PROJECT ON BANK AUDITBy

Priti Parab

MCOM PART- 2

SEMISTER-1

Index

No Particular Pg. No1. Introduction2. Type of Audit3. 1. Statutory Audit4. 2. Concurrent Audit5. 3. RBI Audit6. Principal Enactments Governing Bank Audit7. Stages of Auditing8. Provision Relating to Audit9. List of documents of Bank Audit10. Audit Planning11. Audit aspect of items of Balance Sheet12. Audit aspect of items of Profit & Loss13. Asset Classification14. Audit Report Of HDFC Bank15. Question 16. Conclusion

INTRODUCTON

This project is to view the task perform by an auditor while

conducting the audit of bank deposit and loans & advances. It explains the role

played by different types of auditor, effect of Non-Performing Asset on the

asset of a bank. The auditor needs to be familiarizing with the direction of RBI

affecting the sanctioning and disbursement of advances. The auditor has to

ensure that documents are executed as per the terms of sanction. The auditor

examine the procedure for review of advances laid down by the authorities bas

been complied with or not. Basel II Recommendations affecting the capital

adequacy norms advocated by the year, which perhaps is the beneficial fall-out

from the tightening of the prudential norms. The auditing not only provide true

and fair value but it also helps us to financial position and internal control

system of a bank

It is well known that Banking is such a unique industry that persons

from all walks of involved with Banks in any relation whether as an operational

banker, trainer, auditor or even a support service person such as a security

printer and even a hardware and software supplier make Banking their only

sphere of activity for their full life in the constant endeavor to master in their for

this Industry. In India various types of audit are normally carried out in banking

companies such audit are statutory audit, revenue/income expenditure audit,

concurrent audit, computer and system audit etc. the above audit is mainly

conducted by the banks own staff or external auditors. However, the rules and

the regulation relating to the conduct of various types of audit or inspection

differ from a bank to bank except the statutory audit for which the RBI

guidelines is applicable for that. In this project I give more important on the

concurrent and computer audit and its internal controls in the banks today’s

scenario. Today audit is form in the various organizations it is basically form for

investor because investor investing decision is depend on that particular concept

if auditor has expressing his view about particular organization is true and fair

that investor has get idea about how much should invest in particular securities

or not. In public sector banks multiple firms including central auditors and

branch auditors generally conduct the audit. In case of private sector banks and

foreign banks, a single firm due to centralised database conducts the audit.

Consequently, the responsibilities of auditors in such banks are much wide

TYPES OF AUDITS:

It is well known that no any day of the year, there will be at least one auditor working in the bank branch. The following are the popular types of audits conducted in a bank branch. The titles may be modified in some banks especially for Internal Audit and system Audit but the content remains the same.

I. Statutory Audit: This is an annual audit determined by statute and done normally at the end of the financial year while some of the larger branches are similarly audited half yearly. A bank’s statutory audit is essentially a balance sheet audit including the Long Audit Report though there is no scope restriction of the statutory auditor to perform certain actions of other auditors as part of his duty or if some findings lead him into the domain of the auditors such as Revenue, inspector and even concurrent. The statutory auditor performs the following functions.Verifies the classification of items of the Balance Sheet to assure their correct placement Basel II accord, which has influenced the prudential norms, has included the statutory auditor as an active member to assure the proper execution of the prevailing prudential norms. The direct result of an accurate classification is the appropriateness of income recognition and thus the effect on the profitability of the Bank.

II. Concurrent Audit: In the beginning of the 1990’s, the Great Banking Scam or the Harshad Mehta Scam rocked the nation. This brought into limelight special category of audit called concurrent audit or continuous audit. This stemmed from the need of filling in the gap between the annual statutory audits and the intervening period between two inspections, which is a period sufficiently large to cause damage to the Bank. Now, RBI who insisted that at least 50% of the business of the Bank should be covered under concurrent controlled the spotlight of the concurrent audit. While some Banks covered very large branches under the umbrella of concurrent audit. Some banks took the excurse for improvement by including weak branches though having low volume of business. Concurrent audit in one sentence will mean checking yesterday’s transactions today. Let us see the broad areas covered by the Concurrent Auditor.

A. Revenue Aspects:

1. Interest earned and service charges earned by the Bank 2. Interest Paid3. All charges paid like cancellation charges, compensation under Court

Directive etc.

B. Expenditure: 1. Salary payments2. Branch expenses like printing and stationary, temporary employees etc.3. Rent of premises etc.

C. Documentation and other aspects of advances department: 1. Documentation correctness of ALL new advances granted during the

period 2. Validity of all old advances to ensure that they are not time barred. 3. Currency of insurance cover of stock machinery etc.4. Whether the inspections of units and stock have been carried out at the

pre-set intervals.

D. Administrative and other aspects : 1. Correctness of attendance and leave records2. Cash Department working including security aspects with periodic

surprise inspection by the auditor3. Stock check at regular intervals of all security documents like Blank

chequebooks, Demand Drafts, Pay orders, Pass Books etc.

III. RBI Audit: The Central Bank of the country also sends its own auditors to the Banks for their own inspection. Their actions cannot be covered in this project because it is more of a supervisory implementation of a Government Policy existing from time to time. The primary aim of this audit is as follows.Overall assessment of the assets and liabilities of the Bank, whether its financial position is satisfactory, whether it is in position to pay its depositors in full as and when their claims accure, and in the event of loss, whether it has sufficient cushion of owned funds to safeguard the interests of depositors.Soundness of Bank’s policies and procedures and effectiveness of the management to safeguard point No.1 mentioned above as also whether they are on approved lines and in conformity with socio-economic objectives.

Principal Enactments Governing Bank Audit:

♦ Banking Regulation Act, 1949

♦ State Bank of India Act, 1955

♦ Companies Act, 1956

♦ State Bank of India (Subsidiary Banks) Act, 1959

♦ Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970

♦ Regional Rural Banks Act, 1976

♦ Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980

♦ Information Technology Act, 2000

♦ Prevention of Money Laundering Act, 2002

♦ Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

♦ Credit Information Companies Regulation Act, 2005

♦ Payment and Settlement Systems Act, 2007

STAGES IN AUDITING

1)Preliminary work:

a) The auditor should acquire knowledge of the regulatory environmentin which the bank operates.Thus,the auditor should familiarizehimself with the relevant provisions of applicable laws and ascertain the scope of his duties and responsibilities in accordance with such laws. He should be well acquainted with the provisions of the Banking Regulation act, 1956 in the case of audit of a banking company as far as they relate of preparation and presentation of financial statements and their audit. b) The auditor should also acquire knowledge of the economicenvironment in which the bank operates. Similarly, the auditor needs to acquire good working knowledge of the services offered by the bank. In acquiring such knowledge, the auditor needs to be aware of the many variation in the basic deposit, loan and treasury services that are offered and continue to be developed by banks in response to market conditions. To do so, the auditor needs to understand  thenature of services rendered through instruments such as letters of credit, acceptances, forward contracts and other similar instruments.c) The auditor should also obtain and understanding of the nature of  books and records maintained and the terminology used by the bank to describe various types of transaction and operations. In case of joint auditors, it would be preferable that the auditor also obtains a general understanding of the books and records, etc, relating to the work of the other auditors, In addition to the above, the auditor should undertake the following:

I.Obtaining internal audit reports, inspection reports, inspectionreports and concurrent audit reports pertaining to the bank/branch.

II. Obtaining the latest report of revenue or income and expenditure audits, where available.

In the case of branch auditors, obtaining the report given by the outgoing branch manager to the incoming branch in the case of change in incumbent at the branch during the year under audit, to the extent the same is relevant for the audit.

d) RBI has introduced and offsite surveillance system for commercial banks on various aspects of operations including solvency, liquidity,asset quality, earnings, performance, insider trading etc., and hasindicated that such reports shall be submitted at periodic intervals from the year commencing 1-04-1995. It will be appropriate to be familiar with the reports submitted and to review them to the event that they are relevant for the purpose of audit.

e) In a computerized environment the audit procedure may have toappropriately tuned to the circumstances, particularly as the books are not authenticated as in manually maintained accounts and the auditor may not have his in-house computer facility to taste the software programmes. The emphasis would have to be laid on internal control procedure related to inputs, security in the matter of access to EDP system, use of codes, passwords, data inputs being prepared by person independent of key operators and other build-in procedure for datavalidation and system controls as to ensure completeness andcorrectness of the transaction keyed in. system documentation of the software may be obtained and examined.f) One set of tests that the auditor at both the branch level and headoffice level may apply for audit of banks in analytical procedure.

2) Evaluation of internal control system:It may be noted that transaction in banks are voluminous and repetitive, andfall into limited categories/heads of account. It may, therefore, be moreappropriate that the evaluation of the internal control is made for each class/category of transaction. If the exercise of internal control evaluation is properly carried out, it assist the auditor to determine the effectiveness or otherwise of the control systems and accordingly enable him to strengthen his audit procedures, and lay appropriate emphasis on the risk prone areas. Internal control would include accounting control administrative controls.  

a) Accounting controls:Accounting controls cover areas directly concerned with recording of financial transactions and maintenance of such registers/records as to ensure their reliability.Internal accounting controls are also envisaging such procedures aswould determine responsibility and fix accountability with regard tosafeguarding of the assets of the bank. It would not be out of place of mention that there is a distinction between accounting system and internal accounting controls. Accounting system envisages the processing of the transaction  and events,  their recognition, and appropriate recording. Internal controls are techniques, method and procedures so designed and usually built  into systems,  as would  enable prevention as well as detection of errors, omissions or irregularities in the process of execution and recording of transaction/events. The internal accounting controls as would ensure prevention of errors, omissions and irregularities would include following:

I. Notransaction can be registered/recorded unless it is sanctioned/approved by the designated authority

II. Built- in dual control/supervisory procedures ensure that there is an independent automatic check on input/vouchers.

III. No single person has authority to initiate transaction and record through all stages to the general ledger. Each day transactions are

accurately and promptly recorded, and the control and subsidiary records are kept balanced through personnel independent of each other. The auditor would be well advised to look into other areas may lead to detection of errors, omissions and irregularities,  inter alias in the following:

a) Missing/loss of security paper, stationery forms.b) Accumulation of transactions/balances in nominal heads of accounts

like suspense, sundries, inter-branch accounts, or other nominal head of accounts particularly if there accounts particularly if these accounts are extensively used to balance books, despite availability of information.

c) Accumulation of old/large unexplained/unsubstantiated entries inaccounts with Reserve Bank of India and other banks and institutions.

d) Transaction represented by mere book adjustments notevidenced/substantiated or upon non-honoring of contracts/commitments.

e) Origination debits I head office accounts/inter-branch accounts.f) Analytical review procedure.g) Serious irregularities pointer out in internal audit/inspection/special

audith) Complaints/matters pending in the vigilance/grievances cell, as

regards discrepancies in accounts of constituents, etc.i) Results of periodic analytical review, if observed as adverse.

b) Administrative control: These are broadly concerned with the decision making process and laying down of authority/delegation of powers by the management. It may be noted that in the normal course, the head office use the zonal/regional offices donot conduct any banking business. They are generally responsible for administrative and policy decisions which are executed at the branch level.

3) Preparation of audit programme for substantive testing and its execution Having familiarized him the requirements of audit, the auditor should prepare an audit programme for substantive testing which should adequately cover the scope of his work. In framing the audit programme, due weightage should be given by the auditor to areas where, in his view, there areweaknesses in the internal controls. The audit programme for the statutory auditors would be different from that of the branch auditor. At the branch level, basic banking operation are to be covered by the audit. On the other hand, the statutory auditors at the head office ( provisions for gratuity, inter-office accounts, etc.). The scope of the work of the statutory auditors would also involve  dealing 

with various accounting aspects and disclosure requirements arising out of the branch returns.

4) Preparation and submission of audit report The branch auditor forwards his report to the statutory auditors who have to deal with the same in such manner, as they considered necessary. It is desirable that the branch auditors’ reports are adequately in unambiguous terms. As far as possible, the financial impact of all qualification or adverse comments on the branch accounts should be clearly brought out in the branch audit report. It would assist the statutory auditors if a standard pattern of reporting, say, head wise, commencing with assets, then liabilities and thereafter items related to income and expenditure, is followed. In preparing the audit report, the auditor should keep in mind the concept of materiality. Thus, items which do not materially affect the view presented by the financial statements may be ignored. However, in the judgement of the auditor, an item though not material, is contrary to accounting principles or any pronouncements of the Institute of Chartered Accountants of India or in such as would require a review of the relevant procedure, it would be appropriate for him to draw the attention of the management to this aspect in his long form audit  report. In all cases,  matters covering the statutory responsibilities of the auditor should be dealt with in the main report. The LFAR should be used to further elaborate matters contained in the main report and as substitute thereof. Similarly while framing his main report, the auditor should consider, wherever practicable, the significance of various comments in his LFAR, where any of the comments made by the auditor threr in is adverse, he should consider whether qualification in his main report is necessary by using his discretion on the facts and circumstances of each case. In may be emphasized that the main report  should be self-contained document

Provisions Relating to audit

1. Appointment of the auditors;

The auditor of a banking company, a nationalized bank or a regional rural bank hasto be a person who is duly qualified under law to be an auditor of companies. Thus,the auditor of the companies under sec 226 of the companies Act 1956, and who does not attract any disqualification laid down therein. The auditor of a nationalized bank is appointed by the board of directors of the bank concerned, whereas the auditor of a banking company is appointed by the shareholder at the annual general meeting. Previous approval of RBI for appointment of the auditor is required in the both cases. The auditors of the state bank of India are appointed by RBI in consultation of the Central government. The auditors of the subsidiaries of the state bank of India are appointed by the state bank of India. It may be mentioned in the State bank of India Act 1955, specially provides for the appointment of the ‘two or more auditors’. The auditors of the regional rural banks concerned with the approval of the Central Government. The appointment of auditor of a co-operative bank is governed by the relevant Co-operative bank is governed by the relevant Co-operative Societies Act. Procedure for the Appointment in the case of nationalized banks:-The statutory central auditors are appointed by the bank concerned on the basis of the names recommended by the RBI from out of panel of auditors. For this purpose, the RBI formulates detailed norms on the basis of which a panel is created by the Comptroller and Auditor General of India. Generally, each nationalized bank appoints 4-6 statutory central auditors. As per the norms prescribed by the RBI, to be eligible for empanelment, a firm should, as on January 1 of the relevant year, minimum eligibility norms relating to;

I . N u m b e r o f f u l l t i m e p a r t n e r s ,I I . N u m b e r s o f F C A p a r t n e r s ,I I I . Number  of years the f i rm has been  exis tence ,IV. Period of minimum continuous association of partners with the firm,V.Number of fulltime charted accountants,VI .Number  of profess iona l s ta f f ,VII.Experience of statutory audit of public sector banks having deposits of at leastthe prescribed sum,VIII .Experience of statutory audit of public sector undertakings. Atleast one partner should have qualifications in computer audit.

2. Powers of the Auditor The auditor of a bank has same powers as those of company auditor ,except that the power the auditor of a co-operative are governed by the

relevant Co-operative Societies Act in matter of access to the books of accounts, documents, and vouchers. He is also entitle to require from the offices of the bank such information and explanation as he may think necessary for the performance of his duties. In case of Banking Company, he is entitle to receive notice relating to any general meeting. He is also entitle to attend any general meeting and to be heard there at on any part of the business, which concern him as auditor. It is important to note that the auditor of nationalized bank may employ accountants or other person at the expenses of bank to assist him in audit of accounts. Thus auditor of these banks can appoint the auditor of Branches.

3. Auditor’s Report The auditor of the nationalized bank, State bank of India or its subsidiary is required to report to the central government and has to state the full in his report:

a) Whether, in his opinion, the balance sheet is a full & fair balance sheet containing all the affairs of the bank, and in the case he had called for any explanation or information, whether it has been given and whether it is satisfactory. 

b) Whether or not the transactions of the banks, which have come to notice have been within the powers of the banks;

c) Whether or not the returns received from the offices and branches of the bank have been found adequate for the purpose of the audit;

d) Whether the profit or loss a/c shows a true balances of the profit or loss for the period covered by such account; and

e) Any other matter which he considers should be brought to the notice of the central government. The report of the auditor of the nationalized bank is to be verified, signed, and transmitted to the central government. The auditor has also to forward a copy of the audit report to the bank concerned and to the RBI.

In addition to the matters which he is required to state in his report under the companies Act, the auditor of banking company incorporated in India has also to state the following in his report to the shareholder:

a) Whether or not the information and explanations required by him have been found to be satisfactory;

b) Whether or not the transactions of the company which have come to his notice have been within the powers of the company;

c) Whether or not the returns received from branch offices of the company have been found adequate for the purposes of his audit;

d) Whether the profit and loss account shows a true balance of profit or loss for the period covered by such account;

e) Any other matter which he considers should be brought to the notice of the shareholders of the company.

It may be noted that in in the case of a banking company the auditor has to specifically report whether, in his opinion, the profit & loss account and balancesheet of the banking company comply with the accounting standard referred to in sub- section (3C) of the sec 211 of the Companies Act, 1956.

It may also be noted the Companies(Auditor’s Report) Order [CARO] 2003 (Revised in 2005) is not applicable to Banking Company.

Approach to banks audits:-

The guidance note on the audit of banks issued by the ICAI, recognize that the general approach to audit of banks involves essentially the same stages as in any other audits. However at each stage, the auditor has to take into the account the following special characteristics of banks;

• Custody of large volumes of monetary items, thereby requiring formal operating procedure, well-defined limits on the individual discretions and rigorous internal control. • Large volume and variety of the transactions and continuing development of new products and services, many of which may involve complex accounting.

• Wide geographical dispersal of the operations with consequent difficulties in maintaining uniform operating practices and accounting systems, particularly in the case of the overseas operations.

• Significant commitments without transfer funds not requiring formal recognitions in the books of accounts.

• Special nature of risk with operations.

• A strict legal and regulatory framework that inter alia, influence the accounting and auditing.

LIST OF DOCUMENTS OF BANK AUDIT Bank closing set:

It contains Balance Sheet, Profit & Loss A/c and other annexures. Audit Report

Statutory Audit Report Compliance Certificate Form 3CA Form 3CD

Long Form Audit Report (LFAR) Memorandum of Changes Report on Ghosh and Jilani committee recommendations Other Certificates

AUDIT PLANNING Proper allocation of work among Audit Team should be done for smooth

performance of Audit. A checklist of work to be done should be made with time frame, which

should be specifically adhered to. Review latest available inspection report and concurrent audit report of

branch. Review closing circular issued by HO Study business Mix of branch to decide the sample size and mix. Study of significant policies of the branch and computer system. Study the previous year’s Statutory Audit Report and LFAR Ask for ‘Stress List’ from Branch Give special importance to clients whose names are in Stress List, or

which are highlighted in Concurrent Audit Report. Keep a note of points you come across during audit, which are relevant

for LFAR.

STATUTORY AUDIT REPORT It contains the following Paragharhs: Report on Financial Statements Management’s Responsibility for the Financial Statements Auditor’s Responsibility Opinion Report on other Legal and Regulatory Requirements. It is enclosed with a Certificate of Compliance of guidelines of Reserve

Bank of India on Income recognition and Asset qualification.

It is addressed to the Statutory Central Auditors

TAX AUDIT REPORT Tax Audit Report is done under section 44AB of the IT Act Form 3CA Form 3CD Annexure Part – A All the annexure of Form 3CD are to be enclosed, even if they are NIL.

LONG FORM AUDOT REPORT A questionnaire formulated by RBI. To be filled by auditor after discussing the points with Branch Head. It is advisable to cover LFAR and audit program simultaneously. This

would enable auditor to consider effect of matters on LFAR and audit report.

Format of LFAR form may be found online easily.AUDIT ASPECT OF ITEMS OF BALANCE SHEET

ADVANCES: Check if proper documentation is done while sanctioning of loans. Check income recognition, Asset classification and Provisioning for the

advances.

An asset is said to Non Performing if: Interest and/or Installment remain overdue for more than 90 days. If the account continuously remains in excess of sanctioned

limit/drawing power. No credit in account continuously for 90 days, or credits is not enough to

cover the interest debited during the period. The installment or interest remains overdue for 2 crop season for short

duration crops. The installment or interest remains overdue for 1 crop season for long

duration crops. If credit facility is not renewed within 180 days from the due date. Drawings are allowed against stock/book debt statement which are older

than 180 days.

Income Recognition Policy: Income recognition from NPA is to be based on recovery. If an account turns NPA, branch should reverse the interest already

charged and not Collected, Such interest to be recorded in Dummy Legder.

Analysis of entries outstanding in: Suspense Account Sundry Debtors Sundry Creditors Sundry Deposits. Check for addition/deletion of assets. Check for balances held with other banks with certificate of

closing balance from respective banks. Check provisioning of expenses as on cut-off date. Deposits Contingent Liabilities Whether cash in Balance sheet tallies with physical Cash Book

AUDIT ASPECT OF ITEMS OF PROFIT & LOSS

Check whether all income are properly accounted for. Check if income on NPAs is not recognized. Check if Bank has charges Penal interests on default cases. Verify receipt of Locker Rent Vouch for expenses. Check if expenses are grouped in proper headings. Check whether TDS is deducted on expenses as per applicable sections

and deposited to the credit of government. Check items of ‘Misc Expenses’. Whether Reverse Charge on Service Tax has been created?

MEMORANDUM OF CHANGES

FORMAT

There should be clear justification for every change suggested by auditor

Debit and Credit side of MoC must tally. Total of reclassification of assets should be brought out in MoC For NO CHANGE, NIL MoC should be filed. No. Dr Cr In respect of Income & expenditure Yes/No xx xx In respect of

Balance Sheet Items Yes/No xx xx In respect of classification of advances Yes/No xx xx In respect of closing return where the effect to be given is within the return itself other than Income & Expenditure and Balance Sheet Yes/No xx xx

Physical verification of cash on date of Audit. Also check if cash holding of branch is within retention limit specified by HO.

Verify KYC Compliance of Bank. Check whether any expense exceeding Rs 20000.00 is paid in cash. Get a

certificate for 40A(3) Compliance. Physical verification of stationery and confirmation of balance as per

CBS. Obtain Management Representation Letter from Bank Obtain Man-Days Certificate from Bank

STATUTORY AUDIT – CERTAIN ASPECTS Item Important Audit Checks

A. Verification of Profit & Loss Account Item

Income/ Expenditure Verify: Short debit of interest/ commission on advances; Excess credit of interest on deposits; In case the discrepancies are existing in large number of cases, the auditor

should consider the impact of the same on the accounts; Determine whether the discrepancies noticed are intentional or by error;

Check whether the recurrence of such discrepancies are general or in respect of some specific clients;

Proper authority in sanction and disbursement of expenses as also the correctness of the accounting treatment given as to revenue/ capital/ deferred expenses.

Check accrual of income/ expenditure especially for the last month of the financial year.

Divergent Trends: Divergent trends in income/ expenditure of the current year may be

analysed with the figures of the previous year. Wherever a divergent trend is observed, obtain an explanation along with

supporting evidences like monthly average figures, composition of the income/ expenditure, etc.

B. Verification of Balancesheet Item

1. Cash & Bank Balances: Physically verify the Cash Balance as on March 31, 2014 or reconcile the

cash balance from the date of verification to March 31, 2014. Confirm and reconcile the Balances with banks as on March 31, 2014.

2. Investments: Physically verify the Investments held by the branch on behalf of Head

Office and issue certificate of physical verification of investments to bank’s Investments Department.

Check receipt of interest and its subsequent credit to be given to Head Office.

3. Advances Provisioning: As per RBI norms, unrealised interest on NPA accounts should be

reversed and not charged to “Advance Accounts”. Reversal of unrealised interest of previous years in case of NPA accounts is required to be checked

Partial Recovery in respect of NPA accounts should be generally appropriated against principal amount in respect of doubtful assets.

4. Fixed Assets: Check Inter-branch transfer memos relating to Fixed Assets and whether

they have been correctly classified in the accounts and depreciation accounting thereof.

5. Inter Branch Reconciliation (IBR): Understand the IBR system and accordingly prepare an audit plan to

review the IBR transactions. The large volume of Inter Branch Transactions and the large number of unreconcile entries in the Banking System makes the area fraud-prones. Check up head office inward communication to branch to ascertain date upto which statements relating to inter branch reconciliation have been sent

6. Deposit i. Term ii. Saving iii. Current iv. FCNR/ NRE/ NRNR

Verify transactions during the year relating to: New Accounts opened; Accounts closed; Dormant Accounts; Interest calculations; Test check account statements for unusual/ large/ overdraft

transactions; Overdue Term deposits & banks policy for its renewal; Accrual of interest; RBI Norms for Non-resident deposits & its operations - with due

importance to opening and operation of accounts like NRE, NRNR, FCNR, RFC, etc.;

Interest on various types of deposits; Tax Deducted at Source. Large deposits placed at the end of the year (probable window

dressing). Examine unusual trend in account opening or account closing,

dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, overdrawing, etc.

Examine interest trends as compared to average annual deposits (monthly average figures).

Review the Master Circular on Maintenance of Deposit Accounts issued by RBI dated March 1, 2004 attached hereto.

7. Advances

Review monitoring reports (irregularity reports) sent by the branch to the controlling authorities in respect of irregular advances.

Review appraisal system, Files of large as well as critical borrowers, sanctions, disbursement, renewals, documentation, systems, securities, etc.

Review on test check basis operations in the Advances Accounts. Compliance of sanction terms and conditions in the case of new

advances. Whether the borrower is regular in submission of stock statements, book

debt statements, insurance policies, balance sheets, half yearly results, etc. and whether penal interest is charged in case of default/ delay in submission of such data.

Charge of interest and recovery for each quarter or as applicable to be verified.

Review the monitoring system, i.e. monitoring end use of funds, analytical system prevalent for the advances, cash flow monitoring, branch follow-up, consortium meetings, inspection reports, stock audit reports, market intelligence (industry analysis), securities updation, etc.

Check classification of advances, income recognition and provisioning as per RBI Norms/ Circulars.

Examine interest trends as compared to average annual advances (monthly average figures).

Scrutinise the final advances statements with regard to assets classification, security value, documentation, drawing power, out standings, provisions, etc.

Check whether Non-Fund based (Letter of Credits/ Bank Guarantees) exposure of the borrowers is within the sanctioned limits.

Compare projected financial figures given at the time of project appraisal with actual figures from audited financial statements for relevant period and ascertain reasons for large variance.

Take into account the assessment of RBI if the regional office of RBI has forwarded a list of individual advances to the bank, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels

Necessity for Measurement of Non-Performing Assets:

The repayment of interest/installment was either not easily forthcoming as per schedule or recovery. Consequently, banks found it increasingly prudent not to reckon such interest/other charges as part of their income and pay tax on unrealized income. Rather they chose to cease charging interest in such accounts of bad/doubtful nature or where the prospectuses of recovery were bleak

RBI Health Code System and Relation to NPA:

The Reserve Bank of India introduced the Health Code System of classification of borrower accounts by banks in the year 1985. Based on this classification of advances, it was decided by the Reserve Bank in the years 1989 and1990 that banks should cease charging interest compulsorily in account under Health Code 5 to 8 i.e. Recalled, Suit-filled, Decreed and bad/doubtful and selectivity, taking into account the availability and readability of security, in accounts under Health Code 4 i.e. Stick: Non-viable/Sticky

Asset Classification

Performing Asset:

Performing asset is one which generates periodical income and payments, as and when due or within the minimum lag of two quarters. This is being cut down to one quarter from April 2004.

Non-Performing Asset (NPA):The problem of NPA arises when the dues to the bank, interest/other charges or installments are not being received as per schedule. To justifiably set right this phenomenon, the Reserve Bank of India has drawn upon the international standards of accounting for the purpose of NPA treatment of credit facilities. A loan asset will become NPA if the due amount is not paid within one quarter.

Current position of NPA triggers.

Term Loan Interest and/or installment remain overdue for a period of more than 90 days.

Overdraft/Cash Credit Account remains out of order for a period of more than 90 days.

Bill purchased/Discounted Overdue for more than 90 days from its due date.

Agriculture Loans Interest and/or installment remain overdue for a period of more than 2 harvest seasons but not more than 2 half years.

Any Amount To be received remains overdue for a period more than 90 days.

Categories of NPA

Sub-standard Assets:A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months and from 2005 it is further reduced to 12 months.

Doubtful Assets:A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it remained NPA for a period exceeding 18 months. With effect from March31, 2005, an asset would be classified s doubtful if it remained in the sub-standard category for 12 months.

Loss Assets:Assets which are classified as bad and non-recoverable by the concerned bank or by Statutory Auditors or by RBI Inspectors but the amount have not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, they will continue to appear in the Balance Sheet but under the heading “Loss Asset” although there may be some salvage or recovery value.

Provisions

The current position of providing provision on the various assets is as follows:

Standard assets

General Provision 0.40% of Balance Outstanding

Sub-Standard assets

General provision of 10% of Balance outstanding without considering DICGC or ECGC Guarantees

Doubtful Assets

100% of Unsecured portion after considering the realizable value of security which should be realistic. In addition to the above provision on the secured portion should be made as under: Up to 1 year 20%, 1year to 3 years 30%, More than 3 year 50%

Loss Assets 100% on the Balance outstanding

Checklist to verify validity of NPA classification.

An auditor should ensure that branches for treating an account as NPA do the following or otherwise, irrespective of the cutoff point of limit outstanding balance. Obtain the ‘balance book’ for loans, cash credit and overdraft. This gives you the exhaustive list of accounts outstanding as on the date of your inspection or the date of classification. By use of this balance book, you can ensure that you can cover all the accounts and you do not skip accidentally the classification of any account.

The totals of the report of classification should match with the totals of the concerned departments thereby ensuring that all the accounts are considered. Analysis of the account should be done since ’income recognition’ is the underlying criteria. Therefore obtain the copy of the branch of the account statements to verify the classification made by the Bank. Ensure the following points during your scrutiny of the account.Both interest and installments, wherever applicable should be taken into account for assessing the NPA status of an account. If a particular facility of a borrower becomes NPA. Then all the facilities granted to the borrower should be treated as NPA. Advances backed by Central/State Governments should not be treated as NPA. Advances against bank’s fixed deposits, NSC’s, IVPs, KVPs, and life Policies eligible for surrender, should not be treated as NPAs. In the case of agricultural advances, NPA status should be decided upon after considering the recovery of interest dues for two harvest seasons.Net-worth of borrower/guarantor and availability of security is no consideration for treating an account as NPA or otherwise, as the concept is based on record of recovery of interest/installments. Staff loans should not be treated as NPAs, except in exceptionally problematic cases.

Question:- How to Verify the Asset of Banking Company, give 2 examples

Ans :- Basically Banking Company had 5 main heads & one miscellaneous which as follows

1. Cash and balances with Reserve Bank of India 2. Balances with banks and money at call and short notice 3. Investments

4. Advances 5. Fixed assets 6. Other assets Verification Of assets as follows

1. Cash and balances with Reserve Bank of IndiaA. Cash

Cash on handVerification The auditor should therefore plan to count all cash balances SIMULTANEOUS to prevent any ‘transfers’ of floats to hide discrepancies.Cash countsThe following procedures should be applied:

a) Surprise cash count: cash counts must be performed without the custodian being informed in advance e.g. on a surprise basis.

b) Control all cash funds: until the completion of the count to prevent cash being transferred between funds to conceal deficiencies.

c) Count in the presence of the custodian: to ensure the auditors cannot be blamed for any shortage.

d) List each item in the fund: showing the denominations of notes and coins.

e) The custodian should sign: the record as evidence of agreement.

f) Agree the total to the petty cash book balance: and investigate any differences.

B. Balances with Reserve Bank of Indiaa. Balance confirmation:- Verify the ledger balance with bank

confirmation certificate. And reconciliation statements as at the year end.

b. Explanation:- Obtain a written explanation from the management as to the reason for old outstanding transaction in bank reconciliation statements remaining unexplained for one year.

2. Investmentsa. Guidelines & Policies :- Auditor should examine that whether

investments are made with context of the Guideline of the RBI and accounting policies followed by bank in that respect.

b. Classification:- Classification of investment into three categories Like held to maturity, held for trading or available for sale . Verify whether proper classification of investment has been made at the time of

acquisition which is evidenced by decision of the component authority such as board of director, or investment committee.

c. Change in method:- Change in method of valuation of of investment constitute change in accounting policy and proper disclosure regarding the fact of the change along with its effect should be made in balancesheet.

 CONCLUSION

The project the position of Indian banking system as well as the principal laid down by the Basel Committee on banking supervision. This assessment was done in seven major areas, which are core principals, concurrent audit, internal audit, deposit, loan accounting and transparency and foreign exchange transaction. The project concluded that, given the complexity and development of Indian banking sector, the overall level of compliances with the standards and codes is of high order. This project gives the correct ideas about how the major areas can be found by way of effective auditing system i.e. errors, frauds, manipulations etc. form this auditor get the clear idea show to recommend on the banks position. Project also contain that how to conduct of audit of the banks, what are the various procedure through which audit of banks should be done. Form auditing point of view, there is proper follow up of work done in every organization whether it is banking company or any other  company or any other company there no  misconduct of transactions is taken places for that purpose the auditing is very important aspect in today’s scenario form company and point of view.