In this article we will discuss about the verification of assets and liabilities in a bank: 1. Cash and Bank Balances 2. Deposits and Other Accounts 3. Acceptances, Endorsements and Other Obligations 4. Borrowings from Others 5. Loans and Advances 6. Investments 7. Bills Purchased and Discounted 8. Inter-Branch, Inter-Company, and Overseas Transactions 9. Money at Call and Short Notice.
1. Cash and Bank Balances:
The verification steps should be the following:
Review of internal checks and internal accounting and administrative controls in operation relating to the receipts and payments, rotation of ‘tellers’, delegation of authority and assignment of responsibilities, existence of cash-in-transit insurance policy, fidelity guarantee, deputing a responsible official (who has no connection with the cash department) for test checks every day, etc.
Joint custodian of cash by at least two responsible officers, whether the payments are made only after the cheques, demand drafts, etc., have been passed for such by a responsible official, physical verification of cash in hand on the closing day of the year on the date of audit, agreement of cash in hand with the cash balance book, inspection of foreign currency notes.
Scrutiny of the reconciliation statement of balances with the Reserve Bank of India and/or State Bank of India, Confirmation of balances with other banks against current accounts in and outside India.
2. Deposits and Other Accounts:
The verification steps are:
Checking the Register of fixed deposits with the receipts’ counterfoil, endorsements in the receipts for discharge, lien, etc.; Review of internal accounting controls, re-computation of interest accrued up-to the balance sheet date; and Appraisal of the System of records including the control over the serial numbers of the deposit receipts.
Saving Bank Deposits:
Random checking of interest calculations, passbooks, and cross-check of the Savings Bank Account with individual ledger accounts.
Random checking to find out:
(i) the cases of dishonour of cheques
(ii) the cases where the balances fall below the minimum limit and
(iii) the addition and deletion of individual accounts.
Scrutiny of the amounts of different reserves maintained for meeting any known contingencies, such as provision for bad and doubtful debts, unadjusted suspense account, etc., and their adequacy under circumstances.
3. Acceptances, Endorsements and Other Obligations:
The verification steps should be to:
(i) Examine the bank’s arrangements with the customers with respect to the securities, charging of commission, payment of bills, etc.;
(ii) Scrutinize the details of the bills register to find out the outstanding dues;
(iii) See the validity of the securities provided as guarantees by the customers; and
(iv) Cross check the constituents’ liabilities for these items appearing on the Assets side of the balance sheet.
The expression ‘other obligations’ includes letters of credit issued and guarantees given by the bank on behalf of its constituents.
4. Borrowings from Others:
The usual verification steps are to:
(i) Examine the various sources of borrowings— other banks, agents, etc.;
(ii) Determine the amounts as to the classification secured and unsecured, with reference to the available evidential matter, such as certificates of agents from whom borrowed etc.
5. Loans and Advances:
In case of a bank, such advances given to the customers may be of four types: loans, cash credits, overdrafts, and bills purchased and discounted.
However, the necessary verification steps are to:
(i) Estimate the credit worthiness of the borrowers ;
(ii) Ensure that such loans and advances, etc. do not exceed the prescribed limits and are allowed against the security of commodities, hypothecated or pledged;
(iii) Examine the hypothecation deeds and other agreements with the borrowers;
(iv) Check up whether these securities are valid and authentic; and
(v) See that appropriate interest is determined and realised.
The usual steps for verification are:
(i) Inspection of these investments, their valuation, and disclosures as required under the law;
(ii) Obtaining the confirmation certificates from the actual holders of such investments; and
(iii) Confirming that these investments are valid, not time—barred from the investment register.
7. Bills Purchased and Discounted:
The verification should be on the following lines:
(i) Whether the assignments of the titles to the bank are appropriate.
(ii) Whether a detailed classification statement is prepared by a reference to the relevant documents to pinpoint the outstanding.
(iii) Whether the margins are reasonable to cover decline in values.
In addition to the above, it is necessary to ascertain the bills on hand at the time of audit and check them with the relevant ledger. Further, it should be verified as to whether the discount relating to the succeeding year is carried forward as a liability under the head ‘unexpired discounts’.
8. Inter-Branch, Inter-Company, and Overseas Transactions:
These may include all transactions relating to bank drafts, telegraphic transfers, bills for collection, etc. in and outside India.
The verification steps are to:
(i) See that the code system for Telegraphic Transfers is reliable and being operated by a responsible officer.
(ii) Ensure that the system of communication between the issuing branch and the receiving branch is fool-proof.
(iii) Look for authorisation as to prices for inter-branch and inter-company dealings.
(iv) Check up the returns rendered by overseas branches of these dealings.
(v) Confirm that any drafts and TT’s issued but remaining unpaid on the date of balance sheet appear as a liability.
(vi) Ensure that:
(a) the bills for collection ‘ are consecutively numbered and their
particulars entered in the register, and
(b) on collection Cash Account is debited with the full amount received and the Customer’s Account credited after deducting the bank’s collecting commission.
9. Money at Call and Short Notice:
The verification steps for the purposes of audit are to:
(i) Ascertain and confirm as to (a) whether the branch is duly authorised to operate in call money market and (b) if so, whether the recording function is separate from the investment execution function.
(ii) Examine physically each of the securities on the date of the balance sheet.
(iii) Confirm that the totals of detailed records agree with the control account.
(iv) Ensure that this item is properly disclosed under ‘Property and Assets’ — side of the balance sheet with the amounts (if any) separately for:
(a) Securities of the Central and State Governments and other Trustee securities, including treasury bills of the Central and State Governments,
(b) Fully paid ordinary shares,
(c) Partly paid ordinary shares,
(d) Debentures or bonds,
(e) Other investments, and