CH09P01-AUDIT OF BANKS

BA.2

PFS Bank was engaged in the business of providing Portfolio Management Services to its customers, for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of the Bank’s financial statements for the year 2018-19. Your senior has instructed you to verify the transactions of Portfolio Management Services (PMS). While verifying the transactions you noticed that the bank has not prepared separate record for PMS transactions from the Bank’s own investments. As a statutory auditor what will be your decision for verification of PMS transactions? (CNO-AOB.125)

• (a) It is not necessary to maintain separate records for PMS clients from Bank’s own investments, so the auditor can verify the PMS transactions as part of investment verification for Bank’s financial statements and submit the audit report accordingly.

• (b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and the auditors are required to give a certificate separately for the same. So, in the above case the auditor should not verify the PMS transactions till the Bank segregates the transactions from its own investments

• (c) The auditor can give a qualified opinion in his audit report on the financial statements of the Bank and report the matter in special purpose certificate.

• (d) Auditor should verify that PMS funds are not utilised for lending, inter-bank deposits or deposits to corporate bodies and bills re-discounting only. So, whether the PMS transactions are recorded separately or not will not matter for the auditor

BA.12

While examining the computation of Demand and Time liabilities which of the following is to be included in liabilities:

• (a) Part amounts of recoveries from the borrowers in respect of debts considered bad and doubtful of recovery.

• (b) Amounts received in Indian Currency against import bills and held in sundry deposits pending receipts of final rates.

• (c) Net credit balance in branch adjustment accounts including these relating to foreign branches.

• (d) Margins held and kept in sundry deposits for funded facilities.

BA.8

Your firm has been appointed statutory auditor by a Nationalised Bank for the year 2018-19. Your senior advised you to check all the standard assets shown in the balance sheet as on 31st March 2019. While verification you observed that one of the accounts was regularised on 28th March 2019, for which the interest and instalment amount was overdue from the quarter ending 30th September 2018. The account was regularised after the repayment of overdue interest and instalment amounts was done on 26th March 2019. Only the last day of the financial year was reckoned as the date of account becoming NPA by the Bank. As a statutory auditor will you agree with the Bank’s policy? (CNO-AOB.300)

• (a) As the interest charged in the account was overdue for more than 90days from the end of quarter, it should be classified as NPA and should be considered as substandard asset for the balance sheet as on 31st March 2019.

• (b) As the overdue interest and instalment amount was paid before the balance sheet date there is no reason to classify the account as NPA.

• (c) The auditor should not agree with the Bank’s policy to regularise the account before balance sheet date as overdue interest indicates more than normal risk attached to the business.

• (d) Bank can regularise the account before balance sheet date but should ensure that the amount has been paid through genuine resources and not by sanction of additional facilities, and the account remains in order subsequently.

BA.10

XYZ bank had an NPA account of M/s Glenpark showing recoverable amount of ? 55 lakh in the books. It sold the NPA for ? 56 lakh. Please select as to which of the following options is the correct accounting: (CNO-AOB.360)

• (a) Credit the excess of ? 1 lakh to profit on sale of assets.

• (b) Let the amount remain in Glenpark account.

• (c) Credit the excess of ? 1lakh to Provision for loss on sale of NPAs.

• (d) Return ?1 lakh to the party purchasing the NPA

BA.9

The Advances Bank Ltd. has sanctioned overdraft limit of Rs. 44 crore to ASG Ltd. on the working capital of the company as on 31st March 2015. As per bank norms the drawing power in the overdraft account need to be reviewed on quarterly basis as per the audited stock statement of the company. As a central statutory auditor for the year 2016-17, while verifying the advances for the year ending 31st March 2017, you noticed that the bank has not obtained the stock statement of ASG Ltd. for the two quarters ending 31st December 2016 and 31st March 2017 and no provision of NPA has been made for this account in the financial statements for the year 2016-17. What will be your decision as a central statutory auditor?

or

The MEA Bank Ltd. has sanctioned overdraft limit of Rs.34 crore to Bharat Ltd. on the working capital of the company as on 31st March 2017. As per bank norms the drawing power in the overdraft account need to be reviewed on quarterly basis as per the audited stock statement of the company. As a central statutory auditor for the year 2018-19, while verifying the advances for the year ending 31st March 2019, you noticed that the bank has not obtained the stock statement of Bharat Ltd. for the two quarters ending 31st December 2018 and 31st March 2019 and no provision of NPA has been made for this account in the financial statements for the year 2018-19. What will be your decision as a central statutory auditor?(CNO-AOB.380)

• (a) Classify the borrower’s account as NPA as the borrower’s financial position cannot be determined due to non-submission of stock statement.

• (b) Instruct the bank to obtain the audited stock statement for both the quarters and review the credit limit accordingly.

• (c) As per bank norms the drawing power need to be determined on the basis of stock statement and it was more than three months old as on 31st March 2017, so the outstanding in the account will be deemed as irregular.

• (d) You should give a qualificatory note in the audit report as per SA700.

BA.11

A bank has some non-interest-bearing staff advances. In the Balance Sheet these should be presented under: (CNO-AOB.470)

• (a) ‘Term loans’ under ‘Advances’.

• (b) ‘Cash Credits, Overdrafts and Loans Repayable on Demand’ under ‘Advances’.

• (c) ‘Advances in India – Others’ under ‘Advances’ Schedule.

• (d) ‘Others’ under ‘Other assets.

BA.13

Which of the following statements is INCORRECT? (CNO-AOB.478)

• (a) Inoperative saving and current accounts are a fraud prone area.

• (b) Debit balances in current account are reduced from aggregate demand deposits in balance sheet of a bank.

• (c) Interest accrued but not due on deposits is shown separately under head “Other Liabilities and provisions.”

• (d) FCNR deposits are in designated foreign currencies only.

BA.1

The Chanakya Bank Ltd. was having 150 branches all over India by the year ending 31st March, 2019. Ten branches of the bank were already covered for concurrent audit and the Bank’s Audit Committee decided to include the below mentioned branches for concurrent audit from the year 2019-20. 1. Allahabad branch which started foreign exchange business from February 2019. 2. Rae Bareilly branch whose aggregate deposits were more than 35% of the aggregate deposits of the bank. Whether the decision of audit committee to include both the branches mentioned in above paragraph for concurrent audit is as per RBI Guidelines?

(CNO-AOB.580)

• (a) The decision of audit committee is valid as according to RBI Guidelines, both the branches fulfil the criteria for compulsory concurrent audit.

• (b) Allahabad branch falls under the compulsory audit criteria as per RBI Guidelines, however Rae Bareilly branch whose aggregate deposits are less than 50% of the aggregate deposits of the Bank is not required to be compulsorily covered for concurrent audit.

• (c) Allahabad and Rae Bareilly branch are compulsorily not required to be covered under concurrent audit as per RBI Guidelines.

• (d) Allahabad branch has started foreign exchange business in February 2019 and as per RBI Guidelines only the branches dealing in Foreign exchange business from more than three years are covered under concurrent audit. Therefore, Allahabad branch is not covered under compulsory concurrent audit criteria as per RBI Guidelines but the Rae Bareilly branch is covered under compulsory concurrent audit criteria.

BA.3

How the discrepancy of not filing the details of cash remittances to currency chest by Kanpur branch of the bank should be dealt by the concurrent auditor in his audit report?

(CNO-AOB.600)

• (a) The auditor should report the matter as a major irregularity in his audit report to the management.

• (b) The auditor should verify the details from e-mail sent to currency chest and close the matter.

• (c) As it is a minor irregularity the auditor can ignore the same.

• (d) The auditor should discuss the importance of filing the copy of e-mail sent for cash remittance with the Branch Manager and check for its compliance in the next audit period.

BA.14

Which of the following statements is correct regarding submission of Statutory branch audit report and LFAR of branch signed by the branch Auditor CA. Mahaveer? (CNO-AOB.680)

• (a) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be submitted to head office of bank directly.

• (b) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be submitted to RBI directly.

• (c) Statutory branch audit report as well as LFAR are to be submitted to Statutory Central auditors.

• (d) Statutory branch audit report as well as LFAR are to be submitted to head office directly as appointment was made by Head office.