AUDIT OF BANKS AND OTHER FINANCIAL INSTITUTIONS
Bank audit can be classified into three categories:
- Concurrent audit
- Internal audit
- Statutory audit
Concurrent audit: audit or examination of transaction as and when a transaction actually happens.
It is a continuous audit, which goes all the year around, usually by external auditor on monthly basis.
Internal audit: many banks instead of having concurrent audit or even in addition to concurrent may use ‘ internal audit’.
In internal auditing bank constitutes an audit team with its own organization to cater to its auditing requirement.
These internal auditor will visit branches one by one where and when required and carry out auditing.
Statutory audit: it is conducted by statutory auditor- the word ‘statue’ mean mandatory or compulsory requirement by law or act. In bank’s case it’s RBI mandate.
The audit is most important event for bank as this decides most important thing among others- NPA.
Banks are central to the nation’s financial system because, by receiving deposits and distributing loans, they circulate money. This makes stable and efficient banks essential to the economy. Bank auditors, therefore, evaluate financial information for accuracy and perform procedures that determine if management controls are effective. The public can rely on the banking system because of these audit activities.
Key Areas
Auditors define your bank’s key areas depending on factors such as the services it offers, systems it runs and the risk of fraud or misstatement these systems pose. They examine all the earning streams, including interest income, and the recording mechanisms. They also audit all expense streams, including interest, human resources and regulatory expenses and their recording mechanisms. Items that have an element of human judgment, such as provision for bad debts or asset capitalization, also attract the auditors’ attention. Other significant areas include key assets and liabilities, such as government grants, tax assets or loans.
Test of Details
Test of details is a substantive audit procedure that auditors carry out when they think that the risk of misstatement at the assertion level is substantial. While auditing your bank, auditors usually assume loans are risky. This is because the more loans the bank issues, the more interest it earns. Therefore, as a test of detail, auditors send out confirmation letters to customers who borrowed from your bank. These borrowers respond to the letters, confirming their balances and interest due. Recalculations and physical inspection are among the other tests of details that auditors use. These tests are evidence that the information is legitimate.
Substantive Analytics
While auditing your bank’s financial statements, auditors apply a second type of substantive procedure, the substantive analytics. While performing this analysis they try to find existing plausible relationships among financial data. For example, if your bank’s lending is increasing, auditors expect to find a corresponding increase in interest income. If they don’t find this increase in interest, they look for and try to identify, calculate and corroborate reasonable factors contributing to this situation.
Test of Controls
Usually, when risk of material misstatement isn’t high, auditors rely on a test of controls and substantive analytics for their opinion. Tests of controls are procedures that auditors perform to determine how effectively management or system controls function. Their goal is to find significant control weaknesses if they exist. For example, auditors check whether your bank’s system correctly calculates interest and principal. They also check to see if appropriate bank employees with applicable authorization approve
The important elements to check in the statutory audit of banks are:
- Cash Verification Procedure
- Tax-Related Items
- Verification of Loan Accounts
- Cash Verification Procedure
The auditors have to verify the cash balance at the branch at the end of 31st March. An auditor should follow the below-mentioned checklist for cash verification:
- Whether branch is getting opened at the time as per the guidelines and the branch manager is present at the time of the opening of the branch
- Whether the cash vault/cash safe are being opened by the Joint Custodians
iii. Whether any unrecorded security items or documents are kept in the cash vault/cash safe
- The Branch should maintain the records for the acceptance of currency from the public. This also includes the records of the mutilated notes
- Proper working of the burglary alarm system
- Whether all the other doors are locked at the time of the opening of the cash room
vii. The Gun should remain outside the cash room at the time of opening and closing of the cash room
viii. The cash should be carried out in a locker box from the cash room to the counter and vice versa
- The cash counting machine and UV lamps should be in a working condition
- Tax-Related Items
An auditor will also have to check all the tax-related items and compliances that are applicable to the bank like TDS, 15H & 15H etc. The important elements to check an compliance are mentioned below:
- The tax should be deducted at an appropriate rate on the monthly/quarterly/yearly payments made by the bank towards interest on deposits, rent, payment to contractors/professionals etc
- All the tax payments should be on time and all the challans are there in respect of each payment
iii. All the tax returns are filed on time
- TDS Certificate should be issued on time and Form 15G/15H are collected and sent on time
- Comment on the quality of compliance if the bank is under concurrent audit
- Check if any RBI has been audited in the past. If yes, then whether the same is closed and comment on the quality of compliance is to be seen
vii. The branch should have the copy of the Insurance Policy obtained by the corporate office
viii. The branch should have the lease document with them
- The branch should take balance confirmation from other banks in which it is maintaining the account
- Explanation of the outstanding entry in the system suspense account, if any
- Verification of Loan Accounts
Loan accounts form a major part of the assets for banks. A statutory auditor should check the loan accounts very cautiously.
The verification of Loan Accounts is divided into three parts:
- Preliminary Check
- Disbursement
- Post Disbursement Inspection
- Preliminary Check
The banks should do a preliminary check of all the accounts before considering the project for evaluation. An auditor should look at the following documents for checking the bank preliminary process:
- Loan Application
- Prescribed Application form
iii. KYC Compliance
- Project Report, Projected P&L, Balance Sheet & Cash Flow Statement
- Latest Audited Financial Statements
- Board Resolution for Availing the Credit Facilities
vii. All Government Departments Registration
viii. Technical Review
- Disbursement
An auditor should check that the disbursement should happen only if all the terms and conditions of the sanction letter have been fulfilled and an acceptance letter for the same have been acquired.
- Post Disbursement Inspection
The bank should have a proper check on the active accounts. The important elements that a statutory auditor can check are as follows:
- There should be an acceptance letter duly acknowledged by the borrowers for all the loan accounts
- Execution of the loan documents should be as per the terms and conditions of the sanction letter
iii. All the original documents are held in the safe custody in fire resistance safe
- Confidential Report and NOC from the existing bankers
- CIBIL Report and score. The bank should check for any adverse comments
- Valuation of Securities
vii. External & Internal Credit Rating
viii. Due Diligence Certificate
- Verify the drawing power of the accounts is calculated properly and a margin is maintained as per the sanction letter
- Verify any adverse comment on the stock audit report or the audited balance sheet
- Verify the payment schedule as per the sanction letter is implemented. If any, check the approval document for the same
The auditor should check for any Non-Performing Asset (NPA). All accounts which are overdue or stops generating income for the banks continuously for 90 days, then it has to be treated as NPA.
- Audit Report
After conducting the through audit, an auditor has to give an audit report for the same. An auditor is required to make a report as mentioned in the engagement letter in which he has to state the following:
- Whether the balance sheet is showing true and fair view containing all the necessary particulars to exhibit a true and fair view of the affairs of the banks
- Whether the profit and loss account shows a true balance for the period covered by such account
iii. Whether any transaction has been carried by the branch which was not within the powers of the branch
- Any other matter which the auditor considers to be brought to the notice of the Statutory Central Auditor
