Laws governing the audit of Banking Company

Nationalize banks: banking companies(Acquisition and transfer of undertakings) Act,1980 and Banking Regulation Act,1949. Non Nationalized Banks- banking regulation act1949, and provision of companies act 1956. Co-operative banks: co-operative societies act 1912, relevant state laws governing co-operative societies and banking regulation act 1949

 Regional rural banks: Regional Rural Banks Act,1976. State bank of India: SBI Act,1955, SBI (Subsidiary Banks) Act,1959 and certain provisions of Banking regulation Act-1949

Appointment of Auditor
For Nationalized Bank previous approval of RBI

Duly qualified Company Act 1956 section 226

Regional rural bank- approval of Central Government.

Co-operative Bank governed by relevant Cooperative Societies Act.

Appointed by the Board of Directors of d Bank Auditor of Banking co. is appointed at the annual general meeting of the shareholders.

Appointment of Auditor
For branches of Nationalize Bank, SBI and its Subsidiaries- RBI Maintain a panel which is prepared by ICAI . For this Institute publish an empanelment for, normally in the month of April or May issue of its Journal.

Remuneration of statutory central auditors as well as branch auditors is fixed on the basis of certain norms laid down by RBI.

Powers of Auditor
Same as those of a company auditor except that the powers of the auditors of a Cooperative bank governed by the relevant cooperative societies Act. Two types of Banking Audit: (1) audit of Banking Companies (2) audit of Co-operative Banks

Audit of Banking Companies silent features

Restriction on Business: Section 5 Co. Act Defines Banking as Accepting.. Capital requirements: sec 11&12 of Act contains capital to be maintained by the banks subscribed capital should not be less than 50% of authorized capital and paid up capital should not be less than 50% of subscribed capital. In case incorporated outside India having place of business in the city of Mumbai and Kolkata or both paid up capital and reserve shall not be less than Rs.20 lakhs. any other bank-15 lakhs .

Silent features
Operaing more than one state and having places Mumbai and Kolkata- capital and reserve should be atleast 10 lakhs. Operating in one state-no branches in mumbai and kolkata-paid up capital & reserves Rs. 1 lakh plus Rs. 10,000 in respect of other place in same districe. Total capital and reserves to be mainted need not exceed Rs. 5 lakhs.

Reserve fund: sec-17 every bank must transfer atleast 25% of its net profit called as Reserve Fund. This if statutoty reserve fund.

Silent features
CRR and SLR-sec 18 banking regulation Act-CRR atleast 3% of its time and demand liabilities. SLR in form of cash, gold or unencumbered approved securities.should not be less than 25% to total demand and time liabilities. Restriction on investment, loans and Advances: cannot hold d shares whether as pledgee, mortgagee or absolute owner of other companies exceeding 30% of its own paid up capital and reserves or 30 % of capital of other companies whichever is less. Cannot advance loan on the security of its own shares. Cannot give unsecured loan or advance to any of its director or firm or private company in which such director is interested.

Audit of co-operative banks

Establishment of cooperative societies- cooperative societies Act,1912. Some states Maharashtra, Tamil Nadu, Bengal, Bihar etc. enacted co-operative societies act for their own states according to provisions of central Act.-in this case provision of state legislation will applicable.-1992.

Privileges of Registered societies

It shall have the privileges of a body corporate. Prepetual succession and common seal. Power to hold property Can enter into a contract with others. Can be sued by others and can sue to others. Its share cannot be sold or attached under any decree or order of a court in respect of any debt or liability incured by its member.

Restrictions imposed
Restriction on shares: (a) A member cannot transfer his share unless he has held that share for atleast one year. (b) Can surrender his share to the socierty or to another member after the expiry of one year when he became a member (section 14) (c) A society may refuse to register a transfer if it is in contravention of section 5.

Restriction on loans
Not allowed to loan a person other than member of society except with the general or special permission of the registrar. Cannot advance a loan to another registered co-operative society without the permission of registrar of co-op.soci. State govt.may prohibit to lend money on the mortgage of immovable property.

Restriction on borrowings
A registered society may receive deposits and loans from persons who are not the members of the society to such extent and under such conditions as may be prescribed by the rules of the co-operative societies Act or Bye-laws of the society concerned(section-30)

Qualification of auditor
A practicing chartered Accountant within the meaning of Chartered Account Act,1949. Must be member of ICAI, new Delhi, holding certificate of practice. A firm of Chartered Accountant is appointed as auditor where all the partners of the firm are practicing Chartered Accountants in India. Subject to rules made by central Govt. u/s 226(2)(b) Holder of certificate under the Restricted state Auditor Certificates Rules,1956.however central govt.may be notification in the official gazette makes rules for grant, renewal, suspension or cancel d certificate.

Disqualification of Auditor according to Co.Act,1956 & ICAI Act,1949

1. A Body Corporate 2. Any person who is an officer or employee or partner of employee of the company.

3. Any person who is indebted to the co.for an amount of Rs. 1,000/4. Any person holding the Security of that co. after a period of one year from d date of commencement of the co.Amendement Act 2000.(security means an instrument which carries voting rights)

disqualifications
5. A firm which already holds the specified number of company audits cannot accept any more audit.(not for private Ltd.Cos after the commencement of d Cos. Act,2002) 6. Any company who has given the company a guarantee or an undertaking for d liability of a third party to the Co. for an amount exceeding Rs. 1,000. 7. Director or member of a private company. 8. Who is auditor of holding co. disqualifies for the auditor of subsidiary co. and vise versa.(Sec.226(5) 9. Auditor of branch disqualifies to become an auditor of head office and vice versa.

Auditors Report
Meaning: it contains clear written relevant to d proper presentation of d financial information. the auditor should review and assess d conclusions drawn from d audit evidence obtained as d basis for d expression of an opinion on d financial statements.it contains clear written expression of opinion on d Financial Statements by d auditor taken as a whole. Objective: To establish standards on d form and content of d auditors report issued as a result of an audit performed by an auditor of d financial statements of an entity.

Contents/elements of Auditors Report

Title: Appropriate, helps to identify d reports, Distinguish from other reports, e.g Board of Directors Report. Addressee : it should be appropriately addressed as required by d circumstances of d engagement and applicable laws and regulations.eg.statutory audit is addressed to d shareholders. Opening and introductory paragraph:(a) report should identify d financial statements of d enquiry that have been audited including d date of and period covered by d financial statements.(b) it should include a statement that d financial statements r the responsibility of d entitys management and a statement that d responsibility of d Auditor is to express an opinion on d fin.statements based on d audit.

contents
Scope of paragraph: it should describe Examining, on a test basis, evidence to support d amounts and disclousures in Fin.Statements. Assessing d accounting principles used in d preparation of Fin.Statements. Evaluating d overall position of Fin. Statements. Opinion Paragraph: it indicates d financial reporting framework used to prepare d fin. Statements. It states auditors opinion as to whether d fin. Statements give a true and fair view in accordance with d financial reporting framework. Whether d fin. Statements comply with d statutory requirements.

contents
Date of report: d date on which auditors signs the report expressing his opinion on d fin. Statements. Place of signature: the report should name d specific location, which is ordinarily the city where d audit report is signed. Auditors signature: it should be signed by d auditor in his personal name. Where d firm is appointed , d report should be signed by auditor in d personal name and in d name of audit firm. The partner /propritor signing the report should mention his ICAI Membership Number.

Features of Good Report

Sincerity: the opinion stated express an independent mind unaffected by any bias. Accuracy: the collection, interpretation and presentation of data in audit report should be accurate. Simplicity: Technical Jargons should be avoided. Language:lucid and clear language informing d shareholders about co.s state of affairs. Coherency(Sequency): there must be a thread of unified thought binding sentence to sentence , & paragraph to paragraph. Contents: relevant information as required by law. Reasons: when auditor has given a qualified or adverse report or a disclaimer of opinion , he should state d reason thereof.

Types of Audit Report

Types of Audit report r based on d opinion of auditor. Auditors opinion may be unqualified (Clean) , qualified and adverse. In certain cases auditor may also disclaim d opinion.

Auditors report in case of Nationalized Banks

Submit Report to Central Govt. in which he has to state the following:

1. Whether Balance Sheet is true and fair ,balance sheet contains all the necessary particulars , in case he had called for any explanation or information whether it has been given and whether it is satisfactory. 2.
3. 4.

Whether or not the transaction of d bank which have come to his notice- within d powers of bank.
Returns received from the offices and branches of the bank have been found adequate for d purpose of audit. P&L A/c shows a true balance of P orL for d period covered by such account and any other matter which he considers should be brought to d notice of central Govt.

Auditors report (Nationalized Bank)

Whether he has obtained all d information & Explanations necessary for his work & Whether d same r satisfactory. According to Banking Regulation Act, auditors report in case of Banking Co. Whether all d information and explanations, which to d best of d knowledge and belief were necessary for d purpose of audit, have been duly obtained. Proper books of accounts as required by law have been kept by d banks so far as appears from his examination of d books. Whether B/S & P&L A/c under report r in agreement with d books of accounts.

In case of banking co.

Whether in his opinion and to d best of his information and according to d explanations given to him, d said accounts give d information as required and in d manner so required and give true and fair view: (I) in d case of B/S of d state of companys affairs as at d dateof B/S (2)In the case P/L of the profit for d year ended on that date. By the virtue of d provisions of clause(d) of sub section (3) of section 227 of Co. Act,1956, d auditor has to specifically report whether in his opinion d P&L and B/s of Banking Co. comply with d accounting standards referred to in subsection(3c) of section 211 of d co.Act,1956.

Report of auditors of SBI

submitted to d Central Govt.& almost similar to the Nationalized Bank. In case Subsidiaries of SBI report identical to Nationalized Bank except that all reference to Central Govt. have to be construed instead as reference to d SBI In case of RRBs except that the reference are instead to the bank concerned.

Report of company Auditors under co. Act, 1956.

Whether or not d information and explanation required by auditor found satisfactory. Whether or not transactions of Co. have come to notice r within d powers of d company. Whether or not d returns received from d branch office of d co. found adequate for d purpose of audit. Whether P&L A/c Shows true balance for d period covered by such account.

Any other matter which he considers to be brought to d notice of Shareholders.

Clean /unqualified audit report Meaning: (a) an opinion is said to be unqualified , when d auditor concluded that d financial statements give a true and fair view in accordance with d financial reporting framework used for d preparation and presentation of d fin. Statements. (b) The auditor gives a clean or unqualified report, when he does not have any significant reservation in respect of matters contained in the financial statements.

Clean report
An unqualified opinion indicates d following: The Fin. Stat r prepared using d Generally Accepted Accounting Principles, which have been consistently applied. The Fin. Statements comply with relevant statutory requirements and regulations. There is adquate disclosure of all material matters relevent to d proper presentation of Fin.statments subject to statutory requirement. Any changes in d accounting principles or in d method of their applications, and d effects have been properly determined and disclosed in d financial statements.

When auditor issues unqualified report

Evidence : reasonable evidence obtained Standards: all AS and Accounting Principles followed True and Fair: Fin. Stat represents true and fair Classification: it does not hide a material fact Format : Fin. Statement format prescribed by law Free of Misstatement: no illegal material transaction r recorded Disclosure: all disclosures required relevant r appropriate.

Qualified opinion/Report
Where auditors gives an opinion on truth and fairness of Fin.Sta subject to certain reservations. Reservation is generally stated as Subject to d above, we report that d Balance Sheet shows a true and fair view. Auditor has to give qualified opinion. He should express clearly the nature of the qualification in d report. He should also give d reason for qualification (section 227(4) of Co. Act,1956)

Disclaimer of Opinion
When auditor unable to form an overall opinion about the matters contained in d Fin. Sta. It express when d possible effect of a limitation on scope is so material & pervasive that auditor has not able to obtain sufficient appropriate audit evidence .

It happens in a situation: (1) When books of A/c of co. are sized by Income tax authorities. (2) Not possible for auditor to obtain certain information. (3) When scope of audit work is restricted.
The auditor will state in his report he is unable to form an opinion on d fin. Sta such report is called as Disclaimer of Opinion Report

Piecemeal opinion
In some cases auditor find fin. Statements r partial true and fair view such a situation would warrant a piecemeal opinion.

Adverse opinion/Negative Report

When auditor concludes that based on his examinations he does not agree with d affirmations made in fin. Statements. Auditor states that d fin. Statements do not present a true and fair view of d state of affairs and working results of d organization. The auditor should state d reasons for issuing such a report. E.g: a company has not taken into account d interest payable to its depositors amount to Rs.12,00,000.

Long form Audit Report (LFAR)

For public sector banks, private sector banks and foreign banks. as per d requirements laid down by d RBI. It highlights certain important aspects of d working of a bank specially those related to internal control system, accounting policies, profitability and financial position. It should be submitted within stipulated time, in separated two formats issued by RBI (1985) revised 1987. Submitted by statutory central auditor Addressed to chairman of d bank concerned , a copy to RBI. It also submitted by branch auditor to chairman and copy sent to statutory central auditor.

LFAR Questionnaire
General

Control and subsidiary records at branches and head office been reconcile? If not give observation. Inter-branch a/c reconciled ? R these upto date? Not give observations. Ur major observations in branch returns. Profitability of various operations of d bank under audit and compare d figures immediately preceding two years. Procedure followed by d bank for revaluation of NOSTRO accounts and outstanding forward exchange contracts. A NOSTRO a/c is maintained be d bank at an overseas centre to hold stock of foreign currencies so as to put through foreign transactions.

Questionnaire
Position relating balancing of books examined.

Major frauds discovered and recorded by d bank. your suggestions.

Balances with other bank

Does bank have a procedure for obtaining balance confirmation certificate in respect of outstanding balances with other bank (Including foreign banks) and Whether these certificates were obtained and balances reconciled with such banks as the year end ? If not , your observations may be given,

Investments
Is mode of valuation of investment consistent with that of d earlier year? indicate mode of valuation of investment. Is there any shortfall in d market value of investment as compared to book value and has same been provided for? To the extent to which such shorfall not provided at d year end. Investment/securities value which shown in B/s varified with physical value? R there sizeabile matured securities which have not been enchased? If so give details?

Advances
Is d procedure for review of advances and their classification according to Health Code System(suggested by RBI) adequate, Whether review r submitted to d appropriate authority within d bank? If procedure is inadequate your observations? Whether d bank has evolved a mechanism for detecting incipient sickness in d industrial units financed by it?

R there any categories or individual case of advances where provisions r not made due to d reason ? If any indicate in Statutory report?

advances
Information as to d following as t d year end (also previous year) i.e total advances, total doubtful advances and % of doubtful advances to total advances. Attention to be drawn to management on some adverse feature observed with reason . Procedure followed by bank on recording of interest on advances to interest suspense account or any other similar account , any change made during d year with reason. Furnish list of top 50 problem-account (other than provided by d bank) in your opinion?

advances
Have you come across cases (a) Sanction of facilities to borrowers beyond authorities limits and whether such cases r promptly reported to d competent authority. (b) Frequent overdrawing permitted to borrowers beyond sanctioned limits (c) Credit facilities being accorded without proper documentation?

Premises
Have d documents of title to properties owned by d bank been made available for audit verification? If not d details may be reported.

Other assets /liabilites

Does bank have an adequate system to ensure expeditious (special) clearance of: (a) debits in suspense account (b) Credits in deposits/sundries account? (c) In case any matter relating to such item reported and attented to d management.

Reserves and provisions

Addition to and deductions from various reserves since d last year B/s may be reported with observation if any. Has bank earmarked any portion of d reserves to meet any specific contingency (E.g bonus, gratuity) The quantum of provision of a material nature to d extent not separately dealt with . Status of pending income tax assessment may be reported indicating provisions if any retained/ not made for any major items of controversial nature.

Miscellaneous
R their any other matters which you as auditor would like to bring to d notice of d management?

Non performing Assets

Standard Assets: which does not disclose any problem , which does not carry more than normal risk Sub-standard: classified as NPA fo a period not exceeding two years .in case of loans where installments and principal r overdue for a period exceeding one year but not exceeding two years.

 Doubtful assets: Remain NPA for a period exceeding two years. loss Assets: Where loss is identified by d bank or by d internal or external auditors or by d RBI inspection but d amount has not been written off wholly or partly.

Audit Procedure (internal Control System)

1. Appropriate procedure for evaluating creditworthiness of borrowers and specifications of authority for sanctioning loans and advances. 2. Evidentiary material, such as agreement in support of each loan and advance. 3. Securing of adequate margin in respect of loans and advances as per RBI 4. Securing title and other proof in resepect of securities mortgaged with d banks

procedure
5. Regular inspection and valuation of securities. 6. Appropriate accounting of increase/decrease in securities and their value. 7. Regular review of operation of every account.

Audit of Income(interest & Discount)

Nature of income & its treatment: Interest, Discount,interest on discount money parked with RBI,cash credits, overdrafts,bill purchased & discountedsecured/unsecured/guaranteed,made to a person or agencies in provate or public sector. Treatment: whether there is proper accounting of cash income., recognitions of income of NPAs.

Calculation of Income
Auditor should see that interest calculation is as per relevant agreement. Made up to d Balance Sheet. Proper apportionment of discount on outstanding bills over d current and following year.

Treatment of interest subsidy from RBI

Auditor should ascertain proper computation and disclosure of interest subsidy from RBI in respect of concession-rate advances to priority sector.

Other Business Income

a) commission, brokerage etc: on bills for collection, demand drafts, letter of credit, locker rent. Etc. b) Profit on sale of investment: should verify income from brokers notes, title document, etc.& net profit is adjusted after adjustment of any loss on sale of investment during d year. c) Profit on revaluation of assets: thereshould be upward revaluation that have been written down below cost in previous years.

d) Profit on sale of fixed assets: as per AS-10 there should be credit of such profit to d revaluation reserve and only the excess of such credit over debit from revaluation carried out in earlier years should be net profit shown in profit and loss A/c. e) Miscellaneous Income: such as rent from house property,Godowns, insurance charges from customers etc..if such income exceeds 1% of total income of d bank, notes should contain particulars of d same.

Profit on foreign exchange transaction

Whether there is immediate confirmation of counterparty confirmations? Is d net position of d party the basis for transaction limit? Is there immediate record of deals and monitoring and approval of positions? Are d persons carrying out the deals different from those recording and handling them? Whether RBI compliance Followed? Is there appropriate procedure for hedging against rate loss? Is there regular reconciliation of NOSTRO accounts?

As per Guidance note of ICAI and AS-11

AS-11 (Accounting for d effects of changes in Foreign Exchange Rates) Auditor should see whether there is sufficient insurance cover in respect of deposits in foreign currency Provision for loss from change in foreign exchange rates.

Audit of expenditure- Interest

Auditor should ascertain that provision of interest is as per instructions of d RBI, Its calculation is upto d B/s

Interest on inter-branch balances does not figure in d Financial Statement. Is there apportionment of discount on outstanding bills between the current and the following year.

Operating Expenses
All operating expenses given in schedule no.16 The auditor should carefully examine each item of expenditure. He ascertain that its computation is correct Supported by proper documents and authority for d expenditure.

provisions
The auditor should ascertain that computation of provision for: Bad and doubtful debts Tax payment Decrease in d value of investments Other contigent expenditure are correct and as per direction of RBI.

Accounting Ratios
As per Schedule III to d Banking Regulation Act, there should be d disclosure of d following ratio in the Notes on Accounts (a) Capital adequacy ratio (b) % of shareholding of d GOI in d nationalized Bank. (c) % of NPAs to net Advances (d) Interest income as a % of working funds. (e) Non- interest income as a % of working funds. (f) Returns on assets. (g) Business(deposits and advances per employee) (h) Profit per employee.

Audit of Assets
It involves audit of following assets: (1) advances (2) Fixed Assets (3) Other Assets

Advances
a) Preliminary: The auditor should review past audit reports, internal audit and inspection reports, and relevant internal reports to see if there r negative comment in respect of any borrowers account. verification of priority sector rural advances with reference to their nature. test checking of advances for house building loans or consumer durables to determine their nature. scrutiny of ledger accounts to see that there is no overstepping.

Advances
(b) Classification of Bank Assets: (a) Standard (b) NPAs Window Dressing: means presenting the financial statements in order to show rosy picture. d real value of assets and liabilities in d B/S is not reflected. Similarly the income and Exp. r also shown in a manner so that they do not reflect real value of Income & Expenditure .Eg. showing higher value of Goodwill or higher/lower value of Assets due to increase/decrease of Depreciation.

Possible ways of window dressing by banks

Showing NPA as a standard asset. Granting new loan to a customer whose account has become NPA and renewal of advances from time to time, so that advances are not shown as NPAs. When advances r not shown as NPAs, d provision is reduced and profit of bank is more than d expected. The banks do not follow RBI Guidelines strictly.

Wrong classification of assets.

(c) Other requirements in case of loans and advances

The auditor should see that there is proper observance of the following requirements: (i) Money advanced to customers against security, guarantee etc.- secured/unsecured,security third party, Govt.RBI ,documents, legal status of borrowers(AA & MA),mortgage deed, title deed etc. (ii) Bank cannot advance money against security of own shares or to any concern wherein its director, manager, employee has interest.

(d) Bills purchased and discounted

The Auditor should physically verify the bills with the bank and see which of them have gone for collection. He should ascertain that there is accounting of all bills and that those are within the sanctioned limit. There should be scrutiny of overdue bills with reference to the possibility of recovery.

(e) Provision for bad and doubtful debts

The auditor should see that the provision made by the bank meets the adequacy requirements as prescribed. In case of unlikelihood of recovery of any debt, he should appropriately classify it as doubtful or loss asset. (f) Rules relating to NPAs.

Fixed assets
(a) Premises: A Bank may own premises, wholly or partly for business or residential purposes. any premises acquired by d bank in satisfaction of debts due to it would fall under Fixed Assets only if d bank holds it for own use. The auditor should examine the title deeds & other relevant documents testifying banks ownership. He should see that there is provision for depreciation in respect of premises as per co. Act.

(b)Other fixed assets

These includes furniture, fixtures motor vehicles etc., The auditor should verify them in respect of their existence, ownership, possession, valuation and appropriate disclosure.

Other Assets
These includes the following: (a) Inter- Branch adjustments: Any number of transactions between branches of a bank involving transfer of funds through bills of exchange, DD, travelers' cheques, telegraphic transfer etc., The auditor should ascertain that there is proper system of record of inter-branch transactions with d head office, d head office sets off debit and credit entries pertaining to branches involved in such transactions and speedy identification and correction of errors in d statement sent by branches entering d transactions. There should be system of reconciliation of transactions between branches and any unreasonable difference should get promptly attention

Interest accrued
The auditor should examine interest accruing but not collected on advances and investment, taking in view the likelihood of its recovery.

He should follow the guidelines issued by RBI as to recognition of interest on advances and investments.

(c) Tax paid in advance or deducted at source

The auditor should verify this from challans, TDS certificates etc.,

(d) Non-Banking assets acquired in satisfaction of debts

A bank may acquire any non-banking asset in satisfaction of any debt due to it. According to banking Regulation Act, it must dispose of such asset within seven years of its acquisition. RBI may extend this time limit by up to five years. The auditor should verify such assets with relevant documents e.g. terms of settlement with the party , award of arbitrator, order of the court etc., He should ascertain that ownership of property vests with the bank and in case of any dispute, there should be provision for liability and appropriate disclosure of contingent liability. He should see if valuation of such asset is at lower of the amount of debt settled or net realizable value.

(e) Credit Cards

Credit cards r risk-prone business. The auditor should evaluate the internal control system to see whether there is proper scrutiny of applications for credit cards, issue of credit cards, prompt and regular billing of customers, Charging their accounts Monitoring of receipts Regular reporting by selling dealers of settlements. Any abnormal outstanding amounts should get prompt attention.

(f) Miscellaneous assets

It includes stationary, postal stamps, advances given to staff, money receivable from Govt, prepaid expenses etc., Verify these with reference to the documentary evidence.

Checklist for verification of cash-inhand

The auditor should verify: 1. Daily cash transactions with particular reference to any abnormal receipts and payments. 2. Proper accounting for inward and outward cash remittances. 3. Proper accounting of currency chest transaction, its proper reporting to d RBI 4. Expenses incurred by cash payment involving sizeable amount.

Audit of liabilities
1. Share capital: The auditor should ascertain whether there is compliance with provision of the banking regulation act, under sec.11 and disclosure of capital in the B/s. Subscribed capital not less than one half of its authorized capital Paid up capital not less than one half of its subscribed capital. A banking co. Incorporated outside India must keep a minimum prescribed amount of paid up capital and reserves deposited with RBI in d form of cash or unencumbered approved securities.

Reserves and Surplus

a. ) Statutory reserve: a bank must transfer 25% of its profit to d reserve fund every year before declaring dividend or transferring profit to the central Govt. It may get exemption if Reserve fund + share premium is at lease equal to its paid up capital. If d bank appropriates any amount from the reserve fund or the share premium account , it should report to the RBI within 21 days of such appropriation, explaining the circumstances attending. The auditor should ascertain compliance with this provision as also that the appropriation has authority of a board resolution.

b) Capital and revenue reserves

It includes surplus arising from revaluation of fixed assets. It is not available for distribution as profit. Revenues and other reserves will represent transfer from profit for various purposes.

c) Reserves with branches abroad

The auditor should ascertain whether the bank has created reserves required under the laws governing its foreign branches.

d) Deposits and Borrowings

It includes: Demand and time deposits: balances in current accounts, savings bank account, cash credit accounts, fixed deposits, recurring deposits, deposit certificates, borrowing from RBI. Other banks, Indian financial institutions, and external borrowings.

Procedure to check the Reserves

a) He should verify the reconciliation statement between current a/c ledger and control account. Checking of general ledger control account with subsidiary ledger balances relating to saving bank A/c And saving bank a/c balances with individual accounts in the ledger. b) Detail check and ascertain whether the bank obtains regular confirmation of balances from customers.

 He should see that overdrawing in deposit account appears separately under Advances instead of sum on d liabilities side.

Ascertain interest payable should appear under other liabilities and not included in relevent deposits, also calculation of interest basis of individual account.
See whether there is serial numbering and proper accounting of fixed deposit receipts and cash certificates. and provision of interest on that. See that there is proper compliance with RBI instruction in respect of acceptance of foreign currency deposits from non-residents.

 He should ascertain borrowings from RBI, other banks and financial institutions based on reconciliation statements and confirmations. He should report tricky transactions where there is grant of overdraft to a customer, then receipt of term deposit from him at d year end, followed by reversal entry at d beginning of d following year. See there is distinction maintained between refinance (Borrowing) and rediscount.(reduction form advances) See that inter-branch transfer do not appear as borrowings.

Other liabilities- a) Bills Payable

Auditor should evaluate internal control in respect of demand draft, telegraphic transfer etc.,with particular reference to their serial numbering, safe custody of unused forms, confirmation of transfer, etc., He should examine items outstanding for more than three years and include them in his report.

Provision for taxation

The auditor should see The account give effect to adjustments based on memorandum of changes suggested by branch auditors. During consolidation of accounts, there is reversal of net interest on inter-branch transactions. There is compliance with provision of Income Tax Act regarding allowance of bad debts and provision for bad debts For branches of foreign banks there is compliance with sec.44c of I-T Act in respect of allowance of head office expenses. There is compliance with provisions of I-T Act.

C) KYC Norms (Know Your Customer)

As per RBI Guidelines KYC norms relates mostly to account opening forms. While checking account opening forms the auditor should ensure that the bank has properly obtained the identity proof, address and photo proof of the a/c holder. Check d signature of introducer is verified. Every account should duly signed and stamped by d banks authority. Verify a/c is not bogus.

Contingent liabilities
As per guidance note issued by ICAI it includes: Uncalled liabilities on partly paid up shares held by company as investment. Arrears of dividend on cumulative preference shares. Estimated amounts of contracts remaining to be executed on capital account. Disputed liabilities on account of I-Tax, sales Tax, excise duty, custom duty or which provision is not made. Amount of any guarantee given by company on behalf of directors or other officers of the company, workers claim, not acknowledged as debt of co.

Checklist for evaluation of internal control (ICS)

ICS is d process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about d achievement of an entitys objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations. ICS is sound and reliable auditor can make use of test check on a scientific basis and save his time and avoid repetitive work. He can complete d work quicker. ICS is inseparable part of auditing process. The actual audit work starts after evaluation of the system.

Auditors dealing in ICS

a) Study the nature of business activity. b) study the accounting system. c) Study the managerial hierarchy, duties and responsibilities assigned to various officers. d) Study the internal check and internal audit system. e) Ensure that the system prevents and detects frauds and errors.

Concurrent Audit
In 1993, the RBI issued guidelines on concurrent audit system in commercial banks: It is an audit or verification of transactions or activities of an organization concurrently as the transactions or activity takes place. Concept of audit is to verify the authenticity of the transaction or activity within the shortest possible time after the transaction takes place Looking at d size of business bank decides to get audit conducted on daily or monthly basis..

 The concurrent auditor has to submit d report on 10th of the next month. If quarterly- then the report have to be submitted on 10th of the month after the end of that quarter. During if auditor finds any irregularity /deviation in policies or procedures should submit the fresh report to management to take remedial action immediately. Once in a year bank should evaluate the success and effectiveness of the system.

Appointment of concurrent auditor

Bank can appoint its own staff or external person to conduct the concurrent audit. The person should be well trained, experience and senior personnel. These auditor should be independent of d branch of which the audit is being conducted. If external auditor then the appointment may be initially for a period of one year, it can be extended up to three years. after 3 years external auditor may be shifted to another branch to conduct the audit If performance of auditor is not satisfactory then same should be reported to RBI and ICAI by d bank.

Remuneration to concurrent auditor

Fixed by d bank at their discretion. Bank audit committee of the board of directors should frame guidelines for remuneration keeping in view of various factors like areas to be covered, qualities of work expected , suitable package of remuneration should be framed by the management.

Concurrent audit report

It has three parts: 1. Major irregularities 2. Minor irregularities 3. Compliance with earlier report. The auditor cover preface of the report.

Before submit the report auditor discuss d issue with branch manager of d bank and concerned officer
Report should be submitted to the branch manager & regional office on monthly or quarterly basis. Quarterly executive summery submitted to branch,regional,zonal and central office.

Objective of Fin.Stat.Audit
That Fin. Statements, prepared within a framework of recognized accounting policies and practices and relevant statutory requirements. The auditors' opinion helps determination of the true and fair view of the fin. position and operating results of an enterprise. But however, it should not be assumed that auditors opinion is an assurance as to further viability of d enterprise or d efficiency or effectiveness with which management has conducted the affairs of d enterprise.

Scope of Fin. Statement audit

Scope of audit of Fin. Statement will be determined by the auditor having regard to the terms of the engagement, The requirement of relevant legislation

And pronouncement of the institute.

Limitations of Audit
An audit is an examination essentially of test nature. There is an unavoidable risk of material misstatement which may not be discovered. Discovery of material misstatements is not d objective of an audit nor is the audit program Audit is not an assurance against frauds or errors, but an indicator of frauds or errors. The nature, extent and timing of audit checking and procedure depend upon auditors judgment. Auditor is not expected to perform duties, which falls outside the scope of his competence.

Audit planning
Planning helps the auditor to conduct an audit in an effective ,efficient and timely manner. Need of audit planning: Appropriate attention to important aspects of audit. Potential problems are identified. Timely completion of work. Proper utilization of manpower. Co-ordination of work.

Steps for planning an audit

Knowledge of clients business Developing the overall plan Developing the audit programme. Review of audit plan/programme.

Audit sampling
Meaning: it is one audit tool that allows d auditor to draw inference from test of a subset of clients transactions.

Objective: to establish standards on the design and selection of an audit sample and evaluation of the sample results.

Steps in sampling plan

Specify the audit objective Define the population and no. of population Specifying the sampling unit. Selecting d sampling method Specify sampling parameters. Determine the sample size Choosing a sample selective technique. Drawing a sample Evaluating a sample Determine the adjustment to original plan if need Evaluating any changes Formulating a conclusion.

Special consideration in Fi.st.Audit

The auditor should recognize that the noncompliance by d entity with laws and regulations might materially affect the financial statement. However an auditor is not expected to detect non-compliance with all laws and regulations. It is to establish standars on the auditors resposibility regarding consideration and laws and regulations in an audit of financial statements.

Non-compliance
It means to act of omission or commission by d entity being audited, either intentional or unintentional, which is contrary to the prevailing laws or regulations.

Indicators of Non-Compliance
Investigation by the government Payment of fines or penalties. Unreasonable payments on account of expenses Unusual payment in cash Unusual transaction with companies registered in tax heavens. Payments without proper exchange control documents. Unauthorized and improperly recorded transactions Media comments.

Particulars Auditor report

Meaning Is an expression of opinion, on the true and fair view presented by fin.statemnts

Auditors certificate
Is written confirmation of the accuracy of the facts stated therein and does not involve any estimate/opinion.

Utility

The term is used when auditor express his opinion on d financial statements
Auditor may not take a guarantee the correctness of Fin. Information in absolute terms It is made on d basis of information made available to d auditor

Used when auditor verifies certain exact facts.

When certificate is issued by d auditor is responsible for the factual accuracy of what is stated therein.

Responsibility

Implication

It is issued by an independent accountant on those facts and data which are capable of absolute certification.

Special consideration in case Co.Audit

1. validity of appointment: (a) First auditor(appointed by Board of Directors): he should study the resolution passed at the board meeting authorizing his appointment only within a month of the registration of d company. (b) Appointed by shareholders: the auditor should get a copy of the resolution, concerning his appointment passed at such meeting. he should also inform the registrar about acceptance of appointment within 30 days of the receipt of appointment letter.

Appointment of auditor
(c) Appointment in place of retiring auditor: He should see whether all d provisions of section 225 dealing with the appointment and removal of auditor have been complied with. Communication with previous auditor has been made a part of professional ethics. (d) Casual vacancy: He should secure a copy of resolution of the Board to ascertain whether his appointment is valid . The Board is empowered to fill any casual vacancy provided it has been caused due to resignation of the previous auditor.

vouching
Meaning: it is d examination of the underlying evidence which is in support of d accuracy of a transaction. Following r d important points an auditor should examine while vouching: Whether necessary sanction taken from necessary authority. Transaction-recorded in d books of A/c with documentary evidence. Amount of entry posted in proper heads of A/c Voucher relates to period for which auditing is being done.

How do u audit the following vouching

preliminary Expenses: Meaning: r d expenses incurred by d promoters . 1. Auditor should see all d contract relating to formation of company. 2. if expenses r reimbursed to d directors auditor check AA and resolution passed by d Board of D. 3. Check no other expenses except should be included in this head. 4. See amt of prelim.exp.should not exceed d limit shown in prospectus, if any excess amt it should be approved from d shareholders latter. 5. Confirm amt of exp.not written off should be shown separately in d B/S.

Dividend received
Dividend from investment in shares of Co's should be checked very carefully. Auditor should check amt of dividend warrants. If No. of transaction r large check d investment register. Cross check d amt with amt of register. Check unrealized amt of dividend amt. Check TDS certificate. Check amt of dividend shown in P&L A/c Bifurcation of capital and revenue reserve.

Bad debts recovery

Check d amt. of bad debts. Ensure d amt collected has been recorded properly. Should see order of d court or trustee & correspondence in this respect. Check receipts issued to debtors/trustees to cross verification of d amt collected. Treatment of account should be checked.

Legal charges
R incurred by co.s in connections with legal advise, cases pending in d court and lawyers fees. Verify bills of advocates, payment vouchers and documents relating to legal cases pending . Verify payment is made by cheque in d name of legal adviser and not any other person. Legal fees in respect of retainship should be verified from d agreement. Amt should be under heads of Account.

Carriage outward
It relates to expenses on transportation of goods sold. Check vouchers for payment of carriage outward Check terms and conditions for sale. verify Policy of co. regarding sales and delivery. Check d bill for transportation , details of goods delivered and sales invoices. Verify rates of transports on d basis of quotation Verify payment is made to right person and as per right manner.

Advertisement exp.
See exp.r related to d business not of personal nature. R d exp. Classified as revenue or capital basis. Check d agreement and compare d statement of account. Check receipt received for d payments made. In case tax deducted on payments- confirm d tax rate deposited in time to credit of Govt. A/c. Check O/s adv. expenses at d end of year, Confirm proper provision on o/s amt. If any other facilities like credit facility, incentive r provided by agency confirm that client is avail those facilities.

Vouching cash sale of co.

Examine th system of internal check with d aim to find out loopholes. Ascertain practise followed in d matter of issuing cash memos. Verify cash sales from carbon copies of cash memos . Trace cash memo into cash sale summery book. If cash sales r heavy verify cash book also. Ensure dates of cash memo- tally with entry in cash books. Verify prices of goods correctly entered & calculation. Examine original copy of cash memo which is cancelled since misappropriation of amt thereof. Check daily total entered in cash book with the till rolls.

Verification
Meaning: Means confirmation or providing d truth. Verification is concerned with assets & liabilities. Terms verification signifies Physical Examination of certain class of Assets/Lib. Checking arithmetical accuracy of A/L Asset /lib shown in B/s r really exist and properly shown at true value.

Definition of verification
According to Spicer and Pegier , Verification of assets implies an enquiry into the value, ownership and title, existence and possession and presence of any change on d assets.

Objectives of verification
To show correct valuation of A/L To know whether B/S exhibit a true and fair view of d state of affairs of d business. To find out assets were in proper existence. To find out ownership and title of assets. To detect fraud and errors, if any To verify arithmetical accuracy of books of A/c. Verify whether is an adequate internal control regarding acquisition, utilization and disposal of assets. Ensure all assets properly recorded.

Auditors duties regarding verification

1. 2. 3. 4. 5. 6. Existence Possession Legal ownership and obligation Subject to charge or lien Complete record Auditors report.

Verification of Investment
Date of purchase, rate of purchase, nature of investment, nature of transaction. In case of substantial investment compare d rate with quotations available (Stock exchange quot) Verify amt paid towards purchase of investment Trace amt in cheque book and bank statement Verify capital-revenue expenditure Obtain shecdule of investment for physical inspection. Inspect investment certificates

 In case immovable property shares, debentures in co-operative society verify the cost of shares should be included in d cost of the property. Verify invest.should be shown accordance with the recognised accounting policies and parties and relevent statutory requirement(AS-13). Investment in partnership- shown separately.

Closing stock
It is a major factor in determining the result of a company. Verify existence of stock Precise duty to ascertain value of stock correctly Rely upon statements and report available Expert knowledge method of verification and stock control Should attend at stock taking for d purpose of observing the clients procedure& assurity of reliable result. Modern methods of costing, accounting ratios, budgetary control. Section 41(2) defines proper books of accounts to include statements of annual stock taking and of all goods purchased and sold.

Sales vouching
Verify that the sale of each item of goods relates to the period under audit. That the normally goods r dealt by d co. Sale price correctly recorded Amt. of invoice has been adjusted in an appropriate account. Sale has been authorized by a responsible official.

Cu-off procedure while auditing in big organizations

It means procedure employed to ensure the separation of transactions at the end of one year form those in the commencement of the next year. Usually problem of overlapping found in inventory accouting Often goods r sold but passed after one year is over or goods bought but comes after one year. The auditor examine last (Cutt-Off) documents at d end of year.

 The auditor may examine a sample of documents evidence the movement of stock into and out of source, cut-off date.