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INTRODUCTION

BANK AND CONTROL


AUDITING
BANK AUDIT

INTRODUCTION TO BANK AND CONTROL SYSTEM:


BANKING:

Banking has been defined in section 5 of the act as The accepting, for the purpose of
lending or investment of deposits of money from the public, repayable on demand or otherwise,
and withdraw able by cheque, draft, order or otherwise.
A Banking company or a Bank means any company, which transacts the business of banking in
India and includes a foreign company engaged in the business of banking in India.

There are 4 types of banking institutions in India. These are:-

1) Commercial Banks: Commercial banks are the most prevalent banking institutions in India.
Commercial banks operating in India can be divided into two categories based on their
ownership public sector and private sector banks.
2) Regional rural Banks (RRBs): RRBs have been established with a view to developing
the rural economy by providing credit and other facilities, particularly to the farmers.
3) Co-operative Banks: Co-operative banks are the banks in the Co-operative sector, which
cater predominantly to the needs of the farming, and allied sectors. Co-operative banks
include central Co-operative banks, state Co-operative banks, primary Co-operative banks
and land development banks.
4) Development Banks: Development banks were started for providing only long-term finance
for development purpose; they are also formed as Term-lending Institutions.

Important features:
Banks have the following characteristics, which distinguish them
from most other commercial enterprise.
1. They have custody of large quantum of monetary items, including cash and negotiable
instruments, whose physical security has to be ensured. This applies to both the storage and
the transfer of monetary items and makes banks vulnerable to misappropriation and fraud.

They, therefore, need to establish formal operating procedures, well-defined limits for
individual discretion and rigorous system of internal control.
2. They engage in a large quantum and variety of transactions in terms of both number and
value. This therefore requires complex accounting and internal control system.
3. They generally operate through a wide network of branches and departments which are
geographically dispersed.
4. Banks are regulated by Government authorities and the resultant regulatory requirements
often influence accounting and auditing practices in the Banking sector.

Regulatory system:
There is an elaborate regulatory framework governing banks in India.
The principal enactments which govern the functioning of various types of Banks are:

Banking Regulation Act, 1949.


Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
SBI Act, 1955.
SBI (Subsidiary Banks) Act, 1959.
Regional Rural Banks Act, 1976.
Co-operative Societies Act, 1912 or the relevant state Co-operative Societies Act.

INTRODUCTION TO AUDITING (Overview):

Economic decision in every society must be based upon the information available at the time the
decision is made. For example, the decision of a Bank to make a loan to a business is based upon
previous financial relationships with that business, the financial condition of the company as
reflected by its financial statements and other factors. If decisions are to be consistent with the
intention of the decision maker, the information used in the decision process must be reliable.
Unreliable information can cause inefficient use of resources to the detriment of the society and
to the decision maker themselves. In the lending decision example, assume that the Bank makes

the loan on the basis of misleading financial statements and the borrower company is ultimately
unable to repay, as a result the bank has lost the principal and the interest. In addition, another
company that could have used the funds effectively was deprived of the money.
As a mean of overcoming h problem of unreliable information, the decision maker must develop
a method of assuring him that the information is sufficiently reliable for these decisions. In doing
this he must weigh the cost of obtaining more reliable information against the expected benefits.
A common way to obtain such reliable information is to have some type of verification (audit)
performed by independent person. The audited information is then used in the decision making
process on the assumptions that it is reasonable complete, accurate and unbiased.
The word Audit is derived from the Latin word Audire which means to here. In olden
days, whenever the owner of the business suspects the fraud, they appoint independent and
impartial person who uses to hear the explanations given by the accountant. Such person was
known as Auditor.

Auditing may be defined as


A careful and critical examination of books of accounts by a properly qualified person on the
basis of proper evidence so as to express an opinion (i.e. views) about the truth and fairness of
financial statements.
TYPES OD AUDIT:

The entire process of Audit depends upon the type of Audit. Type of Audit to be conducted is to
be selected carefully, keeping in mind the objects of Audit in each and every case. Hence it is
essential to study the various types of Audit before laying down the program for any Audit work.
Following are the various types of Audit:-

CHARTS SHOWING DIFFERENT CLASSES


OF AUDIT

Based on authority Based on scope Based on time

Based on object

other types

Statutory audit Non-statutory audit Internal audit

Complete audit

Continuous audit

Partial audit

Final audit Interim audit

Special audit Cost audit Management audit Social audit

Balance sheet audit Occasional audit Audit in depth Cash audit Operational audit

BASED ON AUTHORITY:

1) Statutory audit:
It is the Audit which is compulsory under the law. Appointment of Auditors,
removal, remuneration, rights, duties and liabilities are governed as per the provisions of the
respective law applicable to the organization. Scope of Audit work and all other terms are as
laid down by the law. It can be conducted only by a qualified Chartered Accountant.
2) Non-statutory audit:
Non-statutory audit are voluntary Audits. These Audits are not
compulsory under any law. Terms and conditions of Audit are determined as per the
agreement made between the auditor and proprietor for e.g. financial audit of a sole trader or

partnership firm. It also includes non-financial audits e.g. internal audits, management audits,
operational audits, social audits, etc.
a) Private audit: The audit which is done for the satisfaction of the owner is called private
audit. This type of audit is not compulsory at all. It may be conducted by sole proprietors,
partnership firms, family trusts, private trusts, etc. the various types of private audits are:

i) Audit of sole proprietors: Audit of accounts of sole proprietors is not compulsory.


1. for obtaining loan from Banks and Financial Institutions.
2. for presenting authentic data to income tax and sales tax authorities.
3. For his own satisfaction that his employees have written the books of accounts
properly and there are no frauds and errors.
ii) Audit for partnership firms:
1. Under partnership Act it is not compulsory to audit the accounts. However in actual
practice it is not only advisable but even necessary to get them audited.
2. It helps to prevent disputes among the partners.
3. It facilitates borrowings from Banks.
4. Audited accounts are preferred by income tax and sales tax departments.
5. Audited accounts can be helpful in case of litigations.
3) Internal audit:
This type of audit is also optional. It is conducted by the internal auditor who
is appointed by the proprietor. Even the employees of the organization may be appointed as
an internal auditor to examine the books of accounts. All the terms and conditions of audit
work are determined by the agreement. The basic purpose of internal audit is not only to
examine the books of accounts but also to review the present working and make valuable
suggestions to improve it.
BASED ON SCOPE:
1) Complete audit:
In complete audit the auditor has to check each and every transaction,
voucher documents, etc. relating to the transactions of the business. This type of audit is not
possible in case of large business organization.
2) Partial audit:
Sometimes auditor may be called upon to audit few books and give his findings
thereon. Sometimes he may be called upon to audit only the payment side of the cashbook or
receipts side only. This is called as Partial Audit. Auditor has to be very careful when he

undertakes this type of audit. Usually this type of audit is called for when a fraud or
misappropriation is suspected. While submitting the report auditor should clearly mention the
scope and documents or books made available to him for his audit. Partial audit is not
practical. Such an audit is possible where audit is not a legal necessity.

BASED ON TIME:
1) Continuous audit:
One where the auditor, or his staff, is constantly engaged in checking the
accounts during the whole period or where the auditor or his staff attends at regular or
irregular intervals during the period.
Continuous audit means an audit at regular intervals throughout the accounting year.
Continuous audit, accounting and auditing work is done side by side.
2) Final/ annual/ periodical/ completed audit:
Periodic audit is also known as final or
completed audit. Final audit is carried out continuously until it is completed. It is a past
accounts audit. In case of final audit, the auditor gets hold of all books of accounts and the
voucher for the, accounting period. He is in possession of all the facts and figures relating to
the accounting period for which the audit is being conducted. In case to this audit, the auditor
visits the clients place only once and remains there till the audit is over.
Generally this type of audit is appropriate for smaller business concerns.
3) Interim audit:
It is a kind of audit, which is conducted in between the annual or final audit. It
is conducted to find out the interim profit and know the financial position at the end of a part
of the accounting year. This is usually carried out of half yearly intervals. Hence, this is also
called as half yearly audit.

BASED ON OBJECT:
1) Special audit:
Under section 233 of companies Act, the Central Government has power to
direct special audit under following circumstances.
a) When the affairs of my company are not managed as per the sound business principles.
b) When the financial position of the company is such as to endanger its solvency.

c) When company is being managed in a manner which is likely to cause serious injury or
damage to the interest of trade or industry.
The auditor appointed by the government is required to report to the Government.
2) Cost audit:
It is a type, which involves verification of cost records maintained by the
organization. Under section 233 B of the Companies Act, 1956 the Central Government may
direct an audit of cost records by a person who is qualified. Appointment of auditor is done
by the board of directors subject to the approval of the Government. The auditor report to the
government, the copy of the report is sent to the company.
3) Management audit:
It is concerned with the review of operations and performance of
management to improve efficiency and effectiveness of the organization. It is thus an
extension of internal audit function. Some authors use the term management auditing and
operational auditing interchangeably because of the close resemblance of concerned with
review of operations of an entity, management auditing, in addition to it also includes review
of managerial performance.
4) Social audit:
Social audit is recent development in the field of at it is based on the modern
concept of social responsibility of business. Social audit examines to what extent the business
is discharging the social responsibilities. It examines the contribution of the concern to the
society at large.
OTHER TYPES:
1) Balance sheet audit:
Balance sheet audit is of recent origin. As the very name suggests,
balance sheet audit consists such as assets, capital, reserves and liabilities of the business.
Though balance sheet audit concentrates mainly on the balance sheet items, it also includes
an examination of those transactions, which are appearing in the profit and loss account
because of profit and loss account appears in the balance sheet.
2) Operational audit:
This type of audit is carried out occasionally as per the need of the
business. This type of audit is conducted at the desire of the owner of business.
3) Audit in Depth:

In this of audit all records and documents pertaining to the transactions are
checked in detail. The basic purpose of such audit is to check whether the system of internal
check or control system is effective.
4) Cash audit:
Here the auditor examines only cash transactions. He examines cash receipts
and payments. The receipts and payment may be capital or revenue in nature.

INTRODUCTION TO BANK AUDITING:


Bank Audit is a time bound exercise and it is full of challenges and responsibilities. For those
who approach this exercise with scientific methods and proper planning. The auditor has very
limited option as far as the availability of time is concerned, therefore, the only option he has
is to carry out the audit in a very scientific manner so that he is able to conduct a purposeful
audit in the limited time.
Generally, the appointment letters are received in second or third week of March and the
auditors are expected to commence the audit in the first week of April and to complete the
Audit, in one visit and in all respect, by the end of second week of April.
Therefore, the time available for the completion of audit in all respects is generally in the
range of 4-5 days to maximum of a week or 10 days, irrespective of the size of the branch,
volume of business and nature of activities.
The Banks are taking effective measures to address this issue and some banks have allowed
the auditors of large and very large branches to visit the respective branches before the close
of the year. Such visits help the auditors to gather lot of first hand information and insight
about the branches and its business profile, performance, NPA profile, client profile, level of
computerization, etc.
Generally, banks circulate detailed losing instructions to the branches and the auditors well in
advance. It is important to review the instructions and to incorporate the significant
instructions in the audit plan/ program/ checklist.
With the latest information available at the touch of button, it is very important that to keep
update about the significant developments in the audit checklist.
As the concept of Peer review is already put in place, it is important that while carrying out
the attest function due emphasis is given to Auditing & Assurance Standards and other
pronouncements of the Institute while discharging the attest function. Apart from this, it is
also important to preserve all the required documents/ representations etc for future
reference.

Appointment of Auditor:
The auditor of a Banking company is to be appointed at the AGM
of the shareholders; auditor of a nationalized bank is to be appointed by the bank concerned
acting through its Board of Directors. In either case, approval of the Reserve Bank is required
before the appointment is made. The auditors of the SBI are to be appointed by the RBI in
consultation with the Central Government. The auditors of the subsidiaries of the SBI are to
be appointed by the SBI. The auditors of RRBs are to be appointed by the bank concerned
with the approval of the Central Government. As mentioned earlier, the SBI Act, 1955,
specially provides for appointment of two or more auditors. Besides, nationalized banks and
subsidiaries of SBI also generally appoint two or more firms as joint Auditors.
Remuneration of Auditors:
The remuneration of Auditor of a Banking company is to be
fixed in accordance with the provision of section 224 of the Companies Act, 1956 i.e. by the
company in general meeting or in such manner as the company in general meeting may
determine. The remuneration of auditor of nationalized banks and SBI is to be fixed by the
RBI in consultation with Central Government. The remuneration of auditors of subsidiaries
of SBI is to be fixed by the latter. In the case of RRBs the auditors remuneration is to be
determined by the bank concerned with approval of Government.
Powers of Auditor:
The Auditor of a banking company or of a nationalized Bank, SBI, a
subsidiary of SBI or a regional rural bank has the same power as those of company auditor in
the matter of access to books, accounts, documents and the vouchers. He is also entitled to
require from the officers of the bank such information and explanations he may think
necessary for the performance of his duties. In the case of a banking company, he is entitled
to receive notice relating to any general meeting. He is also entitled to attend any general
meeting and to be heard there at on any part of the business, which concerns him as auditor.
It may be noted that the Regional Rural Bank Act, 1976, does not contain any provision
relating to audit of branches. Accordingly, in the case of such banks, audit of branches is also
carried out by the Auditors appointed for the bank as a whole.
AUDIT (Legal provision):

The provision of section 30 of the Banking Regulation Act relating to audit applies to the
banking companies. Sub-section (IB), (IC) and (2) also apply to nationalized banks, RRB and
the SBI and its subsidiaries.
Section 30 reads as below:
1) The balance sheet and profit and loss accounts prepared in accordance with section 29
shall be audited by a person duly qualified under any law for the time being in force to be
an auditor of companies. (1-A) Not withstanding anything contained in any la for the
time being in force or in any contract to the contrary, every banking company shall,
before appointment, reappointing or removing any auditors, obtain the previous approval
of the Reserve Bank.
2) The auditor shall have the powers of, exercise the functions vested in, and discharge the
duties and be subjected to the liabilities and penalties imposed on, auditors of companies
by section 227 of the companies Act, 1956and auditors, if any appointed by the law
establishing constitution or forming the banking company concerned.
3) In addition to the matters, which under the aforesaid act the auditors, is required to state
in his report,
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 he returns received from branch offices of the company have been
found adequate for the purpose of his audit.
d) Whether the profit & 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.

CONTROL SYSTEMS:

BANKING REGULATION ACT, 1949.


CORPORATE GOVERNANCE.
GHOSH COMMITTEE RECOMMENDATIONS.
AUDITING & ASSURANCE STANDARDS (AAS).

BANKING REGULATION ACT, 1949.


CAPITAL RESERVES
Section 11 of the Banking Regulation Act lays down the requirements regarding the minimum
paid-up share capital and reserves of banking companies. Similar requirements in the case of

cooperative banks are laid down in section 56(h). These provisions are not applicable to rural
banks, nationalized banks, and the State Bank of India and its subsidiaries.
Under section 12(1), the subscribed capital of a banking company should not be less than onehalf of its authorized capital and the paid-up capital not less than one-half of the subscribed
capital. If the capital is increased, it should comply with these conditions within a stipulated time
period.
Further, the capital of a banking company should consist of ordinary shares alone, the only
exception being in the case of preference shares issued prior to July 1, 1944. These provisions do
not apply to a banking company incorporated before January 15, 1937 or to a nationalized bank,
a regional rural bank, a cooperative bank, and the state bank of India and its subsidiaries.
A banking company incorporated outside India is required to deposit with the Reserve Bank in
the form of cash and/ or approval securities, (a) An amount not less than the minimum paid-up
capital and reserves as prescribed under section 11(2) of the Banking Regulation Act 1949, and
(b) an amount equal to 20% of its profits for each year in respect of all business transacted
through its branches in India. However the Central Government may, on the recommendation of
the Reserve Bank, exempt a banking company from these requirements for a specific period
having regard to the adequacy of the total amounts deposited by it with the Reserve Bank in
relation to its deposit liabilities.
Restrictions on commission, brokerage, discount, etc. on sale of shares:
Notwithstanding anything to the contrary contained in 3[sections 76and 79 of the Companies
Act, 1956 (1 of 1956)], no banking company shall pay out directly or indirectly by way of
commission, brokerage, discount of remuneration in any form in respect of any shares, issued by
it, any amount exceeding in the aggregate two and one-half percent of the paid-up value of the
said shares.
Restriction for payment of dividend:
5[(1) No banking company shall pay any dividend on its shares until all its capitalized expenses
(including preliminary expenses, organization expenses, share-selling commission, brokerage,

amount of loss incurred any other items of expenditure not represented by tangible assets) have
been completely written off.]
1[(2) Notwithstanding anything to the contrary contained in sub-section (1) or in the Companies
Act, 1956 (1 of 1956), a banking company may pay dividends on its shares without writing off(i)

The depreciation, if any, in the value of its investments in approved securities in any
case where such depreciation has not actually been capitalized or otherwise accounted

(ii)

for a loss;
The depreciation, if any, in the value of its investments in shares, debentures or bonds
(other than approved securities) in any case where adequate provision for such

(iii)

depreciation has been made to the satisfaction of the auditor of the banking company
The bad debts, if any, in any case where adequate provision for such debts has been
made to the satisfaction of the auditor of the banking company.

Reserve fund:
(1) Every banking company incorporated in India shall create a reserve fund and shall, out of the
balance of profit of each year as disclosed in the profit and loss account prepared under
section 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent
to not less than twenty percent of such profit.
(2) Where a banking company appropriates any sum from the reserve fund of the share premium
account, it shall, within twenty one days from the date of such appropriation, report the fact
to the Reserve Bank explaining the circumstances relating to such appropriation provided
that the Reserve Bank may, in any particular case, extend the said period of twenty one days
by such period as it thinks fit or condone any delay in the making of such report.

Cash reserve:
Every banking company, not being a schedule bank, shall maintain in India by way of cash
reserve with itself or by way of balance in a current account with the Reserve Bank or by way of
net balance in current account or in one or more of the aforesaid ways, a sum equivalent, to at

least three percent of the total of its demand and time liabilities. In India as on the last Friday of
the second preceding fortnight and shall submit to the Reserve Bank before the twentieth day of
every month a return showing the amount so held on alternate Fridays during a month with
particulars of its demand time liabilities in India on such Fridays or if any such Friday is a public
holiday under the Negotiable Instruments Act, 1881 (26 of 1881), at the close of business of the
preceding working day.
Restrictions on loans and advances:
(1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956
(1 0f 1956), no banking company shall,
(a) Grant any loans or advances on the security of its own shares, or
(b) Enter into any commitment for granting any loan or advance or advance to or on behalf of

(i)
(ii)

Any of its directors.


Any firm in which any of its director is interested as partner, manager, employee or

(iii)

guarantor, or
Any company [not being a subsidiary of the banking company or a company
registered under section 25 of the companies Act, 1956 (1 of 1956), or a
government company of which or the subsidiary or the holding company] of which
any of the directors of the banking company is a director, managing agent, manager,

employee or guarantor or in which he holds substantial interest, or


(iv)
Any individual in respect of whom any of its directors is a partner or guarantor.
(2) Where any loan or advance granted by a banking company is such that a commitment for
granting it could not have been made if Cl.(b) of sub-section (1) had been in force on the date
on which the loan or advance was made, or is granted by a banking company after the
commencement of section 5 of the banking laws Act, 1968, but in pursuance of
commencement of section 5 of the Banking Laws Act,1968, but in commitment entered into
before such commencement, steps shall be taken to recover the amount due to the banking
company on account of the loan or advance together with interest, if any, due thereon within
the period stipulated at the time of the grant of the loan or advance, or where no such period
has been stipulated, before the expiry of one year from the commencement of the said section
5.

(3) No loan or advance, referred to in sub-section (2), or any part thereof shall be remitted
without the previous approval of the Reserve Bank, and any remission without such approval
shall be void and of no effect.
(4) Where any loan or advance referred to in sub-section (2), payable by any person, has not
been repaid to the banking company within the period specified in that sub-section, then such
person shall, if he is a director of such banking company on the date of the expiry of the said
period, be deemed to have vacated his office as such on the said date.
CONTROL OVER MANAGEMENT:
36-AA. Power of Reserve Bank to remove managerial and other persons from office.
1) Where the Reserve Bank is satisfied that in the public interest or for preventing the affairs of
a banking company being conducted in a manner detrimental to the interests of the depositors
or for securing the proper management of any banking company it is necessary so to do, the
Reserve Bank may, for reasons to be recorded in writing, by order remove from office, with
effect from such date as may be specified in the order 3 any chairman, director, chief
executive officer (by whatever name called) or other officer or employee of the banking
company.
2) No order under sub-section (1) shall be made 4 unless the chairman, director or chief
executive officer or other officer or employee concerned has been given a reasonable
opportunity of making a representation to the Reserve Bank against the proposed order.
Provided that if in the opinion of the Reserve Bank any delay would be detrimental to the
interests of the banking company or its depositors the Reserve Bank may, at the time of
giving the opportunity aforesaid or at any time thereafter, by order direct, that pending the
consideration of the representation aforesaid, if any 5 the chairman or, as the case may be
director or chief executive officer or other officer or employee, shall not, with effect from the
date of such order(a) 6 [act as such chairman or director] or chief executive officer or other officer or employee
of the banking company;
(b) In any way, whether directly or indirectly be concerned with, or take part in the
management of, the banking company.
3) It any person in respect of whom an order is made by the Reserve Bank under sub-section (1)
or under the provision to sub-section (2) contravenes the provisions of this section; he shall

be punishable with fine which may extend to two hundred and fifty rupees for each day
during which such contravention continues.
4) Any person appointed as 1 [chairman, director or chief executive officer] or other officer or
employee under this section shall(a) Hold officer during the pleasure of the Reserve Bank and subject thereto for a period not
exceeding three years or such further periods not exceeding three years at a time as the
Reserve Bank may specify.
(b) Not incur any obligation or liability by reason only of his being a 5 chairman, director or
CEO or other officer or employee or for anything done or omitted to be done in good
faith in the execution of the duties of his office or in relation thereto.
5) Notwithstanding anything contained in any law or in any contract, memorandum or articles
of association, on the removal of a person from officer under this section that person shall not
be entitled to claim any compensation the loss or termination of office.

Power to inspect1) The Reserve Bank shall, on being directed so to do by the Central Government or by the
High Court, cause an inspection to be made by one or more of its officers of a banking
company which is being wound up and its books and accounts.
2) On such inspection, the Reserve Bank shall submit its report to the Central Government and
the High Court.
3) If the Central Government, on consideration of the report of the Reserve Bank, is of opinion
that there has been a substantial irregularity in the winding-up proceeding, it may bring such
irregularity to the notice of the High court for such action as the High Court think fit.

CORPORATE GOVERNANCE.

Good Corporate Governance is the only alternative available before the Indian corporate sectary
and more particularly, Banks both commercial and co-operative sector to some at par with
international standards. But, some serious thought has to be given to bring certain amount of
norms in Governance of the countrys political system.

Corporate Governance has been defined in different ways by different thinkers and experts.
According to Noble Laureate Milion Friedman Corporate Governance is to conduct the business
in accordance with owner or shareholders desires, which generally will be to make as much
money as possible, while confirming the basic rules of the society embodied in law and local
customs. This definition is narrow in scope as it gives more importance to the owners stake.
Over the period of time, with fast developments in the world, the scope of the Corporate
Governance has widened. It now encompasses the interest of not only the owners but also many
other stakeholders.
The OECD experts have defined, Corporate Governance as the system by which corporation are
directed and controlled. The Corporate Governance specifies the distribution of rights and
responsibilities among different parties in the corporation, such as the Board, Manager,
Shareholder and other stakeholders, and spell out the rules and procedures for making decisions
on corporate affairs. In simple words, Corporate Governance is not just profit making, but
behaving responsibly, protecting environment, promoting healthy competition and preventing net
worth erosion. Corporate Governance cannot be explained by a set of hard and fast rules or
standards. The crux of corporate democracy lies in the accountable business leadership. Its main
aim-is to maintain a balance between economic and social goals and between individual and
commercial goals. According to Mr.J.Welfensohn, President, World Bank, Corporate
Governance is about promoting corporate fairness, transparency and accountability.

HISTORICAL BACKGROUND:
The emergence of modern corporate governance is traced back to the Watergate Scandal in USA.
At the same time, on investigation, the U.S. regulatory and legislative bodies were able to
highlight control failures that had allowed several major corporations to make illegal political
contribution and to bribe Government officials. As a consequence to this Foreign and Corrupt
Practices Act of 1977 was introduced in USA that contained specific provisions regarding the
establishment, maintenance and review of a system of internal control. Thereafter, a number of

other measures were initiated for internal financial controls and the most important was
Headway commission after the collapse of Savings and Loans in USA. The Headway
Commission submitted its report in 1987 and stressed for the need for a proper control
environment, independent audit committees and an objective Internal Audit Function.
The corporate world in India cannot remain indifferent to the development around the world. The
collapse of the South East Asian economies in 1997 made corporate governance a very vital
issue for corporate world. With the fast growth of economy, corruption is bound to emerge and it
is considered as a part of growing economy. In developing countries, the resources have to be
prioritized as required by the policy makers. Corruption and economic development cannot go
hand in hand. If a country is considered to be corrupt, it may not attract foreign investment. Good
corporate governance is important for running a business on sound ethical values. In the words of
Mr. Deepak Parekh ethics means, Not doing a thing one would be ashamed of if it becomes
public.
The only good Governance available in the banking sector was the ground rules and code of
Ethics known as GRACE, indention of professional directors, redressal of custom complaints
through Ombudsman and functioning of Audit committee of the Board. The banks enjoyed full
protection. They were not exposed to any competition and there was hardly any concept of
transparency and accountability. This became a breeding ground for malpractices and led to
inefficient due to economic compulsions and pressure, the Government of India compelled to
open Indian Economy and introduce prudential Accounting Norms, as suggested by Narasimham
Committee in its report submitted to RBI in 1990. A new challenge emerged which led to reform
in the Indian banking system so as to bring it at par to International standards as required under
BIS norms.
CRITICAL ISSUES:
Apart from the emerging challenges, a few issues having policy implications continue to remain
shrouded in controversy. Primarily, they relate to the following areas:
a) Government Ownership: Government ownership of the banking sector creates a
number of problems for RBI as the regulator. The problems are particularly complex

because the government often acts as quasi-regulator. Therefore, it is to be decides


whether good governance is complicated with government ownership.
b) Checks and Balances: In India, in most banks the chairman and CEO positions are
combined. This may create concentration of power in a single individual. It has been
suggested that the roles of the Chairman and CEO is separated.
c) RBI and Government nominee directors: Whether RBI can efficiently perform its roles
as supervisors, when it is also represented on the board through its nominee director,
which may lead to conflict of interest with its regulatory functions. More so, since the
nominee of RBI and Government are treated as superior to other directors.
d) Sectoral representation: Considering the current trend of liberalization, the reorientation
given to various interest groups in the board for protection of the sectional economic
interest, may have to be reviewed.
e) Quality and proportion of non-executive director: Only individuals of proven
professional competence and experience and with special insight into specific economic
activities may be appointed as non-executive directors. The optimum proportion of
executive and non-executive directors continues to be matter of debate.
f) Delay in filling up vacancies in the board: In many cases there is long delay in filling
up the vacancies in the board, which cripples its efficient functioning.
g) Ceiling on number of members in board: the size of the board should be too unwieldy
so as hamper its cohesiveness.
h) Disparities in remuneration of whole time directors: Normally, the whole time
directors of PSU banks are remunerated very poorly compared to their private sector
counterparts. Proper framework should also be developed for remuneration of nonexecutive directors.

SPECIAL PROVISION GOVERNING:


NATIONALISED BANKS
The 14 nationalized banks (in 1970) are governed by the provisions of the Banking Companies
(Acquisition and Transfer of undertakings) Act, 1970. The act provided for the nationalization of
the 14 major banking companies. A similar act was passed in 1980, which provided for the
nationalization of another six banking companies. Many provisions of the Banking Regulation
Act also apply to the nationalized banks.

REGIONAL RURAL BANKS (RRB)


Regional Rural Bank is set up under the sponsorship of an existing bank, by the Central
Government. The sponsor bank implies to an existing bank, which agrees to subscribe to the
share capital of the RRB, recruit and train its personnel for the first five years, provide
managerial and financial assistance. The RRB is a body corporate with perpetual succession and
a common seal.

CO-OPERATIVE BANK
Part V of the Banking regulation Act (1949) specifies the extent to which this and is applicable to
co-operative banks, i.e. co-operative societies carrying on the functions of the banking. Certain
provisions of the Banking Regulation Act have been modified in their application to the cooperative banks, while certain others have been omitted.
The third schedule to the act, which lays down the form of the balance sheet and profit & loss
account for the other banks, has been modified to a large extent in its application to the cooperative banks.

GHOSH COMMITTEE RECOMMENDATIONS.

Rec.

Recommendations as

Action points/ Audit considerations.

No.

summarized by RBI.

1.2

Precautions against theft of

Except large branches, enquiry counters are not

cash-staff should not indulge in

established in the branches. Some banks may have a

conversation/ answering

practice of allotting the duties of may I help you

queries, but direct such persons

duties to one of the employees, other cashier. What is

to Enquiry Counter only.

expected is that the cashier functions from any other


open desk. The auditor during his stay may observe
that the cashier so not indulge in conversation
including staff while he is in cash counter and public

1.7

1.8

Precaution against misusing

are not approaching the cashier for enquiry.


To prevent the violation of fiscal laws, RBI has

banking channels for tax

advised the banks that the Pat order, Demand Drafts,

evasion, PO/ TCs in excess of

MTs, TTs and Travelers cheque for Rs.50,000/-and

Rs.50, 000/- should be by way

above should be issued only by debit to the account of

of debit to constituents

the constituents and payment of such instruments

accounts and not by cash.

should be by way of credit to the account of the

Doubtful cases should be

constituent and cash transaction should not be

reported to higher authorities.


Periodical reporting of deposits/

allowed.
This recommendation is applicable to branches having

withdrawals from currency

currency chest attached to them. The auditor should

chest to issue department of

examine:

RBI

a) Deposits/ withdrawals into currency chests are


accounted on the same day.
b) These transactions are to be reported in the
prescribed format (TE-II) to RBI on same day.

3.4

Precautions for averting frauds

The RBI vides its Cir. No. DBOD. No. GC. SIC. BC.

in areas of letters of credit,

97/C. 408 (A)-83 dates 26-11-1983 has advised the

issue of guarantees and

banks to follow the following precautions for opening

acceptance facilities.

LCs, issuing BGs and co-accepting of bills.


a) LCs, BGs facility should be given only to the
customers having regular credit facilities and if the
customers do not have regular credit facilities, the
proposal should be appraised like any other credit
proposal.
b) Before establishing LC, the bank should examine
the financial position of the customer, his ability to

meet the required funds for retirement of bills on


presentation.
c) The bank should obtain suitable margin and other
security.
d) If the customer is enjoying credit facilities or
having account with other banks, without reference
and concurrence of such other bank. LC should not
be opened.
e) LC should not be established on the guarantee of
another bank.
f) For performance guarantee, the bank should
examine the capacity and means to perform the
obligations under guarantee.
g) With respect to co-acceptance of bills, the
following guidelines are given by RBI.
1) The need for sanctioning such facility should be
thoroughly examined and sanctioned only to the
customers having other credit facilities.
2) Genuine trade bills only to be co-accepted, it
should be ensured that the stocks covered bills
are reflected in the stock statement of the
customer.
3) Accommodation bill, house bills, bills of group
concerns should not be co-accepted.
4) Proper records are to be maintained for recording
the bills co-accepted.
5) The powers to co-accept bills, beyond certain
8.14

Monthly certificates of assisted

limits must be exercised by two officers jointly.


The RBI vides its circular No. DBOD. No. Com. BC.

units and on stocks pledged/

28/C. 408 (A)-81 dated 23-02-1981 had advised the

hypothecated to bank.

banks to lay down a system of submitting periodical


returns/ certificates to the controlling offices, say
monthly, containing the information to show name of
the borrowers, limits sanctioned, short description and
value of the securities charged to the bank, date of

inspection thereof names and signature of the officials


who carried out the inspection as also serious defects
if any, observed by the officials during such
inspection. The auditor should examine whether the
branch is submitting such return to the controlling
9.10

Fraud cases up to Rs.25, 000/-

office every month.


With a view to expedite cases and award of

having involvement of an

punishment, the committee desired that where a fraud

insider should not be reported

for an amount not exceeding Rs.25,000/- involving an

to police, where the recovery is

employee of the bank is detected, and the recovery of

not doubtful.

the amount is not in doubt, the matter should not be


reported to the police.

AUDITING AND ASSURANCE STANDARDS (AAS):


The auditor should obtain an understanding of internal control relevant to the audit. The auditor
uses the understanding of internal control to identify types of potential misstatement, consider
factors that affect the risks of material misstatement, and design the nature, timing, and extent of
further audit procedures. Internal control relevant to the audit is discussed below.
Internal control consists of the following components:
(a) The control environment.
(b) Control activities.
(c) Monitoring of controls.
Controls relevant to the Audit:
1) There is a direct relationship between an entitys objectives and the controls it implements to
provide reasonable assurance about their achievement. The entitys objectives and therefore
controls, relate to financial reporting, operations and compliances, however not all of these
objectives and controls are relevant to the auditors risk assessment.

2) Ordinarily, controls that are relevant to an audit pertain to the entitys objective of preparing
financial statement for external purposes that give a true and fair view (or are presented
fairly, in all material respects) in accordance with the applicable financial reporting
framework and the management of risk that may give rise to a material misstatement in those
financial statements. It is a matter of the auditors professional judgment, subject to the
requirements of this AAS, whether a control, individually or in combination with others, is
relevant to the auditors considerations is assessing the risks of material misstatement and
designing and performing further procedures in response to assessed risks. In exercising that
judgment, the auditor considers the circumstances, the applicable component and factors
such as the following:
The auditors judgment about materiality.
The size of the entity.
The nature of the entitys business, including its organization and ownership

characteristics.
The diversity and complexity of the entitys operations.
Applicable legal and regulatory requirements.
The nature and complexity of the system that are part of the entitys internal control,

including the use of service organizations.


3) Controls relating to operations and compliance objectives may, however, be relevant to an
audit if they pertain to data the auditor evaluates or uses in applying audit procedures. For
example, controls pertaining to non-financial data that the auditor uses in analytical
procedures, such as productions statistics, or controls pertaining to detecting non-compliance
with laws and regulations that may have a direct and material effect on the financial
statements, such as controls over compliance with income tax laws and regulations used to
determine the income tax provision, may be relevant to an audit.
4) Internal control over safeguarding of assets against unauthorized acquisition, use, or
disposition may include controls relating to financial reporting and operations objectives. In
obtaining an understanding of each of the components of internal control, the auditors
consideration of safeguarding controls is generally limited to those relevant to the reliability
of financial reporting. Use of excess controls such as passwords, that limit access to the data
and programs that process cash disbursements may be relevant to a financial statement audit.
Conversely, controls to prevent the excessive use of materials in production generally are not
relevant to a financial audit.

Control activities:
1) The auditor should obtain a sufficient understanding of control activities to assess the risks of
material misstatement at the assertion level and to design further audit procedures responsive
to assessed risks. Control activities are the policies and procedures that help ensure that
management directives are carried out for example that necessary actions are taken to address
risks that threaten the achievement of the entitys objectives. Control activities, whether
within IT or manual system, have various objectives and are applied at various organizational
and functional levels. Examples of specific control activities include those relating to the
following: authorization, performance reviews, formation processing, physical controls,
segregation of duties.
2) General IT-controls are policies and procedures that relate to many applications and support
the effective functioning of functioning of application controls by helping to ensure the
integrity of information and security of data commonly include controls over the following:
Data center and network operations.
System software acquisition, change and maintenance.
Access security.
Application system acquisitions, development and maintenance.

The Auditor should document:


The manner in which these matters are documented is for the auditor to determine using
professional judgment. In particular, the results of the risk assessment may be documented
separately, or, may be documented as part of the auditors documentation of further procedures.
Examples of common techniques, used alone or I combination include narrative descriptions,
questionnaires, check lists and flow charts. Such techniques may also be useful in documenting
the auditors assessment of the risks of material misstatement at the overall financial statement
and assertion level. For example, documentation of the understanding of a complex information
system in which a large volume of transactions are electronically, recorded, processed or reported
may include flowcharts, questionnaire or decision tables. For an information system making
limited or no use of IT or for which few transactions are processed (say, long term debt)
documentation in the form of a memorandum may be sufficient. Ordinarily, the more complex
the entity and the extensive the audit procedures performed by the auditors, the more extensive

the auditors documentation will be. AAS 3, Documentation provide guidance regarding
documentation in the context of the audit of financial statement.

Effective date:
This Auditing and Assurance Standards is effective for audits related to accounting periods
beginning or after 1st April, 2007.

STATUTORY BANK AUDIT:

PREPARTION AND PLANNING FOR AUDIT.


AUDIT OF BALACE SHEET AND PROFIT & LOSS.

AUDIT OF ADVANCES.
PRUDENTIAL NORMS.

PREPARATION AND PLANNING FOR AUDIT:


The audit preparation and planning should start immediately on receipt of the appointment letter
and the auditor should not wait until actual commencement of audit for the same. The various
stages involved in audit preparation and planning and the other related issues have been below in
detail.
STAGE I: AT THE OFFICE. UNDERSTANDING THE BASIC SCOPE OF AUDIT: Broadly
the scope of audit can be divided into three main parts:
1. Authentication of closing returns such as:
a) Balance sheet.
b) Profit and loss account either for the full year or for two half years.
c) Master summary of advances containing asset classifications.
d) Statements of furniture, computers, etc.
e) Statements of capital adequacy.
f) Statements of maturity pattern of loans & advances and deposits.
g) Statements of maturity pattern of foreign currency assets and liabilities.
h) Statements of maturity patterns of borrowings.
i) Statements of cash and bank balance on twelve odd dates.
j) Statements of lending to sensitive sectors.
k) Statements of movements in NPA.
l) Statements of advances made by rural branches.
2. Issuance of certificates in relation to:
a) Claim for PMRY subsidy.
b) Refund of DICGC claim.
c) Asset classifications, income recognition and provision.
d) Memorandum of changes (MOC) for previous year.
e) Investments, if any, held on behalf of Head office.
3. Issuance of reports including special reports/ certificates such as:

a)
b)
c)
d)

Auditors Report.
Long from audit report
Tax audit report.
Compliance certificate in respect of implementation of recommendation of Ghosh &
Jilani Committees.

COMMUNICATION WITH THE BRANCH


Generally, the appointment letter issued by the HO/ CO also contains the details like complete
postal address and contact number of the branch, name of the branch head, business portfolio of
the branch, etc. If these details are not mentioned in the appointment letter, the same must be
obtained. Depending upon the business profile of the branch, the auditor must issue written
communication for all the audit requirements to the branch.
PREPARATION FOR AUDIT PROGRAMME
1. While preparing/ updating audit programme due importance must be given toa) Auditing & Assurance Standards and other pronouncements of the Institute.
b) Provisions of the governing statutes.
c) Latest closing instructions.
d) Latest business profile.
e) Audited and un-audited financial statements.
f) LFAR for the previous year.
g) Guidelines and circulars issued by RBI.
h) Past experience of Bank Audit.
2. Generally, the information about the closing returns to be signed and certificates and reports
to be issued is mentioned in the appointment letter and the closing instructions issued by the
HO/Co. it must be ensured that all this information is properly updated I the audit programme
and all the related instructions for the closing returns, certificates, reports, etc. are
incorporated in the audit checklists.
3. As most of the branches are computerized, due emphasis must be given to the level of
computerization at the branch level.
4. The audit programme must be flexible and have substantial scope for modification/ revision
during the course of Audit.

STANDARDIZATION OF WOKING PAPERS

1. As the scope of audit is very wide and the time available is very limited, there are chances
that the(a) Critical areas are either completely omitted or not audited thoroughly by the team.
(b) Proper noting of important issues observed is not made.
(c) More time is devoted on insignificant matters.
2. In order to avoid such possibilities, it is advisable that all the working papers including audit
programme and audit query sheet are standardized.
STAGE II: AT THE BRANCH. UNDERSTANDING THE EDP ENVIRONMENT
1. Before commencing the audit, it is very important to understand the EDP environment at the
branch. The team must interact with the EDP department at the branch to gain an
understanding of the overall EDP environment.
2. The team must review the report on system audit, if any, conducted during the year. The team
must also review the reports of concurrent auditors, RBI inspectors and internal inspectors to
understand the overall EDP environment of the branch.
3. The audit team must be properly briefed about(a) The approach of audit in the computerized environment.
(b) The system of data processing and generation of various outputs at the branch.
(c) The importance of proper understanding and verification of the output before placing
reliance.
(d) Te basic difference between the Automated Ledger Posting Machine (ALPM) branches,
Total Branch Mechanism (TBM) and branches under Core Banking Solutions (CBS).
4. At times, the branches continue to use old version of the software even though latest version
is supplied. It must be ensured that the version being used by the branches is the latest
version that is supplied by the controlling authorities.
5. The branches are required to maintain logbook for recording any disruption/ corruption/
breakdown that may arise in the software/ hardware at the branch. The logbook must be
reviewed to understand the implication of the systematic issues on the overall presentations
of the financial statements.
EXECUTION OF AUDIT
During execution of audit, following important aspects must be borne in mind:
1. The audit programme and the checklists must be suitably updated in the light of the
understanding gathered about the overall functioning of the branch.
2. The audit observations must be discussed on a daily basis.

3. The documentation and proper filing must be given due importance. All the audit memos
along with the supporting documents must be systematically filed on daily basis.
4. The final issue affecting the true and fair view and other disclosures must be discussed with
branch management.
COMPLETION OF AUDIT
At the final stage, the following important aspects must be borne in mind:
1. The auditor must ensure that all the audited closing returns, reports and certificates have been
duly signed and stamped.
2. It must be ensured that LFAR has also been prepared and discussed with the branch.
3. Tax audit must also be completed during the course of statutory audit, as no separate visit is
allowed for the same.
4. The copies of the audited closing returns, reports and certificates are obtained for the purpose
of filing.
5. Necessary representation letter must be obtained from the branch management.
6. In case the Bank requires attendance certificate to be submitted along with the bill, ensure
that the same has been obtained in the prescribed format.
AUDIT OF BALANCE SHEET AND P&L
The statutory audit of banks and their branches is generally described as Balance sheet audit. The
audit procedures followed in case of banks are to some extent different from those followed in
case of other entities. The reason being the system of accounting followed and the nature of
records maintained by the Banks. Before we proceed with the Balance sheet and the P&L, it is
advisable to gain understanding of accounting system and nature of records of the branch.
SPECIFIC AUDIT APPROACH FOR MAJOR ITEMS OF BALANCE SHEET
PART 1: ASSETS
1. Cash
a) Evaluate the effectiveness of internal controls being exercised by the branch by making
enquiries about the daily verification of cash at the opening and the closing hours,
maintenance of cash related registers and vault register, safety of cash cabins, dual
custody of cash, safe keeping of vault and cash box key, recording of movements of keys,

dual custody of the keys, security arrangements for cash movements, decoy money, daily
cash holding and retention limit, etc.
b) Review the reports of the concurrent auditors to ascertain the level and effectiveness of
internal controls and also ascertain the frequency of cash verification carried out by the
concurrent auditors.
c) Verify the closing cash balance at the branch and the extension counter/ATM center
connected to the branch as on the last day of the year or as of any day during the course
of audit in the presence of the cashier and manager.
2. Balances with RBI, SBI and other Banks
Verify the balances as per the books with the balance confirmation certificates received from
3.
4.
5.
6.

these banks ensure that to be reported in LFAR have been duly verified and incorporated.
Money at call and short notice
Generally these assets are not held or dealt with at the branch level.
Investments
Generally these assets are not held or dealt with at the branch level.
Advances
The audit approach in respect of advances is covered in detail in Audit of Advances.
Furniture, fixtures, computers and office equipments
a) Evaluate the effectiveness of internal controls over acquisition recording, identifications,
safeguarding and periodic verification of these items.
b) Verify the major addition and deletion with the related supporting documents such as
invoices, challans, etc.

7. Other assets-inter office adjustments (net)


a) Understand the basic nature of such transactions, the relevance thereof for the overall
presentation of financial statements and the procedures for recording such transactions.
b) Ensure that the closing balance shown in the statement of the last day of the year tallies
with the corresponding balance in general ledger.
c) Comment of very old and high value un-reconciled items.
8. Other asset-interest accrued
Ascertain the system of accruing interest on advances in the computerized branch in the light
of RBI guidelines for monthly charging of interest.
9. Other assets- suspense account
a) Understand the guidelines issued by HO for operating suspense account.
b) Obtain the details of entries outstanding as at the year end.
c) Identify the provision to be made in respect of very old entries.
d) Ensure that the matters to be reported in LFAR have been duly verified and incorporated.
10. Other assets- stationery and stamps
Evaluate the effectiveness of internal controls exercise by the branch for acquisition,
recording, usage, etc.

11. Other assets-security deposit


It relates to telephone deposit, mobile deposit, electricity deposit, deposit Paid to the landlord
for leased premises, etc.

PART II: LIABILITIES


1. Deposits
a) Ensure that the balances as per the subsidiary ledgers of various deposit accounts are duly
balanced and tallied with the respective balances in the general ledger. Any difference in
the balancing should be reported in the audit report.
b) Understand the types of various deposits held by the branch and the salient features of
those deposits with reference to the due dates for applications, accrual, compounding and
payment of interest.
c) Ascertain that the branch has complied with the RBI guidelines related to opening and
maintenance of deposits accounts including NRI deposit accounts.
2. Borrowings
Generally borrowing are not held or dealt with at the branch level.
3. Bills payable
a) Generally bills payable relates to pay-order (PO), demand draft (DD), telegraphic transfer
(TT) and mail transfer (MT) and bankers cheque issued by the branch. The balances in
these accounts indicate progressive balance that is subject to reconciliation at HO level.
b) Ensure that the details of lost demand draft, if any, circulated by RO/HO are readily
available with the branch.
4. Inter-office adjustments (NET)
For details refer item 7of part I
5. Interest accrued
Ascertain the system of accruing interest on deposit in the computerized branch. Generally
interest on deposit is aced at the last day of the month and is reversed on the first day of the
succeeding month.
6. Other liabilities-rebate on bill discounted
a) Ascertain that the branch has complied with the related accounting policy abd necessary
accounting has been done in respect of discount received in advance for the un-expired
period of the bills outstanding as at the year end.
b) In case the bill wise details are not made available and the amount of rebate is material,
report that fact in the audit report.
7. Other liabilities- Tax deducted at source
Normally tax is deducted at source as per the Income Tax Act, 1961 in respect of interest on
term deposit, staff salaries, rent, professional charges and payment made to contractor, etc.

8. Other liabilities- Unrealized interest on NPA


a) This account is also referred to as interest suspense, de-recognized interest, etc.
b) Generally the branches are required to maintain subsidiary ledger for recording account
wise details of unrealized interest.
9. Other liabilities- Others
a) This could include sundry deposits, staff security deposits, margin money and statutory
dues such as deduction of professional tax, provident fund, ESI, etc.
b) In statutory dues, ensure that proper reporting has been done in the Tax Audit report.

PART III: CONTINGENT LIABILITY


1. Claims against the Bank not acknowledge as debts
a) Generally this includes disputed amounts of lease rent, property tax, etc. in respect of
premises taken on lease.
b) Obtain suitable representation from the branch about the completeness of the disclosure
of such contingent liabilities.
2. Guarantees and acceptance, endorsements & other obligations
Obtain the list of unexpired guarantees and letter of credit. In case the list is not made
available, report the fact in the report.

PART IV: BILLS FOR COLLECTION (CONTRA ITEMS)


a) Obtain the list of bills for collection outstanding as at the year end and verify the same
with the related registers maintained by the banks.
b) Ascertain that age of the outstanding bills and the reasons for old items.

SPECIFIC AUDIT APPROACH FOR MAJOR ITEMS OF PROFT AND LOSS


ACCOUNT
PART I: INCOME

1. Interest/ discount on advanced bills


a) Evaluate the overall effectiveness of internal controls through the reports of
concurrent auditors and other agencies.
b) Ascertain the nature and the extent of revenue leakage detected by the concurrent
auditors.
c) Ascertain that the branch has completed with HO instructions for recognizing penal
interest and overdue interest.
2. Other incomes- Commission, exchange and brokerage
a) It normally includes commission on letter of credit, guarantees, remittances and
transfer of funds through DD, TT, MT, etc. bills for collection and Government
business.
b) Ensure that the branch has complied with the provisions of service tax and other taxes
applicable on services.
3. Other incomes- profit on sales of fixed assets
a) It normally includes profit and loss on sale of motor vehicles, furniture and fixtures,
computers and other assets held by the branch.
b) Ensure that proper accounting has been done for the depreciation till the date of
disposal as per the accounting policy framed by the bank.
4. Other incomes- miscellaneous incomes
a) It normally includes locker rent, recovery of godown rent, etc.
b) In case locker rent in recovered in advance for a year or more, ensure that the same is
properly apportioned on time period basis or as per the accounting policy advised by
the HO.
PART II: EXPENDITURE
1. Interest on deposits
a) Evaluate the overall effectiveness of internal controls through the reports of
concurrent auditors and other agencies.
b) Obtain copies of applicable interest rate circulars issued by HO and verify the rate
applied for certain deposit accounts. More emphasis should be given to changes in the
rates, premature closure, back dated renewal, high value deposits, etc.
2. Salary & allowances to staff
a) Generally monthly salary and allowances to staff are processed centrally either at RO
or at any other main branches and the related records are also maintained there. The
monthly salary sheets are then passed on to the respective branches and the payment
is made by those branches. In such situations, it must be ensured that the branch has
properly accounted the payment for entire year.

3. Rent
a) Obtain the details of rented premises used by the branch either for the branch
operations or for the officers and the copies of rent agreements.
b) In case the lessor has availed loan against the rent payable by the branch ensure that
the rent is properly appropriated towards the loan outstanding.
4. Electricity
a) Obtain the details of the connections used for the branch premises and the staff
premises.
b) Ensure that the payment is made as per the original bills held by the branch.
5. Printing & stationery
a) Generally HO or any centralized department of bank supplies major stationery items
like security items, etc. to the branch. At branch level these items are recorded in the
memorandum register for the purpose and internal control.
6. Depreciation
a) Ensure that depreciation has been charged as per the rates and method prescribed in
the HO instructions especially with reference to additional and deletions during the
year. More emphasis should be given to inter branch transfer of assets and the
depreciation thereon.
b) Generally the branches commit mistakes in identifying revenue and capital
expenditure. In case such mistakes are observed during the course of audit, it is
advisable to identify the corresponding impact on the depreciation.

7. Legal charges
a) Ensure that these payments are made on the basis of the bills and other supporting
documents. More emphasis should be given to the approval of higher authorities
required for making such payments.
8. Postage, telegram & telephone
a) Obtain the list of telephone connections used in the branch premises and residential
premises of the staff, as per the policy of the bank.
b) Ensure that the payments are made as per the original bills held by the bank.
9. Repairs & maintenance
a) Normally it includes expenditure incurred on repairs and maintenance of vehicles,
furniture, fixtures, premises, etc and annual maintenance contracts (AMC) for
computers, ACs, etc.
10. Insurance

a) Normally it includes expenditure incurred on insurance of office equipments installed


at the branch like computers. ACs, etc
b) Obtain the details of insurance policies, if any, held by the branch.
11. Other expenditure
a) It included all other expenditure including professional charges, concurrent audit fees,
etc. that is not included in any of the specific heads.

AUDIT OF ADVANCES
PART I: INTRODUCTION
Loans and advances constitute major portion of the assets of any branch and interest thereon is
the major source of revenue for any branch. In view of the significance attached to this item, it is
important for the auditor to thoroughly understand the scope of the audit and the reporting
requirements. It is advisable to standardize the basic format of the scope of audit and also the
notes to be prepared by the team at every stage of the verification. While verifying the advances
it is important to keep in mind the requirement of LFAR, recommendations of Ghosh and Jilani
Committees, prudential norms of RBI and various certificates to be issued.
PART II: AUDIT PROCEDURE (Account level)
1. It is advisable to cover following important aspects while verifying advances:
(a) Compliance with terms and conditions as per the sanction letter.

(b) Regular submission of stock and book-debt statement, QIS/ MSOD and audited and unaudited financial statements.
(c) Adequacy of insurance coverage.
(d) Adequacy of security coverage.
(e) Quality of credit monitoring.
(f) Regular renewal of limits.
2. It is advisable to review the following records:
(a) Latest sanction letter.
(b) Latest correspondence files.
(c) Stock & book debt statements.
(d) Latest audited and un-audited financial statement.
(e) Insurance policies.
(f) Latest valuation reports.
(g) Latest stock audited report, wherever applicable.
(h) Legal documents.
(i) Latest inspection reports.
(j) Minutes of consortium meetings, wherever applicable.
PART III: IMPORTANT ASPECTS OF PRUDENTIAL NORMS
While verifying compliances of the prudential norms issued by RBI give more emphasis on:
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)

Operations in the accounts of the borrower.


Possibility of window dressing in the account.
Reversal of unrealized interest.
Identifications of the date of NPA.
Valuation of security.
Accounts upgraded from NPA category to standard category.
Potential NPA.
Standard accounts with lowest credit ratings.
Standard accounts with negative net worth BIFR.
Asset classification by the other consortium members.

PRUDENTIAL NORMS OF ASSET CLASSIFICATION INCOME RECOGNITION AND


PROVISIONING
1. VERIFICATION OF COMPUTERISED CLOSINF RETURNS
a) Presently many of the banks are using customized software for generation of master
summary and account wise report on asset classification, income recognition and
provisioning. Such software facilities more accuracy and consistency in compilation of
data on prudential norms, provided the same are thoroughly tested and approved.

b) As regards the system generated returns it is important to note that these returns do not
substitute the normal audit procedures that are to be performed by the auditor. These
returns only facilitate the audit to certain extent and hence the same must be accepted
after performing normal audit procedures.
c) Generally the system generated returns contain lot of information that may be relevant
only for the purpose of management information. As this information is not to be audited,
it is advisable to state the fact in the relevant return that is to be certified.

2. SALIENT FEATURES
I.
Non-performing assets:
a) An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank. On other words, a non-performing asset (NPA) shall be a loan or as
advanced where:
i) Interest or installments of principal remain overdue for a period of more than 90 days
in respect of a term loan.
ii)