Statutory Audit is a type of audit which is mandated by a Law or a Statute to ensure the books of accounts presented to the regulators and public are true and fair.Statutory audit is mandatory if certain criteria are being met by the business. It is performed by qualified Chartered Accountant who is independent of the business.
Let’s understand in detail about the Statutory Audit.
Statutory Audit is an audit which is prescribed by the different statute like Reserve Bank of India, Income Tax, Companies Act, etc. A Chartered Accountant need to conduct many audits as per the different statute requirement.
Statutory Audit of banks is mandatory. Statutory Auditors are appointed by RBI in association with the ICAI. Every year after the end of the previous financial year, in every branch of the banks, a very rigorous audit is conducted.
The Statutory Auditors should ensure that the audit report issued by them complies with the requirements of Revised SA 700 – Forming an Opinion and reporting on financial statements, SA 705 – Modifications to the opinion in the Independent Auditor’s Report & SA 706 – Emphasis of matter paragraphs and other matter paragraphs in the Independent Auditor’s Report.
Nowadays, all statutory auditors are given a time frame in which they have to undertake the audit of the branches that are allotted to them. An auditor should immediately accept the appointment send a formal communication to the branch management and all other information that he would require in his audit.
The auditor will have to ensure that their report should include the quantification of advances, deposits, interest income and interest expenses. The important elements to check in the statutory audit of banks are:
A. Cash Verification Procedure
B. Tax-Related Items
C. Verification of Loan Accounts
The auditors have to verify the cash balance at the branch at the end of 31st March. An auditor should follow the below-mentioned checklist for cash verification:
i. Whether branch is getting opened at the time as per the guidelines and the branch manager is present at the time of the opening of the branch
ii. Whether the cash vault/cash safe are being opened by the Joint Custodians
iii. Whether any unrecorded security items or documents are kept in the cash vault/cash safe
iv. The Branch should maintain the records for the acceptance of currency from the public. This also includes the records of the mutilated notes
v. Proper working of the burglary alarm system
vi. Whether all the other doors are locked at the time of the opening of the cash room
vii. The Gun should remain outside the cash room at the time of opening and closing of the cash room
viii. The cash should be carried out in a locker box from the cash room to the counter and vice versa
ix. The cash counting machine and UV lamps should be in a working condition
An auditor will also have to check all the tax-related items and compliances that are applicable to the bank like TDS, 15H & 15H etc. The important elements to check an compliance are mentioned below:
i. The tax should be deducted at an appropriate rate on the monthly/quarterly/yearly payments made by the bank towards interest on deposits, rent, payment to contractors/professionals etc
ii. All the tax payments should be on time and all the challans are there in respect of each payment
iii. All the tax returns are filed on time
iv. TDS Certificate should be issued on time and Form 15G/15H are collected and sent on time
v. Comment on the quality of compliance if the bank is under concurrent audit
vi. Check if any RBI has been audited in the past. If yes, then whether the same is closed and comment on the quality of compliance is to be seen
vii. The branch should have the copy of the Insurance Policy obtained by the corporate office
viii. The branch should have the lease document with them
ix. The branch should take balance confirmation from other banks in which it is maintaining the account
x. Explanation of the outstanding entry in the system suspense account, if any.
Loan accounts form a major part of the assets for banks. A statutory auditor should check the loan accounts very cautiously.
The verification of Loan Accounts is divided into three parts:
A. Preliminary Check
C. Post Disbursement Inspection
The banks should do a preliminary check of all the accounts before considering the project for evaluation. An auditor should look at the following documents for checking the bank preliminary process:
i. Loan Application
ii. Prescribed Application form
iii. KYC Compliance
iv. Project Report, Projected P&L, Balance Sheet & Cash Flow Statement
v. Latest Audited Financial Statements
vi. Board Resolution for Availing the Credit Facilities
vii. All Government Departments Registration
viii. Technical Review
An auditor should check that the disbursement should happen only if all the terms and conditions of the sanction letter have been fulfilled and an acceptance letter for the same has been acquired.
The bank should have a proper check on the active accounts. The important elements that a statutory auditor can check are as follows:
i. There should be an acceptance letter duly acknowledged by the borrowers for all the loan accounts
ii. Execution of the loan documents should be as per the terms and conditions of the sanction letter
iii. All the original documents are held in the safe custody in fire resistance safe
iv. Confidential Report and NOC from the existing bankers
v. CIBIL Report and score. The bank should check for any adverse comments
vi. Valuation of Securities
vii. External & Internal Credit Rating
viii. Due Diligence Certificate
ix. Verify the drawing power of the accounts is calculated properly and a margin is maintained as per the sanction letter
x. Verify any adverse comment on the stock audit report or the audited balance sheet
xi. Verify the payment schedule as per the sanction letter is implemented. If any, check the approval document for the same
The auditor should check for any Non-Performing Asset (NPA). All accounts which are overdue or stops generating income for the banks continuously for 90 days, then it has to be treated as NPA.
After conducting the through audit, an auditor has to give an audit report for the same. An auditor is required to make a report as mentioned in the engagement letter in which he has to state the following:
i. Whether the balance sheet is showing true and fair view containing all the necessary particulars to exhibit a true and fair view of the affairs of the banks
ii. Whether the profit and loss account shows a true balance for the period covered by such account
iii. Whether any transaction has been carried by the branch which was not within the powers of the branch
iv. Any other matter which the auditor considers to be brought to the notice of the Statutory Central Auditor
To view an illustrative Statutory Audit Report, click here Illustrative audit report
|Heading||Brief of contents|
|The title||should mention that it is an ‘Independent Auditor’s Report’.|
|Addressee||Should mention clearly as to whom the report is being given to.
For example Members of the company, Board of Directors
|Management’s Responsibility for Financial Statements||Mentions that it is the Management’s responsibility to Prepare the Financial Statements.|
|Auditor’s Responsibility||Mention that responsibility of the Auditor is to express an unbiased opinion on the financial statements and issue an audit report.|
|Opinion||Should mention the overall impression obtained from the audit of financial statements.
For example Modified Opinion, Unmodified Opinion
|The basis of the Opinion||States the basis on which the opinion as reported has been achieved. Facts of the basis should be mentioned.|
|Other Reporting Responsibility||If any other reporting responsibility exists, the same should be mentioned.
For example Report on Legal or Regulatory requirements
|Signature of the Auditor||The engagement partner (auditor) shall sign the audit report.|
|Place of Signature||The city in which audit report is signed.|
|Date of Audit Report||Date on which the audit report is signed.|
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