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 .
- Basel III (or the Third Basel Accord) is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk.
- 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 .