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PROJECT REPORT ON
“Audit of bank existing in whole banking sector based on enactments & on the guidelines on audit of bank issued by
ICAI & RBI”
Submitted toUniversity of Mumbai
In Partial Fulfillment of the Requirement
For
M.Com (Accountancy) Semester IIIIn the subject
Advanced Auditing
By
Name of the student : - Vivek Shriram MahajanRoll No. : - 15 -9672
Name and address of the collegeK. V. Pendharkar College
Of Arts, Science & CommerceDombivli (E), 421203
NOVEMBER 2015
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DECLARATION
I VIVEK SHRIRAM MAHAJAN Roll No. 15 – 9672, the student of M.Com (Accountancy) Semester III (2015), K. V. Pendharkar College, Dombivli, Affiliated to University of Mumbai, hereby declare that the project for the subject Advanced Auditing of Project report on “Audit of bank existing in whole banking sector based on enactments & on the guidelines on audit of bank issued by ICAI & RBI” submitted by me to University of Mumbai, for semester III examination is based on actual work carried by me.
I further state that this work is original and not submitted anywhere else for any examination.
Place: Dombivli
Date:
Signature of the Student
Name: - Vivek Shriram Mahajan Roll No: - 15 -9672
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ACKNOWLEDGEMENT
It is a pleasure to thank all those who made this project work possible.
I Thank the Almighty God for his blessings in completing this task. The successful completion of this project is possible only due to support and cooperation of my teachers, relatives, friends and well-wishers. I would like to extend my sincere gratitude to all of them.
I am highly indebted to Principal A.K.Ranade, Co-ordinator P.V.Limaye, and my subject teacher Supriya Bhalerao for their encouragement, guidance and support.
I also take this opportunity to express sense of gratitude to my parents for their support and co-operation in completing this project.
Finally I would express my gratitude to all those who directly and indirectly helped me in completing this project.
Name of the studentVivek Shriram Mahajan
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Table of Contents:CHAPTER No Topic Page no
CHAPTER 1 Introduction
Introduction to Subject………………………..History...............................................…………Objectives Of Auditing.....................................
567
CHAPTER 2 Principles & types of Audit
Principles…………………………..Types of Audit......................................
811
CHAPTER 3 Provisions relating to Audit
Provisions relating to audit......................……Guidelines of bank audit issued by ICAI.........
1830
CHAPTER 4 Conclusion
Conclusion………………………………….. 31
Bibliography…………………………………………. 32
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CHAPTER 1: Introduction
Introduction to Subject
Auditing and Assurance Standards (AAS) 1 by ICAI
“Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon”.
A.W. Hanson
“An audit is an examination of accounting records to establish their reliability and the reliability of statements drawn there from.”
International Auditing Guidelines
“Auditing is independent examination of finance information of any entity with a view to expressing an opinion thereon.”
The term ‘audit’ has been derived from the Latin word “audire” which means to hear. According to Auditing Standards and Guidelines, U.K., “An audit is the independent examination of an expression of opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligations”.
Audit is designed to reduce the possibility of a material misstatement in the financial statement of any entity not being detected. Financial audits exist to add credibility to the implied assertion by an organization's management that its financial statements fairly represent the organization's position and performance to the company's stakeholders (interested parties). The principal stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in ensuring that the financial statements are accurate.
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History
The earliest surviving mention of a public official charged with auditing government expenditure is a reference to the Auditor of the Exchequer in England in 1314. The Auditors of the Impress were established under Queen Elizabeth I in 1559 with formal responsibility for auditing Exchequer payments. This system gradually lapsed and in 1780, Commissioners for Auditing the Public Accounts were appointed by statute. From 1834, the Commissioners worked in tandem with the Comptroller of the Exchequer, who was charged with controlling the issue of funds to the government.
As Chancellor of the Exchequer, William Ewart Gladstone initiated major reforms of public finance and Parliamentary accountability. His 1866 Exchequer and Audit Departments Act required all departments, for the first time, to produce annual accounts, known as appropriation accounts. The Act also established the position of Comptroller and Auditor General (C&AG) and an Exchequer and Audit Department (E&AD) to provide supporting staff from within the civil service. The C&AG was given two main functions – to authorize the issue of public money to government from the Bank of England, having satisfied himself that this was within the limits Parliament had voted – and to audit the accounts of all Government departments and report to Parliament accordingly.
Rationale for an Audit
The objective of an audit of financial statements is to enable the auditor to express an opinion whether, apart from representing a true and fair view of an entity’s finances; the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
The underlying objective is to add credibility and enhance the degree of confidence of Users of management’s financial statements. Access to capital markets, mergers, acquisitions, and investments in an entity depend not only on the information that management provides in financial statements, but also on the assurance that the financial statements are free of material misstatements. This assurance is provided, to a considerable extent, by an audit. While an audit does not guarantee financial statements’ accuracy, it provides users with a reasonable assurance that an entity’s financial statements give a true and fair view in conformity with the applicable financial reporting framework.
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The need for an audit therefore originates from the following factors:
• Requirement of Unbiased and relevant financial information to guide investment decisions of stakeholders
• Complexity of Financial information
• Remoteness of the users from the financial information generating system and processes
• Financial and Economic consequences of using unreliable information
As per SA 200A, Objective and Scope of the Audit of Financial Statements issued by the ICAI, The objective of an audit of financial statements, is to enable an auditor to express an opinion on such financial statements and help in determination of the true and fair view of the financial position and operating results of an enterprise, the user, should not assume that the auditor’s opinion is an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which management has conducted the affairs of the enterprise.
OBJECTIVES OF AUDITING
AAS 2 issued by ICAI states that the objective of an audit of financial statement is to enable an auditor to express an opinion on such financial statements. A financial audit has a basic objective of examining whether the accounts are true and fair. It has an incidental objective of detecting errors and frauds.
Primary objectives of Audit (Auditor’s Report)
• Truth and fairness of the financial position shown by the balance sheet.
• Truth and fairness of the trading results or the results of operations shown by the profit and loss account.
• Adequacy of information required to be disclosed in the financial statements.
• Compliance with statutory requirements.
• Accuracy and reliability of books of account and underlying records from which the financial s statements have been prepared.
Secondary objectives of Audit (Auditor’s Report)
• To detect errors and frauds, if any.
• To prevent errors and frauds by the deterrent effect of audit.
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CHAPTER 2: Principles & Types of Audit
Basic Principles Governing an Audit
SA 200, Basic Principles Governing an Audit, issued by the ICAI, describes the basic principles which govern the auditor’s professional responsibilities and which should be complied with whenever an audit is carried out. These are:-
1. Integrity, Objectivity and Independence
The auditor should be straightforward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.
2. Confidentiality
The auditor should respect the confidentiality of information acquired in the course of his work and should not disclose any such information to a third party without specific authority or unless there is a legal or professional duty to disclose.
3. Skills and Competence
The audit should be performed and the report should be prepared with due professional care by persons who have adequate training, experience and competence in auditing.
The auditor requires specialized skills and competence which are acquired through a combination of general education, technical knowledge obtained through study and formal courses concluded by a qualifying examination recognized for this purpose and practical experience under proper supervision. In addition, the auditor requires a continuing awareness of developments including pronouncements of ICAI on accounting and auditing matters, and relevant regulations and statutory requirements.
4. Work Performed by Others
When the auditor delegates work to assistants or uses work performed by other auditors and experts, he will continue to be responsible for forming and expressing his opinion on the financial information. However, he will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied. In the case of any independent statutory appointment to perform the work on which the auditor has to rely in forming his opinion, such as in the case of the work of branch auditors appointed under the Companies Act, 1956, the auditor’s report should expressly state the fact of such reliance.
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The auditor should carefully direct, supervise and review work delegated to assistants. The auditor should obtain reasonable assurance that work performed by other auditors or experts is adequate for his purpose.
5. Documentation
The auditor should document matters which are important in providing evidence that the audit was carried out in accordance with the basic principles.
6. Planning
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business.
Plans should be made to cover, among other things:
(a) Acquiring knowledge of the client’s accounting system, policies and internal control procedures;
(b) Establishing the expected degree of reliance to be placed on internal control;
(c) Determining and programming the nature, timing, and extent of the audit procedures to be performed; and
(d) Coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of the audit.
7. Audit Evidence
The auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information.
Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect.
Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity of the data produced by the accounting system. They are of two types:
(i) Tests of details of transactions and balances;
(ii) Analysis of significant ratios and trends including the resulting enquiry of unusual fluctuations and items.
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8. Accounting System and Internal Control
Management is responsible for maintaining an adequate accounting system incorporating various internal controls to the extent appropriate to the size and nature of the business. The auditor should reasonably assure himself that the accounting system is adequate and that all the accounting information which should be recorded has in fact been recorded. Internal controls normally contribute to such assurance.
The auditor should gain an understanding of the accounting system and related internal controls and should study and evaluate the operation of those internal controls upon which he wishes to rely in determining the nature, timing and extent of other audit procedures.
Where the auditor concludes that he can rely on certain internal controls, his substantive procedures would normally be less extensive than would otherwise be required and may also differ as to their nature and timing.
9. Audit Conclusions and Reporting
The auditor should review and assess the conclusions drawn from the audit evidence obtained and from his knowledge of business of the entity as the basis for the expression of his opinion on the financial information. This review and assessment involves forming an overall conclusion as to whether:
(a) The financial information has been prepared using acceptable accounting policies, which have been consistently applied;
(b) The financial information complies with relevant regulations and statutory requirements;
(c) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information, subject to statutory requirements, where applicable.
The audit report should contain a clear written expression of opinion on the financial information and if the form or content of the report is laid down in or prescribed under any agreement or statute or regulation, the audit report should comply with such requirements. An unqualified opinion indicates the auditor’s satisfaction in all material respects with the matters dealt with in above paragraph or as may be laid down or prescribed under the relevant agreement or statute or regulation, as the case may be.
When a qualified opinion, adverse opinion or a disclaimer of opinion is to be given or reservation of opinion on any matter is to be made, the audit report should state the reasons therefore.
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Types of Audit
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 Paid
3. All charges paid like cancellation charges, compensation under Court Directive etc.
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B. Expenditure:
1. Salary payments
2. 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 records
2. Cash Department working including security aspects with periodic surprise inspection by the auditor
3. Stock check at regular intervals of all security documents like Blank cheque books, 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.
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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
♦ Securitization 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 environment in which the bank operates.Thus, the auditor should familiarize himself 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.
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b) The auditor should also acquire knowledge of the economic environment 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 the nature 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, inspection reports 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 has indicated 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 to appropriately tune 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 data validation and system controls as to ensure completeness and correctness 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 head office level may apply for audit of banks in analytical procedure.
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2) Evaluation of internal control system:
It may be noted that transaction in banks are voluminous and repetitive, and fall into limited categories/heads of account. It may, therefore, be more appropriate 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 as would determine responsibility and fix accountability with regard to safeguarding 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. No transaction 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 their accounts particularly if these accounts are extensively used to balance books, despite availability of information.
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c) Accumulation of old/large unexplained/unsubstantiated entries in accounts with Reserve Bank of India and other banks and institutions.
d) Transaction represented by mere book adjustments not evidenced/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 audit
h) 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 weight age should be given by the auditor to areas where, in his view, there are weaknesses 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 operations 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
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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 judgment 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 there 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.
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CHAPTER 3: Provisions relating to Audit
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.
Provisions relating to audit
1. Appointment of the auditors
The auditor of a banking company, a nationalized bank or a regional rural bank has to 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
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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. Number of fulltime partners,
II. Numbers of FCA partners,
III. Number of years the firm has been existence,
IV. Period of minimum continuous association of partners with the firm,
V. Number of fulltime charted accountants,
VI. Number of professional staff,
VII. Experience of statutory audit of public sector banks having deposits of atleast the 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.
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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 balance sheet 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.
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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 ReportStatutory Audit ReportCompliance Certificate Form 3CA Form 3CD
Long Form Audit Report (LFAR) Memorandum of Changes Report on Ghosh and Jilani committee recommendations Other Certificates
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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.
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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 Ledger.
Analysis of entries outstanding in:
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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
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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.
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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
Term Saving Current FCNR/ NRE/ NRNR
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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.
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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.
Disclosures Prescribed by RBI
In addition to the disclosures of the requirements of the Third Schedule to the Act, the RBI has, vide its Master Circular no. DBOD.BP.BC No.8 /21.04.018/2014-15 of July 1, 2014 on “Disclosure in Financial Statements – Notes to Accounts”, prescribes disclosures to be made in the Notes to Accounts in respect of certain significant aspects of the items of financial statements of banks.
Disclosures Required Under Accounting Standards
The disclosure requirements under the various Accounting Standards, issued by the Central Government under the Companies Accounting Standard Rules, 20063 as well as any other Accounting Standards issued by the ICAI are also to be complied with. Requirements of the Banking Regulation Act, 1949, vis-à-vis Companies Act, 2013 2.13 The requirements of the Companies Act, 2013, relating to the balance sheet and profit and loss account of a company, in so far as they are not inconsistent with the Banking Regulation Act, 1949, also apply to the balance sheet or profit and loss account, as the case may be, of a banking company [subsection (3) of section 29 of the Act]. It may be noted that this provision does not apply to nationalised banks, State Bank of India, its subsidiaries and regional rural banks.
Consolidated Financial Statements in case of one or more
Subsidiaries
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Banks are required to prepare Consolidated Financial Statements incorporating the Financial Statements of all the subsidiaries in the same form and manner as that of its own. In case the Bank is a Company, then such
Consolidated Financial Statements shall also be laid before the annual general meeting of the company along with the laying of its financial statement by virtue of sub – section (3) of section 129 of Companies Act, 2013. Further a separate statement containing the salient feature of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed shall also be attached along with its financial statement.
Regulatory reporting to the Reserve Bank of India (‘RBI’)
Large banks generally have a dedicated regulatory reporting team for the purpose of ensuring appropriate reporting to the RBI. The information for the purpose of regulatory reporting is sourced from the GL and other subsystems of the Bank. In case of specific disclosure requirement, information is sourced from the respective business divisions. The reporting team should maintain an RBI reporting schedule based on which various reports are compiled and submitted to the RBI after being subject to a maker-checker process.
The Reserve Bank said the concurrent audit at bank branches should cover at least half of their advances and deposits. The concurrent audit system is regarded as part of a bank's early warning system to ensure timely detection of irregularities and lapses.
"Concurrent audit at branches should cover at least 50 per cent of the advances and 50 per cent of deposits of a bank,"RBI said in a notification.
It said branches rated as high risk or above in the last risk-based internal audit (RBIA) or serious deficiencies found in internal audit are subject to concurrent audit.
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The audit will also be applicable on all specialised branches like large corporate, mid corporate, exceptionally large/very large branches, SMEs and all centralised processing units like loan processing units (LPUs).
Besides, it would include service branches, centralised account opening divisions, wealth and portfolio management services, card products divisions, data centres and treasury/ foreign exchange business,investment banking, among others.
The concurrent audit also helps in preventing fraudulent transactions at branches.
The main role of concurrent audit is to supplement the efforts of the bank in carrying out simultaneous internal check of the transactions and other verifications and compliance with the procedures laid down, the RBI said.
The scope of concurrent audit should be wide enough or focused to cover certain fraud-prone areas such as handling of cash, deposits, advances, foreign exchange business, off-balance sheet items, credit-card business, Internet banking, it added.
The regulator said appointment of an external audit firm for concurrent audit may be initially for one year and extended up to three years, after which an auditor could be shifted to another branch, subject to satisfactory performance.
Guidelines of bank audit issued by ICAI
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.
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CHAPTER 4: Conclusion
1. Where the accounting is open and documented it is there to handle special situations. Where it is hidden or disguised, it is a case of a company hiding its true position. And given the annual financial statements that the shareholders receive, hiding the true position of a company is simply misleading the owners of the company and should be regarded as fraud.
2. At the same time, there is a strong case for strengthening the requirements for exercise of due diligence by auditors in carrying out audit of the financial affairs of the company, with negligence or willful default being suitably punished in a deterrent manner. The public interest aspect of the auditor’s role is undeniable.
3. The swelling incidents of accounting frauds have brought out the need for investigative accounting. While the accounting scandals have created a crisis of confidence, on the one hand, they have heralded a boom of forensic business, on the other. Now, technology can be used and due diligence exercises can be undertaken to uncover accounting frauds. Over the past few years, prevention of financial statement frauds has risen to the top of the corporate agenda.
4. The development of a broad ranging fraud risk management program is also an important step in managing this challenge. Organizations undertaking the effort should begin by assessing how well they are managing fraud risk. Identifying known risks and existing controls is an important first step. Then the organization can determine its ideal future state, perform an analysis, and prioritize activities that will help enable the development of a company-specific antifraud program. Such a program will not only help enable appropriate compliance with regulatory mandates but also help the organization align its corporate values and performance as well as protect its many assets, including its reputation
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Webilography
http://www.slideshare.net http://www.icai.org/ http://www.bankexamstoday.com/ http://taxguru.in/
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