interest on term deposits on sample basis.

Deposits designated in foreign currencies

4 Verify some of FCNR A/Cs opened during the year on sample basis and ensure these
conform to RBI directions.
4 Verify on sample basis permissible Cr. and Dr. in FCNR A/Cs as per RBI directions.
4 In case of FCNR accounts, examine whether these have been converted into INR at
rate notified in this behalf by H.O.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 39

Audit of Banks
4 Examine whether any resultant increase/decrease has been taken to the P&L A/C.
4 Verify that interest on deposits has been paid on the basis of 360 days in a year.

Others
4 In case of NRE and NRO A/Cs, verify on a sample basis Cr. and Dr. as per RBI guidelines.
Also check repatriablity.
4 NRE A/Cs are repatriable whereas NRO A/Cs are not, except for all current income subject to
certain conditions.

General

4 Verify that deposits of a bank are not inflated for purpose of B/S presentation.
4 Examine that interest accrued but not due on deposits is shown under the head ‘other liabili-
ties and provisions’.
4 Ensure that framework relating to ‘KYC’ and Anti- Money Laundering measures is formulated
and put in place by the bank.

4 Borrowings
Borrowings of a bank are required to be shown in B/S as follows:
l Reserve Bank of
Borrowings in India (RBI) Borrowings
India l Other Banks outside India
l Other Institutions &
Agencies

4 Secured borrowings (including borrowings/refinance in India as well as outside India) included

under above heads is to be shown by way of a note to relevant schedule.
4 Inter-office transactions are not borrowings & therefore, should not be presented as
such.

Audit Procedures:
4 Obtain and verify confirmation certificates and other supporting documents such as,
agreements, correspondence, etc.
4 Auditor is required to comply with the requirements of SA 505 “External
Confirmations” in case of external confirmations.

40 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
4 Examine whether a clear distinction has been made between ‘rediscount’ and ‘refi-
nance’ for disclosure.
4 Examine whether borrowings of money at call and short notice are properly author-
ised. Rate of interest paid/payable on, also and duration of such borrowings should
also be examined.
4 Examine relevant correspondence or other documents to ensure that branch has
been authorised by H.O to borrow/retain other borrowings & terms of such borrow-
ings are in accordance with the authorisation.
4 Examine whether the amount shown in the branch accounts is properly classified
based on security or otherwise.

5 Other Liabilities & Provisions

The Third Schedule to the Banking Regulation Act, 1949 requires disclosures of
following items under the head ‘Other Liabilities and Provisions’.

Others
Bills Inter-office Interest
(including
Payable Adjustments Accrued provisions)

Bills Payable
Evaluate the existence, effectiveness and continuity of ICs over bills payable. Such
controls should usually include the following:
4 Drafts, mail transfers, traveller’s cheques, etc. should be made out in standard
printed forms.
4 Unused forms relating to drafts, traveller’s cheques, etc. should be kept under the
custody of a responsible officer.
4 The bank should have a reliable private code known only to the responsible officers
of its branches, coding and decoding of the telegrams should be done only by such
officers.
4 The signatures on a demand draft should be checked by an officer with the speci-
men signature book.
4 All the telegraphic transfers and demand drafts issued by a branch should be im-
mediately confirmed by advices to the branches concerned. On payment of these
instruments, the paying branch should send a debit advice to the originating

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 41

Audit of Banks
branch.
4 Examine a sample of O/S items comprised in bills payable accounts with relevant
registers.
4 Reasons for old O/S debits paid without advice should be ascertained.
4 Correspondence with other branches after the year-end should be examined spe-
cially for large value items O/S on the B/S date.

Inter-office Adjustments

The balance in inter-office adjustments account, if in credit, is to be shown under this

head.

Interest Accrued

4 Examine interest accrued with reference to terms of the various types of deposits and
borrowings.
4 Examine that such interest not been clubbed with the figures of deposits and borrow-
ings shown under the head ‘Deposit and Borrowings’.

Others (Including Provisions)

Auditor should examine other provisions and other items of liabilities in the same
manner as in the case of other entities.

6 Contingent Liabilities
Audit Approach:
In respect of contingent liabilities, auditor is primarily concerned with seeking
reasonable assurance that all contingent liabilities are identified and properly val-
ued. Auditor should obtain representation from management that:
All Off-B/S transactions:
4 Accounted in the BoA as & when such transaction has taken place
4 Entered into after following due procedure laid down;
4 Supported by the underlying documents.
4 All year end contingent liabilities have been disclosed;
4 i The disclosed contingent liabilities do not include any crystallised liabilities which are
of nature of expense/loss and, require creation of a provision/adjustment in FS;
4 The estimated amounts of financial effect of the contingent liabilities are based on

42 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
the best estimates (as per AS-29), including consideration of possibility of any
reimbursement;
4 In case of guarantees issued on behalf of the bank’s directors, the bank has taken
appropriate steps to ensure that adequate and effective arrangement have been
made to fulfill the commitment out of party’s own resources and that bank will not
be called upon to grant any loans or advances to meet the liability consequent upon
invocation of the said guarantee(s) & that no violation of Sec.20 of the Act, has
arisen on account of such guarantee;
4 i Such contingent liabilities which have not been disclosed on account of the fact that
possibility of their outcome is remote include the management’s justification on that

Audit Procedure:
Area of Focus Suggested Audit Procedures
Contingent n Ensure that there exists a system whereby the non-fund based
Liabilities facilities or additional/ad-hoc credit facilities to parties are extended
only to their regular constituents, etc.
n Ascertain whether there are adequate ICs to ensure that transactions
giving rise to contingent liabilities are executed only by authorised
persons & as per procedures laid down.
n Verify in case of LCs for import of goods, the payment to the overseas
suppliers is made based on shipping documents and ensure such
documents comply with the terms of LCs.
n Ascertain whether accounting system of the bank provides for
maintenance of adequate records in respect of such obligations.
n Whether ICs ensure that contingent liabilities are properly identified
and recorded.
n Test the completeness of the recorded obligations.
n Review reasonableness of the year-end amount of contingent
liabilities in the light of previous experience and knowledge of current
year’s activities.
n Review whether comfort letters issued by the bank has been considered
for disclosure of contingent liabilities.
n Examine whether the bank has given any guarantees in respect of
any trade credit (buyer’s credit or seller’s crefit) and the period of
guarantees is co-terminus with period of credit reckoned from the
date of shipment.
n Verify whether bank has extended any non-fund facility or additional/
ad-hoc credit facilities to other than its regular customers. If so, auditor
should ensure concurrence of existing bankers of such borrowers and
enquire regarding financial position of those customers.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 43

Audit of Banks
Claims against n Examine the relevant evidence, e.g.correspondence with
the Bank not lawyers/ others, claimants, workers/officers, and workmen’s/
acknowledged as officer’s unions.
Debts n Review minutes of meetings & of BOD/committees of BOD,
contracts, and arrangements and agreements, list of pending
legal cases, and correspondence relating to taxes, and duties,
etc to identify claims against the bank.
n Ascertain from the management the status of claims O/S as at
the end of the year.
n A review of subsequent events would also provide evidence
about completeness and valuation of claims.
Liability on n Verify the O/S forward exchange contracts with statement of O/S
Account of O/S forward exchange contracts generated from bank’s computerised
Forward Exchange accounting system or branch manual register. The auditor may
Contracts physically verify the underlying documents including confirmations
& Derivative from merchants to test the existence of such O/S contracts.
Contracts n Auditor may verify O/S derivative contracts like options, interest
rate swaps etc with reports generated in this regard.
Guarantees Given n Ascertain whether there are adequate internal controls over
on Behalf of issuance of guarantees, e.g., whether guarantees are issued under
Constituents: proper sanctions, whether adherence to limits sanctioned for
guarantees is ensured, etc.
n Ascertain whether there are adequate controls over unused
guarantee forms, e.g., whether these are kept under the custody
of a responsible official, whether a proper record is kept of
forms issued, whether stock of forms is periodically verified and
reconciled with book records, etc.
n Examine the guarantee register to seek evidence whether
prescribed procedure of marking off the expired guarantees is
being followed or not.
n Check relevant guarantee registers with the list of O/S guarantees
to obtain assurance that all O/S guarantees are included in the
amount disclosed in this behalf.
n Verify guarantees with the copies of the letters of guarantee
issued by bank & with the counter-guarantees received from the
customers.
n Auditor should also verify the securities held as margin.
n If a claim has arisen, auditor ensure compliance of AS 29,
“Provisions, Contingent Liabilities and Contingent Assets”.
Acceptances, n Evaluate the adequacy of ICs over issuance of letters of credit
Endorsements and and over custody of unused LC forms.
Other Obligations n Verify the balance of LC from the register maintained by the
bank to ascertain the amount of LC and payments made under
them.

44 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
n Auditor may examine the guarantees of the customers and
copies of the letters of credit issued.
n The security obtained for issuing letters of credit should also

be verified.
n Examine whether the bank has incurred a potential

financial obligation in respect of letters of comfort and if

such obligation has been cast, ensure the amount to be
disclosed under contingent liability.
Other items for Determine and verify any other items under this head as required.
which the bank For example, O/S underwriting contracts, bills rediscounting, disputed
is contingently tax demands.
liable
Bills for collection n Ensure that the bills drawn on other branches of the bank
are not included in bills for collection.
n Verify outward bills for collection with reference to the
corresponding register maintained.
n Examine collections made subsequent to the date of the
B/S to obtain further evidence about the existence and
completeness of bills for collection as on the date of B/S.
n Examine the procedure for crediting the customers A/C and
Confirm that this procedure is in consonance with the nature
of obligations of the bank in respect of bills for collection.
n Examine that adequate ICs exists that debits the customers
A/C with the amount of banks commission as soon as a bill
collected is credited to the customer’s account.
n Auditor should also examine that no income has been
accrued in the accounts in respect of bills O/S on the B/S
date.

10. AUDITOR’S REPORT

In case of nationalised banks the auditor is required to make report to CG stating:

Whether, in the auditors’ opinion, the B/S is full and fair, containing
1
all the necessary particulars and is properly drawn up to exhibit true &
fair view of the affairs of the bank.

2 In case the auditor had called for any explanation or information,

whether it has been given and is satisfactory.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 45

Audit of Banks

3 Whether or not the transactions of the bank, have been within the
powers of that bank.

4 Whether or not returns received from offices & branches – adequate for
audit?

5 Whether P&L A/C shows true balance of profit or loss for the period
covered by such A/C.

6 Any other matter to be brought to the notice of CG.

Note: Report of auditors of SBI is also to be made to CG & is identical to nationalised bank’s
audit report.

Format of Audit Report

4 Ensure compliance with SA 700 series.

4 Auditor should ensure disclosure in the audit report of:
n information relating to number of unaudited branches
n quantification of advances, deposits, interest income and interest expense
for such unaudited branches.
4 State in report the matters covered by Sec. 143 of the Companies Act, 2013.

Rule 11 of the Companies (Audit and Auditors) Rules, 2014

Auditor’s report shall also include their views and comments on the following
matters, namely:
1. whether company has disclosed the impact, if any, of pending litigations on its
financial position in its FS;
2. whether company has made provision (required under any law or AS) for material
foreseeable losses, if any, on long term contracts including derivative contracts;
3. Whether there has been any delay in transferring amounts, required to be trans-
ferred, to the Investor Education and Protection Fund by the company.
4. (i) Whether management has represented that, to the best of it’s knowledge and
belief, (other than as disclosed in the notes to the accounts) no funds have
been advanced or loaned or invested (either from borrowed funds or share

46 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
premium or any other sources or kind of funds) by the company to or in
any other person(s) or entity(ies), including foreign entities (“Intermediar
ies”), with the understanding (whether recorded in writing or otherwise)
that the Intermediary shall, whether, directly or indirectly lend or invest in
other persons or entities identified in any manner whatsoever by or on be
half of the company (“Ultimate Beneficiaries”) or provide any guarantee,
security or the like on behalf of the Ultimate Beneficiaries;
(ii) Whether management has represented that, to the best of it’s knowledge
and belief, (other than as disclosed in the notes to the accounts) no funds
have been received by the company from any person(s) or entity(ies),
including foreign entities (“Funding Parties”), with the understanding
(whether recorded in writing or otherwise) that the company shall, whether,
directly or indirectly, lend or invest in other persons or entities identified in
any manner whatsoever by or on behalf of the Funding Party (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like on behalf of
the Ultimate Beneficiaries; and
(iii) Based on audit procedures that the auditors have considered reasonable and
appropriate in the circumstances, nothing has come to their notice that has
caused them to believe that the representations under sub-clause (i) and
(ii) contain any material mis-statement.
5. Whether dividend declared or paid during the year by the company is in compli
ance with section 123 of the Companies Act, 2013.
6. Whether company (in respect of FY commencing on or after the 1st April, 2022)
has used such accounting software for maintaining its books of account which
has a feature of recording audit trail (edit log) facility and the same has been
operated throughout the year for all transactions recorded in the software and the
audit trail feature has not been tampered with and has been preserved by the
company as per the statutory requirements for record retention.

Long Form Audit Report (LFAR)

4 This report is to be given by statutory branch auditors as well as statutory central

auditors.
4 LFAR for branch auditors is in the form of questionnaire where observations/comments
have to be provided on matters including cash, balance with banks, investments,

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 47

Audit of Banks
advances, deposits etc.
4 These are submitted by the statutory branch auditors to statutory central auditors.
4 The consolidation is done at H.O level and LFAR for bank is submitted by statutory
central auditors to management.
4 LFAR, after due examination, should be placed before the ACB of the bank indicating the
action taken/proposed to be taken for rectification of the irregularities, if any & a
copy of the LFAR & the relative agenda note, together with the Board’s views or
directions, is submitted to RBI within 60 days of submission of LFAR by statutory
auditors.

10.1 Other reporting requirements

1. RBI issued a circular relating to implementation of recommendations of Committee on Legal
aspects of Bank Frauds applicable to all scheduled commercial banks (excluding Regional Ru-
ral Banks) providing details regarding liability of accounting and auditing profession including
the professional conduct, non-disclosure of client information and need to report fraud.
2. Auditor should also consider compliance with provisions of Standards on Auditing.
Example, SA 250, “Consideration of Laws and Regulations in an Audit of FS”, explains that
the duty of confidentiality is over-ridden by statute, law or by courts. Whereas an auditor con
ducting an audit in accordance with SAs is responsible for obtaining reasonable assurance
that the FS taken as a whole are free from material misstatement, whether caused by fraud
or error according to SA 240.
3. As per sub-section 12 of section 143 of the Companies Act, 2013, if an auditor of a company,
in course of performance of his duties, has a reason to believe that an offence of fraud involv-
ing such prescribed amount(s), is being or has been committed in the company by its offic-
ers or employees, the auditor shall report the matter to the CG within the prescribed time and
manner.
4. Auditor is not expected to consider each and every transaction but to evaluate the system as
a whole. Therefore, if the auditor while performing normal duties comes across any instance,
he/she should report the matter to the RBI in addition to Chairman/Managing Director/Chief
Executive of the concerned bank.

Reports and Certificates

Statutory Central Auditor provides reports and certificates mainly consisting of

following:

48 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
4 Report on adequacy and operating effectiveness of Internal financial Controls. Fi-
nancial Reporting in case of banks.
4 Long Form Audit Report
4 Report on:
n compliance with SLR requirements.
n whether the treasury operations of the bank have been conducted as per
instructions issued by RBI from time to time.
n whether income recognition, asset classification and provisioning have been
made as per RBI guidelines.
n whether any serious irregularity was noticed in the working of the bank
which requires immediate attention (in accordance with sec 143(12) of the
Companies Act, 2013).
n status of the compliance by the bank with regard to the implementation of
recomendations of the Ghosh Committee relating to frauds and malpractices
and of the recommendations of Jilani Committee on IC and inspection/credit
system.
n instances of adverse credit-deposit ratio in the rural areas.
4 Certificate on:
n reconciliation of securities by the bank (both on its own investment account
as well as PMS Bank’s account).
n compliance by the bank in key areas of prudential and other guidelines relat
ing to such transactions issued by the RBI. (Investment transactions)
n custody of unused Bank Receipt forms and their utilisation.
n Corporate Governance in case of banks listed on Stock Exchange. In some
banks this certification may not be got done by the central auditors.
n claim of various interest subsidies and interest subvention.
4 Authentication of capital adequacy ratio, including disclosure requirements and
other ratios reported in the notes to accounts.
4 Asset liability management.

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Audit of Banks
11 CONCURRENT AUDIT
n It is a verification of transactions or activities of an organisation
concurrently as the transaction or activity takes place.
1 n It is not a pre-audit.
Back drop
n The concept is to verify the authenticity of transaction or activity within
the shortest possible time after it takes place.
n It is akin to internal audit.

The detailed scope of the concurrent audit should be clearly and uniformly deter-
mined for the Bank as a whole by the Bank’s Central Inspection and Audit
2 Department in consultation with the Bank’s Audit Committee of the Board of
Scope of
Concurrent Directors (ACB). Importance should be given to checking high-risk transactions
audit
having large financial implications.
RBI guidelines covers the following areas under concurrent audit:
n Cash n Foreign Exchange
n Deposits n House-Keeping
n Advances
n Other Items
n Investment

n It is to be regarded as part of a bank’s early-warning system to ensure

timely detection of irregularities and lapses which helps in preventing
3 fraudulent transactions at branches.
Concurrent
Audit System
in Commercial n It is, therefore, necessary for the bank’s management to bestow serious
Banks
attention to the implementation of various aspects of the system such
as selection of branches/coverage of business operations, appointment of
auditors, etc.
n The bank should once in a year review the effectiveness of the system
and take necessary measures to correct the lacunae in the implemention
of the programme.

n The scope of work to be entrusted to concurrent auditors, coverage of

business/branches, etc. is left to the discretion of the head of internal
4
Coverage of audit of banks with the due prior approval of the ACB.
Business/ n Banks may, however, ensure that risk sensitive areas identified by them
Branches
as per their specific business models are covered under concurrent audit.
n The broad areas of coverage under concurrent audit shall be based on the
identified risk of the unit and must include random transaction testing
of sufficiently large sample of such transactions wherever required.

50 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks

5
Types of
Activities to
be covered House-
Investments keeping
Advances

Cash Deposits Foreign Other

Exchange Items

Cash

4 Daily cash transactions with particular reference to any abnormal/high value re-
ceipts and payments.
4 Proper accounting of inward and outward cash remittances.
4 Proper accounting of currency chest transactions, its prompt reporting to RBI.
4 Expenses incurred by cash payment involving sizeable amount.

Investments

4 Ensure that in respect of purchase or sale of securities the branch has acted
within its delegated powers having regard to its H.O instructions.
4 Ensure that the securities held in books of the branch are physically held by it.
4 Ensure that the branch is complying with RBI/HO guidelines regarding BRs, SGL
forms, delivery of scrips, documentation and accounting.
4 Ensure that the sale or purchase transactions are done at rates beneficial to the
bank.

Deposits

4 Check the transactions about deposits received and repaid.

4 Percentage check of interest paid on deposits may be made including calculation
of interest on large deposits.
4 Check new accounts opened particularly current accounts.
4 Operations in new current/SB A/C’s may be verified in the initial periods to see
whether there are any unusual operations.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 51

Audit of Banks
Advances

4 Ensure that loans and advances have been sanctioned properly in accordance with
delegated authority.
4 Ensure that securities and documents have been received and properly charged/
registered.
4 Ensure that post disbursement supervision and follow-up is proper, such as recov-
ery receipt of stock statements, instalments, recovery/renewal of limits, etc.
4 Verify whether there is any misutilisation of the loans and whether there are in-
stances indicative of diversion of funds.
4 Check whether the LC issued by the branch are within the delegated power and
they are for genuine trade transactions.
4 Check the bank guarantees issued, whether they have been properly worded and
recorded in register. Whether they have been promptly renewed on the due dates.
4 Ensure proper follow-up of overdue bills of exchange.
4 Verify whether classification of advances has been done as per RBI guidelines.
4 Verify whether the claims to DICGC and ECGC is submitted in time.
4 Verify that instances of exceeding delegated powers have been promptly reported to
controlling / H.O by the branch, have been confirmed, ratified at required level.

Foreign Exchange

4 Check foreign bills negotiated under LC.

4 Check FCNR and other non- resident accounts whether the debits and credits are
permissible under rules.
4 Check whether inward/outward remittance properly accounted for.
4 Examine extension and cancellation of forward contracts for purchase and sale of
foreign currency. Ensure they are duly authorised and necessary charges have been
recovered.
4 Ensure that balances in NOSTRO accounts in different foreign currencies are with
in the limits prescribed by the bank.
4 Ensure that overbought/oversold position maintained in different currencies is rea-
sonable, considering the forex operations.
4 Ensure adherence to the guidelines issued by RBI/H.O of the bank about dealing room
operations.
4 Ensure verification/reconciliation of NOSTRO and VOSTRO account transactions/balances.

52 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
House-keeping

4 Ensure maintenance & balancing of accounts, ledgers and registers including clean
cash is proper.
4 Early reconciliation of entries outstanding in:
n Inter branch and inter bank accounts,
n Suspense account,
n Sundry deposits account,
n DDRR Account,
n Draft Account, etc.
4 Ensure timely adjustment of large value entries.
4 Carry out a percentage check of calculations of interest, discount, commission and
exchange.
4 Chech whether debits in income account have been permitted by competent author-
ities.
4 Check the transactions of staff accounts.
4 Examine the day book to verify as to how the differences in clearing have been ad
justed.
4 Detection and prevention of revenue leakages through close examination of income &
expenditure A/C’s.
4 Verify cheques returned/bills returned register and seek reasons thereof.
4 Checking of inward and outward remittances (DDs, MTs, & TTs).

Other Items

4 In case the branch is entrusted with Govt. business, ensure transactions are done in
accordance with instructions issued by Govt., RBI & H. Q.
4 Ensure that the branch gives proper compliance to internal inspection/audit reports.
4 Ensure customers complaints are dealt promptly.
4 Verification of statements, returns, statutory returns, etc. Submitted to RBI/H. Q.

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Audit of Banks
11.1 Appointment of Concurrent Auditors and Accountability
4 The option to consider whether concurrent audit should be done by banks’ own
staff or external auditors is left to the discretion of individual banks.
4 In case the bank has engaged its own officials, they should be experienced, well
trained and sufficiently senior. The staff engaged on concurrent audit must be in
depent of the branch where concurrent audit is to be conducted.
4 ACB of the bank shall decide the maximum tenure of external concurrent
auditors. Generally, tenure shall not be more than five years on continuous basis.
However, no concurrent auditor shall be allowed to continue with a branch/business
unit for a period of more than three years.
4 If external firms are appointed and any serious acts of omissions or commissions
are noticed in their working their appointments may be cancelled & the fact may
be reported to RBI & ICAI.

11.2 Remuneration of Auditor

Terms of appointment and remuneration may be fixed by ACB of banks keeping in

view various factors such as coverage of areas, skill sets required, number of staff
required and time to be devoted to audit.

11.3 Reporting Systems

4 Each bank should prepare a structured format.

4 The major deficiencies/aberrations noticed during audit should be highlighted in a special
note and given immediately to the bank’s branch/ controlling offices.
4 A quarterly review containing key features brought out during concurrent audits
should be placed before the ACB.
4 There should be zone-wise reporting of the findings of the concurrent audit to ACB
and an annual appraisal/report of the audit system should be placed before ACB.
4 Before submission of the report the auditor should discuss the important issues
with branch manager and concerned officers.
4 Minor irregularities pointed out by the concurrent auditors are to be rectified in
timely manner.
4 Serious irregularities should be reported to controlling officers/H.O for immediate ac-
tion

54 CA FINAL-AUDIT: BY CA. SARTHAK NIRAJ JAIN

 Audit of Banks
4 Whenever fraudulent transactions are detected, they should immediately be reported to
Inspection & Audit department (H.O) and also chief vigilance officer as well as branch
managers concerned.
4 Follow-up action on concurrent audit reports should be given high priority by controlling
office/Inspection and Audit Department and rectification of the features done without
any loss of time.

12 Audit Committee

4 Banks are required to constitute an Audit Committee of their Board in pursuance of

RBI guidelines.
4 One of the function of the audit committee is to provide direction and also oversee
the operations of the total audit function in the bank.
4 The committee also has to review the internal inspection/audit function in the
bank, with special emphasis on the system, its quality & effectiveness in terms of
follow up.
4 The committee has to review the system of appointment and remuneration of
concurrent auditors.
4 Audit committee is connected with the functioning of the system of concurrent
audit as it reviews:
n Method of appointment of auditors
n their remuneration
n Quality of their work.
4 Periodical meetings by the audit committee members with concurrent & statutory
auditors help the audit committee to oversee the operations of total audit function
in the bank.

AB AUDIT HOGA SABSE SCORING BY CA. SARTHAK JAIN 55