Executive Summary: Audit of Banks Deposits and Loans

Audit of Banks Deposits and Loans
EXECUTIVE SUMMARY

This project is to view the task perform by an auditor while conducting the audit of bank
deposit and loans & advances. t e!plains the role played by different types of auditor"
effect of #on$%erforming Asset on the asset of a bank. The auditor needs to be
familiari&ing with the direction of 'B affecting the sanctioning and disbursement of
advances. The auditor has to ensure that documents are e!ecuted as per the terms of
sanction. The auditor e!amine the procedure for review of advances laid down by the
authorities bas been complied with or not. Basel 'ecommendations affecting the
capital ade(uacy norms advocated by the year" which perhaps is the beneficial fall$out
from the tightening of the prudential norms. The auditing not only provide true and fair
value but it also helps us to financial position and internal control system of a bank
)

INTRODUCTION
t is well known that Banking is such a uni(ue industry that persons from all
walks of involved with Banks in any relation whether as an operational banker" trainer"
auditor or even a support service person such as a security printer and even a hardware
and software supplier make Banking their only sphere of activity for their full life in the
constant endeavor to master in their for this ndustry. n ndia various types of audit are
normally carried out in banking companies such audit are statutory audit" revenue*income
e!penditure audit" concurrent audit" computer and system audit etc. the above audit is
mainly conducted by the banks own staff or e!ternal auditors. +owever" the rules and the
regulation relating to the conduct of various types of audit or inspection differ from a
bank to bank e!cept the statutory audit for which the 'B guidelines is applicable for
that. n this project give more important on the concurrent and computer audit and its
internal controls in the banks today,s scenario. Today audit is form in the various
organi&ations it is basically form for investor because investor investing decision is
depend on that particular concept if auditor has e!pressing his view about particular
organi&ation is true and fair that investor has get idea about how much should invest in
particular securities or not.
n public sector banks multiple firms including central auditors and branch
auditors generally conduct the audit. n case of private sector banks and foreign banks" a
single firm due to centralsied database conducts the audit. -onse(uently" the
responsibilities of auditors in such banks are much wider.
.
DEFINITION OF AUDITING:
/arious persons such as the owners" shareholders" investors" creditors" lenders"
government" banks etc. use the final account of a 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 e!pert who e!amines 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 0auditing is concerned with the verification of
accounting data" with determining the accuracy and reliability of accounting
statements and reports1.
Prof. L. R. Dic!"" defines auditing" as 0auditing is an e!amination of
accounting records undertaken with a view to establish whether they correctly
and completely reflect the transactions to which they relate1.
I#t"r#atio#a$ au%iti#& &ui%"$i#"! defines the auditing" as 0auditing is an
independent e!amination of financial information of any entity with a view to
e!pressing an opinion thereon1.
Mo#t&o'"r( defines the auditing as 0auditing is a systematic e!amination of
the books and records of a business or other organi&ation" in order to ascertain or
verify" and to report upon the facts regarding the financial operations and results
thereof2
3
ORIGIN AND EVOLUATION OF AUDITING:
Ori&i# of t"r':
The term audit is derived from the Latin term 0audire1 mean to hear. n early days an
auditor used to listen to the accounts read out by the accountant in order to check them. n
last one decade the ndian Banking sector has witnessed a very high level of conceptual
revolution in terms of organi&ation structure" business model" accounting" operations"
control" environment" customer interface" customer service" regulatory compliance"
information dissemination and a whole lot.
)* A#ci"#t ori&i#:
Auditing is as old as accounting. t was in use in all ancient countries such as
4esopotamia" 5gypt" 6reece" 'ome" 7.8. and ndia. The /edas" 'amayana"
4ahabharata contain references to accounting and auditing. Arthashsastra by 8autilya
gives detailed rules for accounting and auditing of public finances. The 4auryas" the
6uptas and the 4ughals had developed and accounting and auditing system to control
state finances. Thus" basically accounting and auditing had their origin in the need for the
government to control the income and e!penditure of the state and the army. The original
object of auditing was to detect and prevent errors and frauds.
+* Co',u$!or( au%it! of co',a#i"!:
9ith increasing number of companies" the companies, acts in different countries began
providing for compulsory audit of accounts of companies. Thus in the 7.8. audit of
accounts of limited companies became compulsory in ):;;. n ndia" the companies act"
):)3 made audit of company accounts compulsory. 9ith increase in si&e of companies
the object of the audit also shifted to ascertaining whether the accounts were 0true and
<
fair1 rather than 0true and correct1. Thus the emphasis was not on arithmetical accuracy
but on fair representation of financial affair.
3= D"-"$o,'"#t of accou#ti#& a#% au%iti#& !ta#%ar%!:
The international accounting standards committee and the accounting standards board of
the institute of chartered accountant of ndia have developed standard accounting and
auditing practices to guide the accountants and auditors in their day$to$day work.
.* Co',ut"r t"c/#o$o&(:
The latest development in auditing pertains to the use of computers in accounting as well
as auditing. 'eally" auditing has come a long way from 0hearing1 the accounts in the
ancient days to using computers to e!amine computeri&ed accounts of today.
>
Au%it Co''itt"":
Functions:
The functions of the Audit -ommittee include the following2
). ?versight of the -ompany,s financial reporting process and the disclosure of
its financial information" to ensure that the financial statements are true and
accurate and provide sufficient information.
.. 'ecommending to the Board" the appointment" re$appointment and" if
re(uired" the replacement or removal of the statutory auditor and the fi!ation
of their audit fees.
3. Approval of payment to statutory auditors for any other services rendered by
the statutory auditors.
<. 'eviewing" with the management" the annual financial statements before
submission to the board for approval" with particular reference to2
a= 4atters re(uired being included in the Director,s 'esponsibility
statement" which forms a part of the Board,s report in terms of clause
@.AA= of section .)A of the companies Act" ):>B.
b= -hanges" if any" in accounting policies and practices and reasons for
the same.
c= 4ajor accounting entries involving estimates based on the e!ercise of
judgment by management.
d= Disclosure of any related party transactions.
e= Cualifications in the draft audit report.
B
>. 'eviewing" with the management" the (uarterly financial statements before
submission to the Board for approval.
B. Discussion with internal auditors with respect to the coverage and fre(uency
of internal audits as per the annual audit plan" nature of significant findings
and follow up thereof.
A. 'eviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregulatory or a failure of
internal control systems of a material nature and reporting the matter to the
board.
D. 'eviewing with the management" the (uarterly financial statements before
submission to the board for approval.
:. 'eviewing" with the management" performance of statutory and internal
auditors" ade(uacy of the internal control systems.
);. 'eviewing the ade(uacy of internal audit function including the structure of
the internal audit department" staffing and seniority of the official heading the
department" availability and deployment of resources to complete their
responsibilities and the performance of the out$sourced audit activity.
A
)). ?btaining an update on the 'isks 4anagement Eramework and the manner in
which risks are being addressed.
).. Discussion with statutory auditors before the audit commences" about the
nature and scope of audit as well as post$audit discussion to ascertain any area
of concern.
D
0ASIC PRINICPLES OF AUDITING:
a* I#t"&rit(1 o23"cti-it( a#% i#%","#%"#c":
The auditor should be honest and sincere in his audit work. +e must be fair and
objective. +e should also be independent.
2* Co#fi%"#tia$it(:
The auditor should keep the information obtained during audit" confidential. +e
should not disclose such information to any third party. +e should" it is said" keep
his eyes and ears open but his mouth shut.
c* Si$$ a#% co',"t"#c":
The auditor should have ade(uate training" e!perience and competence in
auditing. +e should have a professional (ualification @i.e. be a -hartered
Accountant= and practical e!perience. +e should be aware of recent developments
in the field of auditing such as statement of -A" changes in company law"
decisions of courts etc.
%* 4ori#& ,a,"r!:
The auditor should maintain working papers of important matters to prove that
audit was conducted with due care according to the basic principles.
"* P$a##i#&:
The auditor should plan his audit work. +e should prepare an audit programmed
to complete the audit efficiently and in time.
:
f* Au%it "-i%"#c":
The report of the auditor should be based 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.
&* E-a$uatio# of accou#ti#& !(!t"' a#% i#t"r#a$ co#tro$:
The auditor should ensure that the accounting system is ade(uate. +e should see
that all the transactions have been properly recorded. +e should study and
evaluate the internal controls.
/* O,i#io# a#% r",ort:
The auditor should arrive at his opinion on the account on the basis of the audit
evidence and submit his report. The opinion may be un(ualified or (ualified or
adverse. The audit report should clearly e!press his opinion. Law should re(uire
the content and form of audit report.
);
ADVANATAGES OF AUDITING:
). A!!ura#c" of tru" a#% fair accou#t!:
Audit provides an assurance to the various users of final accounts such as owners"
management" creditors" lenders" investors" government,s etc. that the accounts are
true and fair.
+. Tru" a#% Fair 2a$a#c" !/""t:
The user of accounts can be sure that the assets and liabilities shown in the
audited balance sheet show the concern" as it is i.e. neither more nor less.
5. Tru" a#% fair ,rofit a#% $o!! accou#t:
The user can be confident that the audited profit and loss account shows the true
amount of profit or loss" as it is i.e. neither more nor less.
.. Ta$$( 6it/ 2oo!:
The audited final accounts can be taken to tally with the books of account. Thus"
the income$ta! officer can start with the figure of audited books profit" make
adjustments and compute the ta!able income. An outside user need not go through
the entire books.
7. A! ,"r !ta#%ar% accou#ti#& a#% au%iti#& ,ractic"!:
The audited final accounts follow the standard accounting and auditing principles
laid down by professional bodies. Thus audited accounts are based on objectives
standards and not on personal whims and fancies of a particular accountant or
auditor.
))
8. D"t"ctio# a#% ,r"-"#tio# of "rror! a#% frau%!:
Audited accounts can be assumed to be reasonably free from errors and frauds.
The auditor with his e!pert knowledge would take due care to see that errors and
frauds are detected so that the accounts show a true and fair view.
9. A%-ic" o# !(!t"'1 ta:atio#1 fi#a#c":
The auditor can also advise the client about the accounting system" internal
control" internal check" internal audit" ta!ation" finances etc.
).
LIMITATIONS OF AUDITING:
An auditor cannot check each and every transaction he has to check only the
selected areas and transaction on a sample basis.
Audit evidence is not conclusive in nature thus confirmation by a debtor is not
conclusive evidence that the amount will be collected. t is said evidence is
persuasive rather than conclusive in nature.
An auditor cannot be e!pected to discover deeply laid frauds usually involve acts
designed to conceal them such as forgery" deliberate failure to record transactions"
false e!planations and so on and hence are difficult to detect.
Audit cannot assure the user of account about the future profitability" prospects or
the efficiency of the management.
An auditor has to rely upon e!perts auditor may have to rely on e!perts in related
field such as lawyers" engineers" value,s etc. for estimating contingent liabilities"
valuation of fi!ed assets etc.
)3
SCOPE OF AUDIT:
Bank is the only industry that deals in money while other industries need to convert their
products and services to money by undergoing the set working capital cycle. This uni(ue
feature of a Bank determines the thrust of audit" which has no parallel. it must be
remembered that this industry has come of its own especially in ndia with a history that
pre$dates the British occupation. Despite the continuously evolving strong internal
controls and strengthening audit coverage" it is not uncommon to note Bank frauds
especially since they sadly affect the life long savings of the common man. Erauds"
therefore" have also been the driving force in the evolution of the bank audit and its scope
as we see at present. Another powerful determinant is the advent of technology. #ever
has any machine affected the banking industry operations as the computers" which
hitherto confined to the back office now are spearheading the banking industry and often
critically affecting the life of the Bank itself. These two and many other forces such as
regulatory forces come together to define the general scope of the bank audit" which
undoubtedly is uni(ue for the industry. An auditor thus is re(uired to pay attention to the
following aspects2
a= 9hether accurate and correct record of the liabilities and assets of the
bank*branch is shown in the books.
b= 9hether the books and records are being maintained in accordance with
instructions received from the +ead ?ffice from time to time
c= 9hether assets shown in the books physically e!ist and their condition is
satisfactory.
d= 9hether the documents obtained by the branch from its borrowers are complete
and enforceable.
e= 9hether proper record of instructions from the +ead ?ffice for the advances
@sanction letter= is kept and the e!tent to which they have been complied with.
f= 9hether returns to the +ead ?ffice and the statutory returns are correctly
complied and submitted regularly.
)<
E!!"#tia$ ;ua$iti"! of Au%itor:
t is the primary objective of this project to raise the (uality of talents of the bank Auditor
to ensure minimum acceptable standards. n addition" there are certain (ualities
mentioned here which are of practical nature and will assure your reputation of a good
Bank auditor by both the +ead ?ffice as well as the branch*departments. This is a
difficult balancing act to win over the very persons whose actions one may have critically
commented upon in your report.
). I#t"&rit( a#% Co',"t"#c":
The Bank nspector* auditor should possess high standard of integrity and competence
and should be one who can be relied upon to conduct a through scrutiny of the branch.
There are many leeway,s given to the Bank auditor by which he can place reliance on the
internal control as noted by him to be practiced in the Branch. +ere is where the
competence" higher will be the (uality of audit.
+. E:,"ri"#c" of r"!,o#!i2$" ,o!itio#!:
The Bank auditors have to deal with senior staff and should have a good idea of what the
job entails. The rules and instructions and circulars are present but what are most
effective in all cases are the practicality of the action and the achievement of the
transaction.
5. Co#-"r!a#t 6it/ I#!tructio#! a#% Circu$ar!:
f the Bank auditor has to guide the Bank officials about their work" he has to himself be
conversant with the 4anual of nstruction and -irculars. The Bank auditor is seen as an
e!pert who represents the +ead office and cannot merely the one of Fticking,.
)>
6uide the branch officials in many of the matters. The role of Bank auditor s thus a very
responsible one.
.. E#t/u!" D"-"$o,'"#ta$ Acti-it(:
The Bank auditor is the human face of the +ead ?ffice with whom the Branch officials
can interact. This interaction makes the circulars easier to digest and the Bank ?fficials
are enthused in their work resulting in higher productivity. This unlisted work of the Bank
auditor is critical.
7. Prof"!!io#a$ I#%","#%"#c":
This is the integral (uality of any auditor. f he can be influenced" his whole audit is
effected and unsuccessful. Transfers of auditees2 9here the auditees have come from or
going to the %ersonnel Department" he is likely to be influenced. t is true that he has to
give declaration under Gection .A of the -ompanies Act of not being a borrower or
guarantor to the Bank
8. Co#!tructi-" A,,roac/:
This (uality is an absolute re(uirement of a Bank auditor even though it is recommended
for all audits. +e has to ensure rectification of the irregularities as soon as possible. The
primary objective is not to pull up people committing mistakes but to rectify and prevent
recurrence.
)B
9. Court"ou! a#% %i&#ifi"% 6it/ !taff:
Though this is needed in all audits" it is all the more needed in Banks. The industry has a
large dose of public interface daily for more than >;H of the time and this leads to
emotional fatigue.
f the Bank auditor also add to the irritant already there" he is less likely to get any co$
operation from the affected staff. As a representative of the +ead ?ffice" his attitude to
the staff should not create more problems for the Branch 4anager to solve.
)A
TYPES OF AUDITS:
t is well known that no any day of the year" there will be at least one auditor working in
the bank branch. The following are the popular types of audits conducted in a bank
branch. The titles may be modified in some banks especially for nternal Audit and
system Audit but the content remains the same.
I. Statutor( Au%it:
This is an annual audit determined by statute and done normally at the end of the
financial year while some of the larger branches are similarly audited half yearly. A
bank,s statutory audit is essentially a balance sheet audit including the Long Audit 'eport
though there is no scope restriction of the statutory auditor to perform certain actins of
other auditors as part of his duty or if some findings lead him into the domain of the
auditors such as 'evenue" inspector and even concurrent. The statutory auditor performs
the following functions.
/erifies the classification of items of the Balance Gheet to assure their correct placement
Basel accord" which has influenced the prudential norms" has included the statutory
auditor as an active member to assure the proper e!ecution of the prevailing prudential
norms. The direct result of an accurate classification is the appropriateness of income
recognition and thus the effect on the profitability of the Bank.
II. I#!,"ctio# Au%itor:
The highest coverage of audit is under this category of audit. As we know" the 'evenue
audit responsibility lies with this auditor and test checks of revenue calculation is not
uncommon even if the same was covered by a 'evenue Auditor earlier. Gafety of
advances is the other main function of the auditor.
)D
?ne way to cover is to ensure that the documents obtained from the borrowers are the
correct category and filled in fully. ?ther way to cover this is by analysis of the account
to ensure that the unit is operational by observation of the credit and debits into the
account.
III. Co#curr"#t Au%it:
n the beginning of the )::;,s" the 6reat Banking Gcam or the +arshad 4ehta Gcam
rocked the nation. This brought into limelight special category of audit called concurrent
audit or continuous audit. This stemmed from the need of filling in the gap between the
annual statutory audits and the intervening period between two inspections" which is a
period sufficiently large to cause damage to the Bank. #ow" 'B who insisted that at least
>;H of the business of the Bank should be covered under concurrent controlled the
spotlight of the concurrent audit. 9hile some Banks covered very large branches under
the umbrella of concurrent audit. Gome banks took the e!curse for improvement by
including weak branches though having low volume of business. -oncurrent audit in one
sentence will mean checking yesterday,s transactions today. Let us see the broad areas
covered by the -oncurrent Auditor.
A. 'evenue Aspects2
). nterest earned and service charges earned by the Bank
.. nterest %aid
3. All charges paid like cancellation charges" compensation under -ourt
Directive etc.
B. 5!penditure2
). Galary payments
.. Branch e!penses like printing and stationary" temporary employees etc.
3. 'ent of premises etc.
):

-. Documentation and other aspects of advances department2
). Documentation correctness of ALL new advances granted during the period
.. /alidity of all old advances to ensure that they are not time barred.
3. -urrency of insurance cover of stock machinery etc.
<. 9hether the inspections of units and stock have been carried out at the pre$set
intervals.
D. Administrative and other aspects2
). -orrectness of attendance and leave records
.. -ash Department working including security aspects with periodic surprise
inspection by the auditor
3. Gtock check at regular intervals of all security documents like Blank
che(uebooks" Demand Drafts" %ay orders" %ass Books etc.
IV. R0I Au%it:
The -entral Bank of the country also sends its own auditors to the Banks for their own
inspection. Their actions cannot be covered in this project because it is more of a
supervisory implementation of a 6overnment %olicy e!isting from time to time. The
primary aim of this audit is as follows.
?verall assessment of the assets and liabilities of the Bank" whether its financial position
is satisfactory" whether it is in position to pay its depositors in full as and when their
claims accure" and in the event of loss" whether it has sufficient cushion of owned funds
to safeguard the interests of depositors.
Goundness of Bank,s policies and procedures and effectiveness of the management to
safeguard point #o.) mentioned above as also whether they are on approved lines and in
conformity with socio$economic objectives.
.;
V. I#for'atio# T"c/#o$o&(<S(!t"' Au%it:
This audit is introduced more as a compulsion of the nvasion of technology in all
aspects of Banking. #o longer is this just an office machine or even a back$office
recording machine. This has now turned into the determinant of the Bank whether
as service provider or even as the vehicle of marketing of products of the Bank.
4ore important" for the economy" the Banks have to ensure continuous working to
assure lubricant for the rolling of wheels of the economy. To ensure this and assure
'B that such aspects are taken care of by the Bank in addition to securing the
protection of records of the depositor and borrower" system audit is undertaken to
audit the system I environment to aspects of software testing to some e!tent. t was
observed that the security and disaster recovery aspects improved considerably after
the 'B made system audit mandatory
.)
Table of comparative scope of various audits other than 'B audit2
Activity of Audit Gtatutory
Audit
nternal
Audit
'evenue
Audit
-oncurrent
Audit
Gystem
Audit
5!amination of balance sheet
accounts
5!amination of %rofit & Loss
accounts
Document 5!amination of Advances

%rudential norms verification

+.?. 6uidance compliance for
lending
nterest and service charge collection
accuracy by the Bank

nterest paid on deposits

All charges paid by the Bank

Accuracy of periodic returns

+ousekeeping

Gtaff function

7nit inspection

%rotection of server @%hysical and
Logical=
#ote
ndicates specific coverage as per that type of audit specified in the respective
column.
..
ndicates partial coverage as per practice for the audit specified in the relevant
column.
Pru%"#tia$ Nor'! = t/" Au%itor:
Gtatutory auditor as well as concurrent auditor" needs to verify and
@especially in statutory audit= certify the health codes given to the advance accounts. The
main implication of an account reaching #on$%erforming Asset @#%A= status is that no
further interest can be applied after that point of time. ?ne major current feature is that
hitherto" the accounts were accorded date of #%A from the date of year end in which they
had been so classified but currently" the date of #%A will be the date on which it so
suffered the down gradation as per the applicable rules.
N"c"!!it( for M"a!ur"'"#t of No#>P"rfor'i#& A!!"t!:
The repayment of interest*installment was either not easily forthcoming as per schedule
or recovery. -onse(uently" banks found it increasingly prudent not to reckon such
interest*other charges as part of their income and pay ta! on unreali&ed income. 'ather
they chose to cease charging interest in such accounts of bad*doubtful nature or where the
prospectuses of recovery were bleak
R0I ?"a$t/ Co%" S(!t"' a#% R"$atio# to NPA:
The 'eserve Bank of ndia introduced the +ealth -ode Gystem of classification of
borrowal accounts by banks in the year ):D>. Based on this classification of advances" it
was decided by the 'eserve Bank in the years ):D: and)::; that banks should cease
charging interest compulsorily in account under +ealth -ode > to D i.e. 'ecalled" Guit$
filled" Decreed and bad*doubtful and selectivity" taking into account the availability and
readability of security" in accounts under +ealth -ode < i.e. Gtick2 #on$viable*Gticky.
.3
A!!"t C$a!!ificatio#
I. P"rfor'i#& A!!"t:
%erforming asset is one which generates periodical income and
payments" as and when due or within the minimum lag of two (uarters. This is
being cut down to one (uarter from April .;;<.
II. No#>P"rfor'i#& A!!"t @NPA*:
The problem of #%A arises when the dues to the bank" interest*other
charges or installments are not being received as per schedule. To justifiably
set right this phenomenon" the 'eserve Bank of ndia has drawn upon the
international standards of accounting for the purpose of #%A treatment of
credit facilities. A loan asset will become #%A if the due amount is not paid
within one (uarter.
Curr"#t ,o!itio# of NPA tri&&"r!.
Term Loan nterest and*or installment remain overdue for a period
of more than :; days.
?verdraft*-ash -redit
Account remains out of order for a period of more than
:; days.
Bill purchased*Discounted
?verdue for more than :; days from its due date.
Agriculture Loans
nterest and*or installment remain overdue for a period
of more than . harvest seasons but not more than . half
.<
years.
Any Amount
To be received remains overdue for a period more than
:; days.
Cat"&ori"! of NPA
). Su2>!ta#%ar% A!!"t!:
A sub$standard asset was one" which was classified as #%A for a period not
e!ceeding two years. 9ith effect from 3) 4arch .;;)" a sub$standard asset is
one" which has remained #%A for a period less than or e(ual to )D months and
from .;;> it is further reduced to ). months.
+. Dou2tfu$ A!!"t!:
A doubtful asset was one" which remained #%A for a period e!ceeding two
years. 9ith effect from 3) 4arch .;;)" an asset is to be classified as doubtful" if
it remained #%A for a period e!ceeding )D months. 9ith effect from 4arch3)"
.;;>" an asset would be classified s doubtful if it remained in the sub$standard
category for ). months.
5. Lo!! A!!"t!:
Assets which are classified as bad and non$recoverable by the concerned bank
or by Gtatutory Auditors or by 'B nspectors but the amount have not been
written off wholly. n other words" such an asset is considered uncollectible and
of such little value that its continuance as a bankable asset is not warranted" they
.>
will continue to appear in the Balance Gheet but under the heading 0Loss Asset1
although there may be some salvage or recovery value.
Pro-i!io#!
The current position of providing provision on the various assets is as
follows2
Gtandard assets 6eneral %rovision ;.<;H of Balance ?utstanding
Gub$Gtandard
assets
6eneral provision of );H of Balance outstanding without considering
D-6- or 5-6- 6uarantees
Doubtful Assets );;H of 7nsecured portion after considering the reali&able value of
security which should be realistic. n addition to the above provision on
the secured portion should be made as under2 7p to ) year .;H" )year to
3 years 3;H" 4ore than 3 year >;H
Loss Assets );;H on the Balance outstanding
C/"c$i!t to -"rif( -a$i%it( of NPA c$a!!ificatio#.
An auditor should ensure that branches for treating an account as #%A do
the following or otherwise" irrespective of the cutoff point of limit outstanding balance.
.B
?btain the Fbalance book, for loans" cash credit and overdraft. This gives you the
e!haustive list of accounts outstanding as on the date of your inspection or the
date of classification. By use of this balance book" you can ensure that you can
cover all the accounts and you do not skip accidentally the classification of any
account.
The totals of the report of classification should match with the totals of the
concerned departments thereby ensuring that all the accounts are considered.
Analysis of the account should be done since ,income recognition, is the
underlying criteria. Therefore obtain the copy of the branch of the account
statements to verify the classification made by the Bank. 5nsure the following
points during your scrutiny of the account.
Both interest and installments" wherever applicable should be taken into account
for assessing the #%A status of an account. f a particular facility of a borrower
becomes #%A. Then all the facilities granted to the borrower should be treated as
#%A.
Advances backed by -entral*Gtate 6overnments should not be treated as #%A.
Advances against bank,s fi!ed deposits" #G-,s" /%s" 8/%s" and life %olicies
eligible for surrender" should not be treated as #%As.
n the case of agricultural advances" #%A status should be decided upon after
considering the recovery of interest dues for two harvest seasons.
.A
#et$worth of borrower*guarantor and availability of security is no consideration
for treating an account as #%A or otherwise" as the concept is based on record of
recovery of interest*installments.
Gtaff loans should not be treated as #%As" e!cept in e!ceptionally problematic
cases.
AUDIT OF LOANS AND ADVANCE:
Advances generally constitute the largest item of assets of a bank branch. Banks normally
make advances on the basis of security in the form of tangible assets. n addition" they
may also re(uire the borrowers to furnish guarantees of third parties for repayment of the
advances. 'B has stated that banks should include all interest$bearing loans and
advances granted to their staff under the head FAdvances, in the balance sheet.
A. G"#"ra$:
i. I# t/" ca!" of a%-a#c"! &ra#t"% to 'i#or!:
f any advance has been granted to any minor a letter of assurance from the father or the
guardian" should have been obtained stating that the money borrowed would be utili&ed
solely for the benefits of the minor. The father or the guardian should have e!ecuted the
documents.
ii. I# t/" ca!" of a%-a#c"! &ra#t"% to fir'!:
.D
n the case advances granted to partnership firm the following points are to be
observed.
To verify the partnership deed and to ac(uaint with the powers of
individual partners to operate the accounts and borrow funds.
To see that the partner as per the manual of instructions has duly signed all
documents e!ecuted by the firm issued by the bank concerned.
To go through the latest audited balance sheet of the firm.
iii. I# t/" ca!" a%-a#c"! &ra#t"% to co',a#i"!:
To go through the memorandum and articles of association of the
company.
To see the powers of the board of directors to raise fund by way of loans.
To verify the purpose of the loan" with the help of the loan application and
see that the same falls within the scope of object clause of memorandum.
To verify the board resolution passed in this connection.
To verify whether form$B has been filed with the registrars of companies
within the one month from the date of e!ecution of the documents.
To see that the documents have been e!ecuted by duly authori&ed persons
of the board and confirm that the common seal has been affi!ed in the
presence of two directors if the A?A permits.
0. SECURED ADVANCE:
i. A%-a#c" a&ai#!t &oo%! "( $oa#1 o,"# ca!/ cr"%it:
.:
To check the individual balances in each loan ledger with the trail balance
book.
To verify the head office sanction and renewal for each advance.
To verify the stock statement and ascertain that the loan availed is within
the D% limit is sanctioned not any e!cess amount advanced and see that
head office approval has been obtained for such e!cess.
To pursue the fire insurance policies and ascertain that the policies are
alive as at 3)
st
march. Also see the stocks charged and their location are
correctly described therein.
To see that the later or deed of hypothecation has been e!ecuted in favor
of bank.
The inspect the godown and verify the physical stock$in$hand with the
stock statement and see also the condition of stock.
To see that the name of bank on the board of godown.
Test checks the interests charged and verify the rate of interest with the
help of head office circulation.
n the case of key loans" see that the key are in the bank custody and
satisfy as to the safety of the godown location" fire ha&ard etc.
n clean overdraft" insurance policy endorsed in favour of the Bank under
instructions from the borrower
4andate to debit borrower,s account to pay premium.
ii. A%-a#c" a&ai#!t 3"6"$!:
To check the entire jewel loans account balances with the trial balance
book.
To see that appraiser valuation is attached.
To count all the jewel loan packets and see that it tallies with the total
number of jewel loan account.
3;
The select at random sufficient number of packets and physically verify
the weight with the help of appraiser.
Test check the interest charged.
To ascertain the value of jewels from the finesse mentioned in appraiser
certificate.
To see that the loan advanced does not e!ceed the ma!imum that can be
advanced taking into account the rate per gram fi!ed by the head office the
weight and margin.
iii. Loa# o# %",o!it! @fi:"% %",o!it!1 r"curri#& %",o!it! "tc:
To verify the entire ledger balances with the trail balance.
To see that the deposit receipts or pass book or cash certificates have been
duly discharged in favor of the bank at the time of pledge.
Blank payment challans duly signed by borrower should have been
obtained.
Banks lien should have been marked on the deposit receipt as well as in
the respective deposit ledger folio.
To see that no advance has been granted against duplicate receipt etc.
without proper verification.
n case of borrowings against deposits in the name of minors the branch
should have noted the date of birth of the minor also see that the loan has
been granted for the benefit of the minor.
i-. V"/ic$"! a%-a#c"!:
3)
To verify the copies of the registration certificate test check the original
certificate and ascertain endorsement in favor of the bank.
To see that vehicle has been comprehensively insured and verify the
banker clause in the policy.
To verify the duplicate key of the vehicle has been lodged with the bank.
To check the interest charged.
-. A%-a#c" a&ai#!t i''o-a2$" ,ro,"rti"!:
To e!amine the documents relating to advance and also see that there is
proper sanction from head office.
To go through the legal opinion of banks lawyer about the title of properly
to the borrower. f lawyer has suggested complying with certain
formalities see that the formalities have been compiled with.
To see the latest ta! receipts forwards payment of properly ta!.
To see that the documents have been deposited in notified centers in the
case of e(uitable mortgage.
To verify the documents deposited with other branches and the
acknowledgement kept in the branch where advance has been made.
To verify the engineers valuation.
f the property is a building see that it has been sufficiently insured and
policy has been taken in the joint names of the bank and mortgagor.
To check the interest charged.
-i. A%-a#c" a&ai#!t $if" i#!ura#c" ,o$ici"!:
To verify head office sanction.
To scrutini&e the policy and ascertain the surrender value from L..-.
To verify the latest premium receipts.
To satisfy that sufficient margin is kept or not.
3.
To verify policies should be assigned by the insured in favor of bank and
the assignment is noted by L..-.
-ii. A%-a#c"! a&ai#!t !/ar"! a#% %"2"#tur"!:
To verify head office sanction.
To scrutini&e the share certificates and ascertain that they stand in the
name of borrower.
To see that the bank has obtained undated blank share transfer from duly
signed by the borrower.
To verify notices of lien should have been sent to the company and their
acknowledgement should be obtained.
To ascertain the market value of shares as on the date of verification and
see sufficient margin is maintained.
To verify the copy of dividend mandates and also a dividend warrant.
UNSECURED ADVANCES:
i. C$"a# $oa#! o-"r%raft1 c$"a# ca!/ cr"%it "tc:
To see the head office sanction.
To scrutini&e all clean advances and verify that the accounts are
satisfactorily conducted or not.
nsurance policy endorsed in favour of the Bank under instructions from
the borrower
4andate to debit borrower,s account to pay premium.
ii. Docu'"#tar( 2i$$! ,urc/a!"%:
33
To see the head office sanction.
To see that all bills discounted are accompanied with the ledger register.
To verify all long overdue bills and suggest to debit borrower account with
the amount of such bills.
To see that the limit has not e!ceeded at any time.
Test checks the discount and commission charged.
i-. C$"a# 2i$$! ,urc/a!"%:
To see head office sanction.
To verify that all bills are accompanied with account sales" sales invoices
etc.
To see that bills are met regularly and limit is not e!ceeded.
Test checks the discount and commission charged.
AUDIT OF DEPOSITS:
Deposit accounts are designed to encourage saving. 7nder the category of deposits" we
not only have the term deposits but also the savings and current accounts. Deposits are
the main liabilities of the bank" which give it the re(uired fund flow of the schemes of
lending. t is also main source of e!penditure of the bank in the form of interest. 'evenue
calculation of this department assumes e(ual importance as e!cess e!penditure affects the
profits.
i. Curr"#t %",o!it!:
To verify the balancing books with individual ledger.
3<
To see that no current account is overdrawn at any time without head
office authority.
Test check the new accounts opened during the year with regard to
introduction" partnership deed" memorandum and articles of association in
case of limited companies and necessary resolution.
To see that total balancing books tallies with general ledger balance.
ii. Sa-i#& 2a# accou#t:
To see the consolidation of balance as per different saving book balancing
book. /erify that the total of balancing books tallies with the general
ledger balance.
Test checks the entries in balancing books with individual ledgers.
Test check the interest credited.
To see that saving bank has not been opened in the name of companies.
SAVINGS INTEREST VERIFICATION IN COMPUTERIAED
ENVIRONMENT
+ow is the rate controlled Ithrough a parameter file or each account
Does the parameter file give audit trail of who has changes the rate from
what value
Does the software provide the user without intervention of the T
department from +?" the full history of the rate changes at least for the
period under audit
Test check few accounts opened less than one month" two months" three
months" five months
3>
Test check few accounts which are old I opened almost at the time of start
of the Branch
Test check the accounts with &ero balances to ensure that the accounts are
#?T those accounts which have been closed but remained opened in the
system due to total withdrawal of funds and the accounts closure formality
demanded by software not initiated.
iii. Fi:"% %",o!it accou#t:
Test checks the balance in balancing book with individual ledgers.
To see that the total in balancing book tallies with the general ledgers.
To see that correct interest rate is applied according to the period of
deposit and also check the interest payable.
Test checks the fi!ed deposit receipts issued during the year with the
counterfoils.
To see that fi!ed deposit e!ceeding 's. .;;;;*$ has not been repaid in
cash.
n case of deposits made in the case of minor also see whether date of
birth is mentioned on not.
v. R"curri#& %",o!it!:
-heck the balance is balancing book with individual ledger.
To see that the total in balancing books tallies with the general ledger.
Test checks the interest payable.
To see that penal interest has been debited for late payment.
To see that the repayment of recurring deposit e!ceeding 's. .;;;;*$ has
not been made in cash.
Test checks the interest as per accrued interest charts.
3B
OT?ER AREAS:
i. Guara#t""! i!!u"% 2( t/" 2a# or cou#t"r!i&#"% 2( t/" 2a#:
To verify the accounts with ledger register.
To verify the copies of the guarantees issued and see that all guarantees
conform to the terms and condition of sanction.
To verify that every guarantee indicates the last date by which claim under
the guarantee should be made by the beneficiary after whom the bank
would cease to be liable.
To see that commission has been collected as per head office instruments.
To verify that the guarantees are appropriately stamped before obtained it.
n case of the company verify the resolution should be passed in favor of
guarantee.
To verify whether cash margins have been collected as per the sanction.
To verify whether the e!pired guarantee have been called back" cancelled
and the entries reversed.
To verify whether the individual accounts of the constituents are debit
when the guarantees are invoked" irrespective of payments made by the
bank to the beneficiary.
ii. Saf" %",o!it $oc"r !"r-ic":
9hether the rents for lockers are charged in accordance with head office
circular.
f initial key deposit and advance rent is to be collected.
6ive a list of hirers who have not paid the rent for lockers.
iii. V"rificatio# of fur#itur" a#% fi:tur" a#% !tatio#"r(:
3A
To conduct a physical verification of furniture and fitting and tally with the
register.
To verify the stationery on hand particularly the unused fi!ed deposit
receipts" draft books" che(uebook" traveler,s che(ue etc.
Test check that no leaf has been taken out of the receipts book.
i-. Profit a#% $o!! accou#t:
To verify the salary payment with register.
Test checks the interest payment on deposits saving bank accounts.
Test checks the interest receipts on advances e!cept in the case of
borrowers with limit e!ceeding 's. >;;;*$ in which case all the accounts
have to be verified.
To verify whether the interest is charged in accordance with 'B guidelines
and head office sanction.
To verify other e!penses and compare with that of the last year. n case of
any substantial difference please verify and ascertain the reason.
To verify all e!penses and income on accrual basis i.e. locker rent has to be
accounted for the entire period whether received or no" guarantee
commission" discount and other charges.
-i. Po!ta&"1 t"$"&ra' a#% t"$",/o#"!:
To verify the dispatch and postage register.
To verify the balance of postage stamps and cash in hand.
To verify the entries in the dispatch register at random.
To verify entries made in the trunk call register at random.
To verify whether the charges are recovered in respect of calls made at
instances of constituents and those made by staff.
-ii. G"#"ra$:
3D
To make surprise verification of cash preferably opening balance of cash
before commencing regular audit work.
To verify the general ledger balancing book with the general ledger.
To verify the balance sheet and profit and loss account with the general
ledger balancing book.
C/"c$i!t for au%it of %",art'"#t of D",o!it!
Banks are established for the primary purpose of acceptance of deposits and lending to
those who can utili&e the money for their business. +itherto" lot of care was taken to
ensure the identity and residential accuracy of the borrower since the Bank had to evolve
a system to recover their own money. 7ntil the ):D;,s" lapses in formality of account
opening of the depositors were not given much importance on the plea that the money of
that person is with the Bank and not much harm can come this way in case he forgets to
come. The Bank is not to incur any loss. 9hile this was a selfish microscopic viewpoint
which may have found many sympathi&ers" the role of all the Banks in the economy was
lost sight off and especially in ndia which is known for its parallel economy" the aspect
of money laundering suddenly brought into focus the need of perfect identification and
thus the strict implementation of 8now Jour -ustomer @8J-= norms. 5ven before the
insistence of 8J- norms by the 'eserve Bank of ndia" each Bank should have been
3:
sensitive to the fact that a devious customer first opens a deposit account as bait without
submission of proof of identity. 4any stolen instruments are then deposited and
immediately withdrawn while he has fled before the discovery of the trail. The Bank
officials are then dragged into the case and have to devote precious time for this negligent
and perfectly avoidable action. ?r" he later creates an aura of emergency taking a facility
for Fjust a day or two, and only later the Bank reali&es they were conned by a smooth
operator and all the money lent is lost which naturally has e!ceeded the deposit he had
placed with them. Therefore in the interest of the Bank" the set formality that currently is
largely directed by the 'eserve Bank,s 8J- norms should be adhered to and the auditor
is placed in the immediate supervisor position to stem the problem before it escalates into
anything more serious. As ndia goes more and more on$line" we will get to see more
cases of identity theft" which is one of the largest crimes in 7GA in the turn of the
century. 8J- norm compliance will go a long way to abort attempts of such identity
crimes.
9hile new account opening remains a main area of audit concern" it is also important to
note amendments of e!isting accounts in the areas of change of signatories and
operating instructions etc. The Bank is never privy to the internal frictions and
yesterday,s brothers also part ways but the Bank should not be embroiled in their
controversy. Attempts to remove a partner or change of operating instructions from
joint to single to withdraw the balance by one partner in an unauthori&ed manner are
some of the risks that accrue by amendments to e!isting accounts and the auditor too
should cover these. Guch cases are rater easy to track in computeri&ed environments.
Another dimension to the deposits department is the application of the interest. A fre(uent
change under inade(uately designed software compounds the problem of revenue
leakage. Gometimes the Banks are not able to respond to even the differential rates in new
time slots since adjusting rates to the e!isting time slots is easier.
<;
NE4
BNO4 CUSTOMER NORMS
DOCUMENTS SUMMARIAED O0CECTIVE
Two %hotographs %hysical dentity
Birth certificate in case of minor dentity and %roof of Age
%assport copy dentity" %roof and 'esidence %roof
Diving license copy Age %roof and 'esidence %roof
5lectricity bill copy*landline Telephone bill copy Address %roof
'ent receipt in case premised is rented and maintenance bill
in case the premises is owned by the applicant in a society
Address %roof
5lection dentity -ard Address %roof
-ertified 4emorandum and Association of -ompany To permit the Bank to study the operating
restrictions if any and the registration
certificate copy issued by the 'egistrar of
-ompanies
<)
%A# -ard copy*%A# number allocation letter @when letter is
received but the %A# card is not received
%roof of being a income ta! payer and
submission of correct %A# number
%A# -ard application copy and copy of ncome Ta! 9hen account holder is in the process of
obtaining %A# number and is yet not allotted
%A# number
E?'4 #o. )B 9hen the account holder is not ta!able" such a
declaration is taken on this ncome Ta!
authori&ed form from the account holder
M"'ora#%u' of C/a#&"! Particu$ar! of A%-a#c"!:
%articulars Loans" -ash -redits"
?verdraft etc
Bills discount & purchase
@including foreign Bills=
Additions
@K=
Deductions
@$=
Additions
@K=
Deductions
@$=
Debts considered good in
respect of which bank is fully
secured
Debts considered good in
respect of which bank holds
no other security than
Debtor,s personal activity
Debts considered good
secured by the personal
liability of one or more
parties in addition to the
personal security of the
<.
debtors
Debts consideredL
Doubtful or bad not provided
for
Total
%articulars in the following form
%age reference Account #ame of
borrower
Balance
outstanding
'easons for
reclassification
#ote2 %lease note that grand total of additions of all the items should tally with grand
total of deductions and net effect should be #L. #ame of
BranchM
#ame of 'egionM
DThis is especially useful for2 This checklist is of special use to the
-oncurrent" Gystem @T= & nternal Auditors in addition to the 'B auditors.
I. E-a$uati#& t/" corr"ct #u'2"r of accou#t! o,"#"%
).
@new=
Analy&e the last generated 6eneral Ledger to identify how many accounts
are available in the Bank*branch.
..
@new=
-ompare last subsidiary listing with the previous ones to note accounts
opened for each scheme i.e. Gavings " term deposits" monthly deposits etc.
3.
@new=
?btain the file containing the papers submitted by each account holder and
verify the number of new submission to e(ual the number shown by the
subsidiary and reconcile the difference.
<3
<.
@new=
%apers kept aside" which the officer has identified for follow up due to
non$fulfillment of formality" should also be scrutini&ed by you.
>.
@new=
9here the Bank has a manual account number allocation register" are the
number of accounts tallied with this register or are there cases where
accounts may have been opened with Nero balances and not picked up by
the software for printing subsidiary in case the software has and the
operator has e!ercise the option routines for printing only those accounts
with balancesO
B.
@new=
n case of multiple accounts being opened like Gavings and Ei!ed deposits"
is one set of papers missing from either of the files then is it either marked
with a pointer to the other file @e.g. %hotos with GB 3<>*;:= or is a
photocopy of the papers placed in this fileO
A.
@old a*s
amended=
?btain the e!ception reports from the bound file or a soft copy from the
computer log and scan it for changes made to the masters of deposit
accounts" which will normally detail the old value and the new value.
D.
@old a*s
amended=
Are the letters from the account holder on record instructing the change in
the master accountO
:.
@old a*s
amended=
Are the changes such that do not drastically change any aspect of the
account that is a camouflaged attempt to create a new account within the
old accountO @e.g. -hange of title" unsupported operating instructions"
name removal without death certificate or no objection from person whose
name is being removed=
. V"rificatio# of "ac/ Accou#t
);.
s the number of signatures e(ual to the number of joint holdersO
)).
s the re(uisite number of photos submittedO
<<
)..
s the account opening form filled by the applicant or by the Bank officialO
)3.
s the account introduced properlyO
)<.
Does the Bank know the introducer for a period e!ceeding si! monthsO
@7nless it is a Bank branch recently opened for a period less than a year.
Also" in case of passport copy submission introduction need not be insisted
upon for individuals. Eor incorporated companies" introductions are waived
since the copy of 'egistration certificate issued by 'egistrar of -ompanies
will suffice=
)>.
Are all the supporting papers for 8J- norms submittedO
)>.) Are all the submitted photocopies @Pero!es= authenticated by the Bank
officer on the reverse as having seen the originalO
)>.. n case of income ta! return copy being submitted as a proof of %A#
number is it authenticated as a copy by a practicing -hartered Accountant
)>.3 s a copy of the proof of address submitted and is it the approved type i.e.
copy of a passport or election card or electricity bill or phone bill
@preferably landline=O
)>.< s the address on the submitted proof the same as that given in the account
opening application form for each of the account holdersO
)>.> f the address of the proof of residence is permanent and the temporary
address of the same city of Bank Branch location is to be used" like a hostel
in case of a student" is the additional proof by way of admission letter or
identity card takenO
)>.B n case of current or -ash -redit accounts is the location of the business
also supported by proof of operation in the same nameO f business is
located at a place owned by another organi&ation" then is the rent receipt of
permission to operate in case of a sister concern also submittedO
)>.A Are the joint holders either related or part of an organi&ation like a firm"
company" Trust club etc. in which case" the application needs to be
<>
supported by re(uisite resolution copy duly authenticated by an office
bearer of the same organi&ation.
)>.D 9hen the applicant is an incorporated company" are the signatures of
operators of the account authenticated by a copy of resolution issued by the
company under its sealO @'ubber stamp is also accepted as a seal=
)>.: s the proof of date of birth submitted in case of accounts opened in the
names of minorsO
)B . f the account is opened in a single name of an individual" is a nomination
taken and if nomination is waived by the applicant" is it so written and
signed by the applicant on the application formO
)A. -ompare the operating instructions entered in the computer with that on the
application form and recommend immediate rectification if difference is
noted.
)D. f it is change of partners in a firm is another account opened instead of just
change of signatoriesO
):. Does a firm or company open the new account while the e!isting regular
accounts @current= are fro&en by the 6overnment authorities like the ncome
Ta! Department or Gales Ta! DepartmentO
.;. n case of current accounts" is the declaration taken from the applicant that
he*they does not have any other account and if they do" is full name and
address is taken of those BanksO
.). n such case as mentioned in point above" has the Bank therefore sent
letters to those Banks seeking information if any borrowing is done and if
that Bank does not have any objection if this new account is openedO s
proper follow up done until the receipt of no objection letters from these
BanksO
... Are letters of thanks sent to the account holder at the address written in the
application form as well as the introducer in case the introducer has not
<B
accompanied the applicant to the Bank branch at the time of submission of
application for account openingO
.3. s the correct applicable rate of interest entered in the computer O
.<. s the acknowledgement taken from the account holder wherever Deposit
receipt is handed over or AT4 card etc.O
.>. Are all accounts are opened with -ash deposit or transfer from within the
Bank*branch since accounts should not be opened with e!ternal transfer
instrumentsO
.B. Are large cash deposits made and issued by single instrument or vice versa
i.e. large value instrument deposited and cash withdrawn in case of new
accountO @Guch cases need to be studied for possibility of fraud or money
laundering=
.A. Do the Bank officers monitor new savings accounts and -urrent accounts
for the first si! monthsO
.D. n case of high value and high fre(uency of transactions in savings accounts
has the Bank branch interviewed the account holder to ensure that business
operations are not transacted though the savings account in individual
nameO
.:. 9hen savings accounts are permitted to be opened by a Trust" has the trust
submitted enough evidence that it is a public charitable trustO
3;. After the amendment of the Gmall Gavings Act" are the +7Es permitted to
open only current accounts and not savings accountsO

<A
0ASEL I:
This is should be interest to very auditor to monitor the progress of the Banks in the fields
of nformation Technology" which is essential to drive the pillars of -apital 'e(uirement"
Gupervisory 'eview and 4arket Discipline recommended by the BAG5L committee.
<D
?nly under a clear understanding of these aspects will the auditor lend a
constructive approach in the period of change. Development and fine$tuning of
risk mechanism of the Banks on a scientific basis should already be under
development. Banks are therefore e!pected to shore up their nformation
Technology base for a faster detailed collation of data for real time analysis to
apply risk matri! and initiate risk mitigation actions. All this will have to
eventually be evaluated by the auditor with the internal auditor providing
feedback to the management and the concurrent and statutory auditor$ensuring
adherence to prevailing law by success of the mi! of all these actions.
The business of a bank is to lend deposits to its customers. The interest earned
form the loan is then used to pay for the deposits. 9hile your deposits and interest
are safe" the bank faces the risk of losing money on the loans they have given.
Guccinctly put" while a bank,s assets @loans and investments= are risky and prone
to losses" its liabilities @deposits= are certain. Bank failures are mainly caused by
losses on its assets in the form of default by borrowers @credit risk= and frauds"
systems and process failures @operational risks=.
The failure of the 6erman Bank +erstatt in ):A< forced the central banks of the
6$); countries @Belgium" -anada" Erance" 6ermany" taly" Qapan" The
#etherlands" Gweden" Gwit&erland" The 7nited 8ingdom and the 7nited Gtates= to
delve deeper into the issue of under$capitali&ed banks and non$standardi&ed
banking regulations. These countries" along with the Lu!embourg" formed the
0Basel -ommittee on Banking Gupervision1 under the aegis of the Bank of
nternational Gettlements @BG= in ):A<.Eormed in ):3;" the BG is one of the
oldest international financial institutions. t is actively involved in securing and
maintaining international central banks cooperation.
<:
n Quly ):DD" the Basel -ommittee came out with a set of recommendations aimed
at introducing minimum levels of capital for internationally active banks. This
first series of recommendations by Basel -ommittee are popularly known as
Basel norms. These norms re(uired the banks to maintain capital of at least D
percent of their risk$weighted loan e!posure. The Basel -ommittee also laid down
standard definitions for different types of capital. -apital was categori&ed" as Tier
is mainly the permanent capital like e(uity and Tier capital is the
supplementary capital like subordinate debt.
n ndia" the banks were re(uired by the 'eserve Bank of ndia to maintain a
higher capital$to$risk$weighted$assets ratio @-'A'= of : percent. That almost all
ndian and internationally active banks are sufficiently capitali&ed now is a
testimonial to the success of the norms.
0ASEL II:
Despite the achievements" the norms were becoming increasingly ineffective to address
the fundamental changes in the banking sector over the past decade as increasing use of
financial innovations such as securiti&ation and credit$risk derivatives allowed the banks
>;
BAG5L
Gystematic
'isk
-redit 'isk
?perational
'isk
4arket 'isk
to manipulate their balance sheet figures in such a way that capital re(uirements were
lowered without significant reduction in actual risks. There was a need to revise the Basel
norms
To set right these aspects" the Basel -ommittee came up with a new set of guidelines in
Qune .;;<" popularly known as the Basel norms. These new norms are far more
comple! and comprehensive compared to the Basel norms. t is based on the three
pillars of -apital 'e(uirement" Gupervisory 'eview and 4arket Discipline.
Though the Basel recommendations enhance the business of the bank by better
management of its risk" it has such pitfalls as pro$ cyclical nature of the
recommendations" loans portfolio polari&ation" potential hurdle for the emerging
securiti&ation market and increased capital re(uirement. But it is certain that these norms
are going to have a tremendous effect on our loves by changing the way banks do
business.
Basel adherence emphasi&ed in ndia
'B,s association with the Basel -ommittee on Banking Gupervision dates back to
)::Aas ndia was among to )B non$member countries that were consulted in the drafting
of the Basel -ore %rinciples. 'eserve Bank of ndia became a member of the -ore
%rinciples Liaison 6roup @-%96= in )::D and subse(uently became a member of the
-ore %rinciples 9orking 6roup on -apital.
>)
'B had in April .;;3 itself accepted in principle to adopt the new capital accord Basel
. The 'B has announced" in its Annual %olicy statement in 4ay .;;< that banks in
ndia should e!amine in depth the options available under Basel and draw a road$map
by end December .;;;< for migration to Basel and review the progress made thereof
at (uarterly intervals.
REGULATORY INITIATIVES
5nsuring that the banks have suitable risk management framework oriented
towards their re(uirements dictated by the si&e and comple!ity of business" risk
philosophy" market perceptions and the e!pected level of capital. ntroduction of
'isk Based Gupervision @'BG= in .3 banks on a pilot basis.
5ncouraging banks to formali&e their -apital Ade(uacy Assessment %rogramme
@-AA%= in alignment with business plan and performance budgeting system.
This" together with adoption of 'isk Based Gupervision would aid in factoring the
%illar re(uirements under Basel .
5nhancing the area of disclosures @%illar =" so as to have greater transparency of
the financial position and risk profile of banks. mproving the level of corporate
governance standards in banks.
Banks are re(uired to adopt standardi&ed approach for credit risk and basic
indicator approach for operational risk with effect from 4arch 3)" .;;A. But
>.
banks wanting to adopt advanced approaches have seen asked to make objective
self$assessment of their fulfillment of the minimum criteria prescribed under
Basel .
Banks may be allowed to migrate to nternal 'ating Based @'B= approach after
ade(uate skills both in banks and at supervisory levels are developed. 7nder
standardi&ed approach" banks would use ratings assigned by credit rating agencies
identified by 'B.
The new framework also recogni&es the responsibility of bank management in
developing an nternal -apital Ade(uacy Assessment %rocess @-A%%= that is
commensurate with bank,s risk profile and control environment. The ape! bank"
therefore asked banks to focus on formali&ing and operational sing their -AA%"
which will serve as a useful benchmark while undertaking the parallel run with
effect from April )" .;;B.
The main benefit of Basel will flow from the greater awareness of risk that it will instill
in the banks. t also has in built incentives for improved risk analysis" risk management
systems" allocation of capital and pricing of risk that enable banks to improve the (uality
of their asset portfolio.
The new norms re(uire a lot of disclosures of risks and the risk management practices by
banks. Data sharing among banks is also a very crucial under the new norms. -ompliance
with Basel will re(uire increased capital commitments from all banks" as well as
increased transparency and reporting to both regulators and the market place.
Due to formal risk measurement processes" loans will be granted to only good borrowers.
The more risky borrowers will have difficulty in finding banks that are willing to lend to
them. This should result in reduced #on %erforming Assets for the banking sector as a
whole resulting in better solvency of the ndian banking system.
>3
S?RI C?INAI COLLEGE OF COMMERCE AND ECONOMICS
Sur-"( for ,ro3"ct o# Au%it of 0a# D",o!it a#% Loa#!
NAME: >
DESIGNATION: >
SIGNATURE: >
CONTACT NO: >
)* 4/ic/ 0a# ,ro-i%"! 2"tt"r !"r-ic"! i.". i#t"r"!t rat" i# %",o!itE
><
Pri-at" Pu2$ic Cor,orat"
+* 4/at i#% of %",o!it (ou /a-"E
Sa-i#& Curr"#t Fi:"%
5* Do (ou t/i# i# 2a# t/"r" i!E
Error! Frau%!
.* ?a-" (ou ta" a#( $oa#E
?o'" P"r!o#a$ A#( Ot/"r
7* Ar" (ou a6ar" of Au%iti#&E
Y"! No
8* S/ou$% au%iti#& 2" %o#" i# 0a#E
Y"! No
Co''"#t!: >
Pro3"ct Gui%": Prof. Ni!/ia#t C/a Sur-"( co#%uct"% 2(:
Si&#atur": > Di!/a !/a/
TY.00I. Ro$$ No: > .+
ANALYSIS ON SURVEY
9hich Bank provides better services i.e. interest rate in depositO
>>
%rivate
%ublic
-orporate
9hat 8ind of deposit you haveO
Gaving
>B
-urrent
Ei!ed
Do you think in Bank there isO
5rrors
>A
Erauds
+ave you take any loanO
>D
+ome
%ersonal
Any other
Are you aware of AuditingO
>:
Jes
#o
B;
Ghould auditing be done in BankO
Jes
#o
B)
ANNEXURE
9hat is AuditingO
Auditing in simple terms is to check and correct the statement of accounts"
which gives you accurate and true statement.
9hat are the essential (ualities pf an AuditorO
The auditor should be e!perienced" -onversant with nstructions and
-irculars" clear" integrate information" ade(uate training" professional
(ualifications.
+ow many meeting does auditor have to attendO
?nce in a year. Different in different banks.
+ow many Audits does an Auditor have to checkO
They have to check the main departmentR some of them have to check of their
consult branches.
B.
CONCLUSION
n recent years" banks have placed an increased emphasis on proper review" monitoring
and supervision of advances. As the basic operations are carried out a branch level" audit
of an advances" deposits and interest related thereto constitutes a significant proportion of
the branch auditor,s work. The auditor should be well ac(uainted with the laws governing
banking institution particularly those" which affect the various items of the financial
statements. The auditor should familiar himself with the computer system of the bank and
should evaluate the efficacy of various internal controls over the computer system.
The auditor should report whether the bank has laid down a loan policy specifying the
prudential e!posure norms and industry$wise e!posures.
t would be fitting to conclude that Auditing is an art as well as a Gcience in as much as
one need to apply the principles to the actual realities in an innovative manner. 9hile the
regulatory prescriptions and bank,s own policy guidelines from the boundaries within
which the bank,s investment operations are re(uired and e!pected to be carried out" it is
the auditing process that culls out and highlights the bubbles and weakness in the
procedures adopted by the bank,s operating personnel and forewarn the management
about the likely risks which have the potential to undermine the -orporate ?bjectives of
the bank. ?ne can say that audit process is like the pebble of sand that enters the pearl
oyster without whose irritation the oyster will not be able to produce the pearl.
B3
0i2$io&ra,/(
). www.yahoo.com
.. www.google.com
3. -hartered accountant book @/ol I >>=
B<

B>

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