banking audit

7/31/2019 banking audit

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rel iable. An auditor is an independent expert whoexamines the accounts of a business concern andreports whether the final accounts are reliable ornot. Different authorities have defined auditingas follows.Mautz define theauditing as auditingis concerned with theverification of accounting data, with determining the accuracy andreliability of accounting statementand reports.International auditing guidelinesd e f i n e s t h e a u d i t i n g a s auditing is anindependent examin ation of financial information of anyentity with a view to expressing an opinion thereon.

AUDIT COMMITTEE:In pursuance of RBI circular September 26, 1995, a bankis required to constitute an Audit Committee of its Board.

Themembershipoftheauditcommittee is rest ricted to the Executive Director, nominees of CentralGovernment and the RBI, Chartered Accountant director andone of the non-official directors.One of the functions of this committee is to providedirectionandov er s e es t he op e ra t i on s o f t h eto t a l au d i t f u nc t i o n i n t h e ban k . T hecommittee also has to review the internal inspectionfunction in the bank, with special emphasis on thesystem, its quality and effectiveness in terms of followup. The committee has to review the system ofappointment and remuneration of concurrentauditors.

The audit committee is, therefore, connected with thefunctioning of the system of concurrent audit. Themethod of appointment of auditors, their remuneration

and the quality of their work is to be reviewed bythe Audit Committee. It is in this context that


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periodical meeting by the members of the auditcommittee with the concurrent auditors help the auditcommittee to oversee the operations of the total auditfunction in the bank.C o n s i d e r i n g t h e c o v e r a g e o f t h i s a u d i ta s s i g n m e n t a n d t h e specialized nature of workthere is also a need for training to be imported tithestaff of the auditors. This training has to be given inspecialized field such as foreign exchange,computerization, and areas of income leakage, fraudprone areas, determination of credit rating and othersimilar specialized areas. The bank can organize suchtraining programmed at various places so that it canensure the quality of audit.

ADVANTAGES OF AUDITING

1) Assurance of true and fair accounts: Auditprovides an assurance to the various users of finalaccounts such as owners, management, creditors,lenders, investors, government etc. That the accountsare true and fair.2) True and Fair balance sheet: The user accountscan be sure that the assets and liabilities shown in theaudited balance sheet show the concern, as it is i.e.

neither more nor less.3) True and fair profit and loss account: The usercan be confident that the audited profit and loss accountshows the true amount of profit or loss as it is i.e.neither more nor less.4) Tally with books : The audited final account can betaken to tally with the books of accounts. Thus, theincome-tax officer can start with the figure of audited

books profit, make adjustments and compute the


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taxable income. An outside user need not go through theentire books.5) As per standard accounting and auditingpractices: The audited final accounts follow thestandard accounting and auditing principles laid down byprofessional bodies. Thus, audited accounts are basedon objectives standard and not on personal whims andfancies of a particular accountant or auditor.6) Detection and prevention of errors and frauds:Audited accounts can be assumed reasonably free fromerrors and frauds. The auditor with his expert knowledgewould take due care to see that Errors and frauds aredetected so that the accounts shoe a true and air view.7) Advice on system, taxation, finance: The auditorcan also advise the client about the accounting system,internal control, internal check, internal audit, taxation,finances etc.

LIMITATIONS OF AUDITING

1. An auditor cannot check each and everytransaction he has to check only the selected areasand transactionona sample basis.2. Audit evidence is not conclusive in nature thus

confirmation by a debtor is not conclusive evidencethat the amount will be collected. It is said evidenceis rather than conclusive in nature.3. An auditor cannot be expected to discover deeplylaid frauds usually involves acts designed to concealthem such asforgery,celibatefailureto record transactions, falseexplanation and hence are difficult todetect.


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4. Audit cannot assure the users of account aboutthe future profitability, prospects or the efficiencyof the management.5. An auditor has to rely upon expert auditor may haveto rely onexpertinrelated field such as lawyers, engineers,values etc . for est imat ingcontingent liabilities,valuation of fixed assets etc.

INTERNAL CONTROL IN CERTAIN SELECTEDAREAS:

General:The staff and officer of a bank should lift formone position to another frequently and without priornotice.The work of one person should a lways bechecked by another person in the normal course ofbusiness.

A l l a r i t h m e t i c a l a c c u r a c y o f t h e b o o ks h o u l d b e p r o v e d independently every day.All bank form (e.g. books, demand draft book,travelerscheque,etc.) should be kept in the possessionof an o f f i cer , and another respons ib le o f f i cer should occas iona l ly ver i fy the s tock o f suchstationary.

The mail should be opened by responsible officers.Signature on all the letters and advice received fromother branches of the bank or its correspondenceshould be checked by an officer with signature book.The signature book of the telegraphiccodebook should be kept with responsible officers,used, and seen by authorized officers only.The bank shou ld take out insur ance pol ic ies

aga ins t loss and employees infidelity.


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The power of officers of different grade should beclearly defined.There should be su rpr ise ins pect ion of of f ice and branches at periodic interval by the internal audit department. The irregularities pointed out inthe inspection reports should be promptly rectified.

Cash:Cash should be kept in the joint custody of tworesponsible people.In addition to normal checking by the chiefcashier, cashshouldbetest checked daily and counted in fu ll occasionally by responsibleofficers unconnectedwith the balanced shown the balanced shown bythedaybook every day.The cashier should have no access to theledger account and the daybook. This is animportant safeguard. Bank management are oftentempted to used cashier because of theirshorter working hours as ledger clerks in theabsence of regular staff on leave, etc. This cash can be avery expensive price of economy.

Clearings:C h e q u e s r e c e i v e d b y t h e b a n k i n c l e a r i ng s h o u l d w i t h t he l i s t accompanying themindependent list should be prepared for chequesdebited to d if ferent customers account andthose return unpaid and these should be checked byofficers.The total numbered and amount of chequessent out the bank for clearing should be agreedwith the total of the clearing pay-in-slip, by anindependent person.


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The unpaid cheques received back return clearingshould be checked in the same manner as the chequesreceived.

Constituent ledger:Before making payment, cheques should properlychecked in respect of signature, date, balanced inhand etc. and should be passed by an officers andentered into constituents account. No withdrawal should normally be allowed againstcheques deposited on the same day.An officer should check all the entries made inthe ledger with the original document particularlynothing that the correct account have been debitedor credited.Ledger keeper should not have access to vouchersummary sheet after they have been checked by anofficer and to the daybook.I n t e r e s t d e b i t e d o r c r e d i t e d t o c o n s t i t u en t a c c o u n t s h o u l d b e independently checked.

Bill of collection:All documents accompanying the bill should bereceived and entered in the register by a responsibleofficer. All the time of dispatch, the officer shouldalso see that all document sent along with the bills.The account of customers or principals should becredited only after bills have been collected or anadvice to that effect received from the branch or agentto which they were sent for collection.It should be ensured that bills sent by one, branchfor collection to another branch of the bank, arenot in thecol lect iontwiceintheamalgamated balance shee t o f t he b ank . Fo r t h i s p u r po s e , t h e recei

ving branch should reverse the entries such as bills


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at the end of the receiving branch at the end of theyear fir closing purposes.

Bill purchased:At the time of purchased of bill, an officer shouldverify that all the document of titles are properlyassigned to the bank.Sufficient margin should be kept while purchased ordiscounting a bill to cover any decline in the value of thesecurity etc.If the bank is unable to collect a bill on thedue date, immediately step should be taken torecoveries the amount form the drawer against thesecurity provided.All irregular outstanding account should be reported to the head office.In the case of purchased outstanding at the closeof theyeardiscountreceived thereon should thereon should be properly apport ioned between years.

Loan and advances:The bank should make advances only aftersatisfying itself as to the creditworthiness of theborrowers and after obtaining sanction from theproper authorities of bank.The entire necessary document (e.g. agreement,demand promissory note, letter of hypothecation etc.)Sufficient margin should be kept against securitiestaken to cover any decline in the value thereof and alsoto comply withproperauthoritiesof d i rect ives . Such margin shou ld be de te rm ined by t he p ro per authorities ofthe bank as a general policy or for particular account.All the securities should be received and returned by responsibleofficer. They should be kept in the

joint custody of two such officers


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In the case of good in possession of the bank,content of the package should be test checked at thetime of receipt.Surprise check should be made in respect ofhypothecated goods noting the possession of thebank.Market value of good should be checked byofficer of the bank by personal enquiry in addition tothe invoice to the invoice value given by the borrowers.As soon as any increased or decreased takes take placein the value of securities proper entries should bemade in the drawing power book and daily balancebook. These entries should be checked by an officer.All account should be kept within both the drawingpower and the sanctioned limit at all times.At the account, which exceed the sanctioned limitor drawing power or are against unapproved securitiesor are otherwise irregular, should be brought to thenotice of the management/head office regularly.

Demand draft:The signature on demand draft should be checked byan officer with signature book.All the best demand draft sold by shouldbe immediately confirmed by the advice to the branchesconcerned.I f t h e b r a n c h e s d o n o t r e c e i v e d o e sn o t r e c e i v e d p r o p e r confirmation of antdemand draft form the issuing branch nor doesnotrec eive d cred it in i ts a ccou nt wit h tho se branches , i t shou ld takeimmediate step toascertain the reason.

Inter branch account:The account should be adjusted only on the basis

of application with reasonably good credit assessment.


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Prompt action should be taken preferably by centralauthorities, if any entries are not reasonably time.

Credit card operation:There should be effective screening of applicationwith reasonably good credit assessment.There should be strict control over storage and issuesof card.There should be at system whereby a merchantconfirmthestatueso f u t i l i z ed l i m i t o f a c r ed i t ca rdh o l d e r f o r m t h e b a n k b e f o r e accepting thesettlement in case the amount to be settled exceedspecified percentage of the total limit of the creditholder.There should be system of prompt reporting by themerchant of all settlement accepted by them throughcredit cards.Reimbursement to merchants should be made onlyafter verification of the validity of merchant acceptanceof card.All the reimbursement should be madeimmediately charged to the customers account. Thereshould be a system to ensure that statements are sentregularly and promptly to the customers.There sh ould be a sy stem to monitor a nd follow up customer payment.Items overdue beyond a reasonable period shouldidentification and attended to carefully. Creditshould be stopped by informing the merchantthrough periodic bulletin, as early as possiblyto avoid increased losses.There should be a system of periodic review ofcredit card holder acco unt. On the bas is , thelimi t of cu st ome r may be re vi se d; it necessary,

the review should also includes determination ofdoubtful amount and the provisioning in respect thereof.


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STAGES IN AUDITING

1) Preliminary work:

a) The auditor should acquire knowledge of theregulatoryenvironmentin which the bank operates. Thus, the auditor should famil iarizehimself with therelevant provisions of applicable laws andascertains the scope of his duties andresponsibilities in accordance with such laws. Heshould be well acquainted with the provisions of theBanking Regulation act, 1956 in the case of audit of abanking company as far as they relate of preparationand presentation of financial statements and theiraudit.b )T h e a u d i t o r s h o u l d a l s o a c q u i r e k n o wl e d g e o f t h e e c o n o m i c environment in whichthe bank operates. Similarly, the auditor needs toacquire good working knowledge of the servicesoffered by the bank. In acquiring such knowledge,the auditor needs to be aware of the many variationin the basic deposit, loan and treasury services that areoffered and continue to be developed by banksin responsetomarket conditions. To do so, the auditor needs to understand thenature of services renderedthrough instruments such as letters of credit,acceptances, forward contracts and other similarinstruments.c )The audi tor should a lso obta in and understanding of the nature of books and recordsmaintained and the terminology used by the bank todescribe various types of transaction and

operations. In case of joint auditors, it would bepreferable that the auditor also obtains a general


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understanding of the books and records, etc, relatingto the work of the other auditors, In addition to theabove, the auditor should undertake the following:I . O b t a i n i n g i n t e r n a l a u d i t r e p o r t s , i n s pec t i o n repo r t s , i n s pec t i o n repo r t s andconcurrent audit reports pertaining to the bank/branch.I I . O b t a i n i n g t h e l a t e s t r e p o r t o f r e v e n u eor i n co me an d ex pe nd i t u r e audits, whereavailable.I I I . I n t h e c a s e o f b r a n c ha u d i t o r s , o b t a i n i n g t h e r e p o r t g i v e nby th e outgoing branch manager to theincoming branch in the case of change inincumbent at the branch during the year underaudit, to the extent the same is relevant for the audit.d)RBI has introduced and offs ite surveil lancesys tem for commercial banks on various aspectsof operations including solvency,liquidity,asset qua lity, earnings, performance, insider trading etc., and hasindicated that suchreports shall be submitted at periodic intervalsfrom the year commencing 1-04-1995. It will beappropriate to be familiar with the reportssubmitted and to review them to the event thatthey are relevant for the purpose of audit.e) In a computer ized environment the audit procedure ma y ha ve to appropriately tuned to thecircumstances, particularly as the books arentauthenticated as in manually maintained accounts andthe auditor may not have his in-house computerfacility to taste the software programmers. Theemphasis would have to be laid on internalcontrol procedure related to inputs, security in thematter of access to EDPsystem, use of codes,passwords, data inputs being prepared by person

independent of key operators and other build-inprocedure for


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datava l i da t i o n and s y s te m co n t ro l s a s t o ens ur e co mp le te ne ss an dcorrectness of thetransaction keyed in. system documentation of thesoftware may be obtained and examined.f ) One set of tes ts that the auditor a tbot h the branch leve l an d hea d office level mayapply for audit of banks in analytical procedure.

2) Evaluation of internal control system:

It may be noted that transaction in banks arevoluminous andrepetitive,andfall into limited categories/heads ofaccount. It may, therefore, be moreappropriatethat the evaluation of theinternal control is made for each class/category oftransaction. If the exercise of internal control evaluationis properly carried out, it assist the auditor todetermine the effectiveness or otherwise of thecontrol systems and accordingly enable him tostrengthen his audit procedures, and layappropriate emphasis on the risk prone areas.Internal control would include accounting controladministrative controls.

a) Accounting controls: Accounting controlscover areas directly concerned with recordingof financial transactions and maintenance of suchregisters/records as to ensure their reliability.Internal accounting controls are also envisagingsuch procedures aswould determine responsibility and fix accountability with regard tosafeguar

ding of the assets of the bank. It would not beout of place of mention that there is a distinction


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between accounting system and internal accountingcontrols. Accounting system envisages theprocessingofthetransaction and events, their recognition, and appropr iate recording.Internalcontrols are techniques, method and procedures sodesignedandusu al ly bu i l t in to sys tems , as would e nab le prevent ion as wel l asdetection of errors,omissions or irregularities in the process of executionand recording of transaction/events.

The internal accounting controls as would ensureprevention of errors, omissions and irregularitieswould include following:I . N o t r a n s a c t i o n c a n b e r e g i s te r e d / r e c o r d e d u n l e s s i t i s sanctioned/approved by the designated authority.I I .Bu i l t - in dua l contro l /superv isoryprocedures ensures that there is anindependent automatic check on input/vouchers.I I I . N o s i n g l e p e r s o n h a s a u t h o r i t yt o i n i t i a t e t r a n s a c t i o n a n d r e c o r d throughall stages to the general ledger. Each daytransactions are accurately and promptly recorded,and the control and subsidiary records are keptbalanced through personnel independent of eachother.

The auditor would be well advised to look into otherareasmayleadtode tec tio n o f e rrors , om iss ion s and irr egul ar it ie s, in te r al ia s in th e following:

I . M i s s i n g / l o s s o f s e c u r i t y p a p e r , s t a t i o n e ry f o r m s .I I . A c c u m u l a t i o n o f t r a n s a c t i o n s / b a l an c e s i n n o m i n a l h e a d s o f accounts like

suspense, sundries, inter-branch accounts, orother nominal head of accounts particularly if their


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accounts particularly if these accounts areextensively used to balance books, despiteavailability of information.I I I .Accumulat ion o f o ld / la rge unexpla ined/unsubstant i ated entr i es inacc ou nt s w i th Re serv e B an k o f I n d i a an d o t he r b an ks a nd institutions.

I V . T r a n s a c t i o n r e p r e s e n t e d b y me r e b o o k a d j u s t m e n t s n o t e v i d e n ce d / s u b s t a n t i a t e d o r u p o n n o n -h o n o r i n g o f contracts/commitments.V.Or ig inat ion deb i ts I head o f f i ceaccounts / inter -branch accounts .V I . A n a l y t i c a l r e v i e w p r o c e d u r e .VII.Serious irregularities pointer out ininternal audit/inspection/special auditVIII.Complaints/matters pending in thevigi lance/gr ievances cel l, as regards discrepanciesin accounts of constituents, etc.IX.Results of periodic analytical review, if observed as adverse.

a) Administrative control: These are broadlyconcerned with the decision making process andlaying down of authority/delegation of powers by themanagement. It may be noted that in the normalcourse, the head office usethezonal/regionalofficesdonot conduct any bank ing bus iness . They are genera l ly respons ib lefor administrative and policy decisions which areexecuted at the branch level.

3) Preparation of audit programme forsubstantive testing and its execution:


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pronouncements of the Institute of CharteredAccountants of India or in s uch as would requ ire arev i ew o f t he re l evan t p ro cedure , i t wo u ldbe appropriate for him to draw the attention of themanagement to this aspectinhis lo ng form a udit re port . In a l l ca ses, matter s cov er ing th e st atuto ryresponsibilities ofthe auditor should be dealt with in the main report.

The LFAR should be used to further elaboratematters contained in the main report and assubstitute thereof.Similarly while framing his main report, the auditorshould consider, wherever practicable, thesignificance of various comments in his LFAR, whereany of the comments made by the auditor thereinis adverse, he should consider whetherquali ficat ion in his main report is necessary byusing his discretion on the facts and circumstancesof eac h cas e. In may be emph asiz ed th at th emain report should be self-contained document.

BOOKS OF ACCOUNTS OF BANKS:

A banking company is required to mainta in the book s of acco unts inaccordance with sec.209of the companies act. There are, however,certainimperat ives in banking business they arethe requirements to maintainaccurate and always up to date account. Banks, therefore, devicetheir accounting system to suit these requirements.

The main characteristics of a banks system of bookkeeping are as follows:Entries in the personal ledgers are made directlyfrom vouchers instead of being posted from the booksof prime entry.

A. The vouchers entered into different personalledgers each day are summarized on summery sheet;


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the totals of each are posted to the control accounts inthe general ledger.B.The general ledger trail balance is extractedand agreed every day.C.All entries in the detail personal ledgers and thesummarysheeta re che ck b y p e r s o n o th e r t ha n th o s ew h o h a v e m a d e t h e entries, with the generalresults that most clerical mistake are detectedbefore another day begins.D.A t r ia l ba lance of the deta i led person al ledg er s is pr ep ared periodically, usually every two weeks, and agreed with the general ledgercontrol accounts.E . E x p e c t i n g f o r c a s h t r a n s a c t i o n s , a l w a y st w o v o u c h e r s a r e prepared for each transaction,one for debit and the other for credit. This systemensures double entry at the basic level and obviatesthe possibility of errors in posting.PRINCIPAL BOOKS OF ACCOUNT

General ledger: It contains control accounts of allpersonal ledgers, the profit and loss account anddifferent assets and liabilities accounts. There arecertain additional accounts known as contra accounts,which is unique feature of bank accounting. Thesecontra accounts are maintained with a view tokeeping control over transactions, which haveno direct effect on the banks positions. For e.g.letter of credit opened, bills received for collection,guarantee is given etc.Profit and Loss ledgers: some banks keep oneaccount for profit and loss in this general ledgerand maintained separate books for the detailed

accounts. These arecolumnar books having separate columns for


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each revenue receipt and expense head. Otherbanks keep separate books for debits and credits postedare entered into the profit and loss account in thegeneral ledger.

SUBSIDIARY BOOKS OF ACCOUNTS

Personal ledgers: Separate ledgers are maintained bybanks for different types of accounts, i.e. currentaccount, saving account, etc. As has beenmaintained earlier, these ledgers are posted

directly from vouchers and the entire voucherentered in each ledger in a day is summarized in toVoucher Summary Sheets.Bill Registers: Details of different types of bil lsare kept in separate registers , which havesuitable columns. For e.g. bill purchased, inward bill forcollection, outward bills for collection etc are enteredserially day to day in separate registers. Entries in

these registers are made by reference to theoriginal documents.Other subsidiary registers: There are differentregisters for various types of transaction. Theirnumber, volume and details, which differ accordingto the individual needs of each bank. For example,there will be registers for:A. Demand drafts, telegraphic and mail transfers

issued on branches or agencies.B.Demand drafts, telegraphic and mail transfersreceived from branches and agencies.C.Letters of credit.D.Letter of guarantee.

Departmental journals: Each department of bankmaintains a journal to note the transfer entries

passed by it. These journals are memoranda bookonly, asall the entries made there are also made in


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the daybook, through voucher summary sheets. Thepurpose is to maintain a record of all transfer entriesoriginated by each department.Other memoranda books:Besides the book mentioned above, variousdepartments of a bank have to mention a numberof memorandabookstofaci l i tate their work. Some of the important books aredescribed below:

Receiving cashiers cash book

Paying cashiers cash book

Main cash book Cash balance book

The main cashbook is maintained by a personother than cashier. Each cashier keeps a separatecashbook. When cash is received, it is accompanied bypay-in-slips or other similar documents. The cashiermakes entry in his book, which is check by the chiefcashier.

Outward clearings:A person checks the vouchers and list with theclearingchequesreceived books. The voucher is then sent t o app ropr iate departments , wherecustomers account is immediately credited. Normally no drawings areallowed against clearing cheques

deposited the same day but exceptions are often madeby the manager in the case of established customer.Inward clearing:Cheques received are check with theaccompanying l ist. These are then distributedto differed department and number of chequesgiven to each department is noted in a memobook. When the cheques are passed and posted

in to ledger, there number is independently agreed


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with the memo book. If the cheques arefound unpayable, they are return to clearing house.

Loans and overdrafts departments:a) Registers for shares and other securities heldon behalf of its customerb) Summary books of securities give in detailsof government securities.c)Godown registers maintained by the Godownkeepers of bank.d) Overdraft sanction registere) Drawing power book.f ) De l ivery order books .g) Storage books .

Deposit department:a) Account opening and closing registers.b) Fixed deposits rate register.c ) D u e d a t e d a i r y .d)Specimen signature book.

Establishment department:a)Salary and allied registers.b) Register of fixed assets.c ) Stat ionary reg is tersd) Old record registers

General:

a) Signature books of bank officersb) Private telegraphic code and ciphers

Staticallybooks:Statically records kept by different books are in accordance with their individualneeds. For example, there may be books forrecording:

a) Average balances in loans etc


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b) Deposits received and amounts paid outeach month in the various departments.c) Number of cheques paid.d) Number of cheques, bills and other itemscollected.

Incomplete records:In some situations, the auditor may find that certainaccounting and other records are not up to date.In such a situations, the auditor shouldf irstascerta in t he extent of arrears i n house keepin g and the areas in whi chaccounting andother records are not up to date. It may also be notedthatinLong F orm Audi t Repor t (LFAR0 ), the auditor has to make deta i ledobservation on sucharrears.

VERIFICATION OF ASSETS AND LIABILITES

Capital and Liabilities:1 ) C a p i t a l : The following particulars have to begiven in respect of share capital in the balance sheet

For nationalized banks The capital owned bycentral government as on the date of balancesheet including contribution from government,if any, for participation in world bank projectshould be shown.

For banks incorporated outside India Capi ta l ( thea m o u n t b r o u g h t i n b y b a n k s b y w a y o f s tar tu p capit a l as prescribed by RBI shownunder this head)Amount of depos i t kept with RBI und er sec ti on 11 (2 ) of th e bank ingregulation act,1949.

For other banksAuthorized capital (shares of Rs.each)Issued cap


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ital (-do-)Subscribed capital (-do-)Called-up capital (-do-)Less: calls unpaid Add: forfeited shares Theauditor should verify the opening balance ofcapital with reference tothe audited balance sheet of the previous yea r. In case the re has beenincrease incapital during the year, the auditor shouldexamine the relevant documents supporting theincrease. For example, in case of an increaseunauthorized capital of a banking company, theauditor should examine the special resolution ofshareholders and the memorandum of association. An increase in subscribed and paid-up capital of a banking company, ontheother hand, should be verified with reference to prospectus/ other offer document,reports received from registers to the issue, bankstatement, etc.

2) Reserves and surplus : The following are requiredto be disclosed in the balance sheet under the headReserves and Surplus.a )Statutory reserves .b)Capi ta l reserves .c ) S h a r e p r e m i u m .d) Revenue and other reserves.e) Balance in profit and loss account.

The auditor should verify the opening balancesof various reserves with reference to the auditedbalance sheet of the previous year. Addition toor deductions from reserves should also be verifiedin the usual manner, e.g. with reference to boardresolution.In the case of statutory reserves andshare premium, compliance with legal requireme

nts should also be examined.Thus, the auditorshould specifically examine whether the


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requirementsof governing legislation regarding transfer of the prescribed percentage of profits to reserve fundhave been complied with. In case the bank hasbeengra nted ex empt ion for m such tr ans fer, the auditor should examine therelevant documents grant ing such exempt ion. S imi lar ly , i tshould beexamined whether the appropriations fromshare premium account conform to the legalrequirements.

3)Deposits :Depos i ts are requi red to be c lass i f ied in the balance sheet under thefollowingheads.A.I.DemandDeposits( i ) f r o m b a n k s( i i ) f r o m o t h e r sII.SavingBankDepositsIV . T e r m D e p o s i t s( i ) F r o m b a n k s .( i i ) F r o m O t h e r s .B.I. Deposits of Branches in India.I I . D e p o s i t s o f B r a n c h e s o ut s i d e I n d i a .

The auditor may verify types of deposits in the followingmanner.C u r r e n t a c c o u n t:

The auditor should verify the balances in individualaccounts on a sampling basis. He should also examinewhether the balances as per subsidiary ledgers tally withthe related control accounts in the general ledger. Theauditor should consider the debitbalancesincurrentaccountarenotnetted out on the

l iab i l i t ies s ide but appropr ia te ly inc luded under theadvances.


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I n o p e r a t i v e a c c o u n t s a r e a c o m m o n a r e aof f r au ds i n b a nk s . W hi le examining currentaccount, the auditor should specifically cover inhissample some of the inoperative account revivedduring the year. Theauditor sh ou ld a sc er ta in whe ther i no pe ra ti veare revived only with proper authority. For thispurpose, the auditor should identify cases where therehas been a significant reduction in balancescompared to the previous year and examine theauthorization for withdrawals.

II. Saving bank deposits: The auditor should verifythe balances are individual account on asampling basis. He should also examine whether thebalances as per subsidiary ledgers tally with the relatedcontrol accounts in the general ledger.

The auditor should also check the calculationsof interest on a sampl ing basis. It is not usual forbranches to interest saving bank up to a date close tothe end of the accounting period fore.g.25thMarch based on the actual balances withinterest of the remaining period on an estimatedbasis at the head office level.III.Term deposits: Term deposits are depositsrepayable after a speci fied period. They areconsidered time liabilities of the bank.

The auditor shou ld ver i fy the depos i ts wi th ref er en ce to th e re le va nt registers. The auditorshould also examine, on a sampling basis, the registerswith the counter-foils of the receipts issued and with thedischarged receipts returned to the bank.

IV. Deposits designated in foreign currencies : Inthe case of deposits designated in a foreign

currency, for e.g. foreign currency non-residentdeposits, the auditor should examine whether they


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have been converted into Indian rupees at the ratenotified in his behalf by the head office.

V.Interest accrued but not due : The auditor shouldexamine that interest accrued but not due on depositsisnot inc lu ded und er the de pos i ted b ut is shown under the head o ther liabilities ad provision

2)B orr owin g : Borrowings of a bank are required tobe shown in balance sheet as follows:I. Borrowing in Ind ia .A.Reserves Bank o f Ind ia .b . O t h e r b a n k s .c.Other institution and agencies.I I.Borrowing from RBI, other banks/f inancialinstitution etc . should beverified by the auditorswith reference to confirmation certificated andothersupporting document such as agreements,correspondence etc.

The auditor should also examine whether a cleardistinction hasbeenmad e bet ween red isc ount an d r ef i nance for disclosure of theamount under the abovehead since rediscount does not figure under thishead. The auditor should examine whetherborrowing of money at call and short notice isproperly authorized. The rate of interestpaid/payable on as well as duration of, such borrowingshould also be examined by the auditor.

Other current liabilities: The third schedule to thebanking Regulation act, 1949, requires disclosure of thefollowing items under the head other liabilities andprovisionBills payable

Inter office adjustments.Interest accrued


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Other (including provisions)

The auditor may verify the various items under the headother liabilities and provision in the following manner.

Bills payableBi l l s payable represent ins t rument i ssued byt he br an ch a ga in st m on eyreceived fromcustomers, which are to be paid to the customers or asper his order. These include Demand Draft, Telegraphic

Transfer, and Mailtransfer and Mai l Transfer, Travel ler cheques, Pay order, Banker cheques, and andsimilarinstrument issued by the bank but not presented forpayment until the balance sheet date.

Inter office adjustment:The balanced in inter office adjustment account, ifin credit, is to be shown under this head.

Interest accrued:Interest accrued but not due on deposit is to beshown and borrowing is to shown under this head.

The auditor should examine this with reference toterms of various type of deposits andborrowings. I t should be special ly examinedthat such interest has not been clubbed withthe deposits and borrowing shown under the depositsand borrowing.

OtherAccording to the notes and instructions for compilationof balance sheet and profit and loss account, issuedby the Reserve Bank of India, the following items areto be included under this head.


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Net provision for income tax and other taxeslike interest tax, less advances payment and taxdeducted at source.Surplus in aggregate in provision for bad and doubtfuldebts provision account.Contingency funds, which are actually in thenature of reserved but are not disclosed as such.Provision towards standard assets. These are tooshown separately as contingent standard assets.Proposed dividend/transfer to government.

ASSETS:

Cash, bank balanced and money at call and shortnotice: The third schedule to the Banking Regulationact, 1949, requires following disclosure to the bemade in the made in the balance sheet regardingcash, balances with Reserve Bank of India., balance withother bank, and money at call and short notice.

Cash and balance with Reserve Bank of India.I. Cash in hand (including foreign currency notes)II.Balance with Reserve Bank of Indiaa) In current accountb) In other account Balanced with banks money atcall and short noticeI . I n I n d i aA) Balanced with banks1. in current account2. in other deposits account.B) Money at call and short notice1 . w i t h b a n k s2. with other institutionsII Outside in India1. in current accounts .

2. in other deposits account.3. Money at call and short notice.


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Cash Reserved:One of the determinan ts of cash balance tobe main ta in ed by ban ki ng companies and otherschedule is the requirement for maintenance of certainminimum cash reserve.While the requirement formaintenance of cashrese rve by ba nki ng companies i s conta ined in the bank ing regulat ionact, 1949 corresponding requirements for schedulebank is contain in the Reserve Bank of India.

Statutory liquidity ratio:Section of 24 the act requires that every bankingcompany shall maintain in India in cash, gold orunencumbered approved securities an amountwhich shall not, at the close of business on anyday, be less than twenty five percent, or such otherpercentage not exceeding forty, as the RBI bank fromtime to time, of total demand and time liabilities in Indiaas on last Friday of the second preceding fortnight.Deposits by foreign banking company:Section 11(2) of the act requires the banking companiesincorporated outside India to deposit with RBI certainamount either in cash or in unencumbered securities orpartly in cash and partly in such securities.

2) Investment:The auditor should verify the investment scriptsphysically at the close of business on the date ofbalance sheet. In exceptional cases where physicalverification of investment scripts on the balance sheetdate is not possible the auditor should carry out thephys ica l verif ication on a should take in toconsideration any adjustment for subsequent

transaction of purchase, saleetc. He should take


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particular care to see that only genuine investmentis produced before him.

3 ) Advance s :In carrying out of audit of advances, the auditor ofadvances, the auditor is primarily concerned withobtaining evidence about followinga) Amount included in balance sheet in respect ofadvances are outstanding at the date of balance sheet.b) Advances represent amount due to the bank.c) There are no unrecorded advances.d)The stated basis of valuation of advances isappropriateand properly applied, and that the recoverability of advances isrecognized in theirvaluation.e) The advances are disclosed, classified and describeaccordance with recognized accounting policiesand relevant statutory and regulatory requirements.f)T h e a u d i t o r s h o u l d a s c e r t a i n t h e s t a t u e so f b a l a n c i n g o f subsidiary ledger relating toadvances.g)T h e a u d i t o r s h o u l d r e v i e w t h e o p e r a t i o no t h e r a d v a n c e s accounts.

4) Fixed assets:In carrying out an audit of fixed assets, the auditoris concerned primarily with obtaining evidence abouttheirexistenceand valuation.The branch auditor should ascertain whether the accounts in respect of premises and/or other fixed assets are maintained at thebranch or centrally. Similarly, he should ascertainthe location of documents of title

orother documents evidencing ownership of various i tems of f ixed assets. Theauditor should


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2. Sub-standard asset : It is one, which hasbeen classified as N.P.A. for period not exceedingnot more than 18 months.

3. Doubt fu l asset : It is one, which remainedhas N.P.A for period exceeding 18 months.

4 . L o s s as s e t : I t i s one where the loss hasbeen identif ied by the bank or the internalor external auditors or the RBI inspection, but theamount has not been written off wholly or partly inother words such asset is considered uncollectible andof such little value that its continuous as bankableasset is not warranted through although there may besome salvage or recovery value. With the view tomoving towards international based practices and toensure greater transference it has been decided toadopt the 90daysoverduenormsfor identif ication. Of N.P.A.f r o m t h e y e a r e n d i n g 3 1 st March 2004,according with effect from 31st march 2004, a non-performing asset shall bea loan or advances where,i . I n t e re s t a n d i ns ta l l m e n t o f p r i n c i p l er em ai n s ov e rd ue f or t h e p e r io d of more than90 days in respect of term loan.ii.The account remains out of order for period of morethan 90 days. In respect of overdraft or cash credit limit.i i i . Th e b i l l r e m a i n s o v e r du e f o r p e r i od o f m o r e t h a n 9 0 d a y s i n t h e case of billspurchased and discounted.I v . I n t e r e s t a n d i n s t a l l m e n t o f p r i n c i p l er e m a i n s o v e r d u e f o r t w o harvest season butnot exceeding 2.5 years in the case of advanced grantedfor agriculture purpose.v . A n y a m o u n t t o b e r e c e i v e d r e m a i n s

o v e r d u e f o r a p e r i o d o f m o r e than 90 daysin of other account.


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The ident i f i ca t i on o f N .P .A . i s t o be on thebas is o f the pos it ion as on balance sheet day ifan account has been regularized before the balancesheet day by payment of overdue amountthrough genuine sources and not by sanction ofadditional facilities or transfer of funds betweenaccounts, the accounts need not be treated as N.P.A.the bank should however ensured that the accountsremains in order subsequently. If the account is out oforder or deficient for a temporary period due to non-availability of adequate drawing power. Non-submissionof stock statement, non-renewal of due date, will notclassify as N.P.A.

N.P.A. classification will be as per borrower wiseand not facility wise. It means that if any of the creditfacilities granted to a borrower becomes non- performingall the facilities granted to a borrower will have to betreated as N.P.A. without having any regard toperforming status of other facilities.

Some of the Exemptions are there as follows,i . P r o j e c t f i n a n c e :In the case of bank, finance given for industrialproject or for agricultural status where moratoriumperiod is available for payment of interest, payment ofinterest becomes due after the moratorium periodis over and not on the date of debit of interest.i i . A d v a n c e t o S t a f f :

As in the case o f p roject f i nance in respectof housing loan all similar advances granted tostaff members where interest is payable afterrecovery of principle. The overdue status should berecognized from the date when there is default inpayment of interest on due date of payment.

i ii .Agr icul tura l Advances Af fec ted by

Natural Calamities :


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In terms of RBI instruction where Natural calamities infairs the repayment capacity of agricultural borrower thebank can convert short term production loan, in toterm loan or reschedule the repayment andsanction them short-term loan loans in such casesthe term loan as well as fresh short term may betreated as current dues and need not be classified asN.P.A.

iv.Loans and Advances backedor supported by government :Any loans and advances provided by the bank under anyscheme introduced by GOVT. like PMRY. Schemewill not be treated as N.P.A. though the accountin overdue or outstanding for more than 90 days.

v .A dv ance s s ec ure d a ga i ns tc e r ta in i ns t r um ent s :Advances secured against Term Deposits, National Saving Cert if icate eligible for surrender, IndiraVikas Pattra and Life Insurance Policies have beenexempted from the above guidelines thus intereston such advances may be taken to income accounton due provided adequate margins available in respectof such accounts. In respect of consortiumadvances each bank may classify theborrower accounts according to the own record ofrecovery and other aspect. Having a bearing on therecoverability of the advances.

Provisioning for Loans and Advances:The guidelines require provisions for differentclasses of advances to be made as follows:-

Standard Asset : A general provision of minimum of

0.25% on total standard asset should be made.


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Sub-standard Asset : A general provision ofminimum of 10% on total Standard Asset should bemade.

Doubtful Asset: Full provision to the extent ofunsecured portion should be made in doing soth e r e a l i z a b l e v a l u e o f t h e s e c u r i t y a v a i l ab l e t o t h e b a n k s h o u l d b e determined on areal ist ic basis addit ional ly 20% to 50% of thesecured portion should also be provided for dependingupon the period for which the advances has beenconsidered as a doubtful are as followsLoss Asset : The entire amount should be written off orfull provision should be made for the mount outstanding

Treatment of Restructured Sub-Standard Accounts:A rescheduling of installment of principle amount wouldrender sub-standard asset eligible to be continuing insub-standard category for specified period providedloan or credit facility is fully secured. Arescheduling of interestelements would rendered a substandard asset e l ig ib le to cont inue toclassified insub-standard category for the specified periodsubject to the condition that amount of sacrificeif any in present value terms is either written offor provision is made to the extent of sacrificeinvolved in the amount of interest should eitherbe written off or provision made to the extent ofsacrifice involves.

Reversal of Interest or Income Recognition:In respect of account classified as N.P.A. for the1sttimetheunrealized portion of interest debited to the borrower account and credited to theincome account in the previous year as well as interest

debited during the current year has to be reversed, inrespect of accounts that were classified as N.P.A. in the


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previous year banks generally do not debit anyinterest to the account there is therefore no question ofreversal of interest. However in the case of operativecash credit or overdraft account some bankfollows a practice where by unrealized interestis reversed in the year in which the account isclassified is N.P.A. for the 1st time but redebited at thebeginning of the next financial year during next financialyear interest is debited to theaccount in the us ua l manner unrea l i zed interes t i s reversed and aga inredebited at thesubsequent financial year.

TYPE OF AUDIT IN BANKStatutory audit :

The statutory audit, which is compulsory as per the law.The statutory audit of banks includes examinationand inspection of internal audit, concurrent audit,etc. The statutory audit of banks is like a postmortem activity. The suggest ions of the statutory

auditors can assist the bank managementinimproving the effectiveness of internal audit/concurrent audit/inspectionfunctions, etc. In this waystatutory plays a very important role in regulating thebanking companies.

Internal audit :Banks generally have a wellorganized system of

internal audit. Thereinternal auditors pay frequent


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visit to the branches. They are an important link ininternal control of the bank. The systems of internalaudit in different banks also have a system of regularinspection of branches and head office. A separatedepartment within the banks by firms of charteredaccountants carries out the internal audit andinspection function.

Concurrent audit :Concurrent audit is the system which introduced bythe RBI with the view that interval between theoccurrence of transaction and its over view kept to theminimum extent and examination of transactions bythe auditors take place as soon as thetransaction takes place. It has perceived theeffective means of control. The main view ofconcurrent auditors is to see that the transactionsare properly recorded, documented and vouched.

System audit:In todays technological advancements, bankingcompanies areusingawellorganized computer system to performtheir transactions. So, it is verynecessary toconduct system audit in order to evaluate thecomputer system foreffectiveness.System aud i t is the aud it of suchcomputer environment/system andcomprisesthe following internal controls over EDP activities and witha p p l i c a t i o n c o n t r o l s s p e c i f i cc o n t r o l p r o c e d u r e s o v e r a c c o u n t i n g applications/assuring that all transaction are recordedand authorized and completely, accurately, timelyprocessed manner which in turn are verified bycomputer.

Revenue audit:


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Revenue audit refers to the audit of revenues/incomes. In revenue audit of banking companies,auditors go through the various sources of revenuesfrom wh ich ba nk ear n inc ome. In reven ue aud it of ban ks , th e au di to r inspects thatall the records are showing true and fair picture ofrevenues or not.

CONCLUSION

The project the position of Indian banking system as

well as the principal laid down by the Basel Committeeon banking supervision. This assessment was done inseven major areas, which are core principals,concurrent audit,interna l audi t , depos i t , loan account ing andtranspare ncy and fore ig nexchange transaction.

The project concluded that, given the complexity anddevelopment of Indian banking sector, the overall level

of compliances with the standards and codes is of highorder. This project gives the correct ideas about how themajor areas can be found by way of effective auditingsystem i.e. errors, frauds, manipulations etc. formthis auditor get the clear idea show to recommendon the banks position. Project also contains thathow to conduct of audit of the banks, what are thevarious procedure through whichaudit of banks should

be done. Form auditing point of view, there isproper follow up of work done in every organizationwhether it is bankingcompanyor any other company or any other company the re no mis con duct of transactions istaken places for that purpose the auditing is veryimportant aspect in todays scenario form companyand point of view.


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Documents

banking audit