AUDIT OF BANKS

(A) TYPES OF BANKS

(F) TYPES OF AUDIT REPORTS TO BE ISSUED
F
Commercial Panks Presently, the Statutory Central Auditors (SCAs) have to furnish the following reports in addi�on to their main audit report:

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(i) Report on adequacy (iii) Report on compliance with SLR (v) Report on whether the (vii) Report on status of
the compliance by
Regional Rural Banks
A E and opera�ng effec�ve- requirements. income recogni�on, asset

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ness of Internal Controls (iv) Report on whether the treasury opera- classifica�on and provision- the bank.
Co-opera�ve Banks over Financial Repor�ng. ing have been made. (viii) Report on instances
�ons of the bank have been conducted of adverse credit-de-
1. (ii) Long Form Audit in accordance with the instruc�ons (vi) Report on whether any seri- posit ra�o in the
Payment Banks
INTRODUCTION Report. (LFAR) issued by the RBI from �me to �me. ous irregularity was no�ced rural areas.
Small Finance Banks
(E) PECULIARITIES INVOLVED
Devlopment Banks (Term
Lending Ins�tu�on) B D Wide Large
Huge Strict
volume & geographical range of Extensive vigilance by
complexity of spread products use of banking
(B) FUNCTIONS OF BANK and services technology
C transac�ons of banks
network offered
regulator
etc.
Accep�ng Gran�ng
Deposits Advances (D) REGULATORY FRAMEWORK 2.UNDERSTANDING OF ACCOUNTING 3. BANK AUDIT
Banking Regula�on Act, 1949. SYSTEM IN BANKS APPROACH
(C) REGULATORY BODY State Bank of India Act, 1955.

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From the �me that customers had to In CIS environment, it is (A) DRAWING AN AUDIT PLAN :-
The func�oning of banking industry regulated by Companies Act, 2013. physically visit and deal with a impera�ve that the auditor An audit plan should be drawn

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the RBI which acts as the Central Bank of India. State Bank of India (Subsidiary Banks) is familiar with and sa�sfied up based on:
bank, there is a sea change in
(i) RBI is responsible for: (ii) Important Act 1959. banking as use of technology and its that all the norms/
Banking Companies (Acquisi�on and con�nuous evolu�on has enabled parameters as per the The nature Nature of

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� Development and func�ons of RBI
Transfer of Undertakings) Act, 1970. latest applicable RBI and level of adverse
supervision of the are: banks to reach their customers in
guidelines. opera�ons features
cons�tuents � Issuance of Regional Rural Banks Act, 1976. providing them the convenience
currency; The auditor should not go
� Determining, Banking Companies (Acquisi�on and and comfort of any�me-anywhere-
� Regula�on of by the assump�on that the
in conjunc�on Transfer of Undertakings) Act, 1980. banking by let�ng them access their system demonstrates that
currency issue; Level of
with the CG, the � Ac�ng as Informa�on Technology Act, 2000. informa�on/data on real �me basis, the system driven compliance Audit risks
monetary and banker to the as stored in a safe and secure based on based on

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Preven�on of Money Laundering Act, informa�on is based on the inadequacy/
credit policies CG&SG; and environment on the bank’s servers. previous
2002. required parameters. reports breach

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� Regula�ng the � Ac�ng as in ICs
He should use professional and

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banker to Securi�sa�on and Reconstruc�on of Banks may be divided into three
ac�vi�es of Financial Assets and Enforcement of skep�cism and prudence
commercial board categorises based on the level

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commercial and and other Security Interest Act, 2002. wherever he feels that
other banks of computerisa�on
banks. something manually needs
Credit Informa�on Companies
No bank can commence the business of bank- � Non-computerised banks to be performed to check the
Regula�on Act, 2005.
ing or open new branches without obtaining authen�city and consistency
Payment and Settlement Systems Act, � Par�ally computerised banks of the informa�on obtained
license from RBI. The RBI also has the power to
2007. from the system & document
inspect any bank. � Fully computerised banks
the results.
INTER AUDIT DRONE CHARTS BY CA. SARTHAK NIRAJ JAIN 109
 AUDIT OF BANKS
(B) CONTROL
ENVIRONMENT AT THE BANK
A bank should have appropriate controls to mi�gate
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(C) ENGAGEMENT TEAM DISCUSSIONS: 4. INCOME RECOGINITION POLICY

Should Income from Income from

its risks, including effec�ve segrega�on of du�es, All personnel performing an The engagement team should hold discus- be based performing NPA is

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accurate measurement and repor�ng of posi�ons, etc. engagement, including any sions to gain better understanding of the on assets is recognised
The following are certain common ques�ons / record of recognised on on cash
experts contracted by the firm in bank & its environment, including internal

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steps, which have to be kept in mind while recovery accrual basis basis only
connec�on with that engagement control, and also to assess the poten�al
undertaking/ performing control ac�vi�es:
are known to be the “Engagement for material misstatements of the financial
NATURE OF QUESTIONS TO BE
QUESTIONS CONSIDERED / ANSWERED Team”. statements.
5. FORM AND CONTENT OF FS
Who performs the control?
Who Does the above person have Sec�on 29 (1) and Disclosures to be
requisite knowledge and

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(i) The engagement team discussion ordinarily (2) delas with form given as per
authority to perform the control? (ii) Advantages of such a discussion

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includes a discussion of the following matters: and content of FS applicable AS
What evidence is available to Specific emphasis should be provided to
(a) Errors that may be more likely to occur;

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What demonstrate /prove that the the suscep�bility of the bank’s financial
control is performed? (b) Errors which have been iden�fied statements to MMs due to fraud, that Balance sheet format P&L a/c format
When and with what frequency is in prior years; enables the ET to consider an appropri- specified in Form A of specifeid in Form B
the control performed? (c) Method by which fraud might be ate response to fraud risks, including Third Schedule of Third Schedule
When perpetrated by bank personnel or others those related to engagement risk,
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Is the frequency enough to
prevent, detect & correct RoMM? within par�cular account balances and/or pervasive risks, and specific risks.

pr sp
Where is the evidence of perfor-
disclosures; It further enables the audit engagement 6. AUDIT OF ACCOUNTS
mance of the control retained? (d) Audit responses to engagement risk, partner to delegate the work to the

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For how long is the evidence pervasive risks, and specific risks; experienced ET members, and to de-
Where (e) Need to maintain professional termine the procedures to be followed
retained?
skep�cism throughout the audit when fraud is iden�fied.
Is the evidence accessible/ Further, audit engagement partner may
available for audit? engagement;
review the need to involve specialists to
Why is the control being (f) Need to alert for informa�on or other
address the issues rela�ng to fraud.
performed? condi�ons that indicates that a material
misstatement may have occurred
Why What type of errors are prevented
or detected through the
performance of the control?
How is the control performed?
What are the control ac�vi�es?

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Can these ac�vi�es be bypassed?
How Can the bypass, if any, bedetected?
How are excep�ons / devia�ons
resolved on iden�fica�on?
Sec�on 30(1) : Accounts of a banking company shall
What is the �me frame for resolving be audited by a person duly qualified under any law
the excep�ons? to be an auditor of comapnies

110 AUDIT OF BANKS

 AUDIT OF BANKS
7. APPOINTMENT OF AUDITOR 8. AUDITOR’S REPORT

I As per the provisions of the relevant enactments:-

Banking At AGM by Shareholders

In case of na�onalised bank, auditor is required to make
a report to CG in which he has to state the following:
Whether return
(c) received from
offices and
Company + Approval from RBI branches are
Whether in his opinion FS adequate
present a T/F view of the
Na�onalised By BOD + affairs of the bank & In case he (a)
Bank Approval from RBI called for any explana�on/ Any other
(d) matter to be
info., whether it has been
State Bank By C&AG in given and is sa�sfactory brought to
no�ce of CG
of India consulta�on with CG
Whether or not
Subsidiaries transac�ons
O
By SBI which have come
of SBI
to his no�ce have (b)
been within the The report of auditors of SBI is also to be made to the CG and is almost iden�cal

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Regional power of bank
By Bank with approval of CG to the auditor’s report in the case of a na�onalised bank.
Rural Banks

(A) FORMAT (B) LONG FORM AUDIT REPORT

OF REPORT (C) REPORTING TO RBI
Appointment of • As given in (This Provision has been amended) (i) RBI Circular – If an accoun�ng professional (Internal/ external/
SA-700 (a) This report is to be (e) LFAR a�er due ins�tu�onal auditor) finds anything suscep�ble to fraud/ act of
Auditor

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• Sec�on 143 also given by statutory examina�on, excess power/ smell any foul play in transac�ons, he shall refer
applies branch auditors should be placed it to regulator. Any deliberate failure shall render auditor liable
• CARO not (SCA) as well as before the ACB for ac�on.
applicable statutory central of the bank indi- (ii) Auditor should also consider the provisions of SA 250. The said

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auditors.
ca�ng the ac�on standard explains that the duty of confiden�ality is over-ridden
(b) It is in form of taken/proposed by statute, law or courts.
ques�onnaire to be taken for
where observa�ons/ (iii) SA 240 states that an auditor conduc�ng an audit in accordance
rec�fica�on of the with SAs is responsible for obtaining reasonable assurance that
comments have to
be provided on imp irregulari�es & a the FSs taken as a whole are free from MM, whether caused by
matters. copy of the LFAR & fraud or error.
the rela�ve agenda
(c) These are submit-
ted by the statutory note, together with
branch auditors to the Board’s views (D) FRAUD
statutory central or direc�ons, is REPORTING

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auditors. submitted to RBI UNDER THE
(d) The consolida�on is within 60 days COMPANIES ACT
done at head office of submission of
level and LFAR for LFAR by statutory Report matter to CG in
bank is submitted auditors. such �me and manner
by SCAs to MGT. as may be prescribed

INTER AUDIT DRONE CHARTS BY CA. SARTHAK NIRAJ JAIN 111

 AUDIT OF BANKS

9. CONDUCTING AN AUDIT (A) TYPES (C) LEGAL REQUIREMENTS OF

Points needs to elaborate in exam OF ADVANCES DISCLOSURE IN THE BALANCE SHEET
A B (i) Funded Loans - Those loans

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C D A B
where there is an actual
Iden�fying (i) Bills purchased (i) Secured by
Understand transfer of funds from the

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• and and discounted
• Internal assignments in banks by statutory auditors the bank’s bank to the borrower tangible assets

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assessing (ii) Cash credits,
• risk of accoun�ng (ii) Non-Funded Loans- Those (ii) Covered by
overdra�s and bank/govern-
• material mis process which do not involve such
loans repayable on ment guarantees
• statements transfer
demand (iii) Unsecured
• (iii) Term loans
•
• E 10. C
•
• Oversight & involvement in the
ADVANCES- BASICS I. Advances II. Advances outside India:
control process by TCWG The core business of banks in India:
H G F is accep�ng deposits for
(i) Due from Banks
• Iden�fica�on, measurement &

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Establish Engagement (i) Priority (ii) Due from Others:
Develop monitoring of risk onward lending. Advances
the overall team sectors
are amount of money or

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audit plan (a) Bills purchased
qq.my
• Control ac�vi�es

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audit discussion • Monitoring ac�vi�es credit, given as a loan from a (ii) Public sector and discounted
strategy • Reliable info. system bank to another party with an (iii) Banks (b) Syndicated loans
agreement that the money (iv) Others (c) Others
I J K L M will be repaid.
Audit Determine Consider Assess the risk of Assess
planning audit going fraud including specific

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materiality
(B) ADVANCES COMPRISES
memorandum concern

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money laundering risks (D) CLASSIFICATION
• Term loans • Adverse
240 330 • Cash credits,
balances in de- OF ADVANCES

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Q O N overdra�s,
posit accounts
Reliance on / review of other (i) Sector wise (ii) Security wise
BASEL-III Responses Risk associated demand loans • Par�cipa�on on
reports: The auditor should

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risk sharing basis
take into account the adverse
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framework to assessed with outsourcing • Bills discounted
Priority Secured

to
comments, if any, on advances risks of ac�vi�es & purchased • Interest bearing
appearing in the following-
� Previous year’s audit
reports.
staff Loans
Non Priority Unsecured
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Day
� Latest internal inspec�on Standard Loans (iii) Pruden�al Norms
reports of bank officials. (E) SECTOR WISE
� Reserve Bank’s latest
inspec�on report. • RBI issues common guidelines for lending to priority Standard Regular SMA (Special Men�on Accounts) NPA Loans
� Concurrent / Internal sector which banks are required to follow
audit report. • This guidelines cover rate of int., service charges etc.
� Report on verifica�on of SMA 0 SMA 1 SMA 2
• RBI also issues targets for banks for lending to Priority Sector.
security (A/c showing (Overdue between (Overdue between Sub- Doub�ul Loss
� Other reports • Examples of priority sectors are agriculture , MSME , stress signals) 31 to 60 days) 61 to 90 days) standard (D1/D2/D3)
educa�on , housing , etc.

112 OTHER TOPICS DRONE CHARTS BY CA.

AUDIT SARTHAK NIRAJ JAIN
OF BANKS 112
 AUDIT OF BANKS
(v) Set off
(F) NATURE OF SECURITY (i) Mortgage
(vi) Lien • Right of creditor to (M) ADVANCES UNDER
Several types are there but
Primary Security most important are the It is crea�on of a adjust debit balance CONSORTIUM
Collateral Registered Mortgage and the legal charge with against any credit
Security Equitable Mortgage consent of the balance
• Registered Mortgage - Affected by a owner, which gives
• Can be exercised
The security Principal It is an registered instrument called the lender right to seize/ Based on record of recovery of
liquidate the asset for �me barred
offered by the security addi�onal ‘Mortgage Deed’ signed by mortgagor debt only individual member banks
borrower for security & can & registers property as a security under lien
bank finance or be in any form • Equitable mortgage- It is
the one against i.e. tangible or effected by a mere delivery of
which credit has intangible �tle deeds with intent to (G) MODE OF CREATION If remittance pooled by one
been extended asset, create security thereof OF SECURITY bank or bank receiving remittances
by the bank. movable or is not par�ng with share of other
immovable (iv) Assignment
member banks, account shall

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asset. (iii) • Transfer of exis�ng/
(ii) Pledge be treated as NPA
Hypotheca�on future debt, right or
• Bailment or delivery of • Execu�on of hypothe- property
goods by the borrower to the ca�on agreement for
lending bank with the • Only ac�onable claims
inten�on of crea�ng a charge moveable securi�es accepted as security The par�cipa�ng banks shall get
• Legal ownership remains • No transfer of • Gives asignee absolute their share transferred from lead
(H) NON-PERFORMING ASSETS with pledger while banker gets possession or ownership right over the debts bank for proper asset classifica�on
certain defined interests in • Borrower holds possession of assigned
the goods goods as agent of bank
� A NPA is a loan/advance where interest/ • Borrower periodically
• Pledge of goods
installment is overdue for

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cons�tutes a specific submit statements to
more than 90 days (or fixed) charge Bank to fix DP
� Account is out of order for overdra�/
cash credit bill remains overdue for
PROVISIONS ON NPA (K) ACCOUNTS REGULARIZED
more than 90 days NEAR THE BS DATE

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Sub standard 15%
(NPA ≤ 12 months) � Where few credits are recorded before
the BS should be handled with care &
(I) OUT OF ORDER without scope for subjec�vity
Doub�ul (NPA > 12 (Secured + � If a/c indicates inherent weakness on
• O/S balance is con�nuously in excess of

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san�oned limit/drawing power months) Unsecured) the basis of the data - should be
deemed as NPA.
• No credits for con�nuous 90 days
D1 upto 1 year 25% + 100%
• Credits not enough to cover interest
debited during the same period (L) GOVERNMENT GUARANTEED ADVANCES
D2 1-3 years 40% + 100%
� CG - Where the guarantee is not invoked/ repudiated would be classified

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D3->3 years 100% + 100%
(J) OVER DUE as standard assets, but regarded as NPA for Income Recogni�on purpose.
� Any amount due to the bank under any Loss Assets � SG - The situa�on would be different if the advance is guaranteed by state
credit facility is ‘overdue’ if it is not paid on (loss iden�fied 100% government, where advance is to be considered NPA if it remains overdue for
by bank/auditor/RBI) more than 90 daysE for both provisioning & income recogni�on purposes.
the due date fixed by the bank

INTER AUDIT DRONE CHARTS BY CA. SARTHAK NIRAJ JAIN 113

 AUDIT OF BANKS
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(N) EROSION IN THE VALUE OF SECURITY/ (O) ADVANCES AGAINST (P) AGRICULTURAL ADVANCES AFFECTED BY NATURAL CALAMITIES
FRAUDS COMMITTED BY BORROWERS TERM DEPOSITS, NSCS, KVPS/
IVPS, ETC. Master Circular issued by
the RBI deals elaborately
Erosion means the gradual destruc�on or diminu�on of Need not be treated as NPAs with the classifica�on
something not prudent to follow stages of asset classifi- - provided adequate margin is and income recogni�on
ca�on. It should be straight-away classified as doub�ul or available issues due to impair-
loss asset as appropriate as follows ment caused by natural
calami�es.

(Q) ADVANCES TO STAFF Banks may decide

on their own relief
(i) (ii) measures, subject to
If the realisable • To be included as
Erosion in the the guidelines contained
value of the secu- part of advances
value of security in RBI’s latest Master
rity, as assessed by the por�olio of the bank
can be reckoned as

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Circular
significant when the bank/ approved valuers/ • Classified as NPA on
realisable value of the RBI is < 10 % of the o/s in default in repayment
the borrowal accounts, the of instalment In such cases, the NPA
security is < 50 % of the
existence of security should classifica�on would
value assessed by the • Included under the
be ignored and the asset be governed by such
bank or accepted by sub-head “Others”
should be straight- rescheduled terms.
RBI at the �me of under other assets
last inspec�on away classified as
loss asset.

(R) AGRICULTURAL ADVANCES Meaning :- Drawing Power generally addressed as “DP” is an important concept
11. for Cash Credit (CC) facility availed from banks and financial ins�tu�ons. It is the
As per guidelines they are of two types- COMPUTATION limit upto which en�ty can withdraw from the WC limit sanc�oned
OF DRAWING
POWER (ii)
Long dura�on crops Short dura�on crops (iv)
Considera�ons:- All
Auditor’s Concern:- The stock
accounts should be kept
Crops with crop season Other than long statements, quarterly returns
within both the drawing
longer than 1 year dura�on crops and other statements submit-
power and the sanc�oned
(i) ted by the borrower to the bank
limit at all �mes.
Different from should be scru�nized in detail.
Treated as NPA , if Treated as NPA , if
installment is overdue installmet is overdue Sanc�oned Limit -The
Sanc�oned limit is (iii)
for 1 crop season for 2 crop seasons (v)
the total exposure Bank’s Du�es:- Banks should
while Drawing Power ensure that drawings in the Computa�on of DP :- Ensure
refers to the amount WC account are covered by that drawing power is calculat- (vi)
calculated based the adequacy of the current ed as per guidelines formulated Stock Audit :- The stock audit
on primary security assets & required to be by the BODs of the respec�ve should be carried out by the bank
less margin as on a arrived at based on current bank and agreed upon by the for all accounts having funded
par�cular date. stock statement. concerned statutory auditors. exposure of more than ` 5 crores.

114 AUDIT OF BANKS

 AUDIT OF BANKS

(A) (i) I (x) (B)

In carrying out audit of advances, the Bank make advance only a�er 12 The auditor can obtain SAAE about

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All irregular a/c should
auditor is primarily concerned with obtaining sa�sfying credit worthiness of AUDIT OF advances by study and evalua�on of ICs
be brought to the no�ce
evidence about the following: borrower & appropriate sanc�on. ADVANCES rela�ng to advances by:
of controlling authority

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regularly.
(ii) Examining validity of recorded amounts.
(a) Amounts included in BS in respect of
The opera�on of each

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advances which are outstanding. All necessary documents

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advance account should be (ix)
executed by the par�es before Examining loan documenta�on.
reviewed at least once a year The accounts should
(b) Advances represent amount advances are made.
be kept within both the Reviewing opera�on of accounts.
due to the bank.
(iii) drawing power and the

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sanc�oned limit.
(c) Appropriately supported by The compliance with the (C) Examining existence, enforceability
loan and other documents. terms of sanc�on and Evalua�on of (viii) & valua�on of security.

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end use of funds. Internal Controls

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Update drawing power Checking compliance with RBI norms and

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(d) There are no unrecorded advances. over Advances
(iv) register every month.
(e) The stated basis of valua�on of advances Sufficient margin as specified Carrying out appropriate analy�cal procedures.
in the sanc�on letter should (vii)
is appropriate and properly applied.
be kept against securi�es. In case of goods in possession,

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(f) The advances are disclosed, classified check contents at the �me of recipt
(v) and a�erwards at regular intervals.
and described as per FRF & Law.
(ix) Re-nego�a�ons :-
(g) Appropriate provisions have been
made as per the RBI norms.
e
All securi�es requiring registra�on should be
registered in the name of the bank or other-
wise accompanied by documents.
(vi)
If securi�es taken are shares, debentures,
• Fees and commissions earned by the banks
as a result of re-nego�a�ons or rescheduling
transfer ownership in the name of bank. of outstanding debts should be recognised
on an accrual basis over the period of �me
covered by the re-nego�ated or rescheduled
13

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(A) PROFIT AND Sec�on 29(1) of the Banking Regula�on Act, 1949, requires the prepara�on of Profit and Loss Account in
extension of credit.
AUDIT OF LOSS ACCOUNT Form-B of Third Schedule to the Act or as near thereto as the circumstances admit.
• Test check the interest earned by the banks
REVENUE for the sample selected.
(vi) Advances against (vii) Bills Purchased:- In the case of BP o/s at the close of (viii) Bills for Collec�on :- Examine
ITEMS Securi�es :- May be year the discount received thereon should be properly the procedure for credi�ng the party • Test check the fees and commissions
taken to income a/c on appor�oned between the 2 years. Interest (discount) on whose behalf the bill has been earned by the banks made for commission on
AUDIT the due date, provided component paid by bank/branch on rediscount of bills collected. The commission of the bills for collec�on, letters of credit and bank
APPROACH adequate margin is avail- from other financial ins�tu�ons, is not to be netted off branch becomes due only when the guarantees.
AND able in the accounts. from the discount earned on bills discounted. bill has been collected.
PROCEDURES

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(i) Auditor’s Concern :- Auditor is (ii) RBI’s Direc�ons:- RBI has advised that - any (iii) Materiality:- If any (iv) Revenue Certainty:- Banks (v) Revenue Uncertainty:- Not recognize

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primarily concerned with obtaining income which exceeds 1% of the total income of item not considered recognise income on accrual basis, income on NPAs un�l it is actually realised.
reasonable assurance that transac- bank if the income is reckoned on a gross basis material as per normrs, i.e., as it is earned. It is an essen�al When a classified NP as first �me, interest

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�ons took place in relevant period OR may be recognised when condi�on for accrual of income that accrued and credited to the income a/c in
& pertained to the bank, there is no 1% of the net profit before taxes if the income is
unrecorded income and recorded at reckoned net of costs, should be considered on received & auditors need it should not be unreasonable to the corresponding PY which has not been
appropriate amount accrual as per AS- 9 not qualify their report . expect its ul�mate collec�on. realized should be reversed or provided for.

INTER AUDIT DRONE CHARTS BY CA. SARTHAK NIRAJ JAIN 115

 AUDIT OF BANKS
14 AUDIT OF EXPENSES
(D) INCOME FROM INVESTMENTS
(B) REVERSAL (c)
OF INCOME On advances
(A) AUDIT APPROACH AND (B) AUDIT OF OPERATING
(a) PROCEDURES EXPENSES
(ii) Interest Income on (i) The auditor is primarily concerned with (i) The auditor should study and
(a)
This will apply Investments: This assessing the overall reasonableness of the evaluate the system of IC rela�ng
On leased assets includes all income to expenses.
(i) to Government amount of interest expense by analysing ra�os

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Component of derived from (ii) The auditor should examine wheth-
guaranteed of interest paid on different types of deposits
finance income Where any account securi�es, except er there are any divergent trends in
accounts and borrowings to the average quantum of the

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which was accrued & becomes NPA during income earned by respect of major items of expenses.
also. respec�ve liabili�es during the year.
credited before asset the current year, interest É way of dividends, (ii) The auditor should obtain from the bank an
(iii) The auditor should perform sub-
stan�ve analy�cal procedures in
become NPA should accrued and credited shall etc., from subsidiar- analysis of various types of deposits o/s at respect of these expenses.
be reversed. be reversed or provided (iii) ies and JVs abroad/ the end of each quarter. (iv) The auditor should also verify
for if the same is not in India. expenses with reference to sup-
Fees, (iii) The auditor should also compare the average
realised. por�ng documents and check the
commission and rate of interest paid on the relevant deposits
other accrued income with the corresponding figures for the calcula�ons wherever required.
(b)
On take out finance shall be reversed or previous years and analyse any material
(iv) (b)
• Take out loan is method of provided for as differences. (C) AUDIT OF PROVISIONS
financing where by a loan Check for any Well. Profit on Sale (iv) The auditor should obtain general ledger
large debits to break-up for the interest expense incurred on
AND CONTINGENCIES
that is procured later is used of Investments:
to replace the ini�al loan. interest accounts and Investments are deposits and borrowing each month/quarter. The auditor should ensure that the compli-
• If based on recovery, a/c is obtain sufficient (v) dealt in the course (v) The auditor should analyse month on month ances for various regulatory requirements.
classified as NPA, it should explana�on for In case of banks of banking ac�vity cost analysis and document the reasons for Obtain an understanding as to how the
not recognise as income the same. which have wrongly and hence the net the variances as per the benchmark stated. bank computes provisions.
recognised income in the (vi) He should examine whether the interest ex-
unless realised from
past should reverse the inter-EELprofit or loss on
sale of invest- pense considered in the cost analysis agrees
The auditor may verify the loan classifica-
customer. �on on a sample basis.
est if it was recognised as ments is taken to with the general ledger.
income or make a provi- The auditor should obtain the detailed
P&L a/c. (vii) The auditor should understand the process break up of standard loans, non-performing
(i) sion for an equiva- of computa�on of the average balance and
lent amount. loans.
In the absence of re-compute the same on sample basis.
a clear agreement The auditor should obtain the tax
(C) ON PARTIAL (viii) The auditor should, on a test check basis, provision computa�on from the bank’s
between the bank and RECOVERIES verify the calcula�on of interest and ensure management and verify the nature of
(iii) (c)
the borrower banks that: items debited and credited to P&L a/c to
IN NPAs Interest partly/fully Profit/Loss on Re-
are required to adopt (a) Interest has been provided on all deposits ascertain that the same are appropriately
realised in NPAs can be valua�on of Invest-
an accoun�ng policy upto the date of the BS; considered in the tax provision
taken to income. ments: Investments
and exercise the right computa�on.

e
(b) Interest rates are in accordance with the
of appropria�on of are to be valued at
(iv) bank’s internal regula�ons, RBI direc�ves
recoveries in a uniform periodical intervals
Ensure that credits to- and deprecia�on
and agreements (D) DISCLOSURE OF THE
and consistent manner. (c) Interest on savings accounts are as per rules PRIOR PERIOD ITEMS
wards interest in the or apprecia�on in
framed by the bank/RBI in this behalf. Form B-3rd Sch- Does not specifically
(ii) relevant accounts are not valua�on should
(d) Interest on inter–branch balances has been provide for disclosure of the impact of prior
out of fresh/addi�onal be recognised and
The appropriate policy to provided at the rates prescribed by the period items on the current year’s P&L, such
credit facili�es sanc�oned taken to P&L a/c.
be followed is to recognise head office/RBI. disclosures, wherever warranted, may be
to the borrowers given.
income as per AS-9.
concerned.

116 AUDIT OF BANKS