Audit of Banks

AUDIT OF BANKS
INTRODUCTION
The audit of insurance companies plays a very important role in

India as it help to regulate the insurance companies in right manner. In
insurance of banks includes various types of audit which are normally
carried out in insurance companies such as statutory audit, revenue/income
expenditure audit, concurrent audit, computer and system audit etc. the
above audit is mainly conducted by the banks own staff or external auditor.
However, the rules and the regulation relating to the conduct of various
types of audit or inspections differ from a insurance to insurance expect the
statutory audit for which the IRDA guidelines is applicable. In this, I have
given more importance on the overall insurance audit system. In today’s
competitive world audit is very much necessary as well as compulsory ,
because investor investing decision is depend on that particular concept if
auditor has expressing his view about particular organization is true and fair
then investor can get his ideas about how much he should invest in particular
companies.
Lala Lajpat Rai College 1

AUDIT OF BANKS
MEYHODOLOGY
PRIMARY DATA
I have not collected any primary data for project.
SECONDRY DATA
I have collected secondary data for the project form the books which are
provided by the library and fro the websites related to the Audit of Banks .

AUDIT OF BANKS
DEFINITION OF AUDITING
Various persons such as the owners, shareholders, investors,

creditors, lenders, government etc. use the final account of business concern
for different purposes. All these users need to be sure that the final accounts
prepared by the management are reliable. An auditor is an independent
expert who examines the accounts of a business concern and reports whether
the final accounts are reliable or not. Different authorities have defined
auditing as follows.
 Mautz define the auditing as “auditing is concerned with the

verification of accounting data, with determining the accuracy and
reliability of accounting statement and reports”.
 International auditing guidelines defines the auditing as

“auditing is an independent examination of financial information of any
entity with a view to expressing an opinion thereon”.

AUDIT OF BANKS
ORIGIN AND EVOLUATION OF AUDITING
1) Origin of term :
The term audit is derived from the Latin term “audire” mean to
hear. In early days, an auditor used to listing to the account read out by
the accountant in order to check them.
2) Ancient origin :
Auditing is as old as accounting. It was in use in all ancient

countries such as Mesopotamia, Egypt, Greece, Rome, U.K., and India.
The Vedas,Ramayana, Mahabharata contain references to accounting and
auditing. Arthashasastra by Kautilya gives detailed rules for accounting
and auditing of public finances. The Mauryas, the Guptas and the
Mughals had developed and accounting and auditing system to control
state finances. Thus, basically, accounting and auditing had their origin in
the need for the government to control the income and expenditure of the
state and the army. The original object of auditing was to detect and
prevent errors and frauds.

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3) Compulsory audits of companies:
With increasing number of companies, the companies’ acts in

different countries began providing for compulsory audit of accounts of
companies. Thus U.K. audit of accounts of limited companies became
compulsory in 1900. In India, the companies act, 1913 made audit of
company accounts compulsory. With increase in size of companies, the
object of audit also shifted to ascertaining whether the accounts were
“true and fair” rather than “true and correct”. Thus, the emphasis was not
arithmetical accuracy but on fair representation of financial affairs.
4) Development of accounting and auditing standard:

The international accounting standards committee and the
accounting standards board of institute of chartered accountant of India
have developed standard accounting and auditing practices to guide the
accountants and auditor in their day-to-day work.
5) Computer technology:
The latest development in auditing pertains to the use of computers
in accounting as well as auditing.
Really, auditing has come a long way from “hearing” the accounts
in the ancient day to using computers to examine computerized accounts
of today.

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BASIC PRINCIPAL OF AUDITING:
1) Integrity, objectivity and independence:
The auditor should be honest and sincere in his audit work. He

must be fair and objective. He should also be independent.
2) Confidentiality:
The auditor should keep the information obtained during audit,

confidential. He should not disclose such information to any third party.
He should, keep his eyes and ears open but his mouth shut.
3) Skill and competence:

The auditor should have adequate training, experience and
competence in Auditing. He should have a professional qualification ( i.e.
be a Chartered Accountant) and practical experience. He should be aware
of recent developments in the field of auditing such as statement of ICAI,
changes in company law, decisions of courts etc.

AUDIT OF BANKS
4) Working papers:
The auditor should maintain working papers of important matters
to prove that audit was conducted with due care according to the basic
principles.
5) Planning:
The auditor should plan his audit work. He should prepare an audit
programmed to complete the audit efficiently and in time.
6) Audit evidence:
The report of the auditor should be base on evidence obtained in
the course of audit. The evidence may be obtained through vouching of
transactions, verification of assets and liabilities, ratio analysis etc.
7) Evaluation of accounting system and internal control:

The auditor should ensure that the accounting system is adequate.
He should see that all the transaction have been properly recorded. He
should study and evaluate the internal controls.
8) Opinion and report:

The auditor should arrive at his opinion on the account based on
the audit evidence and submit his report. The opinion may be
unqualified, qualified or adverse. The audit report should clearly express
his opinion. Law should require the content and form of audit report.

AUDIT OF BANKS
ADVANTAGES OF AUDITING
1) Assurance of true and fair accounts:
Audit provides an assurance to the various users of final accounts

such as owners, management, creditors, lenders, investors, government’s
etc. that the accounts are true and fair.
2) True and Fair balance sheet:
The user accounts can be sure that the assets and liabilities shown
in the audited balance sheet show the concern, as it is i.e. neither more
nor less.
3) True and fair profit and loss account:
The user can be confident that the audited profit and loss account
shows the true amount of profit or loss as it is i.e. neither more nor less.
4) Tally with books:
The audited final account can be taken to tally with the books of
accounts. Thus, the income-tax officer can start with the figure of audited

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books profit, make adjustments and compute the taxable income. An

outside user need not go through the entire books.
5) As per standard accounting and auditing practices:
The audited final accounts follow the standard accounting and

auditing principles laid down by professional bodies. Thus, audited
accounts are based on objectives standard and not on personal whims and
fancies of a particular accountant or auditor.
6) Detection and prevention of errors and frauds:
Audited accounts can be assumed reasonably free from errors and

frauds. The auditor with his expert knowledge would take due care to see
that Errors and frauds are detected so that the accounts shoe a true and
fair view.
7) Advice on system, taxation, finance:
The auditor can also advise the client about the accounting system,
internal control, internal check, internal audit, taxation, finances etc.

AUDIT OF BANKS
LIMITATIONS OF AUDITING
1. An auditor cannot check each and every transaction he has to check

only the selected areas and transaction on a sample basis.
2. Audit evidence is not conclusive in nature thus confirmation by a debtor

is not conclusive evidence that the amount will be collected. It is said
evidence is rather than conclusive in nature.
3. An auditor cannot be expected to discover deeply laid frauds usually

involves acts designed to conceal them such as forgery , celibate failure
to record transactions, false explanation and hence are difficult to
detect.
4. Audit cannot assure the users of account about the future profitability,
prospects or the efficiency of the management.
5. An auditor has to rely upon expert auditor may have to rely on expert in
related field such as lawyers, engineers, value’s etc. for estimating
contingent liabilities, valuation of fixed assets etc.

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STAGES IN PREPARATION FOR THE INSURANCE

AUDIT
1. PRELIMINARY WORK :
The auditor must familiarize himself with the nature of the

business carried on by the Insurance company. This will
help him in understanding the various transactions. He
should be aware of the various laws and regulations
applicable to the Insurance companies. He should find out
the economic environment in which the Insurance
Company operates.
2. EVALUATION OF INTERNAL CONTROL SYSTEM:
Every company must have internal control system commensurate

(equivalent) with the nature and the size of business. The auditor will
review whether the Internal Control System is adequate, efficient and
effective. The nature, timing and extent of audit procedure depends upon
Auditor’s evaluation of Internal Control.
3. PREPARATION OF AUDIT PROGRAMME:
An Audit programme is a written document consisting of various Audit

procedures that the auditor will follow during the course of his audit.
Auditor will collect audit evidence and on these audit evidences he will
apply audit procedures.

AUDIT OF BANKS
Audit procedures are classified as:

A) Compliance Audit procedures
b) Substantive Audit procedures

Audit evidence at the disposal of the auditor is persuasive and non
conclusive.
4. COMMUNICATION WITH THE PREVIOUS AUDITOR:
If one auditor has left the Insurance company than the other auditor will
accept his appointment only after communicating with the previous
auditor. This is as per the “CODE OF CONDUCT” issued by the council
of ICAI.
5. AUTHORIZATION OF TRANSACTIONS:
Every transactions must be backed by proper authorization. There must

be a proper sanctioning authority who will delegate work at lower levels.
Authorization may either be ‘specific authorization’ or ‘ General
Authorization’ The board of directors must have financial and
administrative powers.
6. MAINTENANCE OF ADEQUATE RECORDS AND
DOCUMENT:
A company should maintain proper bank A/C’s and documents. In this

various transactions should be recorded. The company must also comply
with the various statutory requirements prescribed by appropriate
authority. If there are any deviations at lower levels than it must be
reported to the higher levels.

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7. SAFEGUARDING OF ASSETS:
The company must maintain adequate records and registrars for its
assets. To this effect, it must appoint a custodian. Whose responsibility
will be keeping safe custody of assets and providing access only to
authorized personnel. The responsibility of safeguarding the assets starts
from the day when the asset is purchased.

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BOOKS AND REGISTERS TO BE MAINTAINED BY

INSURANCE COMPANY:
As per Insurance Act 1938, an Insurance company has to maintain the

following banks and registers.
1. REGISTER OF POLICIES:
An Insurance company issues to the insured various types of policies

like life Insurance, Fire Insurance Policy, Marine Insurance Policy etc. In
this register the Insurance company will record the name of the policy
holder, date of policy, period of policy, type of policy, address of policy
holder nominators etc.
2. REGISTER OF CLAIMS:
An Insurance company has to maintain various books of A/C’s is also

applicable to Insurance companies.
An Insurance company has to maintain following records:
a) Cash Book
b) Subsidiary Book
c) Journal
d) Ledger
e) Control A/C’s etc.

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AUDIT OF INSURANCE COMPANIES:
1. QUALIFICATION FOR AN AUDITOR:
SECTION 226 OF Companies Act, 1956 prescribes qualifications and

disqualifications for an auditor of an Insurance Company only a practicing
Chartered Accountant can be appointed as Auditor of Insurance company.
a) Body Corporate
b) An employee of the company
c) A Director of company
d) A partner of the employee or director of a company
e) A person who is indebted to the company for an

amount exceeding
f) RS. 100/-
g) A person who has given a guarantee or a security to the

Insurance
h) Company on behalf of a third person exceeding Rs.

1000/-
The Central Auditor of the Insurance Company recorded from the name
recommended by ‘ IRDA’. IRDA has formed a panel of auditors.
2. APPOINTMENT:

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Section 224 of Companies Act, 1956 contains provisions regarding

appointment of the Auditor of an Insurance Company.
The Auditor will be appointed by IRDA (Insurance Regulatory and
Development Authority) is required.
3. REMUNERATION:
Section 224 of Companies Act 1956, contains provisions regarding

remuneration of an auditor. The remuneration of auditor will be fixed
at AGM and it will be as per the norms prescribed by IRDA.
4. AUDITOR’S REPORT:
On completion of the Audit, the Auditor will prepare an audit report.

In this Audit Report, he will express his opinions, In Audit Report an auditor
will state the following:
a) Whether he acquired all information and explanation from the

management.
b) Whether the information and explanation provided by the
management is adequate or not.
c) Whether he has acquired all records from the branch management.
d) Whether the company has a proper Internal Control System.
e) Whether the company has a proper Internal Audit System.
f) Whether the company has complied with all the statutory
requirements applicable to it.

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g) Whether the company has maintained proper books of A/C’s and

records.
h) Whether the company has followed proper accounting policies and
accounting standards.
i) Whether the financial statement are in agreement with the books of
A/C’s.
j) Whether the financial statement represent a true and a fair view of state
of affairs.
k) Whether the Balance Sheet represents true and a fair view of financial
of position.
l) Whether the P&L A/C (Income Statement) represent true and fair view
of financial result.
Schedule C of IRDA (maintainence of accounts and audit of A/C’s) order
2000 must be followed by Insurance Companies.

AUDIT OF BANKS
AUDIT AT BRANCH AND HEAD OFFICE LEVEL:-
The Insurance sector consists of LIC (Life Insurance Corporation of India),

GIC (General Insurance Company), Public Sector Company and private
companies. An Insurance company consists of Head Office and Branch
Office (divisional office). At Branch Office, Insurance Policies are issued,
premium money is received, claim money is paid, etc. At Head Office Level,
Administrative policies are framed; Reinsurance contracts are entered into,
etc.
AUDIT AT BRANCH LEVEL:-

Sec 228 of Companies Act 1956, contains provisions regarding the Branch
Audit. Branch Audit is done by a branch auditor. He has a right of access to
books of A/C’s, documents, vouchers, records, financial statements etc of a
branch. After completion of branch audit, he has to furnish his branch audit
report to the Central Statutory Auditor at Head Office. Also, he must give a
copy of Branch Audit Report to the management. Also, Branch management

AUDIT OF BANKS
has to furnish various branch returns like Revenue A/C, P&L A/, B/S etc to
the Central statutory Auditor.
AUDIT AT HEAD OFFICE LEVEL:-

The Auditor appointed at Head Office is known as Central Statutory
Auditor. He will receive branch audit reports, provided by branch auditor
and he will consolidate them. Also he will receive branch returns provided
by branch management and he will consolidate them. Incase of Inter- branch
transactions, he will prepare Inter- branch reconciliation statement. Also, the
Central Statutory Auditor will look into specific matters like depreciation on
premises, valuation of Investments, Non- performing Loans, reinsurance
contracts, Provision for taxation, audit fees, transfer to Reserves, Dividends
etc.
If a particular branch Audit Report is qualified than the Central
Statutory Auditor must apply his professional judgment and find out whether
this qualification should lead to qualifications of his main Audit Report.
Therefore, if the qualification in Branch Audit Report is material or
significant than the Central Statutory Auditor may qualify his main Audit
Report.
According to Sec 12 of the Insurance Act 1938, it is mandatory for
every Insurance Company to audit his Revenue A/C, P&L A/C and B/S.
Section 2 (4) defines the term “QUALIFIED AUDITOR” as a person who is
qualified Chartered Accountant as per Chartered Accountant Act 1949. Also
every Insurance company must manually conduct audit of receipt and
payment A/C.
The 2 main Statute applicable to Insurance Company are:
1.Insurance Act, 1938

AUDIT OF BANKS
2.IRDA Act, 1999
Every Insurance Company must comply with the provisions of these 2

enactments.
According to Sec 18 of Insurance Act 1938, every Insurance company
must prepare a statement of affair and must submit it to IRDA, members and
policy holders. Also, every Insurance Company must submit 4 copies of
audited Annual A/C’s and financial statements to the Authority (IRDA).
There are various other legislations applicable to Insurance Companies:-
a) Income Tax Act,1961 Sec 44.
b) Income Tax Rules, 1962
c) Companies Act, 1956.
d) Life Insurance Corporation Act, 1956.
e) General Insurance Business Act, 1972.

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APPLICABILITY OF ACCOUNTING STANDARDS TO

INSURANCE COMPANIES:-
1. Accounting Standard are issued by council of ICAI.
2. These accounting standards are very useful in

preparation and presentation of accounts and financial
statements.
3. For a company, all the accounting standards are

mandatory/ obligatory/ compulsory.
4. For an Insurance company some accounting standards

are applicable and some accounting standards are not
applicable.
5. Accounting Standards (3) is on Cash flow statement it is

applicable to Insurance company.

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6. As (4) is on contingencies and events accuracy after the

B/S date. Branch Audit is not included whereas joint
Audit is included in the ceiling on the number of
companies i.e. auditor can audit 20 companies. It is not
applicable to Insurance Company.
7. Accounting Standard (9) is on Revenue Recognition. It

is applicable to Insurance company for income not
arising out of Insurance business and it is not applicable
to Insurance company for income arising out of
Insurance Business.
8. Accounting Standard (13) is on Investments. It is not

applicable to Insurance Company.
9. Accounting Standard (17) is on Segment Reporting it is

applicable to Insurance company.
AUDIT PROCEDURES/ AUDIT OF REVENUE ITEMS:-
While conducting audit of Insurance Company an auditor will perform

various audit procedures by collecting audit evidences and applying audit
procedures on these audit evidences for checking and verifying various
items. For material items, he will check all such items. But, if there are less
important items than he will use test check. (Sample method).
1. PREMIUM:-

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Auditor will use the following audit procedures while checking and
verifying the premium.
a) He will understand and evaluate internal control. This
will help him in understanding Internal Control System.
b) He will check whether the company has followed norms

and guidelines laid by Insurance Act, 1938.
c) He will check whether, the company has followed the

regulations framed by IRDA.
d) He will check the policy and procedures framed by the

top management of Insurance Company.
e) He will check whether the company has complied with

the various requirements.
f) He will verify whether the premium received as it at

gross value or net value. Premium should be recorded
at gross value and from that reinsurance premium
paid should be debucted.
g) He will scrutinize whether the premium money

collected is properly booked or recorded.
h) CO- Insurance means two or more Insurance companies

coming together and issuing Insurance policy to an
insured. In this case, the total premium collected will be
divided among various Insurance Companies in
proportionate basis.

AUDIT OF BANKS
i) If the premium money collected through an agent is

refunded than the premium paid to the agent should be
taken back by the Insurance Company.
j) Auditor will verify whether the Insurance Company is

following proper cut- off procedures.
k) Auditor will verify whether the Insurance Company has

created an adequate provision for unexpired risk.
l) Auditor will verify whether the Insurance Company has

created adequate provision for unearned premium.
m) Auditor will verify whether the Insurance Company has

created a adequate provision for premium deficiency.
(This provision will be created when the premium
collection is less and expected claim payment is more).
Premium is an income of Insurance company. It is a consideration paid to

Insurance Company by the insured for bearing the risk. Premium can be
recognized as a income on time basis only. If the risk arising follows a
uniform pattern.
2. CLAIM:-
a. He will understand and evaluate internal control. This

will help him in understanding Internal Control System.

AUDIT OF BANKS
b. He will check whether the company has followed norms

c. He will check whether, the company has followed the

d. He will check the policy and procedures framed by the

e. He will check whether the company has complied with

f) Auditor will use statistical sampling techniques in

verifying various claims.
g) He will ensure whether the company has created

adequate provision for unsettled claim reinsurance
claim and salvage should be deducted.
h) From the gross value of claim reinsurance claim and

salvage should be deducted.
i) The Auditor will verify whether the company is using

average clause method if there is under- insurance.
j) Incase of Co-insurance, the Insurance company will find

out its share of claim and accordingly records in banks
of Account.
k) Total claim cost includes claim money paid to insured,

surveyor’s charges, legal expenses etc.

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l) Auditor will verify whether the contingencies and events

accruing after the Balance Sheet has been takes into
account.
m) If there is a reinsurance contracts than the auditor will

verify whether the company lodges the claim with the
other Insurance Company promptly.
n) If any matter relating to claim is a matter of dispute and

is referred to court, than the money deposited with the
court should not be considered as claim liability.
o) It will become a claim liability only after the court has

given final verdict.
p) After payment of claim money the Insurance company

must get an unqualified discharge letter from the
insured.
The claim liability can be classified as:-

1 Direct Insurance business
2 Re-insurance business
3 Co-Insurance business
Also, the claim liability can be classified as:-
1 Claim reported but not paid.
2 Loss insured but not reported.

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3. COMMISSION:-
While auditing this item, the auditor will follow the following audit
procedures:-
a. The Auditor will check the Commission bills.
b. Auditor will verify whether the payment of Commission

was property authorize or not.
c. Auditor will check calculation of agent’s commission.
d. Auditor will scrutinize agent’s ledger and find out, if

there is any abnormal items.
e. Auditor must ensure that the Commission is paid only

to agent and no one else (Agent gets commission from
the Insurance Company for procuring business for the
Insurance Company.
4. OPERATING EXPENSES:-
While auditing this item, the auditor will follow the following audit
procedure:-
a. Operating expenses refer to administration expense
b. An operating expenses should be shown separately if it

is higher of Rs. 5,00,000 or 1% of Net premium.

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c. Also, if there is some expenses which is not related to

Insurance business, then it must be disclosed
separately.
AUDIT OF REVENUE ITEMS:-
1 INVESTMENT:-
An Insurance company can invest its funds in approved securities but if it

wants to invest funds in other securities than it must satisfy two conditions.
a) Other Investment should not exceed 25% of total
Investments.
b) Is should be made with the consent of Board of

Directors.
An Insurance company can invest in shares and Debentures of other

Insurance Company or Investment Company but there is a restriction.
1 It should not exceed 10% of total assets of Investment Company or 2% of
subscribed capital of investee Company, whichever is least.
An Insurance Company can invest in share and debentures. A Company
which is not a Insurance company or Investment company, but there is a
restriction---

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a) It should not exceed 10% of total assets of Investors

company or 10% of subscribed capital also it cannot
invest money of policyholder outside India.
Accounting Standard 13 on valuation of Investment is not applicable to

Insurance Company. The Insurance Company will follow the following
norms and guidelines by valuing its Investments:-
a) REAL ESTATE:-
It will be valued at historical cost (means a price at

which it was purchased also if there is some
depreciation it will be debucted)
b) DEBT SECURITIES:-
It will be valued at historical cost but is historical cost is

more than face value, than the difference will be
amortized over life debt securities.
c) EQUITY SHARES:-
It will be valued at fair value (i.e. it will be valued at

closing price at stock exchange on Balance Sheet date.)
If there is any loss than it will be debited to Revenue
A/C and if there is any realized gain than it will be
credited “Change in fair value” Account.
d) UNLISTED SECURITIES:-
It will be valued at historical cost.

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AUDITOR WILL FOLLOW THE FOLLOWING AUDIT

PROCEDURE WHILE:-
1 Auditing Investment-
1 He will understand and evaluate internal control. This will help him in
understanding Internal Control System.
2 He will check whether the company has followed norms

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3 He will check whether, the company has followed the

4 He will check the policy and procedures framed by the

5 He will check whether the company has complied with

6 Auditor will ensure himself regarding the existence of

Investment.
7 He will verify whether the company has followed norms

and guidelines for valuation of Investment.
8 He will physically verify the securities.
9 If physical verification of securities is not done on

Balance Sheet date, but it is done on some other day
than he will prepare a reconciliation statement.
10 He will find out whether the securities are held in

physical form or demat form.
11He will check records, registers etc relating to

investments.
12If an income on an Investment is not received than a

provision, will be created.
13If an Investment is not redeemed on its redemption

date, than a provision will be created.

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14If Securities of Insurance Company is lying with share

transfer agent than the auditor will obtain confirmation
letter from share- transfer agent.
15Auditor will examine accounting policies followed by

Insurance company and if there are any changes in
accounting policies than he will find out impact of such
changes.
16Auditor will check TDS certificates (Tax Deducted at

source)
17 Auditor will verify whether the Income from

Investment is properly accounted or not.
2 CASH AND BANK BALANCE:-

In this case, the auditor will follow the following audit procedures:-
1 He will physically verify cash balance at end of the year.
2 He will inspect cash book.
3 If physical verification of cash is not made on Balance Sheet date, but is
done at a later date than he will prepare reconciliation statement.
4 If there are some cheques and they are not deposited than they will be
shown as “ Cheques on hand”.
5 Auditor will test check various bank transactions.
6 Auditor will prepare Bank Reconciliation statement.
7 To verify Bank Balance, the auditor will obtain confirmation letter from
the bank.

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3 AGENT’S BALANCE:-
While auditing this item the auditor will adopt the following auditing
procedures:-
1 He will check agent outstanding balance.
2 He will check outstanding balance in outstanding premium account.
3 If any recovery of large outstanding balance is made in the post audit
period, then the auditor will also check it.
4 Auditor will acquire written explanations of outstanding balances and their
recovery from their management (such a written explanation from the
management is known as Representation Letter or Management Letter).
5 Auditor will ensure that outstanding balance of employees is not included
in agent’s outstanding balance.
6 Auditor will ensure that outstanding balance to other Insurance Company
is not included in agent’s outstanding balance.
7 Auditor will ensure that no Commission is paid to Insurance Company is
Insurance business is directly procured by Insurance Company.
8 Auditor will check payment vouchers
9 Auditor will check agent’s Control Account in General Ledger.
10 Auditor will check various subsidiary records.
4 TAXATION:-
While auditing this item, the auditor will adopt following procedures.

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1 He will verify whether the company has created adequate provision for
taxation.
2 Besides checking Accounts and Financial Statements, auditor will also
check the records submitted by Insurance Company to the Comptroller and
Auditor General of India.
3 Auditor will check whether the Insurance Company has any foreign
income or foreign branches.
4 Auditor will verify whether the Insurance company is properly
maintaining and preserving TDS certificate.
5 The Auditor will also check the implication of Wealth Tax Act, 1957.
(Wealth Tax is payable if net wealth exceeds Rs 15 lakhs and wealth tax
weight is 1%).
6 Auditor will also verify whether the Insurance Company is detecting
Service Tax from its client and is promptly depositing it with statutory
authorities.
5 UNEXPIRED RISK RESERVED:-
1 Date of expiry of various Insurance policies and the last date of financial
year (Accounting year) may not be the same.
2 Therefore, on the date of Balance Sheet the Company will have some
expired policies(i.e. unexpired risk) liability.
3 For such an unexpired risk liability, the Insurance Company will create a
provision. This is called Unexpired Risk Reserve.
4 Incase of Fire Insurance and Marine Cargo Insurance provision will be
made at 50% of net premium.

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5 Incase of Marine Hull Insurance, provision will be made at 100% of net

premium.
6 Sec 44 of Income Tax Act, 1961 contain provision regarding Insurance
business. It allows provision for Unexpired Risk and also allows Deduction
for it.
The Auditor will verify and evaluate whether the Insurance Company has
created adequate (sufficient) unexpired Risk Reserve.
6 CATASTROPHE RESERVES:-
It means Reserve created for a future potential liability. The Auditor will
verify and evaluate the adequacy of such a catastrophe reserve.
TYPES OF AUDIT IN INSURANCE COMPANIES

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• Statutory audit:
The statutory audit, which is compulsory as per the law. The statutory audit
of Insurance Company includes examination and inspection of internal audit,
concurrent audit, etc. The statutory audit of Insurance company is like a post
mortem activity. The suggestions of the statutory auditors can assist the bank
management in improving the effectiveness of internal audit/concurrent
audit/inspection functions, etc. In this way statutory plays a very important
role in regulating the Insurance company.
• Internal audit:
Banks generally have a well-organized system of internal audit. There

internal auditors pay frequent visit to the branches. They are an important
link in internal control of the Insurance company. The systems of internal
audit in different Insurance company also have a system of regular
inspection of branches and head office. A separate department within the
Insurance company by firms of chartered accountants carries out the internal
audit and inspection function.
• Concurrent audit:
Concurrent audit is the system which introduced by the IRDA with the view
that interval between the occurrence of transaction and it’s over view kept to
the minimum extent and examination of transactions by the auditors take
place as soon as the transaction take place. It has perceived the effective

AUDIT OF BANKS
means of control. The main view of concurrent auditors is to see that the
transactions are properly recorded, documented and vouched.
• System audit:
In today’s technological advancements, banking companies are using a well-

organized computer system to perform their transactions. So, it is very
necessary to conduct ‘system audit’ in order to evaluate the computer system
for effectiveness.
System audit is the audit of such computer environment/system and

comprises the following internal controls over EDP activities and with
application controls specific control procedures over accounting
applications/assuring that all transaction are recorded and authorized and
completely, accurately, timely processed manner which in turn are verified
by computer.
CONCLUSION

AUDIT OF BANKS
The project the position of Indian Insurance company system as well as the
principal laid down by the IRDA. This assessment was done in seven major
areas, which are core principals, concurrent audit, internal audit, accounting
and transparency . The project concluded that, given the complexity and
development of Indian Insurance sector, the overall level of compliances
with the standards and codes is of high order. This project gives the correct
ideas about how the major areas can be found by way of effective auditing
system i.e. errors, frauds, manipulations etc. form this auditor get the clear
ideas how to recommend on the Insurance company position. Project also
contain that how to conduct of audit of the Insurance company, what are the
various procedure through which audit of Insurance company should be
done. Form auditing point of view, there is proper follow up of work done in
every organization whether it is banking company or any other company or
any other company there no misconduct of transactions is taken places for
that purpose the auditing is very important aspect in today’s scenario form
company and point of view.

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AUDIT OF BANKS

The audit of insurance companies plays a very important role in

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I have not collected any primary data for project.

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Various persons such as the owners, shareholders, investors,

 Mautz define the auditing as “auditing is concerned with the

 International auditing guidelines defines the auditing as

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ORIGIN AND EVOLUATION OF AUDITING

Auditing is as old as accounting. It was in use in all ancient

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3) Compulsory audits of companies:

With increasing number of companies, the companies’ acts in

4) Development of accounting and auditing standard:

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BASIC PRINCIPAL OF AUDITING:

1) Integrity, objectivity and independence:

The auditor should be honest and sincere in his audit work. He

The auditor should keep the information obtained during audit,

3) Skill and competence:

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7) Evaluation of accounting system and internal control:

8) Opinion and report:

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1) Assurance of true and fair accounts:

Audit provides an assurance to the various users of final accounts

2) True and Fair balance sheet:

3) True and fair profit and loss account:

4) Tally with books:

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books profit, make adjustments and compute the taxable income. An

5) As per standard accounting and auditing practices:

The audited final accounts follow the standard accounting and

6) Detection and prevention of errors and frauds:

Audited accounts can be assumed reasonably free from errors and

7) Advice on system, taxation, finance:

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1. An auditor cannot check each and every transaction he has to check

2. Audit evidence is not conclusive in nature thus confirmation by a debtor

3. An auditor cannot be expected to discover deeply laid frauds usually

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STAGES IN PREPARATION FOR THE INSURANCE

The auditor must familiarize himself with the nature of the

2. EVALUATION OF INTERNAL CONTROL SYSTEM:

Every company must have internal control system commensurate

3. PREPARATION OF AUDIT PROGRAMME:

An Audit programme is a written document consisting of various Audit

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Audit procedures are classified as:

b) Substantive Audit procedures

4. COMMUNICATION WITH THE PREVIOUS AUDITOR:

Every transactions must be backed by proper authorization. There must

A company should maintain proper bank A/C’s and documents. In this

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BOOKS AND REGISTERS TO BE MAINTAINED BY

As per Insurance Act 1938, an Insurance company has to maintain the

An Insurance company issues to the insured various types of policies