Page 330 - CA Inter Audit PARAM

CA Ravi Taori
 Pledge: A pledge thus involves bailment or delivery of goods by the borrower to the lending bank
with the intention of creating a charge thereon as security for the advance. The legal ownership of
the goods remains with the pledger while the lending banker gets certain defined interests in the
goods. The pledge of goods constitutes a specific (or fixed) charge.
 Hypothecation: The hypothecation is the creation of an equitable charge (i.e., a charge created not
by an express enactment but by equity and reason), which is created in favour of the lending bank
by execution of hypothecation agreement in respect of the moveable securities belonging to the
borrower. Neither ownership nor possession is transferred to the bank. However, the borrower
holds the physical possession of the goods as an agent/trustee of the bank. The borrower periodically
submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to
the lending banker on the basis of which the drawing power of the borrower is fixed.
 Assignment: Assignment represents a transfer of an existing or future debt, right or property
belonging to a person in favour of another person. Only actionable claims (i.e., claim to any debt
other than a debt secured by a mortgage of immovable property or by hypothecation or pledge of
moveable property) such as book debts and life insurance policies are accepted by banks as security
by way of assignment. An assignment gives the assignee absolute right over the moneys/debts
assigned to him.
 Set-off: Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit balance in the
debtor’s account against any credit balance lying in another account of the debtor. The right of set-
off enables a bank to combine two accounts (a deposit account and a loan account) of the same
person provided both the accounts are in the same name and same right (i.e., the capacity of the
account holder in both the accounts should be the same). For the purpose of set-off, all the branches
of a bank are treated as one single entity. The right of set-off can be exercised in respect of time-
barred debts also.
 Lien: Lien is creation of a legal charge with consent of the owner, which gives lender a legal right to
seize and dispose / liquidate the asset under lien.

QNO Audit of operating expenses Old Course--
BA.20 Bhaskar CNO - BA.400 (SM20/SM21/M22R/N22M/M23M/M23R)
Explain the audit approach you would follow to check the Operating Expenses of a Bank.
 Auditing the Operating Expenses of a Bank:-

 Internal Controls:
The auditor should study and evaluate the system of internal control relating to expenses,
including authorization procedures in order to determine the nature, timing and extent of his
other audit procedures.

 Divergent Trends:
The auditor should examine whether there are any divergent trends in respect of major items
of expenses.

 Substantive analytical Procedures:
The auditor should perform substantive analytical procedures in respect of these expenses. eg.
assess the reasonableness of expenses by working out their ratio to total operating expenses
and comparing it with the corresponding figures for previous years.

 Vouching & Verification:
The auditor should also verify expenses with reference to supporting documents and check the
calculations wherever required.

QNO Audit of Provisions & Contingency (Bank Audit) Old Course – (N20M/N20E/M22R/N22E)
BA.20.50 Bhaskar CNO - BA.420 New Course -- (SM25/S24E)
You are appointed as Statutory Auditor of DEF Bank Limited for the year 2019-20. As an Auditor how will
you verify Provisions created by DEF Bank Limited?
OR
Your firm of Chartered Accountants has been appointed as auditor of a Nationalised bank. Explain how
will you proceed to carry out audit of provisions and contingencies.

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