Audit Approach and Procedures :
The auditor may verify the various items under the head ‘other liabilities and provisions’ in the following manner.
Bills Payable
The auditor should evaluate the existence, effectiveness and continuity of internal controls over bills payable. Such controls should usually include the following:
(a) Drafts, mail transfers, traveller’s cheques, etc., should be made out in standard printed forms.
(b) Unused forms relating to drafts, traveller’s cheques, etc., should be kept under the custody of a responsible officer.
(c) The bank should have a reliable private code known only to the responsible officers of its branches coding and decoding of the telegrams* should be done only by such officers.
(d) The signatures on a demand draft should be checked by an officer with the specimen signature book.
(e) All the telegraphic transfers and demand drafts issued by a branch should be immediately confirmed by advices to the branches concerned. On payment of these instruments, the paying branch should send a debit advice to the originating branch.
(f) If the paying branch does not receive proper confirmation of any telegraphic transfers or demand draft from the issuing branch, it should take immediate steps to ascertain the reasons.
(g) In case an instrument prepared on a security paper, e.g., draft, has to be cancelled (say, due to error in preparation), it should be examined whether the manner of cancellation is such that the instrument cannot be misused. (For example, in the case of drafts, banks generally cut the distinctive serial number printed on the form and paste it in the book in which drafts issued are entered.) Cases of frequent cancellation and reissuance of drafts, pay orders, etc., should be carefully looked into by a
responsible official.
Based on auditor’s evaluation of the efficacy of the relevant internal controls, the auditor should examine an appropriate sample of outstanding items comprised in bills payable accounts with the relevant registers. Reasons for old outstanding debits in respect of drafts or other similar instruments paid without advice should be ascertained. Correspondence with other branches after the year-end (e.g., responding advices received from other branches, advices received from other branches in respect of drafts issued by the branch and paid by the other branches without advice) should also be examined specially in so far as large value items outstanding on the balance sheet date
are concerned.
Others (Including Provisions)
8.11 It may be noted that the figure of advances and investments in the balance sheet of a bank excludes provisions in respect thereof made to the satisfaction of auditors. The issue of determining the adequacy of provision for doubtful advances is discussed in detail under Assets Classification, Income Recognition and Provisioning chapter of this Guidance Note. The auditor should examine other provisions and other items of liabilities in the same manner as in the case of other entities. Specifically, in case of tax deducted by the bank and payable to the government authorities before the due date, this function may be centralized or de-centralized. While verifying this, the auditor
must check whether tax has been correctly deducted from payments as per the provisions of the Income Tax Act, 1961 and paid on or before the due date as specified under the Act or Rules therefor. Many a times in case of branch audit, reporting has to be done before the due date of paying tax deducted at source for the month of March. In such cases the auditor should report delays observed till the date of his verification and clearly bring out the fact that he has not verified the payment of tax, due date of which would be after the date of the audit report.