Major Points of Indian Bank Audit

Before commencing the Bank Audit , the auditor need to analyze the comments made by other auditors last year in their reports (internal, concurrent, system , stock audit) This would enable the auditors  in selecting accounts for verification  & quantum of  verification required for Income & Expenses. Here is all major points for Bank Audit..
  • The Banking industry is regulated By Reserve Bank of India (RBI)
  • Banks face challenges to keep the cost of operation low on one side and to keep NPA (Non Performing Asset) controlled.
  • The   banks face International Competition & stringent capital adequacy norms so it has to cater to  Basel  III  Norms .
  • A bank has 2 activities – acceptance of deposits & granting advances to customers
  • The accounting policies & rules followed is given in Annual Closing Guidelines
  • Before commencing the audit , the auditor need to analyze the comments made by other auditors last year in their reports (internal, concurrent, system , stock audit) This would enable the auditors  in selecting accounts for verification  & quantum of  verification required for Income & Expenses .
  • The major asset  in the bank is the advance portfolio , it earns substantial revenue To verify Advances – auditor  should verify the documents( namely Project report, business  proofs ) submitted by borrowers & also documents  prepared by the bank  – appraisal  forms, sanction letter , mortgage deed & other documents collected from 3rd parties – confidential reports, direct confirmations .
            Auditor also needs to verify  the security obtained by bank is direct /collateral .
  • The other noteworthy areas in advances would be  to  scrutinize :
    • Non submission of  stock statements
    • Inadequate coverage of  Insurance
    • Diversion of  Funds
    • Defective Lien
    • Over trading
    • High Leverage
  • Types of  Credit facilities offered by the bank are :
    • Term Loan (repayable in predefined installments)
    • Cash Credit (credit against book debts or stock of goods )
    • Overdraft  Accounts
  • Indicators while verifying Cash Credit Account or Overdraft accounts are :
    • Verify if account remains continuously overdrawn
    • Check whether cheques are bounced due to insufficient funds
    • Check whether stock statements & book debts are  renewed every yr
    • Check whether “Temporary Over Limit” is secured by  stock /book debt
  • While checking the monthly/quarterly  stock statements , observe  that :
    • Whether stock statements are submitted in time
    • Check whether item – wise stock details are given, not just gross.
    • If  item wise details are given then , check repetition of  same stock is not there having same quantity and same price in the same stock statement .
    • Check the abnormal loss & normal loss if any .
    • Ask for the comparative stock statement of previous year to compare the movement of stock  and closing stock   quantum .
  • Bank Credit by the way of Third  party Guarantees
Guarantees are 2 types: Performance Guarantee & Finance Guarantee
Performance Guarantee – The Guarantor promises to pay  the beneficiary a stated sum , if the person for whom it is given  defaults
Finance Guarantee –Bank promises to pay the stated amount to the beneficiary, if the other person fails.
·                     The auditor should  be aware of the CBS environment and generate reports .
·                     Audit of  NPA (NON PERFORMING ASSETS)
o   An asset transforms into an NPA, when it ceases to generate income for the bank .  Thus an account would be  an NPA if  interest charged to borrower is not realized  , despite the account being secured .
o   If an advance becomes an NPA , then the auditor should verify whether adequate  provisions  is made by bank for diminution of advances .
o   For a TERM LOAN to be said as NPA , the interest /and instalment should be unpaid for a period more than 90 days .
o   For Cash Credit/OD account ,  it will be treated as NPA if , the outstanding balance remains  continuously  in excess of the sanctioned amount  for 90 days   or credits in the account is inadequate to cover interest debited during this tenure .
o   For Agricultural Advances , the short term duration crops will be an NPA if installment / interest is overdue for 2 crop seasons . The long term duration crops , is treated as  NPA  is installment is due for  1 crop season .
o   Example : ABC Pvt Ltd.  Has taken a loan of  10 lac against term deposit of 15 lacs . The bank account balance as at 31 st march is 11 lacs . Here even though his account is overdrawn, income would be recognized by bank as  deposit. Balance outstanding .
  • Several   reports are to be signed by the auditor namely –
    • Statutory audit report
    • Long Form audit Report
    • Tax audit report
  • The   Auditor should  note that , the report on fraud exceeding 1 crore  will have to be sent to RBI directly .
  • A Revised guidance note on bank audit is been issued , and is attached in the attachment in mail additionally .