Documente Academic
Documente Profesional
Documente Cultură
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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
Conclusion
Pg. No
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. Expenditure:
1. Salary payments
2. Branch expenses like printing and stationary, temporary employees etc.
3. Rent of premises etc.
C. Documentation and other aspects of advances department:
1. Documentation correctness of ALL new advances granted during the period
2. Validity of all old advances to ensure that they are not time barred.
3. Currency of insurance cover of stock machinery etc.
4. Whether the inspections of units and stock have been carried out at the pre-set
intervals.
D. Administrative and other aspects:
1. Correctness of attendance and leave records
2. Cash Department working including security aspects with periodic surprise inspection
by the auditor
3. Stock check at regular intervals of all security documents like Blank chequebooks,
Demand Drafts, Pay orders, Pass Books etc.
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.
STAGES IN AUDITING
1) Preliminary work:
a)
The
auditor
should
acquire
knowledge
of
the
regulatory
environment
in which the bank operates. Thus, the auditor should familiarize himself 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.
needs to understand thenature of services rendered through instruments such as letters of cred
it, 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:
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 off site surveillance system for commercial banks on various
aspects
of
operations
including
solvency,
liquidity,asset quality, earnings, performance, insider trading etc., and hasindicated that such
reports shall be submitted at periodic intervals from the year commencing 1-04-1995. It will
be appropriate to be familiar with the reports submitted and to review them to the event that
they are relevant for the purpose of audit.
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,
maintenance
of
such
registers/records
as
to
ensure
their
reliability.Internal accounting controls are also envisaging such procedures aswould determin
e responsibility and fix accountability with regard tosafeguarding of the assets of the bank. It
would not be out of place of mention that there is a distinction between accounting system
and internal accounting controls. Accounting system envisages the processing of the
transaction and events, their recognition, and appropriate recording. Internal controls are
techniques, method and procedures so designed and usually built into systems, as would
enable prevention as well as detection of errors, omissions or irregularities in the process of
II.
III.
No single person has authority to initiate transaction and record through all stages
to the general ledger. Each day transactions are accurately and promptly recorded,
and the control and subsidiary records are kept balanced through personnel
independent of each other. The auditor would be well advised to look into other
areas
may
lead
to
b)
like
d)
e)
f)
g)
h)
vigilance/grievances cell, as
regards
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
donot conduct any banking business. They are generally responsible for administrative
policy decisions which are executed at the branch level.
offices
and
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, interoffice 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.
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
II.
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 informatio n and explanations required by him have been
found to be satisfactory;
b) Whether or not the transactions of the company which have come to his notice have been
within the powers of the company;
c) Whether or not the returns recei ved from branch offices of the company
have been found adequate for the purposes of his audit;
d) Whether the profit and loss account shows a true balance of profit or loss for the period
covered by such account;
e) Any other matter which he considers should be brought to the notice of the shareholders
of the company.
It may be noted that in 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.
Audit Report
Statutory Audit Report
Compliance Certificate
Form 3CA
Form 3CD
Memorandum of Changes
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.
Study business Mix of branch to decide the sample size and mix.
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.
Form 3CA
Form 3CD
Annexure Part A
All the annexure of Form 3CD are to be enclosed, even if they are NIL.
It is advisable to cover LFAR and audit program simultaneously. This would enable
auditor to consider effect of matters on LFAR and audit report.
ADVANCES:
Check income recognition, Asset classification and Provisioning for the advances.
Suspense Account
Sundry Debtors
Sundry Creditors
Sundry Deposits.
Deposits
Contingent Liabilities
Check whether TDS is deducted on expenses as per applicable sections and deposited
to the credit of government.
MEMORANDUM OF CHANGES
FORMAT
Physical verification of cash on date of Audit. Also check if cash holding of branch is
within retention limit specified by HO.
Check whether any expense exceeding Rs 20000.00 is paid in cash. Get a certificate
for 40A(3) Compliance.
In case the discrepancies are existing in large number of cases, the auditor should
consider the impact of the same on the accounts;
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.
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
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.
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:
Accounts closed;
Dormant Accounts;
Interest calculations;
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.;
Large deposits placed at the end of the year (probable window dressing).
7. Advances
Review monitoring reports (irregularity reports) sent by the branch to the controlling
authorities in respect of irregular advances.
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.
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
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
Overdraft/Cash Credit
Bill purchased/Discounted
Agriculture Loans
Any Amount
Categories of NPA
Sub-standard Assets:
A sub-standard asset was one, which was classified as NPA for a period not exceeding two
years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA
for a period less than or equal to 18 months and from 2005 it is further reduced to 12 months.
Doubtful Assets:
A doubtful asset was one, which remained NPA for a period exceeding two years. With effect
from 31 March 2001, an asset is to be classified as doubtful, if it remained NPA for a period
exceeding 18 months. With effect from March31, 2005, an asset would be classified s
doubtful if it remained in the sub-standard category for 12 months.
Loss Assets:
Assets which are classified as bad and non-recoverable by the concerned bank or by Statutory
Auditors or by RBI Inspectors but the amount have not been written off wholly. In other
words, such an asset is considered uncollectible and of such little value that its continuance as
a bankable asset is not warranted, they will continue to appear in the Balance Sheet but under
the heading Loss Asset although there may be some salvage or recovery value.
Provisions
The current position of providing provision on the various assets is as follows:
Standard assets
Sub-Standard
assets
Doubtful Assets
ECGC Guarantees
100% of Unsecured portion after considering the realizable value of security which
should be realistic. In addition to the above provision on the secured portion should
Loss Assets
be made as under: Up to 1 year 20%, 1year to 3 years 30%, More than 3 year 50%
100% on the Balance outstanding
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.Net-worth of borrower/guarantor and
availability of security is no consideration for treating an account as NPA or otherwise, as the
concept is based on record of recovery of interest/installments.
Staff loans should not be treated as NPAs, except in exceptionally problematic cases.
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.