Contents PAGE
Chapter-wise marks distribution
I-9
PART A DESCRIPTIVE QUESTIONS CHAPTER 1
Nature, Objective and Scope of Audit
A1.3
CHAPTER 2
Audit Strategy, Audit Planning & Audit Programme
A2.1
CHAPTER 3
Audit Documentation and Audit Evidence
A3.1
CHAPTER 4
Risk Assessment and Internal Control
A4.1
CHAPTER 5
Fraud and Responsibilities of the Auditor
A5.1
CHAPTER 6
Audit in an Automated Environment
A6.1
CHAPTER 7
Audit Sampling
A7.1
CHAPTER 8
Analytical Procedures
A8.1
CHAPTER 9
Audit of Items of Financial Statements
A9.1
I-5
I-6
CONTENTS
PAGE
CHAPTER 10
Company Audit
A10.1
CHAPTER 11
Audit Reports
A11.1
CHAPTER 12
Audit of Banks
A12.1
CHAPTER 13
Audit of Different Types of Entities
A13.1
PART B MULTIPLE CHOICE QUESTIONS CHAPTER 1
Nature, Objective and Scope of Audit
B1.3
CHAPTER 2
Audit Strategy, Audit Planning and Audit Programming
B2.1
CHAPTER 3
Audit Documentation and Audit Evidence
B3.1
CHAPTER 4
Risk Assessment and Internal Control
B4.1
CHAPTER 5
Fraud and Responsibilities of the Auditor
B5.1
CHAPTER 6
Audit in an Automated Environment
B6.1
CHAPTER 7
Audit Sampling
B7.1
CHAPTER 8
Analytical Procedures
B8.1
CHAPTER 9
Audit of Items of Financial Statements
B9.1
CONTENTS
I-7 PAGE
CHAPTER 10
Company Audit
B10.1
CHAPTER 11
Audit Reports
B11.1
CHAPTER 12
Audit of Banks
B12.1
CHAPTER 13
Audit of Different Types of Entities (LLP Audit and Cooperative Societies)
B13.1
CHAPTER 14
Integrated Case Studies
B14.1
Dec. 2021 Exam Suggested Answers Part II (Descriptive Questions)
P.1
May 2022 Exam Suggested Answers Part II (Descriptive Questions)
P.14
12
Audit of Banks
C H A P T E R "Marks Distribution of Past Exams (New Syllabus)" 14
4 12
12
10
10
6
8
7 7
4
Marks
7
6 4 2 0 Series1
May-18
Nov-18
May-19
Nov-19
4
12
10*
7*
Attempt May 2018 Nov. 2018
May 2019#
Nov. 2019#
May 2020# Nov. 2020# Jan. 2021# July 2021# Dec. 2021#
Marks of Objective Questions* 0 2 2 0
2 0 0 0
Nov-20
Jan-21
July-21
Dec-21
6*
7*
7*
4*
Summary of Examination Weightage Marks of Subjective Topics Covered Questions 4 Nature of Securities in Verification of advances 5+5 Examination of Internal Control over Advances + NPA Norms for Agricultural Advances and Erosion in Value of Securities 4+4 (i) Engagement Team Discussions
(ii) Requirement of Risk Management System in a Bank (i) NPA provisions on Secured and unsecured advances
4+3
(ii) Engagement Team Discussions Exams cancelled due to Covid-19 4 Verification of Provisions 3+4 (i) Assessing Risk of Fraud (ii) Advances under Consortium (i) Practical Illustration on NPAs
4+3 4
#Marks are given only for descriptive part of the paper.
A12.1
(iiȌ ϐ Computation of Drawing Power
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*Only descriptive questions
May-20
A12.2 12.1 - Banking Operations Q.1
PART A : DESCRIPTIVE QUESTIONS
The functioning of banking industry in India is regulated by the Reserve Bank of India which acts as the Central Bank of our country. Explain. Ans. : Regulation of Banking Industry: In India, banking industry is regulated by the Reserve Bank of India (RBI) known as the Central Bank. Major functions and responsibilities of RBI are:
Ǧ ϐ
issuance and regulation of currency;
Q.2
determining, the monetary and credit policies.
acting as banker to the central and state governments, commercial and other types of banks including term-lending institutions. to regulate the activities of commercial and other banks.
Write short note on: Principal Enactments governing Bank Audit. Ans. : Principal Enactments governing Bank Audit: (a) Banking Regulation Act, 1949;
(b) Reserve Bank of India Act, 1934;
(c) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; TAXMANN®
(d) State Bank of India Act, 1955;
(e) State Bank of India (Subsidiary Banks) Act, 1959; (f) Regional Rural Banks Act, 1976; (g) Companies Act, 2013;
(h) Cooperative Societies Act, 1912 or the relevant State Cooperative Societies Acts; (i) Information Technology Act, 2000;
(j) Prevention of Money Laundering Act, 2002;
(k) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; Q.3
(l) Credit Information Companies Regulation Act, 2005; and (m) Payment and Settlement Systems Act, 2007
There are different types of banks prevailing in India. Explain giving examples of such banks. [MTP - March 21]
Ans.: Different types of banking institutions prevailing in India: 1. Commercial banks are the widest spread banking institutions in India, that provide a number of products and services to general public and other segments of economy. Two of its main functions are: (a) accepting deposits and (b) granting advances.
2. Regional Rural Banks known as RRBs are the banks that have been set up in rural areas in ϐ communities. Examples are Punjab Gramin Bank, Tripura Gramin Bank, Allahabad UP Gramin Bank, Andhra Pradesh Grameena Vikas Bank, etc.
CH. 12 : AUDIT OF BANKS
A12.3
3. Co-operative Banks function like Commercial Banks only but are set up on the basis of Cooperative Principles and registered under the Cooperative Societies Act of the respective state or the Multistate Co-operative Societies Act and usually cater to the needs of the agricultural and rural sectors. Examples are The Gujarat State Co-operative Bank Ltd., Chhattisgarh Rajya Sahakari Bank Mayardit, etc. 4. Payments Banks are a new type of banks which have been recently introduced by RBI. They are allowed to accept restricted deposits but they cannot issue loans and credit cards. However, customers can open Current & Savings accounts and also avail the facility of ATM cum Debit cards, Internet-banking & Mobile banking. Examples are Airtel Payments Bank, India Post Payments Bank, Paytm Payments Bank, etc. 5. Development Banks had been conceptualized to provide funds for infrastructural facilities important for the economic growth of the country. Examples are Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI), etc.
6. Small Finance Banks ϐ facilities to the unserved and unorganised sectors like small marginal farmers, small & micro business units, etc. Examples are Equitas Small Finance Bank, AU Small Finance Bank, etc.
12.2 - Auditing Framework Q.4
Ans : Auditor’s Report in case of Nationalised Banks: In the case of a nationalised bank, the auditor is required to make a report to the Central Government in which the auditor should state the following: 1. 2.
Q.5
3.
Whether, in the auditor’s opinion, the balance sheet is a full and fair balance sheet containing all the necessary particulars and is properly drawn up so as to exhibit a true and fair view of the affairs of the bank.
In case the auditor had called for any explanation or information, whether it has been given and whether it is satisfactory. Whether or not the transactions of the bank, which have come to the auditor’s notice, have been within the powers of that bank.
ͶǤ ϐ adequate for the purpose of audit. ͷǤ ϐ ϐ by such account.
6.
Any other matter which the auditor considers should be brought to the notice of the Central Government.
Write a short note on Long Form Audit Report. Ans. : 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 ϐ Ǥ
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In the case of a nationalised bank, the auditor is required to make a report to the Central Government. The report of auditors of State Bank of India is also to be made to the Central Government and is almost identical to the auditor’s report in the case of a nationalised bank. Explain what would the auditor state in his report. [MTP-Oct. 18]
A12.4
Q.6
PART A : DESCRIPTIVE QUESTIONS
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.
“If an accounting professional, whether in the course of internal or external audit or in the process ϐ power or smells any foul play in any transaction, he should refer the matter to the regulator. Any deliberate failure on the part of the auditor should render himself liable for action”. Analyse and explain the above RBI Circular regarding liability of accounting and auditing profession. [MTP-Aug. 18] Ans : Reporting of Fraud to RBI:
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Q.7
Circular issued by RBI regarding liability of accounting and auditing profession, provides that “If an accounting professional, whether in the course of internal or external audit or in the process ϐ power or smell any foul play in any transaction, he should refer the matter to the regulator. Any deliberate failure on the part of the auditor should render himself liable for action” This requirement is applicable to all scheduled commercial banks excluding Regional Rural Banks. Auditor is not expected to look into each and every transaction but to evaluate the system as a whole. While reporting such kind of matters as stated in the circular, auditor need to consider the provisions of SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”.
SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” further expounds the concept and states that an auditor conducting an audit in accordance with ϐ whole are free from material misstatement, whether caused by fraud or error.
Management develops controls and uses performance indicators to aid in managing key business ϐ Ǥ system in a bank. Or Write short note on: Requirements of a Risk Management Process/System in a bank. Or Ǥ ǡ ϐ Ǥ Discuss the various requirements for an effective risk management system in a bank. [May 19 (4 Marks)] Ans. : Understanding the Risk Management Process: An effective risk management system in a bank generally requires the following:
(a) 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 considers as acceptable.
(b) ϐ ǡ Ƭ ǣ ϐ ǯ ϐ ǡ against pre-approved limits and criteria.
CH. 12 : AUDIT OF BANKS
A12.5
(c) Control activities: Banks must have appropriate controls to manage its risks, including the following:
effective segregation of duties,
ϐ ǡ
reporting and approval of exception.
setting of limits, and
(d) 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.
Q.8
(e) Reliable information systems: Banks must have a reliable information system that provide ϐ ǡ to management and TCWG.
“The engagement team should hold discussions to gain better understanding of the bank and its environment, including internal control, and also to assess the potential for material misstatements ϐ Ǥ reference”. Explain. Or
The discussion between the members of the engagement team and the audit engagement partner ǯ ϐ Ǥ These discussions are ordinarily done at the planning stage of an audit. Analyse and Advise the matters to be discussed in the engagement team discussion. [MTP-March 18, March 19] Or You are appointed as an auditor of Banking Co., and hold discussions with engagement team. List out matters which you would discuss at planning stage of an audit to gain better understanding of the bank and its environment. [May 19 (4 Marks)] Or The discussion between members of the engagement team members and the audit engagement ǯ ϐ Ǥ ϐ Ǥ [Nov. 19 (3 Marks)] Or Discuss the advantages of engagement team discussion done at the planning stage of the bank audit. [July 21 (3 Marks)] Or The engagement team discussion ordinarily includes a discussion of the matters such as - Errors that may be more likely to occur; Errors which have been identified in prior years; Method by which fraud might be perpetrated by bank personnel or others within particular account balances and/ or disclosures; etc. In the above context, explain the advantages of such a discussion.
[RTP-Nov.21]
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Ƭ ǤǦ understanding of the bank and its environment, including internal control, and also to assess the ϐ Ǥ
A12.6
PART A : DESCRIPTIVE QUESTIONS
Ans. : Engagement Team Discussions:
Engagement team should hold discussions to gain better understanding of banks and its environment, ǡ ϐ statements. All these discussions should be appropriately documented for future reference. The ǯ ϐ misstatements. These discussions are ordinarily done at the planning stage of an audit. ϐ ǣ
Opportunity for team members to share their insights based on their knowledge of the bank and its environment. Opportunity for team members to exchange information about the bank’s business risks.
To make an understanding amongst the team members about effect of the results of the risk assessment procedures on other aspects of the audit, including decisions about the NTE of further audit procedures.
Matters to be discussed:
(a) Errors that may be more likely to occur;
(bȌ ϐ Ǣ
(c) Method by which fraud might be perpetrated by bank personnel or others within particular account balances and/or disclosures;
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(dȌ ǡ ǡ ϐ Ǣ
(e) Need to maintain professional skepticism throughout the audit engagement; Q.9
(f) Need to alert for information or other conditions that indicates that a material misstatement may have occurred.
As an Auditor of XYZ Bank Limited, how would you assess the Risk of Fraud including Money Laundering in line with SA 240? [Jan. 21 (3 Marks)] Ans.: Assessing Risk of Fraud:
As an Auditor of XYZ Bank Limited, risk of fraud including money laundering would be assessed as explained hereunder which is in line with SA 240.
As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, the auditor’s objective is to identify and assess the risks of material misstatement ϐ ǡ ϐ ϐ Ǥ The attitude of professional skepticism should be maintained by the auditor so as to recognise the possibility of misstatements due to fraud.
ϐ Dz Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your Customer Guidelines - Anti Money Laundering Standards”), requiring banks to establish policies, procedures and controls to deter and to recognise and report money laundering activities.
Q.10 ǡ Ƭ Ǥǡ Ǥ Explain the reporting requirements of the Statutory Central Auditors (SCAs) in addition to their main audit report. [RTP - May 21] Ans.: Reporting requirements of the Statutory Central Auditors (SCAs) in addition to their main audit report: Presently, the Statutory Central Auditors (SCAs) have to furnish the following reports in addition to their main audit report:
CH. 12 : AUDIT OF BANKS
A12.7
(a) 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 which is normally to be given as an Annexure to the main audit report as per the Guidance Note on Audit of Internal Financial Controls over Financial Reporting issued by the ICAI. (b) Long Form Audit Report. (LFAR)
(c) Report on compliance with SLR requirements.
(d) 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.
(eȌ ǡ ϐ made as per the guidelines issued by the RBI from time to time. (f) Report on whether any serious irregularity was noticed in the working of the bank which requires immediate attention. (g) 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. (h) Report on instances of adverse credit-deposit ratio in the rural areas.
12.3 - Audit of Advances
Ans. : Criteria for classification of advance as NPA: ϐ ǣ
(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 ϐ
ǣ Ǯ ǯǡ ϐ Bank. Out of Order: 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. ϐ Ǥ Ǥ Ǥ ϐ
Term Loans: Term loan will become NPA if interest and/or Instalment of principal has remained overdue for a period exceeding 90 days.
CC/OD: CC/OD account will become NPA if the account has remained out-of-order for a period exceeding 90 days. Ƭ ǣ Bills purchased & Discounted will become NPA when bill remains overdue & unpaid for a period exceeding 90 days.
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Q.11 An asset becomes NPA when it ceases to generate income for the Bank. Explain the criteria for ϐ Ǧ Ǥ
A12.8
PART A : DESCRIPTIVE QUESTIONS
Q.12 Ƭ Ǥ ͵ͳ ǡ ʹͲʹʹǤ ǡ Ƭ Ǥ dominantly 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. Ans. : Criteria for determination of NPA norms in respect of agricultural advances: ϐ Ȁ 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.
3.
Crop season means the period up to harvesting of the crops, as determined by the State Level Bankers’ Committee in each State.
2.
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4. 5.
Short Duration Crops means the crops, other than long duration crops.
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, ϐ Ǧ ǡ ǡ at present, is the 90 days delinquency norm. 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.
Q.13 Dz Ƭ Ǥ ͵ͳ ǡ ʹͲʹʹǤ ǡ Ƭ Ǥǡ are predominantly based in rural areas and major portion of the advances were for agricultural purpose.” Now he needs your assistance on the following points so as to incorporate them in the audit plan: (a) for determine of NPA norms for agricultural advances (b) for accounts where there is erosion in the value of security/frauds committed by the borrowers. [Nov. 18 (5 Marks)] Ans : (i) NPA Norms for 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.
3.
Crop season means the period up to harvesting of the crops, as determined by the State Level Bankers’ Committee in each State.
2.
Short Duration Crops means the crops, other than long duration crops.
CH. 12 : AUDIT OF BANKS
A12.9
(ii) NPA Norms where there is erosion in the value of security/frauds committed by the borrowers
In case there arise erosion in the value of security or any fraud is committed by Borrowers, banks can directly classify these accounts as Doubtful Assets or Loss Assets, irrespective of the period for which the account has remained NPA.
(i) Erosion in the value of securities by more than 50% of the value assessed by the bank or accepted by RBI inspection team at the time of last inspection, as the case may be, would Dz ϐ dzǡ ϐ and provided for adequately.
(ii) The realisable value of security as assessed by bank/approved valuers/RBI is less than 10% of the outstanding in the borrowal accounts, the existence of the security should be ϐ Ǥ be written off or fully provided for.
Q.14 State the internal controls in the area of Loans and Advances of Banks. Or
Dz ϐ ǡ ǡ Ǥdz ϐ Ǥ [Nov. 18 (5 Marks), MTP-April 19] Or
Ans : Aspects of Internal Control in the area of loans and advances: To determine the nature, timing and extent of substantive procedures over advances, auditor should examine the efficacy of various internal controls over advances. 1.
2.
Advances should be made only after evaluating creditworthiness of the borrowers and obtaining sanction from the proper authorities of the bank.
All the loan documents like promissory notes, letters of hypothecation, guarantee letter, etc. should be executed by the parties before advances are made.
͵Ǥ ǡ ϐ securities taken so as to cover any decline in the value thereof and also to comply with RBI directives.
ͶǤ ϐ ϐ Ǥ
5.
Securities requiring registration should be registered in the name of the bank.
7.
Personal inquiries should be made so as to determine market value of goods.
6.
8. 9.
In the case of physical possession of goods as security, the goods should be test checked at the time of receipts. In respect of hypothecated goods not in possession of the bank, surprise checks should be made. For any increase/decrease in the value of securities, drawing power should be adjusted. All the accounts should be kept within both the drawing power and the sanctioned limit at all times. All irregular accounts should be brought to the notice of the H.O. regularly.
10. The operation in each advance should be reviewed at least once every year.
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ϐ to determine the nature, timing and extent of his substantive procedures. Explain what is included in the internal controls over advances. [RTP-May 19]
A12.10
PART A : DESCRIPTIVE QUESTIONS
11. There should exist a proper system for post disbursement supervision and follow-up. ͳʹǤ ϐ Ǥ
13. Ensure that the funds disbursed should be utilized only for the purpose for which advances has been granted.
Q.15 ϐ which are located in the Industrial area. Considering that the location of the branches of bank in industrial area, these would be “advances oriented branches and audit of advances would require the major attention of the auditors. Advise how would you proceed to obtain evidence in respect of audit of advances. [RTP-May 18, MTP-Oct. 19] Or ϐ tion of internal controls relating to advances. Explain in the context of Audit of Banks. [RTP-Nov. 19] Ans : Collection of Evidences in respect of Advances: Evidences in respect of advances may be collected by performing compliance and substantive procedures. Compliance Procedures:
(a) Examine the following:
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loan documentation;
validity of the recorded amounts;
existence, enforceability and valuation of the security;
(b) Ensure compliance with the
terms of sanction end use of funds
ϐ sioning review the operation of the accounts.
Substantive Procedures:
(a) Verify that amounts included in balance sheet in respect of advances are outstanding at the date of the balance sheet. (b) Verify that advances represent amount due to the bank.
(c) Ensure that outstanding amount is appropriately supported by Loan documents. (d) Ensure that there are no unrecorded advances.
(e) Verify the appropriateness of basis of valuation of advances.
(f) Ensure that the recoverability of advances is recognised in their valuation.
Q.16
(gȌ ǡ ϐ accounting policies and relevant statutory and regulatory requirements. (h) Ensure that appropriate provisions towards advances have been made as per the RBI norms.
Ǥ ϐ Ǥ ǡ ǡ ϐ Ǥ ǡ to the bank. Discuss the nature of securities required to be offered to the bank. [May 18 (4 Marks)]
CH. 12 : AUDIT OF BANKS
A12.11
Ans : Nature of Securities to be offered:
(a) Primary security: ϐ credit has been extended by the bank. (b) Collateral security: It is an additional security and can be in any form i.e. tangible or intangible asset, movable or immovable asset.
Security may be created by different modes like Mortgage, Pledge, Hypothecation, Lien, Assignment.
(a) Mortgage: Registered Mortgage can be affected by a ‘Mortgage Deed’ signed by the mortgagor. Equitable mortgage, is affected by a mere delivery of title deeds or other documents of title with intent to create security thereof.
(b) Pledge: It involves physical delivery of goods by the borrower to the lending bank with the intention of creating a charge thereon as security for the advance. Legal ownership of the goods ϐ Ǥ
(c) Hypothecation: Hypothecation is the creation of an equitable charge, which is created in favour of the lending bank by execution of hypothecation agreement in respect of the movable securities belonging to the borrower. Borrower holds the physical possession of the goods. Neither ownership nor possession are transferred to the bank. Borrower periodically submits statements regarding quantity and value of hypothecated assets (like stocks, debtors, etc.) to ϐ Ǥ
(e) Set-off: Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit balance in the debtor’s account against any credit balance lying in another account of the debtor. Q.17
(f) Lien: Lien is creation of a legal charge with consent of the owner, which gives lender a legal right to seize and dispose/liquidate the asset under lien.
Advances generally constitute the major part of the assets of the bank. There are large number of borrowers to whom variety of advances are granted. The audit of advances requires the major attention from the auditors. In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence about, among other points, the amounts included in balance sheet in respect of advances are outstanding at the date of the balance sheet. Explain. [RTP-Nov. 19] Or Advances generally constitute the major part of the assets of the bank. There are large number of borrowers to whom variety of advances are granted. The audit of advances requires the major attention from the auditors. Explain the broad considerations about which the auditor is primarily concerned with obtaining evidence in carrying out audit of advances. [RTP - May 21] Ans.: Auditor’s considerations while obtaining evidence in carrying out audit of advances: In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence about the following: (a) Amounts included in balance sheet in respect of advances which are outstanding at the date of the balance sheet. (b) Advances represent amount due to the bank.
(c) Amounts due to the bank are appropriately supported by loan documents and other documents as applicable to the nature of advances.
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(d) Assignment: Assignment represents a transfer of an existing or future debt, right or property belonging to a person in favour of another person. Only actionable claims such as book debts and life insurance policies are accepted by banks as security by way of assignment. An assignment gives the assignee absolute right over the moneys/debts assigned to him.
A12.12
PART A : DESCRIPTIVE QUESTIONS
(d) There are no unrecorded advances.
(e) The stated basis of valuation of advances is appropriate and properly applied and the recoverability of advances is recognised in their valuation. (f) The advances are disclosed, classified and described in accordance with recognised accounting policies and practices and relevant statutory and regulatory requirements. Q.18
(g) Appropriate provisions towards advances have been made as per the RBI norms, Accounting Standards and generally accepted accounting practices.
“There is no difference in provisioning of NPA as regards to categories of NPA, whether the debt is secured or unsecured.” Critically evaluate the statement on the basis of provisioning norms of NPA of nationalised bank. [Nov. 19 (4 Marks), MTP-Oct. 21] Ans : Provisioning Requirements of NPA:
Statement that “There is no difference in provisioning of NPA as regards to categories of NPA, whether the debt is secured or unsecured” is not correct as the provisioning requirements for substandard and doubtful categories of NPA are different for secured and unsecured advances. (a) For Substandard advances: Additional provision is required @ 10% (5% for infrastructure advances). (b) For Doubtful Advances: Provisioning requirements are given below: TAXMANN®
Secured Portion
Doubtful upto 1 year
Doubtful 1 to 3 years
Doubtful above 3 years
25%
40%
100%
Unsecured Portion 100%
100% 100%
Q.19 Distinguish between Primary Security and Collateral Security with reference to audit of Banks. Also give examples of most common types of securities accepted by the Banks. [RTP-Nov. 20] Or Banks ask Security or Collateral while lending to assure that the Borrower will return the money to bank in prescribed time. Explain stating clearly the concept of Primary and Collateral Security. Also give examples of most common types of securities accepted by banks. [MTP-April 21] Ans : Primary Security and Collateral Security:
ϐ against which credit has been extended by the bank. This security is the principal security for an advance. Collateral security is an additional security. Security can be in any form i.e. tangible or intangible asset, movable or immovable asset. Examples of most common types of securities accepted by banks are the following:
Personal Security of Guarantor
Goods/Stocks/Debtors/Trade Receivables Gold Ornaments and Bullion Immovable Property
Plantations (For Agricultural Advances) Third Party Guarantees Banker’s General Lien
CH. 12 : AUDIT OF BANKS
A12.13
Life Insurance Policies
Stock Exchange Securities and Other Instruments
Q.20 Depending on the nature of the item concerned, creation of security may take the form of a mortgage, pledge, hypothecation, assignment, set-off or lien. Explain with specific reference to Audit of Banks. [RTP-Nov. 20] Ans : Modes of creating securities: Refer Answer of Q. No. 16
Q.21 Explain “Advances under Consortium” in the context of Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances. [Jan. 21 (4 Marks), MTP-Nov. 21] Ans.: Advances under Consortium:
Consortium advances should be based on the record of recovery of the respective individual member banks and other aspects having a bearing on the recoverability of the advances.
Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account should be treated as not serviced in the books of the other member banks and therefore, an NPA.
The banks participating in the consortium, therefore, need to arrange to get their share of recovery transferred from the lead bank or to get an express consent from the lead bank for ǡ ϐ books.
Q.22 In case of a Bank, explain the meaning of Funded loans. Also give examples.
[MTP - April 21]
Funded loans are those loans where there is an actual transfer of funds from the bank to the borrower. Advances comprise of funded amounts by way of: (i) Term loans
(ii) Cash credits, Overdrafts, Demand Loans (iii) Bills Discounted and Purchased
(iv) Participation on Risk Sharing basis (v) Interest-bearing Staff Loans
Q. 23 N Ltd. has been sanctioned a Cash Credit Facility by XYZ Bank Ltd. for INR 1 crore and drawing power as per the Stock Statements furnished for the last quarter is INR 80 Lakh. Outstanding balance in the account is INR 75 lakh. Interest charged to the account is INR 3.5 Lakh and total credit into the account for the quarter is INR 2.5 Lakh. As an auditor how will you report this account in your report. [July 21 (4 Marks)] Ans.: Reporting of Cash credit Facility:
ϐ Ǧ ǣ (a) It ceases to generate income for a bank; or
(b) Interest and/or instalment of principal in respect of such an advance have remain overdue ϐ
Ǯ ǯǡ ϐ Ǥ 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.
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Ans.: Funded Loans:
A12.14
PART A : DESCRIPTIVE QUESTIONS
In the given case, though outstanding balance of INR 75 Lakhs is within the drawing power but, the amount credited in the account (i.e. INR 2.5 Lakhs) is not enough to cover the interest charged in the account (i.e. INR 3.5 Lakhs).
Conclusion: Auditor should report the account as non-performing advance in the report.
12.4 - Audit of Revenue Items (Income)
Q.24 Explain income recognition norms with respect to advances in case of a banking company. Ans. : Income Recognition norms w.r.t. Advances:
Any income which exceeds
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one per cent of the total income of the bank if the income is reckoned on a gross basis or
ϐ ǡ
should be considered on accrual as per AS-9 (subject to certainty as to their ultimate collection). Other incomes may be recognised when received.
In case of NPA, RBI guidelines require that banks should not recognize income until it is actually realised.
ǡ ϐ ȋ Ȍǡ Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
In the case of outstanding bills purchased and discounted the discount received thereon should be properly apportioned. Fees and Commission earned by the bank as a result of rescheduling of advances should be recognized on accrual basis over the period covered by the rescheduled extension of credit period.
Q.25 Write a short note on reversal of income under bank audit. Ans. : Reversal of Income:
(a) First time NPAs: Ȁ ϐ ǡ 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: ϐ ϐ ȏ ϐ 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.
Q.26 In view of the significant uncertainty regarding ultimate collection of income arising in respect Ǧ ǡ Ǧ performing assets until it is actually realised. When a credit facility is classified as non-performing for the first time, interest accrued and credited to the income account in the corresponding previous Ǥ guaranteed accounts also. Analyse and Explain. [RTP-May 20] Ans : Reversal of Income:
If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, the entire interest accrued and credited to income account in the past periods, should be
CH. 12 : AUDIT OF BANKS
A12.15
reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. Further, in case of banks which have wrongly recognised income in the past should reverse the interest if it was recognised as income during the current year or make a provision for an equivalent amount if it was recognized as income in the previous year(s).
Furthermore, the auditor should enquire if there are any large debits in the Interest Income account that have not been explained. It should be enquired whether there are any communications from borrowers pointing out differences in interest charge and whether appropriate action has been taken in this regard.
12.5 - Audit of Revenue Items (Expenses)
Q.27 How would you verify the Interest Expenditure while carrying out audit of a bank. Or In carrying out an audit of interest expense, the auditor is primarily concerned with assessing the overall reasonableness of the amount of interest expense. Analyse and explain stating the audit approach and procedure in regard to interest expense. [RTP-Nov. 21] Ans. : Verification of Interest Expenditure:
(bȌ ϐ previous years and enquire into the difference, if material. (c) Verify the calculation of interest and ensure the following:
Interest has been provided on all deposits upto the date of the balance sheet and determine whether there is any excess or short credit.
Interest rates are in accordance with the bank’s internal regulations, RBI directives and agreements with the depositors;
ϐ ǡ Ȁ ϐ Ǥ
Interest on Savings Account should be checked on a test check basis in accordance with the rules framed by the bank.
Interest on inter-branch balances has been provided at the rates prescribed by the head ϐ Ǥ Interest on overdue/matured term deposits should be estimated and provided for.
(d) Ascertain whether there are any changes in interest rate on saving deposits and term deposits during the period.
Q.28 ǣ ϐ bank audit. Or You are appointed as Statutory Auditor of DEF Bank Limited for the year 2020-21. As an Auditor how will you verify Provisions created by DEF Bank Limited? [Nov. 20 (4 Marks)]
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(a) Obtain from the bank an analysis of various types of deposits outstanding at the end of each quarter and compute a weighted average interest rate. The rate so computed should be compared with the actual average rate and enquire into the difference, if material.
Auditing & Assurance (Auditing)|CRACKER AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE
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Description This book is prepared exclusively for the Intermediate Level of Chartered Accountancy Examination requirement. It covers the questions & detailed answers strictly as per the new syllabus of ICAI. The Present Publication is the 10th Edition & updated till 30th April 2022 for CA-Inter | New Syllabus | Nov. 2022/May 2023 exams. This book is authored by Pankaj Garg, with the following noteworthy features: · Strictly as per the New Syllabus of ICAI · [Topic-wise Question] Coverage of questions on every topic · [Detailed Point-wise Answers] for easy learning · [600+ Question & Case Studies] including: o 350+ Objective Questions o 700+ Knowledge & Application-based MCQs · Coverage of this book includes: o All Past Exam Question till the May 2022 CA-Inter Exam with suggested answers for Part II (Descriptive Questions) o Questions from RTPs and MTPs of ICAI · [Graphical Chapter-wise Marks Distribution] for past exams for each Chapter
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