Auditing

Audit of Banks Deposits and Loans
EXECUTIVE SUMMARY
This project is to view the task perform by an auditor while conducting the audit of bank
deposit and loans & advances. It explains the role played by different types of auditor,
effect of Non-Performing Asset on the asset of a bank. The auditor needs to be
familiarizing with the direction of RBI affecting the sanctioning and disbursement of
advances. The auditor has to ensure that documents are executed as per the terms of
sanction. The auditor examine the procedure for review of advances laid down by the
authorities bas been complied with or not. Basel II Recommendations affecting the
capital adequacy norms advocated by the year, which perhaps is the beneficial fall-out
from the tightening of the prudential norms. The auditing not only provide true and fair
value but it also helps us to financial position and internal control system of a bank
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INTRODUCTION
It is well known that Banking is such a unique industry that persons from all
walks of involved with Banks in any relation whether as an operational banker, trainer,
auditor or even a support service person such as a security printer and even a hardware
and software supplier make Banking their only sphere of activity for their full life in the
constant endeavor to master in their for this Industry. In India various types of audit are
normally carried out in banking companies such audit are 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 auditors. However, the rules and the
regulation relating to the conduct of various types of audit or inspection differ from a
bank to bank except the statutory audit for which the RBI guidelines is applicable for
that. In this project I give more important on the concurrent and computer audit and its
internal controls in the banks today’s scenario. Today audit is form in the various
organizations it is basically form for investor because investor investing decision is
depend on that particular concept if auditor has expressing his view about particular
organization is true and fair that investor has get idea about how much should invest in
particular securities or not.
In public sector banks multiple firms including central auditors and branch
auditors generally conduct the audit. In case of private sector banks and foreign banks, a
single firm due to centralsied database conducts the audit. Consequently, the
responsibilities of auditors in such banks are much wider.
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DEFINITION OF AUDITING:
Various persons such as the owners, shareholders, investors, creditors, lenders,
government, banks etc. use the final account of a business concern for different purposes.
All these users need to be sure that the final accounts prepared by the management are
reliable. An auditor is an independent expert who examines the accounts of a business
concern and reports whether the final accounts are reliable or not. Different authorities
have defined auditing as follows.
 Mautz define the auditing as “auditing is concerned with the verification of
accounting data, with determining the accuracy and reliability of accounting
statements and reports”.
 Prof. L. R. Dicksee defines auditing, as “auditing is an examination of
accounting records undertaken with a view to establish whether they correctly
and completely reflect the transactions to which they relate”.
 International auditing guidelines defines the auditing, as “auditing is an
independent examination of financial information of any entity with a view to
expressing an opinion thereon”.
 Montgomery defines the auditing as “auditing is a systematic examination of
the books and records of a business or other organization, in order to ascertain or
verify, and to report upon the facts regarding the financial operations and results
thereof:
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ORIGIN AND EVOLUATION OF AUDITING:
Origin of term:
The term audit is derived from the Latin term “audire” mean to hear. In early days an
auditor used to listen to the accounts read out by the accountant in order to check them. In
last one decade the Indian Banking sector has witnessed a very high level of conceptual
revolution in terms of organization structure, business model, accounting, operations,
control, environment, customer interface, customer service, regulatory compliance,
information dissemination and a whole lot.
1) Ancient origin:
Auditing is as old as accounting. It was in use in all ancient countries such as
Mesopotamia, Egypt, Greece, Rome, U.K. and India. The Vedas, Ramayana,
Mahabharata contain references to accounting and auditing. Arthashsastra by Kautilya
gives detailed rules for accounting and auditing of public finances. The Mauryas, the
Guptas and the Mughals had developed and accounting and auditing system to control
state finances. Thus, basically accounting and auditing had their origin in the need for the
government to control the income and expenditure of the state and the army. The original
object of auditing was to detect and prevent errors and frauds.
2) Compulsory audits of companies:
With increasing number of companies, the companies’ acts in different countries began
providing for compulsory audit of accounts of companies. Thus in the U.K. audit of
accounts of limited companies became compulsory in 1900. In India, the companies act,
1913 made audit of company accounts compulsory. With increase in size of companies
the object of the audit also shifted to ascertaining whether the accounts were “true and
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fair” rather than “true and correct”. Thus the emphasis was not on arithmetical accuracy
but on fair representation of financial affair.
3) Development of accounting and auditing standards:
The international accounting standards committee and the accounting standards board of
the institute of chartered accountant of India have developed standard accounting and
auditing practices to guide the accountants and auditors in their day-to-day work.
4) Computer technology:
The latest development in auditing pertains to the use of computers in accounting as well
as auditing. Really, auditing has come a long way from “hearing” the accounts in the
ancient days to using computers to examine computerized accounts of today.
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Audit Committee:
 Functions:
The functions of the Audit Committee include the following:
1. Oversight of the Company’s financial reporting process and the disclosure of
its financial information, to ensure that the financial statements are true and
accurate and provide sufficient information.
2. Recommending to the Board, the appointment, re-appointment and, if
required, the replacement or removal of the statutory auditor and the fixation
of their audit fees.
3. Approval of payment to statutory auditors for any other services rendered by
the statutory auditors.
4. Reviewing, with the management, the annual financial statements before
submission to the board for approval, with particular reference to:
a) Matters required being included in the Director’s Responsibility
statement, which forms a part of the Board’s report in terms of clause
(2AA) of section 217 of the companies Act, 1956.
b) Changes, if any, in accounting policies and practices and reasons for
the same.
c) Major accounting entries involving estimates based on the exercise of
judgment by management.
d) Disclosure of any related party transactions.
e) Qualifications in the draft audit report.
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5. Reviewing, with the management, the quarterly financial statements before
submission to the Board for approval.
6. Discussion with internal auditors with respect to the coverage and frequency
of internal audits as per the annual audit plan, nature of significant findings
and follow up thereof.
7. Reviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregulatory or a failure of
internal control systems of a material nature and reporting the matter to the
board.
8. Reviewing with the management, the quarterly financial statements before
submission to the board for approval.
9. Reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems.
10. Reviewing the adequacy of internal audit function including the structure of
the internal audit department, staffing and seniority of the official heading the
department, availability and deployment of resources to complete their
responsibilities and the performance of the out-sourced audit activity.
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11. Obtaining an update on the Risks Management Framework and the manner in
which risks are being addressed.
12. Discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any area
of concern.
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BASIC PRINICPLES OF AUDITING:
a) 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.
b) Confidentiality:
The auditor should keep the information obtained during audit, confidential. He
should not disclose such information to any third party. He should, it is said, keep
his eyes and ears open but his mouth shut.
c) 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.
d) 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.
e) Planning:
The auditor should plan his audit work. He should prepare an audit programmed
to complete the audit efficiently and in time.
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f) Audit evidence:
The report of the auditor should be based 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.
g) Evaluation of accounting system and internal control:
The auditor should ensure that the accounting system is adequate. He should see
that all the transactions have been properly recorded. He should study and
evaluate the internal controls.
h) Opinion and report:
The auditor should arrive at his opinion on the account on the basis of the audit
evidence and submit his report. The opinion may be unqualified or qualified or
adverse. The audit report should clearly express his opinion. Law should require
the content and form of audit report.
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ADVANATAGES OF AUDITING:
1. Assurance of true and fair accounts:
Audit provides an assurance to the various users of final accounts such as owners,
management, creditors, lenders, investors, government’s etc. that the accounts are
true and fair.
2. True and Fair balance sheet:
The user of accounts can be sure that the assets and liabilities shown in the
audited balance sheet show the concern, as it is i.e. neither more nor less.
3. True and fair profit and loss account:
The user can be confident that the audited profit and loss account shows the true
amount of profit or loss, as it is i.e. neither more nor less.
4. Tally with books:
The audited final accounts can be taken to tally with the books of account. Thus,
the income-tax officer can start with the figure of audited books profit, make
adjustments and compute the taxable income. An outside user need not go
through the entire books.
5. As per standard accounting and auditing practices:
The audited final accounts follow the standard accounting and auditing principles
laid down by professional bodies. Thus audited accounts are based on objectives
standards and not on personal whims and fancies of a particular accountant or
auditor.
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6. Detection and prevention of errors and frauds:
Audited accounts can be assumed to be reasonably free from errors and frauds.
The auditor with his expert knowledge would take due care to see that errors and
frauds are detected so that the accounts show a true and fair view.
7. Advice on system, taxation, finance:
The auditor can also advise the client about the accounting system, internal
control, internal check, internal audit, taxation, finances etc.
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LIMITATIONS OF AUDITING:
• An auditor cannot check each and every transaction he has to check only the
selected areas and transaction on a sample basis.
• Audit evidence is not conclusive in nature thus confirmation by a debtor is not
conclusive evidence that the amount will be collected. It is said evidence is
persuasive rather than conclusive in nature.
• An auditor cannot be expected to discover deeply laid frauds usually involve acts
designed to conceal them such as forgery, deliberate failure to record transactions,
false explanations and so on and hence are difficult to detect.
• Audit cannot assure the user of account about the future profitability, prospects or
the efficiency of the management.
• An auditor has to rely upon experts auditor may have to rely on experts in related
field such as lawyers, engineers, value’s etc. for estimating contingent liabilities,
valuation of fixed assets etc.
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SCOPE OF AUDIT:
Bank is the only industry that deals in money while other industries need to convert their
products and services to money by undergoing the set working capital cycle. This unique
feature of a Bank determines the thrust of audit, which has no parallel. it must be
remembered that this industry has come of its own especially in India with a history that
pre-dates the British occupation. Despite the continuously evolving strong internal
controls and strengthening audit coverage, it is not uncommon to note Bank frauds
especially since they sadly affect the life long savings of the common man. Frauds,
therefore, have also been the driving force in the evolution of the bank audit and its scope
as we see at present. Another powerful determinant is the advent of technology. Never
has any machine affected the banking industry operations as the computers, which
hitherto confined to the back office now are spearheading the banking industry and often
critically affecting the life of the Bank itself. These two and many other forces such as
regulatory forces come together to define the general scope of the bank audit, which
undoubtedly is unique for the industry. An auditor thus is required to pay attention to the
following aspects:
a) Whether accurate and correct record of the liabilities and assets of the
bank/branch is shown in the books.
b) Whether the books and records are being maintained in accordance with
instructions received from the Head Office from time to time
c) Whether assets shown in the books physically exist and their condition is
satisfactory.
d) Whether the documents obtained by the branch from its borrowers are complete
and enforceable.
e) Whether proper record of instructions from the Head Office for the advances
(sanction letter) is kept and the extent to which they have been complied with.
f) Whether returns to the Head Office and the statutory returns are correctly
complied and submitted regularly.
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Essential Qualities of Auditor:
It is the primary objective of this project to raise the quality of talents of the bank Auditor
to ensure minimum acceptable standards. In addition, there are certain qualities
mentioned here which are of practical nature and will assure your reputation of a good
Bank auditor by both the Head Office as well as the branch/departments. This is a
difficult balancing act to win over the very persons whose actions one may have critically
commented upon in your report.
1. Integrity and Competence:
The Bank Inspector/ auditor should possess high standard of integrity and competence
and should be one who can be relied upon to conduct a through scrutiny of the branch.
There are many leeway’s given to the Bank auditor by which he can place reliance on the
internal control as noted by him to be practiced in the Branch. Here is where the
competence, higher will be the quality of audit.
2. Experience of responsible positions:
The Bank auditors have to deal with senior staff and should have a good idea of what the
job entails. The rules and instructions and circulars are present but what are most
effective in all cases are the practicality of the action and the achievement of the
transaction.
3. Conversant with Instructions and Circulars:
If the Bank auditor has to guide the Bank officials about their work, he has to himself be
conversant with the Manual of Instruction and Circulars. The Bank auditor is seen as an
expert who represents the Head office and cannot merely the one of ‘ticking’.
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Guide the branch officials in many of the matters. The role of Bank auditor s thus a very
responsible one.
4. Enthuse Developmental Activity:
The Bank auditor is the human face of the Head Office with whom the Branch officials
can interact. This interaction makes the circulars easier to digest and the Bank Officials
are enthused in their work resulting in higher productivity. This unlisted work of the
Bank auditor is critical.
5. Professional Independence:
This is the integral quality of any auditor. If he can be influenced, his whole audit is
effected and unsuccessful. Transfers of auditees: Where the auditees have come from or
going to the Personnel Department, he is likely to be influenced. It is true that he has to
give declaration under Section 27 of the Companies Act of not being a borrower or
guarantor to the Bank
6. Constructive Approach:
This quality is an absolute requirement of a Bank auditor even though it is recommended
for all audits. He has to ensure rectification of the irregularities as soon as possible. The
primary objective is not to pull up people committing mistakes but to rectify and prevent
recurrence.
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7. Courteous and dignified with staff:
Though this is needed in all audits, it is all the more needed in Banks. The industry has a
large dose of public interface daily for more than 50% of the time and this leads to
emotional fatigue.
If the Bank auditor also add to the irritant already there, he is less likely to get any co-
operation from the affected staff. As a representative of the Head Office, his attitude to
the staff should not create more problems for the Branch Manager to solve.
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TYPES OF AUDITS:
It is well known that no any day of the year, there will be at least one auditor working in
the bank branch. The following are the popular types of audits conducted in a bank
branch. The titles may be modified in some banks especially for Internal Audit and
system Audit but the content remains the same.
I. Statutory Audit:
This is an annual audit determined by statute and done normally at the end of the
financial year while some of the larger branches are similarly audited half yearly. A
bank’s statutory audit is essentially a balance sheet audit including the Long Audit Report
though there is no scope restriction of the statutory auditor to perform certain actins of
other auditors as part of his duty or if some findings lead him into the domain of the
auditors such as Revenue, inspector and even concurrent. The statutory auditor performs
the following functions.
Verifies the classification of items of the Balance Sheet to assure their correct placement
Basel II accord, which has influenced the prudential norms, has included the statutory
auditor as an active member to assure the proper execution of the prevailing prudential
norms. The direct result of an accurate classification is the appropriateness of income
recognition and thus the effect on the profitability of the Bank.
II. Inspection Auditor:
The highest coverage of audit is under this category of audit. As we know, the Revenue
audit responsibility lies with this auditor and test checks of revenue calculation is not
uncommon even if the same was covered by a Revenue Auditor earlier. Safety of
advances is the other main function of the auditor.
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One way to cover is to ensure that the documents obtained from the borrowers are the
correct category and filled in fully. Other way to cover this is by analysis of the account
to ensure that the unit is operational by observation of the credit and debits into the
account.
III. Concurrent Audit:
In the beginning of the 1990’s, the Great Banking Scam or the Harshad Mehta Scam
rocked the nation. This brought into limelight special category of audit called concurrent
audit or continuous audit. This stemmed from the need of filling in the gap between the
annual statutory audits and the intervening period between two inspections, which is a
period sufficiently large to cause damage to the Bank. Now, RBI who insisted that at
least 50% of the business of the Bank should be covered under concurrent controlled the
spotlight of the concurrent audit. While some Banks covered very large branches under
the umbrella of concurrent audit. Some banks took the excurse for improvement by
including weak branches though having low volume of business. Concurrent audit in one
sentence will mean checking yesterday’s transactions today. Let us see the broad areas
covered by the Concurrent Auditor.
A. Revenue Aspects:
1. Interest earned and service charges earned by the Bank
2. Interest Paid
3. All charges paid like cancellation charges, compensation under Court
Directive etc.
B. Expenditure:
1. Salary payments
2. Branch expenses like printing and stationary, temporary employees etc.
3. Rent of premises etc.
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C. Documentation and other aspects of advances department:
1. Documentation correctness of ALL new advances granted during the period
2. Validity of all old advances to ensure that they are not time barred.
3. Currency of insurance cover of stock machinery etc.
4. Whether the inspections of units and stock have been carried out at the pre-set
intervals.
D. Administrative and other aspects:
1. Correctness of attendance and leave records
2. Cash Department working including security aspects with periodic surprise
inspection by the auditor
3. Stock check at regular intervals of all security documents like Blank
chequebooks, Demand Drafts, Pay orders, Pass Books etc.
IV. RBI Audit:
The Central Bank of the country also sends its own auditors to the Banks for their own
inspection. Their actions cannot be covered in this project because it is more of a
supervisory implementation of a Government Policy existing from time to time. The
primary aim of this audit is as follows.
Overall assessment of the assets and liabilities of the Bank, whether its financial position
is satisfactory, whether it is in position to pay its depositors in full as and when their
claims accure, and in the event of loss, whether it has sufficient cushion of owned funds
to safeguard the interests of depositors.
Soundness of Bank’s policies and procedures and effectiveness of the management to
safeguard point No.1 mentioned above as also whether they are on approved lines and in
conformity with socio-economic objectives.
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V. Information Technology/System Audit:
This audit is introduced more as a compulsion of the Invasion of technology in all
aspects of Banking. No longer is this just an office machine or even a back-office
recording machine. This has now turned into the determinant of the Bank whether
as service provider or even as the vehicle of marketing of products of the Bank.
More important, for the economy, the Banks have to ensure continuous working to
assure lubricant for the rolling of wheels of the economy. To ensure this and assure
RBI that such aspects are taken care of by the Bank in addition to securing the
protection of records of the depositor and borrower, system audit is undertaken to
audit the system – environment to aspects of software testing to some extent. It was
observed that the security and disaster recovery aspects improved considerably after
the RBI made system audit mandatory
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Table of comparative scope of various audits other than RBI audit:
Activity of Audit Statutory
Audit
Internal
Audit
Revenue
Audit
Concurrent
Audit
System
Audit
Examination of balance sheet
accounts    
Examination of Profit & Loss
accounts    
Document Examination of Advances
  
Prudential norms verification
   
H.O. Guidance compliance for
lending   
Interest and service charge collection
accuracy by the Bank   
•
Interest paid on deposits
  •
All charges paid by the Bank
  •
Accuracy of periodic returns
  •
Housekeeping
   
Staff function
 
Unit inspection
•  
Protection of server (Physical and
Logical) 
Note
 Indicates specific coverage as per that type of audit specified in the respective
column.
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• Indicates partial coverage as per practice for the audit specified in the relevant
column.
Prudential Norms & the Auditor:
Statutory auditor as well as concurrent auditor, needs to verify and
(especially in statutory audit) certify the health codes given to the advance accounts. The
main implication of an account reaching Non-Performing Asset (NPA) status is that no
further interest can be applied after that point of time. One major current feature is that
hitherto, the accounts were accorded date of NPA from the date of year end in which they
had been so classified but currently, the date of NPA will be the date on which it so
suffered the down gradation as per the applicable rules.
Necessity for Measurement of Non-Performing Assets:
The repayment of interest/installment was either not easily forthcoming as per schedule
or recovery. Consequently, banks found it increasingly prudent not to reckon such
interest/other charges as part of their income and pay tax on unrealized income. Rather
they chose to cease charging interest in such accounts of bad/doubtful nature or where the
prospectuses of recovery were bleak
RBI Health Code System and Relation to NPA:
The Reserve Bank of India introduced the Health Code System of classification of
borrowal accounts by banks in the year 1985. Based on this classification of advances, it
was decided by the Reserve Bank in the years 1989 and1990 that banks should cease
charging interest compulsorily in account under Health Code 5 to 8 i.e. Recalled, Suit-
filled, Decreed and bad/doubtful and selectivity, taking into account the availability and
readability of security, in accounts under Health Code 4 i.e. Stick: Non-viable/Sticky.
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Asset Classification
I. Performing Asset:
Performing asset is one which generates periodical income and
payments, as and when due or within the minimum lag of two quarters. This is
being cut down to one quarter from April 2004.
II. Non-Performing Asset (NPA):
The problem of NPA arises when the dues to the bank, interest/other
charges or installments are not being received as per schedule. To justifiably
set right this phenomenon, the Reserve Bank of India has drawn upon the
international standards of accounting for the purpose of NPA treatment of
credit facilities. A loan asset will become NPA if the due amount is not paid
within one quarter.
Current position of NPA triggers.
Term Loan Interest and/or installment remain overdue for a period
of more than 90 days.
Overdraft/Cash Credit Account remains out of order for a period of more than
90 days.
Bill purchased/Discounted Overdue for more than 90 days from its due date.
Agriculture Loans Interest and/or installment remain overdue for a period
of more than 2 harvest seasons but not more than 2 half
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years.
Any Amount To be received remains overdue for a period more than
90 days.
Categories of NPA
1. Sub-standard Assets:
A sub-standard asset was one, which was classified as NPA for a period not
exceeding two years. With effect from 31 March 2001, a sub-standard asset is
one, which has remained NPA for a period less than or equal to 18 months and
from 2005 it is further reduced to 12 months.
2. Doubtful Assets:
A doubtful asset was one, which remained NPA for a period exceeding two
years. With effect from 31 March 2001, an asset is to be classified as doubtful,
if it remained NPA for a period exceeding 18 months. With effect from
March31, 2005, an asset would be classified s doubtful if it remained in the sub-
standard category for 12 months.
3. Loss Assets:
Assets which are classified as bad and non-recoverable by the concerned bank
or by Statutory Auditors or by RBI Inspectors but the amount have not been
written off wholly. In other words, such an asset is considered uncollectible and
of such little value that its continuance as a bankable asset is not warranted, they
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will continue to appear in the Balance Sheet but under the heading “Loss Asset”
although there may be some salvage or recovery value.
Provisions
The current position of providing provision on the various assets is as
follows:
Standard assets General Provision 0.40% of Balance Outstanding
Sub-Standard
assets
General provision of 10% of Balance outstanding without considering
DICGC or ECGC Guarantees
Doubtful Assets 100% of Unsecured portion after considering the realizable value of
security which should be realistic. In addition to the above provision on
the secured portion should be made as under: Up to 1 year 20%, 1year to
3 years 30%, More than 3 year 50%
Loss Assets 100% on the Balance outstanding
Checklist to verify validity of NPA classification.
An auditor should ensure that branches for treating an account as NPA do
the following or otherwise, irrespective of the cutoff point of limit outstanding balance.
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 Obtain the ‘balance book’ for loans, cash credit and overdraft. This gives you the
exhaustive list of accounts outstanding as on the date of your inspection or the
date of classification. By use of this balance book, you can ensure that you can
cover all the accounts and you do not skip accidentally the classification of any
account.
 The totals of the report of classification should match with the totals of the
concerned departments thereby ensuring that all the accounts are considered.
 Analysis of the account should be done since ’income recognition’ is the
underlying criteria. Therefore obtain the copy of the branch of the account
statements to verify the classification made by the Bank. Ensure the following
points during your scrutiny of the account.
 Both interest and installments, wherever applicable should be taken into account
for assessing the NPA status of an account. If a particular facility of a borrower
becomes NPA. Then all the facilities granted to the borrower should be treated as
NPA.
 Advances backed by Central/State Governments should not be treated as NPA.
Advances against bank’s fixed deposits, NSC’s, IVPs, KVPs, and life Policies
eligible for surrender, should not be treated as NPAs.
 In the case of agricultural advances, NPA status should be decided upon after
considering the recovery of interest dues for two harvest seasons.
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 Net-worth of borrower/guarantor and availability of security is no consideration
for treating an account as NPA or otherwise, as the concept is based on record of
recovery of interest/installments.
 Staff loans should not be treated as NPAs, except in exceptionally problematic
cases.
AUDIT OF LOANS AND ADVANCE:
Advances generally constitute the largest item of assets of a bank branch. Banks normally
make advances on the basis of security in the form of tangible assets. In addition, they
may also require the borrowers to furnish guarantees of third parties for repayment of the
advances. RBI has stated that banks should include all interest-bearing loans and
advances granted to their staff under the head ‘Advances’ in the balance sheet.
A. General:
i. In the case of advances granted to minors:
If any advance has been granted to any minor a letter of assurance from the father or the
guardian, should have been obtained stating that the money borrowed would be utilized
solely for the benefits of the minor. The father or the guardian should have executed the
documents.
ii. In the case of advances granted to firms:
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In the case advances granted to partnership firm the following points are to be
observed.
• To verify the partnership deed and to acquaint with the powers of
individual partners to operate the accounts and borrow funds.
• To see that the partner as per the manual of instructions has duly signed all
documents executed by the firm issued by the bank concerned.
• To go through the latest audited balance sheet of the firm.
iii. In the case advances granted to companies:
• To go through the memorandum and articles of association of the
company.
• To see the powers of the board of directors to raise fund by way of loans.
• To verify the purpose of the loan, with the help of the loan application and
see that the same falls within the scope of object clause of memorandum.
• To verify the board resolution passed in this connection.
• To verify whether form-B has been filed with the registrars of companies
within the one month from the date of execution of the documents.
• To see that the documents have been executed by duly authorized persons
of the board and confirm that the common seal has been affixed in the
presence of two directors if the AOA permits.
B. SECURED ADVANCE:
i. Advance against goods key loan, open cash credit:
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• To check the individual balances in each loan ledger with the trail balance
book.
• To verify the head office sanction and renewal for each advance.
• To verify the stock statement and ascertain that the loan availed is within
the DP limit is sanctioned not any excess amount advanced and see that
head office approval has been obtained for such excess.
• To pursue the fire insurance policies and ascertain that the policies are
alive as at 31st
march. Also see the stocks charged and their location are
correctly described therein.
• To see that the later or deed of hypothecation has been executed in favor
of bank.
• The inspect the godown and verify the physical stock-in-hand with the
stock statement and see also the condition of stock.
• To see that the name of bank on the board of godown.
• Test checks the interests charged and verify the rate of interest with the
help of head office circulation.
• In the case of key loans, see that the key are in the bank custody and
satisfy as to the safety of the godown location, fire hazard etc.
• In clean overdraft, insurance policy endorsed in favour of the Bank under
instructions from the borrower
• Mandate to debit borrower’s account to pay premium.
ii. Advance against jewels:
• To check the entire jewel loans account balances with the trial balance
book.
• To see that appraiser valuation is attached.
• To count all the jewel loan packets and see that it tallies with the total
number of jewel loan account.
30

• The select at random sufficient number of packets and physically verify
the weight with the help of appraiser.
• Test check the interest charged.
• To ascertain the value of jewels from the finesse mentioned in appraiser
certificate.
• To see that the loan advanced does not exceed the maximum that can be
advanced taking into account the rate per gram fixed by the head office
the weight and margin.
iii. Loan on deposits (fixed deposits, recurring deposits etc:
• To verify the entire ledger balances with the trail balance.
• To see that the deposit receipts or pass book or cash certificates have been
duly discharged in favor of the bank at the time of pledge.
• Blank payment challans duly signed by borrower should have been
obtained.
• Banks lien should have been marked on the deposit receipt as well as in
the respective deposit ledger folio.
• To see that no advance has been granted against duplicate receipt etc.
without proper verification.
• In case of borrowings against deposits in the name of minors the branch
should have noted the date of birth of the minor also see that the loan has
been granted for the benefit of the minor.
iv. Vehicles advances:
31

• To verify the copies of the registration certificate test check the original
certificate and ascertain endorsement in favor of the bank.
• To see that vehicle has been comprehensively insured and verify the
banker clause in the policy.
• To verify the duplicate key of the vehicle has been lodged with the bank.
• To check the interest charged.
v. Advance against immovable properties:
• To examine the documents relating to advance and also see that there is
proper sanction from head office.
• To go through the legal opinion of banks lawyer about the title of properly
to the borrower. If lawyer has suggested complying with certain
formalities see that the formalities have been compiled with.
• To see the latest tax receipts forwards payment of properly tax.
• To see that the documents have been deposited in notified centers in the
case of equitable mortgage.
• To verify the documents deposited with other branches and the
acknowledgement kept in the branch where advance has been made.
• To verify the engineers valuation.
• If the property is a building see that it has been sufficiently insured and
policy has been taken in the joint names of the bank and mortgagor.
• To check the interest charged.
vi. Advance against life insurance policies:
• To verify head office sanction.
• To scrutinize the policy and ascertain the surrender value from L.I.C.
• To verify the latest premium receipts.
• To satisfy that sufficient margin is kept or not.
32

• To verify policies should be assigned by the insured in favor of bank and
the assignment is noted by L.I.C.
vii. Advances against shares and debentures:
• To verify head office sanction.
• To scrutinize the share certificates and ascertain that they stand in the
name of borrower.
• To see that the bank has obtained undated blank share transfer from duly
signed by the borrower.
• To verify notices of lien should have been sent to the company and their
acknowledgement should be obtained.
• To ascertain the market value of shares as on the date of verification and
see sufficient margin is maintained.
• To verify the copy of dividend mandates and also a dividend warrant.
UNSECURED ADVANCES:
i. Clean loans overdraft, clean cash credit etc:
• To see the head office sanction.
• To scrutinize all clean advances and verify that the accounts are
satisfactorily conducted or not.
• Insurance policy endorsed in favour of the Bank under instructions from
the borrower
• Mandate to debit borrower’s account to pay premium.
ii. Documentary bills purchased:
33

• To see the head office sanction.
• To see that all bills discounted are accompanied with the ledger register.
• To verify all long overdue bills and suggest to debit borrower account with
the amount of such bills.
• To see that the limit has not exceeded at any time.
• Test checks the discount and commission charged.
iv. Clean bills purchased:
• To see head office sanction.
• To verify that all bills are accompanied with account sales, sales invoices
etc.
• To see that bills are met regularly and limit is not exceeded.
• Test checks the discount and commission charged.
AUDIT OF DEPOSITS:
Deposit accounts are designed to encourage saving. Under the category of deposits, we
not only have the term deposits but also the savings and current accounts. Deposits are
the main liabilities of the bank, which give it the required fund flow of the schemes of
lending. It is also main source of expenditure of the bank in the form of interest. Revenue
calculation of this department assumes equal importance as excess expenditure affects the
profits.
i. Current deposits:
• To verify the balancing books with individual ledger.
34

• To see that no current account is overdrawn at any time without head
office authority.
• Test check the new accounts opened during the year with regard to
introduction, partnership deed, memorandum and articles of association in
case of limited companies and necessary resolution.
• To see that total balancing books tallies with general ledger balance.
ii. Saving bank account:
• To see the consolidation of balance as per different saving book balancing
book. Verify that the total of balancing books tallies with the general
ledger balance.
• Test checks the entries in balancing books with individual ledgers.
• Test check the interest credited.
• To see that saving bank has not been opened in the name of companies.
 SAVINGS INTEREST VERIFICATION IN
COMPUTERIZED ENVIRONMENT
• How is the rate controlled –through a parameter file or each account
• Does the parameter file give audit trail of who has changes the rate from
what value
• Does the software provide the user without intervention of the IT
department from HO, the full history of the rate changes at least for the
period under audit
• Test check few accounts opened less than one month, two months, three
months, five months
35

• Test check few accounts which are old – opened almost at the time of start
of the Branch
• Test check the accounts with zero balances to ensure that the accounts are
NOT those accounts which have been closed but remained opened in the
system due to total withdrawal of funds and the accounts closure formality
demanded by software not initiated.
iii. Fixed deposit account:
• Test checks the balance in balancing book with individual ledgers.
• To see that the total in balancing book tallies with the general ledgers.
• To see that correct interest rate is applied according to the period of
deposit and also check the interest payable.
• Test checks the fixed deposit receipts issued during the year with the
counterfoils.
• To see that fixed deposit exceeding Rs. 20000/- has not been repaid in
cash.
• In case of deposits made in the case of minor also see whether date of
birth is mentioned on not.
v. Recurring deposits:
• Check the balance is balancing book with individual ledger.
• To see that the total in balancing books tallies with the general ledger.
• Test checks the interest payable.
• To see that penal interest has been debited for late payment.
• To see that the repayment of recurring deposit exceeding Rs. 20000/- has
not been made in cash.
• Test checks the interest as per accrued interest charts.
36

OTHER AREAS:
i. Guarantees issued by the bank or countersigned by the bank:
• To verify the accounts with ledger register.
• To verify the copies of the guarantees issued and see that all guarantees
conform to the terms and condition of sanction.
• To verify that every guarantee indicates the last date by which claim under
the guarantee should be made by the beneficiary after whom the bank
would cease to be liable.
• To see that commission has been collected as per head office instruments.
• To verify that the guarantees are appropriately stamped before obtained it.
• In case of the company verify the resolution should be passed in favor of
guarantee.
• To verify whether cash margins have been collected as per the sanction.
• To verify whether the expired guarantee have been called back, cancelled
and the entries reversed.
• To verify whether the individual accounts of the constituents are debit
when the guarantees are invoked, irrespective of payments made by the
bank to the beneficiary.
ii. Safe deposit locker service:
• Whether the rents for lockers are charged in accordance with head office
circular.
• If initial key deposit and advance rent is to be collected.
• Give a list of hirers who have not paid the rent for lockers.
iii. Verification of furniture and fixture and stationery:
37

• To conduct a physical verification of furniture and fitting and tally with the
register.
• To verify the stationery on hand particularly the unused fixed deposit
receipts, draft books, chequebook, traveler’s cheque etc.
• Test check that no leaf has been taken out of the receipts book.
iv. Profit and loss account:
• To verify the salary payment with register.
• Test checks the interest payment on deposits saving bank accounts.
• Test checks the interest receipts on advances except in the case of
borrowers with limit exceeding Rs. 5000/- in which case all the accounts
have to be verified.
• To verify whether the interest is charged in accordance with RBI guidelines
and head office sanction.
• To verify other expenses and compare with that of the last year. In case of
any substantial difference please verify and ascertain the reason.
• To verify all expenses and income on accrual basis i.e. locker rent has to be
accounted for the entire period whether received or no, guarantee
commission, discount and other charges.
vi. Postage, telegram and telephones:
• To verify the dispatch and postage register.
• To verify the balance of postage stamps and cash in hand.
• To verify the entries in the dispatch register at random.
• To verify entries made in the trunk call register at random.
• To verify whether the charges are recovered in respect of calls made at
instances of constituents and those made by staff.
vii. General:
38

• To make surprise verification of cash preferably opening balance of cash
before commencing regular audit work.
• To verify the general ledger balancing book with the general ledger.
• To verify the balance sheet and profit and loss account with the general
ledger balancing book.
Checklist for audit of department of Deposits
Banks are established for the primary purpose of acceptance of deposits and lending to
those who can utilize the money for their business. Hitherto, lot of care was taken to
ensure the identity and residential accuracy of the borrower since the Bank had to evolve
a system to recover their own money. Until the 1980’s, lapses in formality of account
opening of the depositors were not given much importance on the plea that the money of
that person is with the Bank and not much harm can come this way in case he forgets to
come. The Bank is not to incur any loss. While this was a selfish microscopic viewpoint
which may have found many sympathizers, the role of all the Banks in the economy was
lost sight off and especially in India which is known for its parallel economy, the aspect
of money laundering suddenly brought into focus the need of perfect identification and
thus the strict implementation of Know Your Customer (KYC) norms. Even before the
insistence of KYC norms by the Reserve Bank of India, each Bank should have been
39

sensitive to the fact that a devious customer first opens a deposit account as bait without
submission of proof of identity. Many stolen instruments are then deposited and
immediately withdrawn while he has fled before the discovery of the trail. The Bank
officials are then dragged into the case and have to devote precious time for this negligent
and perfectly avoidable action. Or, he later creates an aura of emergency taking a facility
for ‘just a day or two’ and only later the Bank realizes they were conned by a smooth
operator and all the money lent is lost which naturally has exceeded the deposit he had
placed with them. Therefore in the interest of the Bank, the set formality that currently is
largely directed by the Reserve Bank’s KYC norms should be adhered to and the auditor
is placed in the immediate supervisor position to stem the problem before it escalates into
anything more serious. As India goes more and more on-line, we will get to see more
cases of identity theft, which is one of the largest crimes in USA in the turn of the
century. KYC norm compliance will go a long way to abort attempts of such identity
crimes.
While new account opening remains a main area of audit concern, it is also important to
note amendments of existing accounts in the areas of change of signatories and
operating instructions etc. The Bank is never privy to the internal frictions and
yesterday’s brothers also part ways but the Bank should not be embroiled in their
controversy. Attempts to remove a partner or change of operating instructions from
joint to single to withdraw the balance by one partner in an unauthorized manner are
some of the risks that accrue by amendments to existing accounts and the auditor too
should cover these. Such cases are rater easy to track in computerized environments.
Another dimension to the deposits department is the application of the interest. A
frequent change under inadequately designed software compounds the problem of
revenue leakage. Sometimes the Banks are not able to respond to even the differential
rates in new time slots since adjusting rates to the existing time slots is easier.
40
NEW

KNOW CUSTOMER NORMS
DOCUMENTS SUMMARIZED OBJECTIVE
Two Photographs Physical Identity
Birth certificate in case of minor Identity and Proof of Age
Passport copy Identity, Proof and Residence Proof
Diving license copy Age Proof and Residence Proof
Electricity bill copy/landline Telephone bill copy Address Proof
Rent receipt in case premised is rented and maintenance bill
in case the premises is owned by the applicant in a society
Address Proof
Election Identity Card Address Proof
Certified Memorandum and Association of Company To permit the Bank to study the operating
restrictions if any and the registration
certificate copy issued by the Registrar of
Companies
41

PAN Card copy/PAN number allocation letter (when letter is
received but the PAN card is not received
Proof of being a income tax payer and
submission of correct PAN number
PAN Card application copy and copy of Income Tax When account holder is in the process of
obtaining PAN number and is yet not allotted
PAN number
FORM No. 16 When the account holder is not taxable, such a
declaration is taken on this Income Tax
authorized form from the account holder
Memorandum of Changes Particulars of Advances:
Particulars Loans, Cash Credits,
Overdraft etc
Bills discount & purchase
(including foreign Bills)
Additions
(+)
Deductions
(-)
Additions
(+)
Deductions
(-)
Debts considered good in
respect of which bank is fully
secured
Debts considered good in
respect of which bank holds
no other security than
Debtor’s personal activity
Debts considered good
secured by the personal
liability of one or more
parties in addition to the
personal security of the
42

debtors
Debts considered*
Doubtful or bad not provided
for
Total
Particulars in the following form
Page reference Account Name of
borrower
Balance
outstanding
Reasons for
reclassification
Note: Please note that grand total of additions of all the items should tally with grand
total of deductions and net effect should be NIL. Name of
Branch…
Name of Region…
*This is especially useful for: This checklist is of special use to the
Concurrent, System (IT) & Internal Auditors in addition to the RBI auditors.
I. Evaluating the correct number of accounts opened
1.
(new)
Analyze the last generated General Ledger to identify how many accounts
are available in the Bank/branch.
2.
(new)
Compare last subsidiary listing with the previous ones to note accounts
opened for each scheme i.e. Savings , term deposits, monthly deposits etc.
3.
(new)
Obtain the file containing the papers submitted by each account holder and
verify the number of new submission to equal the number shown by the
subsidiary and reconcile the difference.
43

4.
(new)
Papers kept aside, which the officer has identified for follow up due to
non-fulfillment of formality, should also be scrutinized by you.
5.
(new)
Where the Bank has a manual account number allocation register, are the
number of accounts tallied with this register or are there cases where
accounts may have been opened with Zero balances and not picked up by
the software for printing subsidiary in case the software has and the
operator has exercise the option routines for printing only those accounts
with balances?
6.
(new)
In case of multiple accounts being opened like Savings and Fixed deposits,
is one set of papers missing from either of the files then is it either marked
with a pointer to the other file (e.g. Photos with SB 345/09) or is a
photocopy of the papers placed in this file?
7.
(old a/s
amended)
Obtain the exception reports from the bound file or a soft copy from the
computer log and scan it for changes made to the masters of deposit
accounts, which will normally detail the old value and the new value.
8.
(old a/s
amended)
Are the letters from the account holder on record instructing the change in
the master account?
9.
(old a/s
amended)
Are the changes such that do not drastically change any aspect of the
account that is a camouflaged attempt to create a new account within the
old account? (e.g. Change of title, unsupported operating instructions,
name removal without death certificate or no objection from person whose
name is being removed)
II. Verification of each Account
10. Is the number of signatures equal to the number of joint holders?
11. Is the requisite number of photos submitted?
44

12. Is the account opening form filled by the applicant or by the Bank official?
13. Is the account introduced properly?
14. Does the Bank know the introducer for a period exceeding six months?
(Unless it is a Bank branch recently opened for a period less than a year.
Also, in case of passport copy submission introduction need not be insisted
upon for individuals. For incorporated companies, introductions are waived
since the copy of Registration certificate issued by Registrar of Companies
will suffice)
15. Are all the supporting papers for KYC norms submitted?
15.1 Are all the submitted photocopies (Xeroxes) authenticated by the Bank
officer on the reverse as having seen the original?
15.2 In case of income tax return copy being submitted as a proof of PAN
number is it authenticated as a copy by a practicing Chartered Accountant
15.3 Is a copy of the proof of address submitted and is it the approved type i.e.
copy of a passport or election card or electricity bill or phone bill
(preferably landline)?
15.4 Is the address on the submitted proof the same as that given in the account
opening application form for each of the account holders?
15.5 If the address of the proof of residence is permanent and the temporary
address of the same city of Bank Branch location is to be used, like a hostel
in case of a student, is the additional proof by way of admission letter or
identity card taken?
15.6 In case of current or Cash Credit accounts is the location of the business
also supported by proof of operation in the same name? If business is
located at a place owned by another organization, then is the rent receipt of
permission to operate in case of a sister concern also submitted?
15.7 Are the joint holders either related or part of an organization like a firm,
company, Trust club etc. in which case, the application needs to be
45

supported by requisite resolution copy duly authenticated by an office
bearer of the same organization.
15.8 When the applicant is an incorporated company, are the signatures of
operators of the account authenticated by a copy of resolution issued by the
company under its seal? (Rubber stamp is also accepted as a seal)
15.9 Is the proof of date of birth submitted in case of accounts opened in the
names of minors?
16 . If the account is opened in a single name of an individual, is a nomination
taken and if nomination is waived by the applicant, is it so written and
signed by the applicant on the application form?
17. Compare the operating instructions entered in the computer with that on the
application form and recommend immediate rectification if difference is
noted.
18. If it is change of partners in a firm is another account opened instead of just
change of signatories?
19. Does a firm or company open the new account while the existing regular
accounts (current) are frozen by the Government authorities like the Income
Tax Department or Sales Tax Department?
20. In case of current accounts, is the declaration taken from the applicant that
he/they does not have any other account and if they do, is full name and
address is taken of those Banks?
21. In such case as mentioned in point above, has the Bank therefore sent
letters to those Banks seeking information if any borrowing is done and if
that Bank does not have any objection if this new account is opened? Is
proper follow up done until the receipt of no objection letters from these
Banks?
22. Are letters of thanks sent to the account holder at the address written in the
application form as well as the introducer in case the introducer has not
46

accompanied the applicant to the Bank branch at the time of submission of
application for account opening?
23. Is the correct applicable rate of interest entered in the computer ?
24. Is the acknowledgement taken from the account holder wherever Deposit
receipt is handed over or ATM card etc.?
25. Are all accounts are opened with Cash deposit or transfer from within the
Bank/branch since accounts should not be opened with external transfer
instruments?
26. Are large cash deposits made and issued by single instrument or vice versa
i.e. large value instrument deposited and cash withdrawn in case of new
account? (Such cases need to be studied for possibility of fraud or money
laundering)
27. Do the Bank officers monitor new savings accounts and Current accounts
for the first six months?
28. In case of high value and high frequency of transactions in savings accounts
has the Bank branch interviewed the account holder to ensure that business
operations are not transacted though the savings account in individual
name?
29. When savings accounts are permitted to be opened by a Trust, has the trust
submitted enough evidence that it is a public charitable trust?
30. After the amendment of the Small Savings Act, are the HUFs permitted to
open only current accounts and not savings accounts?
47

BASEL I:
This is should be interest to very auditor to monitor the progress of the Banks in the fields
of Information Technology, which is essential to drive the pillars of Capital Requirement,
Supervisory Review and Market Discipline recommended by the BASEL II committee.
48

 Only under a clear understanding of these aspects will the auditor lend a
constructive approach in the period of change. Development and fine-tuning of
risk mechanism of the Banks on a scientific basis should already be under
development. Banks are therefore expected to shore up their Information
Technology base for a faster detailed collation of data for real time analysis to
apply risk matrix and initiate risk mitigation actions. All this will have to
eventually be evaluated by the auditor with the internal auditor providing
feedback to the management and the concurrent and statutory auditor-ensuring
adherence to prevailing law by success of the mix of all these actions.
 The business of a bank is to lend deposits to its customers. The interest earned
form the loan is then used to pay for the deposits. While your deposits and interest
are safe, the bank faces the risk of losing money on the loans they have given.
Succinctly put, while a bank’s assets (loans and investments) are risky and prone
to losses, its liabilities (deposits) are certain. Bank failures are mainly caused by
losses on its assets in the form of default by borrowers (credit risk) and frauds,
systems and process failures (operational risks).
 The failure of the German Bank Herstatt in 1974 forced the central banks of the
G-10 countries (Belgium, Canada, France, Germany, Italy, Japan, The
Netherlands, Sweden, Switzerland, The United Kingdom and the United States) to
delve deeper into the issue of under-capitalized banks and non-standardized
banking regulations. These countries, along with the Luxembourg, formed the
“Basel Committee on Banking Supervision” under the aegis of the Bank of
International Settlements (BIS) in 1974.Formed in 1930, the BIS is one of the
oldest international financial institutions. It is actively involved in securing and
maintaining international central banks cooperation.
49

 In July 1988, the Basel Committee came out with a set of recommendations aimed
at introducing minimum levels of capital for internationally active banks. This
first series of recommendations by Basel Committee are popularly known as
Basel I norms. These norms required the banks to maintain capital of at least 8
percent of their risk-weighted loan exposure. The Basel Committee also laid down
standard definitions for different types of capital. Capital was categorized, as Tier
I is mainly the permanent capital like equity and Tier II capital is the
supplementary capital like subordinate debt.
 In India, the banks were required by the Reserve Bank of India to maintain a
higher capital-to-risk-weighted-assets ratio (CRAR) of 9 percent. That almost all
Indian and internationally active banks are sufficiently capitalized now is a
testimonial to the success of the norms.
BASEL II:
Despite the achievements, the norms were becoming increasingly ineffective to address
the fundamental changes in the banking sector over the past decade as increasing use of
financial innovations such as securitization and credit-risk derivatives allowed the banks
50

BASEL II
Systematic
Risk Credit Risk
Operational
Risk Market Risk
to manipulate their balance sheet figures in such a way that capital requirements were
lowered without significant reduction in actual risks. There was a need to revise the Basel
I norms
To set right these aspects, the Basel Committee came up with a new set of guidelines in
June 2004, popularly known as the Basel II norms. These new norms are far more
complex and comprehensive compared to the Basel I norms. It is based on the three
pillars of Capital Requirement, Supervisory Review and Market Discipline.
Though the Basel II recommendations enhance the business of the bank by better
management of its risk, it has such pitfalls as pro- cyclical nature of the
recommendations, loans portfolio polarization, potential hurdle for the emerging
securitization market and increased capital requirement. But it is certain that these norms
are going to have a tremendous effect on our loves by changing the way banks do
business.
Basel II adherence emphasized in India
RBI’s association with the Basel Committee on Banking Supervision dates back to
1997as India was among to 16 non-member countries that were consulted in the drafting
of the Basel Core Principles. Reserve Bank of India became a member of the Core
Principles Liaison Group (CPWG) in 1998 and subsequently became a member of the
Core Principles Working Group on Capital.
51

RBI had in April 2003 itself accepted in principle to adopt the new capital accord Basel
II. The RBI has announced, in its Annual Policy statement in May 2004 that banks in
India should examine in depth the options available under Basel II and draw a road-map
by end December 20004 for migration to Basel II and review the progress made thereof
at quarterly intervals.
REGULATORY INITIATIVES
 Ensuring that the banks have suitable risk management framework oriented
towards their requirements dictated by the size and complexity of business, risk
philosophy, market perceptions and the expected level of capital. Introduction of
Risk Based Supervision (RBS) in 23 banks on a pilot basis.
 Encouraging banks to formalize their Capital Adequacy Assessment Programme
(CAAP) in alignment with business plan and performance budgeting system.
This, together with adoption of Risk Based Supervision would aid in factoring the
Pillar II requirements under Basel II.
 Enhancing the area of disclosures (Pillar III), so as to have greater transparency of
the financial position and risk profile of banks. Improving the level of corporate
governance standards in banks.
 Banks are required to adopt standardized approach for credit risk and basic
indicator approach for operational risk with effect from March 31, 2007. But
banks wanting to adopt advanced approaches have seen asked to make objective
52

self-assessment of their fulfillment of the minimum criteria prescribed under
Basel II.
 Banks may be allowed to migrate to Internal Rating Based (IRB) approach after
adequate skills both in banks and at supervisory levels are developed. Under
standardized approach, banks would use ratings assigned by credit rating agencies
identified by RBI.
 The new framework also recognizes the responsibility of bank management in
developing an Internal Capital Adequacy Assessment Process (ICAPP) that is
commensurate with bank’s risk profile and control environment. The apex bank,
therefore asked banks to focus on formalizing and operational sing their ICAAP,
which will serve as a useful benchmark while undertaking the parallel run with
effect from April 1, 2006.
The main benefit of Basel II will flow from the greater awareness of risk that it will instill
in the banks. It also has in built incentives for improved risk analysis, risk management
systems, allocation of capital and pricing of risk that enable banks to improve the quality
of their asset portfolio.
The new norms require a lot of disclosures of risks and the risk management practices by
banks. Data sharing among banks is also a very crucial under the new norms. Compliance
with Basel II will require increased capital commitments from all banks, as well as
increased transparency and reporting to both regulators and the market place.
Due to formal risk measurement processes, loans will be granted to only good borrowers.
The more risky borrowers will have difficulty in finding banks that are willing to lend to
them. This should result in reduced Non Performing Assets for the banking sector as a
whole resulting in better solvency of the Indian banking system.
53

SHRI CHINAI COLLEGE OF COMMERCE AND ECONOMICS
Survey for project on Audit of Bank Deposit and Loans
NAME: -
DESIGNATION: -
SIGNATURE: -
CONTACT NO: -
1) Which Bank provides better services i.e. interest rate in deposit?
Private Public Corporate
54

2) What kind of deposit you have?
Saving Current Fixed
3) Do you think in bank there is?
Errors Frauds
4) Have you take any loan?
Home Personal Any Other
5) Are you aware of Auditing?
Yes No
6) Should auditing be done in Bank?
Yes No
Comments: -
Project Guide: Prof. Nishikant Jha Survey conducted by:
Signature: - Disha shah
TY.BBI. Roll No: - 42
ANALYSIS ON SURVEY
 Which Bank provides better services i.e. interest rate in deposit?
Private
Public
55

Corporate
0
10
20
30
40
50
60
Private Public Corporate
 What Kind of deposit you have?
Saving
Current
Fixed
56

0
10
20
30
40
50
60
Saving Current Fixed
 Do you think in Bank there is?
Errors
Frauds
57

0
10
20
30
40
50
60
70
80
90
Errors Frauds
 Have you take any loan?
Home
Personal
Any other
58

0
5
10
15
20
25
30
35Home
PersonalAnyother
 Are you aware of Auditing?
Yes
No
59

0
10
20
30
40
50
60
70
80
Yes No
 Should auditing be done in Bank?
Yes
No
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0
10
20
30
40
50
60
70
Yes No
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ANNEXURE
 What is Auditing?
Auditing in simple terms is to check and correct the statement of accounts,
which gives you accurate and true statement.
 What are the essential qualities pf an Auditor?
The auditor should be experienced, Conversant with Instructions and
Circulars, clear, integrate information, adequate training, professional
qualifications.
 How many meeting does auditor have to attend?
Once in a year. Different in different banks.
 How many Audits does an Auditor have to check?
They have to check the main department; some of them have to check of their
consult branches.
CONCLUSION
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In recent years, banks have placed an increased emphasis on proper review, monitoring
and supervision of advances. As the basic operations are carried out a branch level, audit
of an advances, deposits and interest related thereto constitutes a significant proportion of
the branch auditor’s work. The auditor should be well acquainted with the laws governing
banking institution particularly those, which affect the various items of the financial
statements. The auditor should familiar himself with the computer system of the bank and
should evaluate the efficacy of various internal controls over the computer system.
The auditor should report whether the bank has laid down a loan policy specifying the
prudential exposure norms and industry-wise exposures.
It would be fitting to conclude that Auditing is an art as well as a Science in as much as
one need to apply the principles to the actual realities in an innovative manner. While the
regulatory prescriptions and bank’s own policy guidelines from the boundaries within
which the bank’s investment operations are required and expected to be carried out, it is
the auditing process that culls out and highlights the bubbles and weakness in the
procedures adopted by the bank’s operating personnel and forewarn the management
about the likely risks which have the potential to undermine the Corporate Objectives of
the bank. One can say that audit process is like the pebble of sand that enters the pearl
oyster without whose irritation the oyster will not be able to produce the pearl.
Bibliography
1. www.yahoo.com
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2. www.google.com
3. Chartered accountant book (Vol – 55)
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Auditing

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