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BIRLA COLLEGE OF ARTS SCINCE AND COMMERCE

PROJECT
ON
AUDIT OF BANK
IN THE SUBJECT
ADVANCED AUDITING
SUBMITTED TO
UNIVERCITY OF MUMBAI,
FOR SEMESTER III
OF
MASTER OF COMMERCE
BY
DIVYA PRAKASH WAGHMARE
ROLL NO. 27 SEAT NO. ..
UNDER THE GUIDANCE OF
C. A. C. D. PHADAKE
YEAR - 2016 2017

DECLARATION BY THE STUDENT


I,DIVYA PRAKASH WAGHMARE student of C. A. C. D. PHADAKE SIR of
M com part II Roll Number 27 and Seat Number .hereby declare
that the project for the Strategic management titled, Advanced Auditing
submitted by me for Semester III during the academic year 2016-17, is based
on actual work carried out by me under the guidance and supervision
I further state that this work is original and not submitted anywhere
else for any examination.

Signature of student

EVALUATION CERTIFICATE

This undersigned is to certify that they have assessed and evaluated

the

project
On Audit of Bank submitted by DIVYA PRAKASH WAGH, MARE,
student of M com part II. This project is original to the best of our knowledge
and has been accepted for Internal Assessment.

INTERNAL EXAMINER
C. A. C. D. PHADAKE

EXTERNAL EXAMINERS

INTERNAL ASSESSMENT: PROJECT 40 MARKS

CLASS
NAME OF THE STUDENT
FIRST NAME : DIVYA

ROLL.NO
27

FATHERS NAME:PRAKASH

M.COM

SURNAME: WAGHMARE

PART-II

SUBJECT: ADVANCED AUDITING


TOPIC FOR PROJECT: BANK OF AUDIT

SEAT NO

Marked awarded

signature

Documentation
Internal examiner
(out of 10 marks)
Documentation
External examiner
(out of 10 marked)
Presentation
Internal examiner
(out of 10 marked)
Viva and interaction
External examiner
(out of 10 marked)
TOTAL
MARKED
(OUT OF 40)

ACKNOWLEDGEMENT

I indeed very much thankful of my teaching faculty C. D. Phadke sir for


guiding me for Advanced Auditing On the topic of Audit of Bank. His
Guidance really helped me for preparing my project.

INDEX
No
1.
2.

Particular
Introduction
Type of Audit

Pg. No

3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

1. Statutory Audit
2. Concurrent Audit
3. RBI Audit
Principal Enactments Governing Bank Audit
Stages of Auditing
Provision Relating to Audit
List of documents of Bank Audit
Audit Planning
Audit aspect of items of Balance Sheet
Audit aspect of items of Profit & Loss
Asset Classification
Audit Report Of HDFC Bank
Question
Conclusion

EXECUTIVE SUMMERY

A banking companies are requires maintaining the books of account in accordance with
section 209 of the companies act, 1956. Banking generally a sound internal control system
their day to day transaction. The auditor has to evaluate such system carefully. The
fundamental requirement of an audit, as regards reporting on statement of account can be
discharged from the examination of the internal checked and verification of assets and
liabilities by making a comparison and reconciliation of balance with those in the year and
that of amount of income and expenses by application of test checks.
The act casts greater responsibilities on the directors of banks as compared to
those of other companies in the matter of supervise on over their working. Therefore, they
exercise, or are expected to exercise greater supervision over the affairs of bank. The auditor
is entities to rely on such supervision and to limit his checking to test checks. The financial
position of a bank is depended on the condition of assets, loan, investment, cash balanced and
those of its liabilities and fund.
Their verification forms an important part of the balance sheet. Most of the
bank has their own internal audit or inspection department entrusted with the responsibilities
of checking the account of various branches. The statutory auditor may not, therefore,
duplicate work.

CHAPTER NO:1
1.1 INTRODUCTON
8

The audit of banking companies plays a very important role in India as it


help to regulate the banking companies in right manner. In audit of banks includes various
types of audit which are normally carried out in banking companies such as statutory audit,
revenue/income expenditure audit, concurrent audit, computer and system audit etc. the
above audit is mainly conducted by the banks own staff or external auditor. However, the
rules and the regulation relating to the conduct of various types of audit or inspections differ
from a bank to bank expect the statutory audit for which the RBI guidelines is applicable. In
this, I have given more importance on the overall bank audit system.
In todays competitive world audit is very much necessary as well as compulsory , because
investor investing decision is depend on that particular concept if auditor has expressing his
view about particular organization is true and fair then investor can get his ideas about how
much he should invest in particular companies.
This project is to view the task perform by an auditor while conducting the
audit of bank deposit and loans & advances. It explains the role played by different types of
auditor, effect of Non-Performing Asset on the asset of a bank. The auditor needs to be
familiarizing with the direction of RBI affecting the sanctioning and disbursement of
advances.
The auditor has to ensure that documents are executed as per the terms of sanction. The
auditor examine the procedure for review of advances laid down by the authorities bas been
complied with or not. Basel II Recommendations affecting the capital adequacy norms
advocated by the year, which perhaps is the beneficial fall-out from the tightening of the
prudential norms. The auditing not only provide true and fair value but it also helps us to
financial position and internal control system of a bank.

It is well known that Banking is such a unique industry that persons from all walks of
involved with Banks in any relation whether as an operational banker, trainer, auditor or even
a support service person such as a security printer and even a hardware and software supplier
make Banking their only sphere of activity for their full life in the constant endeavor to
master in their for this Industry. In India various types of audit are normally carried out in
banking companies such audit are statutory audit, revenue/income expenditure audit,
concurrent audit, computer and system audit etc. the above audit is mainly conducted by the
banks own staff or external auditors. However, the rules and the regulation relating to the
conduct of various types of audit or inspection differ from a bank to bank except the statutory
audit for which the RBI guidelines is applicable for that. In this project I give more important
on the concurrent and computer audit and its internal controls in the banks todays scenario.
Today audit is form in the various organizations it is basically form for investor because
investor investing decision is depend on that particular concept if auditor has expressing his
view about particular organization is true and fair that investor has get idea about how much
should invest in particular securities or not. In public sector banks multiple firms including
central auditors and branch auditors generally conduct the audit. In case of private sector
banks and foreign banks, a single firm due to centralized database conducts the audit.
Consequently, the responsibilities of auditors in such banks are much wide

1.2 ORIGIN AND EVOLUATION OF AUDITING


ORIGIN OF TERM:

10

The term audit is derived from the Latin term auditor mean to hear. In early days, an
auditor used to listing to the account read out by the accountant in order to check them.

1) ORIGIN :
Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia,
Egypt, Greece, Rome, U.K., and India. The Vedas, Ramayana, Mahabharata contain
references to accounting and auditing. Arthashasastra by Kantilla gives detailed rules for
accounting and auditing of public finances. The Mauras, the Guptas and the Mughals had
developed and accounting and auditing system to control state finances. Thus, basically,
accounting and auditing had their origin in the need for the government to control the income
and expenditure of the state and the army. The original object of auditing was to detect and
prevent errors and frauds.

2) COMPULSORY AUDITS OF COMPANIES


Wit h i n c r e a s i n g n u m b e r o f c o m p a n i e s , t h e c o m p a n i e s a c t s i n different
countries began providing for compulsory audit of accounts of companies. Thus
U. K. audit of accounts of limited companies became c o m p u l s o r y i n 1 9 0 0 . I n
I n d i a , t h e c o m p a n i e s a c t , 1 9 1 3 m a d e a u d i t o f company accounts compulsory.
With increase in size of companies, the o b j e c t o f a u d i t a l s o s h i f t e d t o
a s c e r t a i n i n g w h e t h e r t h e a c c o u n t s w e r e true and fair rather than true and
correct. Thus, the emphasis was not arithmetical accuracy but on fair representation
of financial affairs.

3) DEVELOPMENT OF ACCOUNTING
STANDARD:

11

AND

AUDITING

T h e i n t e r n a t i o n a l a c c o u n t i n g s t a n d a r d s c o m m i t t e e a n d t h e acc
ounting standards board of institute of chartered accountant of India have
developed standard accounting and auditing practices to guide the accountants and
auditor in their day-to-day work.

4) COMPUTER TECHNOLOGY:
The latest development in auditing pertains to the use of computers in accounting as well
as auditing. Really, auditing has come a long way from hearing the accounts in the
ancient day to using computers to examine computerized accounts of today.

1.3 DEFINATION OF AUDIT


Various persons such as the owners, shareholders, investors, creditors, lenders, government
etc. use the final account of business concern for different purposes. All these users need to
be sure that the final accounts prepared by the management are reliable. An auditor is an
12

independent expert who examines the accounts of a business concern and reports whether the
final accounts are reliable or not.
Different authorities have defined auditing as follows.
Mautz define the auditing as auditing is concerned with the verification of accounting data,
with determining the accuracy and reliability of accounting statement and reports.
International auditing guidelines defines the auditing as auditing is an independent
examination of financial information of any entity with a view to expressing an opinion
thereon.

CHAPTER 2
2.1 TYPES OF AUDITS
13

It is well known that no any day of the year, there will be at least one auditor
working in the bank branch. The following are the popular types of audits conducted in a
bank branch. The titles may be modified in some banks especially for Internal Audit and
system Audit but the content remains the same.

I.

STATUTORY AUDIT:

This is an annual audit determined by statute and done normally at the end of the financial
year while some of the larger branches are similarly audited half yearly. A banks statutory
audit is essentially a balance sheet audit including the Long Audit Report though there is no
scope restriction of the statutory auditor to perform certain actions of other auditors as part of
his duty or if some findings lead him into the domain of the auditors such as Revenue,
inspector and even concurrent. The statutory auditor performs the following functions.
Verifies the classification of items of the Balance Sheet to assure their correct placement
Basel II accord, which has influenced the prudential norms, has included the statutory auditor
as an active member to assure the proper execution of the prevailing prudential norms. The
direct result of an accurate classification is the appropriateness of income recognition and
thus the effect on the profitability of the Bank.

II.

CONCURRENT AUDIT:

In the beginning of the 1990s, the Great Banking Scam or the Harshad Mehta Scam rocked
the nation. This brought into limelight special category of audit called concurrent audit or
continuous audit. This stemmed from the need of filling in the gap between the annual
statutory audits and the intervening period between two inspections, which is a period
14

sufficiently large to cause damage to the Bank. Now, RBI who insisted that at least 50% of
the business of the Bank should be covered under concurrent controlled the spotlight of the
concurrent audit. While some Banks covered very large branches under the umbrella of
concurrent audit. Some banks took the excurse for improvement by including weak branches
though having low volume of business. Concurrent audit in one sentence will mean checking
yesterdays transactions today. Let us see the broad areas covered by the Concurrent Auditor.

A. Revenue Aspects:
1. Interest earned and service charges earned by the Bank
2. Interest Paid
3. All charges paid like cancellation charges, compensation under Court Directive etc.

B. Expenditure:
1. Salary payments
2. Branch expenses like printing and stationary, temporary employees etc.
3. Rent of premises etc.

C. Documentation and other aspects of advances department:


1. Documentation correctness of ALL new advances granted during the period
2. Validity of all old advances to ensure that they are not time barred.
3. Currency of insurance cover of stock machinery etc.
4. Whether the inspections of units and stock have been carried out at the pre-set
intervals.

D. Administrative and other aspects:


1. Correctness of attendance and leave records
2. Cash Department working including security aspects with periodic surprise inspection
by the auditor
3. Stock check at regular intervals of all security documents like Blank chequebooks,
Demand Drafts, Pay orders, Pass Books etc.
15

III.

RBI AUDIT:

The Central Bank of the country also sends its own auditors to the Banks for their own
inspection. Their actions cannot be covered in this project because it is more of a supervisory
implementation of a Government Policy existing from time to time. The primary aim of this
audit is as follows.
Overall assessment of the assets and liabilities of the Bank, whether its financial position is
satisfactory, whether it is in position to pay its depositors in full as and when their claims
accrue, and in the event of loss, whether it has sufficient cushion of owned funds to safeguard
the interests of depositors.
Soundness of Banks policies and procedures and effectiveness of the management to
safeguard point No.1 mentioned above as also whether they are on approved lines and in
conformity with socio-economic objectives.

2.2 ADVANTAGES OF AUDITING


Assurance of true and fair accounts:
Audit provides an assurance to the various users of final accounts such as owners,
management, creditors, lenders, investors, governments etc. that the accounts are true and
fair.
1) True and Fair balance sheet:
16

The user accounts can be sure that the assets and liabilities shown in the audited balance sheet
show the concern, as it is i.e. neither more nor less.
2) True and fair profit and loss account:
The user can be confident that the audited profit and loss account shows the true amount of
profit or loss as it is i.e. neither more nor less.
3) Tally with books:
The audited final account can be taken to tally with the books of accounts. Thus, the incometax officer can start with the figure of audited books profit, make adjustments and compute
the taxable income. An outside user need not go through the entire books.
4) As per standard accounting and auditing practices:
The audited final accounts follow the standard accounting and auditing principles laid down
by professional bodies. Thus, audited accounts are based on objectives standard and not on
personal whims and fancies of a particular accountant or auditor.
5) Detection and prevention of errors and frauds:
Audited accounts can be assumed reasonably free from errors and frauds. The auditor with
his expert knowledge would take due care to see that Errors and frauds are detected so that
the accounts shoe a true and fair view.
6) Advice on system, taxation, finance:
The auditor can also advise the client about the accounting system, internal control, internal
check, internal audit, taxation, finances etc.

2.3 LIMITATIONS OF AUDITING


1. An auditor cannot check each and every transaction he has to check only the selected areas
and transaction on a sample basis.
2. Audit evidence is not conclusive in nature thus confirmation by a debtor is not conclusive
evidence that the amount will be collected. It is said evidence is rather than conclusive in
nature.
3. An auditor cannot be expected to discover deeply laid frauds usually involves acts
designed to conceal them such as forgery , celibate failure to record transactions, false
explanation and hence are difficult to detect.
17

4.

Audit cannot assure the users of account about the future profitability, prospects or the

efficiency of the management.


5. An auditor has to rely upon expert auditor may have to rely on expert in related field such
as lawyers, engineers, values etc. for estimating contingent liabilities, valuation of fixed
assets etc.

CHAPTER 3
3.1 INTERNAL CONTROL IN CERTAIN SELECTED AREAS
GENERAL

The staff and officer of a bank should lift form one position to another frequently and
without prior notice.

The work of one person should always be checked by another person in the normal
course of business.

All arithmetical accuracy of the book should be proved independently every day.

18

All bank form (e.g. books, demand draft book, traveler cheque etc.) should be kept in
the possession of an officer, and another responsible officer should occasionally verify
the stock of such stationary.

The mail should be opened by responsible officers. Signature on all the letters and
advice received from other branches of the bank or its correspondence should be
checked by an officer with signature book.

The signature book of the telegraphic codebook should be kept with responsible
officers, used, and seen by authorized officers only.

The bank should take out insurance policies against loss and employees infidelity.

The power of officers of different grade should be clearly defined.

Principal Enactments Governing Bank Audit:


Banking Regulation Act, 1949
State Bank of India Act, 1955
Companies Act, 1956
State Bank of India (Subsidiary Banks) Act, 1959

19

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970


Regional Rural Banks Act, 1976
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
Information Technology Act, 2000
Prevention of Money Laundering Act, 2002
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
Credit Information Companies Regulation Act, 2005
Payment and Settlement Systems Act, 2007

STAGES IN AUDITING
1) PRELIMINARY WORK:
The

auditor

acquire

knowledge

of

the

regulatory

environmentin which the bank operates.Thus, the auditor should familiarizehimself with the
relevant provisions of applicable laws and ascertain the scope of his duties and
responsibilities in accordance with such laws. He should be well acquainted with

20

the provisions of the Banking Regulation act, 1956 in the case of audit of a banking company
as far as they relate of preparation and presentation of financial statements and their audit.
The auditor should also acquire knowledge of the economicenvironment in which the bank
operates. Similarly, the auditor needs to acquire good working knowledge of the services
offered by the bank. In acquiring such knowledge, the auditor needs to be aware of the many
variation in the basic deposit, loan and treasury services that are offered and continue to be
developed

by

banks

in

response

to

market conditions.

To do so, the auditor

needs to understand thenature of services rendered through instruments such as letters of cred
it, acceptances, forward contracts and other similar instruments.
The auditor should also obtain and understanding of the nature of books

and

records

maintained and the terminology used by the bank to describe various types of transaction and
operations. In case of joint auditors, it would be preferable that the auditor also obtains a
general understanding of the books and records, etc, relating to the work of the other auditors,
In addition to the above, the auditor should undertake the following:

I.Obtaining internal audit reports, inspection reports, inspectionreports and concurrent


audit reports pertaining to the bank/branch.

II. Obtaining the latest report of revenue or income and expenditure audits, where
available.

In the case of branch auditors, obtaining the report given by the outgoing branch
manager to the incoming branch in the case of change in incumbent at the branch
during the year under audit, to the extent the same is relevant for the audit.

RBI has introduced and offsite surveillance system for commercial banks on various aspects
of

operations

including

solvency,

liquidity,asset quality, earnings, performance, insider trading etc., and hasindicated that such
reports shall be submitted at periodic intervals from the year commencing 1-04-1995. It will
be appropriate to be familiar with the reports submitted and to review them to the event that
they are relevant for the purpose of audit.
In a computerized environment the audit procedure may have toappropriately tuned to the
circumstances; particularly as the books are not authenticated as in manually maintained
accounts and the auditor may not have his in-house computer facility to taste the
21

software programmers. The emphasis would have to be laid on internal control procedure
related to inputs, security in the matter of access to EDP system, use of codes, passwords,
data inputs being prepared by person independent of key operators and other build-in
procedure for datavalidation and system controls as to ensure completeness andcorrectness of
the transaction keyed in. system documentation of the software may be obtained and
examined.
f) One set of tests that the auditor at both the branch level and head office level may apply
for audit of banks in analytical procedure.

A. EVALUATION OF INTERNAL CONTROL SYSTEM:

It

may

be

noted

that

transaction

in

banks

are

voluminous

and

repetitive,

andfall into limited categories/heads of account. It may, therefore, be moreappropriate that th


e evaluation of the internal control is made for each class/category of transaction. If the
exercise of internal control evaluation is properly carried out, it assist the auditor to determine
the effectiveness or otherwise of the control systems and accordingly enable him to
strengthen his audit procedures, and lay appropriate emphasis on the risk prone areas. Internal
control would include accounting control administrative controls.
22

a) ACCOUNTING CONTROLS:
No transaction can be Accounting controls cover areas directly concerned with recording
of financial transactions and maintenance of such registers/records as to ensure their
reliability.Internal accounting controls are also envisaging such procedures aswould determin
e responsibility and fix accountability with regard tosafeguarding of the assets of the bank. It
would not be out of place of mention that there is a distinction between accounting system
and internal accounting controls. Accounting system envisages the processing of the
transaction and events, their recognition, and appropriate recording. Internal controls are
techniques,

method

and

procedures

into systems, as would enable prevention as well as

so

designed

detection

of

and
errors,

usually built
omissions

or

irregularities in the process of execution and recording of transaction/events. The internal


accounting controls as would ensure prevention of errors , omissions and irregularities
would include following:
I.

Registered/recorded unless it is sanctioned/approved by the designated authority

II.

Built- in dual control/supervisory procedures ensure that there is an independent


automatic check on input/vouchers.

III.

No single person has authority to initiate transaction and record through all stages
to the general ledger. Each day transactions are accurately and promptly recorded,
and the control and subsidiary records are kept balanced through personnel
independent of each other. The auditor would be well advised to look into other
areas

may

lead

to

detection of errors, omissions and irregularities,

inter alias in the following:


a)

Missing/loss of security paper, stationery forms.

b)

Accumulation of transactions/balances in nominal heads of accounts

like

suspense, sundries, inter-branch accounts, or other nominal head of accounts


particularly if their accounts particularly if these accounts are extensively used to
balance books, despite availability of information.
Accumulation of old/large unexplained/unsubstantiated entries inaccounts with Reserve Bank
of India and other banks and institutions.
c)

Transaction represented by mere book adjustments notevidenced/substantiated or


upon non-honoring of contracts/commitments.
23

d)

Origination debits I head office accounts/inter-branch accounts.

e)

Analytical review procedure.

f)

Serious irregularities pointer out in internal audit/inspection/special audit

g)

Complaints/matters pending in the

vigilance/grievances cell, as

regards

discrepancies in accounts of constituents, etc.


h)

Results of periodic analytical review, if observed as adverse.

b) ADMINISTRATIVE CONTROL:
These are broadly concerned with the decision making process and laying down of
authority/delegation of powers by the management. It may be noted that in the normal course,
the

head

office

use

the

zonal/regional

offices

donot conduct any banking business. They are generally responsible for administrative

and

policy decisions which are executed at the branch level.

3) PREPARATION OF AUDIT PROGRAMME FOR SUBSTANTIVE


TESTING AND its EXECUTION
Having familiarized him the requirements of audit, the auditor should prepar
e an audit programme for substantive testing which should adequately cover the scope of his
work. In framing the audit programme, due weight age should be given by the auditor to
areas areas where, in his view, there areweaknesses in the internal controls. The audit
programme for the statutory auditors would be different from that of the branch auditor. At
the branch level, basic banking operations are to be covered by the audit. On the other hand,
the statutory auditors at the head office (provisions for gratuity, inter-office accounts, etc.).
The scope of the work of the statutory auditors would also involve dealing with
various accounting aspects and disclosure requirements arising out of the branch returns.

4) PREPARATION AND SUBMISSION OF AUDIT REPORT


branch auditor forwards his report to the statutory auditors who have to deal
with the same in such manner, as they considered necessary. It is desirable that the branch
auditors reports are adequately in unambiguous terms. As far as possible, the financial
impact

of

all

qualification

or

adverse

comments on the

branch accounts should

be clearly brought out in the branch audit report. It would assist the statutory auditors if
24

a standard pattern of reporting, say, head wise, commencing with assets, then liabilities and
thereafter items related to income and expenditure, is followed. In preparing the audit report,
the auditor should keep in mind the concept of materiality.
Thus, items which do not materially affect the view presented by the financial
statements may be ignored. However, in the judgment of the auditor, an item though not
material, is contrary to accounting principles or any pronouncements of the Institute of
Chartered Accountants of India or in such as would require a review of the relevant
procedure, it would be appropriate for him to draw the attention of the management to this
aspect

in

his long form audit report. In all cases, matters covering the statutory

responsibilities of the auditor should be dealt with in the main report. The LFAR should be
used to further elaborate matters contained in the main report and as substitute thereof.
Similarly while framing his main report, the auditor should consider, wherever practicable,
the significance of various comments in his LFAR, where any of the comments made by the
auditor there in is adverse, he should consider whether qualification in his main report is
necessary by using his discretion on the facts and circumstances of each case. In may
be emphasized that the main report should be self-contained document

3.2 PROVISIONS RELATING TO AUDIT


1. Appointment of the auditors;
The auditor of a banking company, a nationalized bank or a regional rural bank
haste is a person who is duly qualified under law to be an auditor of companies. Thus, the
auditor of the companies under sec 226 of the companies Act 1956, and who does not attract
any disqualification lay down therein. The auditor of a nationalized bank is appointed by the
board of directors of the bank concerned, whereas the auditor of a banking company
is appointed by the shareholder at the annual general meeting. Previous approval of
RBI for appointment of the auditor is required in the both cases. The auditors of the
state bank of India are appointed by RBI in consultation of the Central government.
The auditors of the subsidiaries of the state bank of India are
appointed by the state bank of India. It may be mentioned in the State bank of India Act 1955,
specially provides for the appointment of the two or more auditors. The auditors of the
25

regional rural banks concerned with the approval of the Central Government. The
appointment of auditor of a co-operative bank is governed by the relevant Co-operative bank
is governed by the relevant Co-operative Societies Act.
Procedure for the Appointment in the case of nationalized banks:-The
statutory central auditors are appointed by the bank concerned on the basis of the names
recommended by the RBI from out of panel of auditors. For this purpose, the RBI formulates
detailed norms on the basis of which a panel is created by the Comptroller and Auditor
General of India. Generally, each nationalized bank appoints 4-6 statutory central auditors.
As per the norms prescribed by the RBI, to be eligible for empanelment,
A firm should, as on January 1 of the relevant year, minimum eligibility norms relating to;

I. Number of fulltime partners,


II. Numbers of FCA partners,
III. Number of years the firm has been existence,
IV. Period of minimum continuous association of partners with the firm,
V. Number of fulltime charted accountants,
VI. Number of professional staff,
VII. Experience of statutory audit of public sector banks having deposits of at
least the prescribed sum,
VIII .Experience of statutory audit of public sector undertakings. At least one partner should
have qualifications in computer audit.

2. POWERS OF THE AUDITOR


The auditor of a bank has same powers as those of company auditor ,except that the power
the auditor of a co-operative are governed by the relevant Co-operative Societies Act in
26

matter of access to the books of accounts, documents, and vouchers. He is also entitle to
require from the offices of the bank such information and explanation as he may think
necessary for the performance of his duties. In case of Banking Company, he is entitled to
receive notice relating to any general meeting. He is also entitling to attend any general
meeting and to be heard there at on any part of the business, which concerns him as auditor. It
is important to note that the auditor of nationalized bank may employ accountants or other
person at the expenses of bank to assist him in audit of accounts. Thus auditor of these banks
can appoint the auditor of Branches.

3. AUDITORS REPORT
The auditor of the nationalized bank, State bank of India or its subsidiary is required to report
to the central government and has to state the full in his report:
a) Whether, in his opinion, the balance sheet is a full & fair balance sheet containing all the
affairs of the bank, and in the case he had called for any explanation or information, whether
it has been given and whether it is satisfactory.
b) Whether or not the transactions of the banks, which hav e come to notice, have
been within the powers of the banks;
c) Whether or not the returns received from the offices and branches of the bank
have been found adequate for the purpose of the audit;

27

d) Whether the profit or loss a/c shows a true balances of the profit or loss for the period
covered by such account; and
e) Any other matter which he considers should be brought to the notice of the central
government. The report of the auditor of the nationalized bank is to be verified, signed, and
transmitted to the central government. The auditor has also to forward a copy of the audit
report to the bank concerned and to the RBI.
In addition to the matters which he is required to state in his report under the companies Act,
the auditor of banking company incorporated in India has also to state the following in his
report to the shareholder:
a) Whether or not the information and explanations required by him have been
found to be satisfactory;
b) Whether or not the transactions of the company which have come to his notice have been
within the powers of the company;
c) Whether or not the returns recei ved from branch offices of the company
have been found adequate for the purposes of his audit;
d) Whether the profit and loss account shows a true balance of profit or loss for the period
covered by such account;
e) Any other matter which he considers should be brought to the notice of the shareholders
of the company.
It may be noted that in the case of a banking company the auditor has to specifically report
whether, in his opinion, the profit & loss account and balance sheet of the banking company
comply with the accounting standard referred to in sub- section (3C) of the sec 211 of the
Companies Act, 1956.
It may also be noted the Companies (Auditors Report) Order [CARO] 2003 (Revised in
2005) is not applicable to Banking Company.
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APPROACH TO BANKS AUDITS:The guidance note on the audit of banks issued by the ICAI, recognize that the general
approach to audit of banks involves essentially the same stages as in any other audits.
However at each stage, the auditor has to take into the account the following special
characteristics of banks;
Custody of large volumes of monetary items, thereby requiring formal operating procedure,
well-defined limits on the individual discretions and rigorous internal control.
Large volume and variety of the transactions and continuing development of new products
and services, many of which may involve complex accounting.

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Wide geographical dispersal of the operations with consequent difficulties in maintaining


uniform operating practices and accounting systems, particularly in the case of the overseas
operations.
Significant commitments without transfer funds not requiring formal recognitions in the
books of accounts.
Special nature of risk with operations.
A strict legal and regulatory framework that inter alia, influence the accounting and
auditing.

LIST OF DOCUMENTS OF BANK AUDIT

Bank closing set:


It contains Balance Sheet, Profit & Loss A/c and other annexure.

Audit Report
Statutory Audit Report
Compliance Certificate
Form 3CA
Form 3CD

Long Form Audit Report (LFAR)

Memorandum of Changes

Report on Ghost and Jillian committee recommendations

Other Certificates
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AUDIT PLANNING

Proper allocation of work among Audit Team should be done for smooth performance
of Audit.

A checklist of work to be done should be made with time frame, which should be
specifically adhered to.

Review latest available inspection report and concurrent audit report of branch.

Review closing circular issued by HO

Study business Mix of branch to decide the sample size and mix.

Study of significant policies of the branch and computer system.

Study the previous years Statutory Audit Report and LFAR

Ask for Stress List from Branch

Give special importance to clients whose names are in Stress List, or which are
highlighted in Concurrent Audit Report.

Keep a note of points you come across during audit, which are relevant for LFAR.

STATUTORY AUDIT REPORT

It contains the following Paragraphs:

Report on Financial Statements


Managements Responsibility for the Financial Statements
Auditors Responsibility
Opinion
Report on other Legal and Regulatory Requirements.

It is enclosed with a Certificate of Compliance of guidelines of Reserve Bank of India


on Income recognition and Asset qualification.

It is addressed to the Statutory Central Auditors

TAX AUDIT REPORT

Tax Audit Report is done under section 44AB of the IT Act

Form 3CA

Form 3CD
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Annexure Part A

All the annexure of Form 3CD are to be enclosed, even if they are NIL.

LONG FORM AUDOT REPORT

A questionnaire formulated by RBI.

To be filled by auditor after discussing the points with Branch Head.

It is advisable to cover LFAR and audit program simultaneously. This would enable
auditor to consider effect of matters on LFAR and audit report.

Format of LFAR form may be found online easily.

3.3 AUDIT ASPECT OF ITEMS OF BALANCE SHEET


ADVANCES:

Check if proper documentation is done while sanctioning of loans.

Check income recognition, Asset classification and Provisioning for the advances.

An asset is said to Non Performing if:


Interest and/or Installment remain overdue for more than 90 days.
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If the account continuously remains in excess of sanctioned limit/drawing power.


No credit in account continuously for 90 days, or credits is not enough to cover the
interest debited during the period.
The installment or interest remains overdue for 2 crop season for short duration crops.
The installment or interest remains overdue for 1 crop season for long duration crops.
If credit facility is not renewed within 180 days from the due date.
Drawings are allowed against stock/book debt statement which is older than 180 days.

INCOME RECOGNITION POLICY:


Income recognition from NPA is to be based on recovery.
If an account turns NPA, branch should reverse the interest already charged and not
Collected,
Such interest to be recorded in Dummy Ledger.

ANALYSIS OF ENTRIES OUTSTANDING IN:


Suspense Account
Sundry Debtors
Sundry Creditors
Sundry Deposits.

Check for addition/deletion of assets.

Check for balances held with other banks with certificate of


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Closing balance from respective banks.

Check provisioning of expenses as on cut-off date.

Deposits

Contingent Liabilities

Whether cash in Balance sheet tallies with physical Cash Book

AUDIT ASPECT OF ITEMS OF PROFIT & LOSS

Check whether all income is properly accounted for.

Check if income on NPAs is not recognized.

Check if Bank has charges Penal interests on default cases.

Verify receipt of Locker Rent


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Vouch for expenses.

Check if expenses are grouped in proper headings.

Check whether TDS is deducted on expenses as per applicable sections and deposited
to the credit of government.

Check items of Misc Expenses.

Whether Reverse Charge on Service Tax has been created?

MEMORANDUM OF CHANGES
FORMAT

There should be clear justification for every change suggested by auditor

Debit and Credit side of Mock must tally.

Total of reclassification of assets should be brought out in Mock

For NO CHANGE, NIL Mock should be filed.

No. Dr Cr In respect of Income & expenditure Yes/No xx In respect of Balance Sheet


Items Yes/No xx In respect of classification of advances Yes/No xx In respect of
closing return where the effect to be given is within the return itself other than Income
& Expenditure and Balance Sheet Yes/No xx

Physical verification of cash on date of Audit. Also check if cash holding of branch is
within retention limit specified by HO.

Verify KYC Compliance of Bank.

Check whether any expense exceeding Rs 20000.00 is paid in cash. Get a certificate
for 40A (3) Compliance.

Physical verification of stationery and confirmation of balance as per CBS.

Obtain Management Representation Letter from Bank

Obtain Man-Days Certificate from Bank

STATUTORY AUDIT CERTAIN ASPECTS


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Item Important Audit Checks


A. Verification of Profit & Loss Account Item

Income/ Expenditure Verify:

Short debit of interest/ commission on advances;

Excess credit of interest on deposits;

In case the discrepancies are existing in large number of cases, the auditor should
consider the impact of the same on the accounts;

Determine whether the discrepancies noticed are intentional or by error; Check


whether the recurrence of such discrepancies are general or in respect of some
specific clients;

Proper authority in sanction and disbursement of expenses as also the correctness of


the accounting treatment given as to revenue/ capital/ deferred expenses.

Check accrual of income/ expenditure especially for the last month of the financial
year.

Divergent Trends:

Divergent trends in income/ expenditure of the current year may be analyzed with the
figures of the previous year.

Wherever a divergent trend is observed, obtain an explanation along with supporting


evidences like monthly average figures, composition of the income/ expenditure, etc.

B. VERIFICATION OF BALANCE SHEET ITEM


1. Cash & Bank Balances:

Physically verify the Cash Balance as on March 31, 2014 or reconcile the cash
balance from the date of verification to March 31, 2014.
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Confirm and reconcile the Balances with banks as on March 31, 2014.

2. Investments:

Physically verify the Investments held by the branch on behalf of Head Office and
issue certificate of physical verification of investments to banks Investments
Department.

Check receipt of interest and its subsequent credit to be given to Head Office.

3. Advances Provisioning:

As per RBI norms, unrealized interest on NPA accounts should be reversed and not
charged to Advance Accounts. Reversal of unrealized interest of previous years in
case of NPA accounts is required to be checked

Partial Recovery in respect of NPA accounts should be generally appropriated against


principal amount in respect of doubtful assets.

4. Fixed Assets:

Check Inter-branch transfer memos relating to Fixed Assets and whether they have
been correctly classified in the accounts and depreciation accounting thereof.

5. Inter Branch Reconciliation (IBR):

Understand the IBR system and accordingly prepare an audit plan to review the IBR
transactions. The large volume of Inter Branch Transactions and the large number of
unreconcile entries in the Banking System makes the area fraud-prones. Check up
head office inward communication to branch to ascertain date upto which statements
relating to inter branch reconciliation have been sent

6. Deposit
I. Term
ii. Saving
iii. Current
iv. FCNR/ NRE/ NRNR

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Verify transactions during the year relating to:

New Accounts opened;

Accounts closed;

Dormant Accounts;

Interest calculations;

Test check account statements for unusual/ large/ overdraft transactions;

Overdue Term deposits & banks policy for its renewal;

Accrual of interest;

RBI Norms for Non-resident deposits & its operations - with due importance
to opening and operation of accounts like NRE, NRNR, FCNR, RFC, etc.;

Interest on various types of deposits; Tax Deducted at Source.

Large deposits placed at the end of the year (probable window dressing).

Examine unusual trend in account opening or account closing, dormant


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

Examine interest trends as compared to average annual deposits (monthly


average figures).

Review the Master Circular on Maintenance of Deposit Accounts issued by


RBI dated March 1, 2004 attached hereto.

7. Advances

Review monitoring reports (irregularity reports) sent by the branch to the controlling
authorities in respect of irregular advances.

Review appraisal system, Files of large as well as critical borrowers, sanctions,


disbursement, renewals, documentation, systems, securities, etc.

Review on test check basis operations in the Advances Accounts.

Compliance of sanction terms and conditions in the case of new advances.

Whether the borrower is regular in submission of stock statements, book debt


statements, insurance policies, balance sheets, half yearly results, etc. and whether
penal interest is charged in case of default/ delay in submission of such data.
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Charge of interest and recovery for each quarter or as applicable to be verified.

Review the monitoring system, i.e. monitoring end use of funds, analytical system
prevalent for the advances, cash flow monitoring, branch follow-up, consortium
meetings, inspection reports, stock audit reports, market intelligence (industry
analysis), securities updating, etc.

Check classification of advances, income recognition and provisioning as per RBI


Norms/ Circulars.

Examine interest trends as compared to average annual advances (monthly average


figures).

Scrutinizes the final advances statements with regard to assets classification, security
value, documentation, drawing power, out standings, provisions, etc.

Check whether Non-Fund based (Letter of Credits/ Bank Guarantees) exposure of the
borrowers is within the sanctioned limits.

Compare projected financial figures given at the time of project appraisal with actual
figures from audited financial statements for relevant period and ascertain reasons for
large variance.

Take into account the assessment of RBI if the regional office of RBI has forwarded a
list of individual advances to the bank, where the variance in the provisioning
requirements between the RBI and the bank is above certain cut off level

Necessity for Measurement of Non-Performing Assets:

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The repayment of interest/installment was either not easily forthcoming as per schedule or
recovery. Consequently, banks found it increasingly prudent not to reckon such interest/other
charges as part of their income and pay tax on unrealized income. Rather they chose to cease
charging interest in such accounts of bad/doubtful nature or where the prospectuses of
recovery were bleak

RBI Health Code System and Relation to NPA:


The Reserve Bank of India introduced the Health Code System of classification of borrower
accounts by banks in the year 1985. Based on this classification of advances, it was decided
by the Reserve Bank in the years 1989 and1990 that banks should cease charging interest
compulsorily in account under Health Code 5 to 8 i.e. Recalled, Suit-filled, Decreed and
bad/doubtful and selectivity, taking into account the availability and readability of security, in
accounts under Health Code 4 i.e. Stick: Non-viable/Sticky

Asset Classification
Performing Asset:
Performing asset is one which generates periodical income and payments, as and when due or
within the minimum lag of two quarters. This is being cut down to one quarter from April
2004.

Non-Performing Asset (NPA):


The problem of NPA arises when the dues to the bank, interest/other charges or installments
are not being received as per schedule. To justifiably set right this phenomenon, the Reserve
Bank of India has drawn upon the international standards of accounting for the purpose of
NPA treatment of credit facilities. A loan asset will become NPA if the due amount is not paid
within one quarter.

Current position of NPA triggers.

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Term Loan

Interest and/or installment remain overdue for a period of more th


90 days.

Overdraft/Cash Credit

Account remains out of order for a period of more than 90 days.

Bill purchased/Discounted

Overdue for more than 90 days from its due date.

Agriculture Loans

Interest and/or installment remain overdue for a period of more tha


harvest seasons but not more than 2 half years.

Any Amount

To be received remains overdue for a period more than 90 days.

Categories of NPA
Sub-standard Assets:
A sub-standard asset was one, which was classified as NPA for a period not exceeding two
years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA
for a period less than or equal to 18 months and from 2005 it is further reduced to 12 months.

Doubtful Assets:
A doubtful asset was one, which remained NPA for a period exceeding two years. With effect
from 31 March 2001, an asset is to be classified as doubtful, if it remained NPA for a period
exceeding 18 months. With effect from March31, 2005, an asset would be classified s
doubtful if it remained in the sub-standard category for 12 months.

Loss Assets:
Assets which are classified as bad and non-recoverable by the concerned bank or by Statutory
Auditors or by RBI Inspectors but the amount have not been written off wholly. In other
words, such an asset is considered uncollectible and of such little value that its continuance as
a bankable asset is not warranted, they will continue to appear in the Balance Sheet but under
the heading Loss Asset although there may be some salvage or recovery value.
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Provisions
The current position of providing provision on the various assets is as follows:

Standard assets
Sub-Standard

General Provision 0.40% of Balance Outstanding


General provision of 10% of Balance outstanding without considering DICGC or

assets
Doubtful Assets

ECGC Guarantees
100% of Unsecured portion after considering the realizable value of security which
should be realistic. In addition to the above provision on the secured portion should

Loss Assets

be made as under: Up to 1 year 20%, 1year to 3 years 30%, More than 3 year 50%
100% on the Balance outstanding

Checklist to verify validity of NPA classification.


An auditor should ensure that branches for treating an account as NPA do the following or
otherwise, irrespective of the cutoff point of limit outstanding balance. Obtain the balance
book for loans, cash credit and overdraft. This gives you the exhaustive list of accounts
outstanding as on the date of your inspection or the date of classification. By use of this
balance book, you can ensure that you can cover all the accounts and you do not skip
accidentally the classification of any account.
42

The totals of the report of classification should match with the totals of the concerned
departments thereby ensuring that all the accounts are considered.
Analysis of the account should be done since income recognition is the underlying criteria.
Therefore obtain the copy of the branch of the account statements to verify the classification
made by the Bank. Ensure the following points during your scrutiny of the account.
Both interest and installments, wherever applicable should be taken into account for assessing
the NPA status of an account. If a particular facility of a borrower becomes NPA. Then all the
facilities granted to the borrower should be treated as NPA.
Advances backed by Central/State Governments should not be treated as NPA. Advances
against banks fixed deposits, NSCs, IVPs, KVPs, and life Policies eligible for surrender,
should not be treated as NPAs.
In the case of agricultural advances, NPA status should be decided upon after considering the
recovery of interest dues for two harvest seasons.Net-worth of borrower/guarantor and
availability of security is no consideration for treating an account as NPA or otherwise, as the
concept is based on record of recovery of interest/installments.
Staff loans should not be treated as NPAs, except in exceptionally problematic cases.

Question: - How to Verify the Asset of Banking Company, give 2 examples


An: - Basically Banking Company had 5 main heads & one miscellaneous which as follows
1. Cash and balances with Reserve Bank of India
2. Balances with banks and money at call and short notice
3. Investments
4. Advances
43

5. Fixed assets
6. Other assets
Verification Of assets as follows
1. Cash and balances with Reserve Bank of India
A. Cash
Cash on hand
Verification
The auditor should therefore plan to count all cash balances SIMULTANEOUS to
prevent any transfers of floats to hide discrepancies.
Cash counts
The following procedures should be applied:
a) Surprise cash count: cash counts must be performed without the
custodian being informed in advance e.g. on a surprise basis.
b) Control all cash funds: until the completion of the count to prevent cash
being transferred between funds to conceal deficiencies.
c) Count in the presence of the custodian: to ensure the auditors cannot be
blamed for any shortage.
d) List each item in the fund: showing the denominations of notes and
coins.
e) The custodian should sign: the record as evidence of agreement.
f) Agree the total to the petty cash book balance: and investigate any
differences.

B. Balances with Reserve Bank of India


a. Balance confirmation: - Verify the ledger balance with bank confirmation
certificate. And reconciliation statements as at the year end.
b. Explanation: - Obtain a written explanation from the management as to the
reason for old outstanding transaction in bank reconciliation statements remaining
unexplained for one year.
2. Investments
44

a. Guidelines & Policies :- Auditor should examine that whether investments are
made with context of the Guideline of the RBI and accounting policies followed
by bank in that respect.
b. Classification: - Classification of investment into three categories like held to
maturity, held for trading or available for sale. Verify whether proper classification
of investment has been made at the time of acquisition which is evidenced by
decision of the component authority such as board of director, or investment
committee.
c. Change in method:- Change in method of valuation of investment constitute
change in accounting policy and proper S

CONCLUSION
The project the position of Indian banking system as well as the principal lay down by the
Basel Committee on banking supervision. This assessment was done in seven major areas,
which are core principals, concurrent audit, internal audit, deposit, loan accounting and
transparency deposit, and foreign exchange transaction. The project concluded that, given the
complexity and development of Indian banking sector, the overall level of compliances with
the standards and codes is of high order.
45

This project gives the correct ideas about how the major areas can be found by way of
effective auditing system i.e. errors, frauds, manipulations etc. form this auditor get the clear
idea show to recommend on the banks position. Project also contain that how to conduct of
audit of the banks, what are the various procedure through which audit of banks should be
done. Form auditing point of view, there is proper follow up of work done in
every organization

whether

it

is

banking

company

or

any

other

company or any other company there no misconduct of transactions is taken places for that
purpose the auditing is very important aspect in todays scenario form company and point of
view.

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