## Expenditure Audit: Audit of Interest Expense
Interest expense is typically the single largest expense for a bank. The auditor must verify it on a sample basis with the following procedures:
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### Step 1: Verify Interest Calculations on Deposits
- Confirm that interest has been provided on all deposit accounts up to the date of the Balance Sheet.
- Savings Accounts: Interest computed in accordance with rules framed by the Bank/RBI.
- Inter-Branch Balances: Interest provided at the rate prescribed by RBI (100% compliance required).
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### Step 2: Verify Compliance with Interest Rate Framework
Interest rates must comply with all three of the following:
| Source | Applicability |
|---|---|
| Bank's internal regulations | Internal rate structure |
| RBI directives | Regulatory caps/floors |
| Agreement with the respective deposit holder | Contractual rate |
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### Step 3: Check for Changes in Interest Rates
- Ascertain whether there was any change in interest rates during the period on:
- Savings Accounts
- Term Deposits
- Ensure the change was applied correctly from the effective date.
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### Step 4: Assess Overall Reasonableness (Analytical Procedure)
- Analyse the ratio of interest paid on different types of deposits and borrowings to the average balance of those liabilities during the year.
- This produces an effective interest rate — compare it to the expected rate range as a reasonableness check.
- Any significant deviation requires investigation.
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### Step 5: CBS-Generated Interest
- Interest expense in modern banks is automatically generated by the Core Banking System (CBS).
- The auditor should verify the parameters configured in CBS (interest rates, computation methodology, compounding frequency) to ensure correctness.
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### Step 6: Quarter-End Deposit Balances
- Obtain deposit balances at the end of each quarter.
- Calculate the Weighted Average Interest Rate across deposit types.
- Compare this to the rates actually applied — identify any outliers.