Audit of Profit and Loss account –

Bank branch statutory auditors have to certify in their Statutory Audit Report
that the Profit and Loss account gives a true and fair view of the Profit or Loss
of the branch of the Bank for the year under review. Hence verification of the
accuracy of the numbers appearing in the Profit and Loss ensuring there is no
material mis-statement is the primary duty of the auditor. Apart from that
there is a duty to report in the LFAR as per the questions asked specifically or
on any other matters which needs to be brought to the notice of the Central
Statutory auditors or the Management in terms of Process or Control
inadequacies etc

The auditor states in his audit report that he has done his audit in accordance
with the Standards of Auditing and hence the auditor has to be duly aware of
the various Standards of Auditing more specifically –

SA 230 – Audit Documentation

SA 240 – Responsibility in relation to Fraud

SA 300 – Planning an audit of financial statements

SA 315 - Identifying and assessing the risk of material mis-statement through

u dersta di g of the e tity a d it’s e viro e t

SA 320 – Materiality

SA 530 – Audit Sampling

SA 600 / 610 / 620 – Using work of another auditor / expert

SA 520 – Analytical procedures

SA 580 – Written representations

Auditor will primarily need to verify and ensure the following –

1) Numbers appearing under each head in the Profit and Loss account as
per the prescribed format are materially accurate
2) Reporting is done under appropriate heads
3) Netting off wherever needs to be done has been done.
 4) Prior period or Abnormal items if any are disclosed separately and
specifically.
5) Figures of the Current year are in comparison with figures of the
previous year and appropriate groupings wherever necessary are done
and disclosed.
6) The accounting policies of the Bank have been duly followed while
arriving at these numbers. These policies are in sync with the Accounting
standards issued by the ICAI.
7) Estimates have been consistently followed over the year. Any change in
estimates impacting the numbers materially as compared to the
previous year is disclosed appropriately.
8) Contingent Liabilities do not need any provisioning in the accounts.
9) NPA have been correctly identified as any additional identification will
impact profitability due to additional provisioning and reversal of income
not realized. Security valuation for doubtful accounts is fair resulting in
adequate provisioning.
10) Booking of Expense or Income or any provision of any asset or
liability appearing at the branch is done in the books of the branch itself
and not done at the Regional (RO) or Head Office (HO). Auditor will have
to disclose the same appropriately as his Statutory audit report is for the
branch only. E.g – Depreciation of an asset in books of the branch if
provided for at RO or HO level will have to be disclosed appropriately.
Similar will be the case for provision of leave encashment benefits etc.
11) No cases of postponement or pre-ponement of any asset, liability,
income or expense – Cases of ever greening or window dressing

Since the Branch finalizes the accounts and submits it onwards for
consolidation, any changes will have to be reported through a Memorandum
of Change (MOC) only.

The auditor has limited time at his disposal as his appointment is usually in the
last fortnight of March. He at maximum would get 4 weeks or minimum 2
weeks to complete the entire audit. Hence he needs to carefully plan his audit
work to ensure that the Profit and Loss account is correctly stated to give a
true and fair view of the profits or losses of the Branch of the Bank.
There could be a risk of lack of detection of material mis-statement of the
financial statement with reference to the Profit and Loss and hence the auditor
has to be duly aware of the risk and conduct his audit in a manner that the
same is detected and the risk of mis-statement is at n acceptable level below
threshold considered material.

Focus of the audit has to be on processes, risks, materiality, controls, gap

analysis and prioritization of mitigating key residual risks.

An under or over statement of the assets / liabilities has a corresponding

impact on the profit and loss account and thus to a large extent the audit will
be comprehensively integrated -

The flow of work of a Statutory auditor towards verification of the Profit and
Loss account will typically be as under –

1) Going through the Guidance Note on audit of Banks 2017 edition &
other relevant materials issued by the WIRC / ICAI
2) Obtaining Closing Circulars issued by the Bank
3) Obtaining the Profit or Loss account of the Branch under audit for the
year and comparing with the previous year – Variances over 20% under
any head subject to a materiality threshold fixed for any income or
expense head fixed by the auditor to be marked for detailed checking –
4) Obtaining the Profit and Loss account for each of the 4 quarters over the
year to verify any abnormal deviations under any Income or Expense
head in any quarter –
5) Testing key ratios as Average Cost of Deposits / Return on Advances and
comparing them quarter on quarter or Previous year or with the Bank
Average to arrive at a first level divergence for additional checks.
6) Obtaining the accounting policies of the Bank and understanding the
same. Ensuring that the policies are in sync with the Accounting
standards issued by the ICAI and there is no change in the policies
followed vis a vis the previous year.
7) Obtaining the schedule of charges for the year. If there is any revision in
charges in the year, there may be more than 1 schedule of charges.
8) Obtaining list of delegated authorities with their financial approval limits
for the year – if there is any change during the year, then there could be
more than 1 list for the year.
9) Obtaining Reports of Revenue Auditors / Concurrent or Internal auditors
– last year MOC or LFAR to ensure any issues noted which impacted the
Profit and Loss account.
10) Discussion with the Branch Head and other officials on the
internal process and controls on Income & expense booking that ensures
timely, accurate booking under correct heads of Income & Expenditure,
process gaps if any are identified and corrected timely so that there is no
deviation, divergence.

It is the primary duty of the Bank i.e. the Branch to ensure that the Profit
and Loss is correctly prepared and gives a True and Fair view. A detailed
discussion with Branch Head and other relevant officials on the
processes, controls and gaps if any will enable the auditor to primarily
ascertain the adequacy of controls over Income and expense Booking
and financial reporting so as to draw up his audit program.

Based on a review of all the above, auditor will need to draw up his
detailed audit program duly incorporating the requirements as per the
Standards of Auditing.

The main Income for the Bank is Interest on Advances & Interest on
Deposits and Salaries constitute the main 3 areas of Profit and Loss and
hence the primary duty is to ascertain that these 3 items are absolutely
in order and correct.

Interest on advances is charged as per the acknowledged and Borrower

accepted Sanction letter and as per current Bank schedule of charges.
The key is the correct feeding of the interest rate from the correct date.
This is because the rates keep on changing during the year. Further there
should be no unauthorized changes / alterations to the interest rates.
Hence Access controls assume great importance. If the auditor is
satisfied about the implementation of controls over the feeding in of
interest rates and of modifications thereon and the operative
effectiveness, then he just has to test check a few sample entries end to
end to ensure that the actual computation is accurate. The auditor
should in parallel check the Application controls at the Bank level by
verifying on the system audit conducted at the Bank level. Necessary
Written representations could be obtained from the Branch Head. There
exists a risk of error due to viruses / bugs even though the feeding is
correct and the audit sample not being able to detect it completely. Here
the use of other corroborative ratio analytics, other audits,
representative sample choice would reduce the risk to an acceptable
threshold level. Another area of verification is the reversal of interest
subsequently or concessions / waiver etc. This ought to be duly
authorized. Auditor should obtain relevant MIS reports of interest
reversals / waivers or debits to income accounts and ensure they are
duly authorized and as per bank approved policy.

A key area in this regard is the reversal of interest income in case of NPA
and necessary provisioning thereon. Hence NPA identified by the auditor
in course of his audit will impact the Profitability and entries will have to
be passed through the Memorandum of Changes appropriately.
Provisioning as per RBI norms is the minimum provisioning and auditor
can insist on higher provisioning in case of absence or shortfall of
security. Security valuation is of key importance in Doubtful accounts
and auditor should ensure that the valuation on record is the latest and
prudent. Recent demonetization & slowdown in Real Estate has lead to a
softening of property prices & in that background, collateral valuation
need to be realistic and possibly conservative as per bank policy.

Similar audit checks would need to be done to verify the interest on

deposits. These would be as per bank schedule and need to be checked
especially as they change more frequently compared to interest on
advances. Also if they are withdrawn prematurely, then the interest has
to be reworked on the tenor for which they are held. The interest
charged on Loans / Overdrafts against these deposits will also need to be
reworked if withdrawn prematurely. Auditor should also check that back
dating of Deposits is done as per Bank policy which may vary from Bank
to Bank. Provision on Matured Deposits not renewed till Balance Sheet
date needs to be consistently done as per Bank policy.

Salaries & provisions for Leave encashment benefits are done at HO and
passed in the Bank books. Branch has no control over this centralized
posting and the Branch auditor may just make appropriate disclosures in
this regard as done in the previous year.

Other items of Income that need to be checked are –

1) Income from Investments which are usually centralized or at few

select branches –

2) Commission from Letters of Credit / Guarantees which as per bank

policy consistently adopted would be accounted upfront and duly
amortized monthly or quarterly as the case may be. Auditor to ensure
that the Income pertaining to future periods which if collected is
amortized correctly.

3) Other operating charges like –

Commitment charges for unutilized sanctions / draw downs
Penalty on premature repayments
Cheque book issuance and cheque bouncing charges
Stock inspection charges or reimbursements of stock audits done as
per accepted sanction terms
Reimbursement of legal fees accepted as per sanction terms
Processing Fees – Care should be taken to ensure that processing
fees are collected for the entire year and no miss outs happen for
delayed renewal of advances.
Penal Interest on over drawings / violation of sanction terms – Non or
delayed submission of stock statements or renewals or Insurance –
Auditor should note that incorrect calculation of funding eligibility as
per draw power calculated from submitted stock statements may
impact the penal charges if the same is below sanctioned limit.
Stop payment Charges
DD / PO / RTGS / NEFT charges
Charges for non maintenance of minimum balances
Folio charges
Locker rent – auditor should note that vacant lockers are an
opportunity loss to the bank and should report in LFAR on steps
taken to market usage of lockers.
Debit / Credit / ATM / Rupay Card issuance charges or annual charges
if any or duplicate card or pin issuance charges
Custody or Certification charges
Godown or Shop rent
Scrap or Newspaper sales
Commission on Insurance / Mutual Fund or sale of 3rd party products

Auditor should specifically check the accuracy of interest subvention

claimed by the Bank as per Government sponsored Education,
Housing & other applicable schemes.

As Foreign exchange Income is handled at few specialized branches,

the same is not discussed here. The guidance Note on Audit of Banks
Chapter on profit and Loss Account could be referred for the same

Other items of Expenses that need to be checked are –

1) Printing & Stationery – Auditor should specifically note whether

the same is expenses out on initial purchase or shown as Stock. In
case it is shown as Stock then he should verify whether the items
in stock exist or are usable. Necessary provisions for impairments
may be made accordingly.
2) Lease Rent – Necessary provision and payment has to be made as
per agreement. Attention to be drawn to disputes on increase of
rent or non refund of security deposit of vacated premises for
necessary disclosures and provisions. For Improvements to
Leasehold premises, the depreciation on such assets ahs to be
over the primary lease period as per consistent bank policy.
 3) Professional / Legal / Audit Fees – Payments made towards the
same has to be provided on accrual basis or completion of service
basis. Care has to be taken to ensure that these are accounted on
accrual and not on payment.
4) Telephones – Provision to be on accrual basis. Non refundable
Security deposits to be provided for.
5) Electricity Charges as per accrual basis.
6) Fees paid to 3rd party vendors for other outsourced services like
provision of Security, Delivery, Office & Maintenance Boys
7) Depreciation on Fixed assets which are in use. Physical verification
needs to be done and impairments if any to be provided for.
Assets at 3rd party locations other than the Branch need to be
verified. Maintenance of updated fixed asset register duly
numbered and coded should be verified.
8) Insurance on branch assets. Auditor should note that insurance on
cash retention or deposits (DICGC premium) is done at Head
Office level. Necessary documentation available with the branch if
any to be noted.
9) Advertisement, Marketing & Publicity expenses to be verified with
contractual agreements and provided for on accrual basis as per
contract or service completion as the case may be.
10) Payment of taxes like Tax Deducted at Source Tax or Service
Tax which is on a monthly basis needs to be verified for accuracy
of calculation, timeliness of payments & return filing with the
appropriate authorities on time.

Auditor should note that shortfall in assets like cash or receipt of fake notes
needs a provision in the accounts.

Similarly old debit balances in reconciliations, suspense or inter office

adjustments need to be appropriately provided.

Any shortfall in Deposits or non refundable deposits or deposits with missing

original security receipts need appropriate provisioning on a case to case basis.

Any likely devolvement of Contingent liability needs provisioning. Auditor to be

guided by legal opinion, requirements of AS-29, adverse decision of lower
courts if applicable, payment of amounts in higher court on appeal thereon, his
own judgment about the facts and circumstances on a case to case basis.

Depreciation on Fixed assets has to be provided on the day the asset is put to
use. Auditor should carefully note this date as in some occasions, the
depreciation is done from date of accounting which could be on receipt of
invoice, date of payment or date of accounting which is different from the date
of use would lead to incorrect calculation & impact on the profitability.

Banks may also need to repay in case they are in receipt of funds through
fraudulent alterations on cheques or other financial instruments and this will
be an impact on the profitability.

Realizations of primary / collateral securities charged to the Bank by borrowers

may not fetch the Bank the amount equivalent to the Principal & Interest
including unrealized – uncharged & the shortfall would be a hit to the banking
books. At the times the same may need additional provisioning and
subsequent write offs.

Regulators may charge Branches / banks on violation of Regulatory norms like

non compliance with KYC – AML guidelines / Delayed or inaccurate submission
of MIS returns etc by levying a penalty which apart from an expense is a
significant reputational risk.

Conclusion - Auditor should thus be aware of the various ways in which

Revenue leakages can happen & note the steps taken by the Branch to plug
these leakages. Inefficiencies in the system leading to duplication of efforts is
an extra cost which is also an income leakage. Cost optimization under a
balanced Risk acceptance – Control Remediation scenario is the goal for a
Bank. A thorough understanding of the various components of assets,
liabilities, income and expense and their linkages will help the auditor in going
about his fundamental responsibility to certify that the Profit and Loss account
gives a True & fair view of the Profit or Loss as the case may be of the Bank
Branch for the year under audit. Any qualitative suggestion or input can be
made in the LFAR under the respective question or under Other Matters that
need to be brought to the notice of the Central Statutory auditor or the
Management. It should be noted that there is no restriction on the comments
made in the LFAR and it is not restricted to the questionnaire only.