Auditing and Ethics · Audit of Banks

Bank Financial Statements and Audit Reporting for CA Inter

Updated 4 October 2026 · Fact-checked

Banks prepare financial statements in the Third Schedule formats of the Banking Regulation Act, 1949: a balance sheet (Form A) and profit and loss account (Form B), each supported by schedules. The auditor gives an opinion in the audit report and also submits a long form audit report (LFAR) on detailed matters.

Understand Bank Financial Statements and Audit Reporting

A bank is not a normal company. It is governed by the Banking Regulation Act, 1949, and its financial statements follow the Third Schedule of that Act. Form A is the balance sheet. Form B is the profit and loss account. A company-style Schedule III format is not used for a banking company.

The balance sheet is a list of Capital and Liabilities on one side and Assets on the other. Each line points to a schedule that gives the detail. In the usual Form A numbering, the liability schedules cover capital (Schedule 1), reserves and surplus (Schedule 2), deposits (Schedule 3), borrowings (Schedule 4), and other liabilities and provisions (Schedule 5). The asset schedules cover cash and balances with the RBI, balances with banks and money at call and short notice, investments, advances, fixed assets, and other assets (Schedules 6 to 11). Contingent liabilities (Schedule 12) and bills for collection are shown as memorandum items outside the totals.

The profit and loss account has two broad parts: income (interest earned, other income) and expenditure (interest expended, operating expenses, provisions and contingencies). The result is the profit or loss for the year, followed by the appropriation of profit. Interest earned is itself supported by a schedule (Schedule 13 in the usual numbering). It includes interest and discount on advances and bills, income on investments, interest on balances with the RBI and other inter-bank funds, and others.

The auditor reports in two ways. First, the auditor's report on the financial statements, which is based on the Standards on Auditing (SA 700 and related SAs) and expresses an opinion on whether the statements give a true and fair view. Second, the Long Form Audit Report (LFAR), a detailed report addressed to the bank's Board of Directors/management, as required by the RBI, on specific areas such as advances, NPA classification, internal controls and branch operations. The LFAR is a separate report from the audit report. It is not a substitute for the audit report and does not replace the opinion.

In a bank audit the statements are often compiled from branch returns. Statutory central auditors rely on branch auditors for the branches those branch auditors audit. The central auditor must also read and consider the branch auditors' reports on the branches audited by them, and note how they deal with them in their own report.

Key rules to remember

Governing format: Balance sheet = Form A; Profit and loss account = Form B (Third Schedule, Banking Regulation Act, 1949); Remember A for the balance sheet, B for the profit and loss account.
Balance sheet identity: Total capital and liabilities = Total assets; Use it to check any balance sheet question that gives all items but one. Contingent liabilities and bills for collection are memorandum items outside these totals.
Net profit: Profit for the year = Total income − Total expenditure; Income is interest earned plus other income. Expenditure is interest expended, operating expenses, and provisions and contingencies.
Net interest income: Net interest income = Interest earned − Interest expended; A useful working number when a question asks you to analyse the spread.
Audit report vs LFAR: Audit report = opinion on true and fair view; LFAR = detailed answers on specific matters; Both are required for a bank. One does not replace the other.

How to solve Bank Financial Statements and Audit Reporting questions

Use the same sequence for any question on bank financial statements or bank audit reports.

1Identify what the question asks: a statement format, a schedule, the audit report, or the LFAR.
2If it is about formats, name the correct form (Form A or Form B) and the Third Schedule of the Banking Regulation Act, 1949.
3Place each item under its correct head and schedule (for example, deposits under liabilities, advances under assets).
4Check that totals agree: capital and liabilities must equal assets, and the profit figure must follow from income less expenditure.
5If it is about the audit report, state the opinion, the basis for it, and the responsibilities of management and the auditor, and mention reliance on branch auditors where relevant.
6If it is about the LFAR, list the specific areas covered and say that it is addressed to the bank's Board of Directors/management, as required by the RBI, that it is a separate report, and that it does not replace the opinion.
7Close with a one-line conclusion tied to the question facts.

Quickest way: Form, schedule, report: three-line recall

When to use it: Use this when you have under four minutes for a short written answer or when you must pick an MCQ option fast.

Write the form first: Form A balance sheet, Form B profit and loss account, both under the Third Schedule.
List the main heads in order: capital, reserves, deposits, borrowings, other liabilities; then cash with RBI, balances with banks, investments, advances, fixed assets, other assets.
For MCQs, eliminate options that call the format a Schedule III company format or that say the LFAR replaces the audit report.
For reporting answers, use the order: opinion, basis, responsibilities, branch auditor reliance, LFAR as separate report.
Write each point as a short line so the examiner can award step marks.

Common mistakes in Bank Financial Statements and Audit Reporting

Using the company Schedule III format for a bank balance sheet.
Students learn company accounts first and assume one format fits all.
Fix: Remember that banking companies follow the Third Schedule of the Banking Regulation Act, 1949, Forms A and B.
Mixing up Form A and Form B.
Both forms look similar in notes and the labels are easy to swap.
Fix: Link A with the balance sheet and B with the profit and loss account by their alphabetical order.
Treating the LFAR as the audit opinion.
Both are called reports and both are signed by the auditor.
Fix: State that the audit report gives the opinion on the financial statements, while the LFAR gives detailed observations on specific areas.
Placing contingent liabilities inside the main liabilities total.
They appear in the balance sheet and look like liabilities.
Fix: Show contingent liabilities (Schedule 12) and bills for collection as memorandum items outside the totals.
Ignoring branch auditors' reports in the central auditor's report.
Students focus on the head office figures.
Fix: Mention that the central auditor considers the branch auditors' reports on the branches audited by them and states how they were dealt with in the final report.

Worked examples

Example 1

A bank's income is: interest earned ₹8,40,000 and other income ₹1,10,000 (all in thousands of rupees). Its expenditure is: interest expended ₹5,10,000, operating expenses ₹1,70,000, and provisions and contingencies ₹60,000. Find the net interest income and the profit for the year, and name the form in which the profit appears.

Show the solution

Net interest income = Interest earned − Interest expended = 8,40,000 − 5,10,000 = 3,30,000.
Total income = 8,40,000 + 1,10,000 = 9,50,000.
Total expenditure = 5,10,000 + 1,70,000 + 60,000 = 7,40,000.
Profit for the year = 9,50,000 − 7,40,000 = 2,10,000.
The profit and loss account is presented in Form B of the Third Schedule to the Banking Regulation Act, 1949.

Answer: Net interest income is ₹3,30,000 thousand and profit for the year is ₹2,10,000 thousand, shown in Form B.

Example 2

Explain the difference between the statutory auditor's report and the LFAR in a bank audit, and how a central auditor treats branch auditors' reports.

Show the solution

The auditor's report gives an opinion on whether the financial statements give a true and fair view. It follows the Standards on Auditing, including SA 700.
The LFAR is a separate, detailed report on specific areas such as advances and NPA classification, internal controls and branch operations. It is addressed to the bank's Board of Directors/management, as required by the RBI.
The LFAR does not replace the audit report, and the audit report does not replace the LFAR. Both are needed.
The central auditor considers the reports of the branch auditors on the branches audited by them and takes them into account while forming the opinion.
The central auditor states in the audit report how the branch auditors' reports were dealt with.

Answer: The audit report gives the opinion on the statements. The LFAR gives detailed observations on specified areas. Both are required, and the central auditor must consider and deal with branch auditors' reports on the branches audited by them.

Exam tips

Write 'Third Schedule, Banking Regulation Act, 1949' and the form letter every time you mention a bank format. It earns an easy mark.
For MCQs, reject options that say a bank uses Schedule III of the Companies Act or that the LFAR replaces the audit report.
In written answers, list the schedule heads in order. A clean list of balance sheet heads scores step marks.
For reporting questions, split your answer into opinion, basis, responsibilities and LFAR. Do not mix them in one paragraph.
If the question gives numbers, show total income, total expenditure and profit as separate lines.

Practice questions from Audit of Banks

Bank Financial Statements and Audit Reporting in other exams

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

Bank Financial Statements and Audit Reporting: frequently asked questions

Which Act gives the format of a bank's financial statements?

The Banking Regulation Act, 1949. Its Third Schedule gives Form A for the balance sheet and Form B for the profit and loss account. Banking companies follow these, not the company format.

What is the difference between the audit report and the LFAR?

The audit report gives the auditor's opinion on whether the financial statements give a true and fair view. The LFAR is a detailed report on specific matters such as advances, NPAs and internal controls. Both are required.

What do the schedules to a bank balance sheet show?

They give the detail behind each main head, such as capital, reserves and surplus, deposits, borrowings, investments, advances and fixed assets. They help readers see how each balance is made up.

Does a central auditor need to read branch auditors' reports?

Yes. The central auditor must consider the reports of the branch auditors on the branches those branch auditors audited. The final audit report should state how those reports were dealt with.