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CA Intermediate · Auditing and Ethics · Audit of Banks

The auditor of Narmada Cooperative Commercial Bank, a statutory central auditor, is planning to verify the bank's compliance with the cash reserve requirement. Which procedure is most appropriate for verifying the average daily balance maintained for the reporting fortnight?

The auditor should compare the returns filed with the regulator against the books and the central bank account statements for the period. Reserve requirements are based on average daily balances, so independent external evidence across the period is needed, not representations or a single-day balance.

  1. ARely on the branch managers' representation that the required balance was maintained
  2. BCompare the bank's returns to the regulator with the balances in the books and with the reserve bank account statements for the relevant periodCorrect
  3. CVerify only the closing balance on the last day of the financial year
  4. DCheck only the cash in hand at the head office on the balance sheet date

Explanation

Reserve compliance is measured on average daily balances over a reporting period, so the auditor must agree the returns filed with the books and with independent external confirmation, such as the statement of the bank's account with the central bank. Representations are weak evidence, and a single-day closing balance or head office cash does not test the average requirement.

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