Interest on Deposits
The auditor may assess the overall reasonableness of the amount of interest expense in accordance with Master Direction DBR. Dir No.84/13.03.00/2015-16 “Reserve Bank of India (Interest Rate on Deposits)
Directions, 2016” by analysing ratios of interest paid on different types of deposits and borrowings to the average quantum of the respective liabilities during the year. For example, the auditor may obtain from the bank an analysis of various types of deposits outstanding at the end of each quarter. From such information, the auditor may work out a weighted average interest rate. The auditor may then compare this rate with the actual average rate ofinterest paid on the relevant deposits as per the annual accounts and enquire into the difference, if material. The auditor may also compare the average rate of interest paid on the relevant deposits with the corresponding figuresfor the previous years and analyse any material differences. The auditor should obtain general ledger break-up for the interest expense incurred on deposits (savings and term deposits) and borrowing each month/quarter. The auditor should analyse month on month (or quarter) cost analysis and document the reasons for the variances as per the benchmark stated. He should examine whether the interest expense considered in the cost analysis agrees with the general ledger. The auditor should understand the process of computation of the average balance and re-compute the same on sample basis.
The auditor should, on a test check basis, verify the calculation of interest. He should satisfy himself that:
(a) Interest has been provided on all deposits and borrowings upto the date of the balance sheet; and verify whether there is any excess or short credit of material amount.
(b) Interest rates are in accordance with the bank’s internal regulations, of the RBI directives, and agreements with the respective depositors;
(c) In case of Fixed Deposits it should be examined whether the Interest Rate in the accounting system are in accordance with the Interest Rate mentioned in the Fixed Deposit Receipt/Certificate.
(d) Interest on Savings Account should be checked on a test check basis in accordance with the rules framed by the bank in this behalf.
(e) Discount on bills outstanding on the date of the balance sheet has been properly apportioned between the current year and the following year;
(f) Payment of brokerage is properly authorised; and
(g) Interest on inter–branch balances has been provided at the rates prescribed by the head office.
(h) Interest on overdue/ matured term deposits should be estimated and provided for.
The auditor should ascertain whether there are any changes in interest rate on saving deposits and term deposits during the period. The auditor should obtain the interest rate card for various types of term deposits and analyse the interest cost for the period. The auditor should examine the completeness that there has been interest accrued on the entire borrowing portfolio by obtaining the detailed break up the money market borrowing portfolio and the interest accrued and the same should agree with the GL code wise break up. The auditor should re-compute the interest accrual on sample basis i.e., by referring to the parameters like frequency of payment of interest amount, rate of interest, period elapsed till the date of balance sheet, etc from the term sheet, deal ticket, agreements, etc.