What is Bank Statutory Audit?
A bank statutory audit is the audit of a bank's financial statements required under the Banking Regulation Act, 1949 and the Companies Act, 2013. Statutory central auditors report on the bank as a whole, while branch auditors examine allotted branches, concentrating on advances, income recognition, asset classification and provisioning.
Who needs it
- Public sector banks, whose statutory central and branch auditors are appointed with the Reserve Bank's approval.
- Private sector banks and small finance banks, which appoint statutory auditors with the Reserve Bank's prior approval under the Banking Regulation Act.
- Regional rural banks, where the sponsor bank and the government have a role in the appointment.
- Urban co-operative banks, which follow the Reserve Bank's guidelines on appointing statutory auditors.
- Audit firms allotted individual branches for branch statutory audit after the financial year closes.
Benefits
- An independent opinion on whether the financial statements give a true and fair view.
- Examination of whether advances are classified and provided for in line with the Reserve Bank's income recognition and asset classification norms.
- A Long Form Audit Report that records observations for the bank's management and its regulator.
- A memorandum of changes setting out adjustments the auditor proposes to the accounts as drawn up.
- Reporting on the specific matters the Companies Act and the Reserve Bank require the auditor to address.
Key facts
| Item | Position |
|---|---|
| Who is audited | Banking companies, public sector banks, regional rural banks and co-operative banks |
| Governing law | Banking Regulation Act, 1949 and the Companies Act, 2013, with the Reserve Bank's directions |
| Who appoints | The bank, with the Reserve Bank's prior approval or through its allotment process |
| Main reports | Audit report, Long Form Audit Report, memorandum of changes, tax audit and certificates as applicable |
| Usual timing | April to May for branch audits, after the 31 March closing |
| Key prudential norms | Income recognition and asset classification (IRAC) norms and the related provisioning requirements |
How are bank statutory auditors appointed?
A bank cannot simply engage an auditor of its choice. A banking company appoints its statutory auditors with the prior approval of the Reserve Bank of India, and the Reserve Bank has issued guidelines setting out the eligibility conditions for statutory central auditors and statutory auditors, including the firm's size, the experience of its partners and limits on how many such assignments one firm may hold at a time. Rotation and a cooling-off period also apply, so a firm cannot hold the same bank's audit indefinitely.
For public sector banks, firms are drawn from the panel maintained for the purpose, and branch audits are allotted from that panel. The practical consequence for a bank is that the appointment has to be planned well before the year end, because an appointment that has not been approved cannot be acted upon. The practical consequence for a firm is that empanelment and the eligibility conditions have to be maintained year after year, not just once.
What does a bank statutory audit cover?
The bulk of the work sits on the advances portfolio, because that is where a bank's risk and its judgement concentrate. Beyond advances, the audit covers the areas below.
- Advances: sanction and documentation, drawing power, security, end use, and classification under the IRAC norms
- Income recognition: whether interest and fees have been recognised correctly, and whether income has been reversed where an account has become non-performing
- Provisioning: whether provisions against standard, sub-standard, doubtful and loss assets meet the prescribed rates
- Deposits: interest rates applied, maturity classification, and inoperative and unclaimed accounts
- Balancing and reconciliation: subsidiary ledgers, suspense, sundry and inter-branch accounts
- Cash, other assets, contingent liabilities and off-balance-sheet items such as guarantees and letters of credit
- Compliance with the Reserve Bank's directions and the correctness of the returns the branch submits to central office
How does a statutory audit differ from a concurrent or stock audit?
These three assignments are often confused because the same firm may hold more than one of them at different branches. They differ in who the report is for, when the work happens and what it covers.
| Statutory audit | Concurrent audit | Stock audit | |
|---|---|---|---|
| What is examined | The bank's financial statements | The branch's transactions as they occur | A borrower's stock and receivables |
| When | After the year end | Continuously through the year | Periodically, as the sanction requires |
| Reports to | Shareholders, with the regulator receiving prescribed reports | The bank's management and audit committee | The lending bank |
| Main output | Audit opinion, LFAR, memorandum of changes | Periodic concurrent audit report | Stock audit report with drawing power observations |
| Who is the subject | The bank | The branch | The borrower |
What is the Long Form Audit Report?
The Long Form Audit Report, usually shortened to LFAR, is a structured report that bank auditors complete alongside the audit opinion. The Reserve Bank prescribes its format. Where the audit report gives a short opinion on the financial statements, the LFAR answers detailed questions about how the branch or the bank actually operates: how advances are monitored, whether the branch follows up on overdue accounts, how well the books are balanced, and whether internal controls over areas such as cash and credit work in practice.
Because the LFAR is read by the bank's management and, in aggregate, by its regulator, the observations in it tend to have a longer life than the audit opinion itself. Branches are usually asked to respond to each observation and to report what they have corrected.
What is a memorandum of changes?
A memorandum of changes is the auditor's list of adjustments to the accounts as the branch or the bank originally drew them up. In a bank audit it most often arises from the classification of advances: the auditor concludes that an account should move from standard to non-performing, that a higher provision is needed, or that interest recognised as income should be reversed. The memorandum records each proposed change and its effect, and the figures are taken into account when the final accounts are compiled.
Example: how one advance is reviewed
The figures below are illustrative and are used only to show the sequence of the review. A branch has sanctioned a working-capital limit of ₹2 crore against stock and book debts. The auditor traces the sanction letter and confirms the limit and its renewal date, then checks whether the charge over the security is registered. The borrower's stock statements are compared with the drawing power the branch allowed in the account: if the statement for a month was not received, the auditor looks at whether the branch restricted the drawing power as the sanction requires. The account's record of recovery is then tested against the IRAC norms to see whether the amount has remained overdue beyond the prescribed period. If it has, the auditor considers whether classification, provisioning and the reversal of recognised interest were dealt with correctly, and records any proposed change in the memorandum of changes.
Related reading
- Statutory audit, tax audit and internal audit compared — which audit applies to a business
- Concurrent audit of banks — the ongoing branch-level assignment
- Stock audit for banks — verification of a borrower's security
Official sources
- Reserve Bank of India – master circulars and directions — income recognition, asset classification and provisioning norms
- Reserve Bank of India – notifications — guidelines on the appointment of statutory auditors
- Ministry of Corporate Affairs – Companies Act, 2013 — audit and auditor provisions
Documents required
- 01Trial balance and the branch or bank returns for the year
- 02Advance files: sanction letters, security documents, limit and renewal records
- 03Statements of non-performing assets, provisioning and restructured accounts
- 04Income recognition records and details of interest applied or reversed
- 05Credit monitoring reports, stock statements and drawing power calculations
- 06Previous year's audit report, Long Form Audit Report and memorandum of changes
- 07Concurrent audit, internal audit and inspection reports covering the period
- 08Balancing position of subsidiary ledgers, suspense and inter-branch accounts
Due dates and penalties
| Item | Due date | If missed |
|---|---|---|
| Branch statutory audit | Usually April and May, after the 31 March closing | Delays the bank's own reporting timetable |
| Statutory central audit and adoption of accounts | As fixed by the bank's board calendar for the year | Regulatory and listing reporting delays |
| Auditor appointment and regulatory approval | Before the audit period begins, as the Reserve Bank's guidelines require | The appointment cannot be acted upon until approved |
Each bank fixes its own closing calendar and the Reserve Bank issues the timetable for approvals and appointments for the year. We confirm the applicable dates with the bank before fieldwork begins.
Mistakes to avoid
- An account kept as standard when its record of recovery shows it should have been classified as non-performing.
- Interest applied to accounts on which income recognition should have stopped.
- Security documents incomplete, unstamped or charges not registered in advance files.
- Drawing power computed from stock statements that are out of date or were never received.
- Subsidiary ledgers, suspense and inter-branch accounts left unbalanced at the year end.
- Observations from earlier statutory, concurrent or inspection reports not acted upon.
Why PHMG
- Partner-led: a chartered accountant reviews your work, not only a junior team.
- Clear fee and scope in writing before we start.
- Deadlines tracked for you, with reminders well before the due date.
- Your documents and data are handled confidentially.
- Online service across India, with a single point of contact.
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