auditing chapter 2 (1)

7/30/2019 Auditing Chapter 2 (1)

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Laws governing the audit of Banking

Company

Nationalize banks: banking companies(Acquisitionand transfer of undertakings) Act,1980 andBanking Regulation Act,1949.

NonNationalized Banks- banking regulation act-1949, and provision of companies act 1956.

Co-operative banks: co-operative societies act1912, relevant state laws governing co-operativesocieties and banking regulation act 1949


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Regional rural banks: Regional Rural Banks

Act,1976.

State bank of India: SBI Act,1955, SBI

(Subsidiary Banks) Act,1959 and certain

provisions of Banking regulation Act-1949


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Appointment of Auditor

For Nationalized Bank previous approval of RBI

Duly qualifiedCompany Act 1956 section 226

Regional rural bank- approval of Central Government.

Co-operative Bank governed by relevant Co-operative Societies Act.

Appointed by the Board of Directors of d Bank

Auditor of Banking co. is appointed at the annualgeneral meeting of the shareholders.


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Appointment of Auditor

For branches of Nationalize Bank, SBI and itsSubsidiaries- RBI Maintain a panel which isprepared by ICAI .

For this Institute publish an empanelment for,normally in the month of April or May issue of itsJournal.

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


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Powers of Auditor

Same as those of a company auditor except

that the powers of the auditors of a Co-

operative bank governed by the relevant co-

operative societies Act.

Two types of Banking Audit:

(1) audit of Banking Companies

(2) audit of Co-operative Banks


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Audit of Banking Companies

silent features Restriction on Business: Section 5 Co. Act Defines Banking as

Accepting..

Capital requirements: sec 11&12 of Act contains capital to be

maintained by the banks subscribed capital should not be lessthan 50% of authorized capital and paid up capital should notbe less than 50% of subscribed capital.

In case incorporated outside India having place of business in

the city of Mumbai and Kolkata or bothpaid up capital andreserve shall not be less than Rs.20 lakhs. any other bank-15lakhs

.


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Silent features

Operaing more than one state and having places Mumbai andKolkata- capital and reserve should be atleast 10 lakhs.

Operating in one state-no branches in mumbai and kolkata-paid upcapital & reserves Rs. 1 lakh plus Rs. 10,000 in respect of other

place in same districe.

Total capital and reserves to be mainted need not exceed Rs. 5lakhs.

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


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Silent features CRR and SLR-sec 18 banking regulation Act-CRR atleast 3% of its

time and demand liabilities.

SLR in form of cash, gold or unencumbered approved securities.-should not be less than 25% to total demand and time liabilities.

Restriction on investment, loans and Advances: cannot hold dshares whether as pledgee, mortgagee or absolute owner of othercompanies exceeding 30% of its own paid up capital and reserves or30 % of capital of other companies whichever is less.

Cannot advance loan on the security of its own shares.

Cannot give unsecured loan or advance to any of its director orfirm or private company in which such director is interested.


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Audit of co-operative banks

Establishment of cooperative societies- co-

operative societies Act,1912.

Some states Maharashtra, Tamil Nadu, Bengal,

Bihar etc. enacted co-operative societies act

for their own states according to provisions of

central Act.-in this case provision of state

legislation will applicable.-1992.


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Privileges of Registered societies

It shall have the privileges of a body corporate.

Prepetual succession and common seal.

Power to hold property

Can enter into a contract with others.

Can be sued by others and can sue to others.

Its share cannot be sold or attached under any

decree or order of a court in respect of any debt

or liability incured by its member.


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Restrictions imposed

Restriction on shares:

(a) A member cannot transfer his share unless

he has held that share for atleast one year.

(b) Can surrender his share to the socierty or to

another member after the expiry of one year

when he became a member (section 14)

(c) A society may refuse to register a transfer if it

is in contravention of section 5.


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Restriction on loans

Not allowed to loan a person other than

member of society except with the general or

special permission of the registrar.

Cannot advance a loan to another registered

co-operative society without the permission

of registrar of co-op.soci.

State govt.may prohibit to lend money on the

mortgage of immovable property.


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Restriction on borrowings

A registered society may receive deposits and

loans from persons who are not the members

of the society to such extent and under such

conditions as may be prescribed by the rulesof the co-operative societies Act or Bye-laws

of the society concerned(section-30)


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Qualification of auditor

A practicing chartered Accountant within the meaningof Chartered Account Act,1949.

Must be member of ICAI, new Delhi, holding certificateof practice.

A firm of Chartered Accountant is appointed as auditorwhere all the partners of the firm are practicingChartered Accountants in India.

Subject to rules made by central Govt. u/s 226(2)(b)Holder of certificate under the Restricted state AuditorCertificates Rules,1956.however central govt.may benotification in the official gazette makes rules for grant,renewal, suspension or cancel d certificate.


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Disqualification of Auditor according to

Co.Act,1956 & ICAI Act,19491. A Body Corporate

2. Any person who is an officer or employee or partner ofemployee of the company.

3. Any person who is indebted to the co.for an amount of Rs.1,000/-

4. Any person holding the Security of that co. after aperiod of one year from d date of commencement of theco.Amendement Act 2000.(security means an instrumentwhich carries voting rights)


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disqualifications5. A firm which already holds the specified number of company

audits cannot accept any more audit.(not for private Ltd.Cosafter the commencement of d Cos. Act,2002)

6. Any company who has given the company a guarantee or anundertaking for d liability of a third party to the Co. for an

amount exceeding Rs. 1,000.

7. Director or member of a private company.

8. Who is auditor of holding co. disqualifies for the auditor ofsubsidiary co. and vise versa.(Sec.226(5)

9. Auditor of branch disqualifies to become an auditor of headoffice and vice versa.


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Auditors Report

Meaning: it contains clear written relevant to d proper

presentation of d financial information. the auditor

should review and assess d conclusions drawn from

d audit evidence obtained as d basis for d

expression of an opinion on d financial statements.itcontains clear written expression of opinion on d

Financial Statements by d auditor taken as a whole.

Objective: To establish standards on d form andcontent of d auditors report issued as a result of an

audit performed by an auditor of d financial

statements of an entity.


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Contents/elements of Auditors Report

Title: Appropriate, helps to identify d reports, Distinguish from

other reports, e.g Board of Directors Report.

Addressee : it should be appropriately addressed as required byd circumstances of d engagement and applicable laws andregulations.eg.statutory audit is addressed to d shareholders.

Opening and introductory paragraph:(a) report should identifyd financial statements of d enquiry that have been auditedincluding d date of and period covered by d financial

statements.(b) it should include a statement that d financialstatements r the responsibility of d entitys management and astatement that d responsibility of d Auditor is to express anopinion on d fin.statements based on d audit.


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contentsScope of paragraph: it should describe

Examining, on a test basis, evidence to support d amountsand disclousures in Fin.Statements.

Assessing d accounting principles used in d preparation ofFin.Statements.

Evaluating d overall position of Fin. Statements.

Opinion Paragraph: it indicates d financial reporting framework used to

prepare d fin. Statements.

It states auditors opinion as to whether d fin. Statements

give a true and fair view in accordance with d financialreporting framework.

Whether d fin. Statements comply with d statutoryrequirements.


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contentsDate of report:

d date on which auditors signs the report expressinghis opinion on d fin. Statements.

Place of signature:

the report should name d specific location, which is

ordinarily the city where d audit report is signed.Auditors signature:

it should be signed by d auditor in his personal name.

Where d firm is appointed , d report should be signedby auditor in d personal name and in d name of auditfirm.

The partner /propritor signing the report shouldmention his ICAI Membership Number.


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Features of Good Report

Sincerity: the opinion stated express an independent mindunaffected by any bias.

Accuracy: the collection, interpretation and presentationof data in audit report should be accurate.

Simplicity: Technical Jargons should be avoided.

Language:lucid and clear language informing dshareholders about co.s state of affairs.

Coherency(Sequency): there must be a thread of unifiedthought binding sentence to sentence , & paragraph to

paragraph. Contents: relevant information as required by law.

Reasons: when auditor has given a qualified or adversereport or a disclaimer of opinion , he should state d reasonthereof.


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Types of Audit Report

Types of Audit report r based on d opinion of

auditor.

Auditors opinion may be

unqualified (Clean) ,

qualified and adverse.

In certain cases auditor may also disclaim d

opinion.


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Auditors report in case of Nationalized Banks

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

1. Whether Balance Sheet is true and fair ,balance sheet containsall the necessary particulars , in case he had called for anyexplanation or information whether it has been given andwhether it is satisfactory.

2. Whether or not the transaction of d bank which have come tohis notice- within d powers of bank.

3. Returns received from the offices and branches of the bankhave been found adequate for d purpose of audit.

4. P&L A/c shows a true balance of P orL for d period covered bysuch account and any other matter which he considers should

be brought to d notice of central Govt.


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Auditors report (Nationalized Bank) Whether he has obtained all d information & Explanations

necessary for his work & Whether d same r satisfactory.According to Banking Regulation Act, auditors report in

case of Banking Co.

Whether all d information and explanations, which to d

best of d knowledge and belief were necessary for dpurpose of audit, have been duly obtained.

Proper books of accounts as required by law have been

kept by d banks so far as appears from his examination ofd books.

Whether B/S & P&L A/c under report r in agreement withd books of accounts.


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In case of banking co.

Whether in his opinion and to d best of his information and

according to d explanations given to him, d said accountsgive d information as required and in d manner so requiredand give true and fair view:

(I) in d case of B/S of d state of companys affairs as at d

dateof B/S

(2)In the case P/L of the profit for d year ended on that date.

By the virtue of d provisions of clause(d) of sub section (3)

of section 227 of Co. Act,1956, d auditor has to specificallyreport whether in his opinion d P&L and B/s of Banking Co.comply with d accounting standards referred to in sub-section(3c) of section 211 of d co.Act,1956.


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Report of auditors of SBI

submitted to d Central Govt.& almost similar to

the Nationalized Bank.

In case Subsidiaries of SBIreport identical to

Nationalized Bank except that all reference to

Central Govt. have to be construed instead as

reference to d SBI

In case of RRBs except that the reference are

instead to the bank concerned.


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Report of company Auditors under co. Act,

1956. Whether or not d information and explanation required by auditor

found satisfactory.

Whether or not transactions of Co. have come to notice r within dpowers of d company.

Whether or not d returns received from d branch office of d co.found adequate for d purpose of audit.

Whether P&L A/c Shows true balance for d period covered by suchaccount.

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


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Clean /unqualified audit report

Meaning: (a) an opinion is said to be unqualified ,

when d auditor concluded that d financial

statements give a true and fair view in

accordance with d financial reporting framework

used for d preparation and presentation of d fin.Statements.

(b) The auditor gives a clean or unqualified report,

when he does not have any significantreservation in respect of matters contained in

the financial statements.


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Clean report

An unqualified opinion indicates d following:

The Fin. Stat r prepared using d Generally AcceptedAccounting Principles, which have beenconsistently applied.

The Fin. Statements comply with relevant statutoryrequirements and regulations.

There is adquate disclosure of all materialmattersrelevent to d proper presentation of Fin.statmentssubject to statutory requirement.

Any changes in d accounting principles or in dmethod of their applications, and d effects havebeen properly determined and disclosed in dfinancial statements.


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When auditor issues unqualified

report

Evidence : reasonable evidence obtained

Standards: all AS and Accounting Principlesfollowed

True and Fair: Fin. Stat represents true and fair Classification: it does not hide a material fact

Format : Fin. Statement format prescribed by law

Free of Misstatement: no illegal material

transaction r recorded Disclosure: all disclosures required relevant r

appropriate.


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Qualified opinion/Report

Where auditors gives an opinion on truth andfairness of Fin.Sta subject to certain reservations.

Reservation is generally stated as Subject to dabove, we report that d Balance Sheet shows a

true and fair view. Auditor has to give qualified opinion.

He should express clearly the nature of the

qualification in d report. He should also give d reason for qualification

(section 227(4) of Co. Act,1956)


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Disclaimer of Opinion When auditor unable to form an overall opinion about the

matters contained in d Fin. Sta.

It express when d possible effect of a limitation on scope is somaterial & pervasive that auditor has not able to obtainsufficient appropriate audit evidence .

It happens in a situation:

(1) When books of A/c of co. are sized by Income tax authorities.

(2) Not possible for auditor to obtain certain information.

(3) When scope of audit work is restricted.

The auditor will state in his report he is unable to form anopinion on d fin. Sta such report is called as Disclaimer ofOpinion Report


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Piecemeal opinion

In some cases auditor find fin. Statements r

partial true and fair view such a situation

would warrant a piecemeal opinion.


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Adverse opinion/Negative Report

When auditor concludes that based on his

examinations he does not agree with d affirmationsmade in fin. Statements.

Auditor states that d fin. Statements do not present

a true and fair view of d state of affairs and workingresults of d organization.

The auditor should state d reasons for issuing such a

report.

E.g: a company has not taken into account d interestpayable to its depositors amount to Rs.12,00,000.


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Long form Audit Report (LFAR) For public sector banks, private sector banks and foreign

banks. as per d requirements laid down by d RBI.

It highlights certain important aspects of d working of abank specially those related to internal control system,accounting policies, profitability and financial position.

It should be submitted within stipulated time, inseparated two formats issued by RBI (1985) revised 1987.

Submitted by statutory central auditor

Addressed to chairman of d bank concerned , a copy toRBI.

It also submitted by branch auditor to chairman and copysent to statutory central auditor.


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LFAR QuestionnaireGeneral

Control and subsidiary records at branches and head office been reconcile?

If not give observation.

Inter-branch a/c reconciled ? R these upto date? Not give observations.

Ur major observations in branch returns.

Profitability of various operations of d bank under audit and compare d

figures immediately preceding two years.

Procedure followed by d bank for revaluation of NOSTRO accounts and

outstanding forward exchange contracts. A NOSTRO a/c is maintained be d

bank at an overseas centre to hold stock of foreign currencies so as to put

through foreign transactions.


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Questionnaire

Position relating balancing of books examined.

Major frauds discovered and recorded by d

bank. your suggestions.


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Balances with other bank

Does bank have a procedure for obtaining

balance confirmation certificate in respect of

outstanding balances with other bank (Including

foreign banks) and

Whether these certificates were obtained andbalances reconciled with such banks as the year

end ? If not , your observations may be given,


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Investments

Is mode of valuation of investment consistent with that of

d earlier year? indicate mode of valuation of investment.

Is there any shortfall in d market value of investment ascompared to book value and has same been provided for?

To the extent to which such shorfall not provided at d yearend.

Investment/securities value which shown in B/s varified

with physical value?

R there sizeabile matured securities which have not beenenchased? If so give details?


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Advances Is d procedure for review of advances and their

classification according to Health Code System(suggested

by RBI) adequate,

Whether review r submitted to d appropriate authoritywithin d bank? If procedure is inadequate your

observations?

Whether d bank has evolved a mechanism for detectingincipient sickness in d industrial units financed by it?

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


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advances Information as to d following as t d year end (also

previous year) i.e total advances, total doubtful advancesand % of doubtful advances to total advances.

Attention to be drawn to management on some adversefeature observed with reason .

Procedure followed by bank on recording of interest onadvances to interest suspense account or any othersimilar account , any change made during d year with

reason.

Furnish list of top 50 problem-account (other thanprovided by d bank) in your opinion?


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advances

Have you come across cases

(a) Sanction of facilities to borrowers beyond

authorities limits and whether such cases r

promptly reported to d competent authority.

(b) Frequent overdrawing permitted to borrowers

beyond sanctioned limits

(c) Credit facilities being accorded without proper

documentation?


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Premises Have d documents of title to properties owned

by d bank been made available for auditverification?

If not d details may be reported.


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Other assets /liabilites

Does bank have an adequate system to ensure

expeditious (special) clearance of:

(a) debits in suspense account

(b) Credits in deposits/sundries account?(c) In case any matter relating to such item reported

and attented to d management.


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Reserves and provisions Addition to and deductions from various reserves

since d last year B/s may be reported withobservation if any.

Has bank earmarked any portion of d reserves to

meet any specific contingency (E.g bonus, gratuity) The quantum of provision of a material nature to d

extent not separately dealt with .

Status of pending income tax assessment may bereported indicating provisions if any retained/ not

made for any major items of controversial nature.


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Miscellaneous

R their any other matters which you as auditor

would like to bring to d notice of d

management?


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Non performing Assets

Standard Assets: which does not disclose any

problem , which does not carry more than

normal risk

Sub-standard: classified as NPA fo a period not

exceeding two years .in case of loans where

installments and principal r overdue for a

period exceeding one year but not exceedingtwo years.


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Doubtful assets:

Remain NPA for a period exceeding two years.

loss Assets:

Where loss is identified by d bank or by d

internal or external auditors or by d RBI

inspection but d amount has not been written

off wholly or partly.

A di P d (i l C l


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Audit Procedure (internal Control

System)

1. Appropriate procedure for evaluating creditworthiness ofborrowers and specifications of authority for sanctioningloans and advances.

2. Evidentiary material, such as agreement in support of eachloan and advance.

3. Securing of adequate margin in respect of loans andadvances as per RBI

4. Securing title and other proof in resepect of securitiesmortgaged with d banks


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procedure

5. Regular inspection and valuation of securities.

6. Appropriate accounting of increase/decrease in

securities and their value.

7. Regular review of operation of every account.


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Audit of Income(interest & Discount)

Nature of income & its treatment:Interest, Discount,interest on discount money

parked with RBI,cash credits, overdrafts,bill

purchased & discounted-

secured/unsecured/guaranteed,made to a person

or agencies in provate or public sector.

Treatment:

whether there is proper accounting of cash income.,

recognitions of income of NPAs.

l l f


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Calculation of Income

Auditor should see that interest calculation is as

per relevant agreement.

Made up to d Balance Sheet.

Proper apportionment of discount on outstanding

bills over d current and following year.


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Treatment of interest subsidy from RBI

Auditor should ascertain proper computation

and disclosure of interest subsidy from RBI in

respect of concession-rate advances to

priority sector.


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Other Business Income

a) commission, brokerage etc: on bills forcollection, demand drafts, letter of credit, lockerrent. Etc.

b) Profit on sale of investment: should verifyincome from brokers notes, title document,etc.& net profit is adjusted after adjustment ofany loss on sale of investment during d year.

c) Profit on revaluation of assets: thereshould beupward revaluation that have been writtendown below cost in previous years.


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d) Profit on sale of fixed assets: as per AS-10 there

should be credit of such profit to d revaluationreserve and only the excess of such credit overdebit from revaluation carried out in earlier yearsshould be net profit shown in profit and loss A/c.

e) Miscellaneous Income: such as rent from houseproperty,Godowns, insurance charges from

customers etc..if such income exceeds 1% of totalincome of d bank, notes should containparticulars of d same.

f f h


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Profit on foreign exchange transaction

Whether there is immediate confirmation of

counterparty confirmations? Is d net position of d party the basis for transaction

limit?

Is there immediate record of deals and monitoring

and approval of positions? Are d persons carrying out the deals different from

those recording and handling them?

Whether RBI compliance Followed?

Is there appropriate procedure for hedging againstrate loss?

Is there regular reconciliation of NOSTRO accounts?


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As per Guidance note of ICAI and AS-11

AS-11 (Accounting for d effects of changes in

Foreign Exchange Rates)

Auditor should see whether there is sufficient

insurance cover in respect of deposits in

foreign currency

Provision for loss from change in foreign

exchange rates.

di f di


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Audit of expenditure- Interest

Auditor should ascertain that provision of

interest is as per instructions of d RBI,

Its calculation is upto d B/s

Interest on inter-branch balances does not figure

in d Financial Statement.

Is there apportionment of discount on

outstanding bills between the current and the

following year.


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Operating Expenses

All operating expenses given in schedule no.16

The auditor should carefully examine each item

of expenditure.

He ascertain that its computation is correct Supported by proper documents and authority

for d expenditure.


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provisions

The auditor should ascertain that computation

of provision for:

Bad and doubtful debts

Tax payment

Decrease in d value of investments

Other contigent expenditure are correct and

as per direction of RBI.

A i i


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Accounting Ratios

As per Schedule III to d Banking Regulation Act,there should be d disclosure of d following ratio inthe Notes on Accounts

(a) Capital adequacy ratio

(b) % of shareholding of d GOI in d nationalized Bank.(c) % of NPAs to net Advances

(d) Interest income as a % of working funds.

(e) Non- interest income as a % of working funds.(f) Returns on assets.

(g) Business(deposits and advances per employee)

(h) Profit per employee.

A di f A


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Audit of Assets

It involves audit of following assets:

(1) advances

(2) Fixed Assets

(3) Other Assets

Ad


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Advancesa) Preliminary: The auditor should review past audit

reports, internal audit and inspection reports, andrelevant internal reports to see if there r negativecomment in respect of any borrowers account.

verification of priority sector rural advances withreference to their nature.

test checking of advances for house building loans

or consumer durables to determine their nature.

scrutiny of ledger accounts to see that there is nooverstepping.

Advances


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Advances

(b) Classification of Bank Assets: (a) Standard (b)

NPAs

Window Dressing: means presenting the financial

statements in order to show rosy picture. d real

value of assets and liabilities in d B/S is notreflected. Similarly the income and Exp. r also

shown in a manner so that they do not reflect

real value of Income & Expenditure .Eg. showinghigher value of Goodwill or higher/lower value of

Assets due to increase/decrease of Depreciation.

Possible ways of window dressing by


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Possible ways of window dressing by

banks

Showing NPA as a standard asset.

Granting new loan to a customer whose account hasbecome NPA and renewal of advances from time to

time, so that advances are not shown as NPAs.

When advances r not shown as NPAs, d provision isreduced and profit of bank is more than d expected.

The banks do not follow RBI Guidelines strictly.

Wrong classification of assets.

(c) Other requirements in case of loans


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(c) Other requirements in case of loans

and advances

The auditor should see that there is proper observance ofthe following requirements:

(i) Money advanced to customers against security,guarantee etc.- secured/unsecured,security third

party, Govt.RBI ,documents, legal status ofborrowers(AA & MA),mortgage deed, title deed etc.

(ii) Bank cannot advance money against security of own

shares or to any concern wherein its director,manager, employee has interest.

(d) Bill h d d di t d


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(d) Bills purchased and discounted

The Auditor should physically verify the bills with

the bank and see which of them have gone forcollection.

He should ascertain that there is accounting of all

bills and that those are within the sanctionedlimit.

There should be scrutiny of overdue bills with

reference to the possibility of recovery.

(e) Pro ision for bad and do btf l debts


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(e) Provision for bad and doubtful debts

The auditor should see that the provision made

by the bank meets the adequacy requirements asprescribed.

In case of unlikelihood of recovery of any debt,

he should appropriately classify it as doubtful or

loss asset.

(f) Rules relating to NPAs.

Fi d t


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Fixed assets

(a) Premises: A Bank may own premises, wholly orpartly for business or residential purposes. anypremises acquired by d bank in satisfaction of debtsdue to it would fall under Fixed Assets only if d

bank holds it for own use.

The auditor should examine the title deeds & otherrelevant documents testifying banks ownership.

He should see that there is provision for depreciationin respect of premises as per co. Act.


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(b)Other fixed assets

These includes furniture, fixtures motor

vehicles etc.,

The auditor should verify them in respect of

their existence, ownership, possession,valuation and appropriate disclosure.

Other Assets


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Other Assets

These includes the following:

(a) Inter- Branch adjustments:Any number of transactions between branches of a bank

involving transfer of funds through bills of exchange, DD,travelers' cheques, telegraphic transfer etc.,

The auditor should ascertain that there is proper system ofrecord of inter-branch transactions with d head office, d headoffice sets off debit and credit entries pertaining to branchesinvolved in such transactions and speedy identification andcorrection of errors in d statement sent by branches entering

d transactions.

There should be system of reconciliation of transactionsbetween branches and any unreasonable difference shouldget promptly attention

I t t d


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Interest accrued

The auditor should examine interest accruing but

not collected on advances and investment, taking

in view the likelihood of its recovery.

He should follow the guidelines issued by RBI as

to recognition of interest on advances and

investments.

(c) Tax paid in advance or deducted at


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(c) Tax paid in advance or deducted at

source

The auditor should verify this from challans,

TDS certificates etc.,

(d) Non-Banking assets acquired in satisfaction


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of debts

A bank may acquire any non-banking asset in satisfaction of any debt due

to it.

According to banking Regulation Act, it must dispose of such asset withinseven years of its acquisition.

RBI may extend this time limit by up to five years.

The auditor should verify such assets with relevant documents e.g. termsof settlement with the party , award of arbitrator, order of the court etc.,

He should ascertain that ownership of property vests with the bank and incase of any dispute, there should be provision for liability and appropriatedisclosure of contingent liability.

He should see if valuation of such asset is at lower of the amount of debtsettled or net realizable value.


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(e) Credit Cards

Credit cards r risk-prone business. The auditor should evaluate the internal control

system to see whether

there is proper scrutiny of applications for credit

cards, issue of credit cards,

prompt and regular billing of customers,

Charging their accounts

Monitoring of receipts Regular reporting by selling dealers of settlements.

Any abnormal outstanding amounts should getprompt attention.


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(f) Miscellaneous assets

It includes stationary, postal stamps, advances

given to staff, money receivable from Govt,

prepaid expenses etc.,

Verify these with reference to the

documentary evidence.

Checklist for verification of cash-in-


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Checklist for verification of cash in

hand

The auditor should verify:

1. Daily cash transactions with particular referenceto any abnormal receipts and payments.

2. Proper accounting for inward and outward cashremittances.

3. Proper accounting of currency chesttransaction, its proper reporting to d RBI

4. Expenses incurred by cash payment involvingsizeable amount.

Audit of liabilities


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Audit of liabilities

1. Share capital:

The auditor should ascertain whether there iscompliance with provision of the bankingregulation act, under sec.11 and disclosure ofcapital in the B/s.

Subscribed capital not less than one half of itsauthorized capital

Paid up capital not less than one half of itssubscribed capital.

A banking co. Incorporated outside India must keep aminimum prescribed amount of paid up capitaland reserves deposited with RBI in d form of cashor unencumbered approved securities.

Reserves and Surplus


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Reserves and Surplus

a. ) Statutory reserve: a bank must transfer 25% of its

profit to d reserve fund every year before declaringdividend or transferring profit to the central Govt.

It may get exemption if Reserve fund + sharepremium is at lease equal to its paid up capital.

If d bank appropriates any amount from the reservefund or the share premium account , it should reportto the RBI within 21 days of such appropriation,explaining the circumstances attending.

The auditor should ascertain compliance with thisprovision as also that the appropriation hasauthority of a board resolution.

b) l d


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b) Capital and revenue reserves

It includes surplus arising from revaluation of

fixed assets.

It is not available for distribution as profit.

Revenues and other reserves will represent

transfer from profit for various purposes.

c) Reserves with branches abroad


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c) Reserves with branches abroad

The auditor should ascertain whether the bank

has created reserves required under the laws

governing its foreign branches.

d) D i d B i


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d) Deposits and Borrowings

It includes:

Demand and time deposits: balances in current

accounts, savings bank account, cash credit

accounts, fixed deposits, recurring deposits,deposit certificates, borrowing from RBI.

Other banks, Indian financial institutions, and

external borrowings.

Procedure to check the Reserves


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Procedure to check the Reserves

a) He should verify the reconciliation statement

between current a/c ledger and control account.

Checking of general ledger control account with

subsidiary ledger balances relating to saving

bank A/c

And saving bank a/c balances with individual

accounts in the ledger.

b) Detail check and ascertain whether the bank

obtains regular confirmation of balances from

customers.


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He should see that overdrawing in deposit accountappears separately under Advances instead of sum ond liabilities side.

Ascertain interest payable should appear under otherliabilities and not included in relevent deposits, alsocalculation of interest basis of individual account.

See whether there is serial numbering and properaccounting of fixed deposit receipts and cash certificates.and provision of interest on that.

See that there is proper compliance with RBI instructionin respect of acceptance of foreign currency deposits fromnon-residents.


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He should ascertain borrowings from RBI, other banks andfinancial institutions based on reconciliation statements

and confirmations.

He should report tricky transactions where there is grantof overdraft to a customer, then receipt of term deposit

from him at d year end, followed by reversal entry at dbeginning of d following year.

See there is distinction maintained between refinance

(Borrowing) and rediscount.(reduction form advances)

See that inter-branch transfer do not appear asborrowings.

Oth li biliti ) Bill P bl


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Other liabilities- a) Bills Payable

Auditor should evaluate internal control inrespect of demand draft, telegraphic transfer

etc.,with particular reference to their serial

numbering, safe custody of unused forms,confirmation of transfer, etc.,

He should examine items outstanding for

more than three years and include them in hisreport.

Provision for taxation


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The auditor should see

The account give effect to adjustments based on

memorandum of changes suggested by branchauditors.

During consolidation of accounts, there is reversal ofnet interest on inter-branch transactions.

There is compliance with provision of Income TaxAct regarding allowance of bad debts and provisionfor bad debts

For branches of foreign banks there is compliance

with sec.44c of I-T Act in respect of allowance ofhead office expenses.

There is compliance with provisions of I-T Act.

C) KYC N (K Y C t )


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C) KYC Norms (Know Your Customer)

As per RBI Guidelines KYC norms relates mostly to account openingforms.

While checking account opening forms the auditor should ensurethat the bank has properly obtained the identity proof, address andphoto proof of the a/c holder.

Check d signature of introducer is verified.

Every account should duly signed and stamped by d banksauthority.

Verify a/c is not bogus.

Contingent liabilities


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Contingent liabilities

As per guidance note issued by ICAI it includes:

Uncalled liabilities on partly paid up shares held bycompany as investment.

Arrears of dividend on cumulative preferenceshares.

Estimated amounts of contracts remaining to beexecuted on capital account.

Disputed liabilities on account of I-Tax, sales Tax,excise duty, custom duty or which provision is not

made. Amount of any guarantee given by company on

behalf of directors or other officers of the company,workers claim, not acknowledged as debt of co.

Checklist for evaluation of internal control (ICS)


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Checklist for evaluation of internal control (ICS)

ICS is d process designed, implemented and

maintained by those charged with governance,management and other personnel to providereasonable assurance about d achievement of anentitys objectives with regard to reliability offinancial reporting, effectiveness and efficiency of

operations. ICS is sound and reliable auditor can make use of

test check on a scientific basis and save his time andavoid repetitive work.

He can complete d work quicker. ICS is inseparable part of auditing process.

The actual audit work starts after evaluation of thesystem.

A dit d li i ICS


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Auditors dealing in ICS

a) Study the nature of business activity.

b) study the accounting system.

c) Study the managerial hierarchy, duties and

responsibilities assigned to various officers.

d) Study the internal check and internal audit

system.

e) Ensure that the system prevents and detects

frauds and errors.

Concurrent Audit


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Concurrent Audit

In 1993, the RBI issued guidelines on concurrent

audit system in commercial banks:

It is an audit or verification of transactions or

activities of an organization concurrently as the

transactions or activity takes place. Concept of audit is to verify the authenticity of

the transaction or activity within the shortest

possible time after the transaction takes place Looking at d size of business bank decides to get

audit conducted on daily or monthly basis..


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The concurrent auditor has to submit d report on10th of the next month.

If quarterly- then the report have to be submittedon 10th of the month after the end of that

quarter. During if auditor finds any irregularity /deviation

in policies or procedures should submit the freshreport to management to take remedial action

immediately. Once in a year bank should evaluate the success

and effectiveness of the system.

Appointment of concurrent auditor


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Appointment of concurrent auditor

Bank can appoint its own staff or external person toconduct the concurrent audit.

The person should be well trained, experience andsenior personnel.

These auditor should be independent of d branch ofwhich the audit is being conducted.

If external auditor then the appointment may beinitially for a period of one year, it can be extended upto three years. after 3 years external auditor may be

shifted to another branch to conduct the audit If performance of auditor is not satisfactory then same

should be reported to RBI and ICAI by d bank.

Remuneration to concurrent auditor


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Remuneration to concurrent auditor

Fixed by d bank at their discretion.

Bank audit committee of the board of

directors should frame guidelines forremuneration keeping in view of variousfactors like areas to be covered, qualities ofwork expected , suitable package of

remuneration should be framed by themanagement.

Concurrent audit report


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Concurrent audit report It has three parts:

1. Major irregularities2. Minor irregularities

3. Compliance with earlier report.

The auditor cover preface of the report.

Before submit the report auditor discuss d issue with branchmanager of d bank and concerned officer

Report should be submitted to the branch manager & regional

office on monthly or quarterly basis.

Quarterly executive summery submitted to branch,regional,zonaland central office.

Objective of Fin.Stat.Audit


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Objective of Fin.Stat.Audit That Fin. Statements, prepared within a framework

of recognized accounting policies and practices andrelevant statutory requirements.

The auditors' opinion helps determination of the

true and fair view of the fin. position and operatingresults of an enterprise.

But however, it should not be assumed that auditors

opinion is an assurance as to further viability of denterprise or d efficiency or effectiveness with whichmanagement has conducted the affairs of denterprise.

Scope of Fin. Statement audit


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p

Scope of audit of Fin. Statement will be

determined by the auditor having regard to the

terms of the engagement,

The requirement of relevant legislation

And pronouncement of the institute.

Limitations of Audit


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An audit is an examination essentially of test nature.

There is an unavoidable risk of material mis-statement which may not be discovered.

Discovery of material misstatements is not dobjective of an audit nor is the audit program

Audit is not an assurance against frauds or errors,but an indicator of frauds or errors.

The nature, extent and timing of audit checking and

procedure depend upon auditors judgment. Auditor is not expected to perform duties, which

falls outside the scope of his competence.

Audit planning


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p g

Planning helps the auditor to conduct an audit in

an effective ,efficient and timely manner.

Need of audit planning:

Appropriate attention to important aspects of

audit.

Potential problems are identified.

Timely completion of work.

Proper utilization of manpower.

Co-ordination of work.

Steps for planning an audit


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Steps for planning an audit

Knowledge of clients business

Developing the overall plan

Developing the audit programme.

Review of audit plan/programme.

Audit sampling


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Audit sampling

Meaning: it is one audit tool that allows d

auditor to draw inference from test of a subset

of clients transactions.

Objective: to establish standards on the design

and selection of an audit sample and evaluation

of the sample results.

Steps in sampling plan


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p p g p Specify the audit objective

Define the population and no. of population Specifying the sampling unit.

Selecting d sampling method

Specify sampling parameters.

Determine the sample size

Choosing a sample selective technique.

Drawing a sample

Evaluating a sample Determine the adjustment to original plan if need

Evaluating any changes

Formulating a conclusion.

Special consideration in Fi.st.Audit


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Special consideration in Fi.st.Audit The auditor should recognize that the non-

compliance by d entity with laws and regulationsmight materially affect the financial statement.

However an auditor is not expected to detectnon-compliance with all laws and regulations.

It is to establish standars on the auditorsresposibility regarding consideration and lawsand regulations in an audit of financialstatements.

Non-compliance


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p

It means to act of omission or commission by d

entity being audited, either intentional or

unintentional, which is contrary to the prevailing

laws or regulations.

Indicators of Non-Compliance


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Investigation by the government

Payment of fines or penalties.

Unreasonable payments on account of expenses

Unusual payment in cash

Unusual transaction with companies registered intax heavens.

Payments without proper exchange control

documents. Unauthorized and improperly recorded transactions

Media comments.


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Particulars Auditor report Auditors certificate

Meaning Is an expression of opinion, on

the true and fair viewpresented by fin.statemnts

Is written confirmation of the

accuracy of the facts stated thereinand does not involve any

estimate/opinion.

Utility The term is used when auditor

express his opinion on d

financial statements

Used when auditor verifies certain

exact facts.

Responsibility Auditor may not take a

guarantee the correctness of

Fin. Information in absolute

terms

When certificate is issued by d

auditor is responsible for the factual

accuracy of what is stated therein.

Implication It is made on d basis of

information made available to d

auditor

It is issued by an independent

accountant on those facts and data

which are capable of absolute

certification.

Special consideration in case Co.Audit


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1. validity of appointment:

(a) First auditor(appointed by Board of Directors): heshould study the resolution passed at the boardmeeting authorizing his appointment only within amonth of the registration of d company.

(b) Appointed by shareholders:

the auditor should get a copy of the resolution,concerning his appointment passed at such

meeting. he should also inform the registrar about

acceptance of appointment within 30 days of thereceipt of appointment letter.

Appointment of auditor


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(c) Appointment in place of retiring auditor:

He should see whether all d provisions of section225 dealing with the appointment and removal ofauditor have been complied with.

Communication with previous auditor has been

made a part of professional ethics.(d) Casual vacancy:

He should secure a copy of resolution of the Board

to ascertain whether his appointment is valid . The Board is empowered to fill any casual vacancy

provided it has been caused due to resignation ofthe previous auditor.

vouching


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Meaning: it is d examination of the underlyingevidence which is in support of d accuracy of atransaction.

Following r d important points an auditor shouldexamine while vouching:

Whether necessary sanction taken from necessaryauthority.

Transaction-recorded in d books of A/c withdocumentary evidence.

Amount of entry posted in proper heads of A/c

Voucher relates to period for which auditing is beingdone.

How do u audit the following vouching


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preliminary Expenses:

Meaning: r d expenses incurred by d promoters .1. Auditor should see all d contract relating to

formation of company.

2. if expenses r reimbursed to d directors auditor

check AA and resolution passed by d Board of D.3. Check no other expenses except should be included

in this head.

4. See amt of prelim.exp.should not exceed d limit

shown in prospectus, if any excess amt it should beapproved from d shareholders latter.

5. Confirm amt of exp.not written off should be shownseparately in d B/S.

Dividend received


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Dividend from investment in shares of Co's

should be checked very carefully. Auditor should check amt of dividend warrants.

If No. of transaction r largecheck d investment

register. Cross check d amt with amt of register.

Check unrealized amt of dividend amt.

Check TDS certificate. Check amt of dividend shown in P&L A/c

Bifurcation of capital and revenue reserve.

Bad debts recovery


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Check d amt. of bad debts.

Ensure d amt collected has been recorded properly.

Should see order of d court or trustee &

correspondence in this respect.

Check receipts issued to debtors/trustees to cross

verification of d amt collected.

Treatment of account should be checked.

Legal charges


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R incurred by co.s in connections with legal

advise, cases pending in d court and lawyersfees.

Verify bills of advocates, payment vouchers and

documents relating to legal cases pending .

Verify payment is made by cheque in d name of

legal adviser and not any other person.

Legal fees in respect of retainship should beverified from d agreement.

Amt should be under heads of Account.

Carriage outward


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It relates to expenses on transportation of goods

sold. Check vouchers for payment of carriage outward

Check terms and conditions for sale.

verify Policy of co. regarding sales and delivery.

Check d bill for transportation , details of goodsdelivered and sales invoices.

Verify rates of transports on d basis of quotation Verify payment is made to right person and as

per right manner.

Advertisement exp.


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See exp.r related to d business not of personalnature.

R d exp. Classified as revenue or capital basis.

Check d agreement and compare d statement ofaccount.

Check receipt received for d payments made.

In case tax deducted on payments- confirm d taxrate deposited in time to credit of Govt. A/c.

Check O/s adv. expenses at d end of year,

Confirm proper provision on o/s amt. If any other facilities like credit facility, incentive r

provided by agency confirm that client is avail thosefacilities.

Vouching cash sale of co.


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Examine th system of internal check with d aim to find out

loopholes. Ascertain practise followed in d matter of issuing cash

memos.

Verify cash sales from carbon copies of cash memos .

Trace cash memo into cash sale summery book.

If cash sales r heavyverify cash book also.

Ensure dates of cash memo- tally with entry in cash books.

Verify prices of goods correctly entered & calculation. Examine original copy of cash memo which is cancelled

since misappropriation of amt thereof.

Check daily total entered in cash book with the till rolls.

Verification


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Meaning:

Means confirmation or providing d truth.

Verification is concerned with assets & liabilities.

Terms verification signifies Physical

Examination of certain class of Assets/Lib.

Checking arithmetical accuracy of A/L

Asset /lib shown in B/s r really exist and properlyshown at true value.

Definition of verification


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Definition of verification

According to Spicer and Pegier , Verificationof assets implies an enquiry into the value,

ownership and title, existence and possession

and presence of any change on d assets.

Objectives of verification


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To show correct valuation of A/L

To know whether B/S exhibit a true and fair view ofd state of affairs of d business.

To find out assets were in proper existence.

To find out ownership and title of assets. To detect fraud and errors, if any

To verify arithmetical accuracy of books of A/c.

Verify whether is an adequate internal controlregarding acquisition, utilization and disposal ofassets.

Ensure all assets properly recorded.

Auditors duties regarding verification


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1. Existence

2. Possession

3. Legal ownership and obligation

4. Subject to charge or lien5. Complete record

6. Auditors report.

Verification of Investment


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Date of purchase, rate of purchase, nature of

investment, nature of transaction.

In case of substantial investment compare d rate

with quotations available (Stock exchange quot)

Verify amt paid towards purchase of investment

Trace amt in cheque book and bank statement

Verify capital-revenue expenditure

Obtain shecdule of investment for physical

inspection.

Inspect investment certificates


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In case immovable propertyshares,debentures in co-operative society verify thecost of shares should be included in d cost ofthe property.

Verify invest.should be shown accordancewith the recognised accounting policies andparties and relevent statutory

requirement(AS-13). Investment in partnership- shown separately.

Closing stock


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It is a major factor in determining the result of a company.

Verify existence of stock

Precise duty to ascertain value of stock correctly

Rely upon statements and report available

Expert knowledgemethod of verification and stock

control Should attend at stock taking for d purpose of observing

the clients procedure& assurity of reliable result.

Modern methods of costing, accounting ratios, budgetarycontrol.

Section 41(2) defines proper books of accounts to includestatements of annual stock taking and of all goodspurchased and sold.

Sales vouching


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Verify that the sale of each item of goodsrelates to the period under audit.

That the normally goods r dealt by d co.

Sale price correctly recorded

Amt. of invoice has been adjusted in an

appropriate account.

Sale has been authorized by a responsible

official.

Cu-off procedure while auditing in big

i ti


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organizations

It means procedure employed to ensure theseparation of transactions at the end of one yearform those in the commencement of the nextyear.

Usually problem of overlapping found ininventory accouting

Often goods r sold but passed after one year is

over or goods bought but comes after one year. The auditor examine last (Cutt-Off) documents at

d end of year.


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The auditor may examine a sample ofdocuments evidence the movement of stock

into and out of source, cut-off date.

auditing chapter 2 (1)

Documents