Audit Approach and Procedures
Income
In carrying out an audit of income, the auditor is primarily concerned with obtaining reasonable assurance that the recorded income arose from transactions, which took place during the relevant period and pertain to the bank, that there is no unrecorded income, and that income is recorded in proper amounts and is allocated to the proper period. In view of the mandatory requirement of recognition of income, the recognition of revenue will have to be subjected to examination vis-à-vis the guidelines. Vide circular DBOD.No.BP. BC. 89 /21.04.018/2002-03 dated 29th March 2003, RBI has advised that in respect of any income which exceeds one percent of the total income of the bank if the income is reckoned on a gross basis or one percent of the net profit before taxes if the income is reckoned net of costs, should be considered on accrual as per AS-9. If any item of income is not considered to be material as per the above norms, it may be recognised when received and the auditors need not qualify the statements in that situation. As per AS-9 Revenue Recognition, revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. If revenue recognition is postponed, as per AS-1 on Disclosure of Accounting Policies, an enterprise should also disclose the circumstances in which the revenue recognition has been postponed pending the resolution of significant uncertainties.
Since the entire accounting in banks is done on the CBS, the auditor should plan the audit procedure based on controls testing. If he is not satisfied with the controls in place for accounting and recording of items of income and expenses correctly he should resort to more of substantive checking of documents and records.
In case auditor decides to adopt the control reliance strategy, the auditor should perform test of controls which mitigate the risk of what could go wrong.