Audit of Banks – CA Final Audit Question Bank

Audit of Banks – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Audit of Banks – CA Final Audit Question Bank

Question 1.
Write a short note on – Principal Enactments Governing Bank Audit.
Answer:
Principal Enactments governing Bank Audit:

  1. Banking Regulation Act, 1949;
  2. Reserve Bank of india Act, 1934;
  3. Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970;
  4. State Bank of India Act, 1955;
  5. State Bank of India (Subsidiary Banks) Act, 1959;
  6. Regional Rural Banks Act, 1976;
  7. Companies Act, 2013;
  8. Cooperative Societies Act, 1912 or the relevant State Cooperative Societies Acts;
  9. Information Technology Act, 2000;
  10. Prevention of Money Laundering Act, 2002;
  11. Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002;
  12. Credit Information Companies Regulation Act, 2005; and
  13. Payment and Settlement systems Act, 2007.

Question 2.
Statutory Central Auditors of a Bank have to furnish a number of reports/certificates in addition ! to their main report. List such reports/certificates.
Answer:
Reports/Certificates to be furnished by Statutory Central Auditors:
In addition to main audit report, SCAs are required to issue the following reports/certificates:

  1. 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 Section 143(3)(i) of the Companies Act, 2013.
  2. Long form audit report (LFAR).
  3. Report on compliance with SLR requirements.
  4. 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.
  5. Certificate on reconciliation of securities by the bank (both on its own investment account as well as PMS Banks’ account).
  6. Certificate on compliance by the bank in key areas of prudential and other guidelines relating to such transactions issued by the RBI.
  7. Report on whether the income recognition, asset classification and provisioning have been made as per the guidelines issued by the RBI.
  8. Report on whether any serious irregularity was noticed in the working of the bank which requires immediate attention.
  9. Certificate in respect of custody of unused Bank Receipt forms and their utilisation.
  10. Authentication of capital adequacy ratio, including disclosure requirements and other ratios reported in the notes on accounts.
  11. Certificate in respect of DICGC claims.
  12. Report on status of the compliance by the bank with regard to the implementation of recommendations of the Ghosh Committee relating to frauds and malpractices and of the recommendations of Jilani Committee on internal control and inspection/credit system.
  13. Report on instances of adverse credit-deposit ratio in the rural areas.
  14. Asset liability management.
  15. Certificate on Corporate Governance in case of banks listed on Stock Exchange. In some banks this certification may not be got done by the central auditors.
  16. Certification on claim of various interest subsidies and interest subvention.

Audit of Banks – CA Final Audit Question Bank

Question 3.
Management develops controls and uses performance indicators to aid in managing key business and financial risks. Explain in this reference the requirements of an effective risk management system in a bank.
Or
Write short note on: Requirements of a Risk Management Process/System in a bank. [Nov. 16 (4 Marks)]
Answer:
Requirements of a Risk Management Process/System in a Bank:

1. Involvement of TCWG: Risk Management policies should be approved by TCWG. While approving the policies, TCWG should ensure that the policies should be consistent with the bank’s business objectives and strategies, capital strength, management expertise, regulatory requirements and the types and amounts of risk it regards as acceptable.

2. Identification, measurement & monitoring of risks: Risks that may significantly affect the achievement of bank’s goals and objectives should be identified, measured and monitored against pre-approved limits and criteria.

3. Control activities: Banks must have appropriate controls to manage its risks, including the following:

  • effective segregation of duties,
  • verification and approval of transactions,
  • setting of limits,
  • reporting and approval of exception.

4. Monitoring activities: Independent risk management unit should be set up which regularly assess the Risk management models, methodologies and assumptions used to measure and manage risk.

5. Reliable information systems: Banks must have a reliable information system that provide adequate financial, operational and compliance information on a timely and consistent basis to management and TCWG.

Question 4.
Banks, because of certain characteristics, are distinguished from other commercial enterprises and hence it needs special audit consideration. As an auditor of a bank, specify the various peculiarities which may necessitate special audit consideration to be taken care by you. [May 19 – New Syllabus (4 Marks)]
Answer:
Need for Special Audit Considerations in audit of Banks:
Special audit considerations arise in the audit of banks because of:

  1. the particular nature of risks associated with the financial transactions undertaken by banks;
  2. voluminous scale of banking operations and the resultant significant exposures which can arise within short period of time;
  3. extensive dependence on IT for process of transactions;
  4. various statutory and regulatory requirements; and
  5. the continuing development of new products and services and banking practices which may not be matched by the concurrent development of accounting principles and auditing practices.

In today’s environment, the banks use different applications to carry out different transactions which may include data flow from one application to other application; the auditor while designing his plans should also understand interface controls between the various applications.

Question 5.
List the key security control aspects that an auditor of a bank needs to address when undertaking audit in a computerised environment.
Answer:
Key Security Controls to be addressed while auditing in a computerised environment:

Procedures followed by the auditor in study and evaluation of the accounting system and related internal controls and the NTE of other audit procedures are affected to a greater extent in a CIS environment.

The key security control aspects that an auditor needs to consider when undertaking bank audit in a computerised environment include the following:

  1. To ensure that date available for processing is authorised, accurate and complete.
  2. To ensure that unauthorised amendments to the programmes are being prevented.
  3. To ensure that access and authorisation rights given to staff are appropriate.
  4. To ensure that bank charges calculated manually for accounts when function is not regulated through parameters are properly accounted for and authorised.
  5. To verify whether exceptional transaction reports are being authorised and verified on a daily basis by the concerned officials.
  6. To verify that all the general ledger accounts codes authorised by Head Office are in existence in the system.
  7. To ensure that balance in general ledger tallies with the balance in subsidiary book.
  8. To ensure that the backup media is stored in fire proof cabinet secured with lock and key and also that the off-site backups are preserved for the emergency.
  9. To check that the anti-virus software of latest version is installed in servers/PCs of branches to prevent data corruption.
  10. To ensure that access to the computer room is restricted to authorised persons only.

Question 6.
How will you evaluate the Internal Control system in the area of Credit Card operations of a Bank? [Nov. 09 (5 Marks)]
Or
You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals in providing credit card facilities to its account holder. The bank is aware of the fact that there should be strict control over storage and issue of credit cards. How will you evaluate the Internal Control System in the area of Credit Card operations of a Bank? [Nov. 19 – New Syllabus (4 Marks), MTP-Oct. 20]
Answer:
Evaluation of Internal Control System in the area of Credit Card Operations:
The following points should be considered so as to evaluate the internal control system in the area of credit card operations:

  1. There should be effective screening of applications with reasonably good credit assessments.
  2. There should be strict control over storage and issue of cards.
  3. There should be a 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.
  4. There should be system of prompt reporting by the merchants of all settlements accepted by them through credit cards.
  5. Reimbursement to merchants should be made only after verification of the validity of merchant’s acceptance of cards.
  6. All the reimbursements (gross of commission) should be immediately charged to the customer’s account.
  7. There should be a system to ensure that statements are sent regularly and promptly to the customer.
  8. There should be a system of monitor and follow-up of customers’ payments.
  9. 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.
  10. 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.

Audit of Banks – CA Final Audit Question Bank

Question 7.
State the internal controls in the area of Loans and Advances of Banks.
Or
As the concurrent auditor of Z Bank Ltd. you are requested by its management to draft an internal control policy in respect of loans and advances. What factors do you consider as important while drafting such a policy? [May 12 (10 Marks)]
Answer:
Internal Controls in the area of Loans and Advances:
The following points should be considered so as to evaluate the internal control system in the area
of loans and advances:

  1. Advances should be made only after evaluating credit worthiness of the borrowers and obtaining sanction from the proper authorities of the bank.
  2. All the loan documents like promissory notes, letters of hypothecation, guarantee letter, etc. should be executed by the parties before advances are made.
  3. 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.
  4. Securities should be received and returned by responsible officer and should be kept in the joint custody of atleast two responsible officers.
  5. Securities requiring registration should be registered in the name of the bank.
  6. In the case of physical possession of floods 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.
  7. Personal inquiries should be made so as to determine market value of goods.
  8. 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.
  9. All irregular accounts should be brought to the notice of the H.O. regularly.
  10. The operation in each advance should be reviewed at least once every year.
  11. There should exist a proper system for post disbursement supervision and follow-up.
  12. Classification of advances should be made as per RBI Guidelines.
  13. Ensure that the funds disbursed should be utilized only for the purpose for which advances has been granted.

Question 8.
While doing the audit of a nationalized hank, your audit assistant informed you that there are a lot of irregularities in telegraphic transfers and demand drafts. What guidance would be given to audit assistant? [Nov. 13 (4 Marks)]
Answer:
Evaluation of Telegraphic Transfer and Demand Drafts operations:
The following points should be considered so as to identify the irregularities in the area of telegraphic transfers and demand drafts:

  1. Codes for TT should be known only to responsible officers.
  2. Coding and Decoding of telegrams should be done only by authorised officers.
  3. The signatures on the documents used for TT and DD should be checked by an officer with the Signature Book.
  4. All the T.Ts and D.Ds. sold by a branch should be immediately confirmed by the advices to the branches concerned.
  5. 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.

Question 9.
Write short note on: Special purpose Certificates Relating to Investments required to be issued by Central Statutory Auditors of a bank.
Answer:
Special purpose Certificates Relating to Investments
Pursuant to RBI’s circulars, issued from time to time, banks require their central auditors to issue the following certificates regarding investments of the bank (in addition to their main audit report and the LFAR:

  1. Certificate on reconciliation of securities by the bank (both on its own Investment Account as well as PMS client’s account]. The reconciliation is to be presented in a given format.
  2. Certificate on compliance by the bank in key areas of prudential and other guidelines relating to such transactions issued by the RBI.

Question 10.
What are Non-performing investments in case of banking companies. How income is recognized on such investments?
Answer:
Non-Performing Investments (NPI)
A non-performing investment (NPI), is one where Interest/instalment (including maturity proceeds) is due and remains unpaid for more than 90 days and includes:

  1. Preference shares where the fixed dividend is not paid.
  2. Unquoted Equity shares which are valued at ₹ 1 due to non-availability of the latest balance sheet.
  3. Securities issued by any issuer who has been given any credit facility which is a NPA in the Bank’s Books.
  4. Equity, debentures, bonds, etc., received as a result of conversion of Non-Performing advances. Income recognition on non-performing investments: Income on NPI should be recognized on realisation.

Question 11.
Write short note on: Income Recognition Norms of Investments in case of banking companies.
Answer:
Income Recognition Norms of Investments in case of banking companies:

  1. Performing Investments: Banks may book interest income from all performing investments on accrual basis provided interest rates on these instruments are pre-determined.
  2. Income on Non-performing investments: Income on NPI should be recognized on realisation.
  3. Government Guarantee: Income on securities of Corporate/PSU in respect of which the payment of interest and repayment have been guaranteed by the C. G./S.G. can be accounted for on accrual basis. However, where the interest is not serviced regularly and is in arrears, such income cannot be accounted for on accrual basis.
  4. Dividends: Income from Dividend on Shares of Corporate Bodies can be booked on accrual basis, if the same has been declared by the Corporate Body in its AGM and the Shareholder’s right to receive payment is established.
  5. Discount earned in discounted instruments: Discount earned on discounted instruments like commercial papers, zero coupon bonds should be booked on accrual basis over the remaining period to maturity.
  6. Units of MFs: Income from units of Mutual Funds should be accounted for only on cash basis.
  7. Profit/Loss on sale Investments: Profit and loss on sale of investments including on HTM category, should be shown under Profit/Loss on sale of investments.

Audit of Banks – CA Final Audit Question Bank

Question 12.
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The bank has recognised on accrual basis income from dividends on securities and Units of Mutual Funds held by it as at the end of financial year. The dividends on securities and Units of Mutual Funds were declared after the end of financial year. Comment.
Answer:
Income Recognition w.r.t. Investments:
Prudential Norms on income recognition of investments provides the following:

  • Income from dividend on shares of corporate bodies and units of mutual funds should be booked on cash basis.
  • In respect of income from government securities and bonds and debentures of corporate bodies, where interest rates on these instruments are pre-determined, income could be booked on accrual basis, provided interest is serviced regularly and as such is not in arrears.
  • Banks may book income from dividend on shares of corporate bodies on accrual basis, provided dividend on the shares has been declared by the corporate body in its AGM and the owner’s right to receive payment is established. This is also in accordance with AS-9 as well.

Conclusion: Recognition of dividend income on securities may be recognized on accrual basis if the same has been declared by the Corporate Body in its AGM and the Shareholder’s right to receive payment is established. In the present case, dividends were declared after the end of financial year. Hence, recognition of income from dividends on securities and units of mutual fund on accrual basis is not in order.

Question 13.
ABN Bank was engaged in the business of providing Portfolio Management Services to its customers, for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of the Bank’s financial statements for the year 2019-20. Your senior has instructed you to verify the transactions of Portfolio Management Services (PMS).

While verifying the transactions you noticed that the bank lias not maintained separate record for PMS transactions from the Bank’s own investments. As a statutory auditor what methodology will he adopted by you for verification of PMS transactions? [RTP-Nov. 20]
Answer:
Separation of Investment Functions

The auditor needs to examine whether the bank, as required by the RBI, is maintaining separate accounts for the investments made by it on their own Investment Account, PMS clients’ account, and on behalf of other Constituents [including brokers].

As per the RBI guidelines, banks are required to get their investments under PMS separately audited by external auditors.

In the instant case, ABN Bank is required to prepare separate records for PMS and as per RBI guidelines PMS investments need to be audited separately by the external auditors and the auditors are required to give a certificate separately for the same.

Conclusion: In the above case, auditor should not verify the PMS transactions and advise the bank to segregate the PMS transactions from its own investments and provide the certificate of external auditor as described above. In case ABN Bank does not provide the same the auditor may report accordingly.

Question 14.
Your firm has been appointed as branch auditor of East West Bank Ltd. In carrying out verification of advances, what are the primary evidences you will look into? [May 18 – Old Syllabus (4 Marks)]
Answer:
Verification of Advances:
Concurrent auditor is required to consider the following issues in the audit of advances:

  1. Ensure that loans and advances are sanctioned properly.
  2. Verify whether the sanctions are in accordance with the delegated authority.
  3. Ensure that securities and documents have been received and properly charged/registered.
  4. Ensure that post disbursement supervision and follow up is proper.
  5. Verify whether there is any misuse of loans and advances and whether there are instances indicative of diversion of funds.
  6. Check whether letters of credit issued by the branch are within the delegated power and ensure that they are genuine trade transactions.
  7. Check bank guarantees issued are properly worked and recorded.
  8. Ensure proper follow up of overdue bills of exchange.
  9. Verify the classifications of advances are as per RBI directions.
  10. Verify whether the submission of claims to DICGC and ECGC is in time.
  11. Verify the instances of exceeding delegated powers have been promptly reported.
  12. Verify the frequency and genuineness of such exercise of authority beyond to delegated powers of the concerned officials.

Audit of Banks – CA Final Audit Question Bank

Question 15.
Your firm has been appointed as auditors of a branch of a nationalised Bank. The bank is a consortium member of Cash Credit Facilities of ₹ 50 crores to X Ltd. Bank’s own share is ₹ 10 crores only. During the last two quarters against a debit of ₹ 1.75 crores towards interest, the credits in X Ltd’s account are to the tune of ₹ 1.25 crores only. Based on the certificate of lead bank, the bank has classified the account of X Ltd. as performing. [RTP – Nov. 18]
Answer:
NPA Classification in Consortium advances:

  • Prudential Norms on Asset Classification provides that in case of consortium advances, each bank may classify the advance given by it according to its own experience of recovery and other factors.
  • In the present case, in the last two quarters, the amount remains outstanding and, thus, interest amount should be reversed.
  • Despite the certificate of lead bank to classify the account as performing, the advance need to be classified as non-performing asset.
    Conclusion: Advance to be classified as NPA.

Question 16.
M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing cash credit limit from U Bank of Rs. 25 crores. The limit availed remained less than Rs. 5.00 crores during all the days of F.Y. 2020-21. The company has not done any credit in cash credit account during the year as it is operating current account in newly opened another bank branch adjoining to company premises.

The company is having sufficient security of stocks and debtors and DP of Rs.25.00 crores remains all over the year. The company is availing term loans from other bank branches. Now the Bank Manager is insisting to route the sale proceeds through U Bank, otherwise cash credit limit and term loan accounts with other banks will be treated as Non-Performing Accounts. Now company seeks your opinion. [MTP-Aug. 18, RTP-Nov. 18]
Answer:
NPA Classification in Consortium advances:
An Advance will be classified as NPA if:
(a) It ceases to generate income for a bank.
[b) Interest and/or instalment of principal in respect of such an advance have remain overdue or out of order for a specified period of time

An amount is said to be ‘Overdue’, if it is not paid on the due date fixed by the Bank. An account should be treated as ‘Out-of-order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power or if there are no credits continuously for 90 days as on the balance sheet date or the credits are not enough to cover the interest debited during the same period.

Prudential Norms on Asset Classification provides that in case of consortium advances, each bank may classify the advance given by it according to its own experience of recovery and other factors.

In the present case, company is availing cash credit limit from U Bank of Rs. 25 crores. The limit availed remained less than Rs. 5.00 crores during all the days of F.Y. 2020-21. The company has not done any credit in cash credit account during the year as it is operating current account in newly opened another bank branch adjoining to company premises. The company is availing term loans from other bank branches. Now the Bank Manager is insisting to route the sale proceeds through U Bank, otherwise cash credit limit and term loan accounts with other banks will be treated as Non-Performing Accounts.

Conclusion: Cash credit facility with U bank need to be classified as NPA as there are no credit in
the account to serve the interest charged in the account. Classification of term loan with other banks
depends upon the payment made to that bank.

Question 17.
Shy & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March, 2021. In the audit planning, the partner of Shy & Co. observed that the allotted branches are predominantly based in rural areas and major portion of the advances were for agricultural purpose. He needs your assistance in incorporating the criteria prescribed for determination of NPA norms in respect of agricultural advance, in audit plan. [May 14 (5 Marks), MTP-April 18]
Answer:
Criteria for determination of NPA norms in respect of agricultural advances:
An agricultural advance is classified as NPA is interest and/or instalment of principal is overdue for

  • two crop seasons, in case loans granted for Short Duration crops,
  • one crop season, in case loans granted for Long Duration crops (i.e. more than 1 year)

For this purpose, the following points are to be considered:

1. Long duration crops mean the crops with crop season lbnger than one year.

2. Short Duration Crops means the crops, other than long duration crops.

3. Crop season means the period up to harvesting of the crops, as determined by the State Level Bankers’ Committee in each State.

4. The above norms should be made applicable to all direct agricultural advances as listed in the Master Circular on Lending to Priority Sectors. In respect of all other agricultural loans, identification of NPAs would be done on the same basis as non-agricultural advances, which, at present, is the 90 days delinquency norm.

5. If natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to guidelines issued by RBI.

Question 18.
In course of audit of Good Samaritan Bank as at 31st March 2021 you observed the following: In a particular account there was no recovery in the past 18 months. The bank has not applied the NPA norms as well as income recognition norms to this particular account.

When queried the bank management replied that this account was guaranteed by the C.G. and hence these norms were not applicable. The bank has not invoked the guarantee. Please respond. Would your answer be different if the advance is guaranteed by a State Government? [May 13 (5 Marks), MTP-April 18, RTP-Nov. 19, May-20]
Answer:
Classification of Government Guaranteed advances:

  • The credit facilities backed by Central Government guarantee, though overdue will be classified as NPA only when the govt, repudiates its guarantee when invoked. Credit facilities backed by State Government guarantee should be classified as NPA in normal way.
  • This exemption in case of Central Government is only for the purpose of asset classification and provisioning and not for the purpose of recognition of income.
  • Interest on government guaranteed advances should not be taken to Income Account unless it has been realized.

In the present case, bank has not revoked the guarantee, the question of repudiation does not arise. Therefore, advance need not be classified as NPA in case of Central Government Guarantee. However, as this exemption is not available in respect of income recognition norms, the income to the extent not recovered should be reversed.

Conclusion: Bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this exemption is not available in respect of income recognition norms. The situation would be different if the advance is guaranteed by State Government because this exception is not applicable for State Government Guaranteed advances.

Question 19.
The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write suitable audit program to verify these advances: [May 13 (3 Marks), RTP-May 20]
Answer:
Verification of Advances against life insurance policies:
Audit program for the verification of advances against life insurance policies need to cover the following:

  1. Inspect the policies and see whether they are assigned to the bank and whether such assignment has been registered with the insurer.
  2. Examine whether premium has been paid on the policies and whether they are in force.
  3. Obtain Certificate regarding surrender value from the insurer.
  4. The auditor should particularly see that if such surrender value is subject to payment of certain premia, the amount of such premia has been deducted from the surrender value.

Question 20.
As a statutory auditor, how would you verify advances against goods?
Answer:
Verification of Advances against goods:
Auditor need to verify the following:

  1. Sanctioning: Auditor should examine the sanction letter and loan documents to ascertain important terms and conditions.
  2. Verification of Stock statements: To ascertain the quantity and value of goods hypothecated.
  3. Inspection: Ascertain whether the premises of the borrowers are periodically inspected by the bank officials to verify the quantity as per the stock statements.
  4. Stock Audit: Reviewthestockauditreportandidentifywhetherthereportcontains any adverse comments.
  5. Insurance: Ascertain whether the stock is appropriately insured and policies are in favour of the bank.
  6. Documents of title: Inspect the documents of title to goods to ensure that they are endorsed in favour of the bank.

Audit of Banks – CA Final Audit Question Bank

Question 21.
During the bank audit AB & Co. a new Chartered Accountant firm, observed the sale/purchase of NPAs. Please help them by narrating the aspects, relating to sale/purchase of NPAs, to be considered.
Or
In the course of audit of skip Bank Ltd., you found that the bank had sold certain of its non-performing assets. Draft the points of audit check that are very relevant to this area of checking. [May 18 – New Syllabus (4 Marks)]
Answer:
Sale/Purchase of NPA:

RBI issued guidelines to banks in respect of sale/purchase of NPAs which requires Board of Directors of the banks to lay down policy in respect of the aspects relating to sale/purchase of NPAs, including procedure for purchase/sale, valuation procedure, delegation of powers & accounting policy etc. Any purchase/sale of non-performing financial assets should be conducted in accordance with the policy approved by the Board.

Banks should, while selling NPAs, work out the NPV of the estimated cash flows associated with the realisable value of the available securities net of the cost of realisation. The sale price should generally not be lower than the NPV so arrived.

  • A bank may purchase/sell non-performing financial assets from/to other banks only on ‘without recourse’ basis.
  • Banks should ensure that subsequent to sale of the non-performing financial assets to other banks, they do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks relating to the financial assets sold.
  • A non-performing asset in the books of a bank is eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank.
  • NPAs can be sold to other banks only on cash basis. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration.
  • A non-performing financial asset (NPFA) should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the NPFA.

“ICAI Examiner Comments”
Many candidates wrongly mentioned the prudential norms for classification of NPAs. They did not highlight the aspects to be considered regarding Purchase/Sales of NPAs.

Question 22.
Write short note on: Verification of Provision for Non-performing assets.
Answer:
Verification of Provision for Non-Performing Assets:

Study the latest Master Circular of RBI to get familiarise with the norms prescribed by RBI in relation to provisioning requirements for NPA. The circulars issued by RBI after the date of issue of Master Circular and till the date of audit should also be considered.

Provisioning norms as laid down in the master circular should be construed as the minimum provisioning requirements and wherever a higher provision is warranted in the context of the threats to recovery, ensure that higher provision is made by the bank.

  • Examine whether the classification made by the branch into Standard, Sub-standard, doubtful and loss assets is appropriate.
  • Examine whether the secured and the unsecured portions of advances have been segregated correctly and provisions have been calculated properly.

As per the RBI guidelines, if an account has been regularised before the balance sheet date by payment of overdue amount through genuine sources, the account need not be treated as NPA. However, if an account indicates inherent weakness, the account should be deemed as a NPA. In other genuine cases, auditor need to examine satisfactory evidence about the manner of regularisation of the account to eliminate doubts on their performing status.

Date of NPA is of significant importance to determine the classification and hence specific care be taken in this regard and ensure that the classification is made as per the position as on date and hence classification of all standard accounts be reviewed as on balance sheet date.

Question 23.
Write short note on: Audit Procedure for Accounts falling under Corporate Debt Restructuring (CDR) Programme.
Answer:
Verification of Accounts falling under Corporate Debt Restructuring Programme:
(a) Review the present classification of the account under IRAC norms adopted by the bank and corresponding provision made in the books of account, if any.

(b) If the account is already treated as NPA, the same cannot be upgraded only because of the CDR package.

(c) Review the Debtor-Creditor Agreement [DCA] and Inter Creditor Agreement (ICA) with respect to availability of such agreements and necessary provisions in the agreement for reference to CDR cell.

(d) Ascertain the terms of rehabilitation along with the sacrifices, if any, assumed in the rehabilitation program to verify whether such sacrifices have been accounted in the books of account of the lender.

(e) Ascertain whether any additional financing/ conversion of loan into equity have been envisaged in the rehabilitation/restructuring program.

(f) Ascertain whether account has been referred to BIFR, as such cases are not eligible for restructuring under CDR system. Large value BIFR cases may be eligible for restructuring under CDR if specifically recommended by CDR core group. Auditor has to verify the necessary approvals/recommendations by CDR core group if auditor comes across any BIFR cases.

(g) Ensure that accounts wherein recovery suits have been filed, the initiative to resolve under CDR system is taken by at least by 75% of the creditors by value and 60% in number.

Question 24.
M/s Sri & Co., Chartered Accountant have been allotted the branch audit of a nationalized bank for the year ended 31st March, 2021. You are part of audit team and have been instructed by your partner to verify the following areas:
(i) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural purposes.
(ii) Drawing power calculation from stock statements in respect of working capital accounts.
What may be your areas of concern as regards matters specified above? [May 19 – Old Syllabus (5 Marks)]
Answer:
(i) Criteria prescribed for NPA Norms in respect of agricultural advances:

Criteria for determination of NPA norms in respect of agricultural advances:
An agricultural advance is classified as NPA is interest and/or instalment of principal is overdue for

  • two crop seasons, in case loans granted for Short Duration crops,
  • one crop season, in case loans granted for Long Duration crops (i.e. more than 1 year)

For this purpose, the following points are to be considered:

1. Long duration crops mean the crops with crop season longer than one year.

2. Short Duration Crops means the crops, other than long duration crops.

3. Crop season means the period up to harvesting of the crops, as determined by the State Level Bankers’ Committee in each State.

4. The above norms should be made applicable to all direct agricultural advances as listed in the Master Circular on Lending to Priority Sectors. In respect of all other agricultural loans, identification of NPAs would be done on the same basis as non-agricultural advances, which, at present, is the 90 days delinquency norm.

5. If natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to guidelines issued by RBI.

(ii) Verification of Drawing Power Calculation from stock statements:
(a) Ensure that the DP is calculated as per the BOD guidelines of the respective bank and agreed upon by the concerned statutory auditors.
(b) Ensure that due consideration has been given to proper reporting of sundry creditors for the purposes of calculating DP.
(c) Ensure that bank has conducted stock audit for all accounts having exposure of more than stipulated limit. Review the report submitted by the stock auditors and consider the comments made by the stock auditors on valuation of security and calculation of drawing power.
(d) Special focus need to be given in examining the DP calculation in case of working capital advances to companies engaged in construction business.

Audit of Banks – CA Final Audit Question Bank

Question 25.
While auditing the branch of a Bank you are required to examine inter branch adjustments. What points require your special attention. [May 10 (6 Marks)]
Or
Describe the procedure for verification of Branch Adjustment Account appearing in the account books of a bank.
Answer:
Examination of Inter Branch Adjustments (Branch Adjustment Account):

It represents the balance of all inter-branch transactions of the bank. The same are to be disclosed
“NET”. If the inter-office adjustment (Net) is a debit, it is to be shown under “other assets” and if it is a credit, it is shown under “other Liabilities and Provisions”. These can be subdivided into segments like DD paid. Inter-branch remittances, Head Office Account, etc.

The auditor should pay special attention to the following points:
(a) The origin and validity of old outstanding unmatched entries, particularly debit entries. The auditor may also seek confirmation of transactions relating to outstanding.
(b) Whether there are any reversal entries indicating the possibilities of irregular payments or frauds. ‘
(c) Whether the balances include any items in the nature of cash-in-transit, which remain pending for more than a reasonable period. This is because such items are not expected to remain outstanding beyond a very small period during which they are in transit.
(d) Whether transactions, other than those relating to inter-branch transactions have been included in inter-branch accounts.
(e) Any unusual items put through inter-branch accounts as well as old or large entries outstanding in inter-branch accounts should be carefully looked into. The auditor may also seek explanations from the management in this regard

Question 26.
As a statutory auditor of a bank, how would you verify the following:
(a) Money at call and Short Notice.
(b) Non-Banking Assets acquired in satisfaction of claims
Answer:
Verification of Money at Call and Short Notice:
(a) Verify whether there is a proper authorisation, general or specific, for lending of the money at call or short notice.
(b) Examine whether the instructions or guidelines laid down by the head office or controlling office of the branch in regard to such transactions are being complied with.
(c) Verify the call loans with the certificates of the borrowers and the call loan receipts held by the bank.
(d) Check whether the aggregate balances of money at call and short notice as shown in the relevant register agree with the control accounts as per the general ledger.
(e) Examine subsequent repayments received from borrowing banks to verify the amounts shown under this head as at the year-end.

Verification of Non-Banking Assets acquired in satisfaction of claims:
(a) Verify terms of settlement with the party, order of the Court or the award of arbitration, etc. forming the basis of acquisition of such assets.
(b) Ensure the ownership of the assets so acquired is legally vested in the bank. If there is any dispute over the title of the property, the auditor should examine whether the recording of the asset is appropriate or not.
(c) In case the dispute arises subsequently, the auditor should examine whether a provision for liability or disclosure of a contingent liability is appropriate, keeping in view the requirements of AS 29 “Provisions, Contingent Liabilities and Contingent Assets”.

Verification of Other Liabilities

Question 27.
INDO Bank appointed your firm of Charted Accountants as a branch auditor for the financial year 2020-21. Being head-in-charge of the assignment, while planning, you distributed the work among | your team members and assigned Mr. Pary for verification of bills payable. However, Mr. Pary, being fresh to the bank audits, needs your guidance. Kindly guide. ‘ [MTP-Oct. 19]
Answer:
Verification of Bills Payable:

(i) Evaluate the existence, effectiveness and continuity of internal controls over bills payable. Such controls should usually include the following-

  • Drafts, mail transfers, traveller’s cheques, etc. should be made out in standard printed forms.
  • Unused forms relating to drafts, traveller’s cheques, etc. should be kept under the custody of a responsible officer.
  • The bank should have a reliable private code known only to the responsible officers of its branches, coding and decoding of the telegrams should be done only by such officers.
  • The signatures on a demand draft should be checked by an officer with the specimen signature book.
  • All the telegraphic transfers and demand drafts issued by a branch should be immediately confirmed by advices to the branches concerned. On payment of these instruments, the paying branch should send a debit advice to the originating branch.

(ii) Examine an appropriate sample of outstanding items comprised in bills payable accounts with the relevant registers. Reasons for old outstanding debits in respect of drafts or other similar instruments paid without advice should be ascertained.

(iii) Correspondence with other branches after the year-end (e.g., responding advices received from other branches, advices received from other branches in respect of drafts issued by the branch and paid by the other branches without advice) should be examined specially in so far as large value items outstanding on the balance sheet date are concerned.

Question 28.
While auditing APNA Bank. you observed that a lump sum amount has been disclosed as contingent liability collectively, You are therefore, requested by the management to guide them about the disclosure requirement of Contingent Liabilities for Banks. Kindly guide. [RTP-Nov. 19]
Or
Briefly explain the disclosure requirements of Contingent Liabilities for banks
Answer:
Disclosure Requirements of Contingent Liabilities:
The Third Schedule to the Banking Regulation Act, 1949, requires the disclosure of the following as a footnote to the balance sheet:

  1. Claims against the bank not acknowledged as debts.
  2. Liability for partly paid investments.
  3. Liability on account of outstanding forward exchange contracts.
  4. Guarantees given on behalf of constituents
    • In India.
    • Outside India.
  5. Acceptances, endorsements and other obligations.
  6. Other items for which the bank is contingently liable.

Question 29.
Describe the audit procedures to be followed by a Statutory Auditor of a bank for audit of contingent liabilities.
Answer:
Verification of Contingent Liabilities:
In respect of contingent liabilities, the audifor is primarily concerned with seeking reasonable assurance that all contingent liabilities are identified and property valued.

Auditor should generally follow the audit procedures given below:
(a) Ascertain whether there are adequate internal controls to ensure that transactions giving rise to contingent liabilities are executed only by persons authorised to do so and in accordance with the laid down procedures.
(b) Ascertain whether the accounting system of the bank provides for maintenance of adequate records in respect of such obligations and whether the internal controls insures that contingent liabilities are properly identified and recorded.
(c) Perform substantive audit tests to establish the completeness of the recorded obligations. Such tests include confirmation procedures and examination of relevant records in appropriate cases.
(d) Review the reasonableness of the year end amount of contingent liabilities in the light of previous experience and knowledge of the current year’s activities.
(e) Obtain representation from the management that all C 6ntingent liabilities have been disclosed and that the disclosed contingent liabilities do not include any contingencies which are likely
to result in a loss and which, therefore, require adjustments of assets or liabilities.
(f) Ensure Compliance of AS 29, “Provisions, contingent liabilities and contingent assets”.

Question 30.
While doing the audit of a Nationalised bank branch your audit assistant informed you that he suspects some Irregularities in Guarantees Issued hÿ the Bank. What should be your guidance in the matter to check the same? [May 18- Old Syllabus (4 Marks)
Answer:
Verification points for checking irregularities in guarantees issued by the bank:

(a) Examine the adequacy of internal controls exercised over issuance of guarantees, for example, whether guarantees are sanctioned by appropriate authority whether adequate margins are taken from customers before issuance of guarantees, etc.

(b) Examine the adequacy of controls exercised over unused guarantee forms, for example, whether unused forms are kept under the custody of a responsible official, whether a proper record of forms issued is being kept, whether stock of forms is periodically verified and reconciled with the book records, etc.

(c) Examine whether the prescribed procedure of marking off the expired guarantees is being followed or not.

(d) Examine the relevant guarantee registers with the list of outstanding guarantees to ensure that all outstanding guarantees are included in the amount disclosed.

(e) Examine that expired guarantees are not included in this head.

(f) Verify guarantees with the copies of the letters of guarantee issued by the bank and with the counter-guarantees received from the customers.

(g) Verify the securities held as margin.

(h) Ensure whether a provision is required in terms of the requirements of AS 29, “Provisions, Contingent Liabilities and Contingent Assets”, in case any claim arises under these guarantees.

Question 31.
How would you verify “Acceptances, Endorsements and other obligations” appearing in the Balance Sheet of a bank?
Answer:
Verification of Acceptances, Endorsements and Other Obligations:
Acceptance, Endorsements and Other Obligations includes the following balances:
(a) Letters of credit (LC) opened by the bank on behalf of its customers and
(b) Bills drawn by the bank’s customers and accepted/endorsed by the bank.

Points to be examined w.r.t. Letters of credit:

  1. Evaluate the adequacy of the internal controls. over LC Forms e.g. custody, maintenance of records, periodical verification, reconciliation etc.
  2. Verify the balance of LC from the Register maintained by the bank to ascertain the amount of LC and payments made under them.
  3. Examine the guarantees of the customers, copies of the LC issued & security obtained for issuing LC.

Points to be examined w.r.t. other acceptances and endorsements:

  1. Examine the arrangements made by the bank with its customers.
  2. Test check the amounts of bills with the register maintained by the bank.
  3. Verify whether such bills are marked off in the register on payment at maturity.

Audit of Banks – CA Final Audit Question Bank

Question 32.
How do you examine claims against the Bank not acknowledged as debts? [May 10 (4 Marks)]
Answer:
Examination of Claims against the bank not acknowledged as debts:
The following points should be considered so as to examine the claims against the bank not acknowledged as debts:

  1. The auditor should examine the relevant evidence, for example correspondence with lawyers, claimants, workers/officers and workmen’s/officer’s unions.
  2. The auditor should also review the minutes of the meeting of the Board of directors/ committees of the Board, contracts, agreements and arrangements, list of pending legal cases and correspondence relating to taxes, duties etc., to identify claims against the bank.
  3. The auditor should ascertain from the management the status of claims outstanding as at the end of previous year.
  4. A review of subsequent events would also provide evidence about completeness and valuation of claims.

Verification of Important Ratios

Question 33.
As statutory central auditors of a Nationalised Bank, what special points are to be borne in mind in the audit of compliance with “Statutory Liquidity Ratio” (SLR) requirements?
Or
You have been appointed as a statutory central auditor of AAPKA Bank, a Nationalized bank. What special points would you borne in mind while conducting the audit of compliance with “Statutory Liquidity Ratio” (SLR) requirements?
Answer:
Audit of Compliance of SLR Requirements:
Central statutory auditors are required to verify the compliance of SLR on 12 odd dates in different months not having Fridays. The resultant report is to be sent to the management of the bank and to the RBI. To verify compliance with SLR requirements, the statutory auditor has to examine two aspects:
(a) The correctness of the figure of the DTL at the close of business on the reporting Friday relevant tb the dates selected by the auditor, and
(b) Maintenance of prescribed percentage of liquid assets on the selected date.

Steps for verification

  1. Obtain an understanding of the relevant circulars of the RBI so as to ascertain the items to be included in composition of DTL.
  2. Request the branch auditors to verify the correctness of the trial balances and examine the cash balance at the branch on the selected dates.
  3. Examine, on a test basis, the consolidations regarding DTL position prepared by the head office with reference to the related returns received from branches. Ensure that the consolidations prepared by the bank include the relevant information in respect of all the branches.
  4. Examine the composition of items of DTL as per circulars/instructions of RBI.
  5. Ensure that the interest accrued but not accounted for in the books is included in composition of DTL.
  6. Specify number of unaudited branches and a statement that auditor has relied on the returns received from the unaudited branches in forming his opinion.

Question 34.
Discuss the concurrent audit system in commercial banks.
Or
Explain the scope of concurrent audit of a bank with reference to RBI guidelines.
Answer:
Scope of Concurrent Audit System:
Concurrent audit is an examination which is contemporaneous with the occurrence of transactions. It attempts to shorten the interval between a transaction and its examination by an independent person not involved in its documentation. There is an emphasis in favour of substantive checking in key areas rather than test checking. It is considered as part of bank’s early-warning system to ensure timely detection of irregularities.

Coverage: Concurrent audit should cover the following:
(a) Branches whose total credit and other risk exposures aggregate to not less than 50% of the total credit and other risk exposures of the bank; and
(b) Branches whose aggregate deposits cover not less than 50% of the aggregate deposits of the Bank.

In addition to the above-mentioned parameter, bank should ensure the coverage of following:
(a) Exceptionally large, very large and large branches;
(b) Special branches handling foreign exchange business and merchant banking business.
(c) Branches rated as poor/very poor.
(d) Head Office department dealing with treasury/funds management and handling investment portfolio.
(e) Other branches or departments where in the opinion of the Bank concurrent audit is desirable.

Scope of Concurrent Audit

  1. Daily cash transactions with reference to abnormal receipts and payments. This will include currency chest transactions, major expenses met by cash, high value receipts and disbursements.
  2. Purchase and sale of shares, securities etc. Physical verification of investments and rates at which they are entered into.
  3. Verification of procedure and documentation to open new current, savings, term deposit accounts, etc. Unusual operations noticed have to be thoroughly examined.
  4. Verification of advances, overdrafts, temporary OD, Cash credit accounts, term loans, bills purchase, letters of credit etc. Procedure for sanction and documentation to be verified. Any deviation noticed to be examined in great detail.
  5. Foreign exchange transactions to be verified with reference to RBI guidelines.
  6. Verification of balancing of all ledgers and registers, inter branch reconciliation calculation and verification of interest, discount, commission etc.
  7. Revenue leakage to be detected.
  8. Special efforts to be made in all fraud prone areas. The attempt should be to ensure that all effective measures are taken to prevent frauds.
  9. Verification of high value transactions.
  10. Procedure for safe custody of security forms with the branch.
  11. Whether all procedures for tax deduction at source are followed and the tax so deducted are deposited into Government Account within the time fixed.
  12. Verification of returns, statements, calculation of capital adequacy ratio and compliance with requirements of government business.
  13. Study of RBI and Internal Inspection reports, statutory auditor’s report and compliance thereto.
  14. Whether the customers’ complaints are dealt with promptly.

Question 35.
As the concurrent auditor of Nagpur Main Branch of XYZ Bank Ltd. state the issues which have to be considered in the audit of advances. [Nov. 08 (6 Marks)]
Or
ABC Chartered Accountants have been appointed as concurrent auditors for the branches of Effective Bank Ltd. for the year 2020-21. You are part of the audit team for Agra branch of the bank and have been instructed by your senior to verify the advances of the audit period. You are required to guide your assistant about the areas to be taken care while doing verification during the concurrent audit. [RTF-May 19]
Answer:
Areas to be taken care in verification of advances:

  1. Ensure that loans and advances have been sanctioned properly.
  2. Verify whether the sanctions are in accordance with delegated authority.
  3. Ensure that securities and documents have been received and properly charged/registered.
  4. Ensure that post disbursement supervision and follow-up is proper.
  5. Verify whether there is any misutilisation of the loans and whether there are instances indicative of diversion of funds.
  6. Check whether the letters of credit issued by the branch are within the delegated power and ensure that they are for genuine trade transactions.
  7. Check bank guarantees issued, whether they have been properly worded and recorded.
  8. Ensure proper follow-up of overdue bills of exchange.
  9. Verify whether the classification of advances are as per RBI guidelines.
  10. Verify whether the submission of claims to DICGC and ECGC is in time.
  11. Verify that instances of exceeding delegated powers have been promptly reported.
  12. Verify the frequency and genuineness of such exercise of authority beyond the delegated powers by the concerned officials.

Question 36.
You are the Concurrent Auditor of a Branch of Nationalized Bank which deals in foreign exchange transactions. Give focus areas of your checking in this-respect. [Nov. 1-8-New Syllabus (4 Marks)]
Or
You have been appointed as Concurrent Auditor of a nationalized bank branch. The main business at the branch is dealing in foreign exchange. Suggest the main areas of coverage in regard to foreign exchange transactions of the said branch under concurrent audit. [Nov. 19 – Old Syllabus (5 Marks)]
Answer:
Focus area in checking of foreign exchange transactions:
Foreign exchange transactions to be verified with reference to RBI guidelines. Important points of verification in this respect are:

  1. Check foreign bills negotiated under letters of credit.
  2. Check Foreign Currency Non-Resident and other non-resident accounts to ensure that only permissible transactions route through these accounts.
  3. Check whether inward/outward remittance have been properly accounted for.
  4. Examine extension and cancellation of forward contracts for purchase and sale of foreign currency. Ensure that they are duly authorised and necessary charges have been recovered.
  5. Ensure that the overbought/oversold position maintained in different currencies is reasonable considering the foreign exchange operations.
  6. Ensure compliance of the guidelines issued by RBI/HO of the bank.
  7. Ensure that balances in Nostro accounts in different foreign currencies are within the limit as prescribed by the bank.
  8. Verify transactions of Vostro and Vostro account and their reconciliation statements.

Miscellaneous Questions

Question 37.
What do you understand by Long-form Audit Report?
Answer:
Long Form Audit report:

  • 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.

Audit of Banks – CA Final Audit Question Bank

Question 38.
As a bank branch auditor, what aspects will be considered while reporting on credit appraisal, sanctioning/dibursement and documentation in respect of advances in the LFAR? [Nov. 11 (5 Marks)]
Answer:
Aspects to be considered in LFAR:
Credit Appraisal: Compliance with the procedure/instructions of the controlling authorities of the bank, regarding loan applications, preparation of proposals for grant/renewal of advances, enhancement of limits etc. including adequate appraisal documentation in respect thereof.

Sanctioning/Disbursement

  1. Instance of credit facilities having been sanctioned beyond the delegated authority or limit fixed for the branch?
  2. Instances where advances have been disbursed without complying With the terms and conditions
    of the sanctions?

Documentation

  1. Instances of credit facilities without complying without execution of necessary documents.
  2. Instances of deficiencies in documentation, non-registration of charges, non-obtaining guarantees etc.
  3. Making a lien on deposits in case of advances given against deposits in accordance with the guidelines of the controlling authorities of the bank?

Verification points: For the reporting of above-mentioned points in LFAR, the auditor should examine the following:

  1. Whether the loan applications are complete and in prescribed form;
  2. Procedural instructions regarding grant/renewal/enhancement of facilities have been complied with;
  3. Sanctions are within delegated authority and disbursements are as per terms of the sanction;
  4. Documentation is complete; and supervision is timely, effective and as per prescribed guidelines.

The auditor is required to collect the appropriate evidences by examining relevant documents (such as loan application forms, supporting documentation, sanction letters, security documents, etc.) and by obtaining information and explanations from the branch manager.

Question 39.
Write a short note on reversal of income under bank audit. [RTP-May 19, Nov. 19-Old Syllabus (4 Marks)]
Answer:
Reversal of Income:
(a) First time NPAs: If a Loan/Advance is treated as NPA for the first time, interest accrued which has not been realized but credited to the Income Account should be reversed or provided for.

(b) Commission/other Income: If interest income is recognized on cash basis, then Commission and other such income with respect to the same Borrower, which has been recognized on accrual basis in the previous year but has not been realized, should be reversed or provided for with respect to previous year.

(c) Finance Charge of leased assets: The finance charge component of finance income [as defined in AS 19 -Leases] on the leased asset which has accrued and was credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period.

Question 40.
As a branch auditor ofa nationalised bank, how would you verify the advances to DotCom Companies.
Answer:
Verification of Advances to Dot Com Companies:

  1. Examine the internal control system w.r.t. determination of creditworthiness of the borrower and sanctioning of advances by appropriate authorities.
  2. Examine documents relating to compliances of regulatory provisions of Companies Act, 2013 such as resolution of board of directors and resolution of shareholders.
  3. Verify the business plan of the company.
  4. Determine the sources of funds, whether the company depends only on outside funding or can
    self generate funds.
  5. Review the transactions in the account to ensure the outstanding does not exceeds the limit sanctioned and the account is not window-dressed by running down overdrafts at the year end and again drawing further advances in the new year.
  6. Examine whether the amount of credits in the account are commensurate with the nature and volume of business of the borrower. Any unusual items in the account should be carefully examined by the auditor.
  7. Review periodic statements, cash flow statements, latest financial statements, etc. to assess the recoverability of advances.
  8. Verify the security exist in the account and determine whether the security is legally enforceable and is in the effective control of the bank.
  9. Ensure that proper provisions have been made in case of irregular accounts.

Audit of Banks – CA Final Audit Question Bank

Question 41.
Your firm has been appointed as Statutory Branch auditor of a Nationalised Bank for the financial year 2020-21 which is dealing in Nostro accounts. Enumerate the audit procedures you will follow for verification of Nostro accounts. [Nov. 18 – Old Syllabus (4 Marks)]
Answer:
Vostro and Nostro Accounts:
Meaning of Vostro Account: “Vostro Account” is the opposite of Nostro accounts. Here a foreign bank in another country maintains stocks of Indian rupees with their Indian branch/correspondent/ local bank.
Meaning of Nostro A/c: Foreign currency accounts maintained by Indian banks at other overseas centres is designated by it as “Nostro Account”.

Examination Aspects

  1. Reconciliation: Unreconciled Nostro Accounts, on an examination, may reveal unauthorized payments from the foreign currency account, unauthorized withdrawals.
  2. Evaluation of I.C. w.r.t. inward/outward message: The inward/outward messages should be properly authenticated and discrepancies noticed, should be properly dealt with, in the books of account.
  3. Inter-bank confirmation: In case balance confirmation certificate have been received but the same have not been reconciled, or where confirmation has not been received the same should be reported, in respect of each Account.

Question 42.
As a branch auditor of a nationalized bank, how would you verify the Balances in account of a bank situated in a foreign country.
Or
M/s CAS & Associates have been appointed as one of the statutory central auditors of FDMH Bank., for the Financial Year 2020-21. During the course of the audit, the auditor found that the bank has a balance with a Zurich based bank. The auditor understands that such balance is a matter of important consideration in the audit of the bank. Being head-in-charge of the assignment, while planning, you distributed the work among your team members and assigned Mr. Ansh for verification of Balances in account of the bank situated in foreign country. However, Mr. Ansh, being fresh to the bank audits, needs your guidance. Kindly guide. [MTP-May 20]
Answer:
Verification of Balance in account of a bank situated in foreign country:

1. Examine the ledger balances in each account with reference to the confirmation certificates obtained from the bank and reconciliation statements available.

2. Review the reconciliation statements to examine the following:

  • No debit for charges or credit for interest is outstanding and all the items which ought to have been taken to revenue for the year have been considered.
  • No cheque sent or received in clearing is outstanding.
  • All bills or outstanding cheques sent for collection and outstanding as on the closing date have been credited subsequently.

3. Examine the large transactions in the accounts, particularly near the year-end, to ensure that there is no manipulation in the account.
4. In respect of year-end balance, obtain confirmation certificates from the banks and examine the original deposit receipts.
5. Ensure compliance of AS 11 “Accounting for the Effects of Changes in Foreign Exchange Rates”. In regard to conversion of balance into the Indian currency at the exchange rates prevailing on the balance sheet date.

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