Income from investments
The auditor should examine whether income from investments is properly accounted for. This aspect assumes special importance in cases where the bank has opted for receipt of income through the electronic/on line medium.
Some of the typical audit procedures would include:
Re-computation of amortisation of premium / discount on investment securities.
Re-performance of profit / loss on sale of investments keeping into consideration the method of allocating cost to securities (FIFO or weighted average).
Assessing the dividend recognition policy of bank considering revenue recognition principles of Accounting Standard 9, Revenue Recognition.
Re-computation of interest income on investments and checking the treatment of broken period interest, including ensuring proper cut-offs at reporting period ends.
Checking of proper recognition of investment valuation loss as at reporting date
Checking of interest accrual in respect of interest-bearing investment outstanding at reporting date.
Considering that banks have large investment portfolio, use of substantive analytical procedures may be a useful audit technique for the auditor to conclude income associated with investment balances is free from material misstatement. One of such techniques may include ‘yield analysis’ for the disaggregated investment portfolio of the bank.
There may be cases where the certificates of tax deduction at source (TDS) received along with the dividend/interest on investments are found missing. This increases the incidence of tax on the bank. The auditor should see that there is a proper system for recording and maintenance of TDS certificates received by the bank. The auditor may also review Form 26AS to ensure that the proper credit will be made available to the bank.