ICAI Notes: Audit of Banks | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


a
    
 
CHAPTER 
10 
 
LEARNING OUTCOMES 
 
  
AUDIT OF BANKS  
 
 
 
After studying this chapter, you would be able to: 
? Understand the legal framework for the Bank audit. 
? Gain the knowledge of financial statements of the banks in 
brief. 
? Understand the audit approach for items of profit and loss in 
case of banks. 
? Learn the important items such as Advances, NPAs etc. in the 
context of Bank Audit 
? Understand practicality of above concepts by studying 
through examples and case studies 
  
© The Institute of Chartered Accountants of India
Page 2


a
    
 
CHAPTER 
10 
 
LEARNING OUTCOMES 
 
  
AUDIT OF BANKS  
 
 
 
After studying this chapter, you would be able to: 
? Understand the legal framework for the Bank audit. 
? Gain the knowledge of financial statements of the banks in 
brief. 
? Understand the audit approach for items of profit and loss in 
case of banks. 
? Learn the important items such as Advances, NPAs etc. in the 
context of Bank Audit 
? Understand practicality of above concepts by studying 
through examples and case studies 
  
© The Institute of Chartered Accountants of India
 
 
AUDITING AND ETHICS  
 
10.2 
 
 
 
Sameer was very comfortable with mobile banking app and used to do most of his 
banking activities from this very app. Payments of house electricity bills, Wi-fi rental 
bill, payments of little gifts for her mother and younger sister were all made by him 
using his mobile. Whenever he needed to transfer money to any of his friends as 
common contribution for an evening get together, he used to send money through 
UPI using Bhim app.  
One day, he happened to visit local branch of the bank in which his account was 
maintained. He got a feeling that banking operations are very complex and not as 
simple as he used to think. Since cash deposit machine was out of order on that 
day, he had to deposit cash by going to the counter. It made him realise that there 
is a trail for every bank transaction.   
  
Introduction
Banking Operations
Accounting system 
of Banks
Bank Audit 
Approach
Advances & Their 
Audit
Audit of 
Revenue Items
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


a
    
 
CHAPTER 
10 
 
LEARNING OUTCOMES 
 
  
AUDIT OF BANKS  
 
 
 
After studying this chapter, you would be able to: 
? Understand the legal framework for the Bank audit. 
? Gain the knowledge of financial statements of the banks in 
brief. 
? Understand the audit approach for items of profit and loss in 
case of banks. 
? Learn the important items such as Advances, NPAs etc. in the 
context of Bank Audit 
? Understand practicality of above concepts by studying 
through examples and case studies 
  
© The Institute of Chartered Accountants of India
 
 
AUDITING AND ETHICS  
 
10.2 
 
 
 
Sameer was very comfortable with mobile banking app and used to do most of his 
banking activities from this very app. Payments of house electricity bills, Wi-fi rental 
bill, payments of little gifts for her mother and younger sister were all made by him 
using his mobile. Whenever he needed to transfer money to any of his friends as 
common contribution for an evening get together, he used to send money through 
UPI using Bhim app.  
One day, he happened to visit local branch of the bank in which his account was 
maintained. He got a feeling that banking operations are very complex and not as 
simple as he used to think. Since cash deposit machine was out of order on that 
day, he had to deposit cash by going to the counter. It made him realise that there 
is a trail for every bank transaction.   
  
Introduction
Banking Operations
Accounting system 
of Banks
Bank Audit 
Approach
Advances & Their 
Audit
Audit of 
Revenue Items
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
AUDIT OF BANKS  
a
 
 10.3 
Huge volume of bank transactions take place instantly, moneys are deposited and 
withdrawn from accounts. One can access one’s account from any geographical 
location. Banks work on “ Core Banking Solution” platforms which make transactions 
to happen on such a scale by ensuring customer ease. Deliberating upon it, he also 
thought about processes, controls and automation which makes all this possible.  
He was trying to understand broad working of a bank. A bank accepts deposits 
from its customers and lends money to trade, industry, farmers, needy sections of 
society and to members of general public. The rate at which a bank pays interest 
on deposits to customers is lower than the rates at which it charges interest on 
advances. The spread is used to meet establishment and administrative costs of a 
bank leaving out profits. In making available money to different sections of society 
including trade and industry, banks act as drivers of economic growth of country. 
Lending of money by a bank leads to reflection of “assets” in form of advances in 
financial statements of a bank.  He had heard the term “non -performing assets” 
(NPAs) quite a number of times. What do these denote and what is their 
significance from the point of view of an auditor? Are there some regulatory norms 
relating to NPAs? Meanwhile, his attention also moved towards encompassing 
outreach of audit in case of banks. Audit of banks appeared to be special because 
of huge volume of transactions, extensive use of technology, wide geographical 
spread of banks and other factors peculiar to banks. Excited, he was thinking of 
prospects to conduct audit of a bank some day in future! 
INTRODUCTION 
Banking sector is the backbone of any economy as it is essential for sustainable 
socio-economic growth and ?nancial 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. It is of utmost importance to ensure that 
banking sector stays healthy, safe and sound. For safe and sound banking sector, 
one of the most important factors is reliable ?nancial information supported by 
quality bank audits. 
  
© The Institute of Chartered Accountants of India
Page 4


a
    
 
CHAPTER 
10 
 
LEARNING OUTCOMES 
 
  
AUDIT OF BANKS  
 
 
 
After studying this chapter, you would be able to: 
? Understand the legal framework for the Bank audit. 
? Gain the knowledge of financial statements of the banks in 
brief. 
? Understand the audit approach for items of profit and loss in 
case of banks. 
? Learn the important items such as Advances, NPAs etc. in the 
context of Bank Audit 
? Understand practicality of above concepts by studying 
through examples and case studies 
  
© The Institute of Chartered Accountants of India
 
 
AUDITING AND ETHICS  
 
10.2 
 
 
 
Sameer was very comfortable with mobile banking app and used to do most of his 
banking activities from this very app. Payments of house electricity bills, Wi-fi rental 
bill, payments of little gifts for her mother and younger sister were all made by him 
using his mobile. Whenever he needed to transfer money to any of his friends as 
common contribution for an evening get together, he used to send money through 
UPI using Bhim app.  
One day, he happened to visit local branch of the bank in which his account was 
maintained. He got a feeling that banking operations are very complex and not as 
simple as he used to think. Since cash deposit machine was out of order on that 
day, he had to deposit cash by going to the counter. It made him realise that there 
is a trail for every bank transaction.   
  
Introduction
Banking Operations
Accounting system 
of Banks
Bank Audit 
Approach
Advances & Their 
Audit
Audit of 
Revenue Items
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
AUDIT OF BANKS  
a
 
 10.3 
Huge volume of bank transactions take place instantly, moneys are deposited and 
withdrawn from accounts. One can access one’s account from any geographical 
location. Banks work on “ Core Banking Solution” platforms which make transactions 
to happen on such a scale by ensuring customer ease. Deliberating upon it, he also 
thought about processes, controls and automation which makes all this possible.  
He was trying to understand broad working of a bank. A bank accepts deposits 
from its customers and lends money to trade, industry, farmers, needy sections of 
society and to members of general public. The rate at which a bank pays interest 
on deposits to customers is lower than the rates at which it charges interest on 
advances. The spread is used to meet establishment and administrative costs of a 
bank leaving out profits. In making available money to different sections of society 
including trade and industry, banks act as drivers of economic growth of country. 
Lending of money by a bank leads to reflection of “assets” in form of advances in 
financial statements of a bank.  He had heard the term “non -performing assets” 
(NPAs) quite a number of times. What do these denote and what is their 
significance from the point of view of an auditor? Are there some regulatory norms 
relating to NPAs? Meanwhile, his attention also moved towards encompassing 
outreach of audit in case of banks. Audit of banks appeared to be special because 
of huge volume of transactions, extensive use of technology, wide geographical 
spread of banks and other factors peculiar to banks. Excited, he was thinking of 
prospects to conduct audit of a bank some day in future! 
INTRODUCTION 
Banking sector is the backbone of any economy as it is essential for sustainable 
socio-economic growth and ?nancial 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. It is of utmost importance to ensure that 
banking sector stays healthy, safe and sound. For safe and sound banking sector, 
one of the most important factors is reliable ?nancial information supported by 
quality bank audits. 
  
© The Institute of Chartered Accountants of India
 
 
AUDITING AND ETHICS  
 
10.4 
Types of Banks 
There are di?erent types of banking institutions prevailing in India which are as 
follows: 
Commercial Banks Regional Rural Banks 
Co-operative Banks. Payment Banks. 
Development Banks (more commonly known 
as ‘Term-Lending Institutions’). 
Small Finance Banks. 
1.  Commercial banks are the most wide spread banking institutions in India, 
that provide a number of products and services to general public and other 
segments of economy. Two of its main functions are:- 
(a) accepting deposits and  
(b) granting advances. 
2.  Regional Rural Banks known as RRBs are the banks that have been set up 
in rural areas in different states of the country to cater to the basic banking and 
financial needs of the rural communities. Examples are:- Punjab Gramin Bank , 
Tripura Gramin Bank , Allahabad UP Gramin Bank , Andhra Pradesh Grameen Vikas 
Bank, etc. 
3.  Co-operative Banks function like Commercial Banks only but are set up on 
the basis of Cooperative Principles and registered under the Cooperative Societies 
Act of the respective state or the Multistate Cooperative Societies Act and usually 
cater to the needs of the agricultural and rural sectors. Examples are :- The Gujarat 
State Co-operative Bank Ltd., Chhatisgarh Rajya Sahakari Bank Maryadit, etc.  
4.  Payments Banks are a new type of banks which have been recently 
introduced by RBI. They are allowed to accept restricted deposits but they cannot 
issue loans and credit cards. However, customers can open Current & Savings 
accounts and also avail the facility of ATM cum Debit cards, Internet-banking & 
Mobilebanking. Examples are :- Airtel Payments Bank , India Post Payments Bank, 
Paytm Payments Bank , etc. 
5.  Development Banks had been conceptualized to provide funds for 
infrastructural facilities important for the economic growth of the country. Examples 
are:- Industrial Finance Corporation of India (IFCI), Industrial Development Bank of 
India (IDBI), Small Industries Development Bank of India (SIDBI) , etc. 
© The Institute of Chartered Accountants of India
Page 5


a
    
 
CHAPTER 
10 
 
LEARNING OUTCOMES 
 
  
AUDIT OF BANKS  
 
 
 
After studying this chapter, you would be able to: 
? Understand the legal framework for the Bank audit. 
? Gain the knowledge of financial statements of the banks in 
brief. 
? Understand the audit approach for items of profit and loss in 
case of banks. 
? Learn the important items such as Advances, NPAs etc. in the 
context of Bank Audit 
? Understand practicality of above concepts by studying 
through examples and case studies 
  
© The Institute of Chartered Accountants of India
 
 
AUDITING AND ETHICS  
 
10.2 
 
 
 
Sameer was very comfortable with mobile banking app and used to do most of his 
banking activities from this very app. Payments of house electricity bills, Wi-fi rental 
bill, payments of little gifts for her mother and younger sister were all made by him 
using his mobile. Whenever he needed to transfer money to any of his friends as 
common contribution for an evening get together, he used to send money through 
UPI using Bhim app.  
One day, he happened to visit local branch of the bank in which his account was 
maintained. He got a feeling that banking operations are very complex and not as 
simple as he used to think. Since cash deposit machine was out of order on that 
day, he had to deposit cash by going to the counter. It made him realise that there 
is a trail for every bank transaction.   
  
Introduction
Banking Operations
Accounting system 
of Banks
Bank Audit 
Approach
Advances & Their 
Audit
Audit of 
Revenue Items
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
AUDIT OF BANKS  
a
 
 10.3 
Huge volume of bank transactions take place instantly, moneys are deposited and 
withdrawn from accounts. One can access one’s account from any geographical 
location. Banks work on “ Core Banking Solution” platforms which make transactions 
to happen on such a scale by ensuring customer ease. Deliberating upon it, he also 
thought about processes, controls and automation which makes all this possible.  
He was trying to understand broad working of a bank. A bank accepts deposits 
from its customers and lends money to trade, industry, farmers, needy sections of 
society and to members of general public. The rate at which a bank pays interest 
on deposits to customers is lower than the rates at which it charges interest on 
advances. The spread is used to meet establishment and administrative costs of a 
bank leaving out profits. In making available money to different sections of society 
including trade and industry, banks act as drivers of economic growth of country. 
Lending of money by a bank leads to reflection of “assets” in form of advances in 
financial statements of a bank.  He had heard the term “non -performing assets” 
(NPAs) quite a number of times. What do these denote and what is their 
significance from the point of view of an auditor? Are there some regulatory norms 
relating to NPAs? Meanwhile, his attention also moved towards encompassing 
outreach of audit in case of banks. Audit of banks appeared to be special because 
of huge volume of transactions, extensive use of technology, wide geographical 
spread of banks and other factors peculiar to banks. Excited, he was thinking of 
prospects to conduct audit of a bank some day in future! 
INTRODUCTION 
Banking sector is the backbone of any economy as it is essential for sustainable 
socio-economic growth and ?nancial 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. It is of utmost importance to ensure that 
banking sector stays healthy, safe and sound. For safe and sound banking sector, 
one of the most important factors is reliable ?nancial information supported by 
quality bank audits. 
  
© The Institute of Chartered Accountants of India
 
 
AUDITING AND ETHICS  
 
10.4 
Types of Banks 
There are di?erent types of banking institutions prevailing in India which are as 
follows: 
Commercial Banks Regional Rural Banks 
Co-operative Banks. Payment Banks. 
Development Banks (more commonly known 
as ‘Term-Lending Institutions’). 
Small Finance Banks. 
1.  Commercial banks are the most wide spread banking institutions in India, 
that provide a number of products and services to general public and other 
segments of economy. Two of its main functions are:- 
(a) accepting deposits and  
(b) granting advances. 
2.  Regional Rural Banks known as RRBs are the banks that have been set up 
in rural areas in different states of the country to cater to the basic banking and 
financial needs of the rural communities. Examples are:- Punjab Gramin Bank , 
Tripura Gramin Bank , Allahabad UP Gramin Bank , Andhra Pradesh Grameen Vikas 
Bank, etc. 
3.  Co-operative Banks function like Commercial Banks only but are set up on 
the basis of Cooperative Principles and registered under the Cooperative Societies 
Act of the respective state or the Multistate Cooperative Societies Act and usually 
cater to the needs of the agricultural and rural sectors. Examples are :- The Gujarat 
State Co-operative Bank Ltd., Chhatisgarh Rajya Sahakari Bank Maryadit, etc.  
4.  Payments Banks are a new type of banks which have been recently 
introduced by RBI. They are allowed to accept restricted deposits but they cannot 
issue loans and credit cards. However, customers can open Current & Savings 
accounts and also avail the facility of ATM cum Debit cards, Internet-banking & 
Mobilebanking. Examples are :- Airtel Payments Bank , India Post Payments Bank, 
Paytm Payments Bank , etc. 
5.  Development Banks had been conceptualized to provide funds for 
infrastructural facilities important for the economic growth of the country. Examples 
are:- Industrial Finance Corporation of India (IFCI), Industrial Development Bank of 
India (IDBI), Small Industries Development Bank of India (SIDBI) , etc. 
© The Institute of Chartered Accountants of India
 
 
AUDIT OF BANKS  
a
 
 10.5 
6.  Small Finance Banks have been set up by RBI to make available basic 
financial and banking facilities to the unserved and unorganised sectors like small 
marginal farmers, small & micro business units, etc. Examples are:- Equitas Small 
Finance Bank , AU Small Finance Bank , etc.   
 
Diagram showing Two Major Functions of Banks 
 
Source :- twitter.com 
Reserve Bank of India: Regulating Body 
The functioning of banking industry in India is regulated by the Reserve Bank of 
India (RBI) which acts as the Central Bank of our country.  
RBI is responsible for :- 
? development and supervision of the constituents of the Indian ?nancial 
system (which comprises banks and non-banking ?nancial institutions)  
? determining, in conjunction with the Central Government, the monetary and 
credit policies keeping in with the need of the hour. 
? regulating the activities of commercial and other banks 
  
© The Institute of Chartered Accountants of India