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Auditing and Ethics · Audit of Banks

Audit of Deposits, Investments and Other Items in a Bank Audit

Updated 5 October 2026 · Fact-checked

This topic covers audit procedures for a bank's liabilities and assets other than advances: deposits, investments, cash, balances with RBI, bills and inter-branch accounts. For each item, state the risk, then the verification steps: confirm, reconcile, check classification and valuation, and test controls. Write the answer item by item.

Understand Audit of Deposits, Investments and Other Items

A bank's balance sheet has two big areas. Advances are one. Everything else is this topic: deposits on the liabilities side, and investments, cash, balances with RBI and other banks, bills and inter-branch balances on the assets side.

Deposits are the bank's main liability. The main audit risk is completeness and accuracy. Deposits may be understated, interest may be wrongly computed, and dormant or unclaimed accounts may be mishandled. Deposits are of three types: current (demand), savings and term deposits. Auditors check opening of accounts (KYC), interest calculation, and the control over unclaimed and inoperative accounts. To test interest, the auditor recomputes it on a sample using the terms of the bank's scheme, the applicable rate and the actual period. The method depends on the type of deposit:

  • Cumulative term deposits: interest is compounded at the frequency prescribed in the bank's scheme (commonly quarterly) and paid at maturity.
  • Non-cumulative term deposits: interest is paid out at the periodic payout intervals the scheme provides, such as monthly or quarterly. Recompute it for each payout interval.
  • Savings deposits: interest is calculated on a daily product basis as per RBI directions on interest rates on deposits.

The rate is a per annum rate applied on the bank's day-count basis. Do not assume one method for every deposit. Check the scheme terms and RBI directions.

Investments are held in three categories under the RBI (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023: Held to Maturity, Available for Sale and Held for Trading. HTM is carried at amortised cost. AFS and HFT are carried at fair value. For AFS, the net change in fair value is recognised in the AFS reserve (OCI). The Directions prescribe how net unrealised losses in the AFS reserve are dealt with, so check the Directions rather than assuming a flat rule. HFT changes go to profit and loss. The auditor checks existence (securities held physically, with the depository, or with the custodian), classification, valuation under the RBI Directions, income accrual and provisioning for non-performing investments. Do not value everything at cost. Valuation rules differ by category.

Cash and balances with RBI are high-liquidity items. The auditor physically verifies cash on hand, usually by counting at the branch, or by relying on the branch auditor's count and the bank's internal checks. Balances with RBI and other banks are confirmed with the counterparty and reconciled to the bank's books.

The bank must also maintain the Cash Reserve Ratio (CRR). CRR is a percentage of net demand and time liabilities (NDTL), kept as balances with RBI. The required reserve is computed on NDTL as per RBI's current instructions, which prescribe the reference fortnight. Check the latest RBI Master Direction on CRR for the exact reference date rather than relying on memory. CRR is maintained on a fortnightly average basis. The average of the daily balances over the reporting fortnight must meet the full prescribed CRR. On top of that, the balance on any single day must be at least the minimum percentage of the prescribed CRR laid down by RBI from time to time. Check the current percentage in the latest RBI instructions rather than relying on memory. The auditor tests the fortnightly average against the required CRR computed on the NDTL figure RBI prescribes, and also checks that the daily minimum was met on each day.

Bills are purchased, discounted or for collection. Inter-branch accounts are balances between a bank's own branches. They must net to nil at head office level. The auditor checks that entries are reconciled and that old unreconciled items are investigated and properly treated.

Key rules to remember

Inter-branch rule
Total of all inter-branch debit balances = Total of all inter-branch credit balances (net nil at bank level)
Any difference left at year-end is an unreconciled item. Check ageing and treatment of old entries.
Investment categories (RBI)
HTM = amortised cost; AFS = fair value, net change recognised in AFS reserve (OCI); HFT = fair value, changes to profit and loss
This follows the RBI (Classification, Valuation and Operation of Investment Portfolio of Commercial Banks) Directions, 2023, effective from 1 April 2024. HTM is carried at amortised cost: acquisition cost adjusted for amortisation of any premium or discount over the remaining life of the security, on the method the Directions prescribe. AFS and HFT are both fair valued. For AFS the net change goes to the AFS reserve (OCI), and the Directions prescribe how net unrealised losses in that reserve are dealt with, so check the Directions for the treatment. HFT changes go to profit and loss. The Directions also set conditions for HTM, including limits on its size, sales and transfers. Check the current limits in the latest Directions rather than relying on memory, and test compliance with them. State the category before discussing valuation.
Reconciliation check
Balance per bank's books ± reconciling items = Balance per RBI or other bank's statement
Use it for balances with RBI and other banks. List outstanding items and check their subsequent clearance.
Deposit interest check
Interest = recomputed using the scheme terms and RBI directions: cumulative deposits compounded at the scheme's frequency (commonly quarterly); non-cumulative deposits = Principal × Rate × Period for each payout interval; savings deposits on a daily product basis
Used to recompute interest on a sample of deposits. Apply the rate per annum from the bank's schedule on the bank's day-count basis, and check the period against the deposit dates, the type of deposit and the payout frequency in the scheme.

How to solve Audit of Deposits, Investments and Other Items questions

Use the same frame for every question on deposits, investments, cash, RBI balances, bills or inter-branch accounts. It keeps your answer complete and easy for the examiner to give marks.

  1. 1Identify the item and its side of the balance sheet. Name the main risk in one line, such as understatement of deposits or overstatement of investments.
  2. 2Recall the regulatory and accounting basis: RBI norms and the Banking Regulation Act, 1949. Refer to the Third Schedule format only for presentation and disclosure of the item, not as the basis for verifying it. Mention only what you are sure of.
  3. 3Write existence and ownership procedures: physical verification, confirmation from the depository, custodian, RBI or other bank.
  4. 4Write completeness and accuracy procedures: reconcile to subsidiary ledgers, recompute interest, test cut-off.
  5. 5Write valuation, classification and presentation steps: investment category, provisions, ageing of unreconciled items, disclosure in the schedules.
  6. 6Add the control review: authorisation, dual control over cash and securities, KYC, and periodic reconciliation.
  7. 7Close with reporting: effect of any exception on the audit report and any matter to report to management or those charged with governance.

Quickest way: Item, risk, evidence, control

When to use it: Use this in the exam when you have about 8 to 10 minutes for a 5 to 7 mark question on one of these items, or when you must eliminate MCQ options quickly.

  1. Write the item as a side heading, then one line for the risk.
  2. List four to six procedures as short bullet points, each starting with a verb: verify, confirm, reconcile, recompute, examine.
  3. For MCQs, match the item to its evidence: cash to physical count, RBI balance to confirmation and reconciliation, investments to custodian confirmation and valuation, inter-branch to reconciliation.
  4. Eliminate options that apply the wrong test, such as valuing HTM investments at fair value instead of amortised cost, or confirming cash by RBI statement.
  5. Finish with a one-line conclusion on reporting. Each procedure bullet earns a step mark.

Common mistakes in Audit of Deposits, Investments and Other Items

  • Treating all investments at cost or all at market value.

    Students remember general investment audit and ignore RBI categories.

    Fix: Always name the category first: HTM, AFS or HFT. Then state the valuation basis for that category.

  • Writing only physical verification for investments.

    Students copy the inventory pattern.

    Fix: Securities are often in demat form or with a custodian. Include confirmation from the depository or custodian and reconciliation to the bank's records.

  • Ignoring unreconciled old inter-branch entries.

    Students think the net balance is nil, so no issue exists.

    Fix: Stress ageing review, investigation of long-outstanding items and proper provision or treatment. Report if material.

  • Forgetting interest and unclaimed deposit checks in deposit audit.

    Students focus only on the balance, not on the related expense and compliance.

    Fix: Add recomputation of interest, review of inoperative accounts, and KYC and authorisation checks.

  • Confirming balances with RBI only by reading the bank's own ledger, or testing CRR on a single date's balance.

    The ledger seems enough evidence, and a year-end balance looks like a complete test.

    Fix: Obtain external evidence: RBI statements or confirmation and a reconciliation of differences. Test CRR on the fortnightly average basis against NDTL, and check the daily minimum balance requirement laid down by RBI as well.

Worked examples

Example 1

State the audit procedures for verifying cash and balances with the Reserve Bank of India in a bank audit. (5 marks)

Show the solution
  1. Item and risk: cash and RBI balances are highly liquid, so the risks are misappropriation, misstatement and non-compliance with CRR.
  2. Cash: count cash on hand at the branch, including ATM cash, on a surprise basis where possible. Compare the count with the cash book and the general ledger.
  3. Cash: check the cash in transit, the vault controls, dual custody of keys, and the cash limits set by the bank.
  4. Balances with RBI: obtain statements or confirmation from RBI and reconcile them with the bank's books. Examine reconciling items and check their subsequent clearance.
  5. CRR: recompute the required reserve as a percentage of net demand and time liabilities (NDTL), using NDTL as per RBI's current instructions (the reference fortnight is as RBI prescribes; check the latest RBI Master Direction on CRR). CRR is maintained on a fortnightly average basis, so test that the average of daily balances with RBI over each reporting fortnight meets the full requirement computed on that NDTL. Also test that the balance on each day was at least the daily minimum percentage of the prescribed CRR laid down by RBI from time to time. Review any shortfall and the penalty, if any, under RBI rules.
  6. Presentation: check disclosure under the correct balance sheet heading.

Answer: The auditor physically verifies cash and compares it to records, reviews custody controls, confirms and reconciles RBI balances, tests CRR on the fortnightly average against the required reserve computed on NDTL as per RBI's current instructions along with the daily minimum requirement, and checks disclosure.

Example 2

During a bank audit you find large unreconciled inter-branch entries, some outstanding for many months. What should you do? (5 marks)

Show the solution
  1. Understand the issue: inter-branch accounts should net to nil at the bank level, so unreconciled entries show control weakness or possible error or fraud.
  2. Obtain the list of outstanding entries and prepare an ageing by amount and period.
  3. Check how the bank follows up. Review the reconciliation process, the responsible officials and the review by head office.
  4. Test a sample of old entries. Trace them to the originating branch vouchers and the receiving branch records to find the cause.
  5. Evaluate whether any entry should be written off or provided for, and whether income or expense is misstated. Ask management to correct.
  6. Conclude on materiality. If uncorrected and material, consider a modified opinion. Report the control weakness to management and those charged with governance.

Answer: Age the unreconciled items, trace samples to source, assess the need for adjustment, and report the control weakness. Modify the opinion if the uncorrected effect is material.

Exam tips

  • Answer in a fixed pattern: risk, procedures, control, reporting. Examiners award step marks for each distinct procedure.
  • For MCQs, link each item to its natural evidence. Cash goes with counts, RBI balances with confirmations, investments with custodian and valuation checks.
  • Use the exact RBI category names HTM, AFS and HFT when discussing investments, and do not mix their valuation bases. Under the RBI Investment Directions, 2023, HTM is carried at amortised cost (acquisition cost adjusted for amortisation of premium or discount over the remaining life), AFS is fair valued with the net change recognised in the AFS reserve (OCI), and HFT is fair valued with changes going to profit and loss. For net unrealised losses in the AFS reserve, follow the treatment the Directions prescribe. HTM also carries conditions on size, sales and transfers under the Directions, so check the current limits.
  • For CRR, say it is tested on the fortnightly average against the required reserve computed on NDTL as per RBI's current instructions (check the latest RBI Master Direction for the reference fortnight), with a daily minimum of the percentage of the prescribed CRR laid down by RBI from time to time. Do not write that a balance on any one date is enough.
  • Mention the control weakness and its reporting effect for inter-branch cases. Many students stop at reconciliation.
  • Keep each bullet short. In a 5-mark question, write five or six crisp points rather than two long paragraphs.

Practice questions from Audit of Banks

Audit of Deposits, Investments and Other Items: frequently asked questions

What is the main audit risk in bank deposits?

The main risk is that deposits and the related interest are understated or wrongly computed. Dormant accounts and weak KYC are further risks. The auditor tests records, recomputes interest and reviews controls.

How does an auditor verify investments in a bank?

The auditor confirms existence with the depository or custodian and checks ownership. He then checks the RBI category and valuation, income accrual and provisioning for non-performing investments.

Why must inter-branch accounts be reconciled?

Balances between branches should net to nil for the bank as a whole. Unreconciled entries may hide errors, delayed postings or fraud, so old items need investigation and proper treatment.

Is physical verification enough for cash in a bank audit?

No. A cash count gives existence at one date. You also need to review custody controls, compare with records and consider cash in transit and ATM cash.