Index

No

Particular
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Introduction
Type of Audit
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

Pg. No

INTRODUCTON

What is an audit?
An audit is the examination of the financial report of an organisation - as
presented in the annual report - by someone independent of that
organisation. The financial report includes a balance sheet, an
income statement, a statement of changes in equity, a cash flow
statement, and notes comprising a summary of significant
accounting policies and other explanatory notes.
The purpose of an audit is to form a view on whether the
information presented in the financial report, taken as a whole,
reflects the financial position of the organisation at a given date, for
example:

Are details of what is owned and what the organisation owes

properly recorded in the balance sheet?

Are profits or losses properly assessed?

When examining the financial report, auditors must follow auditing

standards which are set by a government body. Once auditors have
completed their work, they write an audit report, explaining what
they have done and giving an opinion drawn from their work. With
some exceptions, all organisations subject to the Corporations Act
must have an audit each year. Other organisations may require or
request an audit depending on their structure and ownership or for a
special purpose.

Bank audit process

Bank audit process consists of the following steps
Bank Audit Process

Pre-commencement Work

Understanding the business of bank

branch
Overall audit plan Audit
Programme

Audit Procedures:
Substantive Testing & Analytical
Procedure

Report

1. Pre-commencement Work
The following points have to be considered before commencing the
audit

A. Receipt of appointment letter

B. Compliance u/s. 226(3) of Companies Act, 1956 with regard to
qualifications and disqualifications of auditors

None of the following persons shall be qualified for

appointment as auditor of a companya. A body corporate;
b. An officer or employee of the company;
c. A person who is a partner, or who is in the employment,
of an officer or employee of the company;
d. A person who is indebted to the company for an amount
exceeding one thousand rupees, or who has given any
guarantee or provided any security in connection with
the indebtedness of any third person to the company for
an amount exceeding one thousand rupees;
e. A person holding any security of that company after a
period of one year from the date of the companies
(Amendment) Act, 2000
C. Internal Auditor can not be statutory auditor for the same
financial year
D. The nature of audit work has to be ascertained as to whether
it is Concurrent Audit, Stock Audit, Revenue Audit, Credit Risk
Auditor or any other Assignments of any branch of that bank
E. Decision for Acceptance or Rejection of Assignment has to be
communicated to the concerned authority
F. It should be ensured that minimum fees are set as per RBI
circular
G. The Objective and Scope of Work has to be considered with
specific considerations to time available for conducting audit
AAS-2 deals with Objective and Scope of the audit of financial
statements
H. Before accepting the audit assignment, the availability
/outsourcing of staff for conducting bank audit has to be
considered. In doing so the auditor should follow the guidance
given in AAS 10 which deals with using the work of another
auditor.

I. The Previous Auditor must be communicated (Clause 8 of First

Schedule of Chartered Accountants Act, 1949)
J. Engagement Letter under AAS 26 has to be issued
K. There must be a Communication with joint auditor as per AAS
12
L. A list of accounting standard applicable to the branch must be
prepared
M. Copy of all circulars of RBI applicable to branch have to be
obtained and kept ready for reference
N. Attending branch audit seminars could enhance the auditors
knowledge on bank audits
O. Banking terminology and schemes should be well understood
P. A reading of Guidance Note on audit of banks by ICAI would
provide valuable guidance.

2. Understanding the business of bank branch

The next step is in understanding the business of the branch with specific
reference to
Type of constitution
A. Applicable Laws
2.
3.
4.
5.
6.
7.
8.

Banking Regulation Act, 1949

Reserve Bank of India, 1934
Multi State Co-operative Act, 2002
Relevant State Co-operative Act
Companies Act, 1956
Circulars/Guidelines issued by RBI
Circulars/Guidelines issued by Head Office of
bank
9. Service Tax Provisions
10. TDS Provisions under Income tax Act
11. Prevention of Money Laundering Act, 2002

12.

Banking cash transaction tax

C. Type/Nature of transactions
D. Quantum of Transactions under various heads as detailed
below:

Sr.
No.
A
A1
A2
B
B1
B2
C
C1
C2
C3
C4
C5
C6
D.
D1
D2
D3
E.
E1
E2

Particulars
P & L Income
Interest earned
Other income
P & L expenditure
Interest expended
Operating expenses
Balance Sheet & Assets
Cash and balance with RBI
Money at call and short notice
Investments
Advances
Fixed assets
Other assets
Balance sheet & liabilities
Deposits
Borrowings
Other liabilities and provisions
Other items
Contingent liabilities
Bill for collection

Nos.

Total Value

E. Computerization System & software used by the branch

F. Security aspect of software, output of software, interlinking
between various reports
G. Internal Control & Risk Assessment
H. Risk Management & Back up system

In understanding the branch, the following AAS would be relevant

AAS 6
AAS 20
AAS 21

Risk Assessments and Internal control

Knowledge of the business
Consideration of Laws and Regulations

AAS 23
AAS 24

in an audit of financial statement

Related parties
Audit considerations relating to

AAS 29

entities using service organizations

Auditing in CIS environment

3. Overall Audit Plan - Audit Programme

A. While drafting the audit programme, the type of reports to be
submitted have to be
considered. There are four types of reports.
1. Unqualified Report
2. Qualified Report
3. Disclaimer of Opinion
4. Adverse Report
B. Various types of reports include:

Jilani Committee Report

Ghosh Committee Report
Special Reports as applicable (Prime Minister Rojgar Yojana Scheme
Report etc.)
Long Form Audit Report
Tax Audit Report
Main Report (Sec. 30(3) of Banking Regulation Act, 1949)

C. Auditor should plan his work based on the clients business to

enable him to conduct an effective audit in an efficient and timely
manner as per AAS 8
Specimen Audit Plan
Name of Auditee:
Financial Year:
Type of Audit: Statutory /Current/

Person in charge

Memb. No.

Team Members
Name

Signature:

Experience

Qualifications

Experience

1.
2.
D. The auditor should design and select an audit sample, perform
audit procedures thereon, and evaluate sample results so as to
provide sufficient appropriate audit evidence as per AAS 15
Audit sampling
Sr Particulars Nos. Total Samp Criteria
.

Value

le

for

Date/ Action Person

Months/ to be

In

Size selectio Period taken charge

N

n of

o.

data in
sample

A. P& L
A

Income
Interest

1
A

earned
Other

2 income
B. P& L
Expenditur
e

TYPES OF AUDITS:
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 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.
1.
2.
3.

Expenditure:
Salary payments
Branch expenses like printing and stationary, temporary employees etc.
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.
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 accure, 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.

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

STAGES IN AUDITING
1)Preliminary work:
a) The auditor should acquire knowledge of the regulatory
environmentin which the bank operates.Thus,the auditor should familiarizehims
elf 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 hasindicat
ed 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 moreappro
priate 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 appropriate emphasis on the risk prone areas. Internal control would
include accounting control administrative controls.
a) Accounting controls:
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 aswo
uld determine 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 so designed and usually built into systems, as would
enable prevention as well as detection of errors, 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.
Notransaction can be 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.

a)
b)

c)
d)
e)
f)
g)
h)
i)

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:
Missing/loss of security paper, stationery forms.
Accumulation of transactions/balances in nominal heads of accounts
like suspense, sundries, inter-branch accounts, or other nominal head
of accounts particularly if there accounts particularly if these accounts
are extensively used to balance books, despite availability of
information.
Accumulation of old/large unexplained/unsubstantiated entries inacco
unts with Reserve Bank of India and other banks and institutions.
Transaction represented by mere book adjustments notevidenced/subst
antiated or upon non-honoring of contracts/commitments.
Origination debits I head office accounts/inter-branch accounts.
Analytical review procedure.
Serious irregularities pointer out in internal audit/inspection/special
audit
Complaints/matters pending in the vigilance/grievances cell, as
regards discrepancies in accounts of constituents, etc.
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 adminis
trative 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 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 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
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. 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 threr 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

Provisions Relating to audit

1. 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 Cooperative 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;
Numbers of FCA partners,
Number of years the firm has been existence,
Period of minimum continuous association of partners with the firm,
Number of fulltime charted accountants,
N u m b e r o f p r o f e s s i o n a l s t a ff ,
Experience of statutory audit of public sector banks having
deposits of at least the prescribed sum,
o Experience of statutory audit of public sector undertakings. Atleast one
partner should have qualifications in computer audit.
o
o
o
o
o
o

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 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.

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 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:
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 received 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 in the case of a banking company the auditor has to
specifically report whether, in his opinion, the profit & loss account and
balancesheet 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.

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.

LIST OF DOCUMENTS OF BANK AUDIT

Bank closing set:
It contains Balance Sheet, Profit & Loss A/c and other annexures.
Audit Report
Statutory Audit Report
Compliance Certificate
Form 3CA

Form 3CD
Long Form Audit Report (LFAR)
Memorandum of Changes
Report on Ghosh and Jilani committee recommendations
Other Certificates

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 Paragharhs:
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
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.

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?

MEMORANDUM OF CHANGES

 FORMAT

There should be clear justification for every change suggested by auditor

Debit and Credit side of MoC must tally.
Total of reclassification of assets should be brought out in MoC
For NO CHANGE, NIL MoC should be filed.
No. Dr Cr In respect of Income & expenditure Yes/No xx xx In respect of
Balance Sheet Items Yes/No xx xx In respect of classification of advances
Yes/No xx 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 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

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
analysed 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 Balancesheet 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.
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, unrealised interest on NPA accounts should be
reversed and not charged to Advance Accounts. Reversal of unrealised
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
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.
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 updation, 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).
Scrutinise 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 levels

Necessity for Measurement of Non-Performing

Assets:
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.
Term Loan

Interest and/or installment remain overdue for a

period of more than 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 than 2 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 substandard 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.
Provisions
The current position of providing provision on the various assets is as follows:
Standard
assets
Sub-Standard
assets
Doubtful
Assets
Loss Assets

General Provision 0.40% of Balance Outstanding

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

Ans :- 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
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

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 of
investment constitute change in accounting policy and proper
disclosure regarding the fact of the change along with its effect should
be made in balancesheet.

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.