AUDITING OF BANKING COMAPANY

BANK AUDIT EXECUTIVE SUMMARY:

A banking companies are requires maintaining the books of account inaccordance with section209 of the companies act, 1956. Banking generally a sound internal control system their day today transaction. The auditor has to evaluate suchsystem carefully.The fundamental requirementof an audit, as regards reporting on statementof account can be discharged from the examination of the internal checked and verification of assets and liabilities by making a comparison andreconciliation of balance withthose in the year and that amount of inco me and expenses by application of test checks. The banking regulation act casts greater
responsibilities on the directors of banks as comparedto those of other companies inthematterofsupervision over their working. Therefore, they exercise, or are expected toexercise greater supervision over the affairs of bank. The auditor identities to rely on such supervisionan d to limit his checking to test checks. The financialposition of a bank is depended on the condition of assets, loan, investment, cash balanced and those of its liabilities and fund. Their verification Forman important part of the balance sheet. Most of the bank have their own internal audit or inspectiondepartment entrusted with the responsibilities of checkingtheaccountof various branches. The statutory auditor may not, therefore, duplicate work.

 INTRODUCTION:
The audit of banking companies plays a very important role in India as it help to regulate the banking companies in right manner. In audit of banksincludes various types of audit which arenormally carried outin banking companies such as statutory audit, revenue/income expenditure audit, concurrent audit, computer and system audit etc. the

aboveaudit is mainly conducted by the banks own staff or external auditor. However, the rules and theregula tion relating to the conduct of various types of audit or inspections differ from a bank to bank expects the statutory audit for which the RBI guidelines are applicable. In this, I have given

moreimportance on the overall bank audit system. Intodays competitive world audit is very muchnecessary as well as compulsory , because investorinvesting decision is depend on that particular concept

if auditor has expressing his view about particular organization is true and fair then investor can get his ideas about how much he should invest in particular companies.

DEFINITION OF AUDITING
Various persons such as the owners, shareholders, investors, creditors, lenders, government excuse the final account of business concern for different purposes. All these users need to be sure that the finalaccounts prepared by the management arereliable. An auditor is an independent expert who

examines the accounts of a business concern and reports whether the final accounts are reliable or not. Different authorities have defined auditing as follows. Mats Define the auditing as auditing is concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statement and reports. 2

International auditing guidelines Defines the auditing as auditing is an independent examine action of financial information of any entity with a view to expressing an opinion thereon. AUDIT COMMITTEE: In pursuance of RBI circular September 26, 1995, banks required to constitute an Audit Committee of its Board. The membership of the audit committee is restricted to the Executive Director, nominees of Central Government and the RBI, Chartered Accountant director anode of the non-official directors. One of the functions of this committee is to provide direction and oversees the operations of the total audit function in the bank. Thecommittee also has to review the internal inspectionfunction in the bank, with

special emphasis on the system, its quality and effectiveness in terms of follow-up. The committee has to review the system

of appointment and remuneration of concurrentauditors. The audit committee is, therefore, connected with t hefunctioning of the system of concurrent audit. Themethod of appointment of auditors, their remuneration and the quality of their work is to be reviewed byte Audit Committee. It is in this context that periodical meeting by the members of the audit committee with the concurrent auditors help the audit committee to oversee the operations of the total audit function in the bank. Considering the coverage of this audit assignment and the specialized nature of work there is also a need for training to be imported tithe staff of the auditors. This training has to be given inspecialized field such as foreign exchange, computerization, and areas of income leakage, fraud prone areas, determination of credit rating and other similar specialized areas. The bank can organize such training programmed at various places so that it can ensure the quality of audit.

 ORIGIN AND EVOLUTION

1) Origin of term:

The term audit is derived from the Latin term audile mean to hear. In early days, an auditor used to listing to the account read out byte accountant in order to check them.

2) Ancient origin:

Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Egypt, Greece, Rome, U.K., and India. The Vedas, Ramayana, Mahabharata contain references to accounting and auditing. Arthashasastra by Kautilya gives detailed rules for had

accountingand auditing of public finances. The Mauryas, the Guptas and theMughals

developed and accounting and auditing system to controlstate finances. Thus, basically, accounting and auditing had their origin in the need for the government to control the income and expenditure of testate and the army. The original object of auditing was to detect and prevent errors and frauds.

3) Compulsory audits of companies:

With increasing number of companies, the companies acts indifferent countries began providing for compulsory audit of accounts of companies. Thus U.K. audit of accounts of limited companies became compulsory in 1900. In India, the companies act, 1913 made audit of company accounts compulsory. With increase in size of companies, the object of audit also shifted to ascertaining whether the accounts were true and fair rather than true and correct. Thus, the emphasis was not arithmetical accuracy but on fair representation of financial affairs.

4) Development of accounting and auditing standard:

The international accounting standards committee and theaccounting standards board of institute of chartered accountant of India have developed standard accounting and auditing practices to guide the accountants and auditor in their day-to-day work.

5) Computer technology:

The latest development in auditing pertains to the use of computers in accounting as well as auditing. Really, auditing has come a long way from hearing the accounts in the ancient day to using computers to examine computerized accounts of today.

 AUDIT COMMITTEE
In pursuance of RBI circular September 26, 1995, a bank is required to constitute an Audit Committee of its Board. The membership of and the the RBI,

auditcommittee is restricted to the Executive Director, nominees of CentralGovernment

Chartered Accountant director and one of the non-official directors. One of the functions of this committee is to provide direction andoversees the operations of the total audit function in the bank. Thecommittee also has to review the internal inspection function in the bank, with special emphasis on the system, its quality and effectiveness in terms of follow up. The committee has to review the system of appointment and remuneration of concurrent auditors. The audit committee is, therefore, connected with the functioning of the system of concurrent audit. The method of appointment of auditors, their remuneration and the quality of their work is to be reviewed by the Audit Committee. It is in this context that periodical meeting by the members of the audit committee with the concurrent auditors help the audit committee to oversee the operations of the total audit function in the bank.

Considering the coverage of this audit assignment and thespecialized nature of work there is also a need for training to be imported tithe staff of the auditors. This training has to be given in specialized field such as foreign exchange, computerization, and areas of income leakage, fraud prone areas, determination of credit rating and other similar specialized areas. The bank can organize such training programmed at various places so that it can ensure the quality of audit

 Banking in India
An Overview of Banking Institutions in India Banks are one of the foremost agents of financial intermediation in an economy like India and, therefore, development of a strong and resilient banking system is of utmost importance. The impact of reforms initiated in the decade of nineties is showing up as greater efficiency, productivity and diversity in the Indian banking system. The banking institutions in the country are performing in a competitive environment and their regulatory framework is now aligned with the international best practices. Thus, financial deepening has taken place in India and continues to be in progress with a focus on orderly conditions in financial markets while sustaining the growth momentum. The Reserve Bank of India (hereinafter referred to as RBI) acts as the Monetary authority and the central bank of the country. Presently, there are following four types of banking institutions in India: (a) Commercial banks; (b) Regional rural banks; (c) Co-operative banks; and (d) Development banks (more commonly known as term-lending institutions). The following paragraphs describe the salient features of different types of banking institutions enumerated above

Commercial Banks
Commercial banks are by far the most widespread banking institutions in India. Typically, commercial banks provide the following major products and services.

(a)

Acceptance of Deposits:

Acceptance of deposits from the public is one of the most important functions of a commercial bank. Commercial banks accept deposits in various forms: term deposits, savings bank deposits, current account deposits, etc.

(b)

Granting of Advances:

This again is an important function of commercial banks. Advances granted by commercial banks take various forms such as Guidance Note on Audit of Banks (Revised 2013) Cash credit, overdrafts, purchase or discounting of bills, term loans, etc. Apart from granting traditional facilities, banks are also providing facilities like issuance of commercial papers, ECB on behalf of bank/borrower, securitization of credit sales, cash overdraft, etc.

(c)

Remittances:

Remittances involve transfer of funds from one place to another. Two of the most common modes of remittance of funds are drafts and telegraphic/mail transfers (TT/MT). Drafts are issued by one branch of the bank and are payable by another branch of the bank (or, in case there Being no branch of the bank at the place of destination, branch of another bank with which the issuing bank has entered into necessary arrangement). The drafts are handed over to the applicant. In the case of telegraphic/mail transfer, no instrument is handed over to the applicant; the transmission of The instrument is the responsibility of the branch. Generally, the payee of both the TT and the MT is an account holder of the paying branch. Electronic funds transfer (EFT) is another mode of remittance which facilitates almost instantaneous transfer of funds between two centers electronically.

(d)

Collections:

The customers can lodge various instruments such as cherubs, drafts, pay orders, travelers cherubs, dividend and interest warrants, tax refund orders, etc., drawn in their favor and the trade bills drawn by them on their buyers with their bank for collection of the amount from the drawer (the bank or the drawer of the bill). They can also lodge their term deposit receipts and other similar instruments with the bank for collection of the proceeds from the bank with which the term deposit, etc., is maintained. Banks also collect instruments issued by post offices, like national savings certificates, postal orders, etc. The instruments mentioned above may be payable locally or at outside Centers. The instruments payable locally are collected through the clearing house mechanism, while the instruments payable outside are sent by the bank, with which instrument has been lodged, for collection to the branches of the issuing bank at those centers or, if there is no such branch, to other banks. Clearing house settles the inter-bank transactions among the local participating member banks. Generally, post offices are also members of the house. There may be separate clearing houses for MICR (Magnetic Ink Character Recognition) and non-MICR instruments. The clearing house is Managed by the RBI, State Bank of India or any other bank nominated by RBI. In case a bank has many branches within the area of a clearing house, it nominates one branch to act as the nodal branch of that bank for all the branches within that area. This nodal branch collects instruments to be Presented by other branches also. The accounts of all member banks are banking in India maintained by the clearing house. All member banks have to pay an agreed sum to the bank managing the clearing house for meeting the cost of infrastructure and services it provides to them. In addition to the regular clearing houses as discussed above, Electronic Clearing Service (ECS) is also in vogue. ECS takes two forms: ECS credit or ECS debit. In the case of ECS credit, there is a single receiver of funds from a large number of customers, e.g., public utilities, mutual funds, etc. The beneficiary (i.e., the receiver of funds) obtains mandate from its customers to withdraw funds from their specified bank accounts 9

on a particular date. These customers may have accounts with different banks in the same clearing house area. Before the specified date, the beneficiary compiles bank-branch-wise particulars of the accounts to be debited and furnishes the details in the electronic media like a floppy disk to its own bank which, in turn, arranges to provide them to the banks concerned, through the clearing house, for verification of particulars of accounts. Any discrepancies are rectified and, on the specified date, the accounts are debited by the respective banks and the beneficiary gets the credit. In the case of ECS debit, there is a single account to be debited against which a number of accounts with a number of banks in the same clearing house area are credited. This system is useful for distribution of Dividend/interest, payment of salaries by large units, etc. Roll-out of Speed clearing is one of the many initiatives taken by RBI for improving efficiency in the time frame for and process of collection of outstation cherubs the time frame has reduced from 7-45 days to 2-3 days, Speed Clearing leverages on the Core Banking Solutions (CBS) implemented in banks across the country and facilitates realization of outstation cherubs drawn on CBS-enabled branches at the local centre itself, thus obviating the need of such cherubs to physically move to the outstation centre. Keeping in view the benefits to customers as also the infrastructural and processing preparedness of banks, RBI, vide its circular No. DPSS.CO.CHD. No. 1514 / 03.01.03 / 2010-2011 dated January 4, 2011 on Enhancing the scope of Speed clearing decided to extend the scope of Speed clearing to cover all transaction codes, other than those relating to government cherubs. Banks, however, need to exercise usual care and caution while handling such instruments. These revised instructions are effective from February 1, 2011.

e) Receipt of Foreign Contribution on behalf of the registered persons/ organization :Scheduled Banks also handle the foreign contribution receipt on behalf of the registered persons/ organization as per the Foreign Guidance Note on Audit of Banks (Revised 2013) Contribution (Regulation) Act, 2010. Banks need to ensure that the concerned persons/organization are registered with the Central Government Or has obtained the prior permission to receive such foreign contribution if 10

Required by law, and that no branch other than the specified branch accepts Foreign contribution. As per Foreign Contribution (Regulation) Rules, 2011, every bank has to send a report to the Central Government within thirty days of any transaction, in respect of receipt of foreign contribution by any person who is required to obtain a certificate of registration or prior permission under the Act, but who was not granted such certificate or prior permission as on the date of receipt of such remittance. Such report has to contain the following details: (a) Name and address of the donor, (b) Name and address of the recipient, (c) Account number, (d) Name of the Bank and Branch, (e) Amount of foreign contribution (in foreign currency as well as Indian Rupees), (f) Date of receipt, (g) Manner of receipt of foreign contribution (cash/cherub/electronic transfer etc.) Banks also have to send the abovementioned report to the Central Government within 30 days from the date of such last transaction in respect of receipt of any foreign contribution in excess of 1 core or equivalent thereto In a single transaction or in transaction within 30 days by such persons. The RBI has issued detailed guidelines in its Master Circular No. DBOD.AML.BC.No. 12 /14.08.001/ 2012-13 dated July 2, 2012 on Guidelines issued under Section 36(1)(a) of the Banking Regulation Act, 1949 - Implementation of the provisions of Foreign Contribution (Regulation) Act, 2010@

(f) Cash Management Product: A derivative of the collection business, this facility is provided for expeditious transfer of funds collected by a customer at the specified centers in the country to his central account with the use of computers/satellites. It is particularly useful for large units which have their sales/collection network in a very wide geographical area. Only selected branches of a bank may handle the business due to the infrastructural requirements.

(g) Issuance of Letters of Credit and Guarantees: These are two important services rendered by banks to customers engaged in business, industrial and commercial activities. A letter of credit (LC) is an undertaking by a bank to the payee (the supplier of goods and/or services) to pay to him, on behalf of the applicant (the buyer) any amount up to the limit specified in the LC, provided the terms and conditions mentioned in the 11

LC are complied with. The guarantees are required by the customers of banks for submission to the @Revised in 2013 Edition. Banking in India buyers of their goods/services to guarantee the performance of contractual obligations undertaken by them or satisfactory performance of goods supplied by them, or for submission to certain departments like excise and customs, electricity boards, or to suppliers of goods, etc., in lieu of the stipulated Security deposits.

(h) Merchant Banking Business: Many bank branches act as collection agents to issue business for merchant bankers. The customer and the bank have to agree to the modalities of the scheme, like names of branches authorized as collecting branches, the procedure for retaining the subscription and its Remittance periodically, the documents required by the customer from the collecting branches, etc. (I) Credit Cards: The processing of applications for issuance of credit cards is usually entrusted to a separate division at the central office of a bank. The dues against credit cards are collected by specified branches. Many of them also act as cash points to provide cash to the cardholder on demand up to The specified limits. Most credit cards issued by banks are linked to one of the international credit card networks like VISA, Master or Amex.

(j) Technology-based Services: Many banks have started providing internet banking services and phone banking services. Some banks, acting as stock brokers, also provide facility to their customers to buy or sell securities on stock exchanges through the internet. The fast changing technology has Synchronized the banking facility in such a way that the customer need not come physically to the bank for any transactions. The banks are now providing the facility of payment of utility bills, railway reservation, and tax deposition through ATM/internet and also provide recharge facility to mobile Phone users.

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(k) Dividend/Interest/Refund Warrants: Many entities require facilities for distribution of funds to their shareholders and others. For this purpose, they issue warrants in favor of shareholders/others payable at designated branches of specified banks, with a prior arrangement with the banks Concerned. The aggregate amount of the warrants or other instruments issued is deposited by the entity with a nodal branch. The designated branches pay the warrants when presented to them.

(l) Safe-keeping Services: Banks provide services for safe keeping of the scraps and valuables of customers in their vaults. A receipt is issued to the customer by the branch at the time of deposit of the items and an acknowledgement is obtained from him at the time of delivery. Each transaction a receipt or delivery is duly recorded in appropriate register(s) and periodically, the Items physically available are cross-checked with the balances as per registers.

External audits of banks

1. Executive summary 1. the recent financial crisis not only revealed weaknesses in risk management, control and Governance processes at banks, but also highlighted the need to improve the quality of external audits Of banks. Given the central role banks play in contributing to financial stability, and therefore the need For market confidence in the quality of external audits of banks financial statements, the Basel Committee on Banking Supervision (the Committee) is issuing this document on external audits of Banks. It forms part of the Committees commitment to help improve audit quality at banks. This Document enhances and replaces the relationship between banking supervisors and banks external auditors (January 2002)1and External audit quality and banking supervision (December 2008).2

2. Implementation of the 16 principles and observation of the explanatory guidance in this Document are expected to improve the quality of bank audits and enhances the effectiveness of

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Prudential supervision, which will then contribute to financial stability. Through these principles and Explanatory guidance, the document describes supervisory expectations regarding audit quality and how that relates to the external auditors work in a bank. This document specifically sets out supervisory expectations of how: (a) External auditors can discharge their responsibilities more effectively; (b) Audit committees can contribute to audit quality in their oversight of the external audit; (c) An effective relationship between the external auditor and the supervisor, which allows greater Mutual understanding about the respective roles and responsibilities of supervisors and External auditors, can lead to regular communication of mutually useful information; and (d) Regular and effective dialogue between the banking supervisory authorities and the relevant Audit oversight bodies can enhance the quality of bank audits.

3. The document also notes the Committees continued commitment to work through International bodies to enhance audit quality.

4. An external auditor plans and performs the audit of a banks financial statements to obtain Reasonable assurance about whether the financial statements as a whole are free from material Misstatements, whether due to fraud or error, and are prepared, in all material respects, in accordance With an applicable financial reporting framework. In many ways, the supervisor and the external auditor have complementary concerns regarding the same matters. For example, the audit of financial Statements may help identify weaknesses in internal controls relating to financial reporting at a bank Which may, therefore, inform supervisory efforts in this area and contribute to a safe and sound banking? System.

5. Although the focus of this document is on the quality of the audit performed by the external Auditor, an audit in accordance with internationally accepted auditing standards is conducted on the 14

Premise that the management and, where appropriate, those charged with governance5 Have acknowledged certain responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements does not relieve management or those charged with governance of their Responsibilities.

6. The Basel Committee on Banking Supervisions Core Principles for Effective Banking Supervision (September 2012, Core Principles) provide a framework of minimum standards for sound supervisory Practices and are considered universally applicable. Core Principle 27 focuses on prudential regulations And requirements for banks in relation to financial reporting and external audits. This guidance set out in this document is consistent with Core Principle 27. 7. the application and the structure of each section in this document are described below, Followed by an outline of the key international relationships between the Committee and other groups Relevant to external auditing.

Structure The external auditor and audit quality Audit quality includes delivering an appropriate, independent professional opinion on the Financial statements, in compliance with internationally accepted auditing standards. Internationally Accepted auditing standards require the external auditor to possess and demonstrate certain attributes While applying a rigorous audit process. .Given that internationally accepted auditing standards are applicable to all entities, Section 4 of This document builds upon these standards and lays out the supervisory expectations of the external Auditor regarding the audit of a bank. Moreover, Section 4 highlights the key areas where significant Risks of material misstatement in banks financial statements often arise, which therefore require the 15

Auditors particular attention for a quality audit.

Engagement between the external auditor and the audit committee

Regular and effective engagement and communication between the external auditor and the Audit committee contributes to audit quality. Amongst its other responsibilities, the audit committee is responsible for overseeing the banks external auditor. A soundly constituted audit committee can play a key role in contributing to audit quality. Section 5 discusses the audit committees responsibilities in relation to the oversight of, and its relationship with, the external auditor. Engagement between the supervisor and the external auditor Effective communication between the supervisor and the external auditor enhances the effectiveness of supervision of the banking sector. This relationship will then also contribute to audit quality. The supervisor and the external auditor have a mutual interest in building and maintaining an Effective relationship, which fosters regular communication of useful information. Section 6 provides Principles and explanatory guidance for facilitating an effective relationship between the supervisor and the external auditor at the levels of the supervised bank, the audit firm and the accounting profession as a whole. Engagement between the banking supervisory authority and the audit oversight body The banking supervisory authority and the relevant audit oversight body share a strong mutual Interest in ensuring quality independent audits. Regular and effective dialogue between the banking Supervisory authority and the audit oversight body at a national level can assist in identifying and Dealing with key issues in relation to the conduct of bank audits. Section 7 sets out the principles for Facilitating effective communication between these bodies. Supervisors are in a unique position to identify audit quality issues at both the industry and Individual audit level. Regular and effective engagement between the supervisor and the relevant audit Oversight body may enable the supervisor to provide timely feedback on such issues. Additionally, the Supervisor may, if necessary, take action to address issues raised by the audit oversight body. 16

 Overview of the principles Principle 1: The external auditor of a bank should have banking industry knowledge and Competence sufficient to respond appropriately to the risks of material misstatement in the banks financial statements and to properly meet any additional regulatory requirements that may be part of the statutory audit.

Principle 2: The external auditor of a bank should be objective and independent in fact and Appearance with respect to the bank, consistent with the more stringent requirements Applicable to public interest entities in internationally accepted ethical standards. Principle 3: The external auditor should exercise professional skepticism when planning and Performing the audit of a bank, having due regard to the specific challenges in auditing a bank.

Principle 4: Audit firms undertaking bank audits should comply with the more stringent Requirements on quality control applicable to listed entities in internationally accepted quality control standards, having due regard to the complexity of a bank audit.

Principle 5: The external auditor of a bank should identify and assess the risks of material Misstatement in the banks financial statements, taking into consideration the complexities of Banking activities and the need for banks to have a strong control environment 17

 Principle 6: The external auditor of a bank should respond appropriately to the significant risks of material misstatement in the banks financial statements.

Principle 7: The audit committee should have a robust process for approving, or Recommending for approval, the appointment, reappointment, removal and remuneration of The external auditor. Principle 8: The audit committee should monitor and assess the independence of the external Auditor. Principle 9: The audit committee should monitor and assess the effectiveness of the external audit. Principle 10: The audit committee should have effective communication with the external auditor to enable the audit committee to carry out its oversight responsibilities and to enhance the quality of the audit.

Principle 11: The audit committee should require the external auditor to report to it on all relevant matters to enable the audit committee to carry out its oversight responsibilities.

Principle 12: The supervisor21 and the external auditor should have an effective relationship

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that includes appropriate communication channels for the exchange of information relevant to carrying out their respective statutory responsibilities.

Principle 13: The external auditor should report to the supervisor matters that are likely to be of material significance to the functions of the supervisor.

Principle 14: There should be open, timely and regular communication between the banking supervisory authority, the audit firm and the accounting profession as a whole on key risks and systemic issues as well as a continuous exchange of views on appropriate accounting techniques and auditing issues.

Principle 15: There should be regular and effective dialogue between the banking supervisory authority and the relevant audit oversight body.

Principle 16: The banking supervisory authority and the audit oversight body should observe appropriate confidentiality requirements when sharing information.

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 External auditor and the external audit of financial statements

External audits of financial statements performed in accordance with internationally accepted auditing standards enhance the confidence of all users, including supervisors, in the reliability of the audited financial statements and the quality of the information provided. Audits of banks should be performed in accordance with internationally accepted auditing standards. As these standards are not industry-specific, for a quality audit supervisors expect external auditors not only to comply with internationally accepted auditing standards but also to tailor their audit work in response to the significant risks and issues applicable to banks. External auditors are required to comply with applicable jurisdictional and, where relevant, internationally accepted ethical standards. However, given the complexity and systemic risks associated with banks, the external auditor of a bank should follow the most stringent rules for independence under these standards. Similarly, the external auditor of a bank should also follow the most stringent standards on quality control at the engagement level Part A of this section describes the supervisors expectations as a user of the banks financial Statements, specifically with respect to the external auditors knowledge, competence, objectivity, independence, professional skepticism and quality control over the banks audit. Part B identifies areas where supervisors believe there is often a significant risk of material misstatement in a bank financial Statements and factors to which the supervisor expects the external auditor to pay attention when auditing those areas. While the primary focus in this section is on the financial statement audit, particularly in Principles 5 and 6, the external auditor may identify matters23 in the course of the audit that are of

Interest to the supervisor and therefore should be considered for communication to the supervisor. Examples of such matters have been included in Section 6. In some jurisdictions, as part of the statutory audit, the external auditor may also undertake 20

Additional work to provide assurance on internal controls or other aspects of a banks operations. The principles set out in this section provide a relevant reference for the performance of such additional Work. The principles and explanatory guidance set out in this section provide a framework for the

supervisors interactions with the external auditor, the audit committee and the relevant audit oversight body. The outcome of these interactions will inform the supervisors views as to the quality of the external audit and contribute to the supervisory process. These principles and explanatory guidance also provide a framework to assist the audit committee in selecting the external auditor and in assessing the external auditors knowledge, competence, objectivity and independence as well as the effectiven ess of the audit process.

The relationship between the supervisor and the external auditor This section sets out the principles that promote effective relationships that will enable regular communication of mutually useful information in the context of a statutory audit between: the supervisor and the external auditor at the supervised bank level, regardless of whether the communication is mandatory (Subsection A Principles 12 and 13); and the banking supervisory authority and the audit firm, and the accounting profession as a whole That is not specific to an individual bank (Subsection B Principle 14). The key objective of having effective relationships between the parties referred to above is to enhance the effectiveness of the supervision of the banking sector. This relationship will then also Contribute to the quality of external audits. An effective relationship should enable each party to carry out its respective statutory responsibilities while not implying that either party is responsible for or should or can perform the statutory responsibilities of the other party.

Effective relationship at the levels of the audit firm and the accounting profession as a whole

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To assist in effective supervision of banks, it is important to identify system-wide, macro prudential risks which may have an impact on banks. In the course of their work, the banking supervisory authority and external audit firms obtain information which, when reviewed in its entirety, can assist in identifying changing and emerging key trends and developments that may be indicative of emerging systemic risk. Audit firms may also identify emerging issues over inconsistent or inappropriate application of accounting standards which, if identified early, permit external auditors and supervisors to take timely remedial action. There should be open, timely and regular communication between the banking supervisory authority, the audit firm and the accounting profession as a whole on key risks and systemic issues as well as a continuous exchange of views on appropriate accounting techniques and auditing issues. The banking supervisory authority and external audit firms should have regular discussions on existing and emerging key risks and systemic issues at the national level, as the exchange of such information is mutually beneficial. The communication should be open and in an environment that allows a frank exchange of views and ideas. If circumstances dictate, ad hoc meetings should be held to discuss matters requiring urgent action to allow each party to take appropriate action in a timely manner. There should be periodic meetings at the national level between the banking supervisory authority and audit firms and professional accountancy bodies to discuss existing and emerging key risks and systemic issues. Key risks may be identified from discussions on: the appropriateness of accounting techniques for newly developed financial instruments, other aspects of financial innovation and securitization; and existing issues such as market opacity, and impairment

evaluations for a particular asset class. These discussions on key risks could be indicative of systemic issues. They could also assist in achieving banks adoption of the most appropriate accounting policies and their consistent application. It is advisable for banking industry associations to be involved in discussions on these topics.

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 Structure of Internal Control Procedures in a bank

The specific internal control procedures to be followed in an enterprise depend on the nature, volume and complexities of its operations and the managements attitude towards control. However, as in the case of other enterprises, the internal control procedures relevant to assertions made in the financial statements of bank generally falls under the following categories: I. Segregation and Rotation of Duties One of the fundamental features of an effective internal control system is the segregation and rotation of duties in a manner conducive to prevention and timely detection of occurrence of frauds and errors. The functions typically segregated are authorization of transactions; execution of transactions; physical custody of related assets; and maintenance of records and documents. In the case of banks, the following measures are usually adopted: Work of one staff member is invariably supervised/checked by another
Staff member, irrespective of the nature of work. Banks have a system of rotation of job amongst staff members, which reduces the possibility of frauds and is also useful in detection of frauds and errors. Also, most banks usually have a process of giving block leave to its staff members wherein the employee stays away from work For at least a continuous period of 2 weeks. Banks invariably ensure dual responsibility and authorization procedures. Any transaction put through in the banking system is invariably subject to verification and authentication by more than one staff member. For example, in case of treasury transactions such as purchase of a government security, the transaction is entered into on the NDS by the front office; however, the back end support function is responsible for confirming the transaction with the counterparty through an exchange of confirmation, prior to settlement of the transaction. RBI has also vide its circulars and

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notifications propagated banks to establish effective segregation in its functions, for example, the master circulars on prudential norms for classification, valuation and operation of investment portfolio by banks, clearly advises banks to have functional separation of trading, settlement, monitoring and accounting activities. Risk Assessment and Internal Control

II. Authorization of Transactions Authorization may be general (i.e., it may relate to all transactions that conform to prescribed conditions referred to as routine transactions) or it may be specific with reference to a single transaction (non-routine transactions and accounting estimates). It is necessary to establish procedures which provide assurance that authorizations are issued by persons acting within the scope of their authority, and that the transactions conform fully to the terms of the authorizations. The following procedures are usually established in banks for this purpose: The financial and administrative powers of each official/each position are fixed and communicated to all persons concerned, For example, in a bank, procedures in relation to the settlement of transactions, reconciliation of nostrum accounts and the payment system are clearly Defined and documented in a manual. This reduces the risk that segregation of duties may be compromised or that transactions may not be settled in a systematic manner. All financial decisions at any level are required to be reported to the next higher level for confirmation/information. For example, in case of a money market transaction, if the dealer exceeds the predefined limits such as a position limit or counterparty limit, then the transaction has to be vetted and confirmed by the head dealer. Any deviation from the laid down procedures requires confirmation from/intimation to higher authorities.

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 Branch managers have to send periodic confirmation to their controlling authority on compliance of the laid down systems and procedures. III. Maintenance of Adequate Records and Documents Accounting controls should ensure that the transactions are recorded at correct amount and in the accounting periods in which they are executed, and that they are classified in appropriate accounts. Moreover, recording of transactions should be such as would facilitate maintaining the accountability for assets. The procedures established in banks to achieve these objectives usually Include the following: All records are maintained in the prescribed books and registers only. This ensures that all requisite particulars of a transaction are adequately recorded. Also, the work of finalization of accounts is greatly facilitated. For example, deal slips pertaining to purchase and sale of securities Along with the respective counterparty confirmations for the deals are filed together in the deal register. All branches of a bank have a unique code number which is circulated amongst all offices of the bank. This code number is required to be put on all important instruments. All books are to be balanced periodically and it is to be confirmed by an official. For example, in case of purchase and sale of security transactions, the banks periodically reconcile the security balance in the banks book vis--vis the balance in the custodian account (i.e., Subsidiary General Ledger or Demit account). It may be noted that the RBI vide its master circular DBOD No. BP. BC.13/21.04.141/2012-13 dated July 2, 2012 has also mandated that investment balances as per banks book should be reconciled at quarterly intervals with the balances in the Public Debt Offices books. If the number of transactions warrant, such reconciliation should be undertaken more frequently, say on a monthly basis. This reconciliation should be periodically checked by the internal audit department.

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 All inter-office transactions are to be reconciled within a specified time Frame. IV. Accountability for and Safeguarding of Assets The accountability for assets starts at the time of their acquisition and continues till their disposal. The accountability for assets is achieved by maintenance of records of assets and their periodic physical verification. To safeguard the assets, it is also necessary that access to assets is limited to authorized personnel. This covers not only direct physical access, but also indirect access through the preparation or processing of documents that authorize the use or disposal of assets. The following are some of the important controls implemented by banks in this regard: Particulars of lost security forms are immediately advised to branches So that they can exercise caution. The specimen signatures of all officers are maintained in a book which is available in all branches. The officials approving the payment of the instruments drawn on their branches by other branches are required to confirm the signatures on the instruments with reference to the Specimen signatures. Likewise, the branches have on record the specimen signatures of the authorized officials of approved correspondent banks also. The instruments which are evidence of remittances of funds above a Cut-off level is to be signed by more than one official. Risk Assessment and Internal Control Important financial messages, when transmitted electronically, are in code language/ transcript. Negative lists like stop-payment cherubs are kept which may deal with the particular kind of transaction. There may be a caution list for advances also. Sensitive items like currency, valuables, draft forms, term deposit receipts, travelers cherubs and other such security forms are in the custody of at least two officials of the branch. (However, in the case of very small branches having only one official, single custody is also permitted.) 26

 All assets of the bank/charged to the bank are physically verified at specified intervals. V. System Configuration and Account Mapping Information technology (IT) has played a major role in providing a competitive edge to banks to differentiate themselves in the market place and to deliver their services more effectively at a lower cost. VI. Independent Checks Independent checks involve a periodic or regular review of functioning of the system by independent persons to ascertain whether the control procedures are being performed properly. Banks have an elaborate system of various forms of internal audit covering virtually every aspect of their functioning. Operating Framework for Identifying and Dealing with Frauds@ All banks have policy and operating framework in place for detection, Reporting and monitoring of frauds as also the surveillance/ oversight process in operation so as to prevent the perpetration of frauds. The Reserve Bank of India, based on the findings from certain forensic scrutinizes conducted by it, vide its Circular No. DBS. CO.FrMC.BC.No.10/23.04.001/2010-11 date 31st May 2011 had identified certain areas wherein frauds had shown occurrence or increasing trend in banks. These areas include: Loans/ advances against hypothecation of stocks Housing loans cases Submission of forged documents including letters of credit Escalation of overall cost of the property to obtain higher loan amount Over valuation of mortgaged properties at the time of sanction Grant of loans against forged FDRs 27

 over-invoicing of export bills resulting in concessional bank finance, Exemptions from various duties, etc. frauds stemming from housekeeping deficiencies RBI has accordingly prescribed the following guidelines to be incorporated by the banks in their operating framework for identifying and dealing with frauds: The operating framework for tracking frauds and dealing with them Should be structured along the following three tracks: (I) Detection and reporting of frauds (ii) Corrective action and (iii) Preventive and punitive action Detection and Reporting of Frauds (a) The banks are required to have a set of prescribed procedures and criteria with which the events or transactions having serious irregularities are analyzed and assessed to establish occurrence of fraud. (b) The banks may define a fraud based on the guidelines issued by RBI. While doing so, they may clearly demarcate/ distinguish the occurrence of an event on account of negligence in conduct of duty from collusion by the bank staff (with the borrowers and with an intention to cheat the bank). (c) Care needs to be exercised while dealing with instances of willful default. In this connection, a willful default would be deemed to have occurred if any of the following events is noted: The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honor the said obligations.

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 The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank / lender. (d) Further, the banks may also examine the intent to defraud, irrespective of whether or not actual loss takes place. Keeping these key factors in mind, any action taken in collusion to derive undue/ unjust benefit or advantage should be termed as fraud. (e) Accordingly, once a fraud is detected, a report must be prepared and submitted to the Competent Authority. As a part of their overall policy and operating framework, the banks need to identify and designate the Competent Authority to whom such reports should be submitted. The fraud report should be a diagnostic assessment, clearly bringing out the causes of the fraud and identify whether the fraud occurred due to system failure or human failure. Corrective Action An important corrective step in a fraud is recovery of the amount siphoned off through the fraud. A structured scrutiny/ examination of events or transactions would lead to quick conclusion whether a fraud has occurred and the banks funds have been siphoned off. Therefore, this exercise is the first critical step towards corrective action in the sense that it would lead to expeditious filing of police complaints, blocking/ freezing of accounts and salvaging funds from the blocked/ frozen accounts in due course. Once a set of transactions

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is explicitly identified as fraudulent, the mandate for seizing and taking possession of related documents, issuance of suspension order/ order to proceed on leave to identified/ suspected employees would be easier thereby preventing them from destroying/ manipulating evidences or obstruction of investigations. Preventive and Punitive Action The preventive action as deemed necessary to address the system failure and/ or punitive action as prescribed internally for human failure should be initiated immediately and completed expeditiously by the banks. Generally, in the current system driven environment in banks, wherever transactions occur in breach of/ overriding Controls, they get reflected in the End of day exception report. Accordingly, all such exception reports should be perused by the designated officials and a post facto authorization for the transactions accorded. In certain cases the process may not have got duly implemented reflecting the poor internal control mechanisms. Therefore, banks should ensure that they bring in the needed refinement in this process and also specify the manner in which the authority will deal with the exception reports. The entire gamut of the manner in which the exception reports are generated, transactions contained in the reports are examined/ scrutinized, and the reports submitted to higher authorities for necessary authorizations for breaches should be periodically subjected to review and oversight by the banks management/ Board of Directors. In addition to the above, banks have also been advised by RBI to take steps to put in place certain controls and disincentives in their HR processes and internal inspection/ audit processes as part of their fraud risk management framework. These include: (a) For key and sensitive posts such as those in dealing rooms, treasury, relationship managers for high value customers, heads of specialized branches, etc., selecting only such officers who satisfy the Fit and Proper criteria. The appropriateness of such postings should be subjected to periodical review. (b) Putting in place the staff rotation policy and policy for mandatory leave for staff. The internal auditors as also the concurrent auditors must be specifically required to examine the implementation of these policies and point out instances of breaches irrespective of apparent justifications for non-compliance, if any. The decisions taken / transactions effected by officers and staff not rotated/ availing leave as per policy

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should be subjected to comprehensive examination by the internal auditors/ inspectors including concurrent auditors. The findings thereon should be documented in a separate section of the audit/ inspection reports. (c) Building up a database of officers/ staff identified as those having aptitude for investigation, data analysis, forensic analysis, etc. and expose them to appropriate training in investigations and forensic audit. For investigation of frauds, only such officers/ staff should be deployed through the fraud investigation unit/ outfit. Overall Audit Strategy Revised Standard on Auditing (SA) 300, Planning an Audit of Financial Statements states that the objective of the auditor is to plan the audit so that it will be performed in an effective manner. For this purpose, the audit engagement partner should: establish the overall audit strategy, prior to the commencement of an audit; and involve key engagement team members and other appropriate specialists while establishing the overall audit strategy, which depends on the characteristics of the audit engagement. The overall audit strategy sets the scope, timing and direction of the audit as it guides the development of detailed audit plan. The establishment of the overall audit strategy involves: Identifying the characteristics of the audit engagement that define its scope, Such as the financial reporting framework used (Third Schedule to the Banking Regulation Act, 1949), additional reporting requirements at various locations of the components of the bank prescribed by the RBI, etc. Ascertaining the reporting objectives of the audit engagement to plan the timing of the audit and the nature of the communications required, such as deadlines for interim and final reporting, key dates for expected communications with the management and with those charged with governance.

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 Considering the important factors that will determine the focus of the engagement teams efforts, such as determination of appropriate audit materiality, preliminary identification of significant risks, preliminary identification of material components and significant account balances and disclosures. Consider the factors that, in the auditors professional judgment, are significant in directing the engagement teams efforts. Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the bank is relevant. Ascertain the nature, timing and extent of resources necessary to perform the engagement. The audito rs should document the overall audit strategy, including any significant changes thereto. The documentation of the overall audit strategy records the key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team. For Auditor may summaries the overall audit strategy in the form of a memorandum that contains key decisions regarding the overall scope, timing and conduct of the audit. Ordinarily, following are documented as part of establishing the overall audit strategy: Summarization of significant matters relating to overall audit strategy. Significant risks identified. Other decisions considered necessary to properly plan the audit.

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 BOOKS OF ACCOUNTS OF BANKS:

A banking company is required to maintain the books companies act. There are, however, certainimperatives in banking business they are the requirements to maintain accurate and always up to date account. Banks, therefore, device their accounting system to suit these requirements. The main characteristics of a banks system of bookkeeping are as follows: Entries in the personal ledgers are made directly from vouchers instead of being posted from the books of prime entry. A. The vouchers entered into different personal ledgers each day are summarized on summery sheet; he totals of each are posted to the control accounts in the general ledgers. The general ledger trail balance is extracted and agreed every days. All entries in the detail personal ledgers and the summary sheetare check by person other than those who have made the entries, with the general results that most clerical mistake are detected before another day begins .D.A trial balance of the detailed personal ledgers is prepared

periodically, usually every two weeks, and agreed with the general ledgercontrol accounts.E.Expecting for cash transactions, alwaystwo vouchers are prepared for each transaction,one for debit and the other for credit. This systemensures double entry at the basic level and obviatesthe possibility of errors in posting.

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TYPE OF AUDIT IN BANK

Statutory audit :
The statutory audit, which is compulsory as per

the law. The statutory audit of banks includes examinationand inspection of internal audit, concurrent audit, etc. The statutory audit of banks is like a postmortem activity. The

suggestions of the statutoryauditors can assist the bank managementinimproving the effectiveness of internal audit/concurrent audit/inspectionfunctions, etc. In this waystatutory plays a very important role in regulating the banking companies.

Internal audit :

Banks generally have a well organized system of internal audit. There internal auditors pay frequent Visit to the branches. They are an important link in internal control of the bank. The systems of internal audit in different banks also have within a the system banks by firms of of

regularinspection of branches and head office. A separatedepartment

charteredaccountants carries out the internal audit andinspection function.

Concurrent audit :
Concurrent audit is the system which introduced byte RBI with the view that interval between the occurrence of transaction and its over view kept to the minimum extent and examination of transactions bythe auditors take place as soon as thetransaction takes place. It has perceived theeffective means of control 34

. The main view of concurrent auditors is to see that the transactions are properly recorded, documented and vouched.

System audit:
In todays technological advancements, bankingcompanies areusingawellorganized computer system to

performtheir transactions. So, it is verynecessary toconduct system audit in order to evaluate thecomputer system foreffectiveness.System audit is the audit of suchcomputer environment/system andcomprisesthe

following internal controls over EDP activities and with application controls specific control procedures over accountingapplications/assuring that all transaction are recordedand authorized and completely, accurately, timely processed manner which in turn are verified by computer.

Revenue audit:
Revenue audit refers to the audit of revenues/incomes. In revenue audit of banking companies,

auditors go through the various sources of revenuesfrom which bank earn income. In revenue audit of banks, the auditor inspects thatall the records are showing true and fair picture of revenues or not

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WIBLOGRAPHY WWW.SCRIBD.COM WWW.EDU.CO.IN

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CONCLUSION

The project the position of Indian banking system as well as the principal laid down by the Basel Committee on banking supervision. This assessment was done in seven major areas, which are core principals, concurrent audit, internal audit, deposit, loan accounting and transparency and foreign exchange transaction. The project concluded that, given the complexity and development of Indian banking sector, the overall level of compliances with the standards and codes is of high order. This project gives the correct ideas about how the major areas can be found by way of effective auditing system i.e. errors, frauds, manipulations etc. form this auditor get the clear idea show to recommend on the banks position. Project also contains that how to conduct of audit of the banks, what are the various procedure through which audit of banks should be done. Form auditing point of view, there is proper follow up of work done in every organization whether it is banking company or any other company or any other company there no misconduct of transactions is taken places for that purpose the auditing is very important aspect in todays scenario form company and point of view

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