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Laws governing the audit of Banking
Company
Nationalize banks: banking companies(Acquisitionand transfer of undertakings) Act,1980 andBanking Regulation Act,1949.
NonNationalized Banks- banking regulation act-1949, and provision of companies act 1956.
Co-operative banks: co-operative societies act1912, relevant state laws governing co-operativesocieties and banking regulation act 1949
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Regional rural banks: Regional Rural Banks
Act,1976.
State bank of India: SBI Act,1955, SBI
(Subsidiary Banks) Act,1959 and certain
provisions of Banking regulation Act-1949
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Appointment of Auditor
For Nationalized Bank previous approval of RBI
Duly qualifiedCompany Act 1956 section 226
Regional rural bank- approval of Central Government.
Co-operative Bank governed by relevant Co-operative Societies Act.
Appointed by the Board of Directors of d Bank
Auditor of Banking co. is appointed at the annualgeneral meeting of the shareholders.
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Appointment of Auditor
For branches of Nationalize Bank, SBI and itsSubsidiaries- RBI Maintain a panel which isprepared by ICAI .
For this Institute publish an empanelment for,normally in the month of April or May issue of itsJournal.
Remuneration of statutory central auditors aswell as branch auditors is fixed on the basis ofcertain norms laid down by RBI.
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Powers of Auditor
Same as those of a company auditor except
that the powers of the auditors of a Co-
operative bank governed by the relevant co-
operative societies Act.
Two types of Banking Audit:
(1) audit of Banking Companies
(2) audit of Co-operative Banks
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Audit of Banking Companies
silent features Restriction on Business: Section 5 Co. Act Defines Banking as
Accepting..
Capital requirements: sec 11&12 of Act contains capital to be
maintained by the banks subscribed capital should not be lessthan 50% of authorized capital and paid up capital should notbe less than 50% of subscribed capital.
In case incorporated outside India having place of business in
the city of Mumbai and Kolkata or bothpaid up capital andreserve shall not be less than Rs.20 lakhs. any other bank-15lakhs
.
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Silent features
Operaing more than one state and having places Mumbai andKolkata- capital and reserve should be atleast 10 lakhs.
Operating in one state-no branches in mumbai and kolkata-paid upcapital & reserves Rs. 1 lakh plus Rs. 10,000 in respect of other
place in same districe.
Total capital and reserves to be mainted need not exceed Rs. 5lakhs.
Reserve fund: sec-17 every bank must transfer atleast 25% of itsnet profit called as Reserve Fund. This if statutoty reserve fund.
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Silent features CRR and SLR-sec 18 banking regulation Act-CRR atleast 3% of its
time and demand liabilities.
SLR in form of cash, gold or unencumbered approved securities.-should not be less than 25% to total demand and time liabilities.
Restriction on investment, loans and Advances: cannot hold dshares whether as pledgee, mortgagee or absolute owner of othercompanies exceeding 30% of its own paid up capital and reserves or30 % of capital of other companies whichever is less.
Cannot advance loan on the security of its own shares.
Cannot give unsecured loan or advance to any of its director orfirm or private company in which such director is interested.
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Audit of co-operative banks
Establishment of cooperative societies- co-
operative societies Act,1912.
Some states Maharashtra, Tamil Nadu, Bengal,
Bihar etc. enacted co-operative societies act
for their own states according to provisions of
central Act.-in this case provision of state
legislation will applicable.-1992.
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Privileges of Registered societies
It shall have the privileges of a body corporate.
Prepetual succession and common seal.
Power to hold property
Can enter into a contract with others.
Can be sued by others and can sue to others.
Its share cannot be sold or attached under any
decree or order of a court in respect of any debt
or liability incured by its member.
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Restrictions imposed
Restriction on shares:
(a) A member cannot transfer his share unless
he has held that share for atleast one year.
(b) Can surrender his share to the socierty or to
another member after the expiry of one year
when he became a member (section 14)
(c) A society may refuse to register a transfer if it
is in contravention of section 5.
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Restriction on loans
Not allowed to loan a person other than
member of society except with the general or
special permission of the registrar.
Cannot advance a loan to another registered
co-operative society without the permission
of registrar of co-op.soci.
State govt.may prohibit to lend money on the
mortgage of immovable property.
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Restriction on borrowings
A registered society may receive deposits and
loans from persons who are not the members
of the society to such extent and under such
conditions as may be prescribed by the rulesof the co-operative societies Act or Bye-laws
of the society concerned(section-30)
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Qualification of auditor
A practicing chartered Accountant within the meaningof Chartered Account Act,1949.
Must be member of ICAI, new Delhi, holding certificateof practice.
A firm of Chartered Accountant is appointed as auditorwhere all the partners of the firm are practicingChartered Accountants in India.
Subject to rules made by central Govt. u/s 226(2)(b)Holder of certificate under the Restricted state AuditorCertificates Rules,1956.however central govt.may benotification in the official gazette makes rules for grant,renewal, suspension or cancel d certificate.
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Disqualification of Auditor according to
Co.Act,1956 & ICAI Act,19491. A Body Corporate
2. Any person who is an officer or employee or partner ofemployee of the company.
3. Any person who is indebted to the co.for an amount of Rs.1,000/-
4. Any person holding the Security of that co. after aperiod of one year from d date of commencement of theco.Amendement Act 2000.(security means an instrumentwhich carries voting rights)
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disqualifications5. A firm which already holds the specified number of company
audits cannot accept any more audit.(not for private Ltd.Cosafter the commencement of d Cos. Act,2002)
6. Any company who has given the company a guarantee or anundertaking for d liability of a third party to the Co. for an
amount exceeding Rs. 1,000.
7. Director or member of a private company.
8. Who is auditor of holding co. disqualifies for the auditor ofsubsidiary co. and vise versa.(Sec.226(5)
9. Auditor of branch disqualifies to become an auditor of headoffice and vice versa.
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Auditors Report
Meaning: it contains clear written relevant to d proper
presentation of d financial information. the auditor
should review and assess d conclusions drawn from
d audit evidence obtained as d basis for d
expression of an opinion on d financial statements.itcontains clear written expression of opinion on d
Financial Statements by d auditor taken as a whole.
Objective: To establish standards on d form andcontent of d auditors report issued as a result of an
audit performed by an auditor of d financial
statements of an entity.
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Contents/elements of Auditors Report
Title: Appropriate, helps to identify d reports, Distinguish from
other reports, e.g Board of Directors Report.
Addressee : it should be appropriately addressed as required byd circumstances of d engagement and applicable laws andregulations.eg.statutory audit is addressed to d shareholders.
Opening and introductory paragraph:(a) report should identifyd financial statements of d enquiry that have been auditedincluding d date of and period covered by d financial
statements.(b) it should include a statement that d financialstatements r the responsibility of d entitys management and astatement that d responsibility of d Auditor is to express anopinion on d fin.statements based on d audit.
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contentsScope of paragraph: it should describe
Examining, on a test basis, evidence to support d amountsand disclousures in Fin.Statements.
Assessing d accounting principles used in d preparation ofFin.Statements.
Evaluating d overall position of Fin. Statements.
Opinion Paragraph: it indicates d financial reporting framework used to
prepare d fin. Statements.
It states auditors opinion as to whether d fin. Statements
give a true and fair view in accordance with d financialreporting framework.
Whether d fin. Statements comply with d statutoryrequirements.
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contentsDate of report:
d date on which auditors signs the report expressinghis opinion on d fin. Statements.
Place of signature:
the report should name d specific location, which is
ordinarily the city where d audit report is signed.Auditors signature:
it should be signed by d auditor in his personal name.
Where d firm is appointed , d report should be signedby auditor in d personal name and in d name of auditfirm.
The partner /propritor signing the report shouldmention his ICAI Membership Number.
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Features of Good Report
Sincerity: the opinion stated express an independent mindunaffected by any bias.
Accuracy: the collection, interpretation and presentationof data in audit report should be accurate.
Simplicity: Technical Jargons should be avoided.
Language:lucid and clear language informing dshareholders about co.s state of affairs.
Coherency(Sequency): there must be a thread of unifiedthought binding sentence to sentence , & paragraph to
paragraph. Contents: relevant information as required by law.
Reasons: when auditor has given a qualified or adversereport or a disclaimer of opinion , he should state d reasonthereof.
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Types of Audit Report
Types of Audit report r based on d opinion of
auditor.
Auditors opinion may be
unqualified (Clean) ,
qualified and adverse.
In certain cases auditor may also disclaim d
opinion.
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Auditors report in case of Nationalized Banks
Submit Report to Central Govt. in which he has to state the following:
1. Whether Balance Sheet is true and fair ,balance sheet containsall the necessary particulars , in case he had called for anyexplanation or information whether it has been given andwhether it is satisfactory.
2. Whether or not the transaction of d bank which have come tohis notice- within d powers of bank.
3. Returns received from the offices and branches of the bankhave been found adequate for d purpose of audit.
4. P&L A/c shows a true balance of P orL for d period covered bysuch account and any other matter which he considers should
be brought to d notice of central Govt.
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Auditors report (Nationalized Bank) Whether he has obtained all d information & Explanations
necessary for his work & Whether d same r satisfactory.According to Banking Regulation Act, auditors report in
case of Banking Co.
Whether all d information and explanations, which to d
best of d knowledge and belief were necessary for dpurpose of audit, have been duly obtained.
Proper books of accounts as required by law have been
kept by d banks so far as appears from his examination ofd books.
Whether B/S & P&L A/c under report r in agreement withd books of accounts.
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In case of banking co.
Whether in his opinion and to d best of his information and
according to d explanations given to him, d said accountsgive d information as required and in d manner so requiredand give true and fair view:
(I) in d case of B/S of d state of companys affairs as at d
dateof B/S
(2)In the case P/L of the profit for d year ended on that date.
By the virtue of d provisions of clause(d) of sub section (3)
of section 227 of Co. Act,1956, d auditor has to specificallyreport whether in his opinion d P&L and B/s of Banking Co.comply with d accounting standards referred to in sub-section(3c) of section 211 of d co.Act,1956.
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Report of auditors of SBI
submitted to d Central Govt.& almost similar to
the Nationalized Bank.
In case Subsidiaries of SBIreport identical to
Nationalized Bank except that all reference to
Central Govt. have to be construed instead as
reference to d SBI
In case of RRBs except that the reference are
instead to the bank concerned.
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Report of company Auditors under co. Act,
1956. Whether or not d information and explanation required by auditor
found satisfactory.
Whether or not transactions of Co. have come to notice r within dpowers of d company.
Whether or not d returns received from d branch office of d co.found adequate for d purpose of audit.
Whether P&L A/c Shows true balance for d period covered by suchaccount.
Any other matter which he considers to be brought to d notice ofShareholders.
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Clean /unqualified audit report
Meaning: (a) an opinion is said to be unqualified ,
when d auditor concluded that d financial
statements give a true and fair view in
accordance with d financial reporting framework
used for d preparation and presentation of d fin.Statements.
(b) The auditor gives a clean or unqualified report,
when he does not have any significantreservation in respect of matters contained in
the financial statements.
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Clean report
An unqualified opinion indicates d following:
The Fin. Stat r prepared using d Generally AcceptedAccounting Principles, which have beenconsistently applied.
The Fin. Statements comply with relevant statutoryrequirements and regulations.
There is adquate disclosure of all materialmattersrelevent to d proper presentation of Fin.statmentssubject to statutory requirement.
Any changes in d accounting principles or in dmethod of their applications, and d effects havebeen properly determined and disclosed in dfinancial statements.
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When auditor issues unqualified
report
Evidence : reasonable evidence obtained
Standards: all AS and Accounting Principlesfollowed
True and Fair: Fin. Stat represents true and fair Classification: it does not hide a material fact
Format : Fin. Statement format prescribed by law
Free of Misstatement: no illegal material
transaction r recorded Disclosure: all disclosures required relevant r
appropriate.
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Qualified opinion/Report
Where auditors gives an opinion on truth andfairness of Fin.Sta subject to certain reservations.
Reservation is generally stated as Subject to dabove, we report that d Balance Sheet shows a
true and fair view. Auditor has to give qualified opinion.
He should express clearly the nature of the
qualification in d report. He should also give d reason for qualification
(section 227(4) of Co. Act,1956)
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Disclaimer of Opinion When auditor unable to form an overall opinion about the
matters contained in d Fin. Sta.
It express when d possible effect of a limitation on scope is somaterial & pervasive that auditor has not able to obtainsufficient appropriate audit evidence .
It happens in a situation:
(1) When books of A/c of co. are sized by Income tax authorities.
(2) Not possible for auditor to obtain certain information.
(3) When scope of audit work is restricted.
The auditor will state in his report he is unable to form anopinion on d fin. Sta such report is called as Disclaimer ofOpinion Report
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Piecemeal opinion
In some cases auditor find fin. Statements r
partial true and fair view such a situation
would warrant a piecemeal opinion.
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Adverse opinion/Negative Report
When auditor concludes that based on his
examinations he does not agree with d affirmationsmade in fin. Statements.
Auditor states that d fin. Statements do not present
a true and fair view of d state of affairs and workingresults of d organization.
The auditor should state d reasons for issuing such a
report.
E.g: a company has not taken into account d interestpayable to its depositors amount to Rs.12,00,000.
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Long form Audit Report (LFAR) For public sector banks, private sector banks and foreign
banks. as per d requirements laid down by d RBI.
It highlights certain important aspects of d working of abank specially those related to internal control system,accounting policies, profitability and financial position.
It should be submitted within stipulated time, inseparated two formats issued by RBI (1985) revised 1987.
Submitted by statutory central auditor
Addressed to chairman of d bank concerned , a copy toRBI.
It also submitted by branch auditor to chairman and copysent to statutory central auditor.
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LFAR QuestionnaireGeneral
Control and subsidiary records at branches and head office been reconcile?
If not give observation.
Inter-branch a/c reconciled ? R these upto date? Not give observations.
Ur major observations in branch returns.
Profitability of various operations of d bank under audit and compare d
figures immediately preceding two years.
Procedure followed by d bank for revaluation of NOSTRO accounts and
outstanding forward exchange contracts. A NOSTRO a/c is maintained be d
bank at an overseas centre to hold stock of foreign currencies so as to put
through foreign transactions.
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Questionnaire
Position relating balancing of books examined.
Major frauds discovered and recorded by d
bank. your suggestions.
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Balances with other bank
Does bank have a procedure for obtaining
balance confirmation certificate in respect of
outstanding balances with other bank (Including
foreign banks) and
Whether these certificates were obtained andbalances reconciled with such banks as the year
end ? If not , your observations may be given,
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Investments
Is mode of valuation of investment consistent with that of
d earlier year? indicate mode of valuation of investment.
Is there any shortfall in d market value of investment ascompared to book value and has same been provided for?
To the extent to which such shorfall not provided at d yearend.
Investment/securities value which shown in B/s varified
with physical value?
R there sizeabile matured securities which have not beenenchased? If so give details?
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Advances Is d procedure for review of advances and their
classification according to Health Code System(suggested
by RBI) adequate,
Whether review r submitted to d appropriate authoritywithin d bank? If procedure is inadequate your
observations?
Whether d bank has evolved a mechanism for detectingincipient sickness in d industrial units financed by it?
R there any categories or individual case of advanceswhere provisions r not made due to d reason ? If anyindicate in Statutory report?
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advances Information as to d following as t d year end (also
previous year) i.e total advances, total doubtful advancesand % of doubtful advances to total advances.
Attention to be drawn to management on some adversefeature observed with reason .
Procedure followed by bank on recording of interest onadvances to interest suspense account or any othersimilar account , any change made during d year with
reason.
Furnish list of top 50 problem-account (other thanprovided by d bank) in your opinion?
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advances
Have you come across cases
(a) Sanction of facilities to borrowers beyond
authorities limits and whether such cases r
promptly reported to d competent authority.
(b) Frequent overdrawing permitted to borrowers
beyond sanctioned limits
(c) Credit facilities being accorded without proper
documentation?
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Premises Have d documents of title to properties owned
by d bank been made available for auditverification?
If not d details may be reported.
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Other assets /liabilites
Does bank have an adequate system to ensure
expeditious (special) clearance of:
(a) debits in suspense account
(b) Credits in deposits/sundries account?(c) In case any matter relating to such item reported
and attented to d management.
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Reserves and provisions Addition to and deductions from various reserves
since d last year B/s may be reported withobservation if any.
Has bank earmarked any portion of d reserves to
meet any specific contingency (E.g bonus, gratuity) The quantum of provision of a material nature to d
extent not separately dealt with .
Status of pending income tax assessment may bereported indicating provisions if any retained/ not
made for any major items of controversial nature.
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Miscellaneous
R their any other matters which you as auditor
would like to bring to d notice of d
management?
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Non performing Assets
Standard Assets: which does not disclose any
problem , which does not carry more than
normal risk
Sub-standard: classified as NPA fo a period not
exceeding two years .in case of loans where
installments and principal r overdue for a
period exceeding one year but not exceedingtwo years.
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Doubtful assets:
Remain NPA for a period exceeding two years.
loss Assets:
Where loss is identified by d bank or by d
internal or external auditors or by d RBI
inspection but d amount has not been written
off wholly or partly.
A di P d (i l C l
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Audit Procedure (internal Control
System)
1. Appropriate procedure for evaluating creditworthiness ofborrowers and specifications of authority for sanctioningloans and advances.
2. Evidentiary material, such as agreement in support of eachloan and advance.
3. Securing of adequate margin in respect of loans andadvances as per RBI
4. Securing title and other proof in resepect of securitiesmortgaged with d banks
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procedure
5. Regular inspection and valuation of securities.
6. Appropriate accounting of increase/decrease in
securities and their value.
7. Regular review of operation of every account.
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Audit of Income(interest & Discount)
Nature of income & its treatment:Interest, Discount,interest on discount money
parked with RBI,cash credits, overdrafts,bill
purchased & discounted-
secured/unsecured/guaranteed,made to a person
or agencies in provate or public sector.
Treatment:
whether there is proper accounting of cash income.,
recognitions of income of NPAs.
l l f
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Calculation of Income
Auditor should see that interest calculation is as
per relevant agreement.
Made up to d Balance Sheet.
Proper apportionment of discount on outstanding
bills over d current and following year.
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Treatment of interest subsidy from RBI
Auditor should ascertain proper computation
and disclosure of interest subsidy from RBI in
respect of concession-rate advances to
priority sector.
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Other Business Income
a) commission, brokerage etc: on bills forcollection, demand drafts, letter of credit, lockerrent. Etc.
b) Profit on sale of investment: should verifyincome from brokers notes, title document,etc.& net profit is adjusted after adjustment ofany loss on sale of investment during d year.
c) Profit on revaluation of assets: thereshould beupward revaluation that have been writtendown below cost in previous years.
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d) Profit on sale of fixed assets: as per AS-10 there
should be credit of such profit to d revaluationreserve and only the excess of such credit overdebit from revaluation carried out in earlier yearsshould be net profit shown in profit and loss A/c.
e) Miscellaneous Income: such as rent from houseproperty,Godowns, insurance charges from
customers etc..if such income exceeds 1% of totalincome of d bank, notes should containparticulars of d same.
f f h
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Profit on foreign exchange transaction
Whether there is immediate confirmation of
counterparty confirmations? Is d net position of d party the basis for transaction
limit?
Is there immediate record of deals and monitoring
and approval of positions? Are d persons carrying out the deals different from
those recording and handling them?
Whether RBI compliance Followed?
Is there appropriate procedure for hedging againstrate loss?
Is there regular reconciliation of NOSTRO accounts?
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As per Guidance note of ICAI and AS-11
AS-11 (Accounting for d effects of changes in
Foreign Exchange Rates)
Auditor should see whether there is sufficient
insurance cover in respect of deposits in
foreign currency
Provision for loss from change in foreign
exchange rates.
di f di
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Audit of expenditure- Interest
Auditor should ascertain that provision of
interest is as per instructions of d RBI,
Its calculation is upto d B/s
Interest on inter-branch balances does not figure
in d Financial Statement.
Is there apportionment of discount on
outstanding bills between the current and the
following year.
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Operating Expenses
All operating expenses given in schedule no.16
The auditor should carefully examine each item
of expenditure.
He ascertain that its computation is correct Supported by proper documents and authority
for d expenditure.
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provisions
The auditor should ascertain that computation
of provision for:
Bad and doubtful debts
Tax payment
Decrease in d value of investments
Other contigent expenditure are correct and
as per direction of RBI.
A i i
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Accounting Ratios
As per Schedule III to d Banking Regulation Act,there should be d disclosure of d following ratio inthe Notes on Accounts
(a) Capital adequacy ratio
(b) % of shareholding of d GOI in d nationalized Bank.(c) % of NPAs to net Advances
(d) Interest income as a % of working funds.
(e) Non- interest income as a % of working funds.(f) Returns on assets.
(g) Business(deposits and advances per employee)
(h) Profit per employee.
A di f A
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Audit of Assets
It involves audit of following assets:
(1) advances
(2) Fixed Assets
(3) Other Assets
Ad
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Advancesa) Preliminary: The auditor should review past audit
reports, internal audit and inspection reports, andrelevant internal reports to see if there r negativecomment in respect of any borrowers account.
verification of priority sector rural advances withreference to their nature.
test checking of advances for house building loans
or consumer durables to determine their nature.
scrutiny of ledger accounts to see that there is nooverstepping.
Advances
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Advances
(b) Classification of Bank Assets: (a) Standard (b)
NPAs
Window Dressing: means presenting the financial
statements in order to show rosy picture. d real
value of assets and liabilities in d B/S is notreflected. Similarly the income and Exp. r also
shown in a manner so that they do not reflect
real value of Income & Expenditure .Eg. showinghigher value of Goodwill or higher/lower value of
Assets due to increase/decrease of Depreciation.
Possible ways of window dressing by
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Possible ways of window dressing by
banks
Showing NPA as a standard asset.
Granting new loan to a customer whose account hasbecome NPA and renewal of advances from time to
time, so that advances are not shown as NPAs.
When advances r not shown as NPAs, d provision isreduced and profit of bank is more than d expected.
The banks do not follow RBI Guidelines strictly.
Wrong classification of assets.
(c) Other requirements in case of loans
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(c) Other requirements in case of loans
and advances
The auditor should see that there is proper observance ofthe following requirements:
(i) Money advanced to customers against security,guarantee etc.- secured/unsecured,security third
party, Govt.RBI ,documents, legal status ofborrowers(AA & MA),mortgage deed, title deed etc.
(ii) Bank cannot advance money against security of own
shares or to any concern wherein its director,manager, employee has interest.
(d) Bill h d d di t d
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(d) Bills purchased and discounted
The Auditor should physically verify the bills with
the bank and see which of them have gone forcollection.
He should ascertain that there is accounting of all
bills and that those are within the sanctionedlimit.
There should be scrutiny of overdue bills with
reference to the possibility of recovery.
(e) Pro ision for bad and do btf l debts
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(e) Provision for bad and doubtful debts
The auditor should see that the provision made
by the bank meets the adequacy requirements asprescribed.
In case of unlikelihood of recovery of any debt,
he should appropriately classify it as doubtful or
loss asset.
(f) Rules relating to NPAs.
Fi d t
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Fixed assets
(a) Premises: A Bank may own premises, wholly orpartly for business or residential purposes. anypremises acquired by d bank in satisfaction of debtsdue to it would fall under Fixed Assets only if d
bank holds it for own use.
The auditor should examine the title deeds & otherrelevant documents testifying banks ownership.
He should see that there is provision for depreciationin respect of premises as per co. Act.
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(b)Other fixed assets
These includes furniture, fixtures motor
vehicles etc.,
The auditor should verify them in respect of
their existence, ownership, possession,valuation and appropriate disclosure.
Other Assets
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Other Assets
These includes the following:
(a) Inter- Branch adjustments:Any number of transactions between branches of a bank
involving transfer of funds through bills of exchange, DD,travelers' cheques, telegraphic transfer etc.,
The auditor should ascertain that there is proper system ofrecord of inter-branch transactions with d head office, d headoffice sets off debit and credit entries pertaining to branchesinvolved in such transactions and speedy identification andcorrection of errors in d statement sent by branches entering
d transactions.
There should be system of reconciliation of transactionsbetween branches and any unreasonable difference shouldget promptly attention
I t t d
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Interest accrued
The auditor should examine interest accruing but
not collected on advances and investment, taking
in view the likelihood of its recovery.
He should follow the guidelines issued by RBI as
to recognition of interest on advances and
investments.
(c) Tax paid in advance or deducted at
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(c) Tax paid in advance or deducted at
source
The auditor should verify this from challans,
TDS certificates etc.,
(d) Non-Banking assets acquired in satisfaction
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of debts
A bank may acquire any non-banking asset in satisfaction of any debt due
to it.
According to banking Regulation Act, it must dispose of such asset withinseven years of its acquisition.
RBI may extend this time limit by up to five years.
The auditor should verify such assets with relevant documents e.g. termsof settlement with the party , award of arbitrator, order of the court etc.,
He should ascertain that ownership of property vests with the bank and incase of any dispute, there should be provision for liability and appropriatedisclosure of contingent liability.
He should see if valuation of such asset is at lower of the amount of debtsettled or net realizable value.
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(e) Credit Cards
Credit cards r risk-prone business. The auditor should evaluate the internal control
system to see whether
there is proper scrutiny of applications for credit
cards, issue of credit cards,
prompt and regular billing of customers,
Charging their accounts
Monitoring of receipts Regular reporting by selling dealers of settlements.
Any abnormal outstanding amounts should getprompt attention.
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(f) Miscellaneous assets
It includes stationary, postal stamps, advances
given to staff, money receivable from Govt,
prepaid expenses etc.,
Verify these with reference to the
documentary evidence.
Checklist for verification of cash-in-
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Checklist for verification of cash in
hand
The auditor should verify:
1. Daily cash transactions with particular referenceto any abnormal receipts and payments.
2. Proper accounting for inward and outward cashremittances.
3. Proper accounting of currency chesttransaction, its proper reporting to d RBI
4. Expenses incurred by cash payment involvingsizeable amount.
Audit of liabilities
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Audit of liabilities
1. Share capital:
The auditor should ascertain whether there iscompliance with provision of the bankingregulation act, under sec.11 and disclosure ofcapital in the B/s.
Subscribed capital not less than one half of itsauthorized capital
Paid up capital not less than one half of itssubscribed capital.
A banking co. Incorporated outside India must keep aminimum prescribed amount of paid up capitaland reserves deposited with RBI in d form of cashor unencumbered approved securities.
Reserves and Surplus
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Reserves and Surplus
a. ) Statutory reserve: a bank must transfer 25% of its
profit to d reserve fund every year before declaringdividend or transferring profit to the central Govt.
It may get exemption if Reserve fund + sharepremium is at lease equal to its paid up capital.
If d bank appropriates any amount from the reservefund or the share premium account , it should reportto the RBI within 21 days of such appropriation,explaining the circumstances attending.
The auditor should ascertain compliance with thisprovision as also that the appropriation hasauthority of a board resolution.
b) l d
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b) Capital and revenue reserves
It includes surplus arising from revaluation of
fixed assets.
It is not available for distribution as profit.
Revenues and other reserves will represent
transfer from profit for various purposes.
c) Reserves with branches abroad
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c) Reserves with branches abroad
The auditor should ascertain whether the bank
has created reserves required under the laws
governing its foreign branches.
d) D i d B i
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d) Deposits and Borrowings
It includes:
Demand and time deposits: balances in current
accounts, savings bank account, cash credit
accounts, fixed deposits, recurring deposits,deposit certificates, borrowing from RBI.
Other banks, Indian financial institutions, and
external borrowings.
Procedure to check the Reserves
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Procedure to check the Reserves
a) He should verify the reconciliation statement
between current a/c ledger and control account.
Checking of general ledger control account with
subsidiary ledger balances relating to saving
bank A/c
And saving bank a/c balances with individual
accounts in the ledger.
b) Detail check and ascertain whether the bank
obtains regular confirmation of balances from
customers.
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He should see that overdrawing in deposit accountappears separately under Advances instead of sum ond liabilities side.
Ascertain interest payable should appear under otherliabilities and not included in relevent deposits, alsocalculation of interest basis of individual account.
See whether there is serial numbering and properaccounting of fixed deposit receipts and cash certificates.and provision of interest on that.
See that there is proper compliance with RBI instructionin respect of acceptance of foreign currency deposits fromnon-residents.
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He should ascertain borrowings from RBI, other banks andfinancial institutions based on reconciliation statements
and confirmations.
He should report tricky transactions where there is grantof overdraft to a customer, then receipt of term deposit
from him at d year end, followed by reversal entry at dbeginning of d following year.
See there is distinction maintained between refinance
(Borrowing) and rediscount.(reduction form advances)
See that inter-branch transfer do not appear asborrowings.
Oth li biliti ) Bill P bl
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Other liabilities- a) Bills Payable
Auditor should evaluate internal control inrespect of demand draft, telegraphic transfer
etc.,with particular reference to their serial
numbering, safe custody of unused forms,confirmation of transfer, etc.,
He should examine items outstanding for
more than three years and include them in hisreport.
Provision for taxation
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The auditor should see
The account give effect to adjustments based on
memorandum of changes suggested by branchauditors.
During consolidation of accounts, there is reversal ofnet interest on inter-branch transactions.
There is compliance with provision of Income TaxAct regarding allowance of bad debts and provisionfor bad debts
For branches of foreign banks there is compliance
with sec.44c of I-T Act in respect of allowance ofhead office expenses.
There is compliance with provisions of I-T Act.
C) KYC N (K Y C t )
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C) KYC Norms (Know Your Customer)
As per RBI Guidelines KYC norms relates mostly to account openingforms.
While checking account opening forms the auditor should ensurethat the bank has properly obtained the identity proof, address andphoto proof of the a/c holder.
Check d signature of introducer is verified.
Every account should duly signed and stamped by d banksauthority.
Verify a/c is not bogus.
Contingent liabilities
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Contingent liabilities
As per guidance note issued by ICAI it includes:
Uncalled liabilities on partly paid up shares held bycompany as investment.
Arrears of dividend on cumulative preferenceshares.
Estimated amounts of contracts remaining to beexecuted on capital account.
Disputed liabilities on account of I-Tax, sales Tax,excise duty, custom duty or which provision is not
made. Amount of any guarantee given by company on
behalf of directors or other officers of the company,workers claim, not acknowledged as debt of co.
Checklist for evaluation of internal control (ICS)
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Checklist for evaluation of internal control (ICS)
ICS is d process designed, implemented and
maintained by those charged with governance,management and other personnel to providereasonable assurance about d achievement of anentitys objectives with regard to reliability offinancial reporting, effectiveness and efficiency of
operations. ICS is sound and reliable auditor can make use of
test check on a scientific basis and save his time andavoid repetitive work.
He can complete d work quicker. ICS is inseparable part of auditing process.
The actual audit work starts after evaluation of thesystem.
A dit d li i ICS
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Auditors dealing in ICS
a) Study the nature of business activity.
b) study the accounting system.
c) Study the managerial hierarchy, duties and
responsibilities assigned to various officers.
d) Study the internal check and internal audit
system.
e) Ensure that the system prevents and detects
frauds and errors.
Concurrent Audit
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Concurrent Audit
In 1993, the RBI issued guidelines on concurrent
audit system in commercial banks:
It is an audit or verification of transactions or
activities of an organization concurrently as the
transactions or activity takes place. Concept of audit is to verify the authenticity of
the transaction or activity within the shortest
possible time after the transaction takes place Looking at d size of business bank decides to get
audit conducted on daily or monthly basis..
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The concurrent auditor has to submit d report on10th of the next month.
If quarterly- then the report have to be submittedon 10th of the month after the end of that
quarter. During if auditor finds any irregularity /deviation
in policies or procedures should submit the freshreport to management to take remedial action
immediately. Once in a year bank should evaluate the success
and effectiveness of the system.
Appointment of concurrent auditor
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Appointment of concurrent auditor
Bank can appoint its own staff or external person toconduct the concurrent audit.
The person should be well trained, experience andsenior personnel.
These auditor should be independent of d branch ofwhich the audit is being conducted.
If external auditor then the appointment may beinitially for a period of one year, it can be extended upto three years. after 3 years external auditor may be
shifted to another branch to conduct the audit If performance of auditor is not satisfactory then same
should be reported to RBI and ICAI by d bank.
Remuneration to concurrent auditor
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Remuneration to concurrent auditor
Fixed by d bank at their discretion.
Bank audit committee of the board of
directors should frame guidelines forremuneration keeping in view of variousfactors like areas to be covered, qualities ofwork expected , suitable package of
remuneration should be framed by themanagement.
Concurrent audit report
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Concurrent audit report It has three parts:
1. Major irregularities2. Minor irregularities
3. Compliance with earlier report.
The auditor cover preface of the report.
Before submit the report auditor discuss d issue with branchmanager of d bank and concerned officer
Report should be submitted to the branch manager & regional
office on monthly or quarterly basis.
Quarterly executive summery submitted to branch,regional,zonaland central office.
Objective of Fin.Stat.Audit
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Objective of Fin.Stat.Audit That Fin. Statements, prepared within a framework
of recognized accounting policies and practices andrelevant statutory requirements.
The auditors' opinion helps determination of the
true and fair view of the fin. position and operatingresults of an enterprise.
But however, it should not be assumed that auditors
opinion is an assurance as to further viability of denterprise or d efficiency or effectiveness with whichmanagement has conducted the affairs of denterprise.
Scope of Fin. Statement audit
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p
Scope of audit of Fin. Statement will be
determined by the auditor having regard to the
terms of the engagement,
The requirement of relevant legislation
And pronouncement of the institute.
Limitations of Audit
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An audit is an examination essentially of test nature.
There is an unavoidable risk of material mis-statement which may not be discovered.
Discovery of material misstatements is not dobjective of an audit nor is the audit program
Audit is not an assurance against frauds or errors,but an indicator of frauds or errors.
The nature, extent and timing of audit checking and
procedure depend upon auditors judgment. Auditor is not expected to perform duties, which
falls outside the scope of his competence.
Audit planning
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p g
Planning helps the auditor to conduct an audit in
an effective ,efficient and timely manner.
Need of audit planning:
Appropriate attention to important aspects of
audit.
Potential problems are identified.
Timely completion of work.
Proper utilization of manpower.
Co-ordination of work.
Steps for planning an audit
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Steps for planning an audit
Knowledge of clients business
Developing the overall plan
Developing the audit programme.
Review of audit plan/programme.
Audit sampling
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Audit sampling
Meaning: it is one audit tool that allows d
auditor to draw inference from test of a subset
of clients transactions.
Objective: to establish standards on the design
and selection of an audit sample and evaluation
of the sample results.
Steps in sampling plan
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p p g p Specify the audit objective
Define the population and no. of population Specifying the sampling unit.
Selecting d sampling method
Specify sampling parameters.
Determine the sample size
Choosing a sample selective technique.
Drawing a sample
Evaluating a sample Determine the adjustment to original plan if need
Evaluating any changes
Formulating a conclusion.
Special consideration in Fi.st.Audit
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Special consideration in Fi.st.Audit The auditor should recognize that the non-
compliance by d entity with laws and regulationsmight materially affect the financial statement.
However an auditor is not expected to detectnon-compliance with all laws and regulations.
It is to establish standars on the auditorsresposibility regarding consideration and lawsand regulations in an audit of financialstatements.
Non-compliance
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It means to act of omission or commission by d
entity being audited, either intentional or
unintentional, which is contrary to the prevailing
laws or regulations.
Indicators of Non-Compliance
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Investigation by the government
Payment of fines or penalties.
Unreasonable payments on account of expenses
Unusual payment in cash
Unusual transaction with companies registered intax heavens.
Payments without proper exchange control
documents. Unauthorized and improperly recorded transactions
Media comments.
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Particulars Auditor report Auditors certificate
Meaning Is an expression of opinion, on
the true and fair viewpresented by fin.statemnts
Is written confirmation of the
accuracy of the facts stated thereinand does not involve any
estimate/opinion.
Utility The term is used when auditor
express his opinion on d
financial statements
Used when auditor verifies certain
exact facts.
Responsibility Auditor may not take a
guarantee the correctness of
Fin. Information in absolute
terms
When certificate is issued by d
auditor is responsible for the factual
accuracy of what is stated therein.
Implication It is made on d basis of
information made available to d
auditor
It is issued by an independent
accountant on those facts and data
which are capable of absolute
certification.
Special consideration in case Co.Audit
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p
1. validity of appointment:
(a) First auditor(appointed by Board of Directors): heshould study the resolution passed at the boardmeeting authorizing his appointment only within amonth of the registration of d company.
(b) Appointed by shareholders:
the auditor should get a copy of the resolution,concerning his appointment passed at such
meeting. he should also inform the registrar about
acceptance of appointment within 30 days of thereceipt of appointment letter.
Appointment of auditor
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(c) Appointment in place of retiring auditor:
He should see whether all d provisions of section225 dealing with the appointment and removal ofauditor have been complied with.
Communication with previous auditor has been
made a part of professional ethics.(d) Casual vacancy:
He should secure a copy of resolution of the Board
to ascertain whether his appointment is valid . The Board is empowered to fill any casual vacancy
provided it has been caused due to resignation ofthe previous auditor.
vouching
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Meaning: it is d examination of the underlyingevidence which is in support of d accuracy of atransaction.
Following r d important points an auditor shouldexamine while vouching:
Whether necessary sanction taken from necessaryauthority.
Transaction-recorded in d books of A/c withdocumentary evidence.
Amount of entry posted in proper heads of A/c
Voucher relates to period for which auditing is beingdone.
How do u audit the following vouching
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preliminary Expenses:
Meaning: r d expenses incurred by d promoters .1. Auditor should see all d contract relating to
formation of company.
2. if expenses r reimbursed to d directors auditor
check AA and resolution passed by d Board of D.3. Check no other expenses except should be included
in this head.
4. See amt of prelim.exp.should not exceed d limit
shown in prospectus, if any excess amt it should beapproved from d shareholders latter.
5. Confirm amt of exp.not written off should be shownseparately in d B/S.
Dividend received
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Dividend from investment in shares of Co's
should be checked very carefully. Auditor should check amt of dividend warrants.
If No. of transaction r largecheck d investment
register. Cross check d amt with amt of register.
Check unrealized amt of dividend amt.
Check TDS certificate. Check amt of dividend shown in P&L A/c
Bifurcation of capital and revenue reserve.
Bad debts recovery
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Check d amt. of bad debts.
Ensure d amt collected has been recorded properly.
Should see order of d court or trustee &
correspondence in this respect.
Check receipts issued to debtors/trustees to cross
verification of d amt collected.
Treatment of account should be checked.
Legal charges
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R incurred by co.s in connections with legal
advise, cases pending in d court and lawyersfees.
Verify bills of advocates, payment vouchers and
documents relating to legal cases pending .
Verify payment is made by cheque in d name of
legal adviser and not any other person.
Legal fees in respect of retainship should beverified from d agreement.
Amt should be under heads of Account.
Carriage outward
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It relates to expenses on transportation of goods
sold. Check vouchers for payment of carriage outward
Check terms and conditions for sale.
verify Policy of co. regarding sales and delivery.
Check d bill for transportation , details of goodsdelivered and sales invoices.
Verify rates of transports on d basis of quotation Verify payment is made to right person and as
per right manner.
Advertisement exp.
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See exp.r related to d business not of personalnature.
R d exp. Classified as revenue or capital basis.
Check d agreement and compare d statement ofaccount.
Check receipt received for d payments made.
In case tax deducted on payments- confirm d taxrate deposited in time to credit of Govt. A/c.
Check O/s adv. expenses at d end of year,
Confirm proper provision on o/s amt. If any other facilities like credit facility, incentive r
provided by agency confirm that client is avail thosefacilities.
Vouching cash sale of co.
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Examine th system of internal check with d aim to find out
loopholes. Ascertain practise followed in d matter of issuing cash
memos.
Verify cash sales from carbon copies of cash memos .
Trace cash memo into cash sale summery book.
If cash sales r heavyverify cash book also.
Ensure dates of cash memo- tally with entry in cash books.
Verify prices of goods correctly entered & calculation. Examine original copy of cash memo which is cancelled
since misappropriation of amt thereof.
Check daily total entered in cash book with the till rolls.
Verification
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Meaning:
Means confirmation or providing d truth.
Verification is concerned with assets & liabilities.
Terms verification signifies Physical
Examination of certain class of Assets/Lib.
Checking arithmetical accuracy of A/L
Asset /lib shown in B/s r really exist and properlyshown at true value.
Definition of verification
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Definition of verification
According to Spicer and Pegier , Verificationof assets implies an enquiry into the value,
ownership and title, existence and possession
and presence of any change on d assets.
Objectives of verification
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To show correct valuation of A/L
To know whether B/S exhibit a true and fair view ofd state of affairs of d business.
To find out assets were in proper existence.
To find out ownership and title of assets. To detect fraud and errors, if any
To verify arithmetical accuracy of books of A/c.
Verify whether is an adequate internal controlregarding acquisition, utilization and disposal ofassets.
Ensure all assets properly recorded.
Auditors duties regarding verification
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1. Existence
2. Possession
3. Legal ownership and obligation
4. Subject to charge or lien5. Complete record
6. Auditors report.
Verification of Investment
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Date of purchase, rate of purchase, nature of
investment, nature of transaction.
In case of substantial investment compare d rate
with quotations available (Stock exchange quot)
Verify amt paid towards purchase of investment
Trace amt in cheque book and bank statement
Verify capital-revenue expenditure
Obtain shecdule of investment for physical
inspection.
Inspect investment certificates
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In case immovable propertyshares,debentures in co-operative society verify thecost of shares should be included in d cost ofthe property.
Verify invest.should be shown accordancewith the recognised accounting policies andparties and relevent statutory
requirement(AS-13). Investment in partnership- shown separately.
Closing stock
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It is a major factor in determining the result of a company.
Verify existence of stock
Precise duty to ascertain value of stock correctly
Rely upon statements and report available
Expert knowledgemethod of verification and stock
control Should attend at stock taking for d purpose of observing
the clients procedure& assurity of reliable result.
Modern methods of costing, accounting ratios, budgetarycontrol.
Section 41(2) defines proper books of accounts to includestatements of annual stock taking and of all goodspurchased and sold.
Sales vouching
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Verify that the sale of each item of goodsrelates to the period under audit.
That the normally goods r dealt by d co.
Sale price correctly recorded
Amt. of invoice has been adjusted in an
appropriate account.
Sale has been authorized by a responsible
official.
Cu-off procedure while auditing in big
i ti
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organizations
It means procedure employed to ensure theseparation of transactions at the end of one yearform those in the commencement of the nextyear.
Usually problem of overlapping found ininventory accouting
Often goods r sold but passed after one year is
over or goods bought but comes after one year. The auditor examine last (Cutt-Off) documents at
d end of year.
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The auditor may examine a sample ofdocuments evidence the movement of stock
into and out of source, cut-off date.