Commission Income
Auditor may check the items of commission, exchange and brokerage on a test check basis. Such examination can be done for commission earned on bills sent for collection, commission on letters of credit, guarantees and letter of comforts. The auditor should examine whether the commission on non–funded business (e.g., letters of credit, guarantees and bills for collection) has been properly apportioned between the current year and the following year.
The auditor should obtain details of loans sanctioned and disbursed during the period as well as verify the policy of the bank for booking the processing fee income on such loans. For corporate loans, the processing fee income for the material loans sanctioned and disbursed should be re-computed and verified on test check basis by obtaining the loan agreements, sanction letter, etc. Further, for loans sanctioned but not disbursed wherein the processing fee income has been booked on accrual basis, the auditor should verify the subsequent receipt of the same and enquire for subsequent reversals. For retail loans, the auditor should perform analytical procedures for computing the processing fee percentage for different ticket size loans.
The auditor should obtain an understanding of the various types of fee income earned on credit cards and debit cards. Further, the auditor should obtain the rate matrix for various fees charged to the customer. On a sample basis, the auditor should verify whether the fees charged and accounted is as per the rate matrix. Interchange fees is earned from service providers namely Visa, Master card, Amex proportionate to the transactions entered by the customer. On a sample basis, the auditor should verify whether the interchange fees have been received and accounted as per the agreement. Merchant acquiring income is earned on the transactions entered by the customers of other banks on the bank’s terminal. The auditor should perform analytical procedures for such income and obtain the explanation for the variances, if any.
The auditor should understand how management monitors non-funded business and use their analysis for analytical procedures. The auditor should understand the relation with fee income with the business. For example, month on month /quarter loan processing fees with sanction value to arrive at average processing fees on monthly/quarterly basis. The auditor should analyse monthly/quarterly fee percentage and document the reasons for the variances as per the expectation set. Similarly auditor can perform analysis of other fee income by doing monthly/quarterly guarantee fees with average monthly/quarterly guarantee amount, interchange credit card fees vis a vis inter charge transactions etc.
The auditor may also compare the average fee income with the corresponding figures for the previous years and analyse any material differences.
The auditor should also check whether any fees or commission earned by the banks as a result of renegotiations or rescheduling of outstanding debts has, in terms of the income recognition guidelines issued by the RBI, have been recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.
According to the guidelines for income recognition, asset classification, etc., issued by the RBI, if interest income from assets in respect of a borrower becomes subject to non-accrual, fees, commission and similar income with respect to same borrower that have been accrued should cease to accrue for the current period and should be reversed or provided for with respect to past periods, if uncollected. The auditor should examine whether the bank has accordingly made suitable adjustments for de– recognition/ reversal of uncollected commission, etc.
Fee on insurance referral is fast emerging as a major source of income for banks. In terms of the RBI Master Circular No. DBR.No.FSD.BC 19/24.01.001/2015-16 dated July 1, 2015 on “Para Banking Activities”, banks are permitted to undertake insurance business as agents of insurance companies on fee basis or referral arrangement without any risk participation subject to the conditions prescribed under the Master Circular. The auditor should carefully examine the agreement entered into by the bank and the concerned insurance company to see the basis for calculation of the said fee, time when the referral fees becomes due to the bank. Normally, as an industry practice, such agency arrangements also contain clauses known as “claw back” of agency fee, whereby if the client referred to the insurance company by the bank fails to pay the insurance premium for a stipulated amount of time, the agency fees paid or due to the bank becomes recoverable from the bank or is frozen. Such clauses have a direct impact on the recognition of income from the agency fees in terms of Accounting Standard 9, Revenue Recognition and may, therefore, require creation of a corresponding provision in the accounts. There has been no new Master Direction issued by RBI in 2016 dealing with Para Banking Activities.
Profit on Sale of Investments: As per Circular DBOD/BP.BC.34/ 21//04.19/2010-11 dated 6 August, 2010, investments are dealt in the course of banking activity and hence the profit or losses in sale of investments are taken to Profit & Loss account. The auditor should obtain the investment policy of the bank and understand whether the bank is using FIFO method or weighted average cost method for computing the profit/loss on sale of investments. As investments are usually dealt with at the head office level, this item may not appear in the profit and loss account of a branch.
Valuation of investment
Held to maturity – investment classified under HTM category need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortized over the period remaining to maturity.
AFS – the individual scrip in the category will be marked at quarterly or at more frequent intervals.
11.54 Profit/ Loss on Revaluation of Investments: In terms of guidelines issued by RBI, investments are to be valued at periodical intervals and depreciation or appreciation in valuation is to be recognised under this head. As investments are usually dealt with at the head office level, this item may not appear in the profit and loss account of a branch.
Profit on sale of Land, Buildings and Other Assets: This item includes profit (net of any loss) on sale of land, buildings, furniture, motor vehicles, gold, silver, etc.
The auditor can check authority for disposal of:
fixed assets, if any, sold during the year under audit; and
non-banking assets acquired in satisfaction of claims.
The auditor should also vouch transactions in evidence of profit/ loss recorded by the Branch in respect of assets, as aforesaid.