Page 328 - CA Inter Audit PARAM
P. 328
CA Ravi Taori
(i) RBI’s Directions
(ii) Materiality
(iii) Revenue Certainty
(iv) Revenue Uncertainty
Answer Audit Approach and Procedures
• Auditor’s Concern: In carrying out audit of income, the auditor is primarily concerned with obtaining
reasonable assurance that the recorded income arose from transactions, which took place during the
relevant period and pertained to the bank, there is no unrecorded income and the income is recorded
at appropriate amount.
• RBI’s Directions: RBI has advised that in respect of any income which exceeds one percent of the total
income of the bank if the income is reckoned on a gross basis or one percent of the net profit before
taxes if the income is reckoned net of costs, should be considered on accrual as per Accounting
Standard 9.
• Materiality: If any item of income is not considered to be material as per the above norms, it may be
recognised when received and the auditors need not qualify their report in that situation.
• Revenue Certainty: Banks recognise income (such as interest, fees and commission) on accrual basis,
i.e., as it is earned. It is an essential condition for accrual of income that it should not be unreasonable
to expect its ultimate collection. In modern day banking, the entries for interest income on advances
are automatically generated through a batch process in the CBS system.
• Revenue Uncertainty: In view of the significant uncertainty regarding ultimate collection of income
arising in respect of non-performing assets, the guidelines require that banks should not recognize
income on non-performing assets until it is actually realised. When a credit facility is classified as non-
performing for the first time, interest accrued and credited to the income account in the corresponding
previous year which has not been realized should be reversed or provided for. This will apply to
Government guaranteed accounts also
QNO Audit of interest expense - Audit approach and procedure Old Course-- (M20R/N21R)
BA.18 Bhaskar CNO - BA.380
In carrying out an audit of interest expense, the auditor is primarily concerned with assessing the overall
reasonableness of the amount of interest expense. Analyse and explain stating the audit approach and
procedure in regard to interest expense.
Answer Reasonableness of Interest Expense Perform Analytical Procedures
In carrying out an audit of Interest expended, the auditor is primarily concerned with assessing the overall
reasonableness of the amount of interest expense by analysing ratios of interest paid on different types
of deposits and borrowings to the average quantum of the respective liabilities during the year. In
modern day banking, the entries for interest expended are automatically generated through a batch
process in the CBS system. (Core Banking System)
Compare Actual Average Interest Expense with Previous Year
The auditor should also compare the average rate of interest paid on the relevant deposits with the
corresponding figures for the previous years and analyse any material differences.
Month on Month Interest Cost Analysis
The auditor should obtain general ledger break-up for the interest expense incurred on deposits
(savings and term deposits) and borrowing each month/quarter. The auditor should analyses month
on month (or quarter) cost analysis and document the reasons for the variances as per the
benchmark stated. He should examine whether the interest expense considered in the cost analysis
agrees with the general ledger.
Compare Quarterly Weighted Average with Actual Average Interest Rate
The auditor should obtain from the bank an analysis of various types of deposits outstanding at the
end of each quarter. From such information, the auditor may work out a weighted average interest
rate. The auditor may then compare this rate with the actual average rate of interest paid on the
relevant deposits as per the annual accounts and enquire into the difference, if material.
Check process on sample basis
The auditor should understand the process of computation of the average balance and re-compute
the same on sample basis.
Test of Details on Sampling Basis
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