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Type of Audit
1. Statutory Audit
2. Concurrent Audit
3. RBI Audit
Principal Enactments Governing Bank Audit
Stages of Auditing
Provision Relating to Audit
List of documents of Bank Audit
Audit Planning
Audit aspect of items of Balance Sheet
Audit aspect of items of Profit & Loss
Asset Classification

Pg. No

It 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 Internal Audit and system Audit but the
content remains the same.

Statutory Audit:

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 banks statutory
audit is essentially a balance sheet audit including the Long Audit Report though there is no
scope restriction of the statutory auditor to perform certain actions of other auditors as part of
his duty or if some findings lead him into the domain of the auditors such as Revenue,
inspector and even concurrent. The statutory auditor performs the following functions.
Verifies the classification of items of the Balance Sheet to assure their correct placement
Basel II accord, which has influenced the prudential norms, has included the statutory auditor
as an active member to assure the proper execution 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.

Concurrent Audit:

In the beginning of the 1990s, the Great Banking Scam or the Harshad Mehta Scam 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. Now, RBI who insisted that at least 50% of
the business of the Bank should be covered under concurrent controlled the spotlight of the
concurrent audit. While some Banks covered very large branches under the umbrella of
concurrent audit. Some banks took the excurse for improvement by including weak branches
though having low volume of business. Concurrent audit in one sentence will mean checking
yesterdays transactions today. Let us see the broad areas covered by the Concurrent Auditor.

A. Revenue Aspects:
1. Interest earned and service charges earned by the Bank
2. Interest Paid
3. All charges paid like cancellation charges, compensation under Court Directive etc.
B. Expenditure:
1. Salary payments
2. Branch expenses like printing and stationary, temporary employees etc.
3. Rent of premises etc.
C. Documentation and other aspects of advances department:
1. Documentation correctness of ALL new advances granted during the period
2. Validity of all old advances to ensure that they are not time barred.
3. Currency of insurance cover of stock machinery etc.
4. Whether the inspections of units and stock have been carried out at the pre-set
D. Administrative and other aspects:
1. Correctness of attendance and leave records
2. Cash Department working including security aspects with periodic surprise inspection
by the auditor
3. Stock check at regular intervals of all security documents like Blank chequebooks,
Demand Drafts, Pay orders, Pass Books etc.

RBI Audit:

The Central 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 Government Policy existing from time to time. The primary aim of this
audit is as follows.
Overall 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.

Soundness of Banks policies and procedures and effectiveness of the management to

safeguard point No.1 mentioned above as also whether they are on approved lines and in
conformity with socio-economic objectives.

Principal Enactments Governing Bank Audit:

Banking Regulation Act, 1949
State Bank of India Act, 1955
Companies Act, 1956
State Bank of India (Subsidiary Banks) Act, 1959
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
Regional Rural Banks Act, 1976
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
Information Technology Act, 2000
Prevention of Money Laundering Act, 2002
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002
Credit Information Companies Regulation Act, 2005
Payment and Settlement Systems Act, 2007

1) Preliminary work:










in which the bank operates. Thus, the auditor should familiarize himself with the relevant
provisions of applicable laws and ascertain the scope of his duties and responsibilities in
accordance with such laws. He should be well acquainted with the provisions of the Banking
Regulation act, 1956 in the case of audit of a banking company as far as they relate of
preparation and presentation of financial statements and their audit.
b) The auditor should also acquire knowledge of the economicenvironment in which the bank
operates. Similarly, the auditor needs to acquire good working knowledge of the services
offered by the bank. In acquiring such knowledge, the auditor needs to be aware of the many
variation in the basic deposit, loan and treasury services that are offered and continue to be






market conditions.

To do so, the auditor

needs to understand thenature of services rendered through instruments such as letters of cred
it, acceptances, forward contracts and other similar instruments.

The auditor should also obtain and understanding of the nature of books



maintained and the terminology used by the bank to describe various types of transaction and
operations. In case of joint auditors, it would be preferable that the auditor also obtains a
general understanding of the books and records, etc, relating to the work of the other auditors,
In addition to the above, the auditor should undertake the following:

I.Obtaining internal audit reports, inspection reports, inspectionreports and concurrent

audit reports pertaining to the bank/branch.

II. Obtaining the latest report of revenue or income and expenditure audits, where

In the case of branch auditors, obtaining the report given by the outgoing branch
manager to the incoming branch in the case of change in incumbent at the branch
during the year under audit, to the extent the same is relevant for the audit.

d) RBI has introduced and off site surveillance system for commercial banks on various





liquidity,asset quality, earnings, performance, insider trading etc., and hasindicated that such
reports shall be submitted at periodic intervals from the year commencing 1-04-1995. It will

be appropriate to be familiar with the reports submitted and to review them to the event that
they are relevant for the purpose of audit.
e) In a computerized environment the audit procedure may have toappropriately tuned to the
circumstances, particularly as the books are not authenticated as in manually maintained
accounts and the auditor may not have his in-house computer facility to taste the
software programmes. The emphasis would have to be laid on internal control procedure
related to inputs, security in the matter of access to EDP system, use of codes, passwords,
data inputs being prepared by person independent of key operators and other build-in
procedure for datavalidation and system controls as to ensure completeness andcorrectness of
the transaction keyed in. system documentation of the software may be obtained and
f) One set of tests that the auditor at both the branch level and headoffice level may apply
for audit of banks in analytical procedure.
2) Evaluation of internal control system:












andfall into limited categories/heads of account. It may, therefore, be moreappropriate that th

e evaluation of the internal control is made for each class/category of transaction. If the
exercise of internal control evaluation is properly carried out, it assist the auditor to determine
the effectiveness or otherwise of the control systems and accordingly enable him to
strengthen his audit procedures, and lay appropriate emphasis on the risk prone areas. Internal
control would include accounting control administrative controls.
a) Accounting controls:
Accounting controls cover areas directly concerned with recording of financial transactions









reliability.Internal accounting controls are also envisaging such procedures aswould determin
e responsibility and fix accountability with regard tosafeguarding of the assets of the bank. It
would not be out of place of mention that there is a distinction between accounting system
and internal accounting controls. Accounting system envisages the processing of the
transaction and events, their recognition, and appropriate recording. Internal controls are
techniques, method and procedures so designed and usually built into systems, as would
enable prevention as well as detection of errors, omissions or irregularities in the process of

execution and recording of transaction/events. The internal accounting controls as would

ensure prevention of errors, omissions and irregularities would include following:

Notransaction can be registered/recorded unless it is sanctioned/approved by the

designated authority


Built- in dual control/supervisory procedures ensure that there is an independent

automatic check on input/vouchers.


No single person has authority to initiate transaction and record through all stages
to the general ledger. Each day transactions are accurately and promptly recorded,
and the control and subsidiary records are kept balanced through personnel
independent of each other. The auditor would be well advised to look into other




detection of errors, omissions and irregularities,

inter alias in the following:


Missing/loss of security paper, stationery forms.


Accumulation of transactions/balances in nominal heads of accounts


suspense, sundries, inter-branch accounts, or other nominal head of accounts

particularly if there accounts particularly if these accounts are extensively used to
balance books, despite availability of information.

Accumulation of old/large unexplained/unsubstantiated entries inaccounts with Re

serve Bank of India and other banks and institutions.


Transaction represented by mere book adjustments notevidenced/substantiated or

upon non-honoring of contracts/commitments.


Origination debits I head office accounts/inter-branch accounts.


Analytical review procedure.


Serious irregularities pointer out in internal audit/inspection/special audit


Complaints/matters pending in the

vigilance/grievances cell, as


discrepancies in accounts of constituents, etc.


Results of periodic analytical review, if observed as adverse.

b) Administrative control:
These are broadly concerned with the decision making process and laying down of
authority/delegation of powers by the management. It may be noted that in the normal course,






donot conduct any banking business. They are generally responsible for administrative
policy decisions which are executed at the branch level.


3) Preparation of audit programme for substantive testing and its execution

Having familiarized him the requirements of audit, the auditor should prepare



programme for substantive testing which should adequately cover the scope of his work. In






should be given by the auditor to areas where, in his view, there areweaknesses in the internal
controls. The audit programme for the statutory auditors would be different from that of the
branch auditor. At the branch level, basic banking operation are to be covered by the audit.
On the other hand, the statutory auditors at the head office ( provisions for gratuity, interoffice accounts, etc.). The scope of the work of the statutory auditors would also involve
dealing with various accounting aspects and disclosure requirements arising out of the
branch returns.

4) Preparation and submission of audit report

The branch auditor forwards his report to the statutory auditors who have to deal with the
same in such manner, as they considered necessary. It is desirable that the branch auditors
reports are adequately in unambiguous terms. As far as possible, the financial impact of all
qualification or adverse comments on the branch accounts should be clearly brought out
in the branch audit report. It would assist the statutory auditors if a standard pattern of
reporting, say, head wise, commencing with assets, then liabilities and thereafter items related
to income and expenditure, is followed. In preparing the audit report, the auditor should keep
in mind the concept of materiality. Thus, items which do not materially affect the view
presented by the financial statements may be ignored. However, in the judgement of the
auditor, an item though not material, is contrary to accounting principles or any
pronouncements of the Institute of Chartered Accountants of India or in such as would
require a review of the relevant procedure, it would be appropriate for him to draw the
attention of the management to this aspect in his long form audit report. In all cases,
matters covering the statutory responsibilities of the auditor should be dealt with in the main
report. The LFAR should be used to further elaborate matters contained in the main report
and as substitute thereof. Similarly while framing his main report, the auditor should
consider, wherever practicable, the significance of various comments in his LFAR, where any

of the comments made by the auditor threr in is adverse, he should consider whether
qualification in his main report is necessary by using his discretion on the facts and
circumstances of each case. In may be emphasized that the main report

should be self-

contained document

Provisions Relating to audit

1. 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 who does not attract
any disqualification laid down therein. The auditor of a nationalized bank is appointed by the
board of directors of the bank concerned, whereas the auditor of a banking company
is appointed by the shareholder at the annual general meeting. Previous approval of
RBI for appointment of the auditor is required in the both cases. The auditors of the
state bank of India are appointed by RBI in consultation of the Central government. The
auditors of the subsidiaries of the state bank of India are appointed by the state bank of
India. It may be mentioned in the State bank of India Act 1955, specially provides for the
appointment of the two or more auditors. The auditors of the regional rural banks concerned
with the approval of the Central Government. The appointment of auditor of a co-operative
bank is governed by the relevant 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 be eligible for empanelment, a firm should, as on January 1 of the
relevant year, minimum eligibility norms relating to;

Number of fulltime partners,


Numbers of FCA partners,

III Number of years the firm has been existence,

IV. Period of minimum continuous association of partners with the firm,

V. Number of fulltime charted accountants,
VI. Number of professional staff,
VII. Experience of statutory audit of public sector banks having deposits of at
least the prescribed sum,
VIII. Experience of statutory audit of public sector undertakings. Atleast one partner should
have qualifications in computer audit.
2. Powers of the Auditor
The auditor of a bank has same powers as those of company auditor ,except that the power
the auditor of a co-operative are governed by the relevant Co-operative Societies Act in
matter of access to the books of accounts, documents, and vouchers. He is also entitle to
require from the offices of the bank such information and explanation as he may think
necessary for the performance of his duties. In case of Banking Company, he is entitle to
receive notice relating to any general meeting. He is also entitle to attend any general meeting
and to be heard there at on any part of the business, which concern him as auditor. It is
important to note that the auditor of nationalized bank may employ accountants or other
person at the expenses of bank to assist him in audit of accounts. Thus auditor of these banks
can appoint the auditor of Branches.
3. Auditors Report
The auditor of the nationalized bank, State bank of India or its subsidiary is required to report
to the central government and has to state the full in his report:
a) Whether, in his opinion, the balance sheet is a full & fair balance sheet containing all the
affairs of the bank, and in the case he had called for any explanation or information, whether
it has been given and whether it is satisfactory.
b) Whether or not the transactions of the banks, which have come to notice have
been within the powers of the banks;
c) Whether or not the returns received from the offices and branches of the bank
have been found adequate for the purpose of the audit;
d) Whether the profit or loss a/c shows a true balances of the profit or loss for the period
covered by such account; and

e) Any other matter which he considers should be brought to the notice of the central
government. The report of the auditor of the nationalized bank is to be verified, signed, and
transmitted to the central government. The auditor has also to forward a copy of the audit
report to the bank concerned and to the RBI.
In addition to the matters which he is required to state in his report under the companies Act,
the auditor of banking company incorporated in India has also to state the following in his
report to the shareholder:
a) Whether or not the informatio n and explanations required by him have been
found to be satisfactory;
b) Whether or not the transactions of the company which have come to his notice have been
within the powers of the company;
c) Whether or not the returns recei ved from branch offices of the company
have been found adequate for the purposes of his audit;
d) Whether the profit and loss account shows a true balance of profit or loss for the period
covered by such account;
e) Any other matter which he considers should be brought to the notice of the shareholders
of the company.
It may be noted that in in the case of a banking company the auditor has to specifically report
whether, in his opinion, the profit & loss account and balancesheet of the banking company
comply with the accounting standard referred to in sub- section (3C) of the sec 211 of the
Companies Act, 1956.
It may also be noted the Companies(Auditors Report) Order [CARO] 2003 (Revised in
2005) is not applicable to Banking Company.

Approach to banks audits:The guidance note on the audit of banks issued by the ICAI, recognize that the general
approach to audit of banks involves essentially the same stages as in any other audits.
However at each stage, the auditor has to take into the account the following special
characteristics of banks;
Custody of large volumes of monetary items, thereby requiring formal operating procedure,
well-defined limits on the individual discretions and rigorous internal control.
Large volume and variety of the transactions and continuing development of new products
and services, many of which may involve complex accounting.
Wide geographical dispersal of the operations with consequent difficulties in maintaining
uniform operating practices and accounting systems, particularly in the case of the overseas
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


Bank closing set:

It contains Balance Sheet, Profit & Loss A/c and other annexures.

Audit Report
Statutory Audit Report
Compliance Certificate
Form 3CA
Form 3CD

Long Form Audit Report (LFAR)

Memorandum of Changes

Report on Ghosh and Jilani committee recommendations

Other Certificates


Proper allocation of work among Audit Team should be done for smooth performance
of Audit.

A checklist of work to be done should be made with time frame, which should be
specifically adhered to.

Review latest available inspection report and concurrent audit report of branch.

Review closing circular issued by HO

Study business Mix of branch to decide the sample size and mix.

Study of significant policies of the branch and computer system.

Study the previous years Statutory Audit Report and LFAR

Ask for Stress List from Branch

Give special importance to clients whose names are in Stress List, or which are
highlighted in Concurrent Audit Report.

Keep a note of points you come across during audit, which are relevant for LFAR.


It contains the following Paragharhs:

Report on Financial Statements

Managements Responsibility for the Financial Statements
Auditors Responsibility
Report on other Legal and Regulatory Requirements.

It is enclosed with a Certificate of Compliance of guidelines of Reserve Bank of India

on Income recognition and Asset qualification.

It is addressed to the Statutory Central Auditors


Tax Audit Report is done under section 44AB of the IT Act

Form 3CA

Form 3CD

Annexure Part A

All the annexure of Form 3CD are to be enclosed, even if they are NIL.


A questionnaire formulated by RBI.

To be filled by auditor after discussing the points with Branch Head.

It is advisable to cover LFAR and audit program simultaneously. This would enable
auditor to consider effect of matters on LFAR and audit report.

Format of LFAR form may be found online easily.



Check if proper documentation is done while sanctioning of loans.

Check income recognition, Asset classification and Provisioning for the advances.

An asset is said to Non Performing if:

Interest and/or Installment remain overdue for more than 90 days.

If the account continuously remains in excess of sanctioned limit/drawing power.
No credit in account continuously for 90 days, or credits is not enough to cover the
interest debited during the period.
The installment or interest remains overdue for 2 crop season for short duration crops.
The installment or interest remains overdue for 1 crop season for long duration crops.
If credit facility is not renewed within 180 days from the due date.
Drawings are allowed against stock/book debt statement which are older than 180

Income Recognition Policy:

Income recognition from NPA is to be based on recovery.

If an account turns NPA, branch should reverse the interest already charged and not
Such interest to be recorded in Dummy Legder.

Analysis of entries outstanding in:

Suspense Account
Sundry Debtors
Sundry Creditors
Sundry Deposits.

Check for addition/deletion of assets.

Check for balances held with other banks with certificate of

closing balance from respective banks.

Check provisioning of expenses as on cut-off date.


Contingent Liabilities

Whether cash in Balance sheet tallies with physical Cash Book


Check whether all income are properly accounted for.

Check if income on NPAs is not recognized.

Check if Bank has charges Penal interests on default cases.

Verify receipt of Locker Rent

Vouch for expenses.

Check if expenses are grouped in proper headings.

Check whether TDS is deducted on expenses as per applicable sections and deposited
to the credit of government.

Check items of Misc Expenses.

Whether Reverse Charge on Service Tax has been created?


There should be clear justification for every change suggested by auditor

Debit and Credit side of MoC must tally.

Total of reclassification of assets should be brought out in MoC

For NO CHANGE, NIL MoC should be filed.

No. Dr Cr In respect of Income & expenditure Yes/No xx xx In respect of Balance

Sheet Items Yes/No xx xx In respect of classification of advances Yes/No xx xx In
respect of closing return where the effect to be given is within the return itself other
than Income & Expenditure and Balance Sheet Yes/No xx xx

Physical verification of cash on date of Audit. Also check if cash holding of branch is
within retention limit specified by HO.

Verify KYC Compliance of Bank.

Check whether any expense exceeding Rs 20000.00 is paid in cash. Get a certificate
for 40A(3) Compliance.

Physical verification of stationery and confirmation of balance as per CBS.

Obtain Management Representation Letter from Bank

Obtain Man-Days Certificate from Bank


Item Important Audit Checks
A. Verification of Profit & Loss Account Item
Income/ Expenditure Verify:

Short debit of interest/ commission on advances;

Excess credit of interest on deposits;

In case the discrepancies are existing in large number of cases, the auditor should
consider the impact of the same on the accounts;

Determine whether the discrepancies noticed are intentional or by error; Check

whether the recurrence of such discrepancies are general or in respect of some
specific clients;

Proper authority in sanction and disbursement of expenses as also the correctness of

the accounting treatment given as to revenue/ capital/ deferred expenses.

Check accrual of income/ expenditure especially for the last month of the financial

Divergent Trends:

Divergent trends in income/ expenditure of the current year may be analysed with the
figures of the previous year.

Wherever a divergent trend is observed, obtain an explanation along with supporting

evidences like monthly average figures, composition of the income/ expenditure, etc.

B. Verification of Balancesheet Item

1. Cash & Bank Balances:

Physically verify the Cash Balance as on March 31, 2014 or reconcile the cash
balance from the date of verification to March 31, 2014.

Confirm and reconcile the Balances with banks as on March 31, 2014.

2. Investments:

Physically verify the Investments held by the branch on behalf of Head Office and
issue certificate of physical verification of investments to banks Investments

Check receipt of interest and its subsequent credit to be given to Head Office.

3. Advances Provisioning:

As per RBI norms, unrealised interest on NPA accounts should be reversed and not
charged to Advance Accounts. Reversal of unrealised interest of previous years in
case of NPA accounts is required to be checked

Partial Recovery in respect of NPA accounts should be generally appropriated against

principal amount in respect of doubtful assets.

4. Fixed Assets:

Check Inter-branch transfer memos relating to Fixed Assets and whether they have
been correctly classified in the accounts and depreciation accounting thereof.

5. Inter Branch Reconciliation (IBR):

Understand the IBR system and accordingly prepare an audit plan to review the IBR
transactions. The large volume of Inter Branch Transactions and the large number of
unreconcile entries in the Banking System makes the area fraud-prones. Check up
head office inward communication to branch to ascertain date upto which statements
relating to inter branch reconciliation have been sent

6. Deposit
i. Term
ii. Saving
iii. Current
Verify transactions during the year relating to:

New Accounts opened;

Accounts closed;

Dormant Accounts;

Interest calculations;

Test check account statements for unusual/ large/ overdraft transactions;

Overdue Term deposits & banks policy for its renewal;

Accrual of interest;

RBI Norms for Non-resident deposits & its operations - with due importance
to opening and operation of accounts like NRE, NRNR, FCNR, RFC, etc.;

Interest on various types of deposits; Tax Deducted at Source.

Large deposits placed at the end of the year (probable window dressing).

Examine unusual trend in account opening or account closing, dormant

accounts that have suddenly been reactivated by heavy cash withdrawals or
deposits, overdrawing, etc.

Examine interest trends as compared to average annual deposits (monthly

average figures).

Review the Master Circular on Maintenance of Deposit Accounts issued by

RBI dated March 1, 2004 attached hereto.

7. Advances

Review monitoring reports (irregularity reports) sent by the branch to the controlling
authorities in respect of irregular advances.

Review appraisal system, Files of large as well as critical borrowers, sanctions,

disbursement, renewals, documentation, systems, securities, etc.

Review on test check basis operations in the Advances Accounts.

Compliance of sanction terms and conditions in the case of new advances.

Whether the borrower is regular in submission of stock statements, book debt

statements, insurance policies, balance sheets, half yearly results, etc. and whether
penal interest is charged in case of default/ delay in submission of such data.

Charge of interest and recovery for each quarter or as applicable to be verified.

Review the monitoring system, i.e. monitoring end use of funds, analytical system
prevalent for the advances, cash flow monitoring, branch follow-up, consortium
meetings, inspection reports, stock audit reports, market intelligence (industry
analysis), securities updation, etc.

Check classification of advances, income recognition and provisioning as per RBI

Norms/ Circulars.

Examine interest trends as compared to average annual advances (monthly average


Scrutinise the final advances statements with regard to assets classification, security
value, documentation, drawing power, out standings, provisions, etc.

Check whether Non-Fund based (Letter of Credits/ Bank Guarantees) exposure of the
borrowers is within the sanctioned limits.

Compare projected financial figures given at the time of project appraisal with actual
figures from audited financial statements for relevant period and ascertain reasons for
large variance.

Take into account the assessment of RBI if the regional office of RBI has forwarded a
list of individual advances to the bank, where the variance in the provisioning
requirements between the RBI and the bank is above certain cut off levels

Necessity for Measurement of Non-Performing Assets:

The repayment of interest/installment was either not easily forthcoming as per schedule or
recovery. Consequently, banks found it increasingly prudent not to reckon such interest/other
charges as part of their income and pay tax on unrealized income. Rather they chose to cease
charging interest in such accounts of bad/doubtful nature or where the prospectuses of
recovery were bleak
RBI Health Code System and Relation to NPA:
The Reserve Bank of India introduced the Health Code System of classification of borrower
accounts by banks in the year 1985. Based on this classification of advances, it was decided
by the Reserve Bank in the years 1989 and1990 that banks should cease charging interest
compulsorily in account under Health Code 5 to 8 i.e. Recalled, Suit-filled, Decreed and
bad/doubtful and selectivity, taking into account the availability and readability of security, in
accounts under Health Code 4 i.e. Stick: Non-viable/Sticky

Asset Classification
Performing Asset:
Performing asset is one which generates periodical income and payments, as and when due or
within the minimum lag of two quarters. This is being cut down to one quarter from April
Non-Performing Asset (NPA):
The problem of NPA 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 Reserve
Bank of India has drawn upon the international standards of accounting for the purpose of
NPA treatment of credit facilities. A loan asset will become NPA if the due amount is not paid
within one quarter.
Current position of NPA triggers.

Term Loan

Interest and/or installment remain overdue for a period of

more than 90 days.

Overdraft/Cash Credit

Account remains out of order for a period of more than 90


Bill purchased/Discounted

Overdue for more than 90 days from its due date.

Agriculture Loans

Interest and/or installment remain overdue for a period of

more than 2 harvest seasons but not more than 2 half

Any Amount

To be received remains overdue for a period more than 90


Categories of NPA

Sub-standard Assets:
A sub-standard asset was one, which was classified as NPA for a period not exceeding two
years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA
for a period less than or equal to 18 months and from 2005 it is further reduced to 12 months.
Doubtful Assets:
A doubtful asset was one, which remained NPA for a period exceeding two years. With effect
from 31 March 2001, an asset is to be classified as doubtful, if it remained NPA for a period
exceeding 18 months. With effect from March31, 2005, an asset would be classified s
doubtful if it remained in the sub-standard category for 12 months.
Loss Assets:
Assets which are classified as bad and non-recoverable by the concerned bank or by Statutory
Auditors or by RBI Inspectors but the amount have not been written off wholly. In 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 Sheet but under
the heading Loss Asset although there may be some salvage or recovery value.
The current position of providing provision on the various assets is as follows:
Standard assets

General Provision 0.40% of Balance Outstanding

General provision of 10% of Balance outstanding without considering DICGC or

Doubtful Assets

ECGC Guarantees
100% of Unsecured portion after considering the realizable value of security which
should be realistic. In addition to the above provision on the secured portion should

Loss Assets

be made as under: Up to 1 year 20%, 1year to 3 years 30%, More than 3 year 50%
100% on the Balance outstanding

Checklist to verify validity of NPA classification.

An auditor should ensure that branches for treating an account as NPA do the following or
otherwise, irrespective of the cutoff point of limit outstanding balance. Obtain the balance

book for loans, cash credit and overdraft. This gives you the exhaustive 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. Ensure the following points during your scrutiny of the account.
Both interest and installments, wherever applicable should be taken into account for assessing
the NPA status of an account. If a particular facility of a borrower becomes NPA. Then all the
facilities granted to the borrower should be treated as NPA.
Advances backed by Central/State Governments should not be treated as NPA. Advances
against banks fixed deposits, NSCs, IVPs, KVPs, and life Policies eligible for surrender,
should not be treated as NPAs.
In the case of agricultural advances, NPA status should be decided upon after considering the
recovery of interest dues for two harvest seasons.Net-worth of borrower/guarantor and
availability of security is no consideration for treating an account as NPA or otherwise, as the
concept is based on record of recovery of interest/installments.
Staff loans should not be treated as NPAs, except in exceptionally problematic cases.

The project the position of Indian banking system as well as the principal laid down by the
Basel Committee on banking supervision. This assessment was done in seven major areas,
which are core principals, concurrent audit, internal audit, deposit, loan accounting
and transparency and foreign exchange transaction. The project concluded that, given the
complexity and development of Indian banking sector, the overall level of compliances with
the standards and codes is of high order. This project gives the correct ideas about how the
major areas can be found by way of effective auditing system i.e. errors, frauds,
manipulations etc. form this auditor get the clear idea show to recommend on the banks
position. Project also contain that how to conduct of audit of the banks, what are the various
procedure through which audit of banks should be done. Form auditing point of view, there is
proper follow up of work done in every organization whether it is banking company or any
other company or any other company there no misconduct
of transactions is taken places for that purpose the auditing is very important aspect in todays
scenario form company and point of view.