Simple Project On Audit of Bank
Simple Project On Audit of Bank
Simple Project On Audit of Bank
EXECUTIVE SUMMERY
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INTRODUCTION
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1) Origin of term :
The term audit is derived from the Latin term “audire” mean to
hear. In early days, an auditor used to listing to the account read out by
the accountant in order to check them.
2) Ancient origin :
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5) Computer technology:
The latest development in auditing pertains to the use of computers
in accounting as well as auditing.
Really, auditing has come a long way from “hearing” the accounts
in the ancient day to using computers to examine computerized accounts
of today.
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DEFINITION OF AUDITING
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2) Confidentiality:
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4) Working papers:
The auditor should maintain working papers of important matters
to prove that audit was conducted with due care according to the basic
principles.
5) Planning:
The auditor should plan his audit work. He should prepare an audit
programmed to complete the audit efficiently and in time.
6) Audit evidence:
The report of the auditor should be base on evidence obtained in
the course of audit. The evidence may be obtained through vouching of
transactions, verification of assets and liabilities, ratio analysis etc.
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AUDIT COMMITTEE
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ADVANTAGES OF AUDITING
The user accounts can be sure that the assets and liabilities shown
in the audited balance sheet show the concern, as it is i.e. neither more
nor less.
The user can be confident that the audited profit and loss account
shows the true amount of profit or loss as it is i.e. neither more nor less.
The audited final account can be taken to tally with the books of
accounts. Thus, the income-tax officer can start with the figure of audited
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The auditor can also advise the client about the accounting system,
internal control, internal check, internal audit, taxation, finances etc.
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LIMITATIONS OF AUDITING
4. Audit cannot assure the users of account about the future profitability,
prospects or the efficiency of the management.
5. An auditor has to rely upon expert auditor may have to rely on expert in
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General
• The staff and officer of a bank should lift form one position to
another frequently and without prior notice.
• The work of one person should always be checked by another
person in the normal course of business.
• All arithmetical accuracy of the book should be proved
independently every day.
• All bank form (e.g. books, demand draft book, ‘travellers’ cheque,
etc.) should be kept in the possession of an officer, and another
responsible officer should occasionally verify the stock of such
stationary.
• The mail should be opened by responsible officers. Signature on all
the letters and advice received from other branches of the bank or its
correspondence should be checked by an officer with signature book.
• The signature book of the telegraphic codebook should be kept
with responsible officers, used, and seen by authorized officers only.
• The bank should take out insurance policies against loss and
employees infidelity.
• The power of officers of different grade should be clearly defined.
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Cash:
Clearings:
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Constituent ledger:
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Bill of collection:
Bill purchased:
• At the time of purchased of bill, an officer should verify that all the
document of titles are properly assigned to the bank.
• Sufficient margin should be kept while purchased or discounting a bill
to cover any decline in the value of the security etc.
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• If the bank is unable to collect a bill on the due date, immediately step
should be taken to recoveries the amount form the drawer against the
security provided.
• All irregular outstanding account should be reported to the head
office.
• In the case of purchased outstanding at the close of the year discount
received thereon should thereon should be properly apportioned
between years.
• The bank should make advances only after satisfying itself as to the
creditworthiness of the borrowers and after obtaining sanction from
the proper authorities of bank.
• The entire necessary document (e.g. agreement, demand promissory
note, letter of hypothecation etc.)
• Sufficient margin should be kept against securities taken to cover any
decline in the value thereof and also to comply with proper authorities
of directives. Such margin should be determined by the proper
authorities of the bank as a general policy or for particular account.
• All the securities should be received and returned by responsible
officer. They should be kept in the joint custody of two such officer
• In the case of good in possession of the bank, content of the package
should be test checked at the time of receipt.
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Demand draft:
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STAGES IN AUDITING
1) Preliminary work:
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III. In the case of branch auditors, obtaining the report given by the
outgoing branch manager to the incoming branch in the case of
change in incumbent at the branch during the year under audit, to
the extent the same is relevant for the audit.
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f) One set of tests that the auditor at both the branch level and head
office level may apply for audit of banks in analytical procedure.
It may be noted that transaction in banks are voluminous and repetitive, and
fall into limited categories/heads of account. It may, therefore, be more
appropriate that the evaluation of the internal control is made for each
class/category of transaction. If the exercise of internal control evaluation is
properly carried out, it assist the auditor to determine the effectiveness or
otherwise of the control systems and accordingly enable him to strengthen
his audit procedures, and lay appropriate emphasis on the risk prone areas.
Internal control would include accounting control administrative controls.
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a) Accounting controls:
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The auditor would be well advised to look into other areas may lead to
detection of errors, omissions and irregularities, inter alias in the
following:
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a) Administrative control:
These are broadly concerned with the decision making process and laying
down of authority/delegation of powers by the management. It may be noted
that in the normal course, the head office use the zonal/regional offices do
not conduct any banking business. They are generally responsible for
administrative and policy decisions which are executed at the branch level.
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The branch auditor forwards his report to the statutory auditors who have to
deal with the same in such manner, as they considered necessary. It is
desirable that the branch auditors’ reports are adequately in unambiguous
terms. As far as possible, the financial impact of all qualification or adverse
comments on the branch accounts should be clearly brought out in the
branch audit report. It would assist the statutory auditors if a standard pattern
of reporting, say, head wise, commencing with assets, then liabilities and
thereafter items related to income and expenditure, is followed.
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In preparing the audit report, the auditor should keep in mind the concept of
materiality. Thus, items which do not materially affect the view presented by
the financial statements may be ignored. However, in the judgement of the
auditor, an item though not material, is contrary to accounting principles or
any pronouncements of the Institute of Chartered Accountants of India or in
such as would require a review of the relevant procedure, it would be
appropriate for him to draw the attention of the management to this aspect in
his long form audit report. In all cases, matters covering the statutory
responsibilities of the auditor should be dealt with in the main report. The
LFAR should be used to further elaborate matters contained in the main
report and as substitute thereof. Similarly while framing his main report, the
auditor should consider, wherever practicable, the significance of various
comments in his LFAR, where any of the comments made by the auditor
threrin is adverse, he should consider whether qualification in his main
report is necessary by using his discretion on the facts and circumstances of
each case. In may be emphasized that the main report should be self-
contained document.
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C. All entries in the detail personal ledgers and the summary sheet
are check by person other than those who have made the
entries, with the general results that most clerical mistakes are
detected before another day begins.
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• General ledger:
It contains control accounts of all personal ledgers, the profit and loss
account and different assets and liabilities accounts. There are certain
additional accounts known as contra accounts, which is unique feature of
bank accounting. These contra accounts are maintained with a view to
keeping control over transactions, which have no direct effect on the
banks positions.
For e.g. letter of credit opened, bills received for collection, guarantee is
given etc.
Some banks keep one account for profit and loss in this general ledger and
maintained separate books for the detailed accounts. These are columnar
books having separate columns for each revenue receipt and expense head.
Other banks keep separate books for debits and credits posted are entered in
to the profit and loss account in the general ledger.
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• Personal ledgers:
Separate ledgers are maintained by banks for different types of accounts, i.e.
current account, saving account, etc. As has been maintained earlier, these
ledgers are posted directly from vouchers and the entire voucher entered in
each ledger in a day are summarized in to Voucher Summary Sheets.
• Bill Registers:
There are different registers for various types of transaction. Their number,
volume and details, which differ according to the individual needs of each
bank. For example, there will be registers for:
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C. Letters of credit.
D. Letter of guarantee.
• Departmental journals:
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Outward clearings:
A person checks the vouchers and list with the clearing cheques received
books. The voucher are then sent to appropriate departments, where
customers account are immediately credited. Normally no drawings are
allowed against clearing cheques deposited the same day but exceptions are
often made by the manager in the case of established customer.
Inward clearing:
Cheques received are check with the accompanying list. These are then
distributed to differed department and number of cheques given to each
department is noted in a memo book. When the cheques are passed and
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a) Registers for shares and other securities held on behalf of its customer
g) Storage books.
Deposit department:
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c) Stationary registers
General:
Statically books:
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b) Deposits received and amounts paid out each month in the various
departments.
• Incomplete records:
In some situations, the auditor may find that certain accounting and other
records are not up to date. In such a situations, the auditor should first
ascertain the extent of arrears in housekeeping and the areas in which
accounting and other records are not up to date. It may also be noted that in
Long Form Audit Report (LFAR0), the auditor has to make detailed
observation on such arrears.
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1) Capital
Amount of deposit kept with RBI under section 11(2) of the banking
regulation act, 1949.
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The auditor should verify the opening balance of capital with reference to
the audited balance sheet of the previous year. In case there has been
increase in capital during the year, the auditor should examine the relevant
documents supporting the increase. For example, in case of an increase an
authorized capital of a banking company, the auditor should examine the
special resolution of shareholders and the memorandum of association. An
increase in subscribed and paid-up capital of a banking company, on the
other hand, should be verified with reference to prospectus/ other offer
document, reports received from registers to the issue, bank statement, etc.
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The following are required to be disclosed in the balance sheet under the
head ‘Reserves and Surplus’.
a) Statutory reserves.
b) Capital reserves.
c) Share premium.
The auditor should verify the opening balances of various reserves with
reference to the audited balance sheet of the previous year. Addition to or
deductions from reserves should also be verified in the usual manner, e.g.
with reference to board resolution. In the case of statutory reserves and share
premium, compliance with legal requirements should also be examined.
Thus, the auditor should specifically examine whether the requirements of
governing legislation regarding transfer of the prescribed percentage of
profits to reserve fund have been complied with. In case the bank has been
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granted exemption form such transfer, the auditor should examine the
relevant documents granting such exemption. Similarly, it should be
examined whether the appropriations from share premium account conform
to the legal requirements.
3) Deposits:
A. I. Demand Deposits
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I. Current account:
The auditor should consider the debit balances in current account are not
netted out on the liabilities side but appropriately included under the
‘advances’.
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Term deposits are deposits repayable after a specified period. They are
considered time liabilities of the bank.
The auditor should verify the deposits with reference to the relevant
registers. The auditor should also examine, on a sampling basis, the registers
with the counter-foils of the receipts issued and with the discharged receipts
returned to the bank.
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The auditor should also examine whether a clear distinction has been
made between ‘rediscount’ and ‘refinance’ for disclosure of the
amount under the above head since rediscount does not figure under
this head.
The third schedule to the banking Regulation act, 1949, requires disclosure
of the following items under the head ‘other liabilities and provision’
• Bills payable
• Inter office adjustments.
• Interest accrued
• Other (including provisions)
The auditor may verify the various items under the head other liabilities and
provision in the following manner.
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• Bills payable
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Other
According to the notes and instructions for compilation of balance sheet and
profit and loss account, issued by the Reserve Bank of India, the following
items are to be included under this head.
• Net provision for income tax and other taxes like interest tax, less
advances payment and tax deducted at source.
• Surplus in aggregate in provision for bad and doubtful debts provision
account.
• Contingency funds, which are actually in the nature of reserved but
are not disclosed as such.
• Provision towards standard assets. These are to shown separately as
contingent standard assets.
• Proposed dividend/transfer to government.
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ASSETS:
The third schedule to the Banking Regulation act, 1949, requires following
disclosure to the be made in the made in the balance sheet regarding cash,
balances with Reserve Bank of India., balance with other bank, and money at
call and short notice.
a) In current account
b) In other account
1. In current account
2. In other deposits account.
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1. With banks
2. With other institutions
II Outside in India
1. In current accounts.
2. In other deposits account.
3. Money at call and short notice.
Cash Reserved:
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shall not, at the close of business on any day, be less than twenty five
percent, or such other percentage not exceeding forty, as the RBI bank form
time to time, of total demand and time liabilities in India as on last Friday of
the second preceding fortnight.
Section 11(2) of the act requires the banking companies incorporated outside
India to deposit with RBI certain amount either in cash or in unencumbered
securities or partly in cash and partly in such securities.
2) Investment:
The auditor should verify the investment scripts physically at the close of
business on the date of balance sheet. In exceptional cases where physical
verification of investment scripts on the balance sheet date is not possible the
auditor should carry out the physical verification on a should take in to
consideration any adjustment for subsequent transaction of purchase, sale
etc. he should take particular care to see that only genuine investment are
produced before him.
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3) Advances:
regulatory requirements.
accounts.
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4) Fixed assets:
In respect of fixed assets sold during the year, a copy of the sale deed and
receipt of the salve value should examined by the auditor.
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5) Other assets:
The auditor should see that whether there are any reversals entries indicating
the possibility of irregular payments or frauds in case of inter- office
adjustments. The auditor should also pay attention towards interest-accrued
part from the banks point of view. The auditor should see that internal
control over stationery items. The auditor should verify the stationery and
stamps.
The auditor should examine the non-interest bearing advances to the staff
with reference to the relevant documentation. The auditor should also see
that the entries under the head ‘suspense account’. The auditor should also
verify prepaid expenses in the same manner as in the case of entities.
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N.P.A.GUIDELINES
The guideline requires the banks to classify their advances in four broad
categories as follows:-
1. Standard asset:-
A standard asset is one, which does not disclose any problems, and which
does not carry more than normal risk attached to the business such asset is
not a non-performing asset.
2. Sub-standard asset:
It is one, which has been classified as N.P.A. for period not exceeding not
more than 18 months.
3. Doubtful asset:
4. Loss asset:
It is one where the loss has been identified by the bank or the internal or
external auditors or the RBI inspection, but the amount has not been written
off wholly or partly in other words such asset is considered uncollectible and
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of such little value that its continuous as bankable asset is not warranted
through although there may be some salvage or recovery value.
With the view to moving towards international based practices and to ensure
greater transference it has been decided to adopt the 90 days overdue norms
for identification. Of N.P.A. from the year ending 31st March 2004,
according with effect from 31st march 2004, a non-performing asset shall be
a loan or advances where,
ii. The account remains out of order for period of more than 90 days.
In respect of overdraft or cash credit limit.
iii. The bill remains overdue for period of more than 90 days in the
case of bills purchased and discounted.
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N.P.A. classification will be as per borrower wise and not facility wise. It
means that if any of the credit facilities granted to a borrower becomes non-
performing all the facilities granted to a borrower will have to be treated as
N.P.A. without having any regard to performing status of other facilities.
i. Project finance:
In the case of bank, finance given for industrial project or for agricultural
status where moratorium period is available for payment of interest, payment
of interest becomes due after the moratorium period is over and not on the
date of debit of interest.
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Any loans and advances provided by the bank under any scheme introduced
by GOVT. like PMRY. Scheme will not be treated as N.P.A. though the
account in overdue or outstanding for more than 90 days.
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• Standard Asset:
A general provision of minimum of 0.25% on total standard asset should be
made.
• Sub-standard Asset:
A general provision of minimum of 10% on total Standard Asset should be
made.
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• Doubtful Asset:
• Loss Asset:
The entire amount should be written off or full provision should be made for
the mount outstanding
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In respect of account classified as N.P.A. for the 1st time the unrealized
portion of interest debited to the borrower account and credited to the
income account in the previous year as well as interest debited during the
current year has to be reversed, in respect of accounts that were classified as
N.P.A. in the previous year banks generally do not debit any interest to the
account there is therefore no question of reversal of interest. However in the
case of operative cash credit or overdraft account some bank follows a
practice where by unrealized interest is reversed in the year in which the
account is classified is N.P.A. for the 1st time but redebited at the beginning
of the next financial year during next financial year interest is debited to the
account in the usual manner unrealized interest is reversed and again
redebited at the subsequent financial year.
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• Statutory audit:
The statutory audit, which is compulsory as per the law. The statutory audit
of banks includes examination and inspection of internal audit, concurrent
audit, etc. The statutory audit of banks is like a post mortem activity. The
suggestions of the statutory auditors can assist the bank management in
improving the effectiveness of internal audit/concurrent audit/inspection
functions, etc. In this way statutory plays a very important role in regulating
the banking companies.
• Internal audit:
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• Concurrent audit:
Concurrent audit is the system which introduced by the RBI with the view
that interval between the occurrence of transaction and it’s over view kept to
the minimum extent and examination of transactions by the auditors take
place as soon as the transaction take place. It has perceived the effective
means of control. The main view of concurrent auditors is to see that the
transactions are properly recorded, documented and vouched.
• System audit:
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• Revenue audit:
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CONCLUSION
The project the position of Indian banking system as well as the principal
was done in seven major areas, which are core principals, concurrent audit,
exchange transaction. The project concluded that, given the complexity and
the standards and codes is of high order. This project gives the correct ideas
about how the major areas can be found by way of effective auditing system
i.e. errors, frauds, manipulations etc. form this auditor get the clear ideas
how to recommend on the banks position. Project also contain that how to
conduct of audit of the banks, what are the various procedure through which
audit of banks should be done. Form auditing point of view, there is proper
transactions is taken places for that purpose the auditing is very important
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BIBLIOGRAPHY
Websites
www.google.com
www.icai.org
Books
Auditing