Special Consideration of Auditor for Internal Control of Bank

1. 1
T.Z.A.S.P MANDAL’S
PRAGATI COLLEGE OF ARTS & COMMERCE,
DOMBIVALI (E)
A PROJECT ON
“Special Consideration of Auditor for Internal Control of
Bank”
In the Subject Advance Auditing
SUBMITTED TO
UNIVERSITY OF MUMBAI
For Semester – III of
Master of Commerce
By
MISS. SAYALI SUBHASH MAHAJAN
ROLL NO. 17
UNDER THE GUIDANCE OF
Prof. Neetu Methwani
YEAR 2016 – 2017

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T.Z.A.S.P MANDAL’S
PRAGATI COLLEGE OF ARTS & COMMERCE,
DOMBIVALI (E)
This is certify that Miss. Sayali S. Mahajan of M.com, Semester
III (2016–2017) has successful completed the project on “Special
Consideration of Auditor for Internal Control of Bank” under
the guidance of Prof. Prof. Neetu Methwani.
Course Coordinators Principal
Internal Examiner External
Examiner

3. 3
T.Z.A.S.P MANDAL’S
PRAGATI COLLEGE OF ARTS & COMMERCE,
DOMBIVALI (E)
RE-ACCREDITED BY NAAC WITH ‘B+’ GRADE
DECLARATION BY THE STUDENT
I, Miss. Sayali Subhash Mahajan student of M.Com Part –
II, Roll Number – 17, hereby declare that the project for the Paper
“Advance Auditing” titled “Special Consideration of Auditor
for Internal Control of Bank” submitted by me for Semester – III
during the academic year 2016 – 2017, is based on actual work
carried out by me under the guidance and supervision Prof. Neetu
Methwani.
I further state that this work is original & not submitted
anywhere else for any examination.
Signature of the Student
MAHAJAN SAYALI SUBHASH

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T.Z.A.S.P MANDAL’S
PRAGATI COLLEGE OF ARTS & COMMERCE,
DOMBIVALI (E)
RE-ACCREDITED BY NAAC WITH ‘B+’ GRADE
EVALUATION CERTIFICATE
This is certifying the undersigned have accessed and
evaluate the project on “Special Consideration of Auditor for
Internal Control of Bank” submitted by Miss. Sayali Subhash
Mahajan student of M.com Part –II .
This project is original to the best of our knowledge and has been
accepted for Internal Assessment.
Internal Examiner External Examiner Principal
Prof. Neetu Methwani Dr. A.P.Mahajan

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PRAGATI COLLEGE OF ARTS & COMMERCE,
DOMBIVALI (E)
Internal Assessment: Project 40 Marks
Name of the Student Class Division Roll
No.
First Name : Sayali
Father’s Name : Subhash
Sir Name : Mahajan
M.com
(Part II)
Sem.III
- 17
Subject : Advance Auditing
Topic for the Project:
“Special Consideration of Auditor for Internal Control of
Bank”
DOCUMENTATION Marks
Awarded
Signature
Internal Examiner
(Out of 10)
External Examiner
(Out of 10)
Presentation
(Out of 10)
Viva & Interaction
(Out of 10)
Total Marks (Out of 40)

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ACKNOWLEDGEMENT
At the Outset, I would like to Thanks Almighty GOD for this
shower of blessings. The desire of completing this dissertation was given by
my guide Prof. Neetu Methwani. I am very much thankful to her for the
guidance, support and for sparing his precious time from a busy and hectic
schedule.
I am thankful to Dr. A. P. Mahajan, Principal of Pragati College
of Arts & Commerce. My Sincere thanks to our Co-ordinator Prof. Neetu
Methwani who always motivated me and provided a helping hand for
conceiving higher education.
I would fail in my duty if I don’t thank my parents who are
pillars of my life and my friends who have always supported and motivated
me. Finally, I would express my gratitude to all those persons who directly
and indirectly helped me in completing my dissertation.
MAHAJAN SAYALI SUBHASH

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INDEX
Sr. No. Contents Page No.
1 Chapter 1. Introduction of Bank Audit
1.1 Meaning of Audit 1
1.2 Introduction of Bank Audit 1
1.3 Types of Audit 3
2 Chapter 2. Bank Internal Audit
2.1 Introductions 8
2.2. Legal Framework 8
3 Chapter 3. Special Consideration of Auditor for Internal
Control of Bank
3.1 Internal Control in Certain Area 17
3.2 Standards Related to Internal Audit 26
4 Chapter 4. Findings Suggestion & Conclusion 29
5 Chapter 5. Bibliography & Webliography 31

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CHAPTER – 1
INTRODUCTION OF BANK AUDIT
1.1 Definition of Audit :-
An audit is an objective examination and evaluation of the financial statements of an
organization to make sure that the records are a fair and accurate representation of the
transactions they claim to represent. It can be done internally by employees of the
organization, or externally by an outside firm.
The IRS can perform audits to verify the accuracy of a taxpayer’s returns or other
transactions. When an audit is being preformed by the IRS, it usually carries a negative
connotation and is seen as evidence of some type of wrongdoing by the taxpayer.
1.2 Introduction :
This project is to view the task perform by an auditor while conducting the audit of bank
deposit and loans & advances. It explains the role played by different types of auditor,
effect of Non-Performing Asset on the asset of a bank. The auditor needs to be
familiarizing with the direction of RBI affecting the sanctioning and disbursement of
advances. The auditor has to ensure that documents are executed as per the terms of
sanction. The auditor examine the procedure for review of advances laid down by the
authorities bas been complied with or not. Basel II Recommendations affecting the
capital adequacy norms advocated by the year, which perhaps is the beneficial fall-out
from the tightening of the prudential norms. The auditing not only provide true and fair
value but it also helps us to financial position and internal control system of a bank.
.

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It is well known that Banking is such a unique industry that persons from all walks of
involved with Banks in any relation whether as an operational banker, trainer, auditor or
even a support service person such as a security printer and even a hardware and software
supplier make Banking their only sphere of activity for their full life in the constant
endeavor to master in their for this Industry. In India various types of audit are normally
carried out in banking companies such audit are statutory audit, revenue/income
expenditure audit, concurrent audit, computer and system audit etc. the above audit is
mainly conducted by the banks own staff or external auditors.
However, the rules and the regulation relating to the conduct of various types of audit or
inspection differ from a bank to bank except the statutory audit for which the RBI
guidelines is applicable for that. In this project I give more important on the concurrent
and computer audit and its internal controls in the banks today’s scenario. Today audit is
form in the various organizations it is basically form for investor because investor
investing decision is depend on that particular concept if auditor has expressing his view
about particular organization is true and fair that investor has get idea about how much
should invest in particular securities or not. In public sector banks multiple firms
including central auditors and branch auditors generally conduct the audit. In case of
private sector banks and foreign banks, a single firm due to centralized database conducts
the audit. Consequently, the responsibilities of auditors in such banks are much wide.

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1.3 Types of Audits:
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.
I. 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
bank’s 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.
II. Concurrent Audit:
In the beginning of the 1990’s, 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

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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 yesterday’s 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
intervals.
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 cheque
books, Demand Drafts, Pay orders, Pass Books etc.

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III. 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 Bank’s 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

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♦ 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
The general definition of an audit is an evaluation of a person, organization, system,
process, enterprise, project or product. The term most commonly refers to audits in
accounting, internal auditing and government auditing, but similar concepts also exist in
project management, quality management, water management and energy conservation.
Auditing is defined as a systematic and independent examination of data, statements,
records, operations and performances (financial or otherwise) of an enterprise for a stated
purpose. In any auditing the auditor perceives and recognizes the propositions before him
for examination, collects evidence, evaluates the same and on this basis formulates his
judgment which is communicated through his audit report. The types of audit are:-
1. EXTERNAL AUDIT:- independent of the organisation.
2. INTERNAL AUDIT:- an organization auditing its own systems, a self-assessment.
Here, we will study about internal audit and how it helps to control cost.
INTERNAL AUDIT is an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control, and governance processes.
Internal audit is a catalyst for improving an organization's governance, risk management
and management controls by providing insight and recommendations based on analyses
and assessments of data and business processes. With commitment to integrity and
accountability, internal audit provides value to governing bodies and senior management
as an objective source of independent advice. Professionals called internal auditors are
employed by organizations to perform the internal auditing activity.

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The scope of internal audit within an organization is broad and may involve topics such
as an organization's governance, risk management and management controls over:-
efficiency/effectiveness of operations (including safeguarding of assets), the reliability of
financial and management reporting and compliance with laws and regulations. Internal

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CHAPTER – 2
BANK INTERNAL AUDIT
2.1 Introduction :
Introduction Lending constitutes a major activity of a bank. The banking business
revolves primarily around garnering funds through acceptance of deposits for the purpose
of onward lending. As a corollary, advances, generally, constitute the largest item on the
assets side of the balance sheet of a bank and are also a major source of its income.
Amounts disclosed in the balance sheet under the head 'Advances' comprise:
(a) money lent by the bank to its customers and interest accrued and due thereon
(including guarantees invoked/Letters of credit devolved on Bank);
(b) debit balances in deposit accounts;
(c) amount of participation on risk-sharing basis under inter-bank participation schemes
in capacity as a participating bank (net); and
(d) amount receivable from Government of India under the Agricultural Debt Waiver
Scheme 2008.
2.2 Legal Framework
There is an elaborate legal framework governing the functioning of banks in India. The
principal enactments which govern the functioning of various types of banks are:
• Banking Regulation Act, 1949 • State Bank of India Act, 1955
• Companies Act, 2013
• State Bank of India (Subsidiary Banks) Act, 1959
• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970

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• 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 & Settlement Systems, 2007
Beside the above enactments, the provisions of the Reserve Bank of India Act, 1934, also
affected the functioning of bank. The Act gives wide powers to the RBI to given
directions to bank which also have considerable effect on the functioning of banks.
The internal audit function constitutes a separate component of internal control with the
objective of determining whether other internal controls are well designed and properly
operating. Banks generally have a well-organised system of internal audit. The internal
audit is usually carried out either by a separate department within the bank or at times by
independent firms of chartered accountants. Apart from these, the inspectors of RBI also
review the system and transactions of important branches. 2.18 RBI has advised banks to
adopt a framework for Risk-Based Internal Audit to ensure that the internal audit is
undertaken in the bank in a risk focused manner.
This would also facilitate in adoption of the Risk-based Supervision framework.
Attention is invited to RBI circular DBS.CO.PP.BC. 14 /11.01.005/2003-04, dated June
26, 2004 on “Risk Based Supervision – Follow up of Risk Management Systems in
Banks” 2.19 As per section 138 of Companies Act, 2013 and Rules thereunder the
following class of banking companies shall be required to appoint an internal auditor or a
firm of internal auditors, who shall either be a chartered accountant or a cost accountant,

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or such other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company:-
(a) every listed company;
(b) every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding financial year;
or
(ii) turnover of two hundred crore rupees or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the preceding
financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of time during
the preceding financial year; and
(c) every private company having-
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding
one hundred crore rupees or more at any point of time during the preceding financial
year: Guidance Note on Audit of Banks (Revised 2016) II.24 Provided that an existing
company covered under any of the above criteria shall comply with the requirements of
section 138 and this rule within six months of commencement of such section.
Explanation- For the purposes of this rule –
(i) the internal auditor may or may not be an employee of the company;
(ii) the term “Chartered Accountant shall mean ”Chartered Accountant whether engaged
in practice or not.

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The Audit Committee of the company or the Board shall, in consultation with the Internal
Auditor, formulate the scope, functioning, periodicity and methodology for conducting
the internal audit. It should be noted that Internal Audit differs from Concurrent audit in
certain ways. While Concurrent audit examines transactions close to the occurrence to
find errors so as rectify the same and understand the process gaps so that the process gaps
can be remediated so that the occurrence of errors will be eliminated. Though Concurrent
audit has also become risk based, the movement is from the transactional gap to the
control. Internal audit is predominantly risk and control based with focus on control
assurance. For example, even if a design of a control is not in place, internal audit will
highlight the same even if there is no transactional error. RBI has issued circulars on risk
based internal audit of banks where the focus is clearly on prioritizing the audit work
based on the degree of the risk.
1. Preliminary work:
a) The auditor should acquire knowledge of the regulatory environment
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 developed by banks in response to market conditions. To do so, the auditor
need to understand the nature
of services rendered through instruments such as letters of credit, acceptances, forward
contracts and other similar instruments.

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c) The auditor should also obtain and understanding of the nature of books and records
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
available.
III. 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 offsite surveillance system for commercial banks on various
aspects of operations including solvency, liquidity, asset quality, earning, performance,
insider trading etc., and has indicated 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
examined.

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f) One set of tests that the auditor at both the branch level and head office level may
apply for audit of banks in analytical procedure.
2. Evaluation of internal control system:
It may be noted that transaction in banks are voluminous and repetitive,
andfall into limited categories/heads of account. It may, therefore, be moreappropriate tha
t the 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.
Accounting controls:
Accounting controls cover areas directly concerned with recording of financial
transactions and maintenance of such registers/records as to ensure their reliability.
Internal accounting controls are also envisaging such procedures aswould determine resp
onsibility 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:

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I. No transaction can be registered / recorded unless it is sanctioned / approved by the
designated authority.
II. Built- in dual control/supervisory procedures ensure that there is an independent
automatic check on input/vouchers.
III. 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 areas may lead to
detection of errors, omissions and irregularities, inter alias in the following:
(i) Missing/loss of security paper, stationery forms.
(ii) Accumulation of transactions/balances in nominal heads of accounts like 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.
(iii) Accumulation of old/large unexplained/unsubstantiated entries inaccounts with Res
erve Bank of India and other banks and institutions.
(iv) Transaction represented by mere book adjustments notevidenced/substantiated or u
pon non-honoring of contracts/commitments.
(v) Origination debits I head office accounts/inter-branch accounts.
(vi) Analytical review procedure.
(vii) Serious irregularities pointer out in internal audit/inspection/special audit
(viii) Complaints/matters pending in the vigilance/grievances cell, as regards
discrepancies in accounts of constituents, etc.
(ix) Results of periodic analytical review, if observed as adverse.

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a) 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, the head office use the zonal/regional offices
donot conduct any banking business. They are generally responsible for administrative
and 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 an audit
programme for substantive testing which should adequately cover the scope of his work.
In framing the audit programme, due weightage
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 operations are to be covered
by the audit. On the other hand, the statutory auditors at the head office (provisions for
gratuity, inter-office 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.

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Thus, items which do not materially affect the view presented by the financial statements
may be ignored. However, in the judgment 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 there 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.

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CHAPTER – 3
SPECIAL CONSIDERATION OF AUDITOR FOR
INTERNAL CONTROL OF BANK
3.1 Internal Control in Certain Selected Areas
1. General
(a) The staff and officers of a bank should be shifted from one position to another
frequently and without prior notice.
(b) The work of one person should always be checked by another person (usually by an
officer) in the normal course of business.
(c) The arithmetical accuracy of the books should be proved independently every day.
(d) All bank forms (e.g. Cheque books, demand draft books, travellers' cheques etc.)
should be kept in the possession of an officer, and another responsible officer should
occasionally verify the stock of such stationery.
(e) The mail should be opened by a responsible officer. Signatures on all the letters and
advices received from other branches of the bank or its correspondence should be
checked by an officer with the signature book.
(f) The signature book and the telegraphic code book should be kept with responsible
officers and used and seen by authorised officers only.
(g) The bank should take out insurance policies against loss and employees' infidelity.
(h) The powers of officers of different grades should be clearly defined.

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(i) There should be surprise inspection of head office and branches at periodic interval by
the internal audit department. The irregularities pointed out in the inspection reports
should be promptly rectified.
2. Cash
(a) Cash should be kept in the joint custody of two responsible officers.
(b) In addition to normal checking by the chief cashier, cash should be test-checked daily
and counted in full occasionally by a responsible officer unconnected with the cash
department Actual cash in hand should agree with the balance shown by the Day Book
every day.
(c) The cashier should have no access to the customer's ledger accounts and the Day
Book. This is an important safeguard. Bank managements are often tempted to use
cashiers because of their shorter working hours as ledger clerks in the absence of regular
staff on leave, etc. This can be a very expensive price of economy.
(d) The counterfoil cash receipt vouchers (e.g. counterfeits of pay-in-slips lodged by the
depositors) should be signed by an officer in Cash Department, in addition to the
receiving cashier.
(e) Payments should be made only after the vouchers (e.g. cheques, demand drafts etc.)
have been passed for payment by the proper officer and have been entered in the
customer's account.
(f) Receipt and payment scrolls or their totals should be compared with the cash column
of the Day-Book by independent persons.
(g) Where the teller system is prevalent-
(i) A limit should be placed on the powers of tellers to make payment.

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(ii) All vouchers relating to the accounts of customers which the tellers handle should
first be sent to them and entered by them in the ledger cards.
(iii) Total payment made by a teller should be reconciled with the cash columns of the
Voucher Summary Sheet of the ledger concerned every day.
(iv) There should be frequent rotation of tellers.
3. Clearings
(a) Cheques received by the bank in clearing should be checked with the list
accompanying them. Independent list should be prepared for cheques debited to different
customers accounts and those returned unpaid and these should be checked by officers.
The total number and amount of cheques included in these lists should be agreed with the
list first mentioned by a person unconnected with both the customers, ledgers and the
clearing department.
(b) The total number and amount of cheques sent out by the bank for clearing should be
agreed with the total of the clearing pay- in-slips, by an independent person.
(c) The unpaid cheques received back in return clearing should be checked in the same
manner as the cheques received.
4. Constituents' Ledgers
(a) Before making payment, cheques should be properly checked in respect of signature,
date, balance in hand etc. and should be passed by an officer and entered into
constituents' accounts.
(b) No withdrawals should normally be allowed against clearing cheques deposited on the
same day.
(c) An officer should check all the entries made in the ledger with the original documents
particularly noting that the correct accounts have been debited or credited.

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(d) Ledger keepers should not have access to Voucher Summary Sheet after they have
been checked by an officer and to the Day Book.
(e) Interest debited or credited to constituents' accounts should be independently checked.
5. Bills for Collection
(a) All the documents accompanying the bills should be received and entered in the
Register by a responsible officer. At the time of despatch, the officer should also see that
all the documents are sent along with the bills.
(b) The accounts of customers or principals should be credited only after the bills have
been collected or an advice to that effect received from the branch or agent to which they
were sent for collection.
(c) It should be ensured that bills sent by one, branch for collection to another branch of
the bank, are not taken in the bills for collection twice in the amalgamated balance sheet
of the bank. For this purpose, the receiving branch should reverse the entries regarding
such bills at the end of the year for closing purposes.
6. Bills Purchased
(a) At the time of purchase of the bills, an officer should verify that all the documents of
title are properly assigned to the bank.
(b) Sufficient margin should be kept while purchasing or discounting a bill so as to cover
any decline in the value of the security etc.
(c) If the bank is unable to collect a bill on the due date, immediate steps should be taken
to recover the amount from the drawer against the security provided.
(d) All irregular outstanding accounts should be reported to the Head Office.
(e) In the case of bills purchased outstanding at the close of the year the discount received
thereon should be properly apportioned between the two years.

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7. Loans and Advances
(a) The bank should make advances only after satisfying itself as to the creditworthiness
of the borrowers and after obtaining sanction from the proper authorities of the bank.
(b) All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.
(c) Sufficient margin should be kept against securities taken so as to cover any decline in
the value thereof and also to comply with Reserve Bank directives. Such margins should
be determined by the proper authorities of the bank as a general policy or for particular
accounts.
(d) All the securities should be received and returned by responsible officer. They should
be kept in the Joint custody of two such officers.
(e) All securities requiring registration should be registered in the name of the bank or
otherwise accompanied by the documents sufficient to give title of the bank.
(f) In the case of goods in the possession of the bank, contents of the packages should be
test checked at the time of receipts. The godowns should be regularly and frequently
inspected by a responsible officer of the branch concerned, in addition by the inspectors
of the bank.
(g) Surprise checks should be made in respect of hypothecated goods not in the
possession of the bank.
(h) Market value of goods should be checked by officers of the bank by personal enquiry
in addition to the invoice value given by the borrowers.
(i) As soon as any increase or decrease takes place in the value of securities proper entries
should be made in the Drawing Power Book and Daily Balance Book These entries
should be checked by an officer.

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(j) All accounts should be kept within both the drawing power and the sanctioned limit at
all times.
(k) All the accounts which exceed the sanctioned limit or drawing power or are against
unapproved securities or are otherwise irregular should be brought to the notice of the
Management/Head Office regularly.
(I) The operation (in each advance should be reviewed at least once every year.)
8. Telegraphic Transfers and Demand Drafts
(a) The bank should have a reliable private code known only to responsible officers of its
branches, coding and decoding of telegrams should be done only by such officers.
(b) The signatures on a demand draft should be checked by an officer with the Signature
Book.
(c) All the T.Ts and D.Ds. sold by a branch should be immediately confirmed by the
advices to the branches concerned.
(d) If the paying branch does not receive proper confirmation of any T.T. or D.D. from
the issuing branch or does not receive credit in its account with that branch, it should take
immediate steps to ascertain the reasons.
9. Inter Branch Accounts
(a) The accounts should be adjusted only on the basis of advices (and not on the strength
of entries found in the statement of account) received from other branches,
(b) Prompt action should be taken preferably by central authority, if any entries
(particularly debit entries) are not responded to by any branch within a reasonable time.

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10. Credit Card Operations
(a) There should be effective screening of applications with reasonably good credit
assessments.
(b) There should be strict control over storage and issue of cards.
(c) There should be at system whereby a merchant confirms the status of unutilised limit
of a credit-card holder from the bank before accepting the settlement in case the amount
to be settled exceeds a specified percentage of the total limit of the card holder.
(d) There should be a system of prompt reporting by the merchants of all settlements
accepted by them through credit cards.
(e) Reimbursement to merchants should be made only after verification of the validity of
merchant's acceptance of cards.
(f) All the reimbursement (gross of commission) should be immediately charged to the
customer's account.
(g) There should be a system to ensure that statements are sent regularly and promptly to
the customer.
(h) There should be a system to monitor and follow-up customers' payments.
(i) Items overdue beyond a reasonable period should be identified and attended to
carefully. Credit should be stopped by informing the merchants through periodic
bulletins, as early as possible, to avoid increased losses.
(j) There should be a system of periodic review of credit card holders' accounts. On this
basis, the limits of customers may be revised, if necessary. The review should also
include determination of doubtful amounts and the provisioning in respect thereof.

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11. Compliance with CRR and SLR requirements
1. Cash Reserve Ratio ICRRI Requirements
One of the important determinants of cash balances to be maintained by banking
companies and other scheduled banks is the requirement for maintenance of a certain
minimum cash reserve. While the requirement for maintenance of cash reserve by
banking companies is contained in the Banking Regulation Act, 1949, corresponding
requirement for scheduled banks is contained in the Reserve Bank of India Act, 1934.
The RBI, from time to time, reviews the evolving liquidity situation and accordingly
decides the rate of CRR required to be maintained by scheduled commercial banks.
Therefore, the auditor need to refer the master circular issued from time to time in this
regard to ensure the compliance of CRR requirements.
2. Statutory Liquidity Ratio (SLR) Requirements
The Reserve Bank of India requires statutory central auditors of banks to verify the
compliance with SLR requirements of 12 odd dates in different months of a financial year
not being Fridays. The resultant report is to be sent to the top management of the bank
and to the Reserve Bank. The report of the statutory auditors in relation to compliance
with SLR requirements has to cover two aspects:
(i) Correctness of the compilation of DTL (Demand and Time Liabilities) position; and
(ii) Maintenance of liquid assets.
Audit approach and procedure:
(i) Obtain an understanding of the relevant circumstances of the RBI, particularly
regarding composition of items of DTL.
(ii) Require the branch auditors to send their weekly trial balance as on Friday and these
are consolidated at the head office. Based on this consolidation, the DTL position is
determined for every reporting Friday. The statutory central auditor should request the

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branch auditors to verify the correctness of the trial balances relevant to the dates selected
by him. The branch auditors should also be specifically requested to examine the cash
balance at the branch on the selected dates.
(iii) Review the relevant returns received from un-audited brandies to identify any
obvious errors or omissions or inconsistencies.
(iv) Examine, on a test basis, the consolidations regarding DTL position prepared by the
bank with reference to the related returns received from branches. The auditor should
examine whether the valuation of securities done by the bank is in accordance with the
guidelines prescribed by the RBI.
(v) While examining the computation of DTL, specifically examine that the following
items have been excluded from liabilities-
(a) Part amounts of recoveries from the borrowers in respect of debts considered bad
and doubtful of recovery.
(b) Amounts received in Indian currency against import bills and held in sundry
deposits pending receipts of final rates.
(c) Un-adjusted deposits/balances lying in link branches for agency business like
dividend warrants, interest warrants, refund of application money, etc., in respect
of shares/debentures to the extent of payment made by other branches but not
adjusted by the link brandies.
(d) Margins held and kept in sundry deposits for funded facilities.
12 . Time Planning:-
Time is money! Well divide the amount of wages that you give out with the number of
work hours per month. Explain to the employees per hour expenditures that you incur,
and hence the necessity for time management. You may also install good cost control
systems, in order to help your employees to manage their work hours well. A cost control
software will also work wonders in the finance and accounting department.

33. 33
13 . Investment :-
(i) Ensure that in respect of Purchase & Sales Securities the branch has acted within its
delegated power having regard to its Head Office Instruction.
(ii) Ensure that the securities in Books of account of the branch are physically held by it.
(iii) Ensure that the branch is complying with the RBI / Head office guidelines regarding
BRs, SGL forms, delivery of scripts, documentation & accounting.
(iv) Ensure that the sale or purchase transition are done are rates beneficial to the bank.
3.2 Standards Related To Internal Audit:-
1. Standard on Internal Audit 1 - Planning an Internal Audit
a) Internal audit plan should cover areas such as obtaining knowledge of legal and
regulatory framework within which the entity operates, obtaining knowledge of the
entity’s accounting and internal control systems and policies, determining the
effectiveness of internal control procedures adopted by the entity, determining the nature,
timing and extent of procedures to be performed, identifying activities warranting special
focus based on materiality and criticality of such activities, and their overall effect on
operations of the entity, identifying and allocating staff to different activities to be
undertaken.
b) Planning process includes obtaining knowledge of business, establishing the audit
universe, establishing the objectives of engagement, establishing scope of the
engagement, deciding resource allocation, preparation of audit programed.
c) Plan to be finalized in consultation with the appropriate authority before
commencement of the work.

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2. Standard on Internal Audit 2 - Basic Principles Governing Internal Audit
a) Internal auditor should adhere to the basic principles governing an internal audit.
b) These principles are integrity, objectivity and independence, confidentiality, skills and
competence, work performed by others, documentation, planning, internal audit evidence,
accounting system and internal control, and internal audit conclusions and reporting.
3. Standard on Internal Audit 3 - Documentation
a) Internal audit documentation should be designed and properly organized to meet the
requirements and circumstances of each audit. To formulate policies for standardization
of internal audit documentation.
b) It should be sufficiently complete and detailed for an internal auditor to obtain an
overall understanding of the audit.
c) It should cover all the important aspects of an engagement viz., engagement
acceptance, engagement planning, risk assessment and assessment of internal controls,
evidence obtained and examination / evaluation carried out, review of the findings,
communication and reporting and follow up.
4. Standard on Internal Audit 4 - Reporting
a) To review and assess the analysis drawn from internal audit evidence obtained as the
basis for his conclusion on the efficiency and effectiveness of systems, processes and
controls including items of financial statements.
b) Report clearly expressing significant observations, suggestion / recommendations
based on the policies, processes, risks, controls and transaction processing taken as a
whole and managements responses.
c) Report includes basic elements such as title, addressee, report distribution list, period
of coverage of the report, opening or introductory paragraph, objectives paragraph, scope

35. 35
paragraph (describing the nature of an internal audit), executive summary (highlighting
key material issues, observations, control weaknesses and exceptions), observations,
findings and recommendations made by the internal auditor, comments from the local
management, action taken report – action taken / not taken pursuant to the observations
made in the previous internal audit reports, date of the report, place of signature and
Internal auditor’s signature with membership number.

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CHAPTER - 4
FINDINGS, SUGGESTION & CONCULSION
4.1 Finding & Suggestion :-
(a) In Internal Bank Audit checking all the account & other details in bank.
(b) Audit is performed in accordance with standards.
(c) Reports should involve the presentation of work results in a complete form.
(d) Management is the main client of an audit function.
(e) Another major mistake made in reporting is that audit is built on revealing problems.
This situation can be discussed in terms of two main aspects. The first one is about
the expectations of management and the positioning of audit function. The second
reason I observe is that audit reports are finding oriented, in other words,
recommendation part for the solution of identified findings is missing or weak.

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4.2 Conclusion :-
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 today’s scenario form company
and point of view.

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CHAPTER - 5
BIBLIOGRPHY & WEBLIOGRAPHY
Advance Auditing M.com Part II
Auditing Book of ICAI
http://resource.cdn.icai.org/19367sm_aape_finalnew_cp11.pdf
https://www.rbi.org.in/
www.icai.org
http://www.slideshare.net/ATBHATTI/internal-audit-16799405