POSTGRADUATE PROGRAM

ADVANCE AUDITING AND EDP

A Term Paper

For partial Assignment Part 1 for Advanced Auditing and EDP

Group Members Id No.

1. ABEL BERHANU 1083/21

2. TIGIST TAMERAT 1095/21

3. MARKIEW SHIFERAWE 1075/21

Nov 14/2022
ADMAS UNIVERSITY
Introduction

A financial Statement audit comprises the examination of an entity’s financial statements and
accompanying disclosure by an independent auditor. The result of this examination is a report by
the auditor, attesting to the truth and fairness of presentation of the financial statements and
related disclosures.

In preparing financial statement, company’s management makes implicit or explicit claims

regarding:

 Completeness;
 Cut-off;
 Existence/occurrence;
 Rights and obligation; and
 Presentation and disclosure

Of assets, liabilities, equity, income, expense and disclosure in accordance with the applicable
accounting standards.

Banking sector is the back bone of any economy as it is essential for sustainable socio-economic
growth and financial stability in the economy. The banking sector is also crucial as it deals with
mammoth amounts of public monies and is highly sensitive to reputational risk. Like all economic
activities, the banking sector is also exposed to various risks in its operations.

Understanding of accounting system in banks

From the time that customers had to physically visit and deal with a bank, there is a sea change in
banking as use of technology and its continuous evolution has enabled banks to reach their
customers in providing them the convenience and comfort of anytime-anywhere-banking by letting
them access their information/data on real time basis, as stored in a safe and secure environment
on the bank’s servers. With many customers having access to Internet and mobile connectivity,
monetary transactions from inception to finish have become expeditious through E-banking; but
for Core banking technology and extensive advancement therein and the availability and
extensive use of technology tools, banks could not have achieved such phenomenal and
accelerated growth, and could not have ventured into and offered a wide range of innovative
products and services to their customers. The transactions in banks have become voluminous
and it needs to be ensured that in the system of recording, transmission and storage of
information/ data, integrity thereof is optimally maintained and control systems ensure that the
same is free of errors, omissions, irregularities and frauds. Considering the challenges of
technology, bank managements continuously Endeavour to make their internal control systems
robust, safe and secure as well as convenient and expeditious for the customers.

Banks may be divided into three board categorizes based on the level of computerization:

 Non-computerized banks
 Partially computerized banks
 Fully computerized banks.

Bank audit approach

Based on the nature and level of operations, nature of adverse fetuses, level of compliance based
on previous reports and audit risks based on inadequacy in or breach of internal controls and the
familiarization exercise carried out, an audit plan should be drawn up.

A Bank should have appropriate controls to mitigate its risks, including effective segregation of
duties (particular, between front and back offices), accurate measurement and reporting of
positions, verification and approval of transactions, reconciliation of positions and result, setting
up limits, reporting and approval of exceptions, physical security and contingency planning.

Procedure of Bank Audit

Audit Procedure

1. Aspects of Internal control

 Advances should be made only after evaluating creditworthiness of the borrowers and
obtaining sanction from the proper authorities of the bank.
 All the loan documents like promissory notes, letters of hypothecation, guarantee letter,
etc. should be executed by the parties before advances are made.
 While determining the loan amount to be sanctioned, sufficient margin should be kept
against securities taken so as to cover any decline in the value thereof and also to comply
with RBI directives.
 Securities should be received and returned by responsible officer and should be kept in
the joint custody of at least two responsible officers.
  Securities requiring registration should be registered in the name of the bank.
 In the case of physical possession of goods as security, the goods should be test checked
at the time of receipts. In respect of hypothecated goods not in possession of the bank,
surprise checks should be made.
 Personal inquiries should be made so as to determine market value of goods.
 For any increase/decrease in the value of securities, drawing power should be adjusted.
All the accounts should be kept within both the drawing power and the sanctioned limit at
all times.
 All irregular accounts should be brought to the notice of the H.O. regularly.
 The operation in each advance should be reviewed at least once every year.
 There should exist a proper system for post disbursement supervision and follow-up.
 Classification of advances should be made as per RBI Guidelines.

2. Evaluation of Internal Control

(a) Examine the following:

 loan documentation,
 Validity of the recorded amounts;
 existence, enforceability and valuation of the security;

(b) Ensure compliance with the

 Terms of sanction
 End use of funds.
 Loan Policy of Bank as well as RBI norms including appropriate classification and
provisioning

(c) Review the operation of the accounts.

3. Substantive Audit Procedure

 To verify that amounts included in balance sheet in respect of advances are outstanding at
the date of the balance sheet.
 To verify that advances represent amount due to the bank.
 To ensure that outstanding amount is appropriately supported by Loan documents.
 To ensure that there are no unrecorded advances.
  To verify the appropriateness of basis of valuation of advances.
 To ensure that the recoverability of advances is recognized in their valuation.
 To check that the advances are disclosed, classified and described in accordance with
recognized accounting policies and relevant statutory and regulatory requirements.
  Ensure that appropriate provisions towards advances have been made as per the RBI
norms.

Types of Audit Reports

1. Statutory

 In the case of a nationalized bank, the auditor is required to make a report to the Central
Government in which the auditor should state the following:
 Whether, in the auditor’s opinion, the balance sheet is a full and fair balance sheet
containing all the necessary particulars and is properly drawn up so as to exhibit a true
and fair view of the affairs of the bank.
 In case the auditor had called for any explanation or information, whether it has been
given and whether it is satisfactory.
 Whether or not the transactions of the bank, which have come to the auditor’s notice, have
been within the powers of that bank.
 Whether or not the returns received from the offices and branches of the bank have been
found adequate for the purpose of audit.
 Whether the profit and loss account show a true balance of profit or loss for the period
covered by such account.
 Any other matter which the auditor considers should be brought to the notice of the Central
Government.

2. Additional reports to be issued by Statutory Auditor

 Report on adequacy and operating effectiveness of Internal Controls over Financial

Reporting in case of banks which are registered as companies under the Companies Act
in terms of Sec.
 Long Form Audit Report.
 Report on compliance with SLR requirements.
 Report on whether the treasury operations of the bank have been conducted in
accordance with the instructions issued by the RBI from time to time.
  Report on whether the income recognition, asset classification and provisioning have been
made as per the guidelines issued by the RBI from time to time.
 Report on whether any serious irregularity was noticed in the working of the bank which
requires immediate attention.
 Report on instances of adverse credit-deposit ratio in the rural areas.

3. LFAR

 The long form Audit Report has to be furnished by the auditor of a bank in addition to the
audit report as per the statutory requirement.
 The matters which the banks require their auditor to deal with in the form of Long Form
Audit Report have been specified by the RBI.

 The LFAR is to be submitted before 30th June every year. To ensure timely submission of
LFAR, proper planning for completion of the LFAR is required. While the format of LFAR
does not require an executive summary to be given, members may consider providing the
same to bring out the key observations from the whole document.

4. Reporting of Fraud

 Circular issued by RBI regarding liability of accounting and auditing profession, provides

that “If an accounting professional, whether in the course of internal or external audit or in
the process of institutional audit finds anything susceptible to be fraud or fraudulent activity
or act of excess power or smell any foul play in any transaction, he should refer the matter
to the regulator. Any deliberate failure on the part of the auditor should render himself
liable for action”.
 This requirement is applicable to all scheduled commercial banks excluding Regional
Rural Banks. Auditor is not expected to look into each and every transaction but to
evaluate the system as a whole.

5. Concurrent Audit

 Banks deals with a large number of transactions on a daily basis whose examination is
also necessary on a continuous basis for determining the accuracy of the financial
 statement. For conducting such audit an external auditor is appointed by the bank known
as a concurrent auditor who performs an audit of the transaction on a monthly basis.
 The main objective of conducting a concurrent audit is to ensure compliance with the
internal systems, procedures and the guidelines of the bank. Concurrent audit is always
performed on a continuous basis to examine whether proper guidelines are following by
the banks or not such as proper documentation, proper cash verification, NPA
classification, etc.

6. Internal Audit

 Along with the concurrent audit, banks also perform an internal audit for which they
appoint an internal auditor to make a regular check on the financial activities of the bank
throughout the year.
 One of the prominent sectors of internal audit is information system audit, which is
becoming a necessary part of a banking system with the rapid growth of computerized
banking functions, and it is important to keep an eye on such system on timely intervals to
check their work ability.
 Therefore, the auditor should also have a basic knowledge of banking software’s so that
he may identify the errors easily without any help of bank employee as they sometimes
also try to distract the auditor for overlapping their mistakes.
Conducting an Audit

1. Initial Considerations

Initial Considerations include considerations of:

1. Acceptance & Continuance

2. Declaration of Indebtedness
3. Internal Assignments in Banks by Statutory Auditors
4. Terms of Audit Engagements
5. Communication with Previous Auditor
6. Establish Engagement Team

2. Understanding the Bank and its Environment

Auditor is required to obtain understating of:

 Bank and its Environment including Internal Control

 Bank’s Accounting Process
 Risk Management Process
3. Identifying and Assessing RMM

Auditor is required to identify and assess following risk:

 Risks of Material Misstatements

 Risk of Fraud including Money Laundering
 Specific Risks
 Risk Associated with Outsourcing of activities.

Engagement Team Discussions

 To gain better understanding of banks and its environment, including internal control, and
also to assess the potential for material misstatements of the financial statements.
 All these discussions should be appropriately documented for future reference.
 The discussion should be done on the susceptibility of the bank’s financial statements to
material misstatements.
 These discussions are ordinarily done at the planning stage of an audit.

Benefits of discussion

 Opportunity for team members to share their insights based on their knowledge of the
bank and its environment.
 Opportunity for team members to exchange information about the bank’s business risks.
 To make an understanding amongst the team members about effect of the results of the
risk assessment procedures on other aspects of the audit, including decisions about the
NTE of further audit procedures.

Matters to be discussed

 Errors that may be more likely to occur;

 Errors which have been identified in prior years;
  Method by which fraud might be perpetrated by bank personnel or others within
particular account balances and/or disclosures;
 Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks;
  Need to maintain professional skepticism throughout the audit engagement;
  Need to alert for information or other conditions that indicates that a material
misstatement may have occurred.

Establish the Overall Audit Strategy

 As required by SA 300, establish the overall audit strategy, prior to the commencement
of an audit; and
 Involve key engagement team members and other appropriate specialists while
establishing the overall audit strategy, which depends on the characteristics of the
audit engagement.

Develop the Audit Plan

 Develop an overall audit plan which covers details of nature, timing and extent of audit
procedures planned to be performed.

Execution

 Execution stage considers the following:

 Engagement Team Discussions
 Response to the Assessed Risks
 Establish the Overall Audit Strategy
 Audit Planning Memorandum
 Determining Audit Materiality
 Appropriateness of Going Concern

Reliance/Review of other Reports

 Auditor should consider the adverse/qualified remarks, if any, appearing in the following:
 Previous audit reports.
 Internal inspection reports.
  RBI inspection reports.
 Concurrent/Internal audit report.
 Report on verification of security.
 Any other internal reports specially related to particular accounts.

Assessing Risk of Fraud

 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the

auditor’s objective is to identify and assess the risks of material misstatement in the
financial statements due to fraud, to obtain sufficient appropriate audit evidence on those
identified misstatements and to respond appropriately.Assessing Risk of Fraud
 The attitude of professional skepticism should be maintained by the auditor so as to
recognize the possibility of misstatements due to fraud.

Audit of Advances

Disclosure Requirements

1 .Nature wise

 Bills purchased and discounted

 Cash credits, Overdrafts and loans repayable on demand

 Term Loans

2. Security wise

 Secured by tangible assets

 Covered by Bank/Government guarantees

 Unsecured

Classification as per prudential norms

1. Standard assets
  Assets which does not disclose any problem and does not carry more than normal risk.

2. Sub-standard assets

 Asset which has been classified as NPA for a period not exceeding 12 months.

3. Doubtful assets

 Doubtful assets Asset which has remained NPA for a period exceeding 12 months.

4. Loss assets

 Asset in respect of which loss has been identified by the bank or internal auditors or the
RBI inspection, but the amount has not been written off, wholly or partly.

Creation of Security

1. Primary security

 Security offered by the borrower for bank finance or the one against which credit has been
extended by the bank.

2. Collateral security

 It is an additional security and can be in any form i.e. tangible or intangible asset, movable
or immovable asset.

Mortgage

 Registered Mortgage can be affected by a ‘Mortgage Deed’ signed by the mortgagor.

 Equitable mortgage is affected by a mere delivery of title deeds or other documents of title
with intent to create security thereof.

Pledge
  It involves physical delivery of goods by the borrower to the lending bank with the intention
of creating a charge thereon as security for the advance.
 Legal ownership of the goods remains with the pledge while the lending banker gets
certain defined interests in the goods.

Hypothecation

 Hypothecation is the creation of an equitable charge, which is created in favor of the

lending bank by execution of hypothecation agreement in respect of the movable
securities belonging to the borrower.
 Borrower holds the physical possession of the goods. Neither ownership nor possessions
are transferred to the bank.
 Borrower periodically submits statements regarding quantity and value of hypothecated
assets (like stocks, debtors, etc.) to the bank on the basis of which the drawing power of
the borrower is fixed.

Lien

 Lien is creation of a legal charge with consent of the owner, which gives lender a legal
right to seize and dispose/liquidate the asset under lien.

Assignment

 It is a transfer of an existing or future debt, right or property belonging to a person in favor

of another person.
 Only actionable claims (i.e., claim to any debt other than a debt secured by a mortgage of
immovable property or by hypothecation or pledge of movable Prudential Norms

How to Be Prepared for a Bank Audit 

In recent years, technology and software have been developed to help financial institutions
properly conduct their internal bank auditing procedures. There are also teams of experts to assist
in handling a bank audit request. 

The following are the steps to take when required to participate in an external bank audit. 
1. Review the request.

Upon receiving a request for an external bank audit, be sure to carefully review it and make sure
you understand everything that is required. Note any time restrictions or specific requirements.
Reach out to your point of contact for clarification if necessary. 

2. Discuss with key team members. 

Brainstorm your strategy and what needs to be done with everyone that needs to be involved.
This might include financial executives and accounting managers who are directly connected to
the information needed to complete the request.

3. Bring on legal representation if necessary .

In certain instances, you may need to bring on trusted legal counsel. This is necessary if any
customer, employee, confidentiality, or criminal problems arise. 

4. Create safe storage for all documentation.

To make things more efficient and convenient for you and your team, set up a network storage
space and physical site for all necessary documentation. Make sure that it is secure and that only
certain personnel are able to access it. 

5. Organize data.

An it staff can help you gather all the important data related to your case from off-site locations or
back-up drives. 

6. Check the data for validation.

Be sure to cross-check all of the information with pertinent reports in your system to ensure
accuracy and completion. You want to check bank statements, payment transaction reports, or
the general ledger. Use as many validation methods as possible. 

7. Create an information package.

Once all of the information you need is gathered and validated, combine it into an information
package. It is wise to add a summary letter of all of your supporting documentation, findings, and
legal responses that might’ve been included in the request. 

8. Submit your information package.

This step will depend on the type of audit that was requested. Keep in mind – a process audit will
require an on-site walk-through examination. If it isn’t a process audit, the information can be
transmitted through a third-party auditing company or your audit representative. 

9. Request an audit-compliance letter for your own records.

Upon completion of submitting your audit information package, be sure to request an audit-
compliance letter from your bank audit contact. This will prove that you observed and complied
with the audit request and divulge any changes that were made due to the audit findings.   

The audit of payables, accruals, provisions and contingent liabilities

Key assertions

 Existence the payables actually exist;

 Rights and obligations  the company has obligations to settle all payables;
 Valuation and allocation  payables are included in the financial statements at the
correct amount;
 Completeness all payables relating to the period have been accounted for.
 Classification and understandability all payables are appropriately disclosed in the
financial statements.
Completeness is usually the key consideration when testing payables due to the timing and
nature of the items included. Provisions and accruals accounting do offer an opportunity for
creative accounting to manipulate reported profits. Auditors therefore have to consider indicators
that additional liabilities may exist, such as:
 payables not including known major suppliers and those accrued for in the prior year;
 payables not including the significant suppliers from the equivalent list last year;
 Traditionally recurring accruals not being made, e.g.: rent, utilities, telephone, etc.
 Expected finance accruals not being made, e.g.: hire purchase, mortgages, loans etc.
 Non-provision of tax balances, including: corporation tax, payroll taxes, sales taxes, etc.
 Suppliers revealed only after a review of payments after the year-end; and
 Suppliers revealed by a review of unpaid invoices at and after the year-end.
Classification and understandability
 Inspect financial statements to ensure that all liabilities from the nominal ledger have been
adequately and accurately disclosed.
Existence
 Circularize a sample of trade payables to confirm the balance at the end of the year (this is
uncommon and would only be performed in the absence of supplier statements).
 Inspect year-end statements of accounts sent by suppliers. Any differences between the
statement and the nominal ledger should be reconciled.
 Trace a sample of payable/accruals balances to purchase invoices and/or contracts. In
particular identify the date of receipt of the invoice and any evidence of payment (such as
signatures).
Completeness
 Cast the payables ledger to ensure its accuracy.
  Inspect year-end statements of accounts sent by suppliers. Any differences between the
statement and the nominal ledger should be reconciled.
 Investigate any major (by value of purchases in the year) or known regular suppliers that
were shown on last year's payables listing but do not have a balance showing in this
year's list of balances.
 Enquire of management why the above suppliers do not feature in this year's payables list.
 Inspect after date payments in the cash book and bank statements and ensure they have
been provided for at the year-end, as appropriate.
 Perform analytical procedures on the list of payables, such as: payables days, payables as
a percentage of purchases, monthly payables levels. Investigate any unusual variances.
 Compare the purchase ledger control account to the list of payables. Reconcile any
variations.
 Inspect the list of balances for debit balances. Discuss results with management

Supplier statement reconciliations

For those suppliers’ balances selected for testing:

 obtain supplier statements at the balance sheet date

 compare with balance according to the client’s records
 Seek explanation for differences from client staff.

There are generally two main explanations for differences:

1 Timing differences:

 Invoices not yet received by the client.

 Payments not yet received by the supplier.
 Returns and credit notes not yet appearing on the supplier’s statement.

2 Errors
  Supplier errors that will remain as part of the reconciliation until the supplier corrects
them.
 Client errors, which the client needs to adjust.

Goods received accrual– invoices received but not yet processed –perhaps awaiting
authorization, or perhaps ‘Mary does the postings on Tuesdays’ which means that invoices
arriving between Wednesday and Monday are known about but not yet entered on the system.

 Goods received not invoiced– the client accrues for all goods received but does not post to
the purchase ledger until the invoice is received.

Cheques in the drawer– not a good idea to have signed cheques lying around, but sometimes for
relatively short periods there may be adelay in sending out the cheque. Sometimes, with systems
with

Automated payment runs, the accounts staff do not know how to prevent cheques being produced
and the number of ‘cheques in the drawer’ can be quite substantial for long periods. This is a very
bad idea, raises questions about the accounting staff’s competence, and, on the assumption the
amounts are material, will mean the amounts will have to be added back to both bank and
payables.

Accounts payable and accruals – other evidence

 Obtain a list of the individual balances from the payables ledger, check the cast and agree
the total to the trade payables figure in the draft financial statements
 Ensure that balances have been correctly extracted from the payables ledger
 Obtain a list of debit balances in the payables ledger and obtain explanations from
management
 Agree brought forward figures to last year's audit file

Cutoff

Select a sample of GRN's immediately prior to the year end and included in yearend payables,
and ensure that the goods are included in year-end inventories

Accruals
Review relevant invoices when received after the balance sheet date. Ifnone are received,
compare with previous periods.

 Obtain the list of accruals from the client; cast it to confirm arithmetical accuracy.
 Agree the figure per the schedule to the general ledger and financial statements.
 Agree the calculation of the accrual by reference to supporting documentation e.g.
previous period invoice

Tax balances

 Corporation/Profits taxes – agree computations.

 Payroll taxes – agree to payroll records.

Overdrafts, loans, etc.

 Agree to bank confirmations.

Leases, hire purchase creditors

 Agree details to underlying agreement.

Income statement entries related to accounts payable

 Accruals will have a direct impact on the income statement accounts they relate to –
ensure the postings have been put through correctly and any opening accruals have been
properly reversed.
 Some accruals may themselves lead to additional accruals, e.g. accrued bonuses payable
to directors and staff, may lead to additional employer’s social security charges.
 For all interest bearing accounts, loans, overdrafts, etc., ensure the correct accrual is
made for interest payable.

Loan payables

 Agree loan balance to the loan statement.

 Agree interest payments to the loan agreement and the bank statements.
  Analyze relevant disclosures of interest rates, amounts due (e.g. between current and
noncurrent payables) to ensure complete and accurate.
 Recalculate the interest accrual to ensure arithmetical accuracy.

Provisions and contingencies

Provisions are a form of payable where the amount or timing of payment is Uncertain. As such
they are harder to audit.

Where the likelihood of payment is only possible, rather than probable, no amounts will be
entered in the accounts. However, the matter (contingent liability) must be adequately
disclosed.

 Discuss the matter giving rise to the provision with the client to verify whether an
obligation exists.
 Obtain confirmation from the clients lawyers as to the possible outcome and probability
of having to make a payment.
 Review subsequent events. By the time the final audit is taking place the matter may
have been settled.
 Obtain a letter of representation from the client as the matter is one of judgment and
uncertainty.

The audit of share capital, reserves and directors' remuneration

Key assertions

 Existence  do share capital balances and reserves actually exist;

 Rights and obligations  the company has obligations regarding equity balances;
 Valuation and allocation  equity is included in the financial statements at the correct
amount;
 Completeness all equity balances, directors' remuneration and other transactions with
directors have been accounted for.
 Classification and understandability relevant disclosures have been made in the financial
statements, particularly with regard to directors' remuneration.

Share capital

 Agree authorized share capital and nominal value disclosures to underlying shareholding
agreements, such as company memorandums, articles of association and lists of
registered members;
 Inspect cash book for evidence of cash receipts from share issues;
 Inspect terms of share certificates and reconcile to cash receipts and new share capital
totals;
 Inspect board minutes to identify if any dividends have been declared prior to the year-
end;

Directors' remuneration
  Reconcile reported directors' salaries to payroll records;
 Inspect board minutes for evidence of directors' bonus announcements;
 Reconcile directors' bonuses to cash payments in the cash book;
 Inspect board minutes for approval of related party transactions;
 Obtain a written representation from directors that they have disclosed all related party
transactions and director remunerations to the auditor.

Reserves

 Reconcile closing profit reserves to: opening reserves, profit for the year and dividend
paid and proposed during the year;
 Compare opening reserves to closing reserves reported in the prior year's financial
statements;
 Reconcile movements in revaluation reserves to the non-current asset register;
 Corroborate revaluations by comparing to independently produced reports

Audit program for capital stock

 The following procedures are typical of the work required in many engagements for the
verification of capital stock.
 Obtain an understanding of internal control over capital stock transactions
 Examine articles of incorporation, bylaws, and minutes for provisions in relation to capital
stock.  ( To determine existence, completeness, and obligations)
 Obtain or prepare analyses of the capital stock accounts. ( To establish clerical
accuracy)
 Accounts for all proceeds from stock issues. ( To establish existence, completeness and
obligations and valuation )
 Confirm shares outstanding with the independent register and stock transfer agent.( To
establish existence, completeness and obligations )
 For a corporation acting as its own stock register and transfer agent, reconcile the
stockholders records with the general ledger. ( To determine existence, completeness,
and obligation)
 Determine compliance with stock option plans and with other restrictions and
preferences pertaining to capital stock.( To establish presentations and disclosure)
 Capital stock transactions are usually few in number; consequently, the auditors usually,
substantiate all transactions rather than obtaining evidences to reduce their assessment
 of control risk. In additions to the proceeding steps, the auditors must, determine the
appropriate financial statements presentation of capital stock.

Audit of retained earnings and dividends

 The audit work of retained earnings and dividends includes two major steps. These are:
 The review of retained earnings and any appropriation of retained earnings- the auditors
should review the changes in retained earnings during the year.

Credits to retained earning accounts ordinarily represent amounts of net income transferred from
the income summary account.

Debit to Retained earnings accounts ordinarily includes entries for net losses, cash and stock
dividends, and for the creations or enlargement of appropriated reserve.

Appropriation of retained earnings requires specific authorization by the board of directors. The
only verification necessary for these entries is to ascertain that the dates and amounts correspond
to the actions of the board.

The review of dividend procedures for both cash and stock dividends- - in the  verification of cash
dividends, the auditors usually, will perform the following   steps

a. Determine the dates and amounts of dividends authorized

b. Verify the amounts paid
c. Determine the amount of any preferred dividend is arrears
d. Review the treatment of unclaimed dividend checks.

The auditors’ analysis of divided declarations may reveal the existence of cash dividends declared
but not paid. These dividends must be shown as liabilities in the balances sheet. The auditors
also may review the procedures for handling unclaimed dividends and ascertain that these items
are recognized as liabilities. The amount of any accumulated divided in arrears on preferred stock
should be computed. In the verification of dividend there is additional responsibility of determining
that the proper amounts have been transferred from retained earnings to capital stock and paid-
in-capital accounts for both large and small stock dividends.

Presentations- the presentations of capital stock in the balance sheet include a complete

description of each issue. Information to be disclosed includes the title of each issue; par or stated
value; dividend rate, in any; dividend preference; conversion and call provisions; number of
shares authorized, issued and in treasure; dividends in arrears if any ; and shares reserved for
stock options or for conversions.

 Treasury stock preferably is shown in the stockholders’ equity section, at cost, as a

deduction from the combined total of paid-in capital and retained earnings.
 Changes in retained earnings during the year may be shown in a separate statement or
combined with the income statement. One of the most significant points to consider in
determining the presentation of retained earnings in the balance sheet is the existence of
any restriction on the use of this retained income.

Disclosure-In evaluating client disclosure, the auditor must be aware that changes in retained
earnings during the year may be shown in a separate statement or combined with the income
statement. A combined statement of income and retained earnings often is presented. In this form
of presentation, the amount of retained earnings at the beginning of the year is added to the net
income figure, dividends declared are subtracted from the subtotal, and the final figure represents
the new balances of retained earnings.

Existence of any restriction on the use of retained that might be resulted from the agreements with
banks, bondholders, and other creditors commonly impose limitations on the payment of
dividends etc must be fully disclosed in the note to the financial statements.

References
 The Institute of Chartered Accountants India, 2019, Audit of Banks
 The Institute of Chartered Accountants India, 2019, Audit of Banks
 Basel Committee on Banking Supervision,2012, The internal audit function in
banks
 CA V.Jawahar, 2020, Bank Audit – Planning, Approach and Documentation.

 CA. Nitant Trilokekar, 2015, Conducting Bank Branch Audit in CBS Environment

 Kaplan Financial Limited, 2020, Audit Procedures .