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Statutory Audit of Banks

Statutory Audit is a type of audit which is required by a Law or a Statute to ensure the books of accounts presented to the regulators and public are true and fair.

An Statutory audit is mandatory if certain norms are being met by the business. It is performed by qualified Chartered Accountant who is independent of the business.

Let us understand in detail about the Statutory Audit:

Statutory Audit – Meaning & Applicability:-

Statutory Audit is an audit which is prescribed by the different statute like Reserve Bank of India, Income Tax, Companies Act, etc. A Chartered Accountant need to conduct many audits as per the different statute requirement.

Statutory Audit of banks is mandatory. Statutory Auditors are selected by RBI in association with the ICAI. Every year after the end of the previous financial year, in every branch of the banks, a very severe audit is conducted.

The Process to Conduct a Statutory Audit:-

A. Cash Verification Procedure

The auditors have to verify the cash balance at the branch at the end of 31st March. An auditor should follow the below-mentioned checklist for cash verification:

  1. Whether branch is getting opened at the time as per the guidelines and the branch manager is present at the time of the opening of the branch
  2. Whether the cash vault/safe are being opened by the Joint Custodians
  3. Whether any unrecorded security items or documents are kept in the cash vault/cash safe
  4. The Branch should maintain the records for the acceptance of currency from the public. This also includes the records of the mutilated notes
  5. Proper operational of the burglary alarm system
  6. Whether all the other doors are locked at the time of the opening of the cash room
  7. The Gun should remain outside the cash room at the time of opening and closing of the cash room
  8. The cash should be carried out in a locker box from the cash room to the counter and vice versa
  9. The cash counting machine and UV lamps should be in a working condition
B. Tax-Related Items

An auditor will also have to check all the tax-related items and compliances that are applicable to the bank like TDS, 15H & 15H etc. The important elements to check a compliance are mentioned below:

  1. The tax should be deducted at an appropriate rate on the monthly/quarterly/yearly payments made by the bank towards interest on deposits, rent, payment to contractors/professionals etc.
  2. All the tax payments should be on time and all the challans are there in respect of each payment
  3. All the tax returns are filed on time
  4. TDS Certificate should be issued on time and Form 15G/15H are collected and sent on time
  5. Comment on the quality of compliance if the bank is under concurrent audit
  6. Check if any RBI has been audited in the past. If yes, then whether the same is closed and comment on the quality of compliance is to be seen
  7. The branch should have the copy of the Insurance Policy obtained by the corporate office
  8. The branch should have the lease document with them
  9. The branch should take balance confirmation from other banks in which it is maintaining the account
  10. Clarification of the outstanding entry in the system suspense account, if any
C. Verification of Loan Accounts

Loan accounts form a major part of the assets for banks. A statutory auditor should check the loan accounts very vigilantly.

The verification of Loan Accounts is divided into three parts:

  1. Preliminary Check: The banks should do a preliminary check of all the accounts before considering the project for evaluation. An auditor should look at the following documents for checking the bank initial process:
    1. Loan Application
    2. Prescribed Application form
    3. KYC Compliance
    4. Project Report, Projected P&L, Balance Sheet & Cash Flow Statement
    5. Latest Audited Financial Statements
    6. Board Resolution for Availing the Credit Facilities
    7. All Government Departments Registration
    8. Technical Review
  2. Disbursement: An auditor should check that the disbursement should happen only if all the terms and conditions of the sanction letter have been fulfilled and an acceptance letter for the same have been acquired.
  3. Post Disbursement Inspection: The bank should have a proper check on the active accounts. The important elements that a statutory auditor can check are as follows:
    1. There should be an acceptance letter duly approved by the borrowers for all the loan accounts
    2. Execution of the loan documents should be as per the terms and conditions of the sanction letter
    3. All the original documents are held in the safe custody in fire resistance safe
    4. Confidential Report and NOC from the existing bankers
    5. CIBIL Report and score. The bank should check for any adverse comments
    6. Valuation of Securities
    7. External & Internal Credit Rating
    8. Due Diligence Certificate
    9. Verify the drawing power of the accounts is calculated properly and a margin is maintained as per the sanction letter
    10. Verify any adverse comment on the stock audit report or the audited balance sheet
    11. Verify the payment schedule as per the sanction letter is implemented. If any, check the approval document for the same

The auditor should check for any Non-Performing Asset (NPA). All accounts which are overdue or stops generating income for the banks continuously for 90 days, then it has to be treated as Non-Performing Asset (NPA).

Audit Report:-

After conducting the through audit, an auditor has to give an audit report for the same. An auditor is required to make a report as mentioned in the engagement letter in which he has to state the following:

  1. Whether the balance sheet is showing true and fair view containing all the necessary particulars to exhibit a true and fair view of the affairs of the banks
  2. Whether the profit and loss account shows a true balance for the period covered by account
  3. Whether any transaction has been carried by the branch which was not within the powers of the branch
  4. Any other matter which the auditor considers to be brought to the notice of the Statutory Central Auditor

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