What should we know to start stat. audit of commercial bank?
This query is : Resolved
Jatin Goyal
(Querist)
23 March 2014
Meaning of which terms an auditor must know before conducting an bank audit?
And please explain those terms meaning in brief?
And please explain those terms meaning in brief?
Nikhil Kaushik
(Expert)
23 March 2014
you should go through the whole of guidance note on bank audits issued by ICAI.
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Jatin Goyal
(Querist)
23 March 2014
hi nikhil,
Can you explain in brief that guidance note in your words?
Can you explain in brief that guidance note in your words?
03 August 2025
Sure! Here’s a brief overview of important things and terms an auditor must know before starting a statutory audit of a commercial bank, based on ICAI’s Guidance Note on Bank Audit:
Key Areas & Terms to Know Before Starting Bank Audit
Statutory Audit Purpose
To verify the accuracy of the bank’s financial statements.
To ensure the bank follows regulatory requirements (RBI guidelines, Banking Regulation Act, etc.).
Important Terminology
Cash and Balances with RBI: Physical cash in hand and balances banks maintain with RBI.
Advances/Loans and Advances: Money lent to customers, including various types like term loans, cash credits, overdrafts.
Non-Performing Assets (NPA): Loans where interest or principal is overdue for 90 days or more. Critical for auditor to verify correct classification.
Interest Suspense Account: Interest accrued on NPAs but not recognized as income, kept in suspense.
Securitization: Transfer of loan portfolios to other institutions; auditor should verify treatment and disclosures.
Deposits: Customer deposits including savings, current, fixed deposits, etc.
Provisioning: Amount set aside against NPAs and other contingencies as per RBI norms.
Contingent Liabilities: Possible liabilities like bank guarantees, letters of credit.
Capital Adequacy Ratio (CAR): Minimum capital requirement as per Basel norms; important regulatory compliance check.
Fraud Reporting: Banks must report any fraud to RBI; auditor should ensure proper procedure is followed.
Scope of Audit
Verify internal controls in various areas such as cash handling, loan sanction, recovery.
Confirm accuracy of loan classification and provisioning.
Test compliance with RBI regulations including priority sector lending, CRR, SLR.
Review interest income and expenses recognition.
Check reconciliation of balances with RBI and other banks.
Special Audit Reports
Auditor must prepare reports on NPAs, frauds, and compliance with certain sections of the Banking Regulation Act.
Documentation
Review loan files, sanction letters, agreements, securities.
Check board resolutions and policies related to loans and advances.
Audit Risks
High risk due to volume of transactions and complexity.
Emphasis on detecting frauds, misclassification of NPAs, under-provisioning.
Summary
Before starting, the auditor should:
Read and understand ICAI’s Guidance Note on Bank Audit thoroughly.
Understand bank terminology and regulatory requirements.
Plan audit procedures considering key risk areas like NPAs and provisioning.
Maintain professional skepticism due to risk of fraud or misstatement.
Key Areas & Terms to Know Before Starting Bank Audit
Statutory Audit Purpose
To verify the accuracy of the bank’s financial statements.
To ensure the bank follows regulatory requirements (RBI guidelines, Banking Regulation Act, etc.).
Important Terminology
Cash and Balances with RBI: Physical cash in hand and balances banks maintain with RBI.
Advances/Loans and Advances: Money lent to customers, including various types like term loans, cash credits, overdrafts.
Non-Performing Assets (NPA): Loans where interest or principal is overdue for 90 days or more. Critical for auditor to verify correct classification.
Interest Suspense Account: Interest accrued on NPAs but not recognized as income, kept in suspense.
Securitization: Transfer of loan portfolios to other institutions; auditor should verify treatment and disclosures.
Deposits: Customer deposits including savings, current, fixed deposits, etc.
Provisioning: Amount set aside against NPAs and other contingencies as per RBI norms.
Contingent Liabilities: Possible liabilities like bank guarantees, letters of credit.
Capital Adequacy Ratio (CAR): Minimum capital requirement as per Basel norms; important regulatory compliance check.
Fraud Reporting: Banks must report any fraud to RBI; auditor should ensure proper procedure is followed.
Scope of Audit
Verify internal controls in various areas such as cash handling, loan sanction, recovery.
Confirm accuracy of loan classification and provisioning.
Test compliance with RBI regulations including priority sector lending, CRR, SLR.
Review interest income and expenses recognition.
Check reconciliation of balances with RBI and other banks.
Special Audit Reports
Auditor must prepare reports on NPAs, frauds, and compliance with certain sections of the Banking Regulation Act.
Documentation
Review loan files, sanction letters, agreements, securities.
Check board resolutions and policies related to loans and advances.
Audit Risks
High risk due to volume of transactions and complexity.
Emphasis on detecting frauds, misclassification of NPAs, under-provisioning.
Summary
Before starting, the auditor should:
Read and understand ICAI’s Guidance Note on Bank Audit thoroughly.
Understand bank terminology and regulatory requirements.
Plan audit procedures considering key risk areas like NPAs and provisioning.
Maintain professional skepticism due to risk of fraud or misstatement.
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