Skip to content

Advanced Auditing, Assurance and Professional Ethics · Special Features of Audit of Banks & Non-Banking Financial Companies

Revenue, Investments and Other Bank Balance Sheet Audit

Updated 5 October 2026 · Fact-checked

This topic covers how you audit a bank's interest income, investments, deposits, cash and balances with RBI, and check that the financial statements follow the Third Schedule format. Solve questions by naming the assertion at risk, listing procedures with evidence, then concluding on disclosure and reporting.

Understand Revenue, Investments and Other Bank Balance Sheet Audit

A bank earns mainly from interest, fees and treasury gains. It funds itself mainly from deposits. So the audit focuses on three things: is income recognised correctly, are investments valued and classified correctly, and are deposits and cash complete and properly recorded.

Interest income is large, voluminous and system-generated. Risk sits in the core banking system (CBS) calculations, the application of correct rates, and income recognition on non-performing assets. Under RBI's income recognition norms, income on an NPA is not recognised on accrual. It is booked only when actually received. Interest already accrued and not collected must be reversed when an account turns NPA. You test this by checking the system logic, sampling accounts, and recomputing interest.

Investments are classified by RBI norms into categories such as held to maturity, available for sale and held for trading, and are valued as per RBI guidelines. Risks are wrong classification, wrong valuation or depreciation, wrong transfers between categories, and missing or non-existent securities. Audit evidence comes from custodian confirmations (such as the depository or the RBI's Public Debt Office for government securities), physical verification of securities held, and reconciliation with the books.

Deposits, cash and RBI balances: Deposits are liabilities, so the main risk is understatement and unrecorded liabilities. Cash is verified by physical count, including ATM cash, and reconciled with the books. Balances with RBI are confirmed with RBI statements and reconciled to meet reserve requirements such as the cash reserve ratio, which is computed on the bank's net demand and time liabilities.

Financial statements of banking companies are prepared under the Third Schedule to the Banking Regulation Act, 1949. Form A is the balance sheet and Form B is the profit and loss account. The Third Schedule requires prescribed schedules and disclosures. Check that the headings, grouping and notes follow the prescribed format and that the RBI's disclosure requirements are met.

Key rules to remember

Statutory format
Form A = Balance Sheet; Form B = Profit and Loss Account (Third Schedule, Banking Regulation Act, 1949)
Banking companies must prepare accounts in these forms. Do not apply the Companies Act Schedule III format to a bank.
Income on NPA
NPA interest = recognised only on receipt; previously accrued uncollected interest = reversed
This is the main income-recognition risk in bank audit.
Investment classification
HTM, AFS, HFT per RBI norms; valuation per RBI guidelines for each category
State that classification and valuation follow RBI directions, and that transfers between categories need compliance with RBI rules.
Interest recomputation
Interest = Principal × Rate × Time ÷ 100
Use it for substantive recomputation of simple interest on sampled accounts. Use the product's compounding terms where applicable.
Deposit audit assertion
Risk = completeness (understatement of liability)
Direct procedures to unrecorded and misclassified deposits.

How to solve Revenue, Investments and Other Bank Balance Sheet Audit questions

Use the same frame for any question on bank revenue, investments, deposits or format. It keeps your answer in provision-facts-conclusion form.

  1. 1Identify the area: income, investment, deposit, cash, RBI balance or presentation.
  2. 2Name the key risk and the assertion affected, such as occurrence, completeness, valuation or classification.
  3. 3State the governing rule in plain words: RBI income recognition, investment norms, or the Third Schedule requirement.
  4. 4Link the facts of the case to the rule, noting what the bank did and where it departs.
  5. 5List audit procedures and the evidence each gives, such as confirmations, recomputation, physical count or reconciliation.
  6. 6Conclude on adjustment, disclosure, reporting or modification of the opinion, and mention reliance on CBS controls or IT audit where relevant.

Quickest way: Risk, Rule, Evidence, Conclusion

When to use it: Use it for short written answers and when a case-scenario MCQ asks what the auditor should do.

  1. Write the area and its main risk in one line.
  2. Write the RBI or Third Schedule rule in one line.
  3. List three to four procedures, each with its evidence.
  4. End with the effect on the report or disclosure.

Common mistakes in Revenue, Investments and Other Bank Balance Sheet Audit

  • Treating accrued interest on an NPA as income

    Students apply the normal accrual concept from financial reporting.

    Fix: For NPAs, recognise interest only on receipt and reverse uncollected accrued interest.

  • Using the Companies Act Schedule III format for a bank

    Students are used to company financial statements.

    Fix: Say that banks follow Form A and Form B of the Third Schedule to the Banking Regulation Act, 1949.

  • Listing only physical verification for investments

    Physical count feels like the standard procedure.

    Fix: Add confirmations from custodians and depositories, reconciliation to books, and valuation checks against RBI norms.

  • Focusing on overstatement for deposits

    Students carry over the assets approach, where overstatement is the usual risk.

    Fix: Deposits are liabilities, so test completeness and unrecorded items first.

  • Ignoring the CBS and IT environment

    Questions look like manual audit problems.

    Fix: Mention testing of system-generated interest calculation, access controls and exception reports, and the use of IT experts where needed.

Worked examples

Example 1

During the audit of a bank branch, you find that a loan account was classified as NPA on 31 December. Interest of ₹1,50,000 had accrued on it before that date, had not been collected, and was already recognised as income. The CBS has continued to book interest of ₹4,00,000 on it for the period after 31 December, up to 31 March, and that amount is also included in interest income. No cash has been received on the account since the NPA date. How should you respond?

Show the solution
  1. Identify the area: interest income on an NPA. The assertion at risk is occurrence and accuracy of income.
  2. State the rule: under RBI income recognition norms, interest on an NPA is recognised only when actually received. So interest for the period after the NPA date is not recognised at all. Interest that accrued and was not collected before the NPA date, and was already taken to income, must be reversed when the account turns NPA.
  3. Apply the facts to pre-NPA interest: the ₹1,50,000 accrued before 31 December and is still uncollected, so it must be reversed. Confirm that management has done this.
  4. Apply the facts to post-NPA interest: no cash was received after 31 December, so the ₹4,00,000 must not be recognised as income. Because the CBS has booked it, the entry must be removed from interest income.
  5. Quantify: interest income is overstated by ₹1,50,000 + ₹4,00,000 = ₹5,50,000 if neither amount is corrected.
  6. Procedures: check the NPA date and account status, review CBS income logic for NPAs, and test other NPA accounts for the same issue.
  7. Conclude: ask management to reverse the ₹1,50,000, remove the ₹4,00,000 from income, and correct the system flaw. If this is not done and the amount is material, consider a modified opinion.

Answer: The ₹1,50,000 accrued and uncollected before the NPA date must be reversed. The ₹4,00,000 booked after the NPA date must not be recognised, so it must be removed from income because nothing was received. Together, income is overstated by ₹5,50,000 if left uncorrected. If management refuses and the effect is material, the auditor modifies the opinion, and should report the system weakness.

Example 2

A bank's investment book includes government securities held in the depository account. At year end, the custodian confirmation shows a lower face value than the bank's books. How do you proceed, and which statement format applies to the disclosure?

Show the solution
  1. Identify the area: investments. The assertions at risk are existence, rights and completeness.
  2. Procedure: obtain the custodian statement as an independent external confirmation and reconcile it with the bank's investment ledger.
  3. Investigate the difference: check pending settlements, transactions around year end, and unrecorded sales or purchases.
  4. Evaluate: if the difference is real, it is a misstatement. Ask for correction and assess materiality.
  5. Presentation: investments appear in Form A, the Third Schedule balance sheet, as an item with its prescribed schedule, and valuation and classification must follow RBI norms.
  6. Conclude: if the difference is unresolved and material, consider modification and the nature of any control failure.

Answer: Reconcile the custodian confirmation with the books, find the cause, and require correction of any real difference. Present investments in Form A with the schedule required by the Third Schedule, and modify the report if a material difference remains.

Exam tips

  • In written answers, start with the RBI or Third Schedule rule, then apply the facts, then conclude.
  • For investment questions, always mention classification, valuation and external confirmation.
  • In MCQs, watch for the NPA interest trap and for answers that use Schedule III instead of the Third Schedule.
  • Mention CBS controls and IT testing when income or deposits are system generated.
  • Do not recall unrelated numbers. Use rules you are sure of and describe RBI norms in plain words.

Practice questions from Special Features of Audit of Banks & Non-Banking Financial Companies

Revenue, Investments and Other Bank Balance Sheet Audit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Revenue, Investments and Other Bank Balance Sheet Audit: frequently asked questions

Which format do banks use for their financial statements?

Banking companies use Form A for the balance sheet and Form B for the profit and loss account under the Third Schedule to the Banking Regulation Act, 1949. They do not use the Schedule III format of the Companies Act.

How is interest income on an NPA audited?

Check that income is recognised only on receipt, and that accrued uncollected interest is reversed when the account becomes NPA. Test the NPA date, the system logic and a sample of accounts.

What evidence do I get for investments in a bank?

Use custodian and depository confirmations, physical verification of securities held, reconciliation with books, and checks on classification and valuation under RBI norms.

What is the main risk in auditing deposits?

Understatement of the liability, so completeness is the key assertion. Test unrecorded or misclassified deposits and reconcile the ledger with the CBS.