Name- MADHAVI ASHOK PATIL

Class- M.COM PART-2

Roll- 20

Subject- ADVANCED AUDITING

Topic- AUDIT OF BANK

Semester- 3RD

Guidance- KIRAN MENGHANI

Academic YEAR:2016-2017
 DECLARATION

I, Madhavi patil the student of J.W SADUBELLA GIRLS COLLEGE

M.Com Part 2, hereby declare that I have completed this project
"AUDIT OF BANK in the academic year 2016-2017 The information
submmited is true and original to the best
of my knowledge.

-------------------------

STUDENT SIGNATURE
 CERTIFICATE

I, PROF. KIRAN MENGHANI hereby certify that 'MADHAVI PATIL' of

M.COM PART 2 Master of commerce of J.W.SADUBELLA GIRLS
COLLEGE ULHASNAGAR
421001 has comleted the project entitled," AUDIT OF BANK in the
academic year 2016-2017 under my guidance.
The information submitted is true and original to the best of my knowlegde.

PROF ANJALIKARIRA
Signature
 J.WATUMAULL, SADUBELLA GIRLS COLLEGE
UNIVERSITY OF MUMBAI
CERTIFICATE

This is to certify that MADHAVI PATIL Master of commerce (semester 3)

for the academic year 2016-2017 has completed the project onAUDIT OF
BANKunder the guidance of PROF KIRAN MENGHANI

PROF.KIRAN MENGHANI
(Project guide) PROF. DR.VASANT MALI PROF.KIRAN
MENGHANI

I/C (Principal) MCOM

CORDINATOR

EXTERNAL EXAMINER
 INTRODUCTON

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.
What is Bank Audit And its process in India

Bank Audit can be classified into 3 broad categories :-

1. Concurrent Audit
2. Internal Audit/ Information Systems Audit
3. Statutory Audit
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

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

 Types of Audit

Concurrent Audit

Concurrent Audit means the audit or examination of transactions

happening as and when a transaction actually happens.
It is a continuous audit, which goes on all the year around, usually
conducted by external auditors (Chartered Accountants) on monthly
basis.
In concurrent audits daily basis transactions are examined and checked
this ensures any irregularities are nipped at the bud.
Banks have a huge number of daily transactions they also have many
documentations and other formalities that they have to conform too
through concurrent audit any irregularities or nonconformities are
easily found out as and when it happens and rectified immediately; this
avoids piling up of irregularities which may become a huge problem for
any branch when the year end audit comes around!
Concurrent Auditors check for daily maximum cash balance adherence
compliance, KYC norm compliance, proper documentation of new loan
disbursement, checking if new loans have been made as per rules and
regulations, income leakage etc. among other things like putting any
new RBI instruction to work!; these are reported on in the concurrent
audit report.
Concurrent Audit is a measure to help a Branch to work smoothly and
rectify any mistakes to avoid cascading effect of the irregularities.
Internal Audit/ Information Systems Audit

Many banks instead of having concurrent audit or even in addition to

having concurrent audits may use internal auditing.
Internal Auditing is when any organization, including a bank,
constitutes an audit team within its own organization to cater to its
auditing requirements.
These internal auditors will visit branches one by one where and when
required and carry out auditing.
Internal Audit may focus on any specified area or cover every aspect of
the branch, depending on its audit programme and requirement; main
thing is it is conducted by the bank itself.
However one important thing in internal audit is information systems
audit; information systems audit is a new area gaining prominence in
the last few years.
With rapid computerization in banking sector core banking, ATMs,
mobile banking, internet banking, completely computerized banking
functions it becomes necessary to have a periodical review of how
these systems are working.
Internal Control audit looks are the information flow, the channels, the
security (of information) etc.
It also checks for the workability of new banking softwares and how it
rates on security and access.

Statutory Audit

Which by now, I think most of you would know and appreciate how
important it is for any bank NPA and its provisioning affect the
profits of a bank and hence the Balance Sheet and Profit and Loss
Account and finally the shareholders dividends.
Thus Statutory Audit is very important.
Statutory Auditors are appointed by RBI in association with the ICAI,
to empanel Chartered Accountants for the job.
Statutory Audit does not look at the nitty-gritties of the banking
transactions (these are looked at by concurrent and internal audits);
 instead they rely on the concurrent audit reports and test checking to
form their opinion.
Statutory Audit mainly looks at the loans and advances, compliance
with PSL requirements, CRR, SLR etc. and other statutory norms
compliance as per the latest RBI circulars.

STAGES IN AUDITING
)Preliminary work:
a) The auditor should acquire knowledge of the regulatory
environmentin which the bank operates.Thus,the auditor should familiarizehi
mself 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 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.
b) 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 credit, acceptances, forward contracts and other similar
instruments.
c) 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.
d) 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 hasindi
cated 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.
e)
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 software programmes. 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 headoffice
level may apply for audit of banks in analytical procedure.

2) 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 moreap
propriate that the 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
 3) Preparation of audit programme for substantive testing and its
execution

Having familiarized him the requirements of audit, the auditor should prepare
an audit programme for substantive testing which should adequately cover
the scope of his work. In framing the audit programme, due weightage
should be given by the auditor to areas where, in his view, there areweakness
es 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 operation 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
The 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 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 judgement 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.

ADVANTAGES OF AUDITING

1) 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.

2) True and Fair balance sheet:

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.

3) 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.

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.

4) Detection and prevention of errors and frauds:Audited accounts can be

assumed reasonably free from errors and frauds.

Provisions Relating to audit

Appointment of the auditors;

The auditor of a banking company, a nationalized bank or a

regional rural bank hasto be 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 laid 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 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 . Nu mb er of y ea rs th e fi rm has b een exist en ce ,

IV. Period of minimum continuous association of partners with the firm,
V.Number of fulltime charted accountants,
V I .Nu mb er of p rof ess i onal staff ,
VII.Experience of statutory audit of public sector banks having
deposits of at leastthe prescribed sum,
VIII .Experience of statutory audit of public sector undertakings. Atleast
one partner should have qualifications in computer audit.

1. 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 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 entitle to receive notice relating to any general meeting. He is also entitle to
attend any general meeting and to be heard there at on any part of the
business, which concern 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.

2. 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 sSheet 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 have 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;

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:

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.

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.
 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.

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.
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 are
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 Legder.

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
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 are 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
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?

VERIFICATION OF ASSETS AND LIABILITES

Capital and Liabilities:

1) Capital
The following particulars have to be given in respect of share capital in the
balance sheet

For nationalized banks

The capital owned by central government as on the date of balance sheet
including contribution from government, if any, for participation in world
bank project should be shown.

For banks incorporated outside India

Capital (the amount brought in by banks by way of start up capital as
prescribed by RBI shown under this head)

Amount of deposit kept with RBI under section 11(2) of the banking
regulation act, 1949.

For other banks

Authorized capital (shares of Rs.each)

Issued capital (-do-)

Subscribed capital (-do-)

Called-up capital (-do-)

Less: calls unpaid

Add: forfeited shares

2) Reserves and surplus:

The following are required to be disclosed in the balance sheet under the head
Reserves and Surplus.

a) Statutory reserves.
b) Capital reserves.
c) Share premium.
d) Revenue and other reserves.
e) Balance in profit and loss account.

The auditor should verify the opening balances of various reserves with
reference to the audited balance sheet of the previous year. Addition to or
deductions from reserves should also be verified in the usual manner, e.g.
with reference to board resolution. In the case of statutory reserves and share
premium, compliance with legal requirements should also be examined.
Thus, the auditor should specifically examine whether the requirements of
governing legislation regarding transfer of the prescribed percentage of
profits to reserve fund have been complied with. In case the bank has been
granted exemption form such transfer, the auditor should examine the
relevant documents granting such exemption. Similarly, it should be
examined whether the appropriations from share premium account conform
to the legal requirements.

3) Deposits:
Deposits are required to be classified in the balance sheet under the following
heads.

3.. Demand Deposits

(i) from banks
(ii) from others
II. Saving Bank Deposits

III. Term Deposits

(i) From banks.

(ii) From Others
A. I. Deposits of Branches in India.
II. Deposits of Branches outside India
The auditor may verify types of deposits in the following manner.

I. Current account:
The auditor should verify the balances in individual accounts on a sampling
basis. He should also examine whether the balances as per subsidiary ledgers
tally with the related control accounts in the general ledger.

The auditor should consider the debit balances in current account are not
netted out on the liabilities side but appropriately included under the
advances.

Inoperative accounts are a common area of frauds in banks. While examining

current account, the auditor should specifically cover in his sample some of
the inoperative account revived during the year. The auditor should ascertain
whether inoperative are revived only with proper authority. For this
purpose, the auditor should identify cases where there has been a significant
reduction in balances compared to the previous year and examine the
authorization for withdrawals.

II. Saving bank deposits:

The auditor should verify the balances is individual account on a sampling

basis. He should also examine whether the balances as per subsidiary ledgers
tally wit the related control accounts in the general ledger.

The auditor should also check the calculations of interest on a sampling basis.
It is not usual for branches to interest saving bank up to a date close to the
end of the accounting period for e.g.25th March based on the actual balances
with interest of the remaining period on an estimated basis at the head office
level

III. Term deposits:

Term deposits are deposits repayable after a specified period. They are
considered time liabilities of the bank.

The auditor should verify the deposits with reference to the relevant registers.
The auditor should also examine, on a sampling basis, the registers with the
counter-foils of the receipts issued and with the discharged receipts returned
to the bank.

IV. Deposits designated in foreign currencies:

In the case of deposits designated in a foreign currency, for e.g. foreign

currency non-resident deposits, the auditor should examine whether they
have been converted into Indian rupees at the rate notified in his behalf by the
head office.

V. Interest accrued but not due:

The auditor should examine that interest accrued but not due on deposits is
not included under the deposited but is shown under the head other liabilities
ad provision

2. Borrowing:

Borrowings of a bank are required to be shown in balance sheet as follows:

I. Borrowing in India.

a. Reserves Bank of India.

b. Other banks.
c. Other institution and agencies.
II. Borrowing from RBI, other banks/financial institution etc. should be
verified by the auditors with reference to confirmation certificated and
other supporting document such as agreements, correspondence etc.

ASSETS

A) Balanced with banks

 1. In current account
2. In other deposits account.
B) Money at call and short notice
1. With banks
2. With other institutions
1.Cash Reserved:

One of the determinants of cash balance to be maintained by banking

companies and other schedule is the requirement for maintenance of certain
minimum cash reserve. While the requirement for maintenance of cash
reserve by banking companies is contained in the banking regulation act,1949
corresponding requirements for schedule bank is contain in the Reserve Bank
of India.

2) Investment:

The auditor should verify the investment scripts physically at the close of
business on the date of balance sheet. In exceptional cases where physical
verification of investment scripts on the balance sheet date is not possible the
auditor should carry out the physical verification on a should take in to
consideration any adjustment for subsequent transaction of purchase, sale etc.
he should take particular care to see that only genuine investment are
produced before him.

3.Advances:

In carrying out of audit of advances, the auditor of advances, the auditor is

primarily concerned with obtaining evidence about following

Amount included in balance sheet in respect of advances are outstanding at

the date of balance sheet.

a) Advances represent amount due to the bank.

b) There are no unrecorded advances.

c) The stated basis of valuation of advances is appropriate and properly

applied, and that the recoverability of advances is recognized in their

valuation.

4) Fixed assets:

In carrying out an audit of fixed assets, the auditor is concerned primarily

with obtaining evidence about their existence and valuation.

The branch auditor should ascertain whether the accounts in respect of

premises and/or other fixed assets are maintained at the branch or centrally.

CONCLUSION
 The project the position of Indian banking system as well as the
principal laid 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
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. 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.