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9
AUDIT OF BANKS
LEARNING OUTCOMES
After studying this chapter, you will be able to:

 Gain the knowledge of legal framework, form and content of financial
statements of the banks.
 Know the feature of audit of accounts and auditor’s report.
 Understand CRR, SLR and Capital Adequacy etc.
 Understand the prescribed procedure to be followed while doing
verification of assets and liabilities of the bank.
 Acquire the knowledge of Concurrent Audit and types of activities to be
covered in it.
 Know the role of audit committee in audit of banks.
© The Institute of Chartered Accountants of India

9.2 ADVANCED AUDITING AND PROFESSIONAL ETHICS
CHAPTER OVERVIEW
Regulatory Framework
Form and Content of F.S.

Format of Audit
Report
Audit of Accounts
LFAR
Auditor's Report
Coducting an Audit
Reporting to RBI,
Overview
Regulators etc.
Internal Control in Certain
Selected Areas
Assets and Balances
Verfication
Capital and Liabilities
Scope & its covered Activities
Coverage of Business/Branches
Concurrent Audit
Appointment of Auditors and its
accountability
Audit Committee
Audit Report
1. INTRODUCTION
The banking industry is the pivot of any economy and its financial system. Banks are one of the
foremost agents of financial intermediation in an economy like
India and, therefore, development of a strong and resilient
banking system is of utmost importance. The banking
institutions in the country are working in a competitive
environment and their regulatory framework is aligned with the
international best practices. Thus, financial deepening has
taken place in India and continues to be in progress with a
focus on orderly conditions in financial markets while
sustaining the growth momentum.
Banks have certain characteristics distinguishing them from
most other commercial enterprises.

AUDIT OF BANKS 9.3
Custody of large volumes of monetary items, including cash and negotiable

instruments, whose physical security has to be ensured. This applies to storage
and the transfer of monetary items, making banks vulnerable to misappropriation
and fraud, necessitating establishment of formal operating procedures, well-
defined limits for individual discretion and rigorous systems of internal control.
Engagement in a large volume and variety of transactions in terms of number and value
which necessarily require complex accounting and internal control systems and
widespread use of Information Technology (IT).
Operation through a wide network of geographically dispersed branches and
departments necessitating a greater decentralization of authority and dispersal of
accounting and control functions, with consequent difficulties in maintaining uniform
operating practices and accounting systems, particularly when the branch network
transcends national boundaries.
Assumption of significant commitments without any transfer of funds. These items,
called 'off-balance sheet' items, may at times not involve accounting entries and the
failure to record such items may be difficult to detect.
Engagement in transactions that are initiated at one location, recorded at a different
location and managed at yet another location.
Direct Initiation and completion of transactions by the customer without any intervention
by the bank’s employees. For example, over the Internet or mobile or through
automatic teller machines (ATMs).
Integration and linkages of national and international settlement systems could pose a
systemic risk to the countries in which they operate.
Regulatory requirements by governmental authorities often influence accounting and
auditing practices in the banking sector.
Special audit considerations arise in the audit of banks because of:
• the particular nature of risks associated with the
transactions undertaken;
• the scale of banking operations and the resultant significant
exposures which can arise within short period of time;
• the extensive dependence on IT to process transactions;
• the effect of the statutory and regulatory requirements;
• the continuing development of new products and services and banking practices which may not
be matched by the concurrent development of accounting principles and auditing practices.
Evolution of technology and providing services through Net Banking and Mobiles has exposed
banks to huge operational and financial risk.

The auditor should consider the effect of the above factors in designing his audit approach. It is
imperative for Branch Auditors and SCAs (Statutory Central Auditors) to have detailed knowledge of the
products offered and risks associated with them, and appropriately address them in their audit plan to
the extent they give rise to the risk of material misstatements in the financial statements.
In today’s environment, the banks use different applications to carry out different transactions
which may include data flow from one application to other application; the auditor while designing
his plans should also understand interface controls between the various applications.
2. LEGAL FRAMEWORK
There is an elaborate legal framework governing the functioning of banks in India. The principal
enactments which govern the functioning of several types of banks are:
Banking Regulation
Co-operative Act, 1949
Societies Act, 1912 State Bank of India
for Co-operative Act, 1955
Banks
Payment and
Reserve Bank of
Settlement
India Act, 1934
Systems Act, 2007
Credit Information
Companies
(Regulation) Act, Legal Companies Act,
2013
2005
Framework for
Banks in India
Securitisation and Banking
Reconstruction of Companies
Financial Assets (Acquisition and
and Enforcement Transfer of
of Security Interest Undertakings) Act,
Act, 2002 1970
Prevention of
Regional Rural
Money Laundering
Banks Act, 1976
Act, 2002 Banking
Companies
Information
(Acquisition and
Technology Act,
Transfer of
2000
Undertakings) Act,
1980
Further, the Reserve Bank of India Act, 1934 gives wide powers to the RBI to give directions to
banks which also have considerable effect on the functioning of banks

AUDIT OF BANKS 9.5
3. FORM AND CONTENT OF FINANCIAL STATEMENTS

Every banking company is required to prepare a Balance Sheet and a Profit and Loss Account in
the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit.
Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance
Sheet and Form B contains the form of Profit and Loss Account.
Every banking company needs to comply with the disclosure requirements under the various
Accounting Standards, as specified under section 133 of the Companies Act, 2013, read with Rule
7 of the Companies (Accounts) Rules 2014, in so far as they apply to banking companies or the
Accounting Standards issued by the ICAI. It may be noted that implementation of Indian
Accounting Standards (Ind AS) has been deferred by RBI for all scheduled commercial
banks presently.
It is pertinent to state that preparation of balance sheet of a bank usually involves
preparation of standalone financial statements and consolidated financial statements.
Preparation of Standalone financial statements involve consolidation of branch accounts
and incorporation of various verticals/departments of bank in case of a nationalized
bank/public sector bank. The detailed procedures in this regard may vary from bank to
bank. In case of private banks, the processes of accounting are centralized and there is no
concept of mandatory branch audit in accordance with RBI guidelines.
Public sector banks and private banks are listed on recognized stock exchange and are
required to comply with SEBI regulations including LODR.
3.1 Audit of Accounts & Appointment of Auditor

Sub-section (1) of section 30 of the Banking Regulation Act requires that the balance sheet and
profit and loss account of a banking company should be audited by a person duly qualified under
any law for the time being in force to be an auditor of companies.
Most banks, especially those in nationalised banks or public sector, appoint four or more
(depending upon their size and Board decision, as per RBI guidelines) firms of chartered
accountants to act jointly as statutory central auditors (SCAs).
The appointment letter sent by banks in connection with the appointment of SCAs
typically contains the following:
• Period of appointment.
• Particulars of other central auditors.
• Particulars of previous auditors.
• Procedural requirements to be complied with in accepting the assignment.
1. Letter of acceptance (the letter usually contains, inter alia, averment as to
absence of disqualification for appointment, way in which the audit has to be
conducted and confirmation of present name, constitution and address of the
auditor), declaration of fidelity and secrecy, restriction on accepting other assignments
from the bank, etc.
• A statement of division of work and review and reporting responsibilities amongst joint

auditors in case of nationalised banks (Generally this is decided at a later stage)

• Scope of assignment which includes any special reports or certificates to be given by
the SCAs in addition to the main report.
• In case of statutory branch auditors (SBAs), appointment letter is given on similar lines
except in regard to particulars of other auditors and statement of division of work.
However, it is to be noted that statutory branch audit is carried out by a single firm of
chartered accountants.
Authority appointing the Auditors - As per the provisions of the relevant enactments, the auditor
of a banking company is to be appointed at the annual general meeting of the shareholders,
whereas the auditor of a nationalised bank is to be appointed by the concerned bank 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 State Bank of India are to be appointed by the Comptroller and Auditor General of
India in consultation with the Central Government. The auditors of regional rural banks are to be
appointed by the concerned bank with the approval of the Central Government.
Note: Students may refer Chapter 12 of CA Intermediate Auditing and Assurance Study Material for
Eligibility, Qualifications, Disqualification, Appointment, Powers, Remuneration etc. of Auditor.
4. CONDUCTING AN AUDIT
The audit of banks or of their branches involves the following stages –
Initial Considerations Understanding Risk Assessment Execution Reporting

• Acceptance & • Understanding the • Identifying and • Engagement Team • Independent
Continuance Bank and Its Assessing the Discussions Auditor’s
• Declaration of Environment Risks of Material • Prepare response Report
Indebtedness including Internal Misstatements to the Assessed • Long Form
• Internal Assignments in Control • Assess the Risk of Risks Audit Report
Banks by Statutory • Understand the Fraud including • Establish the • Report any
Auditors Bank’s Accounting Money Laundering Overall Audit other matters
• Terms of Audit Process • Assess Specific Strategy to Bank,
Engagements • Understanding the Risks • Audit Planning Regulator or
• Communication with Risk Management • Risk Associated Memorandum Government
Previous Auditor Process with Outsourcing • Determine Audit
• Planning of Activities Materiality
• Establish Engagement • Consider Going
Team Concern

AUDIT OF BANKS 9.7
Stage I: Initial Considerations

Acceptance & Continuance: The assessment of engagement risk is a critical part of the audit
process and should be done prior to the acceptance of an audit engagement since it affects the
decision of accepting the engagement and in planning decisions if the audit is accepted.
Declaration of Indebtedness: The RBI has advised that the banks, before appointing their
statutory central//branch auditors, should obtain a declaration of indebtedness i.e., a written
confirmation that auditor/firm/partners/f/family members have not been declared as wilful
defaulters by any bank/financial institution This is in addition to the declaration regarding absence
of disqualifications stipulated in Section 141 of the Companies Act 2013 which includes borrowing
above stipulated amount. Students may refer Chapter 12 of CA Intermediate Auditing and
Assurance Study Material.
Internal Assignments in Banks by Statutory Auditors: The RBI decided that the audit firms
should not undertake statutory audit assignment while they are associated with internal
assignments in the bank during the same year.
Terms of Audit Engagements: SA 210, “Terms of Audit Engagements” requires that for each
period to be audited, the auditor should agree on the terms of the audit engagement with the bank
before beginning significant portions of fieldwork. It is imperative that the terms of the engagement
are documented, to prevent any confusion as to the terms that have been agreed in relation to the
audit and the respective responsibilities of the management and the auditor, at the beginning of an
audit relationship. This is usually done in the form of engagement letter which is written by the
auditor and acknowledged by the bank.
Communication with Previous Auditor: As per Clause (8) of the Part I of the First Schedule to
the Chartered Accountants Act, 1949, a chartered accountant in practice cannot accept position as
auditor previously held by another chartered accountant without first communicating with him/her
in writing.
Planning: The audit plan needs to be properly documented with respect to timing, extent of
checking, audit procedures to be followed at assertion level and should be flexible and updated or
changed, as and when necessary.
Establish the Engagement Team: The assignment of qualified and experienced professionals is
an important component of managing engagement risk. The size and composition of the
engagement team would depend on the size, nature, and complexity of the bank’s operations.
Stage II : Understanding
Understanding the Bank and Its Environment including Internal Control: An understanding of
the bank and its environment, including its internal control, enables the auditor:
• to identify and assess risk;
• to develop an audit plan to determine the operating effectiveness of the controls, and to
address the specific risks.
Understand the Bank’s Accounting Process: The accounting process produces financial and
operational information for management’s use and it also contributes to the bank’s internal control.

Thus, understanding of the accounting process is necessary to identify and assess the risks of
material misstatement whether due to fraud or not, and to design and perform further audit
procedures.
Understanding the Risk Management Process: Management develops controls and uses
performance indicators to aid in managing key business and financial risks. An effective risk
management system in a bank generally requires the following:
Oversight by those Identification,
Reliable information
charged with measurement and Control activities Monitoring activities
systems
governance monitoring of risks
• Those charged • Risks that could • A bank should • Risk management • Banks require
with governance significantly have appropriate models, reliable
(BOD/Chief impact the controls to methodologies information
Executive Officer) achievement of manage its risks, and assumptions systems that
should approve bank’s goals including effective used to measure provide adequate
written risk should be segregation of and manage risk financial,
management identified, duties should be operational and
policies. The measured and (particularly, regularly compliance
policies should be monitored against between front and assessed and information on a
consistent with pre-approved back offices), updated. This timely and
the bank’s limits and criteria accurate function may be consistent basis.
business measurement and conducted by the Those charged
objectives and reporting of independent risk with governance
strategies, capital positions, management unit. and management
strength, verification and require risk
management approval of management
expertise, transactions, information that is
regulatory reconciliation of easily understood
requirements and positions and and that enables
the types and results, setting of them to assess
amounts of risk it limits, reporting the changing
regards as and approval of nature of the
acceptable. exceptions, bank’s risk profile.
physical security
and contingency
planning.
Stage III : Risk Assessment

Identifying and Assessing the Risks of Material Misstatements: SA 315 requires the auditor to
identify and assess the risks of material misstatement at the financial statement level and the
assertion level for classes of transactions, account balances, and disclosures to provide a basis for
designing and performing further audit procedures.
Assess the Risk of Fraud including Money Laundering: As per SA 240 “The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements”, the auditor’s objective is to
identify and assess the risks of material misstatement in the financial statements due to fraud, to
obtain sufficient appropriate audit evidence on those identified misstatements and to respond
appropriately. The attitude of professional scepticism should be maintained by the auditor to
recognise the possibility of misstatements due to fraud.
The RBI has framed specific guidelines that deal with prevention of money laundering and “Know
Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your

AUDIT OF BANKS 9.9
Customer Guidelines – Anti Money Laundering Standards”), requiring banks to establish policies,
procedures and controls to deter and to recognise and report money laundering activities.
Assess Specific Risks: The auditors should identify and assess specific risks of material
misstatement at the financial statement level which refers to risks that relate to the banking
industry and the use of IT therein.
Risk Associated with Outsourcing of Activities: The modern-day banks make extensive use of
outsourcing as a means of both reducing costs as well as making use of services of an expert not
available internally. There are, however, certain risks associated with outsourcing of activities by
banks and therefore, it is quintessential for the banks to effectively manage those risks.
Stage IV: Execution
Engagement Team Discussions: The engagement team should hold discussions to gain better
understanding of bank and its environment, including internal control, and to assess the potential
for material misstatements of the financial statements.
Response to the Assessed Risks: SA 330 “The Auditor’s Responses to Assessed Risks”
requires the auditor to design and implement overall responses to address the assessed risks of
material misstatement at the financial statement level. The auditor should design and perform
further audit procedures whose nature, timing and extent are based on and are responsive to the
assessed risks of material misstatement at the assertion level.
Establish the Overall Audit Strategy: SA 300 “Planning an Audit of financial Statements’’ states
that the objective of the auditor is to plan the audit so that it will be performed in an effective
manner. For this purpose, the audit engagement partner should:
• establish the overall audit strategy, prior to the commencement of an audit; and
• involve key engagement team members and other appropriate specialists while establishing
the overall audit strategy, which depends on the characteristics of the audit engagement.
Audit Planning Memorandum: The auditor should summarise the team’s audit plan by preparing
an audit planning memorandum in order to:
• Describe the expected scope and extent of the audit procedures to be performed by the
auditor.
• Highlight all significant issues and risks identified during their planning and risk assessment
activities, as well as the decisions concerning reliance on controls.
• Provide evidence that they have planned the audit engagement appropriately and have
responded to engagement risk, pervasive risks, specific risks, and other matters affecting
the audit engagement.
Determine Audit Materiality: The auditor should consider the relationship between the audit
materiality and audit risk when conducting an audit. The determination of audit materiality is a
matter of professional judgment and depends upon the knowledge of the bank, assessment of
engagement risk, and the reporting requirements for the financial statements. Judgments about

materiality are made in light of surrounding circumstances and are affected by the size or nature of
a misstatement, or combination of both.
Consider Going Concern: In obtaining an understanding of the bank, the auditor should consider
whether there are events and conditions which may cast significant doubt on the bank’s ability to
continue as a going concern.
Stage V: Reporting
Students should refer to the reporting requirements explained in heading 8. Auditor’s Report of
this Chapter.
[Note: For detailed understanding of stages involved for conducting an audit, as discussed above,
students may refer Guidance Note on Audit of Banks.]
4.1 Special Considerations in IT Environment

The advent of working in CBS environment in banks coupled with changes in technology, use of
different payment systems and integration of Aadhar for cardless transactions have changed
the way banking used to be in earlier times. However, the technological developments have
brought new challenges for auditors as audit is required to be conducted through the system.
Considering the importance of IT systems in preparation and presentation of financial
statements, it is imperative that bank should share detailed information with auditors like: -
• Overall IT policy, structure and environment of Bank’s IT system
• Data processing and data interface under various systems
• Data integrity and data security
• Business Continuity plans and disaster control plans
• Accounting manual and critical accounting entries, their processes and involvement of IT
systems
• Controls over key aspects, use of various account heads, expense booking, overdue
identification etc.
• Controls on recording of various e-banking and internet banking products and channels
• MIS reports being generated and their periodicity
• Major exception reports and process of generation including embedded logic
• Process of generating various information related to various disclosures in financial
statements and involvement of IT systems
Overall review of IT environment and computerized accounting system has to be taken at head
office level. The branch auditors generally do not have access to IT policy and processes
implemented by the bank. Hence, based upon guidance and information received from Statutory

AUDIT OF BANKS 9.11
central auditors, branch auditors need to ensure that data review and analysis through CBS is
carried out and tests of controls and substantive checking of sample transactions is carried out
at branch level and results are shared with statutory central auditors.
It is responsibility of statutory central auditors to obtain understanding of IT environment
and various controls put in place by management and evaluate whether controls are
operating effectively. The methodology adopted by the bank in implementing and
monitoring controls should be discussed with head of IT department and based on this
understanding, audit procedures can be designed.The key security control aspects that an
auditor needs to address when undertaking audit in a computerised bank include:
• Ensure that authorised, accurate and complete data is made available for processing.
• Ensure that in case of interruption due to power, mechanical or processing failures, the
system restarts without distorting the completion of the entries and records.
• Ensure that the system prevents unauthorised amendments to the programmes.
• Verify whether “access controls” assigned to the staff-working match with the
responsibilities as per manual. It is important for the auditor to ensure that access and
authorisation rights given to employees are appropriate.
• Verify that segregation of duties is ensured while granting system access to users and
that the user activities are monitored by performing an activities log review.
• Verify that changes made in the parameters or user levels are authenticated.
• Verify that charges calculated manually for accounts when function is not regulated
through parameters are properly accounted for and authorised.
• Verify that exceptional transaction reports are being authorised and verified on a
daily basis by the concerned officials. It is important for auditor to understand the
nature of exception and its impact on financials.
• Verify that the account master and balance cannot be modified/amended/altered except
by the authorised personnel.
• Verify that all the general ledger accounts codes authorised by Head Office are in
existence in the system.
• Verify that balance in general ledger tallies with the balance in subsidiary book. .
4.2 Internal Audit and Inspection

Central audit and inspection department in Banks is a combination of centralized function with
some level of decentralization which is usually headed by a Chief Audit Executive. It is responsible
for undertaking risk-Based Internal Audit (RBIA) as per the framework as stipulated by RBI. It is
also responsible for identification of branches for revenue audit, appointment of concurrent
auditors, deciding their scope, meeting the concurrent auditors, discussing their issues, conducting

trainings if needed, and review of work of concurrent auditors. The primary function is to ensure
that the audit function is handled smoothly, effectively & efficiently.
Risk-based Internal audit is conducted based upon the risk assessment of business and
control risks of branches. The risk assessment process includes: -
• Identification of inherent business risks in various activities undertaken by branches
(Business risk)
• Assessment of effectiveness of control systems for monitoring inherent risks of
business activities of branch (Control risk)
• Making an assessment of level and direction of various risk areas and assess level
and direction of overall business risk and control risk
• Drawing up of risk matrix taking into account factors viz. Risk of branch
5. INTERNAL CONTROL IN CERTAIN SELECTED AREAS

System of Internal Control in Banks: Banks are required to implement and maintain a system of
internal controls for mitigating risks, maintain good governance and to meet the regulatory
requirements. Given below are examples of internal controls that are typically implemented in a
bank:
Area of Focus Examples of Internal Controls in a Bank
General • The staff and officers of a bank should be shifted from one position to
another frequently and without prior notice.
• The work of one person should always be checked by another person
(usually by an officer) in the normal course of business.

AUDIT OF BANKS 9.13
• The arithmetical accuracy of the books should be proved

independently every day.
• All bank forms (e.g. Cheque books, demand draft/pay order books,
travelers’ cheques, foreign currency cards etc.) should be kept in the
possession of an officer, and another responsible officer should verify
the issuance and stock of such stationery.
• The mail should be opened by a responsible officer. Signatures on all
the letters and advices received from other branches of the bank or
its correspondence should be checked by an officer with the
signature book.
• The signature book and the telegraphic code book should be kept
with responsible officers and access should be allowed only to
authorised officers.
• The bank should take out insurance policies against loss due to all the
risks such as fire, natural calamities, theft and employees’ infidelity.
• The financial powers of officers of different grades should be clearly
defined.
• There should be surprise inspection of head office and branches at
periodic interval by the internal audit department. The irregularities
pointed out in the inspection reports should be promptly rectified.
Cash • Cash should be kept in the joint custody of two responsible officers.
• In addition to normal checking by the chief cashier, cash should be
test-checked daily and counted in full occasionally by a responsible
officer other than those handling the cash. Actual cash in hand
should agree with the balance shown by the Day Book every day.
• The cashier should have no access to the customer’s ledger
accounts and the Day Book. This is an important safeguard as the
Bank managements are often tempted to use cashiers because of
their shorter working hours as ledger clerks in the absence of regular
staff etc. This can result in substantial losses to the bank.
• The counterfoil of cash receipt vouchers (e.g. counterfeits of pay-in-
slips lodged by the depositors) should be signed by an officer in Cash
Department, in addition to the receiving cashier.
• Payments should be made only after the vouchers (e.g. cheques,
demand drafts etc.) have been passed for payment by the authorised
officer and have been entered in the customer’s account.
• Receipt and payment scrolls or their totals should be compared with
the cash column of the Day-Book by independent persons.
• High value cash receipts and payments should be verified by a higher
officer/ branch manager and the excess cash balance should be remitted
to currency chest according to branch’s retention limit on daily basis.

Clearings • Under the Cheque Truncation System (CTS) implemented by RBI,

an electronic image of the cheque is transmitted to the paying
branch through the clearing house, along with relevant
information like data on the MICR band, date of presentation,
presenting bank, etc. This effectively eliminates the associated
cost of movement of the physical cheques, reduces the time
required for their collection.
• As per RBI guidelines, the branch is required to either call the
customer or email him for any cheque received for the amount of
` 5 lakh and above in respect of inward clearings. The Auditor
may verify the compliance on test check basis.
• The Auditor is to check whether signature of the drawer of the
cheque is being verified by the staff or not as else there will be
liability of the paying bank under all circumstances.
• The unpaid cheques received in outward clearing should be either sent
to the customers at their recorded address or the customers be
informed to collect the same from bank branch.
Bills for • All the documents accompanying the bills should be received and
Collection entered in the Register by a responsible officer. At the time of dispatch,
the officer should also see that all the documents are sent along with
the bills.
• The accounts of customers or principals should be credited only after
the bills have been collected or an advice to that effect received from
the bank branch or agent to which they were sent for collection.
• It should be ensured that bills sent by one branch for collection to
another branch of the bank, are not taken in the bills for collection
twice in the amalgamated balance sheet of the bank. For this purpose,
the receiving branch should reverse the entries regarding such bills at
the end of the year for closing purposes.
Bills • At the time of purchase of the bills, an officer should verify that all the
Purchased documents of title are properly assigned to the bank.
• Sufficient margin should be kept while purchasing or discounting a bill
to cover any decline in the value of the security etc.
• If the bank is unable to collect a bill on the due date, immediate steps
should be taken to recover the amount from the drawer against the
security provided.
• All irregular outstanding account/s should be reported to the Head
Office.
• In the case of bills purchased outstanding at the close of the year the
discount received thereon should be properly apportioned between the
two years.

AUDIT OF BANKS 9.15
Loans and • The bank should make advances only after satisfying itself as to the
Advances creditworthiness of the borrowers and after obtaining sanction from the
proper authorities of the bank.
• All the necessary documents (e.g., agreements, demand promissory
notes, letters of hypothecation, etc.) should be executed by the parties
before advances are made.
• Sufficient margin should be kept against securities taken to cover any
decline in the value thereof and to comply with Reserve Bank
directives. Such margins should be determined by the proper
authorities of the bank as a general policy or after detailed scrutiny for
specific accounts.
• All the securities should be received and returned by responsible
officer. They should be kept in the Joint custody of two such officers.
• All securities requiring registration should be registered in the name of
the bank or otherwise accompanied by the documents sufficient to give
title of the bank.
• All accounts should be kept within both the drawing power and the
sanctioned limit as per prescribed norms. Additional temporary limit
may be sanctioned, for a maximum of 20% of existing limit and 90 days
maximum tenure.
• All the accounts which exceed the sanctioned limit or drawing power or
are against unapproved securities or are otherwise irregular should be
brought to the notice of the Management/Head Office regularly.
• The operation (in each advance account) should be reviewed at least
once every year.)
Demand Drafts • The signatures on a demand draft should be checked by an officer with
the Signature Book.
• All the D.Ds. sold/ issued by a branch should be immediately confirmed
by an advice to the paying branch.
• If the paying branch does not receive proper confirmation of any D.D.
from the issuing branch or does not receive credit in its account with
that branch, it should take immediate steps to ascertain the reasons.
Inter Branch • The accounts should be adjusted only on the basis of advices (and not
Accounts on the strength of entries found in the statement of account) received
from other branches,
• Prompt action should be taken preferably by central authority, if any
entries (particularly debit entries) are not responded to by any branch
within a reasonable time.
Credit Card • There should be effective screening of applications with reasonably
Operations good credit assessments.
• There should be strict control over storage and issue of cards.

• There should be a system whereby a merchant confirms the status of

unutilised limit of a credit-card holder from the bank before accepting
the settlement, in case the amount to be settled exceeds a specified
percentage of the total limit of the card holder.
• There should be a system of prompt reporting by the merchants of all
settlements accepted by them through credit cards.
• Reimbursement to merchants should be made only after verification of
the validity of merchant’s acceptance of cards.
• All the reimbursement (gross of commission) should be immediately
charged to the customer’s account.
• There should be a system to ensure that statements are sent regularly
and promptly to the customer.
• There should be a system to monitor and follow-up customers’
payments.
• Payments overdue beyond a reasonable period should be identified
and attended to carefully. For defaulting customers, credit should be
stopped by informing the merchants through periodic bulletins, as early
as possible, to avoid increased losses.
• There should be a system of periodic review of credit card holders’
accounts. On this basis, the limits of customers may be revised, if
necessary. The review should also include determination of doubtful
amounts and the provisioning in respect thereof.
Example 2
While doing the audit of a branch of XYZ bank for the year ended 31st March 20, it was seen
that the stock statements with the same figures are submitted by borrowers month after
month with a change in the month at the top. These are just filed for formal compliance.
Such things happen because a responsible official does not check the stock statements and
get them entered in in the system, which is a lapse in internal control. Due to such a lapse,
neither the borrower nor bank staff take it sincerely, thus posing a risk of loss to bank.
6. COMPLIANCE WITH CRR AND SLR REQUIREMENTS

(i) Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the central
bank. One of the important determinants of cash balances to be maintained by banking companies
and other scheduled banks is the requirement for maintenance of a certain minimum cash reserve.
While the requirement for maintenance of cash reserve by banking companies is contained in the
Banking Regulation Act, 1949, corresponding requirement for scheduled banks is contained in the
Reserve Bank of India Act, 1934.

AUDIT OF BANKS 9.17
The RBI, from time to time, reviews the evolving liquidity situation and accordingly decides the
rate of CRR required to be maintained by scheduled commercial banks. Therefore, the auditor
needs to refer to the master circular issued from time to time in this regard to ensure the
compliance of CRR requirements.
(ii) Statutory Liquidity Ratio (SLR) Requirements – SLR is the requirement that every
scheduled commercial bank in India is required to maintain in the form of certain liquid assets such
as gold, cash and government approved securities before providing credit to the customers. The
Reserve Bank of India requires statutory central auditors of banks to verify the compliance with
SLR requirements of 12 odd dates in different months of a fiscal year not being Fridays. The
objective of maintaining SLR is to have an amount in the form of liquid assets which can be used
to handle a sudden increase in demand for the amount from the depositors. The resultant report is
to be sent to the top management of the bank and to the Reserve Bank.
Maintenance of liquid assets as

Correctness of the compilation of DTL
prescribed u/s 24 of Banking
(Demand and Time Liabilities) position; and
Regulation Act.
Audit Approach and Procedure:
Area of Focus Suggested Audit Procedures

Compliance with • Obtain an understanding of the relevant circulars/ instructions of
CRR and SLR the RBI, particularly regarding composition of items of DTL.
requirements • Request the branch auditors to send their weekly trial balance as
on Friday and these are consolidated at the head office. Based on
this consolidation, the DTL position is determined for every
reporting Friday. The statutory central auditor should request the
branch auditors to verify the correctness of the trial balances
relevant to the dates selected by him/her. The branch auditors
should also be specifically requested to examine the cash balance
at the branch on the selected dates.
• Examine, on a test basis, the consolidations regarding DTL position
prepared by the bank with reference to the related returns received
from branches. The auditor should examine whether the valuation
of securities done by the bank is in accordance with the guidelines
prescribed by the RBI.
• While examining the computation of DTL, specifically examine that
items have been excluded from liabilities as per RBI guidelines.
Some of these items are:-
• Paid up capital, reserve, any credit balance in profit & loss account
of bank, amount of loan taken from RBI and amount of refinance
taken from EXIM bank, NHB, SIDBI and NABARD

o Part amounts of recoveries from the borrowers in respect of

debts considered bad and doubtful of recovery.
o Amounts received in Indian currency against import bills and
held in sundry deposits pending receipts of final rates.
o Un-adjusted deposits/balances lying in link branches for
agency business like dividend warrants, interest warrants,
refund of application money, etc., in respect of
shares/debentures to the extent of payment made by other
branches but not adjusted by the link branches.
o Margins held and kept in sundry deposits for funded
facilities.
• Similarly, specifically examine that the items have been included in
liabilities as per RBI guidelines. Some of these items are:-
o Net credit balance in branch adjustment accounts.
o Borrowings from abroad by banks in India needs to be
considered as ‘liabilities to other’ and thus, needs to be
considered at gross level unlike ‘liabilities towards banking
system in India’, which are permitted to be netted off against
‘assets towards banking system in India’. Thus, the adverse
balances in Nostro Mirror Account needs to be considered
as ‘Liabilities to other’.
o The reconciliation of Nostro accounts (with Nostro Mirror
Accounts) needs to be scrutinized carefully to analyze and
ascertain if any inwards remittances are received on behalf
of the customers / constituents of the bank and have
remained unaccounted and / or any other debit (inward)
entries have remained unaccounted and are pertaining to
any liabilities for the bank.
• Examine whether the consolidations prepared by the bank include
the relevant information in respect of all the branches.
• It may be noted that, even though interest accrues daily, it is
recorded in the books only at periodic intervals. Thus, examine
whether such interest accrued but not accounted for in books is
included in the computation of DTL.
• The auditor at the central level should apply the audit procedures
listed above to the overall consolidation prepared for the bank as a
whole. Where such procedure is followed, the central auditor
should adequately describe the same in the report.
• While reporting on compliance with SLR requirements, the auditor
should specify the number of unaudited branches and state that
he/she has relied on the returns received from the unaudited

AUDIT OF BANKS 9.19
branches in forming an opinion. Recently, there has been

introduction of Automated Data Flow (ADF) for CRR & SLR
reporting and the auditors should develop necessary audit
procedures around this.
7. VERIFICATION OF ASSETS
Before beginning verification of assets and balances, the auditor should obtain an accurate
schedule of accounts in the prescribed format. The following are the steps involved in verification
of assets and balances. -
I. CASH, BANK BALANCES AND MONEY AT CALL AND SHORT NOTICE - The Third
Schedule to the Banking Regulation Act, 1949, requires disclosures to be made in the
balance sheet regarding cash, balances with Reserve Bank of India, balances with other
banks and money at call and short notice. Audit approach and audit procedures in respect of
these items is discussed as under: -
Balances with
Balances with Other Money at Call and
Cash Reserve Bank of
Banks Short Notice
India
Audit approach: The auditor’s basic objective in verification of these items is their
existence and completeness as on date of balance sheet and audit procedures have to
be tailored to meet these. Remember that cash would be appearing in balance sheet of
almost all branches. However, in most of the branches of a bank, there will be no bank
account requiring reporting except in branches with treasury operations. Similarly,
activity pertaining to money at call and short notice is handled by treasury department
of the bank at head office level.
Banks have a robust system of internal controls pertaining to cash like joint custody of
two responsible officers, checking of cash at periodic intervals etc due to higher risk
of misappropriation. Similarly, the balance with other banks (in case of applicable
branches) are reconciled periodically. The auditor has to be satisfied about effective
operation and implementation of internal controls in this area.
Audit Procedures:
Cash • Carry out the physical verification of cash (including foreign
currency, if any, cash at ATM and cash at cash deposit
machines) as close to the balance sheet date as possible.

• The cash balance as physically verified should be agreed with

the balance shown in the cash register/balance in CBS.
Balance with • Verify the ledger balances in each account with reference to
Reserve Bank the bank confirmation certificates and reconciliation statements
of India as at the year-end.
• Review the reconciliation statements, paying special attention
to the following items appearing in the reconciliation
statements:
o Cash transactions remaining unresponded;
o Revenue items requiring adjustments/write-offs; and
o Other credit and debit entries originated in the
statement provided by RBI remaining unresponded
for more than 15 days.
Balance with Apart from the procedures described above in examining the balances
Other Banks with Reserve Bank of India, while reviewing the reconciliation
(Other than statements, the auditor should pay particular attention to the following.
Reserve Bank • Examine that no debit for charges or credit for interest is
of India) outstanding and all the items which ought to have been taken
to revenue for the year have been so taken.
• Examine that no cheque sent or received in clearing is
outstanding.
• Examine that all bills or outstation cheques sent for collection
and outstanding as on the closing date have been credited
subsequently.
• Examine large transactions in inter-bank accounts to
ensure that no transactions have been put through for
window-dressing particularly towards the close of year.
The balances with banks outside India should also be verified in the
manner described above. These balances should be converted into
the Indian currency at the exchange rates prevailing on the balance
sheet date
Money at Call • Examine whether there is a proper system of authorisation,
and Short general or specific, for lending of the money at call or short
Notice notice. Compliance with the instructions or guidelines laid down
in this behalf by the head office or controlling office of the
branch, including the limits on lending’s in inter-bank call
money market should also be examined.
• Call loans should be verified with the certificates of the
borrowers and the call loan receipts held by the bank.

AUDIT OF BANKS 9.21
• Examine whether the aggregate balances comprising this item

as shown in the relevant register tally with the control accounts
as per the general ledger.
• Examine subsequent repayments received from borrowing
banks to verify the amounts shown under this head as at the
year-end. It may be noted that call loans made by a bank
cannot be netted-off against call loans received.
• Verify that the interest has been properly accrued and
accounted for on year-end outstanding balances of call/ short
notice money.
II. INVESTMENTS
Audit approach:
The auditor’s primary objective in audit of investments is to satisfy himself as to their existence,
ownership and valuation. Examination of compliance with statutory and regulatory requirements is
also an important objective in audit of investments in as much as non-compliance may have a
direct and material effect on the financial statements. The latter aspect assumes special
significance in the case of banks where investment transactions should be carried out within the
numerous parameters laid down by the relevant legislation and directions of the RBIThe auditor
should keep this in view while designing audit procedures relating to investments. Every bank has
their own investment policy, which is drawn strictly in conjunction with RBI Master circular on
investments. The entire compliance needs to be evaluated in terms of requirements of investment
policy read with master circular RBI
Audit Procedures:
Internal Control • Review the investment policy of the bank to ascertain that
Evaluation and the policy conforms, in all material respects, to the RBI’s
Review of Investment guidelines as well as to any statutory provisions applicable
Policy to the bank.
• It should clearly outline the broad investment objectives
separately for the investments on its own account and
investments on behalf of customers.
Separation of • Check the segregation of duties within the bank staff in
Investment Functions terms of executing trades, settlement and monitoring of such
trades, and accounting of the same (generally termed as
front office, middle office and back office functions’
segregation).
Examination of • Examine the reconciliation of the investment account, physically
Reconciliation verify the securities on hand, obtain confirmations from counter-
party banks for Bank Receipts (BRs) issued by such banks and on

hand, obtain confirmation of Subsidiary General Ledger (SGL)

balances with the Public Debt Office (PDO), and examine the
control and reconciliation of BRs issued by the bank.
Examination of • Ascertain whether the investments made by the bank are
Documents within its authority.
• Ensure that any other covenants or conditions which restrict
qualify or abridge the right of ownership and/or disposal of
investments, have been complied with by the bank.
• The acquisition/disposal of investments should be verified
with reference to the broker’s contract note, bill of costs,
receipts and other similar evidence.
Physical Verification • Verify the investment scrips physically at the close of
business on the date of the balance sheet.
• Verify investments held with public debt office of RBI,
custodians and depository with the statement of holdings as
on date of balance sheet. Independent balance confirmation
requests can be made in accordance with SA-505. In case
independent confirmations are not received back, alternative
audit procedures like getting bank personnel to download
investment statement from E-Kuber for government
securities (E-Kuber is CBS platform of RBI) in auditor’s
presence can be designed.
• In respect of BRs issued by other banks and on hand with
the bank at the year-end, the auditor should examine
confirmations of counterparty banks about such BRs. Where
any BRs have been outstanding for an unduly extended
period, the auditor should obtain written explanation from
the management for the reasons thereof. The auditor should
examine the reconciliation of BRs issued by the bank. BRs
should not be issued in respect of transactions in
government securities for which SGL facility is available.
• If certain securities are held in the names of nominees, the
auditor should examine whether there are proper transfer
deeds signed by the holders and an undertaking from them
that they hold the securities on behalf of the bank.
Examination of • Examine that entire investment portfolio of bank is
classification and classified under three categories i.e.HTM, HFT and AFS
shifting and shifting of securities is as per regulatory norms and
laid down policy.
• Examine whether the shifting of the investments from

AUDIT OF BANKS 9.23
‘available for sale’ to ‘held to maturity’ is duly approved by

the Board of Directors of the bank.
Examination of • Examine whether the method of accounting followed by the
Valuation bank in respect of investments, including their year-end
valuation, is appropriate.
• Examine whether the investments have been properly
classified into the three categories at the time of acquisition
based on such intention as evidenced by the decision of the
competent authority such as Board of directors, Asset
Liability Committee (ALCO) or Investment Committee.
• Examine compliance by the bank with the guidelines of the
RBI relating to valuation of investments.
• Verify that investments are classified as non-performing
investments (NPI) as per applicable RBI guidelines. (Non-
performing investments are those where interest/principal is
in arrears and remains unpaid for more than 90 days). In
such cases, banks have not to reckon income on securities
and are required to make provisions for depreciation in
value of investment.
• Examine whether income from investments is properly
accounted for. This aspect assumes special importance in
cases where the bank has opted for receipt of income
through the electronic/on line medium.
• Verify whether adequate disclosure of any change in method
of valuation of investment is made.
• Examine whether the profit or loss on sale of investments
has been computed and accounted for properly.
• Verify that there is a proper system for recording and
maintenance of TDS certificates received by the bank.
Dealings in Securities • Examine whether prior approvals for carrying out such
on Behalf of Others dealings have been obtained.
• Examine whether bank’s income from such activities has been
recorded and is fairly stated in the bank’s financial statements.
• Consider whether the bank has any material undisclosed
liability from a breach of its fiduciary duties, including the
safekeeping of assets.
Special-purpose • Examine whether the bank is maintaining separate accounts
Certificates Relating for the investments made by it on their own Investment
to Investments Account, on PMS clients’ account, and on behalf of other
constituents (including brokers).

• As per the RBI guidelines, banks are required to get their

investments under PMS separately audited by external
auditors.
Audit, Review and Reporting: Banks should undertake half-yearly reviews (as of 30th September
and 31st March) of their investment portfolio. These half yearly reviews should not only cover the
operational aspects of the investment portfolio but also clearly indicate amendments made to the
investment policy and certify the adherence to laid down internal investment policy and procedures
and RBI guidelines.
The internal auditors are required to separately conduct the concurrent audit of treasury
transactions and the results of their report should be placed before the CMD once every month.
Banks need not forward copies of the internal audit report to RBI. However, major irregularities
observed in these reports and position of compliance thereto may be incorporated in the half
yearly review of the investment portfolio.
III. ADVANCES
The Third Schedule to the Act requires classification of advances made by a bank from three
different angles, viz., nature of advance (like cash credit, overdrafts or term loans or bills
purchased and discounted), nature and extent of security(like secured by tangible assets or
covered by bank/govt guarantees), and and place of making advance (i.e. Whether in India or
outside India). Further, advances in India are also to be classified also on sectoral basis (like
priority sector or public sector).
Audit Approach: Advances generally constitute the major part of the assets of the bank. There
are substantial number of borrowers to whom variety of advances are granted. The audit of
advances requires the major attention from the auditors. The auditor is primarily concerned with
obtaining evidence about the following while carrying out audit of advances:-
• Amounts included in the balance sheet in respect of advances are outstanding at the date
of balance sheet
• Advances represent amounts due to the bank
• Amounts due to the bank are appropriately supported by loan documents
• There are no unrecorded advances
• The stated basis of valuation of advances is appropriate and properly applied and
recoverability of advances is recognized in their valuation.
• Advances are disclosed, classified and described in accordance with recognized accounting
policies and practices and relevant statutory and regulatory requirements
• Appropriate provisions towards advances are made as per RBI norms, accounting
standards and generally accepted accounting practices
It would be worth recalling that there exists elaborate and detailed control system &
procedure in banks pertaining to appraisal, sanctioning, documentation, disbursal, review,

AUDIT OF BANKS 9.25
monitoring and supervision of advances. Audit approach of advances should encompass

designing appropriate audit procedures to obtain audit evidence in all these areas.
Audit Procedures - In carrying out audit of advances, the auditor is primarily concerned with
obtaining evidence about the following:
Evaluation of • Examine area of credit appraisal and verify whether laid down
Internal procedures regarding credit appraisals including loan
Controls over applications, preparation of proposals, obtaining satisfaction
Advances about credit worthiness of borrowers are being followed;
• Examine advances are sanctioned according to delegated
authority;
• Examine all necessary loan documents have been executed
after sanction but before disbursals are made to borrowers;
• Examine compliance with stipulated terms of sanction and end use
of funds more particularly in case of term loans;
• Examine existence, enforceability and valuation of securities. In
respect of securities requiring registration, examine this area also;
• Examine the validity of the recorded amounts;
• Review operations of the accounts and look for adverse
features like unauthorised over drawings beyond limits;
• Examine whether system laid down in bank for review/renewals
of advances is being followed;
• Review whether drawing power is being calculated properly on
basis of stock/book debt statements received from borrowers
as stipulated in respective sanction letters;
• Ensure compliance with Loan Policy of Bank as well as prudential
norms of RBI including appropriate asset classification and provisioning.
Substantive • Verify correctness of master data of loan accounts updated in
Audit CBS. Check parameters like instalments, EMI, rate of interest,
Procedures tenure of loans etc.
• Verify that each customer of bank is tagged under single
customer id in respect of all its accounts including those in
which credit facilities are granted.
• Examine all large advances while other advances may be examined
on a sample basis.
• Examine accounts identified to be problem accounts but which
have not yet slipped into NPA category. This can be done by
obtaining list of SMA1 and SMA2 borrowers from the bank and
same can be considered for selection of problematic accounts.

• Examine those accounts which have been adversely

commented upon by concurrent auditors/bank’s internal
inspection/RBI inspection team.
• Examine list of restructured accounts to ensure that
restructure is as per RBI guidelines. Remember restructured
account portfolio requires additional provisioning.
• Examine quick/early mortality accounts. Any advance slippage
to NPA within 12 months of its sanction is called as quick/early
mortality case.
• Verify completeness and accuracy of interest being charged.
• Carry out appropriate analytical procedures.
Recoverability • Review periodic statements submitted by the borrowers indicating
of Advances the extent of compliance with terms and conditions.
• Review latest financial statements of borrowers.
• Review reports on inspection of security.
• Review auditor’s reports in case of borrowers having credit facilities
from the banking system beyond a cut-off limit fixed by board of
directors of bank
Example 3
FT Cooperative Bank lent housing loan of ` 1 crore to Rahul Dave, for an under
construction flat. The project was still incomplete and the builder absconded. It turned out
that the builder had taken a loan from another bank for the entire property on the basis of
an equitable mortgage. Since equitable mortgage is not registered, FT bank was unable to
trace the loan taken by the builder and therefore the borrower Rahul and FT bank both
suffered.
It would be a better idea to first approve the builder after thoroughly examining his
credentials, past performances etc., and then only consider giving loans to buyers of his
flats to minimize such risks. In fact many banks nowadays do this. Somehow FT Coop bank
did not take the precaution and landed in trouble. Further, CIBIL records of the builder also
could have been checked. Loan sanctioning should not become a mere “tick the box”
process.
Verification of asset classification, income recognition and Provision for Non-performing
assets: An important aspect of audit of advances relates to their asset classification and
provisioning (for provisioning norms refer Chapter 12 of Intermediate Auditing & Assurance Study
Module). This implies that advances are classified in accordance with prudential norms on asset
classification, income is recognized on actual record of recovery and a proper provision should be
made in respect of advances where the recovery is doubtful.

AUDIT OF BANKS 9.27
Audit approach
The Reserve Bank has prescribed objective norms for determining the quantum of provisions
required in respect of advances. The auditors must take / download the latest Master Circular of
RBI to familiarise himself fully with the norms prescribed by RBI in this regard. The circulars issued
by RBI after the date of issue of Master Circular and till the date of audit should also be taken /
downloaded and reviewed by the auditors for its adherence. However, these norms should be
construed as laying down the minimum provisioning requirements and wherever a higher provision
is warranted in the context of the threats to recovery, such higher provision should be made.
In this regard, the provisions of section 15 of the Banking Regulation Act, 1949 may be noted. This
section, which applies to banking companies, nationalised banks, State Bank of India and regional
rural banks, requires the bank concerned to make adequate provision for bad debts to the
satisfaction of its auditor before paying any dividends on its shares.
It may be noted that verification of applicable prudential norms on asset classification, income
recognition and provisioning is an important responsibility of statutory branch auditor as well as
statutory central auditor.
Classification • Verify whether bank has a system of ongoing identification and
and Provision classification of advances through CBS without manual
intervention and its accuracy in crystallising date of NPA.
• Examine whether the classification made by the branch is
appropriate. Particularly, examine the classification of advances
where there are threats to recovery.
• Examine whether the secured and the unsecured portions of
advances have been segregated correctly and provisions have been
calculated properly.
• Review and compare the date of NPA of loan accounts
mentioned in current year statements with that of previous year.
Reasons for any change should be ascertained.
Accounts As per the Reserve Bank guidelines, if an account has been regularised
regularized near before the balance sheet date by payment of overdue amount through
Balance sheet genuine sources, the account need not be treated as NPA. Where,
date subsequent to repayment by the borrower (which makes the account
regular), the branch has provided further funds to the borrower (including
by way of subscription to its debentures or in other accounts of the
borrower), the auditor should carefully assess whether the repayment was
out of genuine sources or not. Where the account indicates inherent
weakness based on the data available, the account should be deemed as
NPA. In other genuine cases, the banks must furnish satisfactory evidence
to the Statutory Auditors about the manner of regularisation of the account
to eliminate doubts on their performing status.

It is to be ensured that the classification is made as per the position as on

date and hence classification of all standard accounts be reviewed as on
balance sheet date. The date of NPA is significant to determine the
classification and hence specific care be taken in this regard. NPA should
be recognized only based on concept of Past Due/ Overdue concept, and
not based on the Balance Sheet date.
Drawing Power • Ensure that the drawing power is calculated as per the extant
Calculation guidelines (i.e. the Credit Policy of the Bank) formulated by the Board
of Directors of the respective bank and agreed upon by the concerned
statutory auditors reflected from respective sanction letters
• Special consideration should be given to proper reporting of sundry
creditors and stocks covered under LCs/guarantees for the
purposes of calculating drawing power. It is to be ensured that
declared stocks shall not cover borrower’s liability outstanding in
form of sundry creditors for goods or covered by LCs/guarantees
availed for procurement of material. Similarly, in case bank has
provided credit facility against primary security of book debts, net
value of debtors (i.e. eligible trade debtors as per terms of sanction
less bills discounted with banks) is to be arrived at. It is to be
ensured that drawing power is calculated net of stipulated margin.
Further, in case of consortium accounts, drawing power calculation
and allocation made by lead bank is binding on member banks.
• The drawing power needs to be calculated carefully in case of
working capital advances to companies engaged in construction
business. The valuation of work in progress should be ensured in
consistent and proper manner. It also needs to be ensured that
mobilization advance being received by the contractors is reduced
while calculating drawing power.
• The stock audit including audit of book debts should be carried out
by the bank for all accounts having funded exposure of more than
stipulated limit. The report submitted by the stock auditors should
be reviewed during the course of the audit and special focus should
be given to the comments made by the stock auditors on valuation
of security and calculation of drawing power.
Accounts with • Banks should not classify an advance account as NPA merely due
temporary to the existence of some deficiencies which are temporary in
deficiencies nature such as non-availability of drawing power based on latest
available stock statement, balance outstanding exceeding the
limit temporarily and non-renewal of limits on the due date.
However, stock statements relied upon by the banks for
determining drawing power should not be older than 3 months.

AUDIT OF BANKS 9.29
The outstanding in the account based on drawing power

calculated from stock statements older than 3 months are
considered as irregular. Ensure adherence to these guidelines.
Limits not • Accounts where regular/ad hoc limits are not reviewed within 180
reviewed days from the due date/date of ad hoc sanction, should be
considered as NPA. Auditors should also ensure that the ad
hoc/short reviews are not done on repetitive basis. In such cases,
auditor can consider the classification of account based on other
parameters and functioning of the account.
Asset • Ensure that asset classification is borrower wise and not
classification to facility wise. Therefore, it is to be ensured that all the facilities
be borrower granted by a bank to borrower will have to be treated as NPA
wise and not and not particular facility which has become irregular. Further,
facility wise if debits arising out of devolvement of LC or invoked
guarantees are kept in separate account, the outstanding
balance should be treated as part of borrower’s principal
account for purpose of application of prudential norms on
asset classification, income recognition and provisioning.
Government • If government guaranteed advance becomes NPA, then for the purpose of
Guaranteed income recognition, interest on such advance should not to be taken to
Advances income unless interest is realized. However, for purpose of asset
classification, credit facility backed by Central Government Guarantee,
though overdue, can be treated as NPA only when the Central
Government repudiates its guarantee, when invoked. This exception is not
applicable for State Government Guaranteed advances, where advance is
to be considered NPA if it remains overdue for more than 90 days.
• In case the bank has not invoked the Central Government
Guarantee though the amount is overdue for long, the reasoning for
the same should be taken and duly reported in LFAR.
Agricultural • Ensure that NPA norms have been applied in accordance with the crop
Advances season determined by the State Level Bankers’ Committee in each State.
Depending upon the duration of crops – short term/ long term - raised by
an agriculturist, the NPA norms would also be made applicable to
agricultural term loans availed of by them. Also ensure that these norms
are made applicable to all direct agricultural advances listed in Master
Circular on lending to priority sector.
• In respect of agricultural loans, other than those specified in the
circular, ensure that identification of NPAs has been done on the
same basis as non-agricultural advances.

Provisioning The auditor should check the latest RBI Circulars in this regard. It is be
Towards understood that provision for standard assets is also required to be
Standard made at variable rates in respect of different sectors for the funded
Assets outstanding in accordance with RBI norms as a matter of prudence.
The provisions need to be checked in detail with the statement of
advances. The bifurcation of standard advances under relevant category
for proper calculation of provision should be checked and certified at
branches level. The definition of respective items specified should be
adhered as defined by RBI.
Restructured Restructuring is an act in which a lender, for economic or legal
Advances reasons relating to borrower’s financial difficulty, grants concessions
to the borrower. It may involve modification of terms of advances
including alteration of amount of instalments/alteration of repayment
period/rate of interest/sanction of additional credit facilities etc. to
help in curing of default.
RBI has given revised guidelines for treatment of restructured accounts by
its circular. The auditor should verify compliance with the requirements of
the circular issued in this regard.
Banks may restructure the accounts classified under standard,
substandard or doubtful categories. Banks cannot restructure
accounts with retrospective effect. Once the bank receives an
application/proposal in respect of an account for restructuring, it implies
that the account is intrinsically weak. Accordingly, during the time the
account remains pending for restructuring, the auditors need to take a view
whether provision needs to be made in respect of such accounts, pending
approval for restructuring.
On restructuring, the account will be downgraded from Standard to
substandard. NPAs will remain in the same category.
Upgradation of Examine all the accounts upgraded from NPA to standard category during
Account the year, to ensure that the upgrading of each account is strictly in terms
of RBI guidelines. There can be a possibility of incorrect upgradation
of account on the basis of partial recoveries made in the account and
overdue portion might not have wiped out completely. There can also
be a possibility of recoveries being made in the account after cut-off
date and account being upgraded as on date of balance sheet.
Sale/ Purchase In case of Sale/Purchase of NPA by Bank, the auditor should examine
of NPAs • the policy laid down by the Board of Directors in this regard relating to
procedures, valuation and delegation of powers including non
performing financial assets that may be purchased/sold, norms or
such purchase/sale, valuation procedure and accounting policy.

AUDIT OF BANKS 9.31
• only such NPA has been sold which has remained NPA in the
books of the bank for at least 2 years.
• the assets have been sold/ purchased “without recourse’ only.i.e
the entire credit risk associated with the non-performing asset
should be transferred to the purchasing bank.
• subsequent to the sale of the NPA, the bank does not assume any
legal, operational or any other type of risk relating to the sold NPAs.
• the NPA has been sold at cash basis only. Under no
circumstances, NPA can be sold to another bank at a
contingent price .The entire sale consideration has to be
received on upfront basis.
• the bank has not purchased an NPA which it had originally sold.
In case of sale of an NPA, the auditor should also ensure that:
• on the sale of the NPA, the same has been removed from the books
of the account of selling bank on transfer;
• If the sale is at a price below the net book value (NBV) (i.e., book
value less provisions held), the shortfall should be debited to the
profit and loss account of that year.
• If the sale is for a value higher than the NBV, the excess provision
shall not be reversed but will be utilised to meet the shortfall/ loss
on account of sale of other non-performing financial assets.
Similarly, in case of purchase of NPAs, the auditor should verify that:
• the NPA purchased has been subjected to the provisioning
requirements appropriate to the classification status in the books of
the purchasing bank.
• any recovery in respect of an NPA purchased from other banks is
first adjusted against its acquisition cost and only the recovered
amount in excess of the acquisition cost has been recognised as
profit.
• for the purpose of capital adequacy, banks have assigned 100%
risk weights to the NPAs purchased from other banks.
IV. FIXED ASSETS
The Third Schedule to the Banking Regulation Act, 1949 requires fixed assets to be classified into
two categories in the balance sheet, viz., Premises and Other Fixed Assets. Premises wholly or
partly owned by the banking company for the purpose of business including residential premises
used by employees of bank are shown under the head “Premises”. Other fixed assets include
furniture & fixture, motor vehicles, computers, office equipment etc. Though not specifically
mentioned under the Banking Regulation Act, 1949, the assets taken on lease and intangible
assets should be shown separately for proper classification and disclosure and also to comply with
the requirements of the Accounting Standards (ASs).

Section 9 of the Banking Regulation Act, 1949, prohibits a banking company from holding any
immovable property, howsoever acquired (i.e., whether acquired by way of satisfaction of claims or
otherwise), for a period exceeding seven years from the date of acquisition, except such as is
required for its own use.
Audit Approach : In most of the banks, fixed assets are generally purchased by the head
office or regional/zonal offices. Statutory branch auditor has to ascertain the procedure
followed and plan accordingly. In most of the banks, maintenance of records is centralized
at head office level. In some of the banks, information relating to purchase, sale of fixed
assets is accounted for with help of Fixed asset management software. The audit
procedures have to be designed accordingly.
Audit Procedures
In carrying out the audit of fixed assets, the auditor is concerned primarily with obtaining evidence
about their ownership, existence and valuation. For this purpose, the auditor should review the
following:
Internal Examine the system of internal controls broadly covering the following:
Controls • Control over expenditures incurred on fixed assets acquired or self-
constructed.
• Accountability and utilisation controls.
• Information controls for ensuring availability of reliable information
about fixed assets.
• Ascertain whether the accounts in respect of fixed assets are
maintained at the branch or centrally.
• Ascertain the location of documents of title or other documents
evidencing ownership of various items of fixed assets.
• Examine whether acquisitions, disposals, etc. effected at the branch
during the year have been properly communicated to the head office.
Premises • Verify the opening balance of premises with reference to schedule of
fixed assets, ledger or fixed assets register.
• Acquisition of new premises should be verified with reference to

authorisation, title deeds, record of payment, etc.
• Self-constructed fixed assets should be verified with reference to
authorisation and documents such as, contractors’ bills, work order
records and record of payments.
• Examine whether the balances as per the fixed assets register
reconcile with those as per the ledger and the final statements.
• In the case of leasehold premises, capitalisation and amortisation of
lease premium, if any, should be examined. Any improvements to

AUDIT OF BANKS 9.33
leasehold premises should be amortised over their balance useful life.

• In case the title deeds are held at the head office or some other
location, the branch auditor should obtain a written representation to
this effect from the branch management and should bring this fact to
the notice of the central statutory auditor through a suitable mention in
the report. This fact should also be brought in the Long Form Audit
Report (LFAR).
• Where premises are under construction, it should be seen that they are
shown under a separate heading, e.g., ‘premises under construction’.
• Advances/ payments to contractors for such assets should be shown
under a separate item under the head “fixed assets”.
• Where the premises (or any other fixed assets) are re-valued, the
auditor should examine the appropriateness of the basis of revaluation.
The auditor should also examine whether the treatment of resultant
revaluation surplus or deficit is in accordance with relevant Accounting
Standard. The auditor should also check the impairment, if any, by
applying the principles laid down in relevant Accounting Standard.
• Examine that no immovable properties other than those required for the
own use of the bank have been included in fixed assets (own use would
cover use by employees of the bank, e.g., residential premises
provided to employees). The branch auditor should also obtain a written
representation to the above effect from the branch management.
Other Fixed • The procedures discussed above regarding premises also apply, to the
Assets extent relevant, to verification of other fixed assets. In respect of
moveable fixed assets, the auditor should pay particular attention to the
system of recording the movements as well as other controls over such
fixed assets, e.g., their physical verification at periodic intervals by the
branch management and/or by inspection/internal/concurrent audit
team. The auditor should also examine whether discrepancies have
been properly dealt with in the books of account and adequate
provision in respect of any damaged assets has been made with
appropriate approvals.
• In case of transfer of fixed assets, like furniture, office equipment, etc.
from one branch to another; the auditor should examine whether
accumulated depreciation in respect of such assets is also transferred.
• In case of intangible assets, verify whether the relevant guidelines
given by RBI by way of Circulars and the requirements of AS 26 have
been followed.
• Examine whether fixed assets have been properly classified. Fixed
assets of similar nature only should be grouped together.
4. Items like safe deposit vaults should not be clubbed together with the
office equipment’s or the theft alarm system of the bank.

• Examine whether any expenditure incurred on a fixed

asset after it has been brought to its working condition for its
intended use, has been dealt with properly.
• The auditor at head office level should examine if the consolidated fixed
assets schedule matches in all respect and all the transfers in/out, are
tallied. A broad check on the depreciation amount vis-a-vis the gross
block of assets be reviewed with special emphasis on the computer
hardware/software.
Sale of Fixed • Verify the copy of sale deed and receipt of the sale value, in respect of
Assets fixed assets sold during the year. Ensure that the profit/ loss on sale of
assets has been properly accounted for.
Leased • Verify accounting and provisioning norms to be followed by banks
Assets undertaking leasing activity in accordance with RBI circulars and
guidelines. The auditor, in respect of leased assets, should also have
regard to the requirements of AS 19, “Leases”.
Impairment of • Verify whether the guidelines given by RBI’s circular on compliance
Assets with Accounting Standards,and the requirements of AS 28 have been
followed.
V. OTHER ASSETS: The auditor may carry out the audit of various items appearing under the
head ‘other assets’ in the following manner:
Audit Procedures
Inter-Office Examine whether Inter-branch accounts are normally reconciled at the
Adjustments central level. The auditor should report on the year-end status of inter-branch
accounts indicating the dates up to which all or any segments of the accounts
have been reconciled. The auditor should also indicate the number and
amount of outstanding entries in the inter branch accounts, giving the
relevant information separately for debit and credit entries. The auditor
should ensure that any discrepancies found in inter-branch accounts have
been properly dealt with in the books. The auditor can obtain the relevant
information primarily from branch audit reports.
Interest • Examine whether the interest has been accrued on the entire loans
Accrued and advances portfolio of the bank. Special consideration should be
given to the overdue bills purchased/discounted.
• Ensure that only such interest as can be realised in the ordinary
course of business should be shown under this head. This is based
on the principle, recognised in AS 9, that revenue cannot be
recognised if there is a significant uncertainty about its collectability.

AUDIT OF BANKS 9.35
Tax Paid in • Ensure that the certificates for such tax deducted at source is
Advance/Tax collected by the branch and the original copy is sent to the Head
Deducted at Office along with the transfer of such Tax Deducted at Source (TDS)
Source amount to Head Office on periodic basis as defined.
• TDS Certificates / credits in the form 26AS, and claim of the same in
Income Tax returns filed should be checked to ensure the justification
of the claim towards such certificates.
• At Head Office level, the availability of all the TDS Certificates /
credits in the form 26 AS, and claim of the same in Income Tax
returns filed should be checked to ensure the justification of the claim
towards such certificates.
Stationery and • Ensure that the item “Stationery and Stamps” includes only
Stamps exceptional items of expenditure on stationery like bulk
purchase of security paper which is to be written off over a
period of time. Such items should be valued at cost. Normal
expenditure on stationery is charged to profit & loss account.
Therefore, this item may not appear at branch level as
considerable part of stationery is supplied to branches by head
office.
• Evaluate the existence, effectiveness and continuity of internal
controls over these items in the normal course of audit. It may be
noted that the branch auditor is required to specifically comment on
the adequacy of the relevant internal controls in the LFAR.
• Physically verify the stationery and stamps on hand as at the year-end,
especially stationery of security items. Any shortage should be inquired
into as it could expose the bank to a potential loss from misuse.
• Examine whether the cost of stationery and stamps consumed during
the year has been properly charged to the profit and loss account for
the year in the context of the accounting policy/instructions from the
head office regarding treatment of cost of stationery and stamps.
Non-Banking • Ensure that the heading includes those immovable
Assets properties/tangible assets which the bank has acquired in
Acquired in satisfaction of debts due or its other claims and these are being
Satisfaction of held with intention of being disposed off.
Claims
• Verify such assets with reference to the relevant documentary
evidence, e.g., terms of settlement with the party, order of the Court
or the award of arbitration, etc.
• Check that the ownership of the property is legally vested with the
bank. If there is any dispute or other claim about the property, the

auditor should examine whether the recording of the asset is

appropriate or not. In case the dispute arises subsequently, the
auditor should examine whether a provision for liability or disclosure
of a contingent liability is appropriate, keeping in view the
requirements of AS 29 "Provisions, Contingent Liabilities and
Contingent Assets".
• Ensure compliance with Section 9 of Banking Regulation Act, on
holding period of such assets.
• Ensure that as at date of acquisition, the assets should be
recorded at lower of net book value of advance or net realisable
value of asset acquired.
VI. OTHERS
This is the residual heading, which will include items not specifically covered under other sub-
heads, e.g., claims which have not been received, debit items representing additions to assets or
reductions in liabilities which have not been adjusted for technical reasons or want of particulars,
etc., receivables on account of government business, prepaid expenses, accrued income other
than interest (e.g., dividend declared but not received) may also be included under this head. The
audit procedures relating to some of the major items included under this head are discussed
below:
Audit Approach and Procedures
Non-Interest- • Examine non-interest-bearing staff advances with reference to the
Bearing Staff relevant documentation and the policy in this regard which is framed
Advances by the bank. The availability, enforceability and valuation of security, if
any, should also be examined.
• Ensure that the same relates to employees on the rolls of the bank on
the date of the preparation of financial statements.
Loans and • The auditor should verify that loans have been ordinarily sanctioned by
Advances to the next higher sanctioning authority as compared to the recipient of loan.
Officials and • Loans to senior officers or of higher amount should have been
Relatives reported to the Board.
Security • Examine security deposits with various authorities (e.g., on account of
Deposits telephone, electricity, etc.,) and with others (e.g., deposits in respect
of premises taken on rent) with reference to documents containing
relevant terms and conditions, and receipts obtained from the parties
concerned.
• Ensure that the deposit amount has not become due as per the terms
and conditions. If it is so, then the recoverability of the same needs to

AUDIT OF BANKS 9.37
be considered in detail and appropriate provision be made against the

amount which is doubtful to recover.
Suspense • Obtain from the management details of old outstanding entries in
Account suspense account along with reasons for delay in adjusting the
entries. Where the outstanding balances comprised in suspense
account require a provision/write-off, the auditor should examine
whether the necessary provision has been made/write-off.
Prepaid • Examine whether the basis of allocation of expenditure to different
Expenses periods is reasonable.
• Examine whether the allocation of discounting and rediscounting
charges paid by the bank to different accounting periods is in
consonance with the accounting policy followed for the bank as a
whole.
Miscellaneous • Review the ageing statements pertaining to these items.
Debit • Examine the recoverability of old outstanding items.
Balances on • Examine whether claims for reimbursement have been lodged by the
Government branch in accordance with the relevant terms and conditions. The net
Account balances of the amount recoverable at the Head Office level should
also be taken along with the age-wise analysis of the same. In case of
old outstanding balances without any confirmation or proper
justification of the same, should be provided for in the accounts.
• For major variance as compared to the previous year figures, verify
whether reasons for the same have been recorded and reviewed.
8. VERIFICATION OF CAPITAL & LIABILITIES

I. CAPITAL
The auditor may carry out the audit of various items under ‘Share Capital’ in the following manner:
The auditor should verify the opening balance of capital with reference to the audited balance
sheet of the previous year. In case there has been an increase in capital during the year, the
auditor should examine the relevant documents supporting the increase. For example, in case of
an increase in the authorised capital of a banking company, the auditor should examine the special
resolution of shareholders and the Memorandum of Association. An increase in subscribed and
paid-up capital of a banking company, on the other hand, should be verified with reference to
prospectus/other offer document, reports received from Registrars to the issue, bank statement,
returns filed with the Registrar of Companies etc.

Capital Adequacy: The term ‘capital adequacy’ is used to describe the adequacy of capital
resources of a bank in relation to the risks associated with its operations.
Adequacy of capital of banks has been the subject matter of consideration by banking authorities
around the world for several decades. An international agreement on a common risk-based capital
framework and definition of bank capital was framed by the Committee on Banking Regulations
and Supervisory Practices of the G-1O Nations (popularly known as the Basel Committee) and
was formally adopted in 1988. Basel accords and frameworks were borne out of these
deliberations.
The framework attempted to relate a bank’s capital needs to its risk profile. Besides serving to
strengthen the soundness and stability of the banking system, it also sought to give banks an
incentive to hold lower-risk assets, incorporate off-balance sheet exposures explicitly into capital
assessments, and achieve greater uniformity in application of capital standards to banks across
different countries.
8.1. Stress Testing

RBI has required that all commercial banks (excluding RRBs and LABs) shall put in place a Board
approved ‘Stress Testing framework’ to suit their individual requirements which would integrate
into their risk management systems. Stress tests are designed to understand whether a bank has
enough capital to survive plausible adverse economic conditions and to maintain enough buffer to
stay afloat under extreme scenarios.
8.2 BASEL III framework

Basel III norms relate to the Capital Adequacy requirement compliance which the Bank has to
achieve as contained in the BASEL III accord. Basel capital adequacy norms are meant for the
protection of depositors and shareholders by prescriptive rules for measuring capital adequacy,
thereby evolving methods of determining regulatory capital and ensuring efficient use of capital.
Basel III accord strengthens the regulation, supervision and risk management of the banking
sector. It is global regulatory standard on capital adequacy of banks, stress testing as well as
market liquidity risk.
The Basel III accord, aims at:
(a) improving the banking sector's ability to absorb shocks arising from financial and economic
stress, irrespective of reasons thereof;
(b) improving risk management and governance practices; and
(c) strengthening banks' transparency and disclosure standards.
Capital Adequacy Measures in India: In India, the statutes governing various types of banks lay
down the minimum capital requirements for them. Besides, there are also requirements for
maintenance of statutory reserves. Considering the variations in minimum capital requirements
applicable to distinct types of banks and taking into account the approach adopted by Basel
Committee, the Reserve Bank prescribed, in year 1992, a uniform methodology for determining the

AUDIT OF BANKS 9.39
capital adequacy of scheduled commercial banks (other than regional rural banks). The Master
Circular on “Prudential Guidelines on Capital Adequacy and Market Discipline- New Capital
Adequacy Framework (NCAF)”, provides the guidelines to be followed by banks for capital
adequacy. Some of the important aspects of the circular are covered below.
The basic approach of capital adequacy framework is that a bank should have sufficient capital to
provide a stable resource to absorb any losses arising from the risks in its business. Capital is
divided into tiers according to the characteristics/qualities of each qualifying instrument. For
supervisory purposes capital is split into two categories: Tier I and Tier II, representing different
instruments’ quality as capital.
♦ Tier I capital consists mainly of share capital and disclosed reserves and it is a bank’s
highest quality capital because it is fully available to cover losses.
♦ Tier II capital consists of certain reserves and certain types of subordinated debt. The loss
absorption capacity of Tier II capital is lower than that of Tier I capital.
Components of Capital: The Master Circular on Capital Adequacy discusses the Capital Funds in
two categories – capital funds for Indian banks and capital funds of foreign banks operating in
India.
In case of foreign banks operating in India, RBI’s Master Circular on Capital Adequacy also lays
down certain additional provisions in respect of capital to be followed by such banks.
Capital Risk Adequacy Ratio (CRAR): The CRAR is computed as follows:
_______________Eligible Total Capital Funds______________ x 100
Risk weighted assets and off-balance sheet items
The RBI requires banks to maintain a minimum CRAR of 9 per cent on an ongoing basis. The
Master Circular on Capital Adequacy contains detailed guidelines on calculation of risk weighted
assets and off-balance sheet items for CRAR.
5. For secured housing loans upto ` 75 lakh, the risk weight, subject to some
conditions is 50%.for those above ` 75 lakhs, it is 75%, for loans to commercial real
estate , it is 100%.Thus for a housing loan of ` 60 lakh given by the bank, the risk
weighted asset will be taken at 60 x 50% = Rs.30 lakhs for the purpose of the
denominator in the above formula.
II. RESERVES AND SURPLUS
The following are required to be disclosed in the balance sheet under the head ‘Reserves and
Surplus’.

Statutory Reserves* Capital Reserves* Share Premium*
Revenue and Other Reserves including Balance in Profit and Loss Account
investment Fluctuation Reserve*
*In respect of these items above, opening balance, additions during the year and deductions
during the year are to be shown separately in respect of each item
The auditor should verify the opening balances of various reserves with reference to the audited
balance sheet of the previous year. Additions to or deductions from reserves should also be
verified in the usual manner, e.g., with reference to board resolution. In the case of statutory
reserves and share premium, compliance with legal requirements should also be examined. Thus,
the auditor should specifically examine whether the requirements of the governing legislation
regarding transfer of the prescribed percentage of profits to reserve fund have been complied with.
In case the bank has been granted exemption from such transfer, the auditor should examine the
relevant documents granting such exemption. Similarly, it should be examined whether the
appropriations from share premium account conform to the relevant legal requirements.
Compliance with foreign laws in respect of overseas branches, need to be verified by the auditor.
III. DEPOSITS
Audit Approach
Deposits represent the important source of funds for banks. In carrying out audit of deposits and
liabilities, the auditor is primarily concerned with obtaining reasonable assurance that all known
liabilities are recorded and stated at appropriate amounts.
The following areas should be considered when auditing Deposits:
Current Accounts & Deposits Designated in

Term Deposits
Savings Accounts (CASA) Foreign Currencies
Remember that deposits accepted by banks are primarily of two types i.e those repayable on
demand and those repayable after a fixed term. Current and saving accounts are the most
common form of demand deposits. Term deposits (fixed deposits etc. known under different
nomenclature in different banks) are repayable after a specified period of time ranging from 7 days
at present to say one year or five years. Recurring deposits are also an important variant of term

AUDIT OF BANKS 9.41
deposits in which a specified sum is deposited in the account at regular intervals for a pre-
determined period. At maturity, proceeds are repaid to depositors along with interest.
Deposits designated in foreign currencies e.g. Foreign currency non-resident deposits(FCNR) are
accounts which are opened by Non-resident Indians in form of fixed deposit only.
Besides, there are some accounts like NRE [Non-Resident (External)Rupee account scheme] and
NRO [Non-Resident Ordinary Rupee account scheme]. NRE accounts may be opened by Non-
Resident Indians and persons of Indian origin. NRO accounts may be opened by all non-residents.
These accounts may be maintained in form of savings, current, recurring or fixed deposit and are
denominated in Indian Rupees.
Deposits would be appearing in balance sheet of most of the branches. Hence, these are of
concern to auditors at branch and central/head office level.
Audit Procedures:
The auditor may verify various types of deposits in the following manner:
Current and • Verify on a sample basis current account and saving accounts
saving opened during the year for adherence to KYC norms. Verify that
accounts saving accounts are opened in name of individuals, HUF, some
approved institutions like trusts, educational institutes etc.
Remember that saving accounts are not opened for business or
professional concern. The business transactions are carried in
current accounts which can be opened for all kind of customers
like companies, individuals, partnership firms etc.
• Verify the balances in individual accounts on a sample basis.
• Check the calculations of interest on a test check basis. Remember
that no interest is paid generally on current accounts by banks.
• Examine whether the procedure for obtaining balance confirmation
periodically has been followed consistently. Examine, on a sampling
basis, the confirmations received.
• Ensure that debit balances in current accounts are not netted out on
the liabilities side but are appropriately included under the head
‘advances’.
• Inoperative accounts (both current and saving) are a high-risk area
of frauds in banks. As per RBI guidelines, a savings/ current
account should be treated as inoperative/dormant if there are no
transactions in the account for over a period of two years. Verify on
a sample basis some of inoperative accounts revived/closed during
the year. Ensure that inoperative accounts are revived only with
proper authority. In this regard, cases where there is significant
reduction in balances of such accounts as compared to previous
year, examine authorisation for withdrawals.

Term deposits • Examine whether the deposit receipts and cash certificates are
issued serially and all of them are accounted for in the registers.
• Verify in case of bulk deposits (Rs.2 crore and above for
scheduled commercial banks presently), correct rate of interest
has been offered.
• In case of closure of term deposit, test check whether required
foreclosure penalty has been deducted from applicable rate of
interest payable.
• Verify on sample basis some of recurring deposit accounts
opened during the year.
• Verify correctness of rate of interest on term deposits on sample
basis.
Deposits • Verify some of FCNR accounts opened during the year on
designated in sample basis and ensure these conform to RBI directions.
foreign • Verify on sample basis permissible credits and debits in FCNR
currencies accounts as per RBI directions.
• In case of FCNR accounts, examine whether these have been
converted into Indian Rupees at rate notified in this behalf by
head office.
• Examine whether any resultant increase or decrease has been taken
to the profit and loss account.
• Verify that interest on deposits has been paid on the basis of 360
days in a year.
Others • In case of NRE and NRO accounts, verify on a sample basis
credits and debits as per RBI guidelines. Also check
repatriablity. NRE accounts are repatriable whereas NRO
accounts are not repatriable except for all current income
subject to certain conditions.
General • Verify that deposits of a bank are not inflated for purpose of
balance sheet presentation. For example, some customers might
be given overdrafts near date of balance sheet and the resultant
overdrawn amounts may be placed as deposits with banks and
further advances may be given on strength and security of these
deposits. It would lead to inflated deposits as well as advances.
The transactions may be reversed after close of the year.
In such cases which indicate the possibility of window-dressing,
the auditor should consider making a suitable qualification in
main audit report besides other applicable reporting.
• Examine that interest accrued but not due on deposits is not included
under the relevant deposits but is shown under the head ‘other
liabilities and provisions’.

AUDIT OF BANKS 9.43
• Ensure that framework relating to ‘Know Your Customer’ and Anti-

Money Laundering measures is formulated and put in place by the
bank.
IV. BORROWINGS
Audit approach
Borrowings of a bank are required to be shown in balance sheet as follows.
- Reserve Bank of India
Borrowings in - Other Banks Borrowings outside
India - Other Institutions & India
Agencies
The total amount of secured borrowings included under the above heads is to be shown by way of
a note to the relevant schedule. Secured borrowings for this purpose include borrowings/refinance
in India as well as outside India. It may be noted that the inter-office transactions are not
borrowings and therefore, should not be presented as such.
Audit Procedures:
Borrowings • Obtain and verify confirmation certificates and other supporting
documents such as, agreements, correspondence, etc.
• External confirmations received directly by the auditor from
appropriate confirming parties may assist the auditor in obtaining
audit evidence that the auditor requires to respond to significant risks
of material misstatement. The auditor is required to comply with the
requirements of SA 505 “External Confirmations” which contains
guidance on designing and performing external confirmation
procedures to obtain relevant and reliable audit evidence.
• Examine whether a clear distinction has been made between
‘rediscount’ and ‘refinance’ for disclosure of the amount under the
above head since rediscount does not figure under this head.
• Examine whether borrowings of money at call and short notice are
properly authorised. The rate of interest paid/payable on, as well as
duration of such borrowings should also be examined by the auditor.
• Examine the relevant correspondence or other documents to ensure
that the branch has been authorised by the Head Office to
borrow/retain other borrowings and that the terms on which
borrowings have been made are in accordance with the
authorisation.
• Examine whether the amount shown in the branch accounts is
properly classified based on security or otherwise.

V. OTHER LIABILITIES AND PROVISIONS

The Third Schedule to the Banking Regulation Act, 1949, requires disclosure of the following items
under the head ‘Other Liabilities and Provisions’.
Inter-office Interest accrued Others

Bills payable adjustments (including
(net) provisions)
Audit Procedures:
The auditor may verify the various items under the head ‘other liabilities and provisions’ in the
following manner.
Bills Payable Evaluate the existence, effectiveness and continuity of internal controls
over bills payable. Such controls should usually include the following-
• Drafts, mail transfers, traveller’s cheques, etc. should be made out in
standard printed forms.
• Unused forms relating to drafts, traveller’s cheques, etc. should be
kept under the custody of a responsible officer.
• The bank should have a reliable private code known only to the
responsible officers of its branches, coding and decoding of the
telegrams should be done only by such officers.
• The signatures on a demand draft should be checked by an officer
with the specimen signature book.
• All the telegraphic transfers and demand drafts issued by a branch
should be immediately confirmed by advices to the branches
concerned. On payment of these instruments, the paying branch
should send a debit advice to the originating branch.
Examine an appropriate sample of outstanding items comprised in bills
payable accounts with the relevant registers. Reasons for old outstanding
debits in respect of drafts or other similar instruments paid without advice
should be ascertained.
Correspondence with other branches after the year-end (e.g., responding
advices received from other branches, advices received from other
branches in respect of drafts issued by the branch and paid by the other
branches without advice) should be examined specially in so far as large
value items outstanding on the balance sheet date are concerned.
Inter-office The balance in inter-office adjustments account, if in credit, is to be shown
Adjustments under this head.
Interest Examine interest accrued with reference to terms of the various types of
Accrued deposits and borrowings. It should be specifically examined that such
interest has not been clubbed with the figures of deposits and borrowings
shown under the head ‘Deposits and Borrowings’.

AUDIT OF BANKS 9.45
Others It may be noted that the figure of advances and investments in the balance
(Including sheet of a bank excludes provisions in respect thereof made to the
Provisions) satisfaction of auditors. The auditor should examine other provisions and
other items of liabilities in the same manner as in the case of other entities.
VI. CONTINGENT LIABILITIES
Contingent Liabilities
- Claims against the bank not acknowledged as debts

- Liability for partly paid investments
- Liability on account of outstanding forward exchange contracts & Derivative
Contracts
- Guarantees given on behalf of constituents (within India; outside India)
- Acceptances, endorsements and other obligations
- Other items for which the bank is contingently liable
Bills for Collection
Audit Approach
In respect of contingent liabilities, the auditor is primarily concerned with seeking
reasonable assurance that all contingent liabilities are identified and properly valued. The
auditor should obtain representation from management that:-
(i) all off-balance sheet transactions have been accounted in the books of accounts as
and when such transaction has taken place;
(ii) all off balance sheet transactions have been entered into after following due
procedure laid down;
(iii) all off balance sheet transactions are supported by the underlying documents;
(iv) all year end contingent liabilities have been disclosed;
(v) the disclosed contingent liabilities do not include any crystallised liabilities which are
of the nature of loss/ expense and which, therefore, require creation of a
provision/adjustment in the financial statements;
(vi) the estimated amounts of financial effect of the contingent liabilities are based on the
best estimates in terms of Accounting Standard 29, including consideration of the
possibility of any reimbursement;
(vii) in case of guarantees issued on behalf of the bank’s directors, the bank has taken
appropriate steps to ensure that adequate and effective arrangements have been

made so that the commitments would be met out of the party’s own resources and
that the bank will not be called upon to grant any loan or advances to meet the
liability consequent upon the invocation of the said guarantee(s) and that no violation
of section 20 of the Banking Regulation Act, 1949 has arisen on account of such
guarantee; and
(viii) such contingent liabilities which have not been disclosed on account of the fact that
the possibility of their outcome is remote include the management’s justification for
reaching such a decision in respect of those contingent liabilities
Audit procedures
To this end, the auditor should, generally follow the audit procedures given below:
Contingent • Ensure that there exists a system whereby the non-fund based
Liabilities facilities or additional/ad hoc credit facilities to parties are
extended only to their regular constituents, etc.
• Ascertain whether there are adequate internal controls to
ensure that transactions giving rise to contingent liabilities are
executed only by persons authorised to do so and in
accordance with the laid down procedures.
• Verify in case of LCs for import of goods, the payment to the overseas
suppliers is made based on shipping documents and after ensuring
that the said documents are in strict conformity with the terms of LCs.
• Ascertain whether the accounting system of the bank provides
for maintenance of adequate records in respect of such
obligations and whether the internal controls ensure that
contingent liabilities are properly identified and recorded.
• Test the completeness of the recorded obligations.
• Review the reasonableness of the year-end amount of
contingent liabilities in the light of previous experience and
knowledge of the current year's activities.
• Review whether comfort letters issued by the bank has been
considered for disclosure of contingent liabilities.
• Examine whether the bank has given any guarantees in respect
of any trade credit (buyer’s credit or seller’s credit) and the
period of guarantees is co-terminus with the period of credit
reckoned from the date of shipment.
• Verify whether bank has extended any non-fund facility or
additional/ad hoc credit facilities to other than its regular
customers. In such cases, auditor should ensure concurrence of
existing bankers of such borrowers and enquire regarding
financial position of those customers.

AUDIT OF BANKS 9.47
Claims Against the • Examine the relevant evidence, e.g., correspondence with
Bank Not lawyers/ others, claimants, workers/officers, and
Acknowledged as workmen’s/officers’ unions.
Debts • Review the minutes of meetings of board of
directors/committees of board of directors, contracts,
agreements and arrangements, list of pending legal cases, and
correspondence relating to taxes, and duties, etc. to identify
claims against the bank.
• Ascertain from the management the status of claims
outstanding as at the end of the year.
• A review of subsequent events would also provide evidence
about completeness and valuation of claims.
Liability on • Verify the outstanding forward exchange contracts with the statement
Account of of outstanding forward exchange contracts generated from the
Outstanding bank’s computerised accounting system or manual register
Forward Exchange maintained by the branch. The auditor may physically verify the
Contracts & underlying documents including confirmations from merchants
derivative to test the existence of such outstanding contracts.
contracts • The auditor may verify outstanding derivative contracts like
options, interest rate swaps etc with reports generated in this
regard.
Guarantees Given • Ascertain whether there are adequate internal controls over
on Behalf of issuance of guarantees, e.g., whether guarantees are issued
Constituents under proper sanctions, whether adherence to limits sanctioned
for guarantees is ensured, whether margins are taken from
customers before issuance of guarantees as per the prescribed
procedures, etc.
• Ascertain whether there are adequate controls over unused
guarantee forms, e.g., whether these are kept under the
custody of a responsible official, whether a proper record is kept
of forms issued, whether stock of forms is periodically verified
and reconciled with the book records, etc.
• Examine the guarantee register to seek evidence whether the
prescribed procedure of marking off the expired guarantees is
being followed or not.
• Check the relevant guarantee registers with the list of
outstanding guarantees to obtain assurance that all outstanding
guarantees are included in the amount disclosed in this behalf.
• Examine that expired guarantees are not included in this head.
Verify guarantees with the copies of the letters of guarantee
issued by the bank and with the counter-guarantees received
from the customers. The auditor should also verify the securities

held as margin. If a claim has arisen, the auditor should

consider whether a provision is required in terms of the
requirements of AS 29, "Provisions, Contingent Liabilities and
Contingent Assets”.
Acceptances, • Evaluate the adequacy of internal controls over issuance of
Endorsements and letters of credit and over custody of unused LC forms in the
Other Obligations same manner as in the case of guarantees.
• Verify the balance of letters of credit from the register
maintained by the bank. The register indicates the amount of
the letters of credits and payments made under them. The
auditor may examine the guarantees of the customers and
copies of the letters of credit issued. The security obtained for
issuing letters of credit should also be verified.
• Examine whether the bank has incurred a potential financial
obligation in respect of letters of comfort and if such obligation
has been cast, ensure the amount to be disclosed under
contingent liability.
Other Items for • Determine and verify any other items under this head as
which the Bank is required. For example, outstanding underwriting contracts, bills
Contingently rediscounting, disputed tax demands,
Liable
Bills for Collection • Ensure that the bills drawn on other branches of the bank are
not included in bills for collection.
• Verify outward bills for collection with reference to the
corresponding register maintained.
• Examine collections made subsequent to the date of the
balance sheet to obtain further evidence about the existence
and completeness of bills for collection as on the date of
Balance Sheet.
• Examine the procedure for crediting the party on whose behalf a
bill has been collected. Confirm that this procedure is in
consonance with the nature of obligations of the bank in respect
of bills for collection.
• Examine that adequate internal controls exist that debits the
customer’s account with the amount of bank’s commission as
soon as a bill collected is credited to the customer’s account.
The auditor should also examine that no income has been
accrued in the accounts in respect of bills outstanding on the
balance sheet date.

AUDIT OF BANKS 9.49
Example 4:
A large scam happened at ABC bank wherein the employees, in collusion with an unscrupulous
businessman, misused the SWIFT network to transmit messages to other banks on fund
requirement. While all this was done using SWIFT passwords, the transactions were never
recorded in the bank’s core system, thereby keeping the bank management in the dark for
years. No securities were being obtained. It caused loss of thousands of crores to the bank.
Thus, it is important to give proper importance to the recording and disclosure of contingent
liabilities even though they do not form part of the main balance sheet or at the most appear on
both assets as well as liabilities side with equal amounts as contra items.
NOTE: Verification of revenue items is covered in detail at Intermediate level. Students may refer
Chapter 12 of CA Intermediate Auditing and Assurance Study Material.
9. AUDITOR'S REPORT
In the case of a nationalised bank, the auditor is required to make a report to the Central
Government in which the auditor should state the following:
The report of auditors of State Bank of India is also to be made to the Central Government and is
almost identical to the auditor’s report in the case of a nationalised bank.
Whether, in the auditor’s opinion, the balance sheet is a full and fair balance sheet
containing all the necessary particulars and is properly drawn up so as to exhibit a true and
fair view of the affairs of the bank.
In case the auditor had called for any explanation or information, whether it has been given and
whether it is satisfactory.
Whether or not the transactions of the bank, which have come to the auditor’s notice, have
been within the powers of that bank.
Whether or not the returns received from the offices and branches of the bank have
been found adequate for the purpose of audit.
Whether the profit and loss account shows a true balance of profit or loss for the period
covered by such account.
Any other matter which the auditor considers should be brought to the notice of the Central
Government.

9.1 Format of Audit Report

The auditors, central as well as branch, should also ensure that the audit report issued by them
complies with the requirements of SA 700, “Forming an Opinion and Reporting on Financial
Statements”, SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, SA 706,
“Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s
Report”, SA 710, “Comparative Information-Corresponding Figures and Comparative Financial
Statements” and SA 720, The Auditor’s Responsibility Relating to Other Information in Documents
Containing Audited Financial Statements.
The auditor should ensure that not only the information relating to number of unaudited branches
is given but quantification of advances, deposits, interest income and interest expense for such
unaudited branches has also been disclosed in the audit report. Such disclosure in the audit
report is not only in accordance with the best international trends but also provides useful
information to users of financial statements.
It may be noted that, in addition to the aforesaid, the auditor of a banking company is also required
to state in the report the matters covered by Section 143 of the Companies Act, 2013. However, it
is pertinent to mention that the reporting requirements relating to the Companies (Auditor’s Report)
Order, 2020 is not applicable to a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949.
As per reporting requirements cast through Rule 11 of the Companies (Audit and Auditors)
Rules, 2014 the auditor’s report shall also include their views and comments on the
following matters, namely:
(1) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(2) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(3) whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company.
(4) (i) Whether the management has represented that, to the best of it’s knowledge
and belief, other than as disclosed in the notes to the accounts, no funds have
been advanced or loaned or invested (either from borrowed funds or share
premium or any other sources or kind of funds) by the company to or in any
other person(s) or entity(ies), including foreign entities (“Intermediaries”), with
the understanding, whether recorded in writing or otherwise, that the
Intermediary shall, whether, directly or indirectly lend or invest in other
persons or entities identified in any manner whatsoever by or on behalf of the
company (“Ultimate Beneficiaries”) or provide any guarantee, security or the
like on behalf of the Ultimate Beneficiaries;

AUDIT OF BANKS 9.51
(ii) Whether the management has represented, that, to the best of it’s knowledge
and belief, other than as disclosed in the notes to the accounts, no funds have
been received by the company from any person(s) or entity(ies), including
foreign entities (“Funding Parties”), with the understanding, whether recorded
in writing or otherwise, that the company shall, whether, directly or indirectly,
lend or invest in other persons or entities identified in any manner whatsoever
by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any
guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
(iii) Based on such audit procedures that the auditor has considered reasonable
and appropriate in the circumstances, nothing has come to their notice that
has caused them to believe that the representations under sub-clause (i) and
(ii) contain any material mis-statement.
(5) Whether the dividend declared or paid during the year by the company is in
compliance with section 123 of the Companies Act, 2013.
(6) [Whether the company, in respect of financial years commencing on or after the 1st
April, 2022,] has used such accounting software for maintaining its books of account
which has a feature of recording audit trail (edit log) facility and the same has been
operated throughout the year for all transactions recorded in the software and the
audit trail feature has not been tampered with and the audit trail has been preserved
by the company as per the statutory requirements for record retention.]
9.2 Long Form Audit Report

Besides the audit report as per the statutory requirements discussed above, the terms of
appointment of auditors of public sector banks, private sector banks and foreign banks (as well as
their branches), require the auditors to also furnish a long form audit report (LFAR). The long
form audit report is to be given by statutory branch auditors as well as statutory central
auditors. The LFAR for branch auditors is in form of questionnaire where
observations/comments have to be provided on range of matters including cash, balance
with banks, investments, advances, deposits etc. These are submitted by the statutory
branch auditors to statutory central auditors.
The consolidation is done at head office level and LFAR for bank is submitted by statutory
central auditors to management. The LFAR, on the bank, after due examination, should be
placed before the ACB of the bank indicating the action taken/proposed to be taken for
rectification of the irregularities, if any, mentioned therein; and a copy of the LFAR and the
relative agenda note, together with the Board's views or directions, is submitted to RBI
within 60 days of submission of LFAR by statutory auditors.

9.3 Other Reporting Requirements

The RBI issued a Circular relating to implementation of recommendations of Committee on Legal
Aspects of Bank Frauds applicable to all scheduled commercial banks (excluding Regional Rural
Banks). The said circular provides details regarding liability of accounting and auditing profession
including the professional conduct, non-disclosure of client information and need to report fraud.
Auditor should also consider the compliance with provisions of Standards on Auditing.
8. SA 250, “Consideration of Laws and Regulations in an Audit of Financial

Statements”, explains that the duty of confidentiality is over-ridden by statute, law or
by courts. Whereas an auditor conducting an audit in accordance with SAs is
responsible for obtaining reasonable assurance that the financial statements taken as a whole
are free from material misstatement, whether caused by fraud or error according to SA 240.
Further, as per sub-section 12 of section 143 of the Companies Act, 2013, if an auditor of a
company, in the course of the performance of duties as auditor, has reason to believe that an
offence of fraud involving such amount or amounts as may be prescribed, is being or has been
committed in the company by its officers or employees, the auditor shall report the matter to the
Central Government within such time and in such manner as may be prescribed.
It must be noted that auditor is not expected to consider each and every transaction but to
evaluate the system as a whole. Therefore, if the auditor while performing normal duties comes
across any instance, he/she should report the matter to the RBI in addition to Chairman/Managing
Director/Chief Executive of the concerned bank.
[Note: For detailed understanding on duty to report on fraud under Companies Act, 2013, students
may refer Chapter-5 (The Company Audit) of this Study Material]
9.4 Reports and certificates

Besides, as part of statutory audit process, statutory central auditor provides reports and
certificates mainly consisting of following:-
Report on adequacy and operating effectiveness of Internal financial Controls over

Financial Reporting in case of banks
Long form audit report.
Report on compliance with SLR requirements.
Report on whether the treasury operations of the bank have been conducted in
accordance with the instructions issued by the RBI from time to time.
Certificate on reconciliation of securities by the bank (both on its own investment
account as well as PMS Banks' account).
Certificate on compliance by the bank in key areas of prudential and other guidelines

AUDIT OF BANKS 9.53
relating to such transactions issued by the RBI. (investment transactions)

Report on whether the income recognition, asset classification and provisioning have
been made as per the guidelines issued by the RBI from time to time.
Report on whether any serious irregularity was noticed in the working of the bank
which requires immediate attention (in accordance with sec 143(12) of the
Companies Act, 2013.)
Certificate in respect of custody of unused Bank Receipt forms and their utilisation.
Authentication of capital adequacy ratio, including disclosure requirements and other
ratios reported in the notes to accounts.
Report on status of the compliance by the bank with regard to the implementation of
recommendations of the Ghosh Committee relating to frauds and malpractices and of
the recommendations of Jilani Committee on internal control and inspection/credit
system.
Report on instances of adverse credit-deposit ratio in the rural areas.
Asset liability management.
Certificate on Corporate Governance in case of banks listed on Stock Exchange. In
some banks this certification may not be got done by the central auditors.
Certification on claim of various interest subsidies and interest subvention.
10. CONCURRENT AUDIT

Concurrent audit, as the name suggests, is an audit or verification of
transactions or activities of an organisation concurrently as the
transaction/activity takes place. It is not a pre-audit. The concept in
this audit is to verify the authenticity of the transaction/activity within
the shortest possible time after the same takes place. It is akin to
internal audit which is a concept recognised under the Companies Act. In view of the complexities
of economic activities it is now well recognised that there must be a system of someone, other
than the person involved in the operations, verifying the authenticity of the transaction/activity on a
regular basis, so that any deviation from the laid down procedures can be noticed in the shortest
possible time and remedial action can be taken.
The concept of concurrent audit in the public as well as the private sector banks has gained
acceptance in recent years. In some banks, this task has been entrusted to the internal
inspection staff who are not engaged in operational activities. In other banks, this work is allotted
to outside professional firms of chartered accountants. The Reserve Bank of India (RBI) has
issued certain guidelines for the conduct of this audit.

10.1 Scope of Concurrent Audit

The detailed scope of the concurrent audit should be clearly and uniformly determined for
the Bank as a whole by the Bank’s Central Inspection and Audit Department in consultation
with the Bank’s Audit Committee of the Board of Directors (ACB). In determining the scope,
importance should be given to checking high-risk transactions having large financial
implications as opposed to transactions involving lesser amounts. The detailed scope of
the concurrent audit may be determined and approved by the ACB.
Further, the guidelines issued by the RBI cover all the key areas of activities of the branch
which is under concurrent audit. Most banks have prepared an Audit Manual for this
purpose. Broadly stated, the following areas are covered by these guidelines:
Scope of Concurrent Foreign House

Audit in Banks Exchange Keeping
Cash Investments Other Items
Deposits Advances
10.2 Concurrent Audit System in Commercial Banks

It hardly needs to be stressed that the concurrent audit system is to be regarded as part of a
bank’s early-warning system to ensure timely detection of irregularities and lapses which helps in
preventing fraudulent transactions at branches. It is, therefore, necessary for the bank’s
management to bestow serious attention to the implementation of various aspects of the system
such as selection of branches/coverage of business operations, appointment of auditors,
appropriate reporting procedures, follow-up/rectification processes and utilisation of the feedback
from the system for appropriate and quick management decisions.
The bank should once in a year review the effectiveness of the system and take necessary
measures to correct the lacunae in the implementation of the programme.
10.3 Coverage of Business/Branches

The scope of work to be entrusted to concurrent auditors, coverage of business/branches, etc.
is left to the discretion of the head of internal audit of banks with the due prior approval of the
Audit Committee of the Board of Directors (ACB).
Banks may, however, ensure that risk sensitive areas identified by them as per their specific
business models are covered under concurrent audit. The detailed scope of the concurrent
audit may be determined and approved by the ACB.

AUDIT OF BANKS 9.55
The broad areas of coverage under concurrent audit shall be based on the identified risk of the
unit and must include random transaction testing of sufficiently large sample of such
transactions wherever required.
10.4 Types of Activities to be Covered

The areas that are typically covered as part of a concurrent audit and the suggested audit
procedures are as follows:
Cash • Daily cash transactions with particular reference to any
abnormal/ high value receipts and payments.
• Proper accounting of inward and outward cash remittances.
• Proper accounting of currency chest transactions, its prompt
reporting to the RBI.
• Expenses incurred by cash payment involving sizeable amount.
Investments • Ensure that in respect of purchase or sale of securities the
branch has acted within its delegated power having regard to its
Head Office instructions.
• Ensure that the securities held in the books of the branch are
physically held by it.
• Ensure that the branch is complying with the RBI/head Office
guidelines regarding BRs, SGL forms, delivery of scrips,
documentation and accounting.
• Ensure that the sale or purchase transactions are done at rates
beneficial to the bank.
Deposits • Check the transactions about deposits received and repaid.
• Percentage check of interest paid on deposits may be made
including calculation of interest on large deposits.
• Check new accounts opened particularly current accounts.
Operations in new current/SB accounts may be verified in the
initial periods to see whether there are any unusual operations.
Advances • Ensure that loans and advances have been sanctioned properly
in accordance with delegated authority.
• Ensure that securities and documents have been received and
properly charged/ registered.
• Ensure that post disbursement supervision and follow-up is
proper, such as receipt of stock statements, instalments,

recovery/ renewal of sanction limits, etc.

• Verify whether there is any misutilisation of the loans and
whether there are instances indicative of diversion of funds.
• Check whether the letters of credit issued by the branch are
within the delegated power and ensure that they are for genuine
trade transactions.
• Check the bank guarantees issued, whether they have been
properly worded and recorded in the register of the bank.
Whether they have been promptly renewed on the due dates.
• Ensure proper follow-up of overdue bills of exchange.
• Verify whether the classification of advances has been done as
per RBI guidelines.
• Verify whether the claims to DICGC and ECGC is submitted in time.
• Verify that instances of exceeding delegated powers have been
promptly reported to controlling/Head Office by the branch and
have been confirmed or ratified at the required level.
Foreign • Check foreign bills negotiated under letters of credit.
Exchange • Check FCNR and other non-resident accounts whether the
debits and credits are permissible under rules.
• Check whether inward/outward remittance have been properly
accounted for.
• Examine extension and cancellation of forward contracts for
purchase and sale of foreign currency. Ensure that they are duly
authorised and necessary charges have been recovered.
• Ensure that balances in Nostro accounts in different foreign
currencies are within the limit as prescribed by the bank.
• Ensure that the overbought/oversold position maintained in
different currencies is reasonable, considering the foreign
exchange operations.
• Ensure adherence to the guidelines issued by RBI/HO of the
bank about dealing room operations.
• Ensure verification/reconciliation of Nostro and Vostro account
transactions/balances.
House Keeping • Ensure that the maintenance and balancing of accounts, ledgers
and registers including clean cash is proper.
• Early reconciliation of entries outstanding in the inter-branch and
inter-bank accounts, Suspense Account, Sundry Deposits
Account, DDRR Account, Drafts Account, etc.
• Ensure timely adjustment of large value entries.

AUDIT OF BANKS 9.57
• Carry out a percentage check of calculations of interest,

discount, commission and exchange.
• Check whether debits in income account have been permitted by
the competent authorities.
• Check the transactions of staff accounts.
• Examine the day book to verify as to how the differences in
clearing have been adjusted.
• Detection & prevention of revenue leakages through close
examination of income and expenditure accounts.
• Verify cheques returned/bills returned register and look into
reasons for return of those instruments.
• Checking of inward and outward remittances (DDs, MTs & TTs).
Other items • In case the branch has been entrusted with government
business, ensure that the transactions are done in accordance
with the instructions issued by Government, RBI & HQ.
• Ensure that the branch gives proper compliance to the internal
inspection/audit reports.
• Ensure that customers’ complaints are dealt with promptly.
• Verify the statements, returns, statutory returns etc. submitted to
RBI/ HQ.
10.5 Appointment of Concurrent Auditors and Accountability

• The option to consider whether concurrent audit should be done by bank’s own
staff or external auditors is left to the discretion of individual banks.
• In case the bank has engaged its own officials, they should be experienced, well
trained and sufficiently senior. The staff engaged on concurrent audit must be
independent of the branch where concurrent audit is to be conducted.
• ACB of the bank shall decide the maximum tenure of external concurrent
auditors with the bank. Generally, tenure of external concurrent auditors with a
bank shall not be more than five years on continuous basis. However, no
concurrent auditor shall be allowed to continue with a branch/business unit for a
period of more than three years.
• If external firms are appointed and any serious acts of omissions or
commissions are noticed in their working their appointments may be cancelled
and the fact may be reported to RBI & ICAI.

10.6 Remuneration of Concurrent Auditor

Terms of appointment of the external firms of Chartered Accountants for the concurrent audit and
their remuneration may be fixed by ACB of banks keeping in view various factors such as
coverage of areas, skill sets required, number of staff required and time to be devoted to audit.
10.7 Reporting Systems

• There should be proper reporting of the findings of the concurrent auditors. For this
purpose, each bank should prepare a structured format. The major deficiencies/
aberrations noticed during audit should be highlighted in a special note and given
immediately to the bank’s branch/controlling offices. A quarterly review containing key
features brought out during the concurrent audits should be placed before the ACB.
• There should be zone-wise reporting of the findings of the concurrent audit to ACB and
an annual appraisal/report of the audit system should be placed before the ACB.
• Before submission of the report the auditor should discuss the important issues on
which he/she wishes to report with the branch manager and concerned officers. This will
enable the auditor to take into consideration the opposite view point and clarify any
doubts.
• Minor irregularities pointed out by the concurrent auditors are to be rectified in a timely
manner. Serious irregularities should be reported to the controlling offices/ Head Offices
for immediate action.
• Whenever fraudulent transactions are detected, they should immediately be reported to
Inspection & Audit Department (Head Office) as also the Chief Vigilance Officer as well
as Branch Managers concerned (unless the branch manager is involved).
• Follow-up action on the concurrent audit reports should be given high priority by the
controlling office/Inspection and Audit Department and rectification of the features done
without any loss of time.
11. AUDIT COMMITTEE

Banks are required to constitute an Audit Committee of their Board in pursuance of RBI guidelines. One
of the functions of this committee is to provide direction and also oversee the operations of the total
audit function in the bank. The committee also has to review the internal inspection/audit function in the
bank, with special emphasis on the system, its quality and effectiveness in terms of follow up. The
committee has to review the system of appointment and remuneration of concurrent auditors.
The Audit Committee is, therefore, connected with the functioning of the system of concurrent
audit. The method of appointment of auditors, their remuneration and the quality of their work is to
be reviewed by the Audit Committee. It is in this context that periodical meetings by the members
of the audit committee with the concurrent auditors and statutory auditors help the audit committee
to oversee the operations of the total audit function in the bank.

AUDIT OF BANKS 9.59
TEST YOUR KNOWLEDGE

Theoretical Questions
1. Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The
Bank follows financial year as accounting year. Your Audit Manager informed that the bank
has recognised on accrual basis income from dividends on securities and Units of Mutual
Funds held by it as at the end of financial year. The dividends on securities and Units of
Mutual Funds were declared after the end of financial year. Comment.
2. As statutory central auditors of a Nationalized bank, what special points are to be borne in
mind in the audit of compliance with "Statutory Liquidity Ratio" (SLR) requirements?
3. Explain the scope of concurrent audit of a bank with reference to Reserve Bank of India
guidelines.
4. In course of audit of Good Samaritan Bank as at 31st March, 19 you observed the following:
(a) In a particular account there was no recovery in the past 18 months. The bank has
not applied the NPA norms as well as income recognition norms to this particular
account. When queried the bank management replied that this account was
guaranteed by the central government and hence these norms were not applicable.
The bank has not invoked the guarantee. Please respond. Would your answer be
different if the advance is guaranteed by a State Government?
(b) The bank’s advance portfolio comprised of significant loans against Life Insurance
Policies. Write suitable audit program to verify these advances.
5. Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The
bank is a consortium member of Cash Credit Facilities of ` 50 crores to X Ltd. Bank's own
share is ` 10 crores only. During the last two quarters against a debit of ` 1.75 crores
towards interest the credits in X Ltd's account are to the tune of ` 1.25 crores only. Based
on the certificate of lead bank, the bank has classified the account of X Ltd as performing.
The Bank follows financial year as accounting year. Advise your views on the issue which
were brought to your notice by your Audit Manager.
6. You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also
deals in providing credit card facilities to its account holder. The bank is aware of the fact
that there should be strict control over storage and issue of credit cards. How will you
evaluate the Internal Control System in the area of Credit Card operations of a Bank?
7. You have been appointed as Concurrent Auditor of a nationalized bank branch. The main
business at the branch is dealing in foreign exchange. Suggest the main areas of coverage
with regard to foreign exchange transactions of the said branch under concurrent audit.

8. While auditing FAIR Bank, you observed that a lump sum amount has been disclosed as
contingent liability collectively. You are, therefore, requested by the management to guide
them about the disclosure requirement of Contingent Liabilities for Banks. Kindly guide.
9. ABC Chartered Accountants have been appointed as concurrent auditors for the branches
of Effective Bank Ltd. for the year 2019-20. You are part of the audit team for Agra branch
of the bank and have been instructed by your senior to verify the advances of the audit
period. You are required to guide your assistant about the areas to be taken care while
doing verification during the concurrent audit.
10. In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its non-
performing assets. Draft the points of audit check that are very relevant to this area of
checking.
11. Banks, because of certain characteristics, are distinguished from other commercial
enterprises and hence it needs special audit consideration. As an auditor of a bank, specify
the various peculiarities which may necessitate special audit consideration to be taken care
by you?
12. ABC Bank had sanctioned credit limits of Rs.100 lakh to M/s Volkart Ltd on 1 st September
2018. The renewal of limits was due on 1st September 2019. While doing the statutory
branch audit for the year ended 31st March 2020, you find that the renewal has not been
done even though 180 days are over. The bank says that the renewal process has been
initiated on time and most of the document are received. The account is operated regularly
and is in order; balance is maintained within drawing power. It also shows a letter from
Volkart stating that due to a sudden death of their auditor, a new auditor had to be
appointed. Procedure for appointment took some time and the new auditor was doing the
audit all over again. The limit was not renewed till 31/3/2020. However, the audited
financials are received on 10th April 2020 and the renewal letter was issued immediately.
Your assistant is insisting that the account must be classified as NPA since the limit was not
renewed as on 31/3/2020. What is your opinion?
13. You are auditing a small bank branch with staff strength of the manager, cashier and three
other staff S1 ,S2 and S3. Among allocation of work for other areas, S1 who is a peon also
opens all the mail and forwards it to the concerned person. He does not have a signature
book so as to check the signatures on important communications. S2 has possession of all
bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.). He maintains a record meticulously which you have test checked also.
However, no one among staff regularly checks that. You are informed that being a small
branch with shortage of manpower, it is not possible to always check the work and records.
Give your comments.

AUDIT OF BANKS 9.61
Answers to Theoretical Questions

1. Banks may book income from dividend on shares of corporate bodies on accrual basis,
provided dividend on the shares has been declared by the corporate body in its annual
general meeting and the owner's right to receive payment is established. This is also in
accordance with AS 9. In this case the dividends have been declared after the financial year
end. Therefore, the recognition of income by the bank on accrual basis is not in order.
In respect of income from government securities and bonds and debentures of corporate
bodies, where interest rates on these instruments are pre-determined, income could be
booked on accrual basis, provided interest is serviced regularly and as such is not in
arrears. It was further, however, clarified that banks may book income on accrual basis on
securities of corporate bodies/public sector undertakings in respect of which the payment of
interest and repayment of principal have been guaranteed by the central government or a
State government.
2. Refer Para no 6.
3. Refer Para no. 10.1
4. (a) Government Guaranteed Advance: If a government guaranteed advance becomes
NPA, then for the purpose of income recognition, interest on such advance should
not to be taken to income unless interest is realized. However, for purpose of asset
classification, credit facility backed by Central Government Guarantee, though
overdue, can be treated as NPA only when the Central Government repudiates its
guarantee, when invoked.
Since the bank has not invoked the guarantee, the question of repudiation does not
arise. Hence the bank is correct to the extent of not applying the NPA norms for
provisioning purpose. But this exemption is not available in respect of income
recognition norms. Hence the income to the extent not recovered should be
reversed.
The situation would be different if the advance is guaranteed by State Government
because this exception is not applicable for State Government Guaranteed
advances, where advance is to be considered NPA if it remains overdue for more
than 90 days.
In case the bank has not invoked the Central Government Guarantee though the
amount is overdue for long, the reasoning for the same should be taken and duly
reported in LFAR.
(b) The Audit Programme to Verify Advances against Life Insurance Policies is as
under-

(i) The auditor should inspect the policies and see whether they are assigned to
the bank and whether such assignment has been registered with the insurer.
(ii) The auditor should also examine whether premium has been paid on the
policies and whether they are in force.
(iii) Certificate regarding surrender value obtained from the insurer should be
examined.
(iv) The auditor should particularly see that if such surrender value is subject to
payment of certain premium, the amount of such premium has been deducted
from the surrender value.
5. The bank is a consortium member of cash credit facilities of ` 50 crores to X Ltd. Bank's
own share is ` 10 crores only. During the last two quarters against a debit of
` 1.75 crores towards interest, the credits in X Ltd.’s account are to the tune of
` 1.25 crores only. Sometimes, several banks form a group (the 'consortium') under the
leadership of a 'lead bank' to make advance to a large customer on same conditions and
security with proportionate rights. In such cases, each bank may classify the advance given
by it according to its own experience of recovery and other factors. Since in the last two
quarters, the amount remains outstanding and, thus, interest amount should be reversed.
This is despite the certificate of lead bank to classify that the account as performing.
Accordingly, the amount should be shown as non-performing asset.
6. Refer Para 5.
7. Refer Para 10.4.
8. Refer Para 8 - Part (VI)
9. Refer Para 7 sub heading III
10. Refer Para 7 sub heading III
11. Refer Para 1
12. As per Guidelines of Reserve Bank of India the account should be classified as NPA if
renewal is not done in 180 days. However, in the present case, operations in the account
are excellent. The bank has shown a letter from that company that due to certain reasons
the audited financial statements are delayed. Further, the limit has been renewed before
signing the audit report.
Thus, even if the sanction was issued after the balance sheet date, it relates to the
position as on the balance sheet date. Therefore, it is an adjusting event under AS 4,
Contingencies and Events Occurring After the Balance Sheet Date. It is also a matter of
substance over form.
The auditor would consider classifying the account as a standard asset.

AUDIT OF BANKS 9.63
13. Banks are required to implement and maintain a system of internal controls for mitigating
risks, maintain good governance and to meet the regulatory requirements. Given below
are examples of internal controls that are violated in the given situation:
In the instant case, S1 who is a peon opens all the mail and forwards it to the concerned
person. Further, he does not have a signature book so as to check the signatures on
important communications is not in accordance with implementation and maintenance of
general internal control. As the mail should be opened by a responsible officer. Signatures
on all the letters and advices received from other branches of the bank or its
correspondence should be checked by an officer with the signature book.
All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques,
foreign currency cards etc.) should be kept in the possession of an officer, and another
responsible officer should verify the issuance and stock of such stationery. In the given
case, S2 has possession of all bank forms (e.g. cheque books, demand draft/pay order
books, travelers’ cheques, foreign currency cards etc.). He maintains a record
meticulously which were also verified on test check basis.
Further, contention of bank that being a small branch with shortage of manpower they are
not able to check the work and records on regular basis, is not tenable as such lapses in
internal control pose risk of fraud.
The auditor should report the same in his report accordingly.

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9

After studying this chapter, you will be able to:

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Form and Content of F.S.

Scope & its covered Activities

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Custody of large volumes of monetary items, including cash and negotiable

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3. FORM AND CONTENT OF FINANCIAL STATEMENTS

3.1 Audit of Accounts & Appointment of Auditor

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auditors in case of nationalised banks (Generally this is decided at a later stage)

Initial Considerations Understanding Risk Assessment Execution Reporting

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Stage I: Initial Considerations

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Stage III : Risk Assessment

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4.1 Special Considerations in IT Environment

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4.2 Internal Audit and Inspection

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5. INTERNAL CONTROL IN CERTAIN SELECTED AREAS

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• The arithmetical accuracy of the books should be proved

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Clearings • Under the Cheque Truncation System (CTS) implemented by RBI,

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• There should be a system whereby a merchant confirms the status of

6. COMPLIANCE WITH CRR AND SLR REQUIREMENTS

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Maintenance of liquid assets as

Audit Approach and Procedure:

Area of Focus Suggested Audit Procedures

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o Part amounts of recoveries from the borrowers in respect of

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branches in forming an opinion. Recently, there has been

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• The cash balance as physically verified should be agreed with

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• Examine whether the aggregate balances comprising this item

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hand, obtain confirmation of Subsidiary General Ledger (SGL)

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‘available for sale’ to ‘held to maturity’ is duly approved by

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• As per the RBI guidelines, banks are required to get their

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monitoring and supervision of advances. Audit approach of advances should encompass

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• Examine those accounts which have been adversely

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It is to be ensured that the classification is made as per the position as on

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