Audit of banks:-

The audit of the banks should be well-acquainted with the relevant provision of the
special enactment that govern different types of banks, particularly those which
affect the various items of the financial implications of the business carried on by
banks and the types of the transaction that arise in the day-to-day operations.
In this chapter, salient features of audit of the banks are considered in the context of
the provision of the various enactment governing them.

Legislations relevant to Audit of banks:-

The provisions of many Acts relevant to audit of different types of banks. An auditor
of the banks should acquaint with the specific provision of the Acts applicable to the
type of banks under audit.
Nationalized banks are governed by the provisions of of the relevant Banking
companies Act. Certain provision of the Banking Regulation Act 1949 also
applicable to nationalized banks
The non-nationalized banking companies are governed by the provision of the
Banking Regulation Act 1949.
Co-operative banks are governed by the Co-operative Societies Act 1912 or the
Co-operative Societies Act of the state in which they are situated, as well as by Part-
v of the Banking Regulation act 1949.Certain provision of the Banking Regulation
act have been modified while certain others have been omitted in their allocation to
co-operative banks.
Regional rural banks are governed by the Regional rural banks Act 1976. The
provisions of the State bank of India Act 1955, and the State bank of
India(subsidiary banks)Act 1959, apply State bank of India and its subsidiaries
respectively. Certain specified provisions of the Banking Regulation act 1949, are
applicable to regional rural banks as well as to the State bank of India and its
subsidiaries.
Provision relating to Accounts:-
Section 29 of the Banking Regulation Act deals with the obligation of the banks
regarding maintenance of accounts and preparation of financial statements.
Its main preparation as follows;

1. Banks have to prepare a balance sheet and profit and loss accounts as on 31st
march every year in the form to set out in the Third schedule to the Act. A
foreign banking company has to similarly prepare a balance sheet and a profit
and loss a/c every year in respect of the business transacted through its branch
in India.

2. The financial statements of the banks are to signed by the manager or the
principal officer and by atleast three directors. The financial statements of
foreign banking companies are to be signed by the manager or the agent of
principal office in India.

3. In cases of the banking companies the provisions of the companies Acts 1956,
relating to the financial statements are also applicable to the extent they are
not inconsistent with requirements of the Banking Regulation Ac, 1949.

4. As per the third schedule to the Banking Regulation Act, the balance sheet of
the bank as to classify the items of the Capital and Liabilities and those of the
assets below:-

Capital & Liabilities: Assets

Capi tal Cash and balances with Rereserve bank of India

Reserves and surplus. Balances with the banks money at call &,short notice
Deposits investments
Borrowings Advances
Other liabilities and Fixed assets
provisions Other assets

Besides the above, contingent liabilities and bills for collection are also to be
disclosed.
The forms of the profits and losses a/c shows the main item of the income
,expenditure and appropriations. The disclosure requirements of the Third Sheduled
are discussed later in this chapter along with the audit to verify the various items of
the financial statements.
Apart from the requirements of the Third Schedule to the banking regulation act
1949,the financial statement of the bank have to contain additional disclosures
required by RBI from time to time. Besides, listed banks have to also satisfy the
disclosure of listing agreement with stock exchange (s).
RBI has issued detailed notes and instruction for completion of balance sheet
and profit and loss account of banks. These notes and instructions provide
interpretation of the requirement of the Third schedule to the Banking Regulation
Act and are thus useful to the auditor.

Provisions Relating to audit:

Appointment of the auditors;
The auditor of a banking company, a nationalized bank or a regional rural bank has
to be a person who is duly qualified under law to be an auditor of companies. Thus,
the auditor of the companies under sec 226 of the companies Act 1956, and who
does not attract any disqualification laid down therein.
The auditor of a nationalized bank is appointed by the board of directors of the
bank concerned, whereas the auditor of a banking company is appointed by the
shareholder at the annual general meeting. Previous approval of RBI for
appointment of the auditor is required in the both cases. The auditors of the state
bank of India are appointed by RBI in consultation of the Central government. The
auditors of the subsidiaries of the state bank of India are appointed by the state
bank of India. It may be mentioned in the State bank of India Act 1955, specially
provides for the appointment of the ‘two or more auditors’. The auditors of the
regional rural banks concerned with the approval of the Central Government.
The appointment of auditor of a co-operative bank is governed by the relevant Co-
operative bank is governed by the relevant Co-operative Societies Act.

Procedure for the Appointment in the case of nationalized banks:-

The statutory central auditors are appointed by the bank concerned on the basis of
the names recommended by the RBI from out of panel of auditors. For this purpose,
the RBI formulates detailed norms on the basis of which a panel is created by the
Comptroller and Auditor General of India. Generally, each nationalized bank
appoints 4-6 statutory central auditors. As per the norms prescribed by the RBI, to be
eligible for empanelment, a firm should, as on January 1 of the relevant year, meet
the minimum eligibility norms relating to;
I. Number fulltime partners,
II. Numbers of FCA partners,
III. Number of years the firm has been existence,
IV. Period of minimum continuous association of partners with the firm,
V. Number of fulltime charted accountants,
VI. Number of professional staff,
VII. Experience of statutory audit of public sector banks having deposits of at least
the prescribed sum,
VIII. Experience of statutory audit of public sector undertakings.Atleast one partner
should have qualifications in computer audit.

Powers of the Auditor

The auditor of a bank has same powers as those of company auditor ,except that the
power the auditor of a co-operative are governed by the relevant Co-operative
Societies Act.

Auditor’s Report
The contents of the auditor report in case of different types of banks are somewhat
different.

Banking Companies:-
In addition to the matters which he is required to state in his report under the
companies Act, the auditor of banking company incorporated in India has also to
state the following in his report to the shareholder:
a) Whether or not the information and explanations required by him have been
found to be satisfactory ;
b) Whether or not the transactions of the company which have come to his notice
have been within the powers of the company;
c) Whether or not the returns received from branch offices of the company have
been found adequate for the purposes of his audit;
d) Whether the profit and loss account shows a true balance of profit or loss for
the period covered by such account;
 e) Any other matter which he considers should be brought to the notice of the
shareholders of the company.

Nationalized banks:-
The auditor of the nationalized bank, State bank of India or its subsidiary is
required to report to the central government and has to state the full in his report:
a) Whether, in his opinion, the balance sheet is a full & fair balance sheet
containing all the affairs of the bank, and in the case he had called for any
explanation or information, whether it has been given and whether it is
satisfactory ;
b) Whether or not the transactions of the banks, which have come to notice,
have been within the powers of the banks;
c) Whether or not the returns received from the offices and branches of the
bank have been found adequate for the purpose of the audit;
d) Whether the profit or loss a/c shows a true balances of the profit or loss for
the period covered by such account; and
e) Any other matter which he considers should be brought to the notice of the
central government.

The report of the auditor of the nationalized bank is to be verified, signed, and
transmitted to the central government. The auditor has also to forward a copy of the
audit report to the bank concerned and to the RBI.

Regional Rural Banks:-

In the case of a regional rural banks, the auditor has to report directly to the bank.
the content of the report are similar to those of an audit report in the case of a
nationalized banks.
Apart from the audit report on the financial statements, the auditor of a nationalized
bank, State bank of India , any of its subsidiary, or a banking company has also to
prepare a long form audit report(LFAR).The auditor of the banks is also called upon
to give reports and certificates on certain other specified matter.
Special audit:-

In addition to the normal annual audit, a special of the banking company can be
ordered by RBI under sec 30(1b) of the Banking Regulation Act. This power can be
exercise by the RBI if it of the opinion that the it is necessary to do so in public
interest of the banks or in the of the bank or its depositors. The special audit is to
cover the banks accounts, for the transaction or class of transaction or for such
period or period as may be specified by RBI. For conducting special audit, RBI may
either appoint a person who is qualified to act as a company auditor or the direct the
statutory auditor of the bank to conduct a special audit. The section 223 of the
Companies Act relates to the provisions of the special audit.

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.