Page 281 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
• Guarantees given on behalf of constituents
o In India
o Outside India
• Acceptances, endorsements and other obligations
• Liability for partly paid investments
• Liability on account of outstanding forward exchange contracts.
• Claims against the bank not acknowledged as debts
• Other items for which the bank is contingently liable
Bills for Collection
Audit procedures
Contingent Liabilities
Primary Concern -- Identification & Valuation
In respect of contingent liabilities, the auditor is primarily concerned with seeking reasonable assurance
that all contingent liabilities are identified and properly valued. To this end, the auditor should, generally
follow the audit procedures given below:
Regular Constituents
the auditor should ensure that there exists a system whereby the non-fund-based facilities (Letter of Credit,
Guarantees) or additional/ad hoc credit facilities to parties are extended only to their regular constituents,
etc.
Verify whether bank has extended any non-fund facility or additional/ad hoc credit facilities to other than
its regular customers. In such cases, auditor should ensure concurrence of existing bankers of such
borrowers and enquire regarding financial position of those customers.
Authorisation
Ascertain whether there are adequate internal controls to ensure that transactions giving rise to contingent
liabilities are executed only by persons authorised to do so and in accordance with the laid down
procedures.
Terms & Conditions
The auditor should also ensure that in case of LCs for import of goods, as required by the Master Circular
on guarantees and co-acceptances, the payment to the overseas suppliers is made on the basis of shipping
documents and after ensuring that the said documents are in strict conformity with the terms of LCs.
Accounting Records
Ascertain whether the accounting system of the bank provides for maintenance of adequate records in
respect of such obligations and whether the internal controls ensure that contingent liabilities are properly
identified and recorded.
Confirmation
Performs substantive audit tests to establish the completeness of the recorded obligations. Such tests
include confirmation procedures as well as examination of relevant records in appropriate cases.
Reasonableness
Review the reasonableness of the year-end amount of contingent liabilities in the light of previous
experience and knowledge of the current year's activities.

Special Points
• Comfort Letters
Review whether comfort letters (Willingness to support customer with loan if required) issued by the
bank has been considered for disclosure of contingent liabilities.
• Guarantee in respect of trade credit
The auditor should also examine whether the bank has given any guarantees in respect of any trade credit
(buyers credit or sellers credit). The period of guarantees is coterminous with the period of credit reckoned
from the date of shipment.

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