Audit Of Bank1

Audit of banks:The audit of the banks should be well-acquainted with the relevant provision of the special enactment that govern different types of banks, particularly those which affect the various items of the financial implications of the business carried on by banks and the types of the transaction that arise in the day-to-day operations. In this chapter, salient features of audit of the banks are considered in the context of the provision of the various enactment governing them.

Legislations relevant to Audit of banks:The provisions of many Acts relevant to audit of different types of banks. An auditor of the banks should acquaint with the specific provision of the Acts applicable to the type of banks under audit. Nationalized banks are governed by the provisions of of the relevant Banking companies Act. Certain provision of the Banking Regulation Act 1949 also applicable to nationalized banks The non-nationalized banking companies are governed by the provision of the Banking Regulation Act 1949. Co-operative banks are governed by the Co-operative Societies Act 1912 or the Co-operative Societies Act of the state in which they are situated, as well as by Partv of the Banking Regulation act 1949.Certain provision of the Banking Regulation act have been modified while certain others have been omitted in their allocation to co-operative banks. Regional rural banks are governed by the Regional rural banks Act 1976. The provisions of the State bank of India Act 1955, and the State bank of India(subsidiary banks)Act 1959, apply State bank of India and its subsidiaries respectively. Certain specified provisions of the Banking Regulation act 1949, are applicable to regional rural banks as well as to the State bank of India and its subsidiaries.

Provision relating to Accounts:Section 29 of the Banking Regulation Act deals with the obligation of the banks regarding maintenance of accounts and preparation of financial statements. Its main preparation as follows; 1. Banks have to prepare a balance sheet and profit and loss accounts as on 31st

march every year in the form to set out in the Third schedule to the Act. A foreign banking company has to similarly prepare a balance sheet and a profit and loss a/c every year in respect of the business transacted through its branch in India. 2. The financial statements of the banks are to signed by the manager or the

principal officer and by atleast three directors. The financial statements of foreign banking companies are to be signed by the manager or the agent of principal office in India. 3. In cases of the banking companies the provisions of the companies Acts 1956,

relating to the financial statements are also applicable to the extent they are not inconsistent with requirements of the Banking Regulation Ac, 1949. 4. As per the third schedule to the Banking Regulation Act, the balance sheet of

the bank as to classify the items of the Capital and Liabilities and those of the assets below:Capital & Liabilities: Capi tal Reserves and surplus. Deposits Borrowings Other liabilities and provisions

Assets Cash and balances with Rereserve bank of India Balances with the banks money at call &,short notice investments Advances Fixed assets Other assets

Besides the above, contingent liabilities and bills for collection are also to be disclosed.

The forms of the profits and losses a/c shows the main item of the income ,expenditure and appropriations. The disclosure requirements of the Third Sheduled are discussed later in this chapter along with the audit to verify the various items of the financial statements. Apart from the requirements of the Third Schedule to the banking regulation act 1949,the financial statement of the bank have to contain additional disclosures required by RBI from time to time. Besides, listed banks have to also satisfy the disclosure of listing agreement with stock exchange (s). RBI has issued detailed notes and instruction for completion of balance sheet and profit and loss account of banks. These notes and instructions provide interpretation of the requirement of the Third schedule to the Banking Regulation Act and are thus useful to the auditor.

Provisions Relating to audit: Appointment of the auditors; The auditor of a banking company, a nationalized bank or a regional rural bank has to be a person who is duly qualified under law to be an auditor of companies. Thus, the auditor of the companies under sec 226 of the companies Act 1956, and who does not attract any disqualification laid down therein. The auditor of a nationalized bank is appointed by the board of directors of the bank concerned, whereas the auditor of a banking company is appointed by the shareholder at the annual general meeting. Previous approval of RBI for appointment of the auditor is required in the both cases. The auditors of the state bank of India are appointed by RBI in consultation of the Central government. The auditors of the subsidiaries of the state bank of India are appointed by the state bank of India. It may be mentioned in the State bank of India Act 1955, specially provides for the appointment of the ‘two or more auditors’. The auditors of the regional rural banks concerned with the approval of the Central Government. The appointment of auditor of a co-operative bank is governed by the relevant Cooperative bank is governed by the relevant Co-operative Societies Act. Procedure for the Appointment in the case of nationalized banks:The statutory central auditors are appointed by the bank concerned on the basis of the names recommended by the RBI from out of panel of auditors. For this purpose, the RBI formulates detailed norms on the basis of which a panel is created by the

Comptroller and Auditor General of India. Generally, each nationalized bank appoints 4-6 statutory central auditors. As per the norms prescribed by the RBI, to be eligible for empanelment, a firm should, as on January 1 of the relevant year, meet the minimum eligibility norms relating to; I. Number fulltime partners, II. Numbers of FCA partners, III. Number of years the firm has been existence, IV. Period of minimum continuous association of partners with the firm, V. Number of fulltime charted accountants, VI. Number of professional staff, VII. Experience of statutory audit of public sector banks having deposits of at least the prescribed sum, VIII. Experience of statutory audit of public sector undertakings.Atleast one partner should have qualifications in computer audit.

Powers of the Auditor The auditor of a bank has same powers as those of company auditor ,except that the power the auditor of a co-operative are governed by the relevant Co-operative Societies Act.

Auditor’s Report The contents of the auditor report in case of different types of banks are somewhat different.

Banking Companies:In addition to the matters which he is required to state in his report under the companies Act, the auditor of banking company incorporated in India has also to state the following in his report to the shareholder: a) Whether or not the information and explanations required by him have been found to be satisfactory ; b) Whether or not the transactions of the company which have come to his notice have been within the powers of the company; c) Whether or not the returns received from branch offices of the company have been found adequate for the purposes of his audit; d) Whether the profit and loss account shows a true balance of profit or loss for the period covered by such account;

e) Any other matter which he considers should be brought to the notice of the

shareholders of the company.

Nationalized banks:The auditor of the nationalized bank, State bank of India or its subsidiary is required to report to the central government and has to state the full in his report: a) Whether, in his opinion, the balance sheet is a full & fair balance sheet containing all the affairs of the bank, and in the case he had called for any explanation or information, whether it has been given and whether it is satisfactory ; b) Whether or not the transactions of the banks, which have come to notice, have been within the powers of the banks; c) Whether or not the returns received from the offices and branches of the bank have been found adequate for the purpose of the audit; d) Whether the profit or loss a/c shows a true balances of the profit or loss for the period covered by such account; and e) Any other matter which he considers should be brought to the notice of the central government. The report of the auditor of the nationalized bank is to be verified, signed, and transmitted to the central government. The auditor has also to forward a copy of the audit report to the bank concerned and to the RBI.

Regional Rural Banks:In the case of a regional rural banks, the auditor has to report directly to the bank. the content of the report are similar to those of an audit report in the case of a nationalized banks. Apart from the audit report on the financial statements, the auditor of a nationalized bank, State bank of India , any of its subsidiary, or a banking company has also to prepare a long form audit report(LFAR).The auditor of the banks is also called upon to give reports and certificates on certain other specified matter.

Special audit:In addition to the normal annual audit, a special of the banking company can be ordered by RBI under sec 30(1b) of the Banking Regulation Act. This power can be exercise by the RBI if it of the opinion that the it is necessary to do so in public interest of the banks or in the of the bank or its depositors. The special audit is to cover the banks accounts, for the transaction or class of transaction or for such period or period as may be specified by RBI. For conducting special audit, RBI may either appoint a person who is qualified to act as a company auditor or the direct the statutory auditor of the bank to conduct a special audit. The section 223 of the Companies Act relates to the provisions of the special audit.

Approach to banks audits:The guidance note on the audit of banks issued by the ICAI, recognize that the general approach to audit of banks involves essentially the same stages as in any other audits. However at each stage, the auditor has to take into the account the following special characteristics of banks; • Custody of large volumes of monetary items, thereby requiring formal operating procedure, well-defined limits on the individual discretions and rigorous internal control. • Large volume and variety of the transactions and continuing development of new products and services, many of which may involve complex accounting. • Wide geographical dispersal of the operations with consequent difficulties in maintaining uniform operating practices and accounting systems, particularly in the case of the overseas operations. • Significant commitments without transfer funds not requiring formal recognitions in the books of accounts. • Special nature of risk with operations. • A strict legal and regulatory framework that inter alia, influence the accounting and auditing.