## Audit of Expenses in Bank Audit
Expenditure is examined under three broad heads:
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### (A) Interest Expenses
The auditor assesses overall reasonableness of interest expense through:
1. Ratio analysis: Compare interest paid on each deposit/borrowing type to the average quantum of respective liabilities.
2. Weighted average rate: Obtain quarter-wise deposit breakup → compute weighted average rate → compare with actual average rate in annual accounts → investigate material differences.
3. Year-on-year comparison: Compare average interest rates with prior years; explain material variances.
4. Monthly/quarterly trend analysis: Obtain GL breakup for interest on savings deposits, term deposits, and borrowings; analyse month-on-month cost variances against a benchmark.
5. Test check calculations: Verify that:
- Interest is provided on all deposits up to balance sheet date.
- Interest rates comply with bank's internal regulations, RBI directives, and deposit agreements.
- Savings account interest follows RBI rules.
- Inter-branch interest is at Head Office/RBI prescribed rates.
6. Interest rate changes: Ascertain any changes in savings or term deposit rates during the period.
7. Interest rate card: Obtain and use it to validate the interest cost computation.
8. Completeness: Confirm interest is accrued on the entire borrowing portfolio and agrees with general ledgers.
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### (B) Operating Expenses
The auditor should:
1. Study and evaluate internal controls over expenses, including authorisation procedures.
2. Identify divergent trends in major expense items.
3. Perform substantive analytical procedures — e.g., compute each expense as a ratio to total operating expenses and compare with prior years.
4. Verify expenses against supporting documents and re-check calculations.
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### (C) Provisions and Contingencies
The auditor should:
1. Confirm compliance with all RBI circulars on provisioning requirements.
2. Understand how the bank computes provisions on standard assets and NPAs — check classification into standard, sub-standard, doubtful, loss categories.
3. Obtain detailed loan breakup (standard + NPA) and agree balances with the general ledger.
4. Verify tax provision computation — check that items in P&L are correctly considered for tax.
5. Examine other provisions for adequacy by discussing with management and obtaining explanations.