CHAPTER

NO.
CH 1

CH 2

CH 3

CH 4

CH 5

CH 6

TOPICS

PAGE
NO.

INTRODUCTION TO BANK
1.1 INRODUCTION
1.2 DEFINATION
1.3 HISTROY OF BANK
1.4 TYPES OF BANK
1.5 REGULATION OF BANK
AUDITING
2.1 INTRODUCTION
2.2 SCOPE OF AUDIT
2.3 FEATURES OF AUDIT
2.4 OBJECTIVES OF AUDIT
2.5 PRINCIPLES OF AUDIT
AUDIT PLANNING
3.1 MEANING OF AUDIT PLANNING
3.2 OBJECTIVE OF AUDIT PLANNING
3.3 FACTOR TO BE CONSIDER
3.4 DEVELOPMENT
3.5 AUDIT PROGRAMME
3.6 ADVANTAGES & DISADVANTAGES
PROVISION RELATING AUDITOR
4.1 INTRODUCTION TO AUDITOR
4.2 APPOINTMENT OF AUDITOR
4.3 QUALIFICATION & DISQUALIFICATION
4.4 RIGHTS & DUTIES OF AUDITOR
4.5 AUDITOR REPORTS
BANK AUDIT
5.1 INTRODUCTION
5.2 ROLE OF RBI IN AUDIT
5.3 AUDIT OF BANKING COMPANY
5.4 AUDTING OF CO-OPERATIVE BANK
BANK AUDIT PROCESS
6.1 AUDIT OF INCOMES
1

6.2 REVENUE OF AUDIT PROCEDURE

6.3 AUDIT OF EXPENDITURE
6.4 AUDIT OF ASSETS
6.5 AUDIT OF LIABILITIES
TYPES OF AUDIT IN BANK
7.1 STATUTORY AUDIT
7.2 INTERNAL AUDIT
7.3 CONCURRENT AUDIT
7.4 SYSTEM AUDIT
7.5 REVENUE AUDIT
BOOK OF ACCOUNTS OF BANK
8.1 INTRODUCTION
8.2 PRINCIPLE OF BOOK OF A/C
8.3 SUBSIDIARY BOOK OF A/C
8.4 OTHER MEMORANDOM BOOK
CONCLUSION

10

BIBLOGRAPHY & WEBLOGRAPHY

CH 7

CH 8

EXECUTIVE SUMMERY

A banking companies are requires maintaining the books of account in accordance with section
209 of the companies act, 1956. Banking generally a sound internal control system their day to
day transaction. The auditor has to evaluate such system carefully. The fundamental requirement
of an audit, as regards reporting on statement of account can be discharged from the examination
of the internal checked and verification of assets and liabilities by making a comparison and
reconciliation of balance with those in the year and that of amount of income and expenses by
application of test checks. The banking regulation act casts greater responsibilities on the
directors of banks as compared to those of other companies in the matter of supervision over
their working. Therefore, they exercise, or are expected to exercise greater supervision over the
affairs of bank. The auditor is entities to rely on such supervision and to limit his checking to test
checks. The financial position of a bank is depended on the condition of assets, loan, investment,
cash balanced and those of its liabilities and fund. Their verification form an important part of
the balance sheet. Most of the bank have their own internal audit or inspection department
entrusted with the responsibilities of checking the account of various branches. The statutory
auditor may not, therefore, duplicate work.

CHAPTER 1
INTRODUCTION TO BANK

1.1 Introduction
Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector
acts as the backbone of modern business. Development of any country mainly depends
upon the banking system.
The term bank is either derived from Old Italian word banca or from a French
word banque both mean a Bench or money exchange table. In olden days, European

money lenders or money changers used to display (show) coins of different countries in
big heaps (quantity) on benches or tables for the purpose of lending or exchanging.
A bank is a financial institution which deals with deposits and advances and other related
services. It receives money from those who want to save in the form of deposits and it
lends money to those who need it.

1.2

Definition of a Bank
Oxford Dictionary defines a bank as
"An establishment for custody of money, which it pays out on customer's order."

1.3

History of Banking
Banking industry in India goes back to the 18 thcentury when two banks the General Bank
of India and Bank of Hindustan operated under the British rule. These banks are no
longer operational. Around 1796, three important presidency banks were established.
Later, these were merged post-independence. The Indian government owned its first bank
the State Bank of India (SBI). It was formed after the merger of Bank of Bengal. SBI is
still functional today.
During the pre-independent era, banks in India operated with a small capital. They were
established and owned mostly by the Indian merchants. The bank officials collected
money from people for safe-keeping. Syndicate Bank for instance, became quite popular
with its pygmy deposit. The Union Bank was formed in 1839 but dwindled soon after
the economic downturn in 1849.
Kolkata became a centre for the banking industry. The primary reason was that Kolkata
port was crowded with people conducting trade and commerce. Soon, many foreign
banks, such as HSBC and the ComptoiredEscompt de Paris of France opened their shops
in Kolkata. However, many of these banks had to close down post independence. Some
Indian banks also opened their offices in foreign countries. For instance, Bank of India
opened its branch in London in 1946. In 1976, it opened an overseas branch in Paris.

Apart from SBI, another noted bank that has survived till now is the Punjab National
Bank. Established in 1895 in Lahore, the bank is still working in the country. During preindependent era, three types of banks were noticed in the banking industry. These are:
Presidency Banks, which operated as quasi-central bank and was owned by the
government of the pre-independence era.
Exchange Banks, which were under the British merchants and tapped the foreign
exchange market
.
Indian Joint Stock Banks, where the bank was owned by private groups. They were
basically shareholders. The bank issued the stock. The profit was shared by the
shareholders.
After India became independent, a lot of changes took place in the Indian economy and
the banking industry. The British were no longer a part of the Indian economy. The Indian
government took proactive measures to streamline the economy and boost
industrialization. For stability in the economy, it created banking regulations, such as:
The Reserve Bank of India (RBI) was created in 1949 as the central bank of India under
the Reserve Bank of India (Transfer to Public Ownership) Act. It had the authority to
direct other banks. The RBI could regulate, direct, or inspect other banks.
No two banks could have common Directors.
No bank could open another branch without the permission from the RBI. A license
would be issued if permission is granted.

1.4 Types of Banks

 Savings banks: These banks function with the intention to culminate saving habits
among people, especially those who belong to low income groups or those who are
salaried. The money these people deposit in the banks are invested in securities, bonds
etc. These days, many commercial banks perform the dual functions of savings bank. The
postal department is also in a way a saving bank.

 Commercial banks: These banks function to help the entrepreneurs and businesses. They
give financial services to these businessmen like debit cards, banks accounts, short term
deposits, etc. with the money people deposit in such banks. They also lend money to
businessmen in the form of overdrafts, credit cards, secured loans, unsecured loans and
mortgage loans to businessmen. The commercial banks in the country were nationalized
in 1969. So the various policies regarding the loans, rates of interest and loans etc are
controlled by the Reserve Bank. These days, the commercialized banks provide some
services given by investment banks to their clients.
The commercial banks can be further classifies as: public sector bank, private sector
banks, foreign banks and regional banks.
The public sector banks are owned and operated by the government, who has a major
share in them. The major focus of these banks is to serve the people rather earn profits.
Some examples of these banks include State Bank of India, Punjab National Bank, Bank
of Maharashtra, etc.
The private sector banks are owned and operated by private institutes. They are free to
operate and are controlled by market forces. A greater share is held by private players and
not the government. For example, Axis Bank, Kotak Mahindra Bank etc.
The foreign banks are those that are based in a foreign country but have several branches
in India. Some examples of these banks include; HSBC, Standard Chartered Bank etc.
The regional rural banks were brought into operation with the objective of providing
credit to the rural and agricultural regions and were brought into effect in 1975 by RRB
Act. These banks are restricted to operate only in the areas specified by government of
India. These banks are owned by State Government and a sponsor bank. This sponsorship
was to be done by a nationalized bank and a State Cooperative bank. Prathama Bank is
one such example, which is located in Moradabad in U.P.
Cooperative banks: These banks are controlled, owned, managed and operated by
cooperative societies and came into existence under the Cooperative Societies Act in
1912. these banks are located in the urban as well in the rural areas. Although these banks
have the same functions as the commercial banks, they provide finance to farmers,
8

salaried people, small scale industries, etc. and their rates of interest of interest are lower
as compared to other banks.
There are three types of cooperative banks in India, namely:
Primary credit societies: These are formed in small locality like a small town or a village.
The members using this bank usually know each other and the chances of committing
fraud are minimal.
Central cooperative banks: These banks have their members who belong to the same
district. They function as other commercial banks and provide loans to their members.
They act as a link between the state cooperative banks and the primary credit societies.

State cooperative banks: these banks have a presence in all the states of the country and
have their presence throughout the state.
Investment banks: These are financial institutions that provide financial and advisory
assistance to their customers. Their clients can be individuals, businesses, or government
organizations. They assist their customers to raise funds when required. These banks act
as the underwriters for their customers when they want to raise capital by issuing
securities. In some cases, they also help their customers to issue securities.
When there is a merger or an acquisition, they provide their customers with the necessary
support like marketing, foreign trading, foreign exchange, sale of equities, fixed income
instruments etc. Apart from raising capital, these banks render valuable financial advise
to their customers and various kinds of businesses. Some examples of these banks
include, Bank of America, Barclays Capital, Citi Bank, Deutsche Bank etc
.
Specialized banks: These provide unique services to their customers. Some such banks
include, foreign exchange banks, development banks, industrial banks, export import
banks etc. These banks also provide huge financial support to businesses and various
kinds projects and traders who have to import or export their goods or services.
Central bank: The central bank is also called the banker's bank in any country. In India,
the Reserve Bank of India is the central bank. The Federal Reserve in USA and the Bank
of England in UK function as the central bank. This bank makes various monetary
9

policies, decides the rates of interest, controlling the other banks in the country, manages
the foreign exchange rate and the gold reserves and also issues paper currency in a
country. The monetary control is the primary function of a central bank in most countries
and so they are considered as the lender of last resort to various commercial banks.
The banking system has witnessed a huge growth and the competition amongst various
banks has increased these days. The boom in e-commerce industry, globalization, and
increased popularity of internet has made it vital for the banks keep up with the latest
technology trends. With the entry of the private and global banks in the market, the
competition amongst the banks has increased in the country. They provide a wide variety
of services other than borrowing and lending money to people.

1.5 Banking Regulations

10

 Reserve Bank of India Act, 1934 is the legislative act under which
the Reserve Bank of India was formed. This act along with the
Companies Act, which was amended in 1936, were meant to provide a
framework for the supervision of banking firms in India
The Act contains the definition of the so-called scheduled banks, as
they are mentioned in the 2nd Schedule of the Act. These are banks
which were to have paid up capital and reserves above 5 lakh
(US$7,400).
The Section 17 of the Act defines manner in which the RBI can conduct
business. The RBI can accept deposits from the central and state
governments without interest. It can purchase and discount bills of
exchange from commercial banks. It can purchase foreign exchange
from banks and sell it to them. It can provide loans to banks and state
11

financial

corporations.

It can provide

advances

to the

central

government and state governments. It can buy or sell government

securities. It can deal in derivative, repo and reverse repo.
The Section 18 deals with emergency loans to banks. The Section 21
states the RBI must conduct the banking affairs for the central
government and manage public debt. The Section 22 says that only
RBI has the exclusive rights to issue currency notes in India. The
Section 24 states that the maximum denomination a note can be
10,000 (US$150). The Section 28 allows the RBI to form rules
regarding the exchange of damaged and imperfect notes.
The Section 31 says that in India only the RBI or the central
government can issue and accept promissory notes that are payable
on demand. However, cheque, that are payable on demand, can be
issued by anyone.
The Section 42(1) says that every scheduled bank must have an
average daily balance with the RBI. The amount of the deposit shall be
more that a certain percentage of its net time and demand liabilities in
India
Bank regulation is a form of government regulation which subjects
banks to certain requirements, restrictions and guidelines, designed to
create market transparency between banking institutions and the
individuals and corporations with whom they conduct business, among
other things.
Given the interconnectedness of the banking industry and the reliance
that the national (and global) economy hold on banks, it is important
for regulatory agencies to maintain control over the standardized
practices of these institutions. Supporters of such regulation often base
their arguments on the "too big to fail" notion. This holds that many
financial institutions (particularly investment banks with a commercial
12

arm) hold too much control over the economy to fail without enormous
consequences. This is the premise for government bailouts, in which
government financial assistance is provided to banks or other financial
institutions that appear to be on the brink of collapse. The belief is that
without this aid, the crippled banks would not only become bankrupt,
but would create rippling effects throughout the economy leading to
systemic failure.

CHAPTER 2
AUDITING

13

2.1 Introduction
An audit is a systematic and independent examination of books, accounts, statutory
records, documents and vouchers of an organization to ascertain how far the financial
statements as well as non-financial disclosures present a true and fair view of the
concern. It also attempts to ensure that the books of accounts are properly maintained by
the concern as required by law. Auditing has become such a ubiquitous phenomenon in
the corporate and the public sector that academics started identifying an "Audit Society".
The auditor perceives and recognizes the propositions before him/her for examination,
obtains evidence, evaluates the same and formulates an opinion on the basis of his
judgment which is communicated through his audit report.
Any subject matter may be audited. Audits provide third party assurance to various
stakeholders that the subject matter is free from material misstatement. The term is most
frequently applied to audits of the financial information relating to a legal person. Other
areas which are commonly audited include: secretarial & compliance audit, internal
controls, quality management, project management, water management, and energy
conservation.

14

2.2 Scope of audit

In ancient period, there was limited scope of audit because there was no development of
business. Generally, auditor used to check cash transactions if there were suspected
frauds. But in the recent years, scope of audit has increased. Now-a-days auditing is
related to the examination of books of account, evidence, bills, stock and its physical
verification etc.
Now-a-days, it is not possible to go through the books of account. So, an
auditor applies test check. But such test is possible in such organization where effective
internal check system is applied. An auditor should analyze the suspected frauds so as to
find out the fact but an auditor should depend on the information provided by the
concerned officer.
An auditor should prepare and present report after the examination of profit and loss
account and balance sheet. Auditor does not only check the books of account on the basis
of evidence but also has to check the authenticity of documents. An auditor should set his
mind in that area where he is not satisfied with the records. Despite having above facts,
attention of audit can be set up as follows:

Checking of books of accounts so as to find out the truth and fairness.

Verification of assets and liabilities after its detail checking.
Checking of books of accounts on the basis of available evidence.
Checking arithmetical accuracy of books of accounts.
Expressing independent opinion about the financial statements.
Preparing and presenting fair report to the concerned officer or owners.

2.3 Features of an Audit

15

 Systematic process: Auditing is a systematic and scientific process that follows a

sequence of activities, which are logical, structured, and organized.
Three party relationships: The audit process involves three parties, that is, shareholders,
managers, and the auditors.
Subject matter: Auditors give assurance on a specific subject matter. However, the
subject matter may differ considerably, such as data, systems or processes and behavior.
Evidence: Auditing process, requires collecting the evidence, that is, financial and nonfinancial data, and examining thereof.
Established criteria: The evidence must be evaluated in terms of established criteria,
which

include

International

Accounting

Standards,

International Financial

Reporting Standards, Generally Accepted Accounting Principles, industry practices,

etc.
16

 Opinion: The auditor has to express an opinion as to the reasonable assurance on the
financial statements of the entity.

2.4

Objectives of audit

OBJECTIVES
OF AUDIT
PRIMARY

SECONDARY

Primary Objectives
Secondary Objectives

Primary Objectives: To determine and judge the reliability of the financial statement
and the supporting accounting records of a particular financial period is the main purpose
of the audit. As per the Indian Companies Act, 1956 it is mandatory for the organizations
to appoint an auditor who, after the examination and verification of the books of account,
disclose his opinion that whether the audited books of accounts, Profit and Loss Account
and Balance Sheet are showing the true and fair view of the state of affairs of the
company's business. To get a true and fair view of the companies affairs and express his
opinion, he has to thoroughly check all the transactions and relevant documents of the
company made during the audited period. Which will help the auditor to report the
financial condition and working result of the organization? While carrying out the
process of audit, the auditor may come across certain errors and frauds. But detection of

17

fraud or errors are not the primary objective of the audit. They are come under the
secondary objectives of audit.
Audit also disclose whether the Accounting system adopted in the organization is
adequate and appropriate in recording the various transactions as well as the setbacks of
the system.
Secondary Objectives:
In order to report the financial condition of the business, auditor has to examine the books
of accounts and the relevant documents. In that process he may come across some errors
and frauds. We may classify these errors and frauds as below:

Detection and prevention of Errors

Detection and prevention of Frauds.

Detection and prevention of Errors: Following types of errors can be detected in the
process of auditing.

Clerical Errors

Errors of Principle
Clerical Errors: Due to wrong posting such errors may occur. Money received from
Microsoft credited to the Semens account is an example of clerical error. Even though
the account was posted wrongly, the trial balance will agree. We can classify clerical
errors as below:

Errors of Commission
Errors of Omission
Compensating Errors.
Errors of Commission: These errors are errors caused due to wrong posting either wholly
or partially of in the books of original entry or ledger accounts or wrong totaling, wrong
calculations, wrong balancing and wrong casting of subsidiary books. For example Rs.
5000 is paid to Microsoft for the supply of windows program and the same is recorded in
the cash book. While posting the ledger the Microsoft's account is debited by Rs. 500. It
18

may be due to the carelessness of the accountant. Most of these errors of commission are
reflected in the trial balance and can be identified by routine checking of the books.
Errors of Omission: When there is no record of transactions in the books of original entry
or omission of posting in the ledger could lead to such errors. Sales not recorded in the
sales book or omissions to enter invoices in the purchase book are examples of Errors of
Omission. Errors due to entire omission will not affect the trial balance. Errors due to
partial omission will affect the trial balance and can be detected.
Compensating Errors are errors committed in such a way that the net result of these errors
on the debit side and credit side would be nullifying the net effect of the error. For
example, Ram's account which was to be debited for Rs. 5000 was credited for Rs. 5000
and similarly, Sita's Account which was to be credited for Rs. 5000 was debited for Rs.
5000. These two mistakes will nullify the effect of each other. Unless detailed
investigation is undertaken such errors are difficult to locate as both the sides of the trial
balance are equally affected.
Errors of Principle: While recording a transaction, the fundamental principles of
accounting is not properly observed, these types of errors could occur. Over valuation of
closing stock or incorrect allocation of expenditure or receipt between capital and
revenue are some of the examples of such errors. Such errors will not affect the trial
balance but will affect the Profit and Loss account. It may occur due to lack of knowledge
of sound principles of accounting or can be committed deliberately to falsify the
accounts. To detect such errors, the auditor has to do a careful examination of the books
of account.
Detection and Prevention of frauds: To get money illegally from the organization or from
the proprietor frauds are committed intentionally and deliberately. If it remain undetected,
it could affect the opinion of the auditor on the financial condition and the working
results of the organization. Therefore, it is necessary for the auditor to exercise utmost
care to detect such frauds. It can be committed by the top management or by the
employees of the organization. Frauds could be of the following types:
Misappropriation of cash
Misappropriation of goods
19

 Falsification or Manipulation of accounts

Window dressing
Secret Reserves
Misappropriation of Cash: Since the owner has very limited control over the receipt and
payments of cash, misappropriation or defalcation of cash is very common specially in
big business organizations. Cash can be misappropriated by various ways as mentioned
below:

Recording fictitious payments

Recording more amount than the actual amount of payment
Suppressing receipts
Recording less amount than the actual amount of payment.
There should be strict control over receipts and payments of cash known as "Internal
check system" to prevent such frauds. The auditor should check the Cash Book with
original records, bills register, invoices, vouchers, counterfoils or receipt books, wage
sheets, salesman's diary, bank statements etc. in order to discover such frauds.
Misappropriation of goods: Companies handling with high value goods are pray to this
kind of misappropriation. Without proper records of stock inward and stock outward, it is
difficult for the auditor to find out such fraud. Periodical and surprise checking of stock
and maintaining the proper record of inward and outward movement of stock can reduce
the possibility of such fraud.
Falsification or manipulation of accounts: In order to achieve certain specific objectives,
accounts may be manipulated by those responsible persons who are in the top
management of the organization.

They prepare accounts such a manner that they

disclosed only a fake picture not the true picture. Some of the ways used in manipulating
the accounts are as follows:

Inflating or deflating expenses and incomes

Writing off of excess or less bad debts.
Over-valuation or under-valuation of closing stock.
Charging excess or less depreciation
Charging capital expenditures to revenue and vice-versa
Providing for excess or less doubtful debts.
Suppressing sales and purchase or showing fictitious sales and purchases etc.
20

Window dressing: is the way of presenting the financial data in a much better position
than the original position. It is known as window dressing. Some of the reasons for doing
window dressing are as follows:
To win the confidence of share holders
To obtain further credit
To raise the price of shares in the market by paying higher dividend so that shares held
may be sold
To attract prospective partners or shareholders.
To win the confidence of shareholders.
Secret Reserves: In secret reserves, accounts are prepared in such a way that they disclose
worse picture than actually what they are. The objectives of preparing accounts in this
way are:
To conceal the true position from the competitors.
To avoid or reduce the tax liability
To reduce the price of shares in the market by not paying dividend or paying lower
dividend so that the shares may be bought at a much lower price.
It is very difficult to detect such frauds since these frauds are committed by those persons
in the organizations who are at the top positions like directors, managers, financial
controllers etc. To detect these kind of frauds, the auditor must be vigilant and should
make searching inquiries to arrive at the true position.

21

2.5 BASIC PRINCIPAL OF AUDITING

integrity
objectivity
and
independence
opinion and
report

confidentialit
y

PRINCPAL OF
AUDIT
skill and
competnce

planning

audit
evdience

working
paper

Integrity, objectivity and independence:

The auditor should be honest and sincere in his audit work. He must be fair and
objective. He should also be independent.

22

 Confidentiality:
The auditor should keep the information obtained during audit, confidential. He should
not disclose such information to any third party. He should, keep his eyes and ears open
but his mouth shut
Skill and competence:
The auditor should have adequate training, experience and competence in Auditing. He
should have a professional qualification ( i.e. be a Chartered Accountant) and practical
experience. He should be aware of recent developments in the field of auditing such as
statement of ICAI, changes in company law, decisions of courts etc.
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.

Planning:
The auditor should plan his audit work. He should prepare an audit programmed to
complete the audit efficiently and in time.
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.
Evaluation of accounting system and internal control:
The auditor should ensure that the accounting system is adequate. He should see that all
the transaction have been properly recorded. He should study and evaluate the internal
controls.
Opinion and report:
The auditor should arrive at his opinion on the account based on the audit evidence and
submit his report. The opinion may be unqualified, qualified or adverse. The audit report
should clearly express his opinion. Law should require the content and form of audit
report.

23

CHAPTER 3
AUDIT PLANNING
3.1

Meaning of Audit Planning

Audit planning is a vital area of the audit primarily conducted at the beginning of audit
process to ensure that appropriate attention is devoted to important areas, potential
problems are promptly identified, work is completed expeditiously and work is properly
coordinated. "Audit planning" means developing a general strategy and a detailed
approach for the expected nature, timing and extent of the audit. The auditor plans to
perform the audit in an efficient and timely manner.
24

Definition
An Audit plan is the specific guideline to be followed when conducting an audit.it helps
the auditor obtain sufficient appropriate evidence for the circumstances, helps keep audit
costs at a reasonable level, and helps avoid misunderstandings with the client.

3.2

Objectives of Planning
There are three main benefits from planning audits: it helps the auditor obtain sufficient
appropriate evidence for the circumstances, helps keep audit costs at a reasonable level,
and helps avoid misunderstandings with the client. ISA 300 Planning an Audit of
Financial Statements requires that the planning stage of the audit should be used to
establish an overall strategy for the audit, develop an audit plan, and reduce audit risk to
an acceptably low level. The standard also requires that: Auditors should plan the audit
work so that the engagement is performed in an effective manner. It is important to
clarify what are meant by the terms overall audit strategy and audit plan as per ISA
300. The overall audit strategy describes in general terms how the audit is to be carried
out and the audit plan details the specific procedures to be carried out to implement the
strategy and complete the audit. It is also important for students to understand the precise
meaning of the risk terms: audit risk and inherent risk as both risks influence how the
audit is carried out and the costs involved. The auditor will spend quite a bit of time at the
early planning stages obtaining information to assess these risks so that the engagement
is performed in an effective manner. Audit risk is the risk that an auditor may give an
inappropriate audit opinion on financial statements that are materially misstated. To
reduce the audit risk to an acceptably low level means the auditor needs to be more than
certain that the financial statements are not materially misstated. This is reiterated by ISA
200, which states, The auditor should plan and perform the audit to reduce audit risk to
an acceptably low level that is consistent with the objective of an audit. Inherent Risk
as per ISA 400 is the susceptibility of an account balance or class of transactions to
misstatements that could be material, individually or when aggregated with
misstatements in other balances or classes, assuming that there are no related internal
25

controls. Assessing audit risk and inherent risk is an essential part of audit planning
because it determines the quantity and quality of evidence that will need to be gathered
and the staff that need to be assigned to the particular audit. If for example there were
valuation issues with property inherent risk would then be assessed as high, therefore
meaning more evidence would have to be gathered and staff that are more experienced
assigned to perform testing on this account.

3.3

Factors to be considered
Factors to consider when formulating the audit plan
The auditor should consider the audit approach he wishes to adopt, including the extent to
which he may rely on internal controls and any aspects of the audits, which need
particular attention. Matters to consider by the auditor in developing overall audit plan
include;
Understanding the accounting and internal control systems
The auditor should seek to understand the accounting policies adopted by the entity and
changes in these policies. The auditors cumulative knowledge of the accounting and
internal control systems and the relative emphasis expected to be placed on tests of
control and substantive procedures.
Reviewing matters rose in the previous years audit, which may have continuing
relevance in the current year. This is done by reviewing previous years working papers.
The auditor will be able to identify areas noted as having weak controls or specific
accounting problems. Attention should be paid to such areas in the audit plan.
Assessing the effects of any changes in legislation or accounting practice affecting the
financial statements of the company. The audit plan should include a review of these
changes and whether the client has complied

26

 The auditor should consult with management and staff of the organization about current
trading circumstances and any significant changes in the business carried on and the
management of the enterprise. E.g. changes in management might weaken the internal
control system.
Identify any significant changes in the clients accounting procedures such as installation
of a new computer information system. Changes to a computerized system could result in
weak controls.
Conditions requiring special attention such as the existence of related parties.
Consider any current or impending financial difficulties, which could face the company.
E.g. shortage of raw materials or failure to raise working capital.
The auditor should check the nature and timing of reports and other communications with
the client so that the audit plan accommodates such timings e.g. he should consider the
dates of the annual general meeting, stock taking, dates when management reports are
available.
Set materiality levels for audit purposes and in particular identify areas with material
transactions, which call for more audit work.
The assessment of internal audit department and level of reliance to be place on its work.
The auditor should also determine the number of audit staff required, experience and
special skills required and the timing of the audit visits.

3.4

Development of Planning
The nature and extent of planning activities that are necessary depend on the size and
complexity of the company, the auditor's previous experience with the company, and
changes in circumstances that occur during the audit. When developing the audit strategy
27

and audit plan, as discussed in paragraphs 8-10, the auditor should evaluate whether the
following matters are important to the company's financial statements and internal control
over financial reporting and, if so, how they will affect the auditor's procedures:
Knowledge of the company's internal control over financial reporting obtained during
other engagements performed by the auditor;
Matters affecting the industry in which the company operates, such as financial reporting
practices, economic conditions, laws and regulations, and technological changes;
Matters relating to the company's business, including its organization, operating
characteristics, and capital structure;
The extent of recent changes, if any, in the company, its operations, or its internal control
over financial reporting;
The auditor's preliminary judgments about materiality,5/ risk, and, in integrated audits,
other factors relating to the determination of material weaknesses;
Control deficiencies previously communicated to the audit committee6/ or management;
Legal or regulatory matters of which the company is aware;
The type and extent of available evidence related to the effectiveness of the company's
internal control over financial reporting;
Preliminary judgments about the effectiveness of internal control over financial reporting;
Public information about the company relevant to the evaluation of the likelihood of
material financial statement misstatements and the effectiveness of the company's internal
control over financial reporting;
Knowledge about risks related to the company evaluated as part of the auditor's client
acceptance and retention evaluation; and
The relative complexity of the company's operations.
Note: Many smaller companies have less complex operations. Additionally, some larger,
complex companies may have less complex units or processes. Factors that might
indicate less complex operations include: fewer business lines; less complex business
processes and financial reporting systems; more centralized accounting functions;
extensive involvement by senior management in the day-to-day activities of the business;
and fewer levels of management, each with a wide span of control.

3.5

Audit program

28

Audit program are lists of audit procedures to be performed by audit staff in order to
obtain sufficient appropriate evidence.
The individual procedures are determined after obtaining an understanding of the
accounting system and determining the audit strategy to be followed
.
The audit program reflect the understanding of the system and will incorporate a mix of
compliance (test of control) and substantive tests that the auditor intend to perform.
The audit program is an important part of the auditors working papers and records a
significant part of the audit evidence required to justify the audit opinion
Purpose of Audit Programs
A set of instructions to the audit team
Assist with planning and performance of the audit.
A means to control and record the proper execution of the audit work and also to review
the audit work
A record of the audit procedures to be adopted, the audit objectives, timing, sample size
and basis of selection of each criteria.
Audit evidence to support the auditor opinion.
Types of audit programs
Standardized audit programs: Is a pre prepared listing of objectives and tests
which may be used in any audit. A consistent approach to all audits. Reduce risks that
procedures are omitted.
Tailored audit programs: Some audit programs need to be tailored to the specific
circumstances of an engagement as all clients are different. The design of the
audit procedures to be followed match exactly to the actual
entity.

Reference

can

be

made

specifically

Procedures/documents.

3.6 Advantages and Disadvantages of audit program

29

system
to

of

the

particular

ADVANTAGES OF AUDIT PROGRAMME

Supervision Of Work :The auditor can judge the efficiency of his audit team by holding of an audit programme.
He is in a position to know the progress of the work. He can see at any time that what
part of the work has been completed and what remains to be done.
Distribution Of Work :Audit programme is very useful in distributing the audit work properly among the
members f the audit team according to their talent.

Uniformity Of Work :Audit programme helps in settling all the things in advance, so the uniformity of work
can be achieved.
Basic Instrument For Training :Audit programme is very useful for the new auditor. It provides training and guidance to
him. So it is rightly called the basic instrument for training.
Legal Evidence :Audit programme is a legal evidence of work done by every assistant of the audit team. It
can be presented in the court of law if any client is taken against the auditor for
negligence.
Fixation Of Responsibility :If any error or fraud remains undetected the responsibility of negligence will fall on the
particular assistant who has performed that job.
Several Audits may Be Controlled :The auditor controls the audit of various companies at the same time. In the absence of
audit programme he cannot supervise them effectively.
Easy Transfer :If one assistant is unable to continue the work given to him, it can be given to another
person. Audit programme guides him that what is done and what is remaining.
Final Review :30

Before signing the report, final review is made and for this purpose also auditing
programme is very useful.
Useful For Future :On completion of an audit, it serves the purpose of audit record which may be useful for
future reference.
DISADVANTAGES OF AUDIT PROGRAMME
Not Comprehensive :Auditors may have covered the whole field but it cannot be said with certainty that all the
necessary work have been done.
Rigidness :Audit programme looses its flexibility. While each business has a separate problem. So
audit programme cannot be laid down for each type of business.
No Initiative :It kills the initiative of capable persons assistant cannot suggest any improvement in the
plan.
Too Mechanical :Such audit programme is mechanical that it ignores many other aspects like internal
control.
Not Suitable For Small Audit :It has been proved that audit programme is not suitable for sail audits.
New Problems Over Looked :With the passage of time new problems arise which may be over looked.

31

CHAPTER 4
PROVISION RELATING TO AUDIT

4.1 INTRODUCTION TO AUDITOR

32

The auditor is an individual who is trained to review and verify that the accounting data
provided by an audited company accurately corresponds to the activities that have been
part taken by the company.
The auditor's job is to write a report at the conclusion of the audit which determines the
level of accuracy and clarity that the organization has accounted for.
For instance, if all accounting moves made by the company are reflected in the books
(such as the general ledger), and all data that appears in the records correspond to the
course of business in the company, then the audit will have shown no misstatements.

4.2 Appointment of auditor

(1)Subject to the provisions of this Chapter, every company shall, at the first
annual general meeting, appoint an individual or a firm as an auditor who shall hold
office from the conclusion of that meeting till the conclusion of its sixth annual general
meeting and there after till the conclusion of every sixth meeting and the manner and
procedure of selection of auditors by the members of the company at such meeting shall
be such as may be prescribed:
Provided that the company shall place the matter relating to such appointment for
Ratification by members at every annual general meeting:
Provided further that before such appointment is made, the written consent of the auditor
to such appointment, and a certificate from him or it that the appointment, if made,shall
be in accordance with the conditions as may be prescribed, shall be obtained from the
Auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the
Criteria provided in section 141:
Provided also that the company shall inform the auditor concerned of his or its
Appointment, and also file a notice of such appointment with the Registrar within fifteen
days of the meeting in which the auditor is appointed.
Explanation.For the purposes of this Chapter, appointment includes
reappointment.

33

(2) No listed company or a company belonging to such class or classes of companies

as may be prescribed, shall appoint or re-appoint
(a) An individual as auditor for more than one term of five consecutive years; and
(b) An audit firm as auditor for more than two terms of five consecutive years:
Provided that
(i)

An individual auditor who has completed his term under clause

(a)Shall not be eligible for re-appointment as auditor in the same company for 5 year
From the completion of his term;
(ii)

An audit firm which has completed its term under clause

(b)Shall not be eligible for re-appointment as auditor in the same company for 5
years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common
Partner or partners to the other audit firm, whose tenure has expired in a company
immediately preceding the financial year, shall be appointed as auditor of the same
company for a period of five years:
Provided also that every company, existing on or before the commencement of this Act
Which is required to comply with provisions of this sub-section, shall comply with the
Requirements of this sub-section within three years from the date of commencement of
this Act:
Provided also that, nothing contained in this sub-section shall prejudice the right of
the company to remove an auditor or the right of the auditor to resign from such office of
the company.
(3) Subject to the provisions of this Act, members of a company may resolve to
Provide that
34

(a) In the audit firm appointed by it, the auditing partner and his team shall be
Rotated at such intervals as may be resolved by members; or
(b) The audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which the companies
Shall rotate their auditors in pursuance of sub-section (2).
Explanation.For the purposes of this Chapter, the word firm shall include a
limited
Liability partnership incorporated under the Limited Liability Partnership Act, 2008.
(5) Notwithstanding anything contained in sub-section (1), in the case of a Government
company or any other company owned or controlled, directly or indirectly, by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, the Comptroller and AuditorGeneral of India shall, in respect of a financial year, appoint an auditor duly qualified to
be appointed as an auditor of companies under this Act, within a period of one hundred
and eighty days from the commencement of the financial year, who shall hold office till
the conclusion of the annual general meeting
(6) Notwithstanding anything contained in sub-section (1), the first auditor of a
company, other than a Government company, shall be appointed by the Board of
Directors within thirty days from the date of registration of the company and in the
case of failure of the Board to appoint such auditor, it shall inform the members of
the company, who shall with in ninety days at an extraordinary general meeting
appoint such auditor and such auditor shall hold office till the conclusion of the first
annual general meeting.
(7) Notwithstanding anything contained in sub-section (1) or sub-section (5), in the
case of a Government company or any other company owned or controlled, directly or
indirectly, by the Central Government, or by any State Government, or Governments, or
partly by the Central Government and partly by one or more State Governments, the first
35

auditor shall be appointed by the Comptroller and Auditor-General of India within sixty
days from the date of registration of the company and in case the Comptroller and
Auditor-General of India does not appoint such auditor within the said period, the Board
of Directors of the company shall appoint such auditor within the next thirty days; and in
the case of failure of the Board to appoint such auditor within the next thirty days, it shall
inform the members of the company who shall appoint such auditor within the sixty days
at an extraordinary general meeting, who shall hold office till the conclusion of the first
annual general meeting.

(8)Any casual vacancy in the office of an auditor shall

(i) In the case of a company other than a company whose accounts are subject to audit by
an auditor appointed by the Comptroller and Auditor-General of India, be filled by the
Board of Directors within thirty days, but if such casual vacancy is as a result of the;
resignation of an auditor, such appointment shall also be approved by the company at a
general meeting convened within three months of the recommendation of the Board
and he shall hold the office till the conclusion of the next annual general meeting
(ii) In the case of a company whose accounts are subject to audit by an auditor appointed
by the Comptroller and Auditor-General of India, be filled by the Comptroller and
auditor-General of India within thirty days: Provided that in case the Comptroller
and Auditor-General of India does not fill the vacancy within the said period, the
Board of Directors shall fill the vacancy within next thirty days.
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a
retiring auditor may be re-appointed at an annual general meeting, if
(a) He is not disqualified for re-appointment;
(b) He has not given the company a notice in writing of his unwillingness
(c) A special resolution has not been passed at that meeting appointing some other auditor
.

or providing expressly that he shall not be re-appointed

36

(10) Where at any annual general meeting, no auditor is appointed or re-appointed,

the existing auditor shall continue to be the auditor of the company.
(11) Where a company is required to constitute an Audit Committee under section
177,all appointments, including the filling of a casual vacancy of an auditor under this
section shall be made after taking into account the recommendations of such committee.

4.3 Qualification and disqualification of Auditor

According to Provisions of Section 141(1) of the Companies Act, 2013 a person shall
be eligible for appointment as an auditor of a company only if he is a chartered
accountant within the meaning of Chartered Accountants Act, 1949 and holds a valid
Certificate of Practice.
It has been further provided that the firm shall also considered to appointed by its firm
name whereof majority of partners practicing in India are qualified for appointment as
auditor of a company.
According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including
limited liability partnership who are chartered accountants shall be authorized to act as
auditor and sign on behalf of the such limited liability partnership or firm.

Summary:
A person shall appointed as an auditor if he is chartered accountant within the meaning of
Chartered Accountants Act, 1949 and holding valid certificate of practice and acting in
capacity as
a) Individual
b) Partnership Firm
c) Limited Liability partnership

37

It has been further provided that only partners who are Chartered Accountants will be
Authorized to sign on behalf of the firm.

Disqualification of Auditor
According to Provisions of Section 141(3) of the Companies Act, 2013 , following
persons shall not be eligible as auditor of the company:
a) A body corporate other than LLP registered under the LLP Act, 2008
b) An officer or employee of the company
c) A person who is partner or who in the employment, of an officer or employee of the
company.
d) A person who or his relative or partner

Is holding any security/interest in the company or its subsidiary or of its holding or

associate company or subsidiary of such holding company. It has been further provided
that an relative may hold security or interest in the company of face value not exceeding

one lac rupees

Is indebted to the company or its subsidiary, or its holding or associate company or
subsidiary of such holding company, in excess of Rs. 5 lacs rupees
Has given guarantee or provide any security in connection with the in debtness of
any third person to the company or its subsidiary, or its holding or associate company
or a subsidiary of such holding company for value in excess of Rs. 1 lacs.

(e) A person or a firm who (whether directly or indirectly) has business relationship with
the company, or its subsidiary, or its holding or associate company or subsidiary of such
holding company or associate company.
Here the business relationship shall be construed as any transactions enter into for a commercial
purpose except:

38

Commercial transactions which are in the nature of professional services permitted to be

rendered by an auditor or audit firm by the professional bodies regulated such members.
Commercial transactions which are in ordinary course of business of the company at arms
length price as customer.
A person whose relative is a director or is in the employment of the company as a director or key
managerial personnel.
A person
(i) who is in full time employment elsewhere or
(ii) a person or a partner holding appointment as its auditor is at the date of such
appointment or reappointment holding appointment as auditor for more than 20
companies. A person who has been convicted by a court of an offence involving fraud
and a period of ten years has not elapsed from the date of such conviction. Any person
whose subsidiary or associate company or any other form of entityis engaged as on the
date of appointment in consulting or specialized services in reference to provision of
Section 144 of the Companies Act, 2013. Further According to Provisions of Section
141(4) of the Companies Act, 2013, where a person appointed as auditor of the company
incurs any of the disqualification mentioned in Section 141(3) of the Companies Act,
2013 after his appointment, he shall vacate his office as such auditor and such vacancy
shall be deemed to be casual vacancy in the officer of the auditor. It must be noted that
the aforesaid provisions are applicable to all types of auditors
i.e. cost auditors, statutory auditors and secretarial auditors

4.4 Rights and duties of Auditor

Right of Access to Books of Accounts:

Every auditor of a Company has a right of access at all times to the books of accounts and
vouchers of the company whether kept at the head office of the company or elsewhere.
Thus, the auditor may consult all the books, vouchers and documents whenever he so
likes. This is his statutory right. He may pay a surprise visit without informing the

39

Directors in advance but in practice, the auditors inform the Directors before they pay
their visits.

Right to obtain Information and Explanations:

He has a right to obtain from the Directors and officers of the company any information
and explanation as he thinks necessary for the performance of his duties as an auditor.
This is another important power in the hands of the auditor. He will, however, decide as
to which information or explanations he thinks necessary to obtain. It the Directors or
officers of the company refuse to supply some information on the ground that in their
opinion it is not necessary to furnish it, he has a right to mention the fact in his report.

Right to Correct any Wrong Statement:

The auditor is required to make a report to the members of the company on the accounts
examined by him and on every Balance Sheet and Profit and Loss Account and on every
other document declared by this Act to be part of or annexed to the Balance Sheet or
Profit and Loss Account which are laid before the company in General Meeting during
his tenure of office. The Directors have a duty to prepare them and present them to the
auditor.
The auditor cannot require but advise the Directors to amend their system of maintaining
accounts if it is faulty. If his suggestions are not carried out, he has a right to refer the
matter to the members. If the method of accounting is inadequate, he must state the fact
in his report that proper books of accounts have not been kept by the company.

Right to visit Branches:

According to section 228, if a company has a branch office, the accounts of the office
shall be audited by the companys auditor appointed under section 224 or by a person
qualified for appointment as auditor of the company under section 226.
Where the Branch Accounts are not audited by a duly qualified auditor, the auditor has a
right of access at all time to the books, accounts and vouchers of the company and thus,
may visit the branch, if he deems it necessary.

40

Right to Signature on Audit Report: Under section 229, only the person appointed as
auditor of the company, or where a firm is so appointed, only a partner in the firm
practicing in India, may sign the auditors report, or sign or authenticate any other
document of the company required by law to be signed or authenticated by the auditor.

Right to receive Notice and other Communications relating to General Meeting and
attend them:

Under section 231 an auditor of a company has a right to receive notices and other
communications relating to General Meeting in the same way as a member of the
company. He is also entitled to attend any General Meeting which he attends or any part
of the business which concerns him as an auditor.
According to the power of the auditor, he may make any statement or explanation with
regard to the accounts as he may desire. He need not, however, answer any questions.
Ordinarily, it is not necessary for the auditor to attend every General Meeting, but it will
be good for him to attend meetings in the following circumstances:
(a) When his report contains important qualifications directly affecting the management,
so that his remarks may not be misunderstood or misinterpreted.
(b) When he has received a notice from the company that someone else is going to be
proposed for appointment as auditor of the company at the Annual General Meeting.
(c) When he has been specially asked by the management to be present.

Right of being indemnified:

Under section 633, an auditor (being an officer of a company), has a right to be

indemnified out of the assets of the company against any liability incurred by him
defending himself against any civil and criminal proceedings by the company if it is
proved that the auditor has acted honestly or the judgment delivered is in his favor.

Right to have Legal and Technical Advice:

41

 He has a right to seek the opinion of the experts and, thus, take legal and technical advice.
This is necessary to give his opinion in his report. (Re. London and General Bank Case,
1895).
He has a right to receive his remuneration provided he has completed the work which he
undertook to do.
Duties of an Auditor:

To Enquire:

The duties of an auditor have been extended by the insertion of sub-section (1A) of section
227 under the Companies (Amendment) Act 1965 which is reproduced below:

With prejudice to the provision of sub-section (1), the auditor shall enquire:
(a) Whether loans and advances made by a company on the basis of security have been
properly secured and whether the terms on which they have been made are not prejudicial to
the interests of the company or its members.
(b) Whether transactions of the company which are represented merely by book entries are
not prejudicial to the interests of the company.
(c) Where the company is not an investment company within the meaning of section 372 or a
banking company, whether so much of the assets of the company, as consists of shares,
debentures and other securities have been sold at a price less than at within they were
purchased by the company.
(d) Whether loans and advances made by the company have been shown as deposits.
(e) Whether personal expenses have been charged to revenue account.
(f) Whether it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment, and if
no cash has actually been so received, whether the position as stated in account books and the
Balance sheet is correct, regular and not misleading.
42

4.5 Auditors report

The auditor's report is a disclaimer thereof, issued by either an internal auditor or an

independent external auditor as a result of an internal or external audit or public]], among
others) as an assurance service in order for the user to make decisions based on the results
of the audit.

43

An auditor's report is considered an essential tool when reporting financial information to

users, particularly in business. Since many third-party users prefer, or even require
financial information to be certified by an independent external auditor, many audits rely
on auditor reports to certify their information in order to attract investors, obtain loans,
and improve public appearance. Some have even stated that financial information without
an auditor's report is "essentially worthless" for investing purposes
It is important to note that auditor's reports on financial statements are neither evaluations
nor any other similar determination used to evaluate entities in order to make a decision.
The report is only an opinion on whether the information presented is correct and free
from material misstatements, whereas all other determinations are left for the user to
decide.

INDEPENDENT AUDITOR'S REPORT

Board of Directors, Stockholders, Owners, and/or Management of

ABC Company, Inc.
123 Main St.
Anytown, Any Country
We have audited the accompanying balance sheet of ABC Company, Inc. (the "Company")
as of December 31, 20XX and the related statements of income, retained earnings, and cash
flows for the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in (the
country where the report is issued). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 20XX, and the results of
its operations and its cash flows for the year then ended in accordance with generally
44

accepted accounting principles in (the country where the report is issued).

AUDITOR'S SIGNATURE
Auditor's name and address
Date = Last day of any significant field work

This date should not be dated earlier than when the auditor has sufficient audit evidence
to support the opinion.
Recently modifications have been made by the PCAOB to the opinion in the independent
auditors report. These changes can be attributed to the introduction of SAS No. 122 and
SAS No. 123.[3] For periods ending after December 15, 2012, the following is an
example of a standard unqualified auditor's report on financial statements as it is used in
most countries, using the name ABC Company, which was incorporated in California, as
an auditee's name:

INDEPENDENT AUDITOR'S REPORT

Board of Directors, Stockholders, Owners, and/or Management of
ABC Company, Inc.
123 Main St.
Anytown, Any Country
We have audited the accompanying financial statements of ABC Company, Inc. (a
California corporation), which comprise the balance sheet as of December 31, 20XX, and
the related statements of income, retained earnings, and cash flows for the year then ended,
and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with U.S. generally accepted accounting principles; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based
45

on our audit. We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditors' judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and
fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity's internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of ABC Company, Inc. as of December 31, 20XX, and the
results of its operations and its cash flows for the year then ended in accordance with U.S.
generally accepted accounting principles.
AUDITOR'S SIGNATURE
Auditor's name and address
Date = Last day of any significant field work
This date should not be dated earlier than when the auditor has sufficient audit evidence
to support the opinion.

46

CHAPTER 5
BANK AUDIT

5.1 Introduction
The audit of banking companies plays a very important role in India as it help to regulate
the banking companies in right manner. In audit of banks includes various types of audit
which are normally carried out in banking companies such as statutory audit,
revenue/income expenditure audit, concurrent audit, computer and system audit etc. the
above audit is mainly conducted by the banks own staff or external auditor. However, the
rules and the regulation relating to the conduct of various types of audit or inspections
differ from a bank to bank expect the statutory audit for which the RBI guidelines is
applicable. In this, I have given more importance on the overall bank audit system. In
todays competitive world audit is very much necessary as well as compulsory , because
investor investing decisions depend on that particular concept if auditor has expressing
47

his view about particular organization is true and fair then investor can get his ideas about
how much he should invest in particular companies

Bank auditing is the procedure of reviewing the services and procedures adopted by
banks and other financial institutions. It is a routine procedure that all financial services
entities must undergo in order to ensure that they are in compliance with industry
standards and jurisdictional regulations.

5.2

Role of RBI in Bank Auditing

48

In exercise of the powers conferred by section 35 A of the Banking Regulation Act, 1949
the Reserve Bank of India being satisfied that it is necessary and expedient in the public
interest so to do, hereby, issues the directions hereinafter specified.
The directions are issued with a view to providing a framework to banks enabling them to
detect and report frauds early and taking timely consequent actions like reporting to the
49

Investigative agencies so that fraudsters are brought to book early, examining staff
accountability and do effective fraud risk management. These directions also aim to
enable faster dissemination of information by the Reserve Bank of India (RBI) to banks
on the details of frauds, unscrupulous borrowers and related parties, based on banks
reporting so that necessary safeguards / preventive measures by way of appropriate
procedures and internal checks may be introduced and caution exercised while dealing
with such parties by banks.
The Chairmen and Managing Directors/Chief Executive Officers (CMD/CEOs) of banks
must provide focus on the "Fraud Prevention and Management Function" to enable,
among others, effective investigation of fraud cases and prompt as well as accurate
reporting to appropriate regulatory and law enforcement authorities including Reserve
Bank of India.
The fraud risk management, fraud monitoring and fraud investigation function must be
owned by the bank's CEO, Audit Committee of the Board and the Special Committee of
the Board.
Classification of Frauds

Misappropriation and criminal breach of trust.

Fraudulent encashment through forged instruments, manipulation of books of account or

through fictitious accounts and conversion of property.

Unauthorized credit facilities extended for reward or for illegal gratification.
Cash shortages.
Cheating and forgery.
Fraudulent transactions involving foreign exchange
Any other type of fraud not coming under the specific heads as above.

Reporting of frauds to Reserve Bank of India

Banks need not furnish FMR 1 return in fraud cases involving amount below 0.1 million
to RBI in either hard or soft copy. However, banks at their end should make the data entry
in respect of such cases through the FRMS package individually in FMR 1 format (less
than0.1 million) which will get automatically captured in FMR 2 return and will form
part of the consolidated database relating to frauds for the respective bank. In respect of
frauds above 0.1 million the following procedure may be adopted.
50

5.3 Audit of Banking Companies

The audit of the banks should be well-acquainted with the relevant provision of the
special enactment that govern different types of banks, particularly those which affect the
various items of the financial implications of the business carried on by banks and the
types of the transaction that arise in the day-to-day operations. In this chapter, salient
features of audit of the banks are considered in the context of the provision of the various
enactments governing them.
Legislations relevant to Audit of banks:The provisions of many Acts relevant to audit of different types of banks. An auditor of
the banks should acquaint with the specific provision of the Acts applicable to the type of
banks under audit. Nationalized banks are governed by the provisions of the relevant
Banking companies Act. Certain provision of the Banking Regulation Act 1949 also
applicable to nationalized banks The non-nationalized banking companies are governed
by the provision of the Banking Regulation Act 1949.Co-operative banks are governed
by the Co-operative Societies Act 1912 or the Co-operative Societies Act of the state in
which they are situated, as well as by Part-v of the Banking Regulation act 1949.Certain
provision of the Banking Regulation act have been modified while certain others have
been omitted in their allocation toco-operative banks. Regional rural banks are governed
by the Regional rural banks Act 1976. The provisions of the State bank of India Act 1955,
and the State bank of India(subsidiary banks)Act 1959, apply State bank of India and its
subsidiaries respectively. Certain specified provisions of the Banking Regulation
act 1949, are applicable to regional rural banks as well as to the State bank of India and
its subsidiaries.
Provision relating to Accounts:Section 29 of the Banking Regulation Act deals with the obligation of the banks
regarding maintenance of accounts and preparation of financial statements. Its main
preparation as follows;
Banks have to prepare a balance sheet and profit and loss accounts as on 31stmarch every
year in the form to set out in the Third schedule to the Act. A foreign banking company
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has to similarly prepare a balance sheet and a profit and loss a/c every year in respect of
the business transacted through its branching India.
The financial statements of the banks are to signed by the manager or the principal officer
and by atleast three directors. The financial statements of foreign banking companies are
to be signed by the manager or the agent of principal office in India
In cases of the banking companies the provisions of the companies Acts 1956,relating to
the financial statements are also applicable to the extent they are not inconsistent with
requirements of the Banking Regulation Ac, 1949.
As per the third schedule to the Banking Regulation Act, the balance sheet of the bank as
to classify the items of the Capital and Liabilities and those of thea ssets below:-

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 The forms of the profits and losses a/c show the main item of the income,expenditure and
appropriations. The disclosure requirements of the Third Scheduledare discussed later in
this chapter along with the audit to verify the various items of the financial statements.
Apart from the requirements of the Third Schedule to the banking regulation act1949,the
financial statement of the bank have to contain additional disclosures required by RBI
from time to time. Besides, listed banks have to also satisfy the disclosure of listing
agreement with stock exchange (s).
RBI has issued detailed notes and instruction for completion of balance sheet and profit
and loss account of banks. These notes and instructions provident repetition of the
requirement of the Third schedule to the Banking Regulation Act and are thus useful to
the auditor.

5.4 Audit of Cooperative Banks

The co-operative banks have a history of almost 100 years. Co-operatives in India came
into being as a result of the Government taking cognizance of the agricultural conditions
that prevailed during the latter part of the nineteenth century and the absence of
institutional arrangements for finance to agriculturists, which had resulted in mounting
distress and discontent. Small, local, locally worked institutions, co-operative in form,
which would satisfy the postulates of proximity, security and facility for providing credit,
were seen as the answer to this situation. Subsequent events during both pre and postIndependence period have led to a vast growth of co-operative s covering various sectors
of the Indian economy. The potential of the co-operative sector for bringing about
development, right up to the nineties, resulted in an increase in the number of cooperatives and their contribution, making the Indian co-operative movement one of the
largest movements of its kind in the world.

Audit of State Co-operative Banks and Central Co-operative Banks is relatively a new
area for Chartered Accountants. On the recommendations of Revival Package for Short
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Term Co-operative Credit Structure. NABARD has issued instructions in the year 2008
for audit of and CCBs by Chartered Accountants to bring in professionalism in the audit
process. With a view to equipping the Chartered Accountants, several guidelines, format
of LFAR, etc., were issued by NABARD in the past 5 years. Besides, sensitization
meets / National Seminars etc., were also conducted to discuss operational problems and
find suitable solutions. During the seminars, a strong need for a Manual / Guidance Note
for audit of cooperative banks was expressed by the participants.
The Guidance Note has been designed to guide the auditors of State Cooperative Banks
(StCBs) and District Central Co-operative Banks (DCCBs) to conduct statutory audit as
envisaged by the respective State Co-operative Societies Act (the Act), Banking
Regulation Act (as applicable to Cooperative Banks), 1949, Reserve Bank of India (RBI)
and National Bank for Agriculture and Rural Development (NABARD), Notifications &
Circulars issued by Central Government and RBI and Accounting and Auditing &
Assurance Standards, Guidance Notes issued by ICAI as amended from time to time in
accordance with uniform auditing scope, programs and techniques as detailed in this
Guidance Note. The principles, practices and programs set out in this Guidance Note
need to be applied for the audits of StCBs and DCCBs irrespective of their geographical
distribution.
The standards and practices set out in this Guidance Note should be incorporated as the
minimum benchmark for all audits of StCBs and DCCBs. However, the audit approach
and the extent of the test procedures may be tailored by the auditors to suit the specific
needs of the small or very large StCBs and DCCBs.
Need for Co-operative Audit
Co-operative Audit serves the following purposes:The members of the Society are to be satisfied that the affairs of the society are managed
properly and on sound business principles. This is possible by the Co-operative Auditor
undertaking a detailed check of the voluminous transactions taking place during the entire
year and making a report of his findings as a result of this check, to the members.

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A large number of societies borrow funds from outside. The creditors would be keen to
satisfy themselves of the financial soundness and credit worthiness of the society. For this
purpose they would depend upon the Co-operative Auditors report.
A large number of persons are employed by Co-operatives for managing their affairs. In
order to ensure that there is proper check on efficiency and integrity of employees, the
managements would require a systematic and thorough check of their accounts. This
purpose is served by Co-operative Audit.
Non-members who deposit their funds with the Co-operative Banks would like to satisfy
themselves that their funds are safe with the Bank, This is possible by the Co-operative
Auditors report.
Salient features of Co-operative Audit:The audit of a Co-operative Society is different from that of a joint stock company
because the objects of a Co-operative Society are quite different from those of a Joint
Stock Company. While the main object of a Joint Stock Company is to earn profit, the
object of a Co-operative Society is to render service to its members. Service rather than
profit is the motto of a Co-operative Society.
Opinions have been expressed from time to time on the nature, extent and scope of Cooperative Audit.
According to the Maclagan Committee, Co-operative Audit extends somewhat beyond
the bare requirements of the Act and should embrace an enquiry into all the
circumstances which determine the general position of the society. It is the duty of the
Co-operative Auditor to notice any instance in which the Act, rules or byelaws have been
infringed, to verify the cash balance and certify the correctness of the accounts, to
ascertain that loans are made fairly for proper periods and objects and on adequate
security to examine repayments in order to check book adjustments and improper
extensions and generally to see that the society is working on sound lines and that the
committee, the officers and the ordinary members understand their duties and
responsibilities.

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According to the Mirdha Committee, Co-operative Audit should include scrutiny of the
extent of benefit accruing to the weaker sections of the societys members.
Thus a Co-operative Auditor should not confine his enquiry to the books of accounts but
should go beyond the books and make enquiries into the working and general functioning
of the society. His enquiry according to the Maclagan Committee should embrace all
circumstances which determine the general position of the society and should aim at
seeing that the society is working on sound lines. The audit of Co-operative Society has
to be conducted specially in the background of Co-operative Principles, and guidance is
to be given by the Co-operative Auditor for improvement of the Co-operative Institution
in the light of this background.
Statutory provisions relating to Co-operative Audit
Audit of Co-operatives is conducted as per provisions of Section 63 of the Karnataka
Co-operative Societies Act, 1959.
According to section 63(1) Every Co-operative society shall get its accounts
audited at least once in each year by an auditor or an auditing firm appointed by the
general body from the panel of auditors approved by the Director of Co-operative
Audit and the Director of co-operative audit is the authority to prepare and
maintain a panel of auditors or auditing firms. (sub Rule 6 ,8 and 9 of Rule 29B
and sub Rule 12 of Rule 29B)
According to section 63(3) the manner of preparation of the list of auditors and
auditing firms and the procedures to be followed by the co-operative society has
been detailed in rule 29(A) and 29(B).
Section 63(11)- The Director of co-operative audit shall submit the audit reports of
an Apex co-operative society to the State Government annually to be placed before
the legislature (Rule 29B).
According to section 63(15) , the auditor shall make a report to the co-operative
society on the accounts examined by him. The report shall state whether in his
opinion and to the best of his information and according to the explanations given to

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him, the said accounts give the information required by this act, in the manner so
required and give a true and fair view

Main features of Co-operative Audit

The main features of Co-operative Audit relate to the following:-

Adherence to Co-operative Principles It has to be ascertained in general whether and if so,

to what extent the objects for which the society was set up have been fulfilled. The assessment
need not be only in terms of profit made. It could also be in terms of benefits given to members.
The benefits could be in terms of sales effected at lower prices to members, economy achieved in
operations, avoidance of wastage of funds, avoidance of middlemen in purchases etc.,

Observance of the provision of the Act and Rules Infringement of the provisions of the KCS
Act and Rules and the byelaws of the society, if any, should be pointed out in audit. Financial
implications of the infringement should also be assessed and indicated. As per Section 57(2A) of
the KCS Act and Rule 22(2) of the KCS Rules, the maximum dividend a society can pay to a
shareholder is 25 percent.

Examination of overdue debts Overdue debts affect the working of a society seriously.
They affect the Working Capital position of the society. As such it is necessary to make a
detailed analysis of the overdue debts with a view to ascertaining the chances of their
recovery and classifying them as good or bad. It is also necessary to compare the
percentage of overdue debts to working capital and loans and advances with that of last
year and ascertain whether the trend is decreasing or increasing, whether adequate action
is being taken for recovery, and whether necessary provision is being made for doubtful
debts. Detailed instructions have been issued in this regard in the Audit Instructions
Personal verification of members loan and examination of their pass Books This is
necessary in Co-operative Societies in order to ensure that books of accounts are free
from manipulation, since in many Rural and Agricultural Societies a considerable number
of members could be illiterate and as such personal verification provides a safeguard
57

against any manipulation. Personal verification will however be on the basis of a test
check. Detailed instructions have been issued in this regard in the Audit Instructions.
Audit classification of Society Audit classification made by the Auditor indicates the
overall performance of the society. Detailed instructions have been issued in this regard
in the Audit Instructions.
Discussion of the Draft Audit Report with Managing Committee the Auditor with the
management before finalizing the Audit Report should discuss the draft audit report. If
the management desires. Detailed instructions have been issued in this regard in the Audit
Instructions.

CHAPTER 6
Bank Audit Process

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Banks are central to the nations 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.

6.1Audit of Incomes

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Financial statement audits are a routine part of closing your financial books. Audits help
to ensure the accuracy of the accounting data used to compile the statements as well as
the overall calculations. An income statement audit can help you isolate mathematical
errors and ledger discrepancies or give you peace of mind before you file the income
statement during closing.
The first step in auditing financial statements is to verify the summary calculations. Start
with the income section, confirming that the total revenue amount is equal to the sum of
the income lines. Repeat this process for the expense category. Manually calculate the
difference between the revenue and expense numbers to verify the equity section, as
owner's equity is simply the difference between the revenue and expenses.
Once you determine that the calculations on the income statement itself are accurate, you
need to review the detail that contributes to the figures. Pull summary transaction reports
from the general ledger for each revenue account. Review the overall data on the
summary reports for accuracy. Run transaction-level reports for the accounts so that you
can view the details to confirm that the summary report figures are accurate. Each
transaction-level report shows you what has posted to the account. Compare the
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transactions in the ledger to the hard copy files, such as invoices or check stubs that
support the journal entries, to confirm that they were posted correctly.
When you complete a full audit of the income statement, select a few transactions from
each relevant account, such as a few credits posted to each revenue account and a few
payments issued from each expense account. Request the documentation of the
transactions you selected to complete a sample audit of the account activity. The
documentation in question would consist of check stubs and invoices or paperwork filed
to support journal entries. Check the calculations of the invoices or the payment
vouchers, and verify that the entries in the system match the documentation.

6.2 REVENUE AUDIT PROCEDURE

Revenue audit is the audit of items governing income & expenditure of banks, basically
this type of audits are conducted with a view to verify the accuracy, relevance of
expenditure incurred & Incomes earned by the banks according to applicable latest
circulars, notification , Auditors only required to concentrate on the areas which affect
revenue items of the banks.
Normal Procedure to conduct the revenue audit is as under

Study the relevant circulars pertaining to charges given by bank, Go through the
Format of Audit Report & Annexure attached to the audit report. Design the Query
Sheet in Format of annexure given to bank & get some print out copies of query sheet
before going to audit.
Prepare a separate file for audit & dont forget to carry Audit engagement letter given by
head office along with file & query sheet formats, circulars, r scales, audit pens, pencils
calculators.
Prepare the Short Audit Programme for audit covering which areas to be covered & to be
covered by whom.
Auditors are advised to keep in mind the period of audit so as to avoid haphazard way of
audit.

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 Scrutinize the previous revenue audit reports, latest concurrent audit reports of branch
to get the idea of nature of leakage that can be possible to identify. Get Some idea about
Bank Officials & Nature of their duties, positions,
Get Some Basic idea about branchs banking software (i.e. Putting A/c No, Period of
Audit) so as to facilitate easy viewing of customer ledger.
Ask the Bank manager to make available Advances Sanction Register for our Audit

Period, Jottings of Some Important accounts.

Total Cash Credit Accounts Of Branch
Top 10 Saving Accounts
Top 10 Depositors of bank.
Overdue Advances in Audit Period
List of Special Advance Sanctions & Get its Sanction Letters.
List of NPA Accounts of branch of Recoveries made during audit period against them.

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6.3 Audit of Expenditure

Companies have many types of internal controls related to expenses. Some invoices may
require certain levels of signatures, and others may require a written contract. One of the
first steps in an audit is to evaluate paid expenses against how closely they follow the
internal controls. An offshoot of this step is for the auditor to recommend changes should
he find loopholes within the controls that may allow an employee to abuse or misuse the
process of paying expenses.
A reasonableness check involves checking expenses to see if they are in line with what is
considered ordinary. For example, an invoice of $100 for a small box of pencils would
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not be reasonable and should raise a red flag. An additional reasonableness step is to
make sure that only expenses that are necessary are incurred. Having a bill from two
electric companies for one location should also cause an audit flag, as most locations only
have one electricity supplier.
Expenses must be being received in a timely manner. The last thing a company wants is
for expenses to be turned in for something that occurred a year or two ago. A wide time
gap makes it harder for companies to make sure the expenses are legitimate and
reasonable. The older the invoice, the harder it is to ensure it is legitimate.
However, financial statements of financial firms such as banks are very different.On the
back of banking regulations, banks' accounts are presented in a different manner. As
such, one needs to analyze the same in a different manner.
The key expense of a bank is interest on deposits that are made with it. These could be in
the form of term (fixed) or savings bank account deposits. The second biggest expense
head for a bank would be its operating expenses. This head would include all operational
costs, which even non-financial companies expend. Some of include employee costs,
advertisement and publicity costs, administrative costs, rent, lighting and stationary.
Under expenses, there is also an item called 'provisions and contingencies' that is
included. In the simplest terms, these are liabilities that are of uncertain timing or
amount. This includes provisions for unrecoverable assets. In accounting terms, such
provisions are called as 'Provisions for Non-performing assets (NPAs)'. Apart from
NPAs, these provisions also include provision for tax and also depreciation in the value
of investments.
Moving on to the bank's expense account. The total interest expended stood at 89 billion.
The interest on deposits stood at 80 billion, while interest on borrowings from other
sources such as the RBI and other bank borrowings stood at 6 billion. Operating
expenses during the year stood at 56 billion. The major contributor to this head was
employee costs (23 billion). Provision and contingencies amount stood at 29 billion.

6.4 Audit of Assets

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What a bank owns, including loans, reserves, investment securities, and physical assets.
Bank assets are typically listed on the left-hand side of a bank's balance sheet. Bank
liabilities, what a bank owes, are listed on the right-hand side of a bank's balance sheet.
Net worth is the difference between assets and liabilities. The largest asset category of
most banks is loans, which generates interest revenue. A critical asset category used to
maintain the safety of deposits is reserves (vault cash and Federal Reserve deposits).
Bank assets are the physical and financial "property" of a bank, what a bank owns. While
a bank commonly owns physical property (buildings, land, furniture, equipment), the
bulk of a bank's assets are financial--legal claims on the property or the wealth of others.
The two most notable asset categories are loans (which generate interest revenue) and
reserves (which keep deposits safe).

Audit of Bank and Cash

Liquid assets and include: notes and coins, bank current accounts, bank deposit accounts
Vulnerable assets because of its liquidity
Easily verified because they can be confirmed directly by third parties or by physical
counts

Risks

Fraudulent activity or misappropriation of funds

Inappropriate or inadequate banking arrangements resulting in financial loss.
Delays in making banking are resulting in financial loss or overdraft

.Audit objectives

Completeness: to ensure that there is no unrecorded cash. This means reconciling cash
balances to records, ensuring that proper sales cut off has been performed.

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 Accuracy of measurement: to ensure that amounts are correctly recorded in the proper
accounting period. This means that cut off is correct.
Existence: to ensure that the cash exist at a given date. The related evidence includes
cash count.
Rights and obligations: to ensure that the company has a right to the cash
Occurrence: to ensure that the cash belongs to the company at the year-end date. This
means checking to ensure no cash receipts are postdated
Presentation and disclosures: to ensure that the cash balance and related income
statement entries are correctly disclosed in the FS in accordance with legislation and
accounting standards.

Test on bank reconciliation at year end

Compare cash book entries with bank statements.

Balance as per bank statement at year end to tally to bank confirmations letter and to
Balance used in bank reconciliation.
Verify unpresented cheques.
Verify outstanding lodgments.
Establish arithmetical accuracy.
Account for direct debits and direct credits
Check post balance sheet transactions.

Banks reports for audit purposes (bank confirmation)

Consist of confirmation of bank balances and other matters from the clients bankers at
the period end.
Standard letters are used to confirm information with the bank where the client has
dealings.

Reasons for auditors to seek bank confirmation

Bank confirmation provides evidence in respect of existence, ownership, and accuracy.

It is a third party, written in relation to the balance sheet of assets and liabilities.

Procedures

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 Request for confirmation issued to relevant banks: a request for a bank confirmation is to
be issued on auditors letterhead and sent to all banks where the client has dealings. The
request should be clear and concise.
The request to be vague or precise: auditors should consider whether it is appropriate to
list down balances and other information and request confirmation, or to request details
of balances and other information.
Control over the content and dispatch of requests for confirmation: is the responsibility of
the auditor. However, the client will need to authorize disclosure of the relevant
information. Replies should be sent direct to the auditor who should enclose a pre-paid
envelope to facilitate a speedy response.
What precise information to be sought: the following categories of information may be
sought:

Balances due to or from the bank, the letter may give the account number, description
and currency, and should request information on nil balances and accounts closed during

the period.
Collateral given or received, maturity and interest terms, unused facilities, lines of

credit and any rights of offset or other rights or encumbrances.

Terms and repayments conditions of loan and overdrafts.
Contingent liabilities such as bills, acceptance, guarantees, and endorsements.
Asset repurchase and resale agreements and options.
Forward currency and other outstanding contracts.
Assets held in safe custody any encumbrances over them.
Check that replies are complete: in reviewing the banks reply it is important for auditors
to check that the bank has answered all the questions information asked for in full.

Cash on hand
Verification
The auditor should therefore plan to count all cash balances SIMULTANEOUS to prevent
any transfers of floats to hide discrepancies.

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6.5

Audit of Liabilities
Liabilities are the financial obligations of an enterprise other than owners funds.
Liabilities include loans and borrowings, trade creditors and other current liabilities,
deferred payment credits, installments payable under hire purchase agreements, and
provisions. Besides liabilities, this Guidance Note also deals with contingent liabilities,
i.e., obligations relating to past transactions or other events or conditions that may arise in
consequence of one or more future events which are presently deemed possible but not
probable.
In any auditing situation, the auditor employs appropriate procedures to obtain reasonable
assurance about various assertions [see Statement on Standard Auditing Practices (SAP)
5, Audit Evidence]. In carrying out an audit of liabilities, the auditor is particularly
concerned with obtaining sufficient appropriate audit evidence to satisfy himself that all
known liabilities are recorded and stated at fair and reasonable amounts.
Bank's liabilities constitute five major items. The share capital, the contribution which
shareholders have contributed for starting the bank. Reserve funds are the money, which
the bank has accumulated over the years from its undistributed profits. Deposits are the
money owned by customers and therefore it is a liability of a bank. There can be various
kinds of deposits and recurring deposits. Apart from these items a bank can borrow from
central and other commercial banks. These borrowings are also treated as bank's
liabilities.
Liabilities are either the deposits of customers or money that banks borrow from other
sources to use to fund assets that earn revenue. Deposits are like debt in that it is money
that the banks owe to the customer but they differ from debt in that the addition or
withdrawal of money is at the discretion of the depositor rather than dictated by contract.

Checkable Deposits
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 Checkable deposits are deposits where depositors can withdraw the money at will.
These include all checking accounts. Some checkable deposits, such as NOW, superNOW, and money market accounts pay interest, but most checking accounts pay very
little or no interest. Instead, depositors use checking accounts for payment services,
which, nowadays, also includes electronic banking services.
Before the 1980s, checkable deposits were a major source of cheap funds for banks,
because they paid little or no interest on the money. But as it became easier to transfer
money between accounts, people started putting their money into higher yielding
accounts and investments, transferring the money when they needed it.

Non transaction Deposits

Nontransaction deposits include savings accounts and time deposits, which are
basically certificates of deposits (CDs). Savings accounts are not used as a payment
system, which is why they are categorized as nontransaction deposits and is also the
reason why they pay more interest. Savings deposits of yore were mostly passbook
savings accounts, where all transactions were recorded in a passbook. Nowadays,
technology and regulations have allowed statement savings where transactions are
recorded electronically and may be viewed by the depositor on the bank's website or a
monthly statement is mailed to the depositor; and money market accounts, which have
limited check writing privileges and earn more interest than either checking or savings
accounts.
A Certificate of Deposit (CD) is a time deposit where the depositor agrees to keep the
money in the account until the CD expires. The bank compensates the depositor with a
higher interest rate. Although the depositor can withdraw the money before the CD
expires, banks charge a hefty fee for this.
There are 2 types of certificates of deposit (CDs): retail and large. A retail CD is for less
than $100,000 and is generally sold to individuals. It cannot be resold easily. Large CDs
are for $100,000 or more and are highly negotiable so they can be easily resold in the
money markets. Large negotiable CDs are a major source of funding for banks.

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Borrowings
Banks also borrow money, usually from other banks in what is called the federal funds
market, so-called because funds kept in their reserve accounts at the Federal Reserve are
called federal funds, and it is these accounts that are credited or debited as money is
transferred between banks. Banks with excess reserves, which are usually smaller banks
located in smaller communities, lend to the larger banks in metropolitan areas, which are
usually deficient in reserves.
The interbank loans in the federal funds market are unsecured, so banks only lend to
other banks that they trust. Part of the reason for the 2007 - 2009 Credit Crisis is that
banks didn't know which other banks were holding risky mortgage-backed securities that
were beginning to default in large numbers, so they stopped lending to each other, forcing
banks to restrict their lending to the public, which caused the supply of money to decline
and the economy to contract.
Banks also borrow from non depository institutions, such as insurance companies and
pension funds, but most of these loans are collateralized in the form of a repurchase
agreement (aka repo), where the bank gives the lender securities, usually Treasuries, as
collateral for a short-term loan. Most repos are overnight loans that are paid back with
interest the very next day.
As a last resort banks can also borrow from the Federal Reserve (Fed), though they rarely
do this since it indicates that they are under financial stress and unable to get funding
elsewhere. However, during the credit freeze in 2008 and 2009, many banks borrowed
from the Fed because they could not get funding elsewhere.

Verification and valuation of Different Kinds of Liabilities:

Capital: Although capital is not the liability of a company, still it should be verified to
enable an auditor to give a certificate in regard to the correctness of the balance sheet.
The auditor should examine the Memorandum of Association and the Articles of
Association of the company. He should also examine the CashBook, Pass Book and

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Minutes Book of the Board of Directors to find out the number and different classes of
shares issued
.
Reserve Accounts and Funds: For the audit of these two items, the auditor should
examine the Minutes Books of directors meeting.
Debentures and Mortgage: The auditor should enquire in to powers of the company to
borrow money
Trade Creditors: The auditors should ask for schedule of the creditors and check it with
the purchase ledger which in its turn may be checked with the books of original entry
with the Purchase invoices, Credit Notes, Goods Inward Books,Return Outward Book,
Bill Payable Book, and Cash Book. The Auditor should see that all Purchase during the
year have been included in the purchases and especially purchases made at the close of
the year
Bills Payable: The auditor should verify this item form Bills payable Book and the Bills
Payable Account. The Bills payable already paid should be checked rom the Cash Book
and examine the returned bills payable. To see the genuineness of the bills payable in
hand on the date of balance sheet, the auditors should check the cash book of the
succeeding year as to whether any payment has been made in respect of such bills
.
Outstanding Expenses: The auditor should get a certificate from a responsible official to
see that all expenses for the current year are included and the payment for each expenses
such as interest, discounts, salaries have not been paid are included.
Loans: Reference may be made to the agreement and correspondence for getting the
loan. If interest on the loan has not been paid, he should see that it is shown as a liability.
In case of bank overdraft, the agreement with the bank and the security offered should be
examined
Contingent Liability: The auditors should consider the circumstance and the situation
about the occurrence of that type of liabilities.

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.
.

CHAPTER 7
Type of Audit In Banks

7.1 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
72

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.
A statutory audit is a legally required review of the accuracy of a company's or
governments financial records. The purpose of a statutory audit is the same as the
purpose of any other type of audit: to determine whether an organization is providing a
fair and accurate representation of its financial position by examining information such
as bank balances, bookkeeping records and financial transactions.
BREAKING DOWN 'Statutory Audit'
For example, a state law may require all municipalities to submit to an annual statutory
audit examining all accounts and financial transactions and to make the results of the
audit available to the public. The purpose of such an audit is to hold the government
accountable for how it is spending taxpayers' money.
Many government agencies participate in regular audits. This helps ensure any funds
directed by the larger government entity, such as at the federal or state level, have been
used appropriately and according to any associate laws or requirements for their use.
Being subject to a statutory audit is not an inherent sign of wrongdoing. Instead, it is
often a formality designed to help prevent such activities, such as the misappropriation
of funds, by ensuring regular examination of various records by a third party. The same
also applies to other audits.
Understanding Statutes
The term statutory is used to denote the audit is required by statute. A statute is a law or
regulation enacted by the legislative branch of the organizations associated government.
Statutes can be enacted at multiple levels, including federal, state or other municipality.
In business, statute can also refer to any rule set forth by the organizations leadership
team.

7.2 Internal audit

Banks generally have a well-organized system of internal audit. There internal auditors
pay frequent visit to the branches. They are an important link in internal control of the
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bank. The systems of internal audit in different banks also have a system of regular
inspection of branches and head office. A separate department within the banks by firms
of chartered accountants carries out the internal audit and inspection function.
An employee of a company charged with providing independent and objective
evaluations of the company's financial and operational business activities, including its
corporate governance. Internal auditors also provide evaluations of operational
efficiencies and will usually report to the highest levels of management on how to
improve the overall structure and practices of the company.
Internal auditors deal with issues that are fundamentally important to the survival and
prosperity of any organization. Unlike external auditors, they look beyond financial risks
and statements to consider wider issues such as the organizations reputation, growth, its
impact on the environment and the way it treats its employees.
In sum, internal auditors help organizations to succeed. We do this through a
combination of assurance and consulting. The assurance part of our work involves telling
managers and governors how well the systems and processes designed to keep the
organization on track are working. Then, we offer consulting help to improve those
systems and processes where necessary.

7.3 Concurrent audit:

Concurrent audit is the system which introduced by the RBI with the view that interval
between the occurrence of transaction and its 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.
Concurrent audit is an examination, which is contemporaneous with the occurrence of
transactions or is carried out as near thereto as possible. It attempts to shorten the
interval between a transaction and its examination by an independent person not in its
documentation. In concurrent audit, there is an emphasis in favor of substantive checking
in key areas rather than test checking

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This concurrent audit is essentially a management process integral to the establishment

of internal accounting functions and effective controls and setting the tone for a vigilance
internal audit to preclude the incidence of serious errors and fraudulent manipulations.
The main focus while conducting concurrent audit it to ensure that transactions are not
dealt with in routine but in adherence with the systems and procedures laid down. The
study of various fraudulent transactions with the systems and procedures, by the bank
employees, which resulted in misuse of one's position. Hence, the focus of concurrent
audit is on adherence to laid down systems, procedures and safeguards.
A concurrent auditor may not sit in judgment of the decisions taken by a branch
manager or an authorized official. The concern was that this is beyond the scope of
concurrent auditor. However, the auditor will necessarily have to see whether the
transaction or decisions are within the policy parameters laid down by the Head Office,
they do not violate the instructions or policy prescriptions of the RBI, and that they are
within the delegated authority and in compliance with the terms and conditions for
exercise of the delegated authority. In every large branch, which has different divisions
dealing with specific activities, concurrent audit is a means to help the in-charge of the
branch to ensure on an ongoing basis that the different divisions function within laiddown parameters and procedures.

7.4 System audit:

In todays technological advancements, banking companies are using a well-organized
computer system to perform their transactions. So, it is very necessary to conduct
system audit in order to evaluate the computer system for effectiveness. System audit is
the audit of such computer environment/system and comprises the following internal
controls over EDP activities and with application controls specific control procedures
over accounting applications/assuring that all transaction are recorded and authorized
and completely, accurately, timely processed manner which in turn are verified by
computer.

75

An information systems audit performed by RMAS is a comprehensive examination of a

given targeted system. The audit consists of an evaluation of the components which
comprise that system, with examination and testing in the following areas:

High-level systems architecture review

Business process mapping (e.g. determining information systems dependency with

respect to user business processes)

End user identity management (e.g. authentication mechanisms, password standards,

roles limiting or granting systems functionality)

Operating systems configurations (e.g. services hardening)
Application security controls
Database access controls (e.g. database configuration, account access to the database,

roles defined in the database)

Anti-virus/Anti-malware controls
Network controls (e.g. running configurations on switches and routers, use of Access

control lists, and firewall rules)

Logging and auditing systems and processes
IT privileged access control (e.g. System Administrator or root access)
IT processes in support of the system (e.g. user account reviews, change management)
Backup/Restore procedures

The general mechanics of the audit consist of sampling configuration and log files, with
subsequent interviews with key personnel. Additionally, RMAS performs testing with
regard to identified key controls, and may require the creation of user accounts such that
RMAS auditors may more thoroughly peruse the system and determine the efficacy of
implemented controls. Further, a subset of integration testing may be performed against
test or staging environments to assure controls that the general user may experience are
in place and functioning as described and expected.
While much of the evaluation performed in an information systems audit is heavily
focused on the IT general control environment for the given system, interviews with
primary the primary users or information owners may be conducted. Inquiry into the user
community would be performed to determine general user acceptance of the system and
to determine service expectations with regard to the system.

7.5 Revenue audit:

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 Revenue audit refers to the audit of revenues/ incomes. In revenue audit of banking
companies, auditors go through the various sources of revenues from which bank earn
income. In revenue audit of banks, the auditor inspects that all the records are showing
true and fair picture of revenues or not.
A Revenue audit is an examination of the information and figures shown by a taxpayer in
their tax returns against those shown in their business records. Therefore, the auditor
needs to see all books and records in relation to the tax for the period being audited and
these should be available on the first day of the audit.
It is normally concerned with the review of the taxpayer's return of income for one year,
but where significant discrepancies arise during the audit, the Revenue may extend the
examination for prior or subsequent years.
The primary objectives of Revenue audits are to promote voluntary compliance and

monitor tax compliance. The function of a Revenue audit is to:

Determine the accuracy of a return in relation to tax liability or claim for
repayments;
Identify any additional liabilities or other matter requiring adjustment;
Collect tax, interest and penalties where applicable;
Specify any remedial action required to put the taxpayer on a compliant footing
Where indicators of serious evasion occurs to consider prosecution.

CHAPTER 8
BOOKS OF ACCOUNTS OF BANKS

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8.1 Introduction
A banking company is required to maintain the books of accounts in accordance with
sec.209 of the companies act. There are, however, certain imperatives in banking business
they are the requirements to maintain accurate and always up to date account. Banks,
therefore, device their accounting system to suit these requirements. The main
characteristics of a banks system of book keeping are as follows:
Entries in the personal ledgers are made directly from vouchers instead of being posted
from the books of prime entry.

The vouchers entered into different personal ledgers each day are summarized on
summery sheet; the totals of each are posted to the control accounts in the general ledger.

The general ledger trail balance is extracted and agreed every day.

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.

78

A trial balance of the detailed personal ledgers is prepared periodically, usually every two
weeks, and agreed with the general ledger control accounts.

Expecting for cash transactions, always two vouchers are prepared for each transaction,
one for debit and the other for credit. This system ensures double entry at the basic level
and obviates the possibility of errors in posting.

8.2 PRINCIPAL BOOKS OF ACCOUNT

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.
Profit and Loss ledgers;
Some banks keep one account for profit and loss in this general ledger andmaintained
separate books for the detailed accounts. These are columnar bookshaving separate
columns for each revenue receipt and expense head. Other bankskeep separate books for
debits and credits posted are entered in to the profit andloss account in the general ledger.

8.3 SUBSIDIARY BOOKS OF ACCOUNTS

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 ledgersare posted
directly from vouchers and the entire voucher entered in each ledger in

a day are

summarized in to Voucher Summary Sheets.

Bill Registers:
Details of different types of bills are kept in separate registers, which have suitable
columns. For e.g. bill purchased, inward bill for collection, outward bills for collection
79

etc are entered serially day to day in separate registers. Entries in these registers are made
by reference to the original documents.

Other subsidiary registers:

There are different registers for various types of transaction. Their number, volumeand
details, which differ according to the individual needs of each bank. Forexample, there
will be registers for:

Demand drafts, telegraphic and mail transfers issued on branches or agencies.

Demand drafts, telegraphic and mail transfers received from branches and agencies.

Letters of credit.

Letter of guarantee

Departmental journals:
Each department of bank maintains a journal to note the transfer entries passed byit.
These journals are memoranda book only, as all the entries made there are alsomade in
the daybook, through voucher summary sheets. The purpose is toMaintain record of all
transfer entries originated by each department.

8.4 Other memoranda books:

Besides the book mentioned above, various departments of a bank have to mention a
number of memoranda books to facilitate their work. Some of the important books are
described below:

Receiving cashiers cash book

Paying cashiers cash book

Main cash book

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Cash balance book

The main cashbook is maintained by a person other than cashier. Each cashier keeps a
separate cashbook. When cash is received, it is accompanied by pay-in-slips or other
similar documents. The cashier makes entry in his book, which is check by the chief
cashier.

Outward clearings:
A person checks the vouchers and list with the clearing cheques received books. The
vouchers are then sent to appropriate departments, where customers accounts 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 posted in to ledger, there number is
independently agreed with the memo book. If the cheques are found unpayable, they are
return to clearing house.

Loans and overdrafts departments:

Registers for shares and other securities held on behalf of its customer

Summary books of securities give in details of government securities.

81

Godown registers maintained by the Godown keepers of bank.

Overdraft sanction register

Drawing power book.

Delivery order books.

Storage books.

Deposit department:

Account opening and closing registers.

Fixed deposits rate register.

Due date dairy.

Specimen signature book

Establishment department:

Salary and allied registers.

Register of fixed assets.

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Stationary registers

Old record registers

General:

Signature books of bank officers

Private telegraphic code and ciphers

Statically books:
Statically records kept by different books are in accordance with their
individual needs. For example, there may be books for recording:

Average balances in loans etc.

Deposits received and amounts paid out each month in the various departments.

Number of cheques paid.

Number of cheques, bills and other items collected.

83

CONCLUSION

The project the position of Indian banking system as well as the principal laid down by
the Basel Committee on banking supervision. This assessment was done in seven major
areas, which are core principals, concurrent audit, internal audit, deposit, loan accounting
and transparency and foreign exchange transaction. The project concluded that, given the
complexity and development of Indian banking sector, the overall level of compliances
with 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 follow up of work done in every organization whether it is banking
company or any other company or any other company there no misconduct of
transactions is taken places for that purpose the auditing is very important aspect in
todays scenario form company and point of view.

84

QUESTIONNAIRE

SR

PARTICULARS

REFERN

N
O
1

REMARK

CE
Whether opening balance have been
checked with last year Balance Sheet?

Verify

Whether all cash expenses entries have

been made?

Verify

through

last

year

audited balance sheet.

with

vouchers

duly

supported and authenticated by

competent authority.
Take the copy

Whether bank has been reconciled?

of

bank

reconciliation of last month for

the entire bank. Note down date
of clearing of entries on the
reconciliation.

Report

old

outstanding entries in your special

4

Whether reconciliation entries have been

subsequently cleared in the following
months?
Whether bank balance certificates have
been obtained?

observation report.
Some entries are pending since
long and under observation.
Try

to

obtain

bank

balance

certificate from the bank. If same

If yes, do they tally with the

balance as per bank statement &
with balance as appearing in bank
reconciliation?
85

is not available than take the copy

of closing balance from bank
statement.

Whether Interest certificates have been

taken?
If yes, do they tally with interest
accounted for in the books of

account?
Whether print out of all fixed accounts
has been taken?

Verify that is there any revenue

nature item is capitalized in the
books or vice a versa.
1. Verify salary and wages with

Whether salary & wages for all months

including March has been made?

esi/pf return.
2. Whether TDS has been
deducted.
3. Provision for march has been

10

b)Whether sales tax return is filed? If

yes, whether reconciliation of sales as per
books of accounts & as per sales tax
return have been made?
If yes, whether a copy of it has been kept
for our records?
Whether provision for all expenses like
telephone, electricity, water etc. has been
made?

made.
4. Provision for gratuity made.
Make monthly reconciliation of
sales and VAT with VAT return
and VAT challans.

Make provision for FBT, Income

Tax,

Salary,

Deferred tax liability and assets

also.

86

Gratuity, Bonus,

BIBLIOGRAPHY/WEBLIOGRAPHY

BOOKS
BANK AUDIT - Rajkumar S. Adukia
AUDITING SachinBhandarkar&Sandeep Gupta
WEBSITES
1
2
3
4
5
6

www.icra.com
www.google.com
www.icai.org
www.google.co.in
www.wikipedia.com
www.financialexpress.com
NEWS PAPER-

1
2

ECONOMIC TIMES
BUSINESS STANDARD

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