GROUP 9

Framework of Auditing of
Banking Companies &
Audit of Key Financial
Items in Banks Financial
Statements

Presented By:
BCH/22/132 – Purvangi Dawar
BCH/22/134 – Muskan Mahto
BCH/22/131 – Aayushi Gupta
BCH/22/135 – Ritika Kumari
BCH/22/58 – Sonakshi Gupta
 CONTENTS AND FORM OF BANK’S FINANCIAL STATEMENTS

Balance Sheet & Profit & Loss Account

▪ A banking company is mandated to prepare and present the financial statements in the manner set out by the Third
Schedule to the Banking Regulation Act, 1949.
▪ Balance Sheet: Form A of the Third Schedule
▪ Profit & Loss Account: Form B of the Third Schedule

Disclosure Requirements
▪ The Companies Act, 2013, under Section 133 notifies the disclosure requirements under various applicable
accounting standards to be complied by the banking companies

Form A (Balance Sheet)

Banking
Regulation Third Schedule
Act, 1949
Form B (Profit & Loss Account)
 AUDIT OF ACCOUNTS

Audit Requirements
▪ Section 30(1) of the Banking Regulation Act, 1949 requires that the financial statements of a banking company should
be audited by a person who is duly qualified under the law being in force to be an auditor of companies.

THE AUDITOR(S) OF THE BANKING COMPANY

1. Eligibility, Qualification & Disqualification

▪ Financial Statements of a banking company can be audited by a person qualified to be an auditor of the companies
under Section 141 of the Companies Act, 2013.

2. Appointment
▪ The auditor of any banking company is appointed at the Annual General Meeting (AGM) of the shareholders.
▪ In case of a nationalised bank, the appointment of auditor is done by the banks concerned acting through its Board
of Directors.
▪ In any case, the banks need approval of the RBl before the appointment of the auditors.
3. Remuneration
▪ For auditors of a banking company, the remuneration is fixed as per the provisions of Section 142 of the Companies
Act, 2013.
▪ For auditors of SBl and other nationalised banks, the remuneration is determined by RBI in consultation with the
Central Government.

4. Rights & Powers

▪ Auditors of banks have same powers as the auditors of companies under the Companies Act, 2013.
▪ Notably, they have the rights and powers to access the books of account and vouchers, right to obtain information
and explanations, right to sign the audit reports, right to receive the notice of and attend the AGM.

AGM (Annual General Meeting) Appointment of Auditor

For any Banking Company

Board of Directors + RBI Approval Appointment of Auditor

For Nationalised Banks

 BANK AUDIT REPORTS

Statutory Audit Report Additional Reports Reporting of Frauds to RBI

Long Form Audit Reports

1. STATUTORY AUDIT REPORT

Purpose & Scope
▪ Purpose: Provide an independent opinion on whether financial statements reflect a true and fair view of the
company and comply with the laws and accounting standards.
▪ Scope: Covers the entire financial year, including a review of records, transactions, and internal controls.

Compliance & Use

▪ Ensures compliance with laws, regulations, and standards (GAAP/IFRS).
▪ Used by stakeholders (investors, regulators, management) to understand financial health.
 Auditor’s
Components of the Statutory Audit Report Opinion
▪ Auditor’s Opinion: Whether the financial statements are free from Basis for
Opinion
material mis-statements.
▪ Basis for Opinion: Explanation of audit methods and evidence. Components

▪ Key Audit Matters: Significant issues encountered during the audit. Management
Responsibilities
▪ Management Responsibilities: Details on management's role in
Key Audit
financial statements. Matters

2. ADDITIONAL REPORTS IN STATUTORY AUDITS

Types of Additional Reports
▪ Management Letter: Recommendations on internal controls and operational efficiency.
▪ Compliance Report: Assesses regulatory adherence.
▪ Internal Controls Report: Evaluates internal control systems.
▪ Risk Management Report: Reviews risk management practices.
▪ Special Reports: For specific issues like fraud investigations.
LFAR (Long Form Audit Report)

▪ Detailed Analysis: Covers areas like asset quality, provisioning, and risk management.
▪ Standardized Format: Prescribed by RBI.
▪ Focus on Key Areas: Capital adequacy, liquidity, earnings, operational efficiency.
▪ Actionable Insights: Provides recommendations for improvement.

(The Statutory Central Auditors (SCAs) are required to submit the LFARs to the banks by 30th of June every year)

3. REPORTING OF FRAUDS TO RBI

▪ As per RBI’s circular, auditors must report any fraudulent activity discovered during the audit to RBI.
▪ Failure to report such instances leads to professional incompetence and liability.
 AUDIT TO KEY FINANCIAL ITEMS IN BANK’S FINANCIAL STATEMENTS

1. AUDIT OF LOANS AND ADVANCES

▪ Loans and Advances form a significant portion of a bank's assets, generating interest income but also
posing risks due to potential defaults and Non-Performing Assets (NPAs: loans or advances on which the
borrower has stopped making interest or principal repayments for a specified period, typically 90 days or
more).
▪ Auditing these items ensures their validity, accuracy, and compliance with regulations.

Key Audit Procedures:

Review Internal Controls ▪ Assess internal controls over loans to prevent frauds and unauthorized
transactions.
Credit Appraisal and Sanctioning ▪ Review the credit appraisal process, creditworthiness of borrowers,
purpose of loans, and collateral assessments.
Document Verification ▪ Examine loan agreements, sanction letters, and security documents for
accuracy and completeness.
Loan Disbursement ▪ Verify that loans are disbursed according to terms, conditions, and
authorizations.
 Monitoring and Follow-Up ▪ Ensure regular monitoring and timely action to detect early signs of
defaults.
Classification and Provisioning ▪ Classify loans (standard, sub-standard, doubtful, loss) as per RBI
norms and ensure adequate provisions for NPAs.
Interest Computation ▪ Verify the accuracy of interest income calculations and timely
recognition.
Review of Large Advances ▪ Conduct a detailed review of high-value loans, focusing on related-
party transactions to detect risks.

2. AUDIT OF DEPOSITS
▪ Deposits are the prime source of funds for the banks. They represent the money that customers place in
various accounts like savings, current and fixed deposits. They are key to a bank’s financial stability and
operational efficiency. Auditing of deposits involves the review and verification of the deposits recorded by the
bank to ensure their accuracy, completeness, and proper classification in compliance with regulatory standards
and accounting principles.
Key Audit Procedures:

Verification of Balances ▪ Reconcile the balances in the bank’s ledger and customer’s statement
to ensure accuracy.
▪ Verify that the balances reflect the actual deposits held by the bank.
Review of Documentation ▪ Examine the account opening forms, KYC documents, and other
relevant paperwork to ensure compliance with norms and guidelines.
Testing of Internal Controls ▪ Evaluate the internal control and check system of the bank related to
deposits, including for various deposits types, and timely crediting of
interest to the accounts of customers.
Compliance with Regulatory ▪ Verify the adherence to the RBI guidelines related to deposits such as
Norms maintenance of minimum balance, interest rates related regulations,
and reporting requirements.
Test Check deposit Transactions ▪ Perform a sample testing on deposit transactions to verify the
accuracy and authenticity of deposits, withdrawals, and transfers.

Review Dormant Accounts ▪ Verify the handling of inactive and dormant accounts (an account that
has had no activity, deposits, or withdrawals for a period of 12 to 24
months, typically resulting in its deactivation by the financial institution,
ensure they are managed as per internal policies and RBI guidelines.
3. AUDIT OF INTEREST INCOME
▪ Interest on loans and advances is a significant revenue for banks. It represents the earnings from the funds lent to
borrowers and is vital for bank’s profitability and financial health. Audit of interest income ensures that it is
accurately computed, recorded, and reported.

Key Audit Procedures:

Review Loan Agreements ▪ Verify the loan agreements to understand the terms of loan, interest
rate, repayment schedule, and other factors that affect interest rate
calculations.
Recalculate Interest ▪ Perform re-calculation of interest on a sample of loan transactions to
verify the accuracy of bank’s calculations.
Test Interest Recognition ▪ Verify that interest income is recorded on accrual basis in accordance
with applicable accounting standards.
Examine NPAs ▪ Review the classification of loans and advances, especially NPAs and
ensure that interest income on NPAs isn't recorded inappropriately.

Examine Interest Suspense ▪ Verify that interest accrued on NPAs is transferred to interest
Accounts suspense a/c as per RBI Guidelines not and recognized as income
until it is actually realized.
Evaluate IT Systems ▪ Examine the IT System used to compute the interest on loans and
advances, to ensure that system is accurately processing the income.
Review Adjustments and Write- ▪ Verify adjustments and/or write-offs relating to interest income to
Offs ensure that they are appropriately authorized and documented.

4. AUDIT OF INTEREST EXPENSE

▪ Interest on Deposits represents a major expense for banks, paid to depositors for funds in various accounts like
savings and fixed deposits.
▪ Auditing ensures that these expenses are accurately recorded, computed, and reported in the financial
statements.

Key Audit Procedures:

Review Deposit Documents ▪ Examine deposit types, terms and conditions, interest rates,
calculation methods, and payment schedules.
Recalculate Interest ▪ Recalculate interest on a sample of deposit accounts to verify the
accuracy of bank’s calculations.
Interest Expense Recognition ▪ Ensure interest expense is recorded on an accrual basis as per
applicable accounting standards
Verify Interest Payments Check the actual payment of interest to the depositors and reconcile it
with the recorded interest expense.
Evaluate IT Systems Evaluate the IT system for computation of interest on deposits to ensure
that the system is functioning correctly.
Review Internal Controls Assess the effectiveness of internal controls over interest expenses to
prevent unauthorised payments, frauds and errors.
Review Interest Expense Verify that interest expense is accurately allocated across different types
Reallocation of deposit accounts.
Thank You!