EXECUTIVE SUMMERY A b an k ing co mp an ies are req u ires main tain in g th e b o ok s o f acco u n t in acco rd an ce with sectio n 2 09 o f th e co mp an ies act,

1 9 5 6 . Bank in g generally a sound internal control system their day to day transaction.The auditor has to evaluate such system carefully. The fundamentalrequirement of an audit, as regards reporting on statement of account can be discharged from the examination of the internal checked andv erif icatio n o f assets an d liab ilities b y mak in g a co mp a riso n an d reconciliation of balance with those in the year and that of amount of in co me an d ex p en ses b y ap p licatio n of test ch eck s. Th e b an k in g regulation act casts greater responsibilities on the directors of banks as co mp a r ed to th o se of o th er co mp an ie s in th e ma tter o f su p erv isio n o v e r t h e i r w o r k i n g . T h e r e f o r e , t h e y e x e r c i s e , o r a r e e x p e c t e d t o exercise greater supervision over the affairs of bank. The auditor isentities to rely on such supervision and to limit his checking to testchecks. The financial position of a bank is depended on the conditionof assets, loan, investment, cash balanced and those of its liabilitiesan d f un d . Th eir v erif icatio n f o rm an i mp o rtan t p art o f th e b alan ce sheet. Most of the bank have their own internal audit or inspectiondepartment entrusted with the responsibilities of checking the accounto f v a r i o u s b r a n c h e s . T h e s t a t u t o r y a u d i t o r m a y n o t , t h e r e f o r e , duplicate work.

INTRODUCTION The audit of banking companies plays a very important role in Indiaas it h elp to reg u late th e b an k ing co mp an ies in r ig h t man n er . In au d it o f b ank s in clud es v ario u s typ es of au d it wh ich are n o r mall y ca rried o u t in b an k in g co mp an ies su ch as statu to ry au d it, rev en u e/in co me ex p en d itu re audit, concurrent audit, computer and system audit etc. the above audit is mainly conducted by the banks own staff or external auditor. However, the rules and the regulation relating to the conduct of various types of audit or inspections differ from a bank to bank expect the statutory audit for which the RBI guidelines is applicable. In this, I have given more importance on the overall bank audit system. In todays competitive world audit is very much necessary as well as compulsory , because investor investing 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.

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 a l l a n c i e n t 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 accountinga n d a u d i t i n g o f p u b l i c f i n a n c e s . T h e M a u r y a s , t h e G u p t a s a n d t h e Mughals had developed and accounting and auditing system to controlstate finances. Thus, basically, accounting and auditing had their origin inthe 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 in creasin g n u mb er o f co mp an ies, th e c o mp an ies acts in different countries began providing for compulsory audit of accounts of companies. Thus U.K. audit of accounts of limited companies became co mp u lso ry in 1 9 00 . In In d ia, th e co mp an ies act, 1 9 13 mad e au d it o f company accounts compulsory. With increase in size of companies, the o b ject o f

au d it also sh if ted to ascertain in g wh eth er th e acco u n ts 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 a n d t h e 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 dayto-day work. 5)Computer technology: The latest development in auditing pertains to the use of computersin 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.

DEFINITION OF AUDITING. Various persons such as the owners, shareholders, inv e s t o r s , creditors, lenders, government etc. use the final account of business concernfor different purposes. All these users need to be sure that the final accounts p rep ared b y th e man ag e men t are reliab le. An au d ito r is an in d ep en d en t expert who examines the accounts of a business concern and reports whether th e f in al acco u n ts are reliab le o r n o t. Dif f eren t au th o rities h av e d ef in ed auditing as follows. Mautz Def in e th e au d iting as au d iting is co ncern ed with th ev erif icatio n o f acco un ting data, with d eter min in g th e acc u racy an d reliab ility of accounting statement and reports. Interna tio na l a uditing g uidelines d e f i n e s t h e a u d i t i n g a s auditing is an independent examination of financial information of any entity with a view to expressing an opinion thereon.

BASIC PRINCIPAL OF AUDITING: 1)Integrity, objectivity and independence: Th e au d ito r sho u ld b e ho n est an d sin cere in h is au d it wo rk . He must be fair and objective. He should also be independent. 2 )Co nfidentia lity : Th e au d ito r sho u ld k eep th e in f o rmatio n o b tain ed d u ring au d it,confidential. He should not disclose such information to any third party.He should, keep his eyes and ears open but his mouth shut. 3 )Skill a nd co mpet ence: The auditor should have adequate training, experience andcompetence in Auditing. He should have a professional qualification ( i.e. be a Chartered Accountant) and practical experience. He should be awareof recent developments in the field of auditing such as statement of ICAI,changes in company law, decisions of courts etc. 4) Working papers: The auditor should maintain working papers of important mattersto prove that audit was conducted with due care according to the basic principles. 5) Planning: The auditor should plan his audit work. He should prepare an audit programmed to complete the audit efficiently and in time. 6) Audit evidence: The report of the auditor should be base on evidence obtained inthe course of audit. The evidence may be obtained through

vouching of transactions, verification of assets and liabilities, ratio analysis etc. 7) Evaluation of accounting system and internal control: The auditor should ensure that the accounting system is adequate.He should see that all the transaction have been properly recorded. Heshould study and evaluate the internal controls. 8 ) Opinio n a nd repo rt: The auditor should arrive at his opinion on the account based ont h e a u d i t e v i d e n c e a n d s u b m i t h i s r e p o r t . T h e o p i n i o n m a y b e unqualified, qualified or adverse. The audit report should clearly expresshis opinion. Law should require the content and form of audit report.

AUDIT COMMITTEE In pursuance of RBI circular September 26, 1995, a bank is requiredto constitute an Audit Committee of its Board. The membership of the auditco mmittee is restricted to th e Ex ecu tiv e Directo r, n o m in ees o f Cen tral Government and the RBI, Chartered Accountant director and one of the non-official directors.One of the functions of this committee is to provide direction ando v e r s e e s t h e o p e r a t i o n s o f t h e t o t a l a u d i t f u n c t i o n i n t h e b a n k . T h e committee also has to review the internal inspection function in the bank,with special emphasis on the system, its quality and effectiveness in terms of f o llo w u p . Th e co mmittee h as to rev iew th e syste m o f ap p o in t men t an d remuneration of concurrent auditors.The audit committee is, therefore, connected with the functioning of the system of concurrent audit. The method of appointment of auditors, their remuneration and the quality of their work is to be reviewed by the AuditCommittee. It is in this context that periodical meeting by the members of the audit committee with the concurrent auditors help the audit committee tooversee the operations of the total audit function in the bank. Considering the coverage of this audit assign m e n t a n d t h e specialized nature of work there is also a need for training to be imported tothe staff of the auditors. This training has to be given in specialized fieldsuch as foreign exchange, computerization, and areas of income leakage,fraud prone areas, determination of credit rating and other similar specializedareas. The bank can organize such training programmed at various places sothat it can ensure the quality of audit.

ADVANTAGES OF AUDITING 1)Assurance of true and fair accounts: Audit provides an assurance to the various users of final accountssuch as owners, management, creditors, lenders, investors, governmentsetc. that the accounts are true and fair. 2)True and Fair balance sheet: The user accounts can be sure that the assets and liabilities shownin the audited balance sheet show the concern, as it is i.e. neither morenor less. 3)True and fair profit and loss account: The user can be confident that the audited profit and loss accountshows the true amount of profit or loss as it is i.e. neither more nor less. 4)Tally with books: The audited final account can be taken to tally with the books of accounts. Thus, the income-tax officer can start with the figure of audited books profit, make adjustments and compute the taxable income. Anoutside user need not go through the entire books. 5)As per standard accounting and auditing practices: The audited final accounts follow the standard accounting andauditing principles laid down by professional bodies. Thus, auditedaccounts are based on objectives standard and not on personal whims andfancies of a particular accountant or auditor. 6)Detection and prevention of errors and frauds: Audited accounts can be assumed reasonably free from errors andfrauds. The auditor with his expert knowledge would take due care to seethat Errors and frauds are detected so that the accounts shoe a true andfair view. 7)Advice on system, taxation, finance: The auditor can also advise the client about the accounting system,internal control, internal check, internal audit, taxation, finances etc.

LIMITATIONS OF AUDITING 1 .An au d ito r can n o t ch eck each an d ev ery tra n sactio n h e h as to ch eck only the selected areas and transaction on a sample basis.2.Audit evidence is not conclusive in nature thus confirmation by a debtor is not conclusive evidence that the amount will be collected. It is saidevidence is rather than conclusive in nature. 3. An auditor cannot be expected to discover deeply laid frauds usuallyinvolves acts designed to conceal them such as forgery , celibate failureto reco rd tran sactio n s, f alse ex p lan ation an d h en ce ar e d if f icu lt to detect.4.Audit cannot assure the users of account about the future profitability, prospects or the efficiency of the management. 5. An auditor has to rely upon expert auditor may have to rely on expert inrelated f ield su ch as lawyers, en g in eers, v alu es etc. f o r esti matin g contingent liabilities, valuation of fixed assets etc.

INTERNAL CONTROL IN CERTAIN SELECTED AREASGeneral Th e staf f an d o ff icer o f a b an k sho u ld lif t fo r m o n e p o sitio n to another frequently and without prior notice. Th e wo rk o f on e p erso n sho uld always b e ch eck ed b y an o th er person in the normal course of business. A l l a r i t h m e t i c a l a c c u r a c y o f t h e b o o k s h o u l d b e p r o v e d independently every day. All bank form (e.g. books, demand draft book, travellers cheque,e t c . ) s h o u l d b e k e p t i n t h e p o s s e s s i o n o f a n o f f i cer, and another responsible officer should occasiona l l y v e r i f y t h e s t o c k o f s u c h stationary. The mail should be opened by responsible officers. Signature on allthe letters and advice received from other branches of the bank or itscorrespondence should be checked by an officer with signature book. Th e sig n atu re b o ok o f th e teleg rap h ic co d ebo o k sh o u ld b e k ep t with responsible officers, used, and seen by authorized officers only. T h e b a n k s h o u l d t a k e o u t i n s u r a n c e p o l i c i e s a g a i n s t l o s s a n d employees infidelity. The power of officers of different grade should be clearly defined.

Bill of collection: All documents accompanying the bill should be received and enteredin the register by a responsible officer. All the time of dispatch, theofficer should also see that all document sent along with the bills. The account of customers or principals should be credited only after bills have been collected or an advice to that effect received form the branch or agent to which they were sent for collection. It should be ensured that bills sent by one, branch for collection toan o th er b ran ch o f th e b an k , are n o t in th e co llectio n twice in th ea m a l g a m a t e d b a l a n c e s h e e t o f t h e b a n k . F o r t h i s p u r p o s e , t h e receiving branch should reverse the entries such as bills at the end of the receiving branch at the end of the year fir closing purposes. Bill purchased: At the time of purchased of bill, an officer should verify that all thedocument of titles are properly assigned to the bank. Sufficient margin should be kept while purchased or discounting a billto cover any decline in the value of the security etc. If the bank is unable to collect a bill on the due date, immediately stepshould be taken to recoveries the amount form the drawer against thesecurity provided. All irreg u lar o u tstan d in g acco u n t sh o u ld b e rep o rted to th e h ead office.

In the case of purchased outstanding at the close of the year discountreceiv e d th ereo n sho u ld th ereo n sho u ld b e p ro p erly ap p o rtio n ed between years. Loan and advances: The bank should make advances only after satisfying itself as to thecreditworthiness of the borrowers and after obtaining sanction fromthe proper authorities of bank. The entire necessary document (e.g. agreement, demand promissorynote, letter of hypothecation etc.) . Sufficient margin should be kept against securities taken to cover anydecline in the value thereof and also to comply with proper authoritieso f d i r e c t i v e s . S u c h m a r g i n s h o u l d b e d e t e r m i n e d b y t h e p r o p e r authorities of the bank as a general policy or for particular account. All th e secu rities sh o u ld b e receiv ed an d retu rn ed b y resp o n sib leofficer. They should be kept in the joint custody of two such officer . In the case of good in possession of the bank, content of the packageshould be test checked at the time of receipt. Surprise check should be made in respect of hypothecated goods notin the possession of the bank. Mark et v alu e o f go o d sh ou ld b e ch eck ed b y o ff icer o f th e b an k b y personal enquiry in addition to the invoice to the invoice value given by the borrowers. As soon as any increased or decreased takes take place in the value of securities proper entries should be made in the drawing power

book and daily balance book. These entries should be checked by an officer. All account should be kept within both the drawing power and thesanctioned limit at all times. At the account, which exceed the sanctioned limit or drawing power or are against unapproved securities or are otherwise irregular, should be brought to the notice of the management/head office regularly. Demand draft: The signature on demand draft should be checked by an officer withsignature book. All the best demand draft sold by should be immediately confirmed by the advice to the branches concerned. I f t h e b r a n c h e s d o e s n o t r e c e i v e d o e s n o t r e c e i v e d p r o p e r confirmation of ant demand draft form the issuing branch or does notr e c e i v e d c r e d i t i n i t s a c c o u n t w i t h t h a t b r a n c h e s , i t s h o u l d t a k e immediate step to ascertain the reason.

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 thetype of banks under audit.Nationalized banks are governed by the provisions of of the relevant Bankingcompanies Act. Certain provision of the Banking Regulation Act 1949 alsoapplicable to nationalized banksThe nonnationalized banking companies are governed by the provision of theBanking Regulation Act 1949.Co-operative banks are governed by the Co-operative Societies Act 1912 or theCo-operative Societies Act of the state in which they are situated, as well as by Part-v of the Banking Regulation act 1949.Certain provision of the Banking Regulationact have been modified while certain others have been omitted in their allocation toco-operative banks.Regional rural banks are governed by the Regional rural banks Act 1976. The provisions of the State bank of India Act 1955, and the State bank of India(subsidiary banks)Act 1959, apply State bank of India and its subsidiariesrespectively. Certain specified provisions of the Banking Regulation act 1949, areapplicable to regional rural banks as well as to the State bank of India and it subsidiaries.

Provision relating to Accounts:Section 29 of the Banking Regulation Act deals with the obligation of the banksregarding 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 31 st march every year in the form to set out in the Third schedule to the Act. Aforeign banking company has to similarly prepare a balance sheet and a profitand loss a/c every year in respect of the business transacted through its branchin 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 arenot 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 theassets below:-

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 Sheduledare discussed later in this chapter along with the audit

to verify the various items of the financial statements.Apart from the requirements of the Third Schedule to the banking regulation act1949,the financial statement of the bank have to contain additional disclosuresrequired by RBI from time to time. Besides, listed banks have to also satisfy thedisclosure of listing agreement with stock exchange (s).RBI has issued detailed notes and instruction for completion of balance sheetand profit and loss account of banks. These notes and instructions provideinterpretation of the requirement of the Third schedule to the Banking RegulationAct 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 hasto 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 whodoes 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 theshareholder 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. Theauditors 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 theregional rural banks concerned with the approval of the Central Government.The appointment of auditor of a co-operative bank is governed by the relevant Co-operative 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 beeligible for empanelment, a firm should, as on January 1 of the relevant year, meetthe minimum eligibility norms relating to;I . N u m b e r f u l l t i m e p a r t n e r s , I I . N u m b e r s o f F C A p a r t n e r s , III .N u mb er o f yea rs th e f ir m h as b een ex isten ce, IV. Period of minimum continuous association of partners with the firm,V.Number of fulltime charted accountants,V I .Nu mb e r o f p ro f essio n al staf f , VII.Experience of statutory audit of public sector banks having deposits of at leastthe 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-operativeSocieties Act. Auditors Report The contents of the auditor report in case of different types of banks are somewhatdifferent. Banking Companies:In addition to the matters which he is required to state in his report under thecompanies Act, the auditor of banking company incorporated in India has also tostate the following in his report to the shareholder:a)Whether or not the information and explanations required by him have beenfound to be satisfactory ; b)Whether or not the transactions of the company which have come to his noticehave 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 theshareholders of the company. Nationalized banks:The auditor of the nationalized bank, State bank of India or its subsidiary isrequired 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 sheetcontaining all the affairs of the bank, and in the case he had called for anyexplanation or information, whether it has been given and

whether it issatisfactory ; 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 thecentral government.The report of the auditor of the nationalized bank is to be verified, signed, andtransmitted to the central government. The auditor has also to forward a copy of theaudit 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 anationalized 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 uponto 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 beordered by RBI under sec 30(1b) of the Banking Regulation Act. This power can beexercise by the RBI if it of the opinion that the it is necessary to do so in publicinterest of the banks or in the of the bank or its depositors. The special audit is tocover 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 mayeither appoint a person who is qualified to act as a company auditor or the direct thestatutory auditor of the bank to conduct a special audit. The section 223 of theCompanies 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 thegeneral approach to audit of banks involves essentially the same stages as in anyother audits. However at each stage, the auditor has to take into the account thefollowing 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.