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Unit 10: Audit of Financial Statements

4. If any credit facility availed by the issuer is NPA in the books of the bank, investment in Notes
any of the securities issued by the same issuer would also be treated as NPI and vice versa.
5. The investments in debentures/bonds, which are deemed to be in the nature of advance
would also be subjected to NPI norms as applicable to investments.
State Government Guaranteed Investments: All investments in State Government guaranteed
securities, including those in the nature of ‘deemed advance’, will attract prudential norms for
identification of non-performing investments and provisioning, when interest/installment of
principal (including maturity proceeds) or any other amount due to the bank remains unpaid
for more than 90 days.

10.10.3 Income Recognition

Banks may book income on accrual basis on securities of corporate bodies/public sector undertakings
in respect of which the payment of interest and repayment of principal have been guaranteed by the
Central Government or a State Government, provided interest is serviced regularly and as such is
not in arrears. Banks may book income from dividend on shares of corporate bodies on accrual basis
provided dividend on the shares has been declared by the corporate body in its Annual General
Meeting and the owner’s right to receive payment is established.

Banks may book income from Government securities and bonds and debentures of corporate
bodies on accrual basis, where interest rates on these instruments are pre-determined and provided
the past interest is serviced regularly and is not in arrears.

Banks should book income from units of mutual funds on cash basis.
Since it is very difficult to condense all the provisions of the RBI guidelines in this article it
would be desirable for the auditors examining the investment portfolio of a bank to be thoroughly
familiar with these guidelines and also the bank’s own policy document on investment before
commencing the audit.

10.11 Depreciation

1. Check the depreciation rates as provided in Company’s act, 1956.

2. Check whether there is any addition made during the year, if yes then check whether
depreciation is correctly charged from the date of purchase till last date of a/c year.
3. Check whether there is sale of any asset and if yes den check its treatment given by the
company.
4. Scrutinize all the original documents supporting any additions made by the company in
case of fixed assets and cross tally the amount debited to FA a/c with such documents.
5. Also check application of AS-10 & AS-6 whether it has been correctly applied by the
management.
6. See whether all the assets added and sold by the management are properly authorized by
passing resolution for it.
7. Also check the internal policy if any of the company. These are some of the imp points that
you need to keep in mind while doing audit of asset & dep.

10.11.1 Straight-Line Depreciation

Depreciation is an income tax deduction allowance that provides tax payers the ability to recover
the cost of a property and is based on an “annual allowance for the wear and tear, deterioration,

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