Monday, April 13, 2015

Special Points in Audit of Banking Companies

Rights and Duties of the Auditor in case of audit of Banking Companies

The auditor of a Banking Company has a right to examine the books and vouchers of the business to enable his to satisfy himself whether or not the balance sheet is drawn up, so as to exhibit a true or fair view of the state of affairs of the business, according to the best of his information and explanation given to him. To enable him to perform his duty, the auditor should take the following steps :
General:

1. Confirmation of Appointment: He should, first of all, confirm that his appointment is in order.

2. Annual Accounts: He should see that Annual Accounts of the banking company have been prepared in proper form.

3. Internal Check: Auditor has to rely on the internal check system of the bank. He should take the written statement about the well organized system of internal check.

4. Internal Audit Checking: Internal audit staff of the bank completes the audit of bank record thoroughly. Independent auditor should examine the audit work performed by the internal audit staff.

5. Balance with Other Banks: Auditor should obtain the certificate from the state bank for the balances with other banks.

6. Verify Cash in Hand: Auditor should check the cash in hand on the date of the balance sheet.

7. Verify Balance with RBI: If the money has been kept with the Reserve Bank of India or any other bank, he should obtain a certificate confirming the deposit.

8. Verification of unrecorded cheques and drafts: He should specially check the receipt of drafts, cheques, etc., on the last working day which has not been entered in the books.

9. Verify the Loans and Advances: Auditor should verify the list of loans and advance with the ledgers. He should compare the total of each schedule with general ledger.

Income:

10. Verification of Investments and return thereon: He should verify investments and income there from. It should be seen that investments have been properly valued.

11. Vouching of Interest receivable: He should vouch the interest on loans and advances and ensure that irrecoverable interest is adequately provided for.

12. Verification of bills discounted and discount received: He should verify bills discounted and also discount received in respect of such bills. It is to be ascertained that the rebate on bills discounted and unmetered bills has been carried forward.

13. Vouching of commission earned: Sometimes, a banking company gets a commission from its customers for services rendered to them. If so, such a commission received should be vouched by proper vouchers.

14. Verification of interest on securities deposited: He should verify the securities deposited with bank for safe custody purpose and see that income in respect thereof has been properly accounted for.

Expenditure:

15. Examine capital and revenue expenditure: He should see that capital expenditure has been properly dealt with in the books and proper distinction has been made between capital and revenue.

16. Verification of deposits accepted and interest payable: He should check the balance of Current Account, Fixed Deposit and Savings Bank Ledgers with the schedules obtained from the client and ascertain that all interest outstanding on deposits has been provided for.

17. Inspect the Bad Debts: Auditor should verify all the bad debts written off and doubtful debts provided for in the books of accounts.

Miscellaneous:

18. Verify the Bank assets and liabilities: All assets and liabilities should be verified and it should be seen that adequate provision has been made for doubtful and bad debts. He should specially check the overdrafts, etc.

19. Verify the Branch Return: He should examine the Branch Returns and ensure that they are being properly incorporated in the Head Office books.

20. Examine the Secret Reserves: He should go through the details of Secret Reserves, if any, maintained and see that their purpose is genuine.

21. Examine the securities against loans and advances: He should ascertain the adequacy of Securities in respect of loans and advances in both cases, fully secured and partly secured.

22. Inspection of Reserve Fund: He should ensure that 20% of profits before paying dividend are transferred to the Reserve Fund as required under the Act.


23. He should see that the provisions of the Banking Companies (Regulation) Act have been fully complied with.

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