Guidance Note on Audit of Banks (Revised 2025)

1
Practical Guide for Statutory Branch
Auditors performing Bank Branch
Audit for the First Time
1.01 The banking industry is the backbone of any economy as it is essential
for the sustainable socio-economic growth and financial stability of the economy.
There are different types of banking institutions operating in India. These are:
(a) Commercial Banks
(b) Regional Rural Banks
(c) Co-operative Banks
(d) Development Banks (more commonly known as ‘Term-Lending Institutions’)
(e) Foreign Banks
(f) Payment Banks
(g) Small Finance Banks
(h) EXIM Bank
1.02 All these banks have their unique features and perform various
functions / activities in compliance with the guidelines issued by the Reserve
Bank of India (RBI) from time to time. Section 6 of the Banking Regulation Act,
1949, specifies the forms of business which the banking companies may carry
on. The text of Section 6 of the Banking Regulation Act, 1949 appears at
Appendix I of Section B (Available on ICAI website) of the Guidance Note on
Audit of Banks (2025 Edition).
1.03 Of these banks, commercial banks are the most widely spread banking
institutions in India. Commercial banks offer a number of products and services
to the general public and other segments of the economy. Four of the main
functions of commercial banks are (1) accepting deposits (2) granting advances
(3) Payment and settlement (4) Treasury. Treasury operation involves
investment of surplus funds in various types of securities as also investment in
specified securities as per RBI guidelines and carrying out forex operations. In
addition to their main banking activities, commercial banks also undertake certain
eligible para banking activities such as investment in Mutual Fund, Stock, Bond

303
Guidance Note on Audit of Banks (Revised 2025)

and insurance products which are governed by the RBI Guidelines on Para
Banking activities.
1.04 The functioning of banking industry in India is regulated by the RBI
which is the Central Bank of our country. RBI is responsible for the development
and supervision of the constituents of the Indian financial system (which
comprises of banks and non-banking financial institutions) as well as for
determining, in conjunction with the Central Government, the monetary and
credit policies keeping pace with the need of the hour. Important functions of RBI
are issuance of currency; regulation of currency issue; acting as banker to the
Central and State Governments; and acting as banker to commercial and other
types of banks including term-lending institutions. Besides, RBI has also been
entrusted with the responsibility of regulating the activities of commercial and
other banks. No bank can commence the business of banking or open new
branches without obtaining a licence from the RBI. The RBI also has the power
to inspect any bank and carries out such inspections on regular basis.
1.05 The provisions regarding financial statements of banks are governed by
the Banking Regulation Act, 1949. The Third Schedule to the said Act, prescribes
the forms of balance sheet and profit and loss account in case of banks. Readers
may refer Appendix II of Section B (Available on ICAI website) of the Guidance
Note on Audit of Banks (2025 Edition) for the text of the Third Schedule to the
Banking Regulation Act, 1949. Further, in case of banking companies, the
requirements of the Companies Act, 2013, relating to the preparation of the
balance sheet, profit and loss account and cash flow statement of a company, in
so far as they are not inconsistent with the Banking Regulation Act, 1949, also
apply to the financial statements, as the case may be, of a banking company. It
may be noted that this provision does not apply to Nationalised Banks, State
Bank of India, its Subsidiaries and Regional Rural Banks (RRBs). The provisions
regarding audit of Nationalised Banks are governed by the Banking Regulation
Act, 1949 and the RBI Guidelines. The audit of banking companies is governed
by the provisions of the Banking Regulation Act, 1949, RBI Guidelines and the
provisions of the Companies Act, 2013. The RBI issued Master Direction no.
RBI/DOR/2021-22/83 [Link].45/21.04.018/2021-22 dated August
30, 2021 (Updated as on April 01, 2024) on “Financial Statements - Presentation
and Disclosures” which provides guidelines/ instructions/directives to the banks
on the presentation of financial statements, regulatory clarification on compliance
with accounting standards, and disclosures in notes to accounts.
1.06 Annual Statutory Audit of banks is a very important exercise and
considerable significance is given to the same by RBI. Given below are some of
the guidelines for conducting statutory audit of bank branches.

304
 Guidance Note on Audit of Banks (Revised 2025)

Pre-commencement of Audit
Co-ordination with Branch Management
1.07 Statutory Branch Auditors (SBAs) are given limited time within which
they have to undertake the audit of branches allotted to them. Accordingly, the
planning of the assignment and start of the work is really critical. Co-ordination
between the auditor and the branch management is essential for an effective
audit and timely completion with highest audit quality. Communication with
previous auditor is necessary in accordance with Clause (8) of Part I of the First
Schedule to the Chartered Accountants Act, 1949. It is advisable that
immediately after accepting the appointment, the SBA should send a formal
communication to the branch management/HO accepting his appointment and
other declarations and undertakings as required. Further, the SBA should also
specify the books, records, and other information that he would require in the
course of his audit. Such a communication would enable the branch
management to keep the requisite documents, information, etc., ready.
1.08 The SBA needs to plan the work properly prior to commencement of the
audit. The SBA needs to issue the audit engagement letter in accordance with
Standard on Auditing (SA) 210, “Agreeing the Terms of Audit Engagements” and
the requirement letter which will contain the details or information needed to
conduct the audit. The SBA needs to obtain basic information about the size of
the branch and nature of the activities carried out at the branch, to find out
whether the branch is a normal branch or specialised branch such as forex /
overseas or service branch. If the branch is a normal branch, then based on the
size of the branch, the SBA should organise his audit team and prepare the audit
plan. If it is specialised branch, members of the audit team should be thoroughly
acquainted with the rules and regulations governing such specialised branch.
The audit team needs to have basic knowledge / understanding about RBI
regulations and circulars governing the specialized branch as well as normal
branch. It is advisable to initiate the verification related to non-financial areas like
documentation review, sanctioning terms, review of the supervision and
monitoring terms, review of the concurrent/internal audit and inspection reports,
etc. before the year-end itself.
Engagement and Quality Control Standards
1.09 The auditor/audit firm should establish a system of quality control
designed to provide reasonable assurance that the auditor/firm and its personnel
comply with professional standards and regulatory and legal requirements, and
that reports issued by the firm or engagement partner(s) are appropriate in the
circumstances and will survive the test of any regulatory, legal or other review /
action that may arise in future. This system of quality control should consist of

305
Guidance Note on Audit of Banks (Revised 2025)

policies designed to achieve its objectives and the procedures necessary to

implement and monitor compliance with those policies. The nature of the policies
and procedures developed by individuals or firms to comply with SQC 1, “Quality
Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements” will
greatly depend on various factors such as the size, maturity, geographical
location, type of work handled and other operating characteristics.
1.10 The ICAI has issued various Standards on Auditing applicable to audit
of financial statements which are mandatorily to be followed by all auditors.
Understanding the concepts in these Standards on Auditing would help the SBAs
in discharging their duties diligently.
1.11 In the present scenario of statutory bank branch audit, one of the most
important aspects is proper planning and documentation of the auditing activity.
The SBA should have sound and complete knowledge of the business of the
bank.
1.12 The auditor needs to study the following:
1. Appointment Letter – It is necessary to read the Appointment Letter
carefully and duly consider all the terms and conditions mentioned therein,
that are required to be followed during the process of the audit. The letter of
appointment sent by banks to SBAs typically contains the following:
 Appointment under the Banking Regulation Act, 1949, and the
underlying duties and responsibilities of the SBA.
 Particulars of branch(s) to be audited and of the region/zone to which
the branch reports.
 Particulars of Statutory Central Auditors (SCAs).
 Particulars of previous auditors.
 Guidelines for conducting audit of branches, completion of audit,
eligible audit fees, reimbursement of expenses etc.
 Procedural requirements to be complied with in accepting the
assignment, e.g., letter of acceptance, declaration of indebtedness,
declaration of fidelity and secrecy, other undertakings by the
firm/SBA, specimen signatures, etc.
 Scope of work - Besides the statutory audit under the provisions of the
Banking Regulation Act, 1949, the SBA is also required to verify
certain other areas and issue various reports and certificates like
LFAR, Tax Audit Report, certificates for cash verification on odd
dates, Ghosh & Jilani Committee Reports etc.

306
 Guidance Note on Audit of Banks (Revised 2025)

2. RBI Guidelines and Circulars – SBA should read and study RBI circulars,
master directions, notifications and the Banking Regulation Act, 1949. This
is very crucial and shall help in proper understanding and executing the
audit.
3. Bank’s Closing Circular – Along with the appointment letter, banks also
issue closing guidelines. These guidelines/circulars cover the process and
policies followed by the bank. Basic understanding of these circulars is
necessary.
4. The SBA also needs to have a basic knowledge of allied applicable laws to
carry out an effective audit. For example: Indian Contract Act 1872,
Negotiable Instruments Act 1881, relevant Stamp Acts, etc.
5. Internal Financial Controls over Financial Reporting (IFCoFR) – The
RBI has made reporting on IFCoFR for Public Sector Banks mandatory
from Financial Year 2020-21. SCAs of Nationalised Banks report on the
same on the basis of testing of various controls by them. However, some of
the controls have to be tested at branch level also on sample basis which
are decided and communicated to SBA by SCA in consultation with bank
management. In case the branch allotted to SBA is selected for testing of
IFCoFR, then the SBA would be required to report on IFCoFR of that
branch. SBAs may refer the Technical Guide on “Audit of Internal Financial
Controls in case of Public Sector Banks” in this regard.
Steps for Audit of Advances and NPA related matters
1.13 The SBA should document the criteria for test check which he has
chosen for verification of advances. SBA should prepare / suitably create
checklist to verify advances which are selected for verification. Based on RBI
guidelines, the auditor should see that sanctioning, disbursement, review /
renewal and monitoring of advances are being done properly. If there are
deviations, the auditor should report the same. The auditor should select
appropriate sample from all categories of advances so that they truly represent
the entire population and carry out appropriate test checks. The larger advances
as required in any case would need to be audited.
1.14 The SBA should study the latest Income Recognition and Asset
Classification (IRAC) Guidelines of RBI. The auditor should also check whether
the bank has correctly classified the advances into performing and non-
performing categories. Appropriate test checks should be carried out regarding
classification of advances. The auditor should appropriately deal with the
deviations in classification and accordingly, memorandum of changes should be
issued if required. The SBA should report all deficiencies noted by him in the
Long Form Audit Report. The RBI vide its notification dated September 14, 2020,

307
Guidance Note on Audit of Banks (Revised 2025)

has mandated that income recognition, asset classification and provisioning

should be totally automated by the banks by June 30, 2021. This date has
subsequently been extended upto December 31, 2021. This should be verified
by SBAs.
1.15 The RBI is now insisting on checking of Central Repository of
Information on Large Credits (CRILC) for advances over Rs. 5 Crores, which
maintains history of the borrowers from inception. Banks have to update this
every time the borrower moves into or out of default. This history card will give a
snapshot of the borrower’s behaviour.
1.16 Similarly for advances less than Rs. 5 Crores, the RBI maintains the
Central Fraud Registry (CFR) which holds all the data regarding frauds reported
by banks in India. This allows the bank to decide whether the borrower is eligible
before processing the sanction as well as for timely action against existing
borrowers.
1.17 The SBAs should specifically check the review / renewal of advances,
availability of drawing power, restructured cases, credit and debit summation in
accounts, daily stamping of NPA, evergreening of loans, etc. carefully while
conducting their audit, as such verification may not only indicate the lapses in the
selected account but may also give an indication of control lapses at branch level
in each of the above processes.
Steps for Audit related to Cash, Housekeeping, Deposits and Other
Matters
1.18 The SBA should check internal controls on custody of cash and check
that the cash management policy of the bank is strictly followed. The SBA should
physically check cash at the branch and at the ATM attached to the branch. The
SBA should examine rotation of duties of key management at branch for effective
operations. The SBA should examine the limit for cash holding and cash actually
held by branch throughout the year.
1.19 The Deposits constitute the other major item of the financial statements.
Interest accrued on these deposits at year end should be verified on sample
basis. KYC, ReKYC and Statement of Financial Transactions (SFT) reporting,
etc. are being focussed and should be reviewed for their status and compliance.
Interest paid on deposit should be verified as per the rates applicable from time
to time. Unclaimed deposit is very important area where there are chance of
fraud. Withdrawal from inoperative deposit account should be checked in depth
with proper documentation to ensure that real deposit holder is doing withdrawal
on test check basis.

308
 Guidance Note on Audit of Banks (Revised 2025)

1.20 The “Other Assets” and “Other Liabilities” heads in the financial
statements should be reviewed for their correctness. Old balances in ‘other
assets and the provisioning required against the same should be carefully
examined.
Steps for Audit related to Financial Statements
1.21 The SBA should apply basic audit principles and carry out checking of
the financial statements. The SBA may apply analytical procedures such as ratio
analysis and comparative analysis to find out key variances, if any in the financial
statements and then to focus on such key variances for detailed audit. Based on
the audit process carried out by the audit team and after examination of the final
financial statements, the auditor should frame their audit opinion.
Steps for Compiling the Main Report & LFAR etc.
1.22 The SBAs should also ensure that their audit report complies with the
requirements of SA 700 (Revised), “Forming an Opinion and Reporting on
Financial Statements”, SA 705 (Revised), “Modifications to the Opinion in the
Independent Auditor’s Report” and SA 706 (Revised), “Emphasis of Matter
Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”.
Based on the audit process carried out, the auditor should report his findings in
the Audit Report. The illustrative formats of auditor’s report are given in
Appendices III and IV of Section B (Available on ICAI website) of the Guidance
Note on Audit of Banks (2025 Edition) as follows:
Appendix III - Illustrative Format of Report of the Branch Auditor of a
Nationalised Bank
Appendix IV - Illustrative Format of Report of the Branch Auditor of a Banking
Company
1.23 Besides the main audit report, the terms of appointment of auditors of
public sector banks, private sector banks and foreign banks (as well as their
branches), require the auditors to also furnish a Long Form Audit Report (LFAR)
to the management. While planning the audit, the auditor should cover all
aspects on which reporting is to be done in his main report and also in the LFAR.
The matters to be dealt with by auditors in LFAR have been specified by the RBI.
Latest revision to LFAR by RBI has been made in September 2020 and is to be
applied accordingly. For matters which are reported in the main report and LFAR,
the auditor should have necessary and appropriate audit documentation to
evidence the findings made. If the auditor intends to issue modified opinion,
reasons therefor need to be stated. SBAs may refer the “Technical Guide on
Revised Formats of Long Form Audit Report” in this regard.

309
Guidance Note on Audit of Banks (Revised 2025)

1.24 For the benefit of the members various illustrative formats have been
given in Appendices V to XI of Section B (Available on ICAI website) of this
Guidance Note as detailed hereunder:

Appendix V - Illustrative Format of Engagement Letter to be sent to the

Appointing Authority of the Nationalised Bank by Branch
Auditor.
Appendix VI - Illustrative Format of Engagement Letter to be sent to the
Appointing Authority of the Nationalised Bank by Branch
Auditor (Separate only for Audit of Internal Financial
Controls Over Financial Reporting).
Appendix VII - Illustrative Format of Written Representation Letter to be
obtained from the Branch Management.
Appendix VIII - Suggested Abbreviations used in the Banking Industry.
Appendix IX - Illustrative Bank Branch Audit Programme for the Year
ended March 31, 2025.
Appendix X - Typical reasons observed for the divergence in asset
classification and provisioning (large accounts) during
Supervisory Cycle 2024-25 (FY 2023-24), during Capital
Assessment Exercise.

Special Audit Considerations in Foreign Banks

1.25 Audit of foreign banks operating in India, poses unique challenges
compared to local banks in India. Foreign banks have different operating models
compared to local banks and to a limited extent, they also operate in a different
regulatory environment.
1.26 Foreign banks generally operate in India through branches and do not
have a separate legal entity/existence in India. Some are set up as Indian
subsidiaries of the foreign banks. However, the RBI regulates their functioning in
India, with regard to scale and nature of business they undertake in India.
1.27 Auditors of foreign banks will have to modify their audit procedures so
as to take care of the operational structure and operations of these banks. Some
of the important elements related to foreign banks which may have a bearing on
the audit plan and procedure are:
 Management structure.
 More centralised operational functions.
 Core banking software used globally.

310
 Guidance Note on Audit of Banks (Revised 2025)

 Requirement for compliance with foreign legal and regulatory requirements.

 Cross border flow and processing of data.
 Complex treasury operations and cross border forex deals.
 Compliance with Basel III Regulatory Framework for Capital Adequacy.
 Operational processes.

311