Audit of Banks
Domain 10 tests the overlay that banking law and RBI directions place on a normal audit.
Legal framework
The Banking Regulation Act, 1949 governs: Section 29 prescribes the form of the balance sheet and accounts, and Section 30 the annual audit. Appointment and remuneration of auditors of banking companies require RBI approval, with separate arrangements for nationalised banks and the State Bank of India under their own statutes. The statutory report follows the prescribed form; the Long Form Audit Report prescribed by RBI is submitted separately and is not part of the statutory report.
Asset classification and income
Under IRAC norms, an advance is a non-performing asset where interest or instalment is overdue for more than 90 days, with special rules for certain categories. Sub-standard, doubtful and loss assets carry different provisioning. Income on NPAs is recognised on realisation, not accrual. Verify cash, balances with RBI and other banks, SLR and CRR securities, and advances by inspecting documents and applying prudential norms.
Branch and concurrent audit
Large banks use statutory branch audit and concurrent audit; the central statutory auditor relies on branch reports but must still obtain sufficient evidence and report on the bank as a whole by consolidating branch returns.
Worked example
A term loan instalment fell due on 1 January and remained unpaid until 20 April. Reasoning: the overdue period exceeds 90 days, so the account is an NPA classified sub-standard (up to 12 months). Interest for the period cannot be taken to income; the auditor should test provisioning and reverse accrued income.
Traps
- Treating the LFAR as the statutory audit report.
- Using 180 days instead of 90 days for NPA classification.
- Accepting branch audit papers without review.
- Ignoring off-balance-sheet items such as guarantees and letters of credit.