A Study of Auditing And Audit of DNS Bank

CHAPTER NO. 1
INTRODUCTION OF AUDITING
1.1 : INTRODUCTION -AN OVERVIEW OF AUDITING
Economic decisions in every society must be based upon the information available at the time the
decision is made. For example, the decision of a bank to make a loan to a business is based upon
previous financial relationships with that business, the financial condition of the company as
reflected by its financial statements and other factors.
If decisions are to be consistent with the intention of the decision makers, the information used in
the decision process must be reliable. Unreliable information can cause inefficient use of resources

A Study of Auditing And Audit of DNS Bank

to the detriment of the society and to the decision makers themselves. In the lending decision
example, assume that the barfly makes the loan on the basis of misleading financial statements and
the borrower Company is ultimately unable to repay. As a result the bank has lost both the
principal and the interest. In addition, another company that could have used the funds effectively
was deprived of the money.
As society become more complex, there is an increased likelihood that unreliable information will
be provided to decision makers. There are several reasons for this: remoteness of information,
voluminous data and the existence of complex exchange transactions
As a means of overcoming the problem of unreliable information, the decision-maker must
develop a method of assuring him that the information is sufficiently reliable for these decisions.
In doing this he must weigh the cost of obtaining more reliable information against the expected
benefits.
A common way to obtain such reliable information is to have some type of verification (audit)
performed by independent persons. The audited information is then used in the decision making
process on the assumption that it is reasonably complete, accurate and unbiased.

1.2 : DEFINITION OF AUDITINGS

The term auditing has been defined by different authorities :
1.

Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of

business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so
as to give a true and fair view of the state of affairs of the business and that the profit and loss
account gives true and fair view of the profit/loss for the financial period, according to the best of
information and explanation given to him and as shown by the books; and if not, in what respect he
is not satisfied."

2.

Prof. L.R.Dicksee. "auditing is an examination of accounting records undertaken

A Study of Auditing And Audit of DNS Bank

with a view to establish whether they correctly and completely reflect the transactions
to which they relate.

3.

The book "an introduction to Indian Government accounts and audit" "issued by
the Comptroller and Auditor General of India, defines audit an instrument of
financial control. It acts as a safeguard on behalf of the proprietor (whether an
individual or group of persons) against extravagance, carelessness or fraud on the part
of the proprietor's agents or servants in the realization and utilisation of the money or
other assets and it ensures on the proprietor's behalf that the accounts maintained truly
represent facts and that the expenditure has been incurred with due regularity and
propriety. The agency employed for this purpose is called an auditor."

1.3 : ORIGIN AND EVOLUTION

The term audit is derived from the Latin term audire, which means to hear. In early days an
auditor used to listen to the accounts read over by an accountant in order to check them.

Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing.
Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances. The
original objective of auditing was to detect and prevent errors and frauds.

A Study of Auditing And Audit of DNS Bank

Auditing evolved and grew rapidly after the industrial revolution in the 18th century With
the growth of the joint stock companies the ownership and management became separate.
The shareholders who were the owners needed a report from an independent expert on the
accounts of the company managed by the board of directors who were the employees.

The objective of audit shifted and audit was expected to ascertain whether the accounts were
true and fair rather than detection of errors and frauds. In India the companies Act 1913
made audit of company accounts compulsory.

With the increase in the size of the companies and the volume of transactions the main
objective of audit shifted to ascertaining whether the accounts were true and fair rather than
true and correct. Hence the emphasis was not on arithmetical accuracy but on a fair
representation of the financial efforts.

The companies Act.1913 also prescribed for the first time the qualification of auditors. The
International Accounting Standards Committee and the Accounting Standard board of the
Institute of Chartered Accountants of India have developed standard accounting and auditing
practices to guide the. accountants and auditors in the day to day work.

1.4 : FEATURES OF AUDITING

1) Audit is a systematic and scientific examination of the books of accounts of a

business;

2) Audit is undertaken by an independent person or body of persons who are duly

qualified for the job.

3) Audit is a verification of the results shown by the profit and loss account and the state

A Study of Auditing And Audit of DNS Bank

of affairs as shown by the balance sheet.

4) Audit is a critical review of the system of accounting and internal control.

5) Audit is done with the help of vouchers, documents, information and explanations
received from the authorities.

6) The auditor has to satisfy himself with the authenticity of the financial statements and
report that they exhibit a true and fair view of the state of affairs of the concern.

7) The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting
the transactions and examine correspondence, minute books of share holders,
directors, Memorandum of Association and Articles of association etc., in order to
establish correctness of the books of accounts.

1.5 : OBJECTIVE OF AUDTING

There are two main objectives of auditing. The primary objective and the secondary or
incidental objective.

A. Primary objective as per Section 227 of the Companies Act 1956, the primary duty
(objective) of the auditor is to report to the owners whether the balance sheet gives a
true and fair view of the Companys state of affairs and the profit and loss A/c gives a
correct figure of profit of loss for the financial year.

A Study of Auditing And Audit of DNS Bank

B. Secondary objective it is also called the incidental objective as it is incidental to the
satisfaction of the main objective. The incidental objective of auditing are:

i) Detection and prevention of Frauds, and ii) Detection and prevention of Errors.

Detection of material frauds and errors as an incidental objective of independent financial

auditing flows from the main objective of determining whether or not the financial
statements give a true and fair view. As the Statement on auditing Practices issued by the
Institute of Chartered Accountants of India states, an auditor should bear in mind the
possibility of the existence of frauds or errors in the accounts under audit since they may
cause the financial position to be mis-stated.

Fraud refers to intentional misrepresentation of financial information with the intention to

deceive. Frauds can take place in the form of manipulation of accounts, misappropriation of
cash and misappropriation of goods. It is of great importance for the auditor to detect any
frauds, and prevent their recurrence. Errors refer to unintentional mistake in the financial
information arising on account of ignorance of accounting principles i.e. principle errors, or
error arising out of negligence of accounting staff i.e. Clerical errors.

1.6 : ADVANTAGES AND LIMITATIONS OF AUDIT

ADVANTAGES OF AUDTING
A. Businessmens Point of View :
1) Detection of errors and frauds
2) Loan from Bank

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3) Build Reputation
4) Proper Valuation of Assets
5) Government Acceptance
6) Suggestions for Improvement
7) Useful for Agency
B. Investor's Point of View :
1.

Protects Interest

2.

Moral Check

3.

Proper Valuation of Investments

4.

Good Security

C. Other Advantages :
1.

Evaluate financial status

2.

Usting of shares

3.

Settlements of Claims

4.

Evidence in Court

5.

Settlement of Accounts

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6.

Facilitates Taxation

LIMITATIONS OF AUDITING
1. Non-detection of errors/frauds:- Auditor may not be able to detect certain frauds which
are committed with malafide intentions.

2. Dependence on explanation by others:- Auditor has to depend on the explanation and

information given by the responsible officers of the company. Audit report is affected
adversely if the explanation and information prove to be false.

3. Dependence on opinions of others:- Auditor has to rely on the views or opinions given
by different experts viz Lawyers, Solicitors, Engineers, Architects etc. he can not be an
expert in all the fields.

4. Conflict with others: - Auditor may have differences of opinion with the accountants,
management, engineers etc. In such a case personal judgement plays an important role. It
differs from person to person.

5. Effect of inflation : - Financial statements may not disclose true picture even after audit
due to inflationary trends.

6. Corrupt practices to influence the auditors :- The management may use corrupt
practices to influence the auditors and get a favourable report about the state of affairs of the
organisation.
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7. No assurance :- Auditor cannot give any assurance about future profitability and
prospects of the company.

8. Inherent limitations of the financial statements :- Financial statements do not reflect

current values of the assets and liabilities. Many items are based on personal judgement of
the owners. Certain non-monetary facts can not be measured. Audited statements due to
these limitations can not exhibit true position.

9. Detailed checking not possible :- Auditor cannot check each and every transaction. He
may be required to do test checking.

1.7 : QUALITIES OF AN AUDITOR

So far we have discussed the question of formal qualifications of an auditor. But it is not
enough to realise what an auditor should be. He is concerned with the reporting on financial
matters of business and other institutions. Financial matters inherently are to be set with the
problems of human fallibility; errors and frauds are frequent. The qualities required,
according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry,
judgment, patience, clear headedness and reliability. In short, all those personal qualities that
goes to make a good businessman contribute to the making of a good auditor. In addition, he
must have the shine of culture for attaining a great height. He must have the highest degree
of integrity backed by adequate independence. In fact, AAS-1 mentions integrity, objectivity

A Study of Auditing And Audit of DNS Bank

and independence as one of the basic principles.

He must have a thorough knowledge of the general principles of law which govern matters
with which he is likely to be in intimate contact. The Companies Act, 1956 and the
Partnership Act, 1932 need special mention but mercantile law, specially the law relating to
contracts, is no less important.

Needless to say, where undertakings are governed by a special statute, its knowledge will be
imperative; in addition, a sound knowledge of the law and practice of taxation is
unavoidable.

He must pursue an intensive programme of theoretical education in subjects like financial

and management accounting, general management, business and corporate laws, computers
and information systems, taxation, economics, etc. Both practical training and theoretical
education are equally necessary for the development of professional competence of an
auditor for undertaking any kind of audit assignment.

The auditor should be equipped not only with a sufficient knowledge of the way in which
business generally is conducted but also with an understanding of the special features
peculiar to a particular business whose accounts are under audit. AAS-8 on Audit Planning
emphasises that an auditor should have adequate knowledge of the clients business. The
auditor, who holds a position of trust, must have the basic human qualities apart from the
technical requirement of professional training and education.

He is called upon constantly to critically review financial statements and it is obviously

useless for him to attempt that task unless his own knowledge is that of an expert. An
exhaustive knowledge of accounting in all its branches is the sine qua non of the practice of
auditing. He must know thoroughly all accounting principles and techniques.

Auditing is a profession calling for wide variety of knowledge to which no one has yet set a
limit; the most useful part of the knowledge is probably that which cannot be learnt from

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books because its acquisition depends on the alertness of the mind in applying to ever
varying circumstances, the fruits of his own observation and reflection; only he who is
endowed with common sense in adequate measure can achieve it.

Lord Justice Lindley in the course of the judgment in the famous London & General Bank
case had succinctly summed up the overall view of what an auditor should be as regards the
personal qualities. He said, an auditor must be honest that is, he must not certify what he
does not believe to be true and must take reasonable care and skill before he believes that
what he certifies is true.

1.8 : IMPORNTANT CONCEPTS IN AUDTING

Auditing: Auditing is a systematic and scientific examination of the books of accounts and
records of business to enable the auditor to satisfy himself that the profit and loss account
and the balance sheet are properly drawn up so as to exhibit a true and fair view of the
financial state of affairs of the business and profit or loss for the financial period.

Continuous audit: An audit which involves a detailed and exhaustive examination of the
books of accounts at regular intervals throughout the year along with the accounting work.

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Errors: Mistakes committed innocently and unknowingly while making entries in the books
of accounts.

Frauds: Fictitious entries made in the books of accounts with certain motives.

Interim audit: An audit which is conducted for a part of the accounting period for some
specific purpose.

Investigation: Examination of accounts for special purpose.

Qualified auditor: A person who is a Chartered Accountant within the meaning of the
Chartered Accountants Act,1949.

Statutory audit: An audit undertaken under any specific statute or Act.

True and fair view: A phrase which means that the financial statements must not contain
anything which is untrue, unfair, unlawful, immoral and unethical i.e. the financial
statements must not contain errors and fraud.

1.9 : BASIC PRINCIPLES OF AUDIT

AAS-1 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
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appear to be free of any interest which might be regarded. Whatever it's 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 legal or professional duty to disclose. It is remarked that
an auditor should keep his ears and eyes open but his mouth shut.

3. Skill and competence: The audit should be performed and the report prepared with due
professional care by persons who have adequate training, experience and competence. This
can be 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.

4. Work performed by others: When the auditor delegates work to assistant* or uses work
performed by other auditors or experts, he will continue to be responsible for forming and
expressing his opinion on the financial information.

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 client's business.
They should be further developed and revised, if required, during the course of audit.

7. Audit evidence: The auditor should obtain sufficient appropriate audit evidence through
the performance of compliance and substantive test procedure. It will enable him to draw
reasonable conclusions there from on which he has to base his opinion on the financial
information.

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8. Accounting system & internal control: The auditor should gain an understanding of the
accounting system and related internal controls. He 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.

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.

The audit report should contain a written expression of opinion of the financial information.
It should comply with the legal requirements. In case of a qualified opinion, adverse opinion
or disclaimer of opinion is given or reservation on any matter is to be made reasons thereof.

1.10 : AUDIT TYPES

MEANING: Audit is not legally obligatory for all types of business organizations or
institutions. On this basis audits may be of two broad categories i.e., audit required under
law and voluntary audits.

(i) Audit required under law : The organizations which require audit under law are the
following:

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(a) companies governed by the Companies Act, 1956;

(b) banking companies governed by the Banking Regulation Act, 1949;

(c) electricity supply companies governed by the Electricity supply Act, 1948;
(d) co-operative societies registered under the co-operative Societies Act, 1912;
(e) public and charitable trusts registered under various Religious and Endowment Acts;
(f) corporations set up under an Act of parliament or State Legislature such as the Life
Insurance Corporation of India.

(g) Specified entities under various sections of the Income-tax Act, 1961.
(ii) In the voluntary category are the audits of the accounts of proprietary entities,
partnership firms, Hindu undivided families, etc. in respect of such accounts, there is no
basic legal requirement of audit. Many of such enterprises as a matter of internal rules
require audit. Some may be required to get their accounts audited on the directives of
Government for various purpose like sanction of grants, loans, etc. But the important motive
for getting accounts audited lies in the advantages that follow from an independent
professional audit. This is perhaps the reason why large numbers of proprietary and
partnership business get their accounts audited.

INTERIM AUDIT:

An audit that is taken up between two annual audits is called an Interim Audit. A specific
date, as per the clients requirement is taken into account, e.g. 30th September, 31st
December, etc. a trial balance is drawn and verified with a view to prepare financial
statement. Financial statement are prepared and authenticated for the interim audit period.
Assets and liabilities are verified for interim balance sheet purposes. Independence is
considered less independent than the statutory Auditor; generally an employee of the

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enterprise will be the internal auditor. In the interim audit no format is prescribed. It depends
on the nature of work, coverage and audit observations.

CONTINUOUS AUDIT:

A continuous audit is one in which the auditors staff is engaged continuously in checking
the accounts of the client, during the whole year round or when for the purpose, the staff
attends at quite frequent intervals say weekly basis during the financial period.

A continuous audit is preferred for the following reasons:

i. It makes it possible for the management to exercise a stricter control over the accounts in
as much as one is able to check sooner the causes of any errors of frauds uncovered by such
an audit.

ii. The frequent attendance by the staff deters persons so inclined, from committing a fraud.

iii. The accounting staff of the client is motivated to keep the books of account up-to-day.

CHAPTER NO. 2

2.1 : LITERTURE REVIEW

This chapter reviews a range of literature and concepts relevant to the study. The literature
review is centered around the core aspects of bank auditing, these include the functions of
bank Audit, objectives of bank audit, the role of auditors while doing audit, Means of
achieving control over system, the control environment, Board of Directors or Audit

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Committee, Authority and Responsibility, Audit Committee Financial Expert, Organisational
structure, and the challenges of auditing. The core components above, guide the
establishment and effective functioning of in auditing departments and the Audit department
of DNS BANK for that matter, and therefore to adequately treat the topic of auditing and the
case of the audit department of the bank, it is important that we understand these important
aspects and the extent of work that have been done on them.

2.2 : OBJECTIVES OF THE STUDY

The main objectives of the study are as follows:

1.

To critically evaluate the audit of bank and their compliance with critical elements of
external audit operations.

2.

Identify short-comings or weakness in the Auditing practices of the Auditing Departments

if any.

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3.

Make recommendations to improve on weaknesses and short-comings of the bank auditing

departments.

4.

To stimulate further research into other areas of bank to improve their strength.

5.

To understand the audit procedure of bank.

2.3 : RESEARCH METHODOLOGY

This chapter discussed how data was gathered, analysed, and interpreted to explain the
relationships between the various variables in relation to the objectives of the research paper.
The researcher used a case study to explain the relationship between the variables: the case
of the bank audit. The researcher employed both primary and secondary data, qualitative and
quantitative research methods were also used to examine the bank audit. A number of data
collection methods were combined to verify the reliability and accuracy of the data as study
used a combination of data collection tools; a Survey, Questionnaire, Relevant Corporate
Documents and Observation.
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Sources of Data :

The sources of data for the study were mainly primary and secondary. The primary sources
employed questionnaire, and observation to record data. The Secondary sources include,
company archives, auditing reports, bank website and bank auditing framework or regulation
of bank.

2.4 : LIMITATIONS OF THE STUDY

The research was limited to DNS BANK. The researcher was constrained by time and
financial resources and could not therefore apply other methods of research aside
Questionnaire, Relevant Corporate Documents and Observation.

As with all surveys, a further limitation is that the results rely on the self-reports of
respondents and are therefore open to misinterpretation of the questions as well as to
subjectivity in the responses. Questionnaires require careful design, for example, to ensure
that key issues are included, whilst avoiding ambiguous or confusing questions. Bias may

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arise from poor sampling or if respondents feel that they should give a correct reply rather
than their real view. Poor response may also lead to problems of non-response bias or
inadequate numbers for valid statistical analysis.

CHAPTER NO. 3

3.1 : PROFILE DOMBIVLI SAHKARI BANK LID.

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Way back in 60s Few enthusiastic persons gathered together with a common goal to make
available the banking facility to the commonest of the common man. They had an aim that
any person in genuine financial difficulty or in need of finance to fulfill his dreams whether
personal or professional should have an institutional support and he should not be a prey of
traditional moneylenders.

The dream of these persons came into existence by bearing a name i.e. Dombivli Nagari
Sahakari Bank Ltd. on 6th September, 1970. Since then the bank has grown by leaps and
bound. With a modest beginning in a small 500 sq.ft. of main branch cum central office,
having deposit base of 7.04 lacs and total advances of 5.75 lacs in June 1971, it has now
reached a business mix of Rs. 6414 crores contributed by deposit of Rs.3688 crores and Rs.
2726 crores of advances with 47 branches spread across 12 districts of Maharashtra.
Milestones Scheduled status in 1996. Rs. 100 crores deposit in financial year 1994 to 1995.
Rs. 500 crores deposit in financial year 2002 to 2003. Crossed Thane Dist. Border by
opening Fort and Pune Branches in 2002-03. Core Banking Services From Year 2006.
Merging of Shivneri Sahakari Bank With DNS Banks On 13 October 2007 and Suvarana
Mangal Mahila Sahakari Bank on 3rd January 2010. Crossed the milestones Rs. 4000 crores
Business Mix in March 2013. Crossed the milestones Rs. 5000 crores Business Mix in
March 2014. Crossed the milestones Rs. 6000 crores Business Mix in March 2015. Key

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Financial Indicators Since inception Audit class A. Maximum permissible dividend paid
every year. Net NPA 1.39% CRAR at 13.08% USP Business philosophy

We aim at: Evolving ourselves into a strong and sound competitive financial system,
providing integrated services to customers from all segments, leverage on technology and
human resources, adopt best accounting and ethical practices and fulfill corporate and social
responsibilities towards all stakeholders, visualize aspiring benchmarks / goals and attain
them efficiently and effectively. Technology Consumer banking brings a welcome change in
a common person's life. It is not only the name for giving services to elite and privileged
class of the society but is also to facilitate the common people, which normally represent a
big proportion of the society. It is not possible for Banks to offer better services to this big
proportion of the society without the help of Technology. Mobile & SMS Banking DNS
Bank Ltd. in an attempt to fulfill the ever rising needs of banks customers has launched SMS
banking facility.

SMS Banking brings Banking to your fingertips. With SMS, you can perform a wide range
of query based transactions from your mobile phone. Also get alerts for transaction in
account, Deposit Maturity and EMI Due's. DNS is 1st Co-op. Bank to launch Mobile
Banking Services in India. The Bank's customers can send and receive funds on any day and
any time as per their convenience by using their mobile phones. Various bill payment,
Mobile and DTH Recharge facility is available in mobile banking. ATM Shared Network

DNS Bank is amongst the 1st five Co-op. Banks to join NFS ATM Shared Network. The
customers now have access to 1,80,000 + ATMs across most of the bank's operating in India
and bank owns 42 ATM centers. Debit Card Our DNS Bank offers RuPay Debit Card and the
Card would be accepted on over one lakh ATMs of NFS Members Banks in the Country and
would be accepted on Point of Sale (POS) and Internet. The Bank also able to provide
customers anytime, anywhere, payment systems services which are simple, easy to use, safe,
secure, fast and also cost effective version with introduction of Rupay Debit Card. RTGS &
NEFT Since 2004, when RBI introduced RTGS, DNS is providing this electronic funds
transfer facility. Using which customer can transfer funds to any other person's bank account
within few hours in India. The NEFT facility which is similar to RTGS is also provided by

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the bank from the year 2007.

E-Lobby The bank has setup E-Lobby at 11 Branches. The Lobby has facilities for
customers to deposit cheques, cash, print passbook, withdraw cash, 24 hours and 365 days.
Any branch's customer can access the E-Lobby for their requirements. Social Commitment
While carrying out conventional banking bank has not lost sight of its Social responsibilities.
An amount of over Rs 28 Lacs has been granted as subsidy to 101 Social, and Educational
institutes working in rural areas. Bank also helps students in remote areas of Talasari,
Shahapur, Nashik, Karjat and Khopoli Blocks by providing collection of 'expected questions'
and 'ideal answer sheets' on all subjects.

The Bank has continued its efforts in micro financing through self help groups. In Shahapur
alone bank had disbursed a loan of over Rs 1.5 crores to such SHGs. The purpose includes
Poultry, Dairy, goat rearing, purchase of Fertilizers etc. I am happy to report that the
repayment has been satisfactory. Bank receives help in this behalf from Utkarsh
Navinyapurna Shakari Sanstha promoted by Sahakar Bharati. Sahakar Bharati : is working in
Co-operative sector on national level. Shri. Vasantrao Deodhar of this organization was
awarded 'SAHAKAR MITRA'. Mr. Sanjeev Vibhute actively working in field of child
education, eradication of superstition from society, helping people to overcome vices, was
awarded 'SAMAJ MITRA'. In addition to above bank also helps Sports and cultural
activities. Accordingly the eight sport persons who achieved medals in Commonwealth
Games were honored by the bank. Ms. Suma

Shirur (Panvel), Madhurika Patkar and Mamata Prabhu (Thane), Anisa Saiyad (Pune), Rachi
Sarnobat and Tejasvini Sawant (Kolhapur). Kavita Raut (Nasik) and Narsing Yadav
(Mumbai) were honored by the bank duly visiting their homes. The sport persons
appreciated the initiatives taken the bank. Green Project Our Bank is thinking positively to
participate in social aforestation project. This project will be implemented in the area of
Mamnoli, Murbad which is about 100 kms from Mumbai with the cooperation of Paryavaran
Dakshata Manch. Financial Inclusion The Bank has continued its efforts in micro financing
through self help groups. In Shahapur alone bank had disbursed a loan of over Rs 1.5 crores
to such SHGs. The purpose includes Poultry, Dairy, goat rearing, purchase of Fertilizers etc.

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BOARD OF DIRECTORS

Chairman C.A. Mr. Uday Madhusudan Karve (C.A., L.L.B. (General))

Vice Chairperson Mrs. Nandini Shashikant Kulkarni (B.Com., L.L.B., C.A.I.I.B.)
Director C.A. Mr. Jayant Balkrishna Pitre (B.Com., F.C.A. (D.I.S.A.))

CHAPTER NO. 4

4.1 : APPROACH TO BANK AUDIT

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1. KNOW THE BRANCH

2. UNDERSTAND BANKING SOFTWARE

3. COMPONENTS OF FINANCIAL STATEMENTS

4. AUDIT PROCEDURES

5. CONCLUSIONS

1. KNOW THE BRANCH

Obtain the following reports to assess the branch performance :

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PreviousYearsAuditorsReport/LFAR;
Concurrent Audit Reports for the audit period;
Risk Based Internal Audit Report;
Zonal Inspection Reports, if any;
Exception Report;
Latest Revenue Audit Report;
IT System Audit Report;
RBI Inspection Report.

Understand the bank portfolio :

Types of deposits and advances
Whether branch is deposit or advance rich
Types of customers and borrowers

Must go through :

RBI Master Circulars

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Banks Internal Circulars and Guidelines
Relevant Closing Circulars
Other relevant regulations under various statutes

Reporting Requirements :
List the Returns and Certificates to be signed
Items to be reported in LFAR
Audit Report Format

2. UNDERSTAND BANKING SOFTWARE

Understand the structure of accounting software whether following are in different
modules or same

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Recording of day-to-day transactions
Financial Statements
Various closing returns and certificates at branch level
Level of Automation

Centralized or Decentralized accounting

Exception Reports

Level of access rights at branch leveleditable and uneditable fields

System of downgrading and upgrading of accounts

Interest Calculations

Generation of reports relating to advance classification and Capital Adequacy calculation

etc..

Illustrative structure of Banking Software

Banking
Software
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CBS (Records
day to day
software)

Like Balance
Sheet and
Profit & Loss

Financial
Statements
generating
software

All other non

advances
related
returns

Assets
classification
&Provisioning
software

Other
Returns &
Certificates

All advances
related Basel and
Capital Adequacy
Returns

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A Study of Auditing And Audit of DNS Bank

CHAPTER NO. 4

4.1 : STURCTURE OF STAR ASSURANCE AUDIT DEPARTMENT

BOARD AUDIT COMMITEE

HEAD OF AUDIT
DEPARTMENT
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FINANCIAL
AUDIT

SYSTEMS
AUDIT

4.2 : FUNCTIONS OF INTERNAL AUDIT

Organizations have encountered rapid changes in economic complexity, expanded regulatory

requirements, and technological advancements in recent years. These changes have given the
internal audit function (IAF) a set of expanded opportunities to support management,
provide services to other organizational functions, and generate direct reporting links to the
audit committee.(Hass et al, 2006)

According to Cai Chun, (1997) the function of internal audit is a vital and controversial
problem in auditing theory and practice worldwide. There has been a widespread view in the
western auditing circles that internal audit is an independent appraisal function.

In June 1999, the Institute of Internal Auditors (IIA) officially adopted a new definition of
the internal auditing function. The new definition was developed by the Guidance Task
Force and defines the internal audit function as:

An independent, objective assurance and consulting activity designed to add value and
improve an organisations operations. It helps an organisation accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes (IIA, 2001)

4.3 : ROLE OF INTERNAL AUDITOR

To look at the current role of internal audit, it is worth looking at the definitions of internal

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audit by the audit practice board and the institute of internal auditors.

According to the Audit Practice Board, internal audit is an independent appraisal function
established by management for the review of the internal control system as a service to the
organization. It objectively examines, evaluates and reports on the adequacy on internal
control as a contribution to the proper economic, efficient and effective use of resources.

The IIA came up with a new definition of internal auditing in 1999, changing the focus of
internal audit towards a more risk based, consultancy type activity and recognizing that
internal audit is not always within the organization, but can be an outsource activity. The
following are the element of the institute definitions.

- Independence, objectivity assurance, consulting activity.

- Designed to add value and improve organization operations.
- Helps an organization accomplish its objectives.

The main role of internal audit according to Turnbull report published in 1999 is normally to
evaluate risk and monitor the effectiveness of the system of internal control. The Report
identifies the following criteria as the basis of an effective Internal Audit

Assurance that the management processes are adequate to identify and monitor
significant risks

Confirmation of the effective operation of the established internal control systems

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Credible processes for feedback on risks management and assurance, and

Objective confirmation that the Board receives the right quality of assurance and
information from management and this information is reliable.

4.4 : ELEMENTS OF INTERNAL AUDIT

According to the IIA guidelines there are certain elements, which are critical to the setting up
and operation of internal audit departments. In chronological manner these elements could
be listed as follows:

Where to be placed ?

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What to do ?
How much the department has to do ?
When the things have to be done ?
Who have to do things?
How to review ?
The where element :
A study conducted by Liu et al. (1997) show that where the department is to be placed in
the chain of command or the hierarchical system is a very significant element. This should
be the first major question that needs to be addressed in setting up an internal audit
department.(Liu et al. (1997). The Research shown that, the internal audit department
provides service to the organization and therefore the implication is that its effectiveness
will rest on the position it is given in the organization both in actual and perceived cases.
The research revealed that the traditional view of auditors as being part of the finance or
accounting function is now too narrow to be accepted as a definition. This is implied from
the fact that, the objectives of internal audits are being increased to cover social,
management, operational and ad hoc audits.

The department should, therefore, enjoy a high profile from the start. It should be placed
high in the organization so that the internal audit staff can audit virtually any functional
level for compliance with strategic objectives and liaise with the strategic planning
department in relation to possible changes in objectives. The department has to be linked
to the top management, directors and the chief executive.

The What Element :

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It is essential that all levels of staff within the organization know about the functions of the
internal audit department and are aware of the terms of reference under which the
department has been authorized to operate.(Liu et al. (1997). It is thus important that the
audit committee on behalf of the board of directors should draw up an audit charter, detailing
the work of the department.

The practice advisories (PA) issued by the Institute of Internal Auditors (IIA) require internal
auditors to share observations and recommendations with those charged with oversight
responsibilities, typically, the board of directors. Also a charter, internal audit plans, and
activity reports are discussed in the advisories.

The PAs specify that every internal audit department should have a charter. The document
validates the units position in the entity, authorizes internal audit access to records, and
defines the scope of its work.

The charter should be approved by senior management and accepted by the board.
Periodically, the Chief Audit Executive (CAE) should assess whether the charter is still
adequate and communicate the assessment to senior management and the board. The CAE
should also submit to senior management and the board a summary of plans of work for the
upcoming year.

The summary should be approved by senior management and tendered to the board for
informational purposes. Such information helps the board ascertain if the work of internal
auditing supports the objectives and plans of the entity.

After completing the work, the internal audit department should present reports of its
activities to senior management and the board. Significant engagement observations and
recommendations are included in the report and this must be done at least annually. Below
are those items which the PAs suggest might constitute significant engagement observations
and therefore, should be communicated to the board.

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Irregularities
Illegal acts
Errors
Waste
Inefficiencies
Ineffectiveness
Conflicts of interest
Control weaknesses
While it is the internal auditors responsibility to report significant engagement observations,
it is managements duty to resolve those issues. Management may decide to act by
implementing recommendations made by the internal auditors or by making other changes.
Alternatively, management may decide not to take action, thereby accepting whatever risk
the internal auditors have identified in the current situation. Regardless of which course
management chooses, the internal auditor is then responsible for informing the board as to
managements actions or decisions.

The charter should also contain:

A. An outline of the assurance which the board expects to receive. These may include
assurance that there is surveillance of internal controls throughout the organization. Also the
assets are safeguarded and the performance reporting can be accepted with confidence.

B. The authority given to internal audit to examine all activities throughout the organization
for the purpose of evaluating internal control. This should specify responsibilities to reassure

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accountable managers of the adequacy and efficiency of their internal controls, identifying
any unsound commercial procedures to management and offering recommendations for
improving performance and preventing future shortcomings. The charter should make clear
to management at all levels that internal audit is independent from the operations they audit
and that, they are empowered to make changes to systems, methods or staffing.

C.The various types of reviews or audits to be undertaken for e.g. efficiency reviews,
environmental audits, and operational audits.

D. The procedures for issuing, and responding to reports from internal audit. The audit report
may be dealt with as confidential documents to be delivered to and responded to by the level
of management who can take effective action on any recommendations made.

The How Element- Audit Scope :

The internal audit function is responsible for evaluating and commenting on the
effectiveness of risk management, control and corporate governance processes. However,
management remains responsible for identifying and management risk, reporting of risk and
ensuring that the right policies, procedures and practices are in place.The amount of work
involved in giving assurances under the terms of the charter will need to be estimated. To
achieve this, it is necessary to undertake a review of all systems used within the
organization. It will require a prior knowledge of business organization and methodology. To
make the assessment worthwhile, it is necessary to carry out an overall review of the whole
organization. Each system has to be recorded and evaluated using common terminology
wherever possible so that the relevant audit priorities of one system against another can be
ascertained. Having drawn a map in this manner then, in order to provide some form of
ranking, it is recommended that risk analysis is used whereby various elements of each
system can be valued and each system can be compared by total value with all other systems.
This is one method by which priorities can be assessed and a full picture of the risk element
to which an organization is exposed can be drawn.

The Who Element

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Having established the map, the risk analysis and the resource allocation, the audit
committee will need to decide on who will carry out the audit plan, the size of the internal
audit department and the professional expertise required. The responsibilities of the persons
to be appointed include:

a. They should foster constructive working relationships with accountable management

and their staff and with the external auditors.

b. They should consider the planning, controlling and recording of their work as important
elements of the job so that their work can be easily reviewed.

c. They must exercise due care in the collection and interpretation of their findings and
recommendations.

d. They must adopt a professional attitude and ethical standards at all times. The chief
internal auditor should be responsible for details of the duties of staff but all staff should
be made to apply a sound understanding of internal audit techniques to a through
understanding of the organization and its systems of internal control involving all
activities. To maximize the benefit to the organization, staff should agree with accountable
management the program and timing of audits and identify, assess and rank the risk
involved in all systems. Of paramount importance is the internal auditors ability to
evaluate the adequacy and effectiveness of the system of internal control, to carry out all
necessary tests and report their findings promptly and objectively.

If an organization is able to adjust its audit plan, thereby reducing the levels of audit work, a
smaller staff may be a reasonable strategy. However, with the trend being towards increased
fraud prevention and detection, increased audit activities and increased reliance on internal
auditors, a reduced, workload may not be realistic. In addition, if staff are not competent no
matter how reduced the audit work is, more staff or time will be required.

The internal auditor should cultivate a close working relationship with top management.

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This will call for developing a management perspective, understanding how management
has developed its long-term strategies and how it hopes to implement them. Staff training
should alert the audit staff to improvements that could be made in specific areas such as sales
and customer communication process. Finding new and improved motivational strategies
that encourage increase productivity from the staff should be a high priority. One of the keys
to improving the performance of the internal audit is to identify items that have the greatest
potential to operate as positive. These re-enforcers include: feedback, self-fulfillment, selfesteem and creativity and participation in goal setting.It will be a good idea to make the
management and staff aware of the potential benefits that a successful internal audit
department could bring.

4.5 : Board of Directors or Audit Committee

The control environment of an organization is significantly influenced by the effectiveness

of its board of directors or the audit committee. It was more than a decade ago when an
increasing number of stakeholders began to suggest that instances of fraudulent financial
reporting could be decreased by improving the effectiveness of audit committees. A common
thread that runs through suggestions from these different sources is that audit committees
need to assume greater responsibility with respect to corporate governance by overseeing
financial reporting and internal control matters. Factors that bear on the effectiveness of the
board or audit committee include the extent of its independence from management, the
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experience and stature of its members, the extent to which it raises and pursues difficult
questions with management, and its interaction with the internal and external auditors.

Beginning with the 1999 Blue Ribbon Committee on Improving the Effectiveness of
Corporate Audit Committees (BRC), more formalized approaches were taken to develop and
publish explicit recommendations that audit committees could address to improve their
effectiveness. The audit committee of the board of directors should be composed of
independent directors who are not officers or employees of the organization and do not have
other relationships that impair independence. Corporate governance codes in most countries
typically require that internal auditors report functionally to the audit committee of their
companys board of directors. This enables the audit committee to be effective at overseeing
the quality of the organizations financial reports, and at acting as a deterrent to management
override of controls and to management fraud. The audit committee must establish
procedures for receiving, retaining and treating complaints about accounting, internal
control, or auditing matters and for the confidential, anonymous submission by employees of
their concerns about questionable accounting or auditing matters. The audit committee must
have authority to engage independent counsel and other advisors as the committee
determines necessary to carry out its duties.

The company must provide appropriate funding, as determined by the audit committee, for
the compensation of

(i) the audit work and any related work of the companys independent auditor
(ii) any other audit, review or attest services provided to the company by a public accounting
firm and

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(iii) any advisors engaged by the audit committee. The Act requires of every reporting
company that the audit committee approve all audit services. Additionally, the audit
committee must approve all permitted non-audit services to be provided by the auditor or its
associated person before the services are provided.

CHAPTER NO. 5

5.1 : CONCLUSION

This chapter discusses the conclusions and recommendations of the study which was
conducted on the compliance or non-compliance of organisations with the requirements of
the Institute of Internal Auditors. A case study of Star Assurance Company Ltd.

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My research revealed that Star Assurance Company Limited has an internal audit
department, which could be said to be auditing its activities in accordance with the definition
as specified by the I.I.A. It was observed that the Internal Audit department assisted
management in the discharge of their responsibilities by furnishing them with analysis,
recommendations and pertinent comments concerning activities of the company, e.g. the
Internal Audit department was involved in assessment and review of the activities of all
branches and departments.

The study can conclude on the following issues discussed as follows:

A. Identify the functions and role of the Internal Audit Department.

It was observed that the company was to a large extent complying with the functions and
role as outlined by the IIA.They assisted management in the effective discharge of their
responsibilities by furnishing them analyses, appraisals, recommendations.

B. Identify the ethical guidelines of the internal audit department.

It can be concluded that the organisation satisfies the ethical guidelines of organizational
status, objectivity and independence

C. Identify the control environment at Star Assurance Company Ltd

It was observed that the control environment was adequate for the operations of the
company. There were clear guidelines on integrity and ethical issues. There were also
human resource policies in place.

D. Identify the challenges faced by the internal audit department.

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It was observed that the major challenge of the department was the small number of staff.

5.2 : RECOMMENDATION

It is also recommended that, the internal auditor should submit to senior management and
the board a summary of the plan of work for the upcoming year. The summary should be
approved by senior management and tendered to the board for nformational purposes.
Such information helps the board ascertain if the work of internal auditors supports the
objectives and plans of the entity

It was observed that, the internal auditor presents reports of its activities to senior
management which should be continued. Management has a duty to resolve issues raised.
Even though the company is not listed but, the company has puts in place an audit
committee. This ensured that corporate governance principles were adhered to.

5.3 : BIBLIOGRAPHY

Reference Books : 1. MCOM PART II - AUDITING.

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5.4 : WEBLIOGRAPHY

Websites :

1. www.starassurance.com

2. www.investopedia.com

3. www.shodganga.com

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