Nagindas

Khandwala
College
Presented To :-
Poonam Popat Maam
Contents
Approach
Steps in banking audit
Provisions of relating to accounts
Provisions of relating to audit
Salient features of audit of banks
Internal Control evaluation
Long-Form Audit Reports
Provisions of NPA
Contingent liabilities and Bills for collection


APPROACH
A bank audit is sometimes described as balance sheet
audit, systems audit, or audit of advances. The audit
approach is as follows :
Bank audit is a time frame program.
The aim of the auditors is to express opinion or true
and fair view of balance sheet and profit and loss
account.
As the banking transactions are huge in volume the
auditor has to apply test checks.
The auditor gives his opinion on the balance sheet
his attention to be more towards loans and
advances.

Steps
Evaluation of internal control system
Checking of loans and advances
Checking of other items of assets
Checking of liabilities
Scrutinising
Making of audit report
Provisions relating to Accounts
Banks have to prepare a balance sheet and a P&L
a/c as on 31
st
March every year.
The financial statements of banks are to be signed
by the manager and by at least 3 directors.
In case of banking companies the provisions of the
companies act 1956 relating to the financial
statement is also applicable to the extent they are
not inconsistent with the requirements of the Banking
Regulation Act 1949
Provisions relating to Audit

Auditors Report
Whether the balance sheet is a full and fair
balance sheet and it shows the correct state of
affairs of the bank.
Whether satisfactory information, explanation and
transactions are within the powers of the bank or
not.
Whether the returns received from branches are
found to the adequate or not.
Whether profit / loss account gives true and fair
view of profit or loss.
Any other matter which he considers should be
brought to the notice of the shareholders of the
company.
Salient features of enacting
banks
A. Restrictions on Business:
Under Section 6(1) The banks are allowed to do
the followings:
Borrowing and lending of money
Negotiable instrument.
Letter of Credit and Travellers Cheque.
Bullions and foreign exchange
Underwriting
Safe Deposit Vault


B. Capital Requirements
Section 12 specifies that the subscribe capital of the
banks should not be less than 50% of authorized
capital.
Paid up capital not less than 50% of subscribed
capital.
Banks are required to a specific capital adequacy ratio
: Total capital
Risk adjusted Assets
Minimum capital required to open a bank is
Rs.500crore.
C. Reserves Funds
Every banking company must transfer at least 20%
of its net profit to a fund called Reserves Fund.
The reserves are kept untouched.
Cash reserves ratio and statutory ratio
CRR 4%
SLR 22.5% of its time and demand liabilities.

D. Restrictions on Investment, loans and advances:
Cannot hold share whether as pledged, mortgage of
other companies exceeding 30% of its paid up capital
and reserves OR
30% of capital of other companies whichever is
lower.
Cannot advance loans on the security of its own
shares.
Internal Control Evaluation
The auditor should study and evaluate the internal
control system relating to advances.
Evaluating the credit worthiness of the prospective
borrowers.
Are necessary documents executed by the parties
before advances are made?
Are sufficient margins taken from the borrowers?
Are all securities in the nature of the shares,
debentures, etc. kept in joint custody of two
responsible officer?
Are increases or decreases in the quantity of the
security or its value entered properly in the Drawing
Power Book.


Long-Form Audit Reports
The long-form audit report highlights certain important
aspects of the working of a bank and its branches.
Considering the differences in the nature of operations
carried out at the head office/regional or zonal offices and
those carried out at the branches, two separate formats of
long-form audit reports have been designed by RBI .
One format ( which is descriptive in nature ) is to be dealt
with by statutory central auditors and auditors of regional or
zonal or other controlling offices of banks.
And the other format ( which is in questionnaire format ) is
applicable to audit of branches.
The statutory central auditors will consider the long-form
audit report submitted by auditors of branches.

General considerations:

The auditor should submit the LFAR within the stipulated
time limit.
Where no time is specified, LFAR should be sent along
with the main audit report.
LFAR to be submitted by the statutory central auditor
should be addressed to the Chairman of the bank
concerned and a copy thereof should be sent to RBI.
LFAR to be submitted by the branch auditor should be
addressed to the Chairman of the bank and a copy of the
same should be sent to the statutory central auditor

The main report should be a self-contained
document.

LFAR cannot be a substitute for the main audit
report ; the latter should contain all significant
matter even if they have been covered in detail in
LFAR.

In his LFAR, the statutory central auditor should
indicate the number of audited branches from
which LFARs have been received.

LFAR in case of Banks
Internal control in the loans and advances
department of the bank.
Evaluation in the control system pertaining to
sanction, disbursement, security, documents,
follow up, etc.
The auditor should ensure that the advances
are accurately measured and classified into :
Facility wise
Sector wise
Security wise
Performing and Non-performing assets
wise.
If the loans and advances are secured or
guaranteed by government then the security
should be available and accessible.
The auditor should ensure that adequate
provisions for substandard, doubtful and
loss assets are made properly in the profit
and loss as per RBI guidelines.
Auditor must make review of all major loans
and advances.
Auditor must physically inspect all the major
securities which are inform of jewelry,
pledged with the bank.
The auditor should ensure that all the
disclosure requirement related to loans and
advances is properly and fairly done in
balance sheet.

Contingent Liabilities and Bills for
collection
The auditor may pay special attention to the
following.
Verify the outstanding forward exchange contracts
with the relevant register and with the brokers
advice notes.
Examine the register of guarantees issued and
whether the guarantee liability has been marked
off in the register.
Verify the securities held as margin.
If a claim has arisen, consider whether a provision
is required.

Verify balance of letters of credit from the register
with the guarantees received from the customers,
copies of letters of credit issued, etc.
The auditor may inspect the bills for collection that
are available with the branch on the closing day.
The auditor should ascertain whether the credit to
the party concerned is given when the bill is
collected or earlier.
It should be seen that the credit for commission
income is taken only when the bill is collected.
Commission income should not be recognised in
respect of bills outstanding on the balance sheet
date.


Bibliography
Kamal Gupta. CONTEMPORARY AUDITING.
New Delhi: The McGraw-Hill Companies, 1976.