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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.
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:
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.
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:-
Based on object
other types
Complete audit
Continuous audit
Partial 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:
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.
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:
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)
(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,
(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
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.
Rec.
Recommendations as
No.
summarized by RBI.
1.2
conversation/ answering
1.7
1.8
of debit to constituents
allowed.
This recommendation is applicable to branches having
examine:
RBI
3.4
The RBI vides its Cir. No. DBOD. No. GC. SIC. BC.
acceptance facilities.
hypothecated to bank.
having involvement of an
not doubtful.
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,
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 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.
AUDIT OF ADVANCES.
PRUDENTIAL NORMS.
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.
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.
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
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)
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)