CHAPTER NO.

INTRODUCTION

Banks play an important role in the development of any country. It’s like an agent
of the economy. Like all economic activities, the banking sector is also exposed to various
risks in its operations. It is of utmost importance to ensure that the banking sector stays
healthy, safe, and sound. For the safe and sound banking sector, one of the most important
factors is reliable financial information supported by quality bank audits.

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.

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
today’s competitive world audit is very much necessary as well as compulsory , because
investor investing decision is depend on that particular concept if auditor has expressing
his view about particular organization is true and fair then investor can get his ideas about
how much he should invest in particular companies. Let us now understand the growth of
auditing in India. The Indian Companies Act, 1913, prescribed for the first time the qualifications
of an Auditor. The Government of Bombay was the first to conduct related courses of study such
as the Government Diploma in Accountancy (GDA).

The Auditor’s Certificate Rule was passed in 1932 to maintain uniform standard in
Accountancy and Auditing. The Chartered Accountant Act was enacted by the Parliament
of India in 1939. The Act regulates that a person can be authorized to audit only when he
qualifies in the examinations conducted by The Institute of Chartered Accountants of
India.
 1.1 DEFINITION AND MEANING OF AUDITING

Various persons such as the owners, shareholders, investors, creditors, lenders,

government etc. use the final account of 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

statement and reports”.

 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”.

A Bank audit is a routine examination of the records and services of the organization
to ensure whether they are in compliance with the laws and standards of the industry.
Banks have to get many types of audits done such as statutory audit, revenue audit,
concurrent audit, etc. This may be carried out by external or internal agencies. In this blog,
we will have an overview of the statutory audit of the Branch of the Bank that is carried
out as per guidance provided by RBI.

 ORIGIN AND EVOLUATION OF AUDITING

1) Origin of term :-

The term audit is derived from the Latin term “audire” mean to hear. In early

days, an auditor used to listing to the account read out by the accountant in order to
 check them.

2) Ancient origin :-

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. Arthashasastra 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.

3) 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 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 audit also shifted to ascertaining whether the accounts were “true and fair”

rather than “true and correct”. Thus, the emphasis was not arithmetical accuracy but on

fair representation of financial affairs.

4) Development of accounting and auditing standard :-

The international accounting standards committee and the accounting

standards board of institute of chartered accountant of India have developed standard

 accounting and auditing practices to guide the accountants and auditor in their day-to-

day work.

5) Computer technology :-

The latest development in auditing pertains to the use of computers in

accounting as well as auditing.Really, auditing has come a long way from “hearing”

the accounts in the ancient day to using computers to examine computerized accounts

of today.

 BASIC PRINCIPLES 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,

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.

f) 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.

1.2 FEATURES OF AN AUDIT

The audit is structured into activities that follow a logical sequence. The audit will

focus on the management and delivery of the electronic device, which supposes fluxes

of electronic devices and procedures of treatment specific associated :

1. Systematic Process

Auditing is a systematic and scientific process that follows a sequence of activities, which
are logical, structured, and organized.

2. Three-party Relationship

The audit process involves three parties: shareholders, managers, and auditors.

3. 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.

4. Evidence

The auditing process requires collecting the evidence, that is, financial and non-financial
data, and examining thereof.

5. Established Criteria
The evidence must be evaluated regarding established criteria, which include International
Accounting Standards, International Financial Reporting Standards, Generally Accepted
Accounting Principles, industry practices, etc.

6. Opinion

The auditor has to express an honest and professional opinion as to the reasonable
assurance of the entity’s financial statements.

1.3 ADVANTAGES OF AUDITING

Auditing has become a compulsory task in the business organization. All the
organizations like business, social, industries and trading organizations make audit of
books of accounts. One of the biggest advantages of audit that it offers assurances to
the owners, investors, shareholders etc. The owners of the business will be assured
about the accuracy of their books of accounts. Moreover, audit helps in the detection
and prevention of errors and frauds, as it creates a fear to be discovered.

Following are a few advantages of Auditing:

 Ensures compliance – The significance of auditing is this process ensures that

policies and procedures are in place to protect the public interest. Also, by
conducting an audit, the management can ensure that their practices are compliant
with best practices and effective for the organisation. Furthermore, auditing helps
to identify trends and whether or not there have been any changes or issues with
management or other company processes.

 Auditing helps with business or system improvements – Audit is a way to test

the system and identify opportunities that can be used to improve business
performance. Auditing helps with implementing changes in the system and
detecting improvement opportunities. By auditing, we can see if any specific
processes are not performing as expected or not being followed.

 Provides credibility – Auditing is a process in which an independent party makes

sure that there are no financial losses or problems with the company that the
company has not disclosed. This can be done through the use of third-party
auditors, financial statements, and internal audit processes. In today’s day and age,
it is important to have credibility in your business. Auditing offers credibility
 because it allows you to run your business without fear of being discovered for
some kind of fraud.

 Prevent fraud – Auditing is the best way to reduce fraud and corruption. Financial
audits are undertaken to monitor a company’s financial health. Embezzlement and
other fraudulent activities can occur within companies, contractors, agencies and
institutions that receive government funding. Audits can also be conducted on
individuals and it is usually an annual requirement for them to carry out this
process. Auditors should be able to detect cheating in any of the following areas:
accounting, employee management, inventory control, logistics, procurement, risk
management, sales records and more.

 Useful for Planning and Budgeting – Audit planning and budgeting is part of the
auditing process. It plays a significant role in finding hidden risks or opportunities
within the planned activities. For example, auditors can plan to perform an internal
audit once every three years during the full cycle because this provides enough
time for corrective actions to be implemented before any major problems arise.

 Helps in maintaining accounts regularly: Maintenance of all accounts on a

regular basis is another major advantage provided by the auditing process. It keeps
a check on the regularity of account and raises questions if they are not maintained
in an adequate manner

 Keeps morale check: Auditing monitors the overall financial dealing of

organizations. This prevents the working staff from committing any error and
fraud. All employees work efficiently towards their role with a fear that all
irregularities will be identified by auditing.
 Stakeholder’s confidence: Auditing statements enables in gaining the confidence
of stakeholders. All stakeholders such as creditors, shareholders, banks, investors,
etc. have more confidence in audited financial accounts of the company.
1.4 DISADVANTAGES OF AUDITING

Following are a few disadvantages of Auditing:

 Auditing is Costly – Auditing can be a costly process that may require the
implementation of many different measures to ensure compliance. These measures
could include hiring an external auditing firm, or subcontracting specific areas and
continually monitoring their results. The costs associated with auditing could reach
a point where it might be not feasible to implement the process every often.

 Auditing requires experts – Auditing in general can be a very difficult process

and requires considerable knowledge and experience. Moreover, auditing for large
companies is both cost and time-intensive. Accounting firms tend to charge high
prices because they have access to unprotected client data. This is a huge problem
because it means company employees can use this information to commit fraud or
theft in the workplace.

 Impossible to check all transactions – The key disadvantage of performing an

audit is that it is impossible to check all transactions that are taking place in the
company. This makes constant monitoring a challenge for audits in business
settings.

 Unsuitable for small businesses – Auditing is a highly intensive process that

requires substantial time and resources. Most small businesses do not have the in-
house expertise or the resources to conduct audits. Instead, these companies should
invest their efforts in improving their processes and decision-making so that audits
are unnecessary.

 Bribes and threats: It’s easy for an auditor to be tempted by bribes and other
incentives that can significantly raise the value of their audits. Similarly, threats
posed to an auditor can also impact an audit’s end result.
1.5 TYPES OF AUDIT IN BANK

There are many types of bank audits: risk-based internal audit, statutory audit and tax
audit, stock audit, credit audit, RBI inspection system audit, forensic audit, concurrent
audit, snap audit, and foreign exchange.

I. Internal Audit :

Indian banking sector is witnessing major changes in recent years, as a result of which
new regulations are being brought into practice. With the implementation of Basel III
requirements, more importance is given to risk-based bank audits. With more guidance
and circulars from RBI for regulating the banking business in the country, bank’s
management is focused to bring about a robust framework which will identify, assess
and manage the financial risks. In order to achieve this target, the internal audit of
banks is necessary.

A periodic Internal audit is required to monitor the bank’s system of internal control
and procedures. Good internal audit process helps the management in the effective
discharge of its responsibilities. It gives them the assurance of the risk and operational
performance of the bank. Based on the volume and value of its transactions, every
bank should conduct an internal audit to fulfil its responsibilities and to achieve its
objectives.

 General Functions of Internal Audit

Audit Plan:
Internal audit function begins with the audit plan drafted by the audit team in
consultation with the management. This audit plan includes the timing and frequency
of the internal audit work to be carried on and it is based on control risk assessment.
Risk assessment examines all the bank’s activities and internal control system which
exhibits the probable degree of risk present in these activities.

Audit procedures:
The objectives framed in the audit plan are achieved through a detailed audit
programme which lists down the procedure to be carried out for each specific audit
area. These procedures are adapted according to the risks identified in every process
across the bank’s operations. Based on the value and volume of the banking
transactions, samples are selected in each of the core areas to be audited. Audit
samples should also be selected on a random basis in certain areas, which will expose
all the related risk. Listed below are some of the important areas to be covered in any
of the bank’s internal audit:

Cash Transactions – The deposits and withdrawals made, need to be tracked. Further,
surprise verification of the cash balance on a particular day needs to be initiated.

Loan – This is the most important division in banking services. Various types of loans
and cash credits are given to customers. These need to be checked for necessary
documentation and approvals. Checking the loan repayment schedules and examining
the reported non-performing assets is also required.

Documentation – Checking for the KYC norms and ensuring the sufficiency of the
supporting documents is important.

Charges – Analysing if all charges for various services rendered by the bank are
collected from the customers per the head office circulars is required. If there are any
revenue leakages, it should be reported.

Tax – All the required withholdings and other tax deductions have to be executed
promptly.

Other Services – Other banking commercial services such as swift money transfers,
the line of credit followed and much more should be ensured to be in place. This has to
be carried out with required approvals, documentation, etc.
Cost reduction through process improvements and reducing the non-value added
activities should be worked on.
 Benefits of Internal Audit

Listed below are some of the benefits of having a good internal audit system in banks:

o Overall operational and control environment of the bank is improved

o Regular internal audit system increases the accountability of the employees
o Strong internal audit process enables early detection of fraud or probable fraud
o Identifies redundant procedures and recommends improvement which increases
the operational efficiency.

II. Statutory Audit :

Statutory audit of banks can be defined as an audit to ensure that the financial
statements and books of account presented to the regulators and the public are fair and
accurate. It is an audit that is prescribed by a different statute such as Income Tax,
Reserve Bank of India, Companies Act and so on. The Statutory Audit of Banks is
mandatory and, the RBI in association with the ICAI appoints Statutory Auditors for
the same. At the end of every financial year, a rigorous statutory audit is conducted in
every branch of a bank. This article talks about the various essentials of the Statutory
Audit of Banks.

 Statutory Audit Process

It is vital that Statutory Auditors ensure that the audit reports issued by them are
compliant with the requirements prescribed in following standards.

 Standard of Auditing 700: Forming an Opinion and Reporting on Financial

Statements (Revised)
 Standard of Auditing 705: Modifications to the Opinion in the Independent
Auditor’s Report
 Standard of Auditing 706: Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report (Revised).

Statutory Auditors are generally given a time frame within which they are required to
undertake the audit of the bank’s branches that are allocated to them. An auditor must
accept the appointment immediately and send a formal intimation to the management
of the branch and inquire about the information necessary to conduct an audit.
The assigned auditor would have to ensure that their report includes the qualification
of deposits, advances, interest income and interest expenses. The essential elements to
verify in a statutory audit of a bank are the following.
 Cash Verification Procedure
 Tax-Related Items
 Verification of Loan Accounts

 Cash Verification Procedure

A statutory auditor must verify the cash balance at the branch of a bank by the 31st of
March of every year. Below is the checklist for cash verification that an auditor must
follow.
 Whether the branch is being opened at the time as indicated in the guidelines and
the branch manager is present at the branch when it is being opened.
 Whether the Joint Custodians are opening the cash safe/ cash vault.
 If any unrecorded security documents or objects are placed in the cash safe.
 If the branch is maintaining a record when a currency is accepted from the public.
This would also include the records of receiving mutilated notes.
 If the burglar alarm system is functioning properly.
 If all the other entrances to the bank and the ones within the bank are locked at the
time of opening the cash room.
 Ensure that any weapon stays outside the cash room when it is being opened or
closed.
 If the cash is being carried from the cash room to the counter and vice versa in a
locker box.
 Ensure that the UV lamps and the cash counting machine are in a working
condition.
 Tax-Related Items
A statutory auditor is required to ensure that all the tax-related items and
compliances that are generally applicable to a bank. Below is the checklist for
compliance that an auditor must follow.
 The tax must be levied and deducted at an appropriate rate on all the payments
made by the bank towards interest on deposits, rent, payment to professionals/
contractors and so on.
 Ensure that all the payments for the tax are on time and all the challans for the
same are present.
 Ensure that all the tax returns are filed on time.
 If the TDS certificate is issued and Form 15G/ 15H is collected and sent on time.
 Review on the quality of compliance if concurrent audits are being conducted at
the bank.
 Loan Accounts Verification
The assets of most banks majorly comprise of loan accounts. A statutory auditor is
required to review the loan accounts with extra care.
The verification of loan accounts is split into three parts.
 Preliminary Check
 Disbursement
 Post Disbursement Inspection
 Preliminary Check
Banks are vested with the responsibility of conducting a preliminary check of all the
accounts prior to considering the project for evaluation. A statutory audit must review
the documents below for evaluating the bank’s preliminary process.
 Prescribed Application form
 Loan Application
 KYC Compliance
 Latest Audited Financial Statements
 Project Report, Projected P&L, Balance Sheet and Cash Flow Statement
 Board Resolution for Availing the Credit Facilities
 All the Government Department’s Registration
 Technical Review
 Disbursement
A statutory auditor has the responsibility to check the disbursement and if it happens
under the fulfilment of all the terms and conditions of the sanction letter. It should also
be ensured that an acceptance letter for the same has also been acquired.
 Post Disbursement Inspection
The bank maintains a proper review of the active documents. A statutory auditor has
the responsibility to check the following essential elements.
 There must be an acceptance letter that is duly acknowledged by the borrowers
concerning all the loan accounts.
 There should be a proper execution of the loan documents and records as indicated
by the terms and conditions of the sanction letter.
 All the original documents must be held in safe custody which is fire resistant.
 Proper maintenance of Confidential Reposts and NOCs from existing bankers.
 The bank should check the CIBIL Report and Score for any adverse comments.
 External & Internal Credit Rating
 Valuation of Securities
 Due Diligence Certificate

III.Concurrent Audit :

Concurrent audit is a systematic and timely examination of financial transactions on a

regular basis to ensure accuracy, authenticity, compliance with procedures and
guidelines. The emphasis under concurrent audit is not on test checking but on
substantial checking of transactions. It is an ongoing appraisal of the financial health of
an entity to determine whether the financial management arrangements (including
internal control mechanisms) are effectively working and identify areas of
improvement to enhance efficiency.
  Objectives of Concurrent Audit:

 Ensure voucher/ evidence based payments to improve transparency

 Ensure accuracy and timeliness in maintenance of books of accounts
 Ensure timeliness and accuracy of periodical financial statements
 Improve accuracy and timeliness of financial reporting especially at sub-district
levels
 Ensure compliance with laid down systems, procedures and policies
 Regularly track, follow up and settle advances on a priority basis
 Assess & improve overall internal control systems

 Concurrent Audit Procedure

The concurrent audit covers all transactions of the bank. Hence to understand how this
audit needs to be conducted, an understanding of the processes of the banks is
imperative. Banking functions are inclusive but not limited to the following:
 Acceptance of deposits
 Loans and advances
 Cash management
 Safety Lockers
 Forex
 Bill payment
To conduct a concurrent audit, functions of the bank must be fragmented to
transactions, and the necessary checks and balances must be assigned.
 Acceptance of deposits
Acceptance of deposits is a core function of banks. The deposits are of varied nature
depending on the holder and purpose of the account. Nevertheless, the process of
acceptance of deposits can be summed up as follows:-
 Collection of details
 KYC and AML norms compliance
 Creation of account in Core Banking System (CBS)
  Loans and advances

The lending of funds is the other core function of the bank. The bank accepts deposits at a
certain rate and lends at a higher rate. The margin is the bank’s profit. Lending function
ranks higher on the risk factor as there is a possibility of the debt not being recovered.
Hence there is a great significance and need for proper documentation.

There are several loans and advances that a bank offers. However, the process for
disbursement remains more or less the same. The process for disbursement of loan can be
summed up as the following transactions:

 Building a relationship with the customer

 Collection of all requisite documents

 Checking the credibility of the customer

 Disbursing the loan and monitoring the loan

 Cash management

Since the bank earns interest on the rupee it lends, maintaining a high cash balance can
result in interest losses. However, banks need to hold enough to fund the ATMs. Hence
the bank must achieve a balance.

 Forex

For forex operations of a bank, the auditor must ensure the following checks:

 Rate of foreign exchange on the transaction date and correct entry in books

 Adherence to RBI norms relating to forex

 Correct valuation of forex held in hand at the time of the audit

 Bill payments
 This is an add on service offered by banks; wherein a customer can make payments
towards public utilities through the bank. The auditor will have to verify:

 If standing instructions have been received from customers, then ensure that the
same has been noted in the CBS to generate an auto payment

 Ensure proper reconciliations of the utility accounts

 Income leakage

For an auditor to ensure completeness of audit it is imperative to check that all

charges are collected, interest rates are inputted accurately in the CBS. The auditor must
generate MIS to analyze the various charges and interest computations. Also, there has to
be a documented process for changing the rates in the system, and the same must be
strictly monitored. The concurrent audit aims at reducing the gap between the occurrence
of a transaction and its examination. A concurrent audit report covers all transactions and
hence is the second line of defense for a bank.

IV. System audit:

In today’s 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.

V. Revenue audit:

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.

1.5 CONDUCTING THE AUDIT OF BANKS

The audit of banks or their branches involves the following stages –

1. Initial consideration by the statutory auditor in regards to:
a) Declaration of Indebtedness
b) Internal Assignments in Banks by Statutory Auditors
c) Planning an Audit of Financial Statements
d) Communication with Previous Auditor
e) Terms of Audit Engagements
f) Initial Engagements
g) Assessment of Engagement Risks
h) Understanding the Bank and its Environment
2. Identifying and Assessing the Risks of Material Misstatements
3. Understanding the Bank and Its Environment including Internal Control
4. Understanding the Bank’s Accounting Process
5. Understanding the Risk Management Process
6. Engagement Team Discussions
7. Establishing the Overall Audit Strategy
8. Developing the Audit Plan
9. Summarizing the audit plan by preparing an audit planning memorandum
10. Determining the Audit Materiality by considering the relationship between the
audit
11. While obtaining an understanding of the bank, the auditor should consider whether
there are events and conditions which may cast significant doubt on the bank’s ability
to continue as a going concern
12. Assessing the Risk of Fraud including Money Laundering
13. Assessing specific risks
14. Assessing the risk associated with outsourcing of activities
15. Responses to the Assessed Risks
16. Reviewing the other reports by taking into account the adverse comments, if any,
such as:
a) Previous year’s audit reports
b) Latest internal inspection reports of bank officials
c) Reserve Bank’s latest inspection report
d) Concurrent / Internal audit report
e) report on verification of security
f) Any other internal reports specially related to particular accounts
g) Manager’s charge-handing-over report when incumbent is changed

Classification of Advances

Advances, generally, constitute the largest item on the assets side of the balance sheet
of a bank and are a major source of its income. Audit of advances is one of the most
important areas covered by auditors in bank audits. It is necessary that auditors should
have adequate knowledge of the banking industry and the regulations governing the
banks. Auditors must be aware of the various functional areas of the bank/branches, its
processes, procedures, systems, and prevailing internal controls with regard to
advances.
Classification of Advances Sector Wise
RBI issues common guidelines for lending to Priority Sector such as agriculture,
MSME, Education, Housing, etc. which banks are required to follow. These guidelines
cover rate of interest, service charges, receipt, sanction, rejection, disbursement
Register; the issue of Loan Application Acknowledgement. RBI also issues targets for
banks for lending to Priority Sector.

Classification of Advances Security Wise

Banks ask for Security or Collateral while lending to assure that the Borrower will
return the money to the bank in a prescribed time. Depending on the nature of the item
concerned, the creation of security may take the form of a mortgage, pledge,
hypothecation, assignment, set-off, or lien.
Classification of Advances as per RBI Prudential Norms

 Non-performing Assets: An asset becomes NPA when it ceases to generate

income for the Bank, where:
a) interest and/ or installment of principal remain overdue for a period of more than 90
days in respect of a term loan;
b) the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/ CC);
c) the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted.
d) where the remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not parting with
the share of other member banks, the account should be treated as NPA.
 Out of Order: An account should be treated as ‘out of order’ if:-
a) the outstanding balance remains continuously in excess of the sanctioned
limit/drawing power or
b) in cases where the outstanding balance in the principal operating account is less than
the sanctioned limit/drawing power, but there are no credits continuously for 90 days
as on the date of Balance Sheet; or
c) credits are there but are not enough to cover the interest debited during the same
period, these accounts should be treated as ‘out of order’.
 Overdue: Any amount due to the bank under any credit facility is ‘overdue’ if it is
not paid on the due date fixed by the bank. Accounts regularized near the Balance
Sheet Date should be handled with care and without scope for subjectivity.
 Government Guaranteed advances
In the case of Central Govt. guaranteed Advances, where the guarantee is not invoked,
would be classified as Standard Assets, but regarded as NPA for Income Recognition
purposes.
However, where the advance is guaranteed by State Government, it is considered NPA
if it remains overdue for more than 90 days for both Provisioning and Income
recognition purposes.
Audit of Advances
In carrying out the audit of advances, the auditor is primarily concerned with obtaining
evidence about the following:
a) Amount of advance outstanding at the date of the balance sheet.
b) Advances representing the amount due to the bank.
c) Amounts due to the bank are appropriately supported by loan documents and other
documents as applicable to the nature of advances.
d) Existence of unrecorded advances, if any.
e) Existing basis of valuation of advances is appropriate.
f) Advances are disclosed, classified, and described in accordance with recognized
accounting policies and practices and relevant statutory and regulatory requirements.
g) Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards, and generally accepted accounting practices

Audit of Revenue items

The auditor is primarily concerned with obtaining reasonable assurance that the
recorded income arose from transactions that pertain to the relevant period. Also, there
is no unrecorded income and the income is recorded at an appropriate amount.
As directed by RBI, any income which exceeds one percent of the total income of the
bank if the income is reckoned on a gross basis or one percent of the net profit before
taxes if the income is reckoned net of costs should be considered on an accrual basis as
per Accounting Standard 9. However, if any item of income is not considered to be
material then it may be recognized when received.
Income such as interest, fees, and commission are recorded on an accrual basis, i.e., as
it is earned. It is an essential condition for accrual of income if there is a certainty for
its ultimate collection. However, in case, where, a significant uncertainty regarding the
ultimate collection of income arises in respect of non-performing assets, then banks
should not recognize income on non-performing assets until it is actually realized.
In the case of a credit facility and Government guaranteed account, when it is classified
as non-performing for the first time, interest accrued and credited to the income
account in the corresponding previous year which has not been realized should be
reversed or provided for. In case of Interest on advances against Term Deposits,
National Savings Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras
(KVPs) and Life policies may be taken to income account on the due date, provided
adequate margin is available in the accounts.
In case of bills purchased outstanding at the close of the year the discount received
thereon should be properly apportioned between the two years. Interest (discount)
component paid by Bank/Branch on rediscount of bills from other financial
institutions, is not to be netted off from the discount earned on bills discounted.
In case of bills for collection, the auditor should also examine the procedure for
crediting the party on whose behalf the bill has been collected. The procedure is
usually such that the customer’s account is credited only after the bill has actually been
collected from the drawee either by the bank itself or through its agents, etc. The
commission of the branch becomes due only when the bill has been collected.
Fees and commissions earned by the banks as a result of re-negotiations or
rescheduling of outstanding debts should be recognized on an accrual basis over the
period of time covered by the re-negotiated or rescheduled extension of credit.
Audit of Expenses
Expenditure is to be shown under three broad heads:
a) Interest expense
b) Operating expense
c) Provisions and contingencies.
The auditor is primarily concerned with assessing the overall reasonableness of the
amount of interest expense by analyzing ratios of interest paid on different types of
deposits and borrowings to the average quantum of the respective liabilities during the
year.
For this, an auditor may obtain from the bank analysis of various types of deposits
outstanding at the end of each quarter. From such information, the auditor may work
out a weighted average interest rate. The auditor may then compare this rate with the
actual average rate of interest paid on the relevant deposits as per the annual accounts
and enquire into the difference if material.
 BOOKS OF ACCOUNTS OF BANKS

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.
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.
1. 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 and
maintained separate books for the detailed accounts. These are columnar books having
separate columns for each revenue receipt and expense head. Other banks keep
separate books for debits and credits posted are entered in to the profit and loss account
in the general ledger.
2. 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 ledgers are
posted directly from vouchers and the entire voucher entered in each ledger in a day
are summarized in to Voucher Summary Sheets.

 Bill Registers:
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 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,
volume and details, which differ according to the individual needs of each bank. For
example, there will be registers for:
Demand drafts, telegraphic and mail transfers issued on branches or agencies.
Letters of credit.
Letter of guarantee.
Departmental journals: Each department of bank maintains a journal to note the
transfer entries passed by it. These journals are memoranda book only, as all the
entries made there are also made in the daybook, through voucher summary sheets.
The purpose is to maintain a record of all transfer entries originated by each
department.
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 bookCash 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 voucher are then sent to appropriate departments, where customers account are
immediately credited. Normally no drawings are allowed against clearing cheques
deposited the same day but exceptions are often made by the manager in the case of
established customer.
Inward clearing:
Cheques received are check with the accompanying list. These are then distributed
to differed department and number of cheques given to each department is noted in a
memo book. When the cheques are passed and 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.

 VERIFICATION OF ASSETS AND LIABILITES

o Capital and Liabilities:

1) Capital

The following particulars have to be given in respect of share capital in the balance
sheet

 For nationalized banks

 The capital owned by central government as on the date of balance sheet including
contribution from government, if any, for participation in world bank project should be
shown.

 For banks incorporated outside India

Capital (the amount brought in by banks by way of start up capital as prescribed by

RBI shown under this head)

Amount of deposit kept with RBI under section 11(2) of the banking regulation act,
1949.

]For other banks

Authorized capital (shares of Rs…….each)

Issued capital (-do-)

Subscribed capital (-do-)

Called-up capital (-do-)

Less: calls unpaid

Add: forfeited shares

The auditor should verify the opening balance of capital with reference to the audited
balance sheet of the previous year. In case there has been increase in capital during the
year, the auditor should examine the relevant documents supporting the increase. For
example, in case of an increase an authorized capital of a banking company, the
auditor should examine the special resolution of shareholders and the memorandum of
association. An increase in subscribed and paid-up capital of a banking company, on
the other hand, should be verified with reference to prospectus/ other offer document,
reports received from registers to the issue, bank statement, etc.

2) Reserves and surplus:

The following are required to be disclosed in the balance sheet under the head
‘Reserves and Surplus’.

a) Statutory reserves.

b) Capital reserves.

c) Share premium.

d) Revenue and other reserves.

e) Balance in profit and loss account.

The auditor should verify the opening balances of various reserves with reference
to the audited balance sheet of the previous year. Addition to or deductions from
reserves should also be verified in the usual manner, e.g. with reference to board
resolution. In the case of statutory reserves and share premium, compliance with legal
requirements should also be examined. Thus, the auditor should specifically examine
whether the requirements of governing legislation regarding transfer of the prescribed
percentage of profits to reserve fund have been complied with. In case the bank has
been granted exemption form such transfer, the auditor should examine the relevant
documents granting such exemption. Similarly, it should be examined whether the
appropriations from share premium account conform to the legal requirements.
3) Deposits:

Deposits are required to be classified in the balance sheet under the following heads.
A. I. Demand Deposits

(i) from banks

(ii) from others

II. Saving Bank Deposits

I. Term Deposits

(i) From banks.

(ii) From Others.

B. I. Deposits of Branches in India.

II. Deposits of Branches outside India.

The auditor may verify types of deposits in the following manner.

I. Current account:
The auditor should verify the balances in individual accounts on a sampling
basis. He should also examine whether the balances as per subsidiary ledgers tally with
the related control accounts in the general ledger.
The auditor should consider the debit balances in current account are not netted
out on the liabilities side but appropriately included under the ‘advances’.
Inoperative accounts are a common area of frauds in banks. While examining
current account, the auditor should specifically cover in his sample some of the
inoperative account revived during the year. The auditor should ascertain whether
inoperative are ‘revived’ only with proper authority. For this purpose, the auditor
should identify cases where there has been a significant reduction in balances
compared to the previous year and examine the authorization for withdrawals.
II. Saving bank deposits:
 The auditor should verify the balances is individual account on a sampling basis.
He should also examine whether the balances as per subsidiary ledgers tally wit the
related control accounts in the general ledger.
The auditor should also check the calculations of interest on a sampling basis. It is
not usual for branches to interest saving bank up to a date close to the end of the
accounting period for e.g.25th March based on the actual balances with interest of the
remaining period on an estimated basis at the head office level.

III. Term deposits:

Term deposits are deposits repayable after a specified period. They are considered
time liabilities of the bank.
The auditor should verify the deposits with reference to the relevant registers.
The auditor should also examine, on a sampling basis, the registers with the counter-
foils of the receipts issued and with the discharged receipts returned to the bank.
IV. Deposits designated in foreign currencies:
In the case of deposits designated in a foreign currency, for e.g. foreign currency
non-resident deposits, the auditor should examine whether they have been converted
into Indian rupees at the rate notified in his behalf by the head office.
V. Interest accrued but not due:
The auditor should examine that interest accrued but not due on deposits is not
included under the deposited but is shown under the head ‘other liabilities and
provision’

 ASSETS:
Cash, bank balanced and money at call and short notice:
The third schedule to the Banking Regulation act, 1949, requires following
disclosure to the be made in the made in the balance sheet regarding cash, balances
with Reserve Bank of India., balance with other bank, and money at call and short
notice.
Cash and balance with Reserve Bank of India.
I. Cash in hand (including foreign currency notes)
II. Balance with Reserve Bank of India

f) In current account
g) In other account

Balanced with banks money at call and short notice

I. In India

A) Balanced with banks

1. In current account
2. In other deposits account.

B) Money at call and short notice

1. With banks
2. With other institutions

II Outside in India

1. In current accounts.
2. In other deposits account.
3. Money at call and short notice.

Cash Reserved:
One of the determinants of cash balance to be maintained by banking companies
and other schedule is the requirement for maintenance of certain minimum cash
reserve. While the requirement for maintenance of cash reserve by banking companies
is contained in the banking regulation act,1949 corresponding requirements for
schedule bank is contain in the Reserve Bank of India.
Statutory liquidity ratio:
Section of 24 the act requires that every banking company shall maintain in India in
cash, gold or unencumbered approved securities an amount which shall not, at the
close of business on any day, be less than twenty five percent, or such other percentage
not exceeding forty, as the RBI bank form time to time, of total demand and time
liabilities in India as on last Friday of the second preceding fortnight.

Deposits by foreign banking company:

Section 11(2) of the act requires the banking companies incorporated outside India to
deposit with RBI certain amount either in cash or in unencumbered securities or partly
in cash and partly in such securities.

2) Investment:

The auditor should verify the investment scripts physically at the close of business on
the date of balance sheet. In exceptional cases where physical verification of
investment scripts on the balance sheet date is not possible the auditor should carry out
the physical verification on a should take in to consideration any adjustment for
subsequent transaction of purchase, sale etc. he should take particular care to see that
only genuine investment are produced before him.
Advances:

In carrying out of audit of advances, the auditor of advances, the auditor is primarily
concerned with obtaining evidence about following

a) Amount included in balance sheet in respect of advances are outstanding at

the date of balance sheet.
b) Advances represent amount due to the bank.
c) There are no unrecorded advances.
 d) The stated basis of valuation of advances is appropriate and properly
applied, and that the recoverability of advances is recognized in their
valuation.
e) The advances are disclosed, classified and describe accordance with
recognized accounting policies and relevant statutory and regulatory
requirements.
f) The auditor should ascertain the statues of balancing of subsidiary ledger
relating to advances.
g) The auditor should review the operation other advances accounts.

4) Fixed assets:

In carrying out an audit of fixed assets, the auditor is concerned primarily with
obtaining evidence about their existence and valuation.

The branch auditor should ascertain whether the accounts in respect of premises and/or
other fixed assets are maintained at the branch or centrally. Similarly, he should
ascertain the location of documents of title or other documents evidencing ownership
of various items of fixed assets. The auditor should verify the opening balance of
premises with reference to schedule of fixed assets, ledger or fixed asset register.

In respect of fixed assets sold during the year, a copy of the sale deed and receipt of the
salve value should examined by the auditor.

Other assets:

The auditor should see that whether there are any reversals entries indicating the
possibility of irregular payments or frauds in case of inter- office adjustments. The
auditor should also pay attention towards interest-accrued part from the banks point of
view. The auditor should see that internal control over stationery items. The auditor
should verify the stationery and stamps.
The auditor should examine the non-interest bearing advances to the staff with
reference to the relevant documentation. The auditor should also see that the entries
under the head ‘suspense account’. The auditor should also verify prepaid expenses in
the same manner as in the case of entities.
 CHAPTER NO.2

RESEARCH METHODOLOGY

The present study, being exploratory in nature, it can be categorized as descriptive survey
method. It was proposed to use both types of information, primary, as well as, secondary;
to provide systematic and scientific explanation to the findings. For the collection of
primary data, a self-prepared questionnaire was administered to the selected sample
(Banks). For the secondary data, researcher has used all the possible published
information, such as, Newspapers, Periodicals, Reports, Articles, Websites of RBI and
other selected banks etc. In this way the data collected and analyzed by using appropriate
statistical method and interpreted accordingly.

Title of the study :

“A study on Audit of Bank”

2.1 OBJECTIVES OF THE STUDY

i. The aim of an audit of a banking company is rooted in compliance.

ii. The target of a bank audit is to review whether the financial activities of the
institutions are legal, fair, and complete.
iii. The main objective of the bank audit is to conduct an independent
inspection of the bank’s performance, its information systems and control.
iv. The system has to undergo various examinations to generate the findings,
and auditors can suggest some possible reformative actions that the
institution should take to perform better.

2.2 SCOPE OF STUDY

i. Review the adequacy of the risk management procedures and

methodologies. Checking the efficiency of routine operations of the bank.
Evaluate the reliability and accuracy of the financial records and reports.
 ii. Perform necessary tests, enquiries and other verification procedure of
accounting transactions and account balances.
iii. The audit scope, ultimately, establishes how deeply an audit is performed.
iv. Audit scope, defined as the amount of time and documents which are
involved in an audit, is an important factor in all auditing.

2.3 SIGNIFICANCE OF THE STUDY

 Audit is an important term used in accounting that describes the examination

and verification of a company’s financial records. It is to ensure that financial
information is represented fairly and accurately.
 Audits are performed to ensure that financial statements are prepared in
accordance with the relevant accounting standards.
 It gives you objective insight.

 It ensures and improves efficiency of your operations and controls.

 It allows you to assess risks and protect assets.
 It allows for evaluation of controls.
 Ultimately, it ensures that your organization is complying with the rules.

2.4 LIMITATIONS OF THE STUDY

 The sample size for collecting the primary data was meagre as it includes only ___
respondents, hence the conclusion would not be a universal one.
 There was lack of time on the part of respondents.
 The survey was carried through questionnaire and the questions were based on
perception.
 Google Forms were prepared and there were___ respondents only.
 II.5 METHODS OF DATA COLLECTION
There are two types of data mainly Primary Data and Secondary Data-

A. PRIMARY DATA
 Observation
 Questionnaires
 Online Surveys

Primary data has been collected from survey. Survey has been conducted through Online
Form with the help of 17 Close ended questionnaire. This survey has been conducted
among the different type of Audit of Bank. The Study Participants are as from multiple
regimes of transactions. The method followed in obtaining the primary data was through
the structured questionnaire. The researcher had used a questionnaire for obtaining the
primary data for analysis. A questionnaire is a form prepared and distributed to secure
response to certain questions.

 The sample size of my project is limited to__ respondents only and Data has been
presented with the help of tables, bar graph, pie charts, line graphs etc.

B. SECONDARY DATA :
 Articles and Research Papers
 Books
 Internet

It refers to the information nor facts already collected. Such data are collected with the
objective of understanding the past status of any variable.

Here, secondary data used for making a financial analysis.

Secondary data was collected from the websites has been mentioned in the bibliography.
 II.6 SAMPLING

It was divided into following parts:

Sampling Universe

The auditor concludes that controls are operating effectively, when in fact they are
not. Insofar as substantive testing is concerned (which is primarily used to test for
material misstatement), the auditor may conclude that a material misstatement does
not exist, when in fact it does. These erroneous conclusions will more than likely
lead to an incorrect opinion being formed by the auditor.

Sampling Technique

Simple Random Sampling. Sample was taken randomly. The advantage of sampling are
that it is much less costly, quicker and analysis will become easier.
 CHAPTER NO 3

LITERATURE REVIEW

This paper focuses on the literature, contributes to the philosophy of audit materiality and
auditor independence. The study covers a large period ranging from 1996 to 2019.
Auditing provides an independent examination of the books and accounts. The concept of
audit materiality and independence of the auditor plays a vital role in the process of
expressing an opinion by the auditor. The level of materiality determines the reliability of
the audit report and independence ensures the quality of the opinion. The major
implications of the study indicate the importance of auditing standards and the
improvement in the regulatory requirements.

 Literature Review on Audit plan Audit planning includes deciding on the

overall audit strategy and developing an audit plan. Auditing Standard No. 9 from
the Public Company Accounting Oversight Board (PCAOB) describes an external
auditor's responsibility and the requirements for planning an audit. According to
standard No. 9, an audit plan is expected to describe the planned nature, extent, and
timing of the procedures for risk assessment and the tests to be done on the controls
and substantive procedures, along with a description of other audit procedures
planned to ensure the audit meets PCAOB standards. For internal auditing, the
Institute of Internal Auditors provides guidance for audit planning. Planning starts
with determining the scope and objectives of the audit. Internal auditors need to
understand the business, operations, and unique characteristics of the
department/unit being audited and to develop an audit plan that defines the
procedures needed to do an efficient and effective audit. Planning an audit involves
establishing the overall audit strategy for the engagement and developing an audit
plan. Adequate planning benefits the audit of financial statements in several ways,
including the following: • Helping the auditor identify and devote appropriate
attention to important areas of the audit • Helping the auditor identify and resolve
potential problems on a timely basis • Helping the auditor properly organize and
manage the audit engagement so that it is performed in an effective and efficient
manner • Assisting in the selection of engagement team members with appropriate
levels of capabilities and competence to respond to anticipated risks and allocating
team member responsibilities • Facilitating the direction and supervision of
engagement team members and the review of their work • Assisting, when
applicable, in coordination of work done by auditors of components and specialists.
Audit plans have been and remain to be an important scholarly academic subject.
Recently many scholars have analyzed various aspects of audit plans. Etheridge
(2011) emphasizing the importance of audit plan suggests that for an effective
audit plan a proper auditing planning is crucial. In this aspect Etheridge (2011)
states: “Planning identifies key audit areas such as material account balances and
situations with high risk and guides the auditor’s approach and responses to these
areas” (p. 83). [2] Moreover the same author claims that planning occurs in
advance of fieldwork and usually begins with an evaluation of the auditing plan in
order to determine the scope of the audit. According to Mock and Wright (1999)
audit planning is a two stage process: [3] 1. Risk assessment and 2. Evidential
planning. The above mentioned authors claim that both stages are important for
developing an audit plan, because even if the auditor manages to assess the client
risks, he would need to develop an appropriate evidential plan in order to react to
those risks. 38 The opinions of scholars regarding audit plans have their specifics.
However their common opinion is that audit plans should be risk adjusted (e.g.
Bechara and Kapoor, 2012: Hammersley, 2011: Fukukava, Mock and Right, 2006:
Vandervelde, 2006:). Hammersley (2011) emphasizes the need of dynamic
modification of the audit plan. [4] The mentioned author claims that because of the
fraud risks identified during the auditing process the audit plan prepared in
preliminary phase need to be object of modification. Vandervelde (2006) also
suggests that adaptation of audit plans should be in direct proportion with the
associated risk, claiming that an auditor should response to any change of the risk
factor when compiling an audit plan. [5] Bechara and Kapoor (2012) ighlight the
issue of risk-based audit plans, claiming that traditional audit plans are based on
suspicion and usually directed from senior management. [6] The traditional
auditing approach according to the above mentioned authors did not show to be
effective during and before the recent financial crisis. Therefore, Bechara and
Kapoor (2012) insist for a comprehensive risk based audit plan, enabling detection
of the risks in the prism of strategic objectives. Noel and Patterson (2003) suggest
that formulating an audit plan is a complex task especially when the auditee has a
multiple way of frauds. [7] These frauds according to the author may be
defalcation, fraudulent financial reporting, and a combination of these two. In
addition the authors explain that which of these frauds would occur depends on: 1.
The relative difference of rewards and penalties from each type of fraud, 2.
Strength of audit procedures, and 3. Current industry conditions the company is
part of. Fukukava, Mock and Right (2006) found that the some financial risk items
such as liquidity, profitability and flow from operations have a significant
influence on audit planning decisions, whereas, the risks which are governance-
 related have minor impact on audit plans.[8] In regard of governmental audits
Meinhardt, Moraglio and Steinberg (1987) suggest that there are issues to be
addressed, such as auditing standard violation related to non compliance with rules
and regulations in power. Cohen, et al. (2011) claim that even if the rules,
regulations, and standards are emplaced, the interference and the pressure from
senior management to the auditors may minimize the chances for reliable and
impartial presentation of financial statement in particular or to an entire auditing
process in general. [9]

 Kumar. N. and Rama (2008) analysed that retail banking is the innovation of 21st
century. India has experience a rapid growth in retail banking. Retail banking is a
banking service that is geared primarily towards individual customers. It focuses
strictly on consumer markets. Retail banking is a mass-market banking where
individual customers use local branches of larger commercial banks. The services
offered by retail banking includes saving and checking accounts, mortgages,
personal loans, debit cards, credit cards etc. its take care of the diverse banking
products and services to individuals customers. It provides banking products and
services to individuals. Retail banking contains features like multiple products,
channels and customer groups. Most of the Indian banks have been retail banks in
their business composition. Retail banking in India is growing and the same
expected in future.

 Auditing Literature Audit literature is one of the richest contributed fields among
accounting and auditing. The concentration of the literature shows a drastic shift
from time to time. Till 2000’s the area mostly concentrates on the fundamentals
such as vouching, verification, internal control, audit materiality, auditor’s
independence, sources of audit evidence and audit risk. Our paper tries to explore
the fundamental contributions in the field. After 2000’s the literature shows some
advanced shifts from these basic concepts, such as structure if internal control,
related auditing standards, protection of auditor’s independence, financial reporting
standards, etc (Armitage, 2008). Audit independence and materiality are two
important factors which decide the fair expression of view by the auditor on the
financial statement. The concept of materiality is related to misstatements, a
misstatement or omission is considered to be material if the amount is individually
or aggregately significant and which may affect the investment, financial,
operational uses of the users of the financial statements (Baldacchino, Tabone, &
Demanuele, 2017). This concept had to use by the auditor both before and during
the audit. During the planning, stage auditor ensures that she covers all the relevant
transactions which are vulnerable to misstatements. This helps the auditor to form
an opinion on the statement. However, the auditor has to make sure that the
 financial statement has been prepared in such a manner that is free from material
misstatement and according to all reporting standards. Hence a big risk is
associated with it, related to expressing an inappropriate opinion on a financial
statement which is vulnerable in nature (Barndt, Fuller, & Flynn, 2016). Even
though the concept of materiality looks easy by definition it involves difficulties in
practical. The auditor has to use his discretion to decide the material area which
affects the investors decisions (Vorhies, 2005). The auditor may decide the
materiality of a transaction based on various features of the transaction such as the
amount of transaction, parties involved in the transactions, the period of
transactions, volume of transactions, etc. The determination of materiality is based
on the auditor’s professional judgment. Hence the auditor decides a materiality
level based on the above-mentioned measures, and such limit can be called as
performance materiality (Bell, Knechel, Payne, & Willingham, 1998). Based on the
materiality benchmark determined by the auditor, more than fifty percent of the
income statement shows a profit which is less than the planned materiality
level(Chen, Pany, & Zhang, 2008).

 Qualitative Materiality The audit materiality is closely related to audit

qualifications, as per the auditing standard the level of materiality constrained to
the transactions which are having the minimum value of five percent of the sales of
an organization. But the literature pointed out that the audit materiality
concentrates on the qualitative aspects of a transaction than on a quantitative basis.
Empirics prove that qualitative materiality gets more importance while taking audit
adjustment decisions (T. B.-P. Ng & Tan, 2007). According to (Corte, García, &
Laviada, 2010) the auditors express a qualified opinion on financial statements
based the misstatements related to qualitative materiality as well, this conclusion is
based on 473 samples first-hand data collected by the authors through interviews.
Based on a large enough sample size the author generalizes the result to identical
scenarios based on a positivistic method of accounting. The accounting and
auditing profession face multiple issues and criticisms in recent periods.

 Literature review on Internal control Internal controls are nothing more than
policies or procedures put in place to safeguard an asset, provide reliable financial
information, promote efficient and effective operations, and ensure policy
compliance. For example: When you came to work this morning did you lock the
doors to your house? If so, that's an example of an "internal control" you used to
protect the assets you own. Generally there are three types of control: Preventative
Controls - are designed to discourage errors or irregularities from occurring. For
example: Processing a requisition only after it has been properly approved by the
appropriate personnel. Detective Controls - are designed to find errors or
irregularities after they have occurred. For example: Reviewing the monthly
Statement of Account for activity in your area's general ledger. Directive Controls
- are designed to encourage a desirable event. For example: written policies and
training seminars assist in the accomplishment of area goals and objectives.
Internal control should have the following objectives: Efficient conduct of
business: Controls should be in place to ensure that processes flow smoothly and
operations are free from disruptions. This mitigates against the risk of
inefficiencies and threats to the creation of value in the organisation. Safeguarding
assets: Controls should be in place to ensure that assets are deployed for their
proper purposes, and are not vulnerable to misuse or theft. A comprehensive
approach to his objective should consider all assets, including both tangible and
intangible assets. 41 Preventing and detecting fraud and other unlawful acts:
Even small businesses with simple organisation structures may fall victim to these
violations, but as organisations increase in size and complexity, the nature of
fraudulent practices becomes more diverse, and controls must be capable of
addressing these. Completeness and accuracy of financial records: An
organisation cannot produce accurate financial statements if its financial records
are unreliable. Systems should be capable of recording transactions so that the
nature of business transacted is properly reflected in the financial accounts. Timely
preparation of financial statements: Organisations should be able to fulfil their
legal obligations to submit their account, accurately and on time. They also have a
duty to their shareholders to produce meaningful statements. Internal controls may
also be applied to management accounting processes, which are necessary for
effective strategic planning, decision taking and monitoring of organisational
performance. Many scholars in their most recent publications have analyzed the
issue of internal audit control. There is a wide consensus amongst them that the
goals of audit internal control are to check reliability, efficiency and effectiveness
of financial reporting, and also make sure that financial reports are compiled in
accordance with the laws and regulations in power. According to Etheridge (2012)
the term itself has it routs back in 1949 when the American Institute of Certified
Public Accountants (AICPA) defined the term “Internal Control”, referring to the
control of financial statements. In addition, Etheridge (2012) states that Statements
on Auditing Standards (SAS) No. 109, provides guidance to auditors related to
consideration of internal control as part of an audit. “It requires auditors to obtain
an understanding of internal control that is sufficient to assess the risk of material
misstatement of the financial statements due to error or fraud and to design the
nature, timing, and extent of further audit procedures” (p. 67). According to
Cosmin (2011) internal control is an auditing instrument providing a reasonable
assurance that company has capacity to achieve its objectives. [17] Moreover, the
same author insists that in order to attain its auditing objective and tackle financial
 fraud effectively, it is necessary to develop instruments which would monitor
internal control activities to make sure that internal control is emplaced in
accordance to the rules and regulations in power and not deteriorate. According to
Nagaraja and Vijayakumar (2012) a proper system of internal audit control in an
organization enables effective risk management through early detection and
prevention of frauds and misstatements. [18] Furthermore, relating this issue with
public organizations, the same authors claim that appropriate system of internal
control also ensures reliable financial reporting and compliance with laws and
regulations in power. Dogic (2011) emphasizes the need of establishing a
functional system of internal control especially in large companies. [19] According
to the same author in small companies the process of internal audit control is easily
managed and usually dictated by senior management, whilst for large companies
which are in frequent domestic and overseas interaction proposes a sophisticated
system of internal control in order to correct and avoid future financial risks.
Hyehner (2011) analyzing some issues related to public organizations in general
and local government auditing issues in particular, relates the issue of efficient
internal control with the level of monitoring, stating “Inadequate monitoring leads
to weaknesses in internal controls, which in turn provide an opportune environment
for fraud, abuse, and waste, and may result in loss or inefficient use of municipal
resources and added costs to taxpayers” (p. 21). [20] Limsuwam and Wittayapoom
(2012) suggest that reliability of financial reporting is based on the effectiveness of
internal control. [21] In addition the authors provides some specifics about the
interaction of various factors effecting internal control, which in the last stage
impacts the reliability of financial reporting. Those factors effecting effectiveness
of internal control according to the same authors are: 42 1. Risk management
efficiency, 2. Compliance quality, 3. Potential of intra organization
communication, and 4. Continuous monitoring adequacy.

 McConnel, J. H. (2006) in the book Auditing your Human Resource Department

describes that as more and more organizations demand high performance from all
their business units, HR departments are scrambling to prove their value and not
just in general terms, but in painstaking detail. Now there's a readymade tool that
make the HR assessment as quick, complete and painless as possible. Auditing
your Human Resources Department's comprehensive on-target process, helps HR
professionals to accurately gauge their strength and weaknesses in 16 key results
areas, including; Recruitment and Selection, Training and Development, Employee
Relations, Benefits, Compensation, HR planning, Diversity and EEO. The book
poses a series of hard-hitting questions, readers must ask about their department's
effectiveness. It then helps them score and analyze their answer and develop action
plans for improving problem areas.
 CHAPTER NO. 5

FINDINGS

 Audit findings are the results of an audit. In a financial institution, bank audits
must be carried out routinely to determine if the bank is following industry best
practices, legal and regulatory requirements, and their own bank policies.

 After the bank auditor completes its audit, it presents audit findings to
communicate what it has discovered and its recommendations for improvement.

 The audit findings are based on evidence about how the bank’s operations measure
up against the audit criteria. The audit criteria are outlined in a document that
auditors use as a guide for conducting their examination of the bank’s processes
and procedures.

 It includes the bank’s plans, policies, procedures, and the requirements it must
meet.

 Audit findings can show either conformity or nonconformity to the audit criteria. In
cases where the bank is operating appropriately, the finding is that it conforms to
the standards set out in the criteria used to evaluate it. However, if bank processes
and procedures are not adequate or appropriate, the finding will be that the bank or
some of its functions are nonconforming.

 For each issue that needs to be corrected, a finding of nonconformity details and
relays that information so that the bank can take corrective action.

 Through audit findings, the financial institution receives information about how
well it is functioning on a daily basis and how it is strategically positioned to move
forward.

 It is preferable to discover items that need to be corrected before they are

discovered by a regulator and written up in a finding.

 To do this, banks need to monitor the findings they receive, assign tasks for
resolving issues communicated through findings, identify areas for improvement,
report the findings to people in positions of responsibility, and deal with
accountability issue.
 CHAPTER NO.6

SUGGESTIONS AND RECOMMENDATIONS

The Audit Checklist should be used, and each box marked in the negative should result in
an audit recommendation. Audit each account separately. Check off items in red ink as
they are reviewed. Do not correct errors. Ask the responsible financial officer to correct
errors. After errors have been corrected, and the auditor is satisfied that the financial
accounts are correct, the auditor needs to denote the ending date of the audit. If a manual
ledger and check register exists, draw a double line across the ledger and checkbook
register where the audit concludes and sign and date using red ink, “Audited by (name) on
(date).” If a computerized accounting program is used, attach a copy of the cash account
and the last page of the check register to the audit report filed with the secretary minutes,
sign and date using red ink, “Audited by (name) on (date).”

The auditor ensures that the association’s financial transactions have been accurately
recorded

 Include bank name, bank address, type of account and the account number on each
report.

 Start audit with records posted after the last audit. Verify the amount shown on the
first bank statement (adjusted for outstanding checks and deposits per the prior
audit) corresponds to the starting balance recorded in the checkbook register,
ledger, and treasurer report, and the ending balance of the last audit.

 Confirm bank statement was reviewed by another non-check signer if the auditor
had not been assigned that task.

 Verify there have been no ATM transactions.

 Make sure every check issued for the audit period is substantiated with an
authorization for payment, the reason and budget line item for the disbursement,
appropriate payee and a receipt or bill. Each authorization should be signed by the
president and the secretary. If the check has cleared the bank verify that there are
two signatures and that both were from authorized check signers. Verify
authorization/ratification in the minutes. Note: Checks issued for pass-through
funds do not require pre-authorization but should be ratified.

 Check that all bank charges and interest earned are recorded in the checkbook
register, ledger and treasurer reports.
 Trace each deposit slip to bank statement and checkbook entries. Verify deposits
are properly supported and that a Cash Verification Form (Forms, Chapter 9) or
equivalent was used for each deposit. Verify that at least one of the signers of the
form was an officer or committee chairman. Ensure money was deposited
promptly.

 Ensure collection process is in place for returned checks that includes

reimbursement of applicable bank charges. A returned check is treated as reverse
income and reimbursed bank charges are treated as reverse expenses. Verify
returned checks have been properly reported.

 Verify deposits and checks have been properly recorded in the treasurer’s reports.

 Verify the deposits and checks have been properly posted to the ledger and check
register. Note: Request computer reports that show all the various accounts
affected by the transaction.

 Verify that all income and expenditures are allocated into budgeted categories.

 Make certain that council, district, State and National PTA portions of the
membership dues have been kept separate from other receipts.

 Make certain that the number of memberships agrees with membership chairman’s
report, and verify that membership monies collected correspond to membership
monies forwarded.

 Ensure payment for insurance premiums.

 Make certain the money collected for a specific purpose (special projects, Founders
Day, scholarship funds, council dues, etc.) has been so disbursed.

 Check event reports to verify receipts and expenditures have been properly
reflected in the financial records.

 If an advance has been given, verify that receipts and/reimbursements have been
received and properly recorded. If money was returned, verify it has been
redeposited into the PTA account.

 Compare figures on monthly treasurer and financial reports against ledger for
accuracy.

 Ensure proper tax returns have been filed.

 Verify that the PTA-required Workers’ Compensation Annual Payroll Report form
has been filed through PTA channels.
 Verify that all required state and federal report forms have been filed if PTA hires
employee(s) or independent contractor(s).
 CHAPTER NO.7

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 today’s scenario
form company and point of view. The banking audit uncovers the breaching of laws and
regulations of the financial institutions and their negligence in following the bank’s
policies. Bank auditors focus on the cause of issues and make favourable
recommendations for the institution. They document their findings and keep them on the
file of the bank.

Bank audits are essential to ensure that the bank’s practices are good. The bank audits can
be stress alleviating for the bank managers. Many audit software solutions can help the
bank smooth out the stay compliant for an easy audit process. The aim of an audit of a
banking company is rooted in compliance and can help the financial institution grow.