Bank Audit Manual 2025–2026: Key Audit Checks, Asset Classification Norms, and Practical Guidance for Branch Audits
Introduction
The Bank Audit Manual 2025–2026 provides practical guidance and reference material for auditors conducting bank branch audits. It compiles key regulatory principles, audit procedures, checklists, and reporting formats required during the audit of bank branches. The manual is intended to assist auditors in understanding important compliance areas, including asset classification, provisioning norms, income recognition, advances verification, and preparation of statutory reports.
The document also includes ready-reckoner charts, audit checklists, formats for audit communication, and suggested audit programmes to facilitate efficient and structured branch audits.
Key Regulatory Points for the Audit Year 2025–2026
One of the important highlights mentioned in the manual is that the break-even date for NPA classification for the year 2025–2026 is 1 January 2026.
The manual also reiterates certain important operational rules relevant for classification of loan accounts:
- Once a borrower account is classified as Non-Performing Asset (NPA), all facilities granted to that borrower must also be treated as NPA.
- An exception is provided in the case of Primary Agricultural Credit Societies (PACS) and Farmers Service Societies (FSS).
- The overdue period begins immediately upon expiry of the due date.
- The earlier concept of “past due” is no longer applicable.
- Stock statements that are older than three months should not be relied upon for assessing drawing power.
These principles play a crucial role in the evaluation of loan accounts during bank audits.
Income Recognition and Asset Classification (IRAC)
The manual includes a summarized overview of Income Recognition and Asset Classification norms, which guide auditors in evaluating the performance and classification of loan accounts.
Income from advances must be recognized only when it is actually realized, particularly in the case of accounts classified as NPAs. Interest cannot be recognized on an accrual basis for non-performing accounts.
The classification of advances generally falls into the following categories:
- Standard Assets
These are performing assets where interest and principal payments are received on time.
- Sub-standard Assets
Accounts which have remained non-performing for a specified period fall into this category.
- Doubtful Assets
Loans that remain in the sub-standard category for an extended period may be classified as doubtful.
- Loss Assets
Accounts where the loss has been identified but not yet written off.
Correct classification directly affects provisioning requirements, making this a critical audit area.
Provisioning Requirements
The manual provides a ready reckoner for provisioning applicable to different asset categories.
Provisioning is required to ensure that banks adequately cover potential losses arising from non-performing loans. Auditors must verify whether provisions have been correctly calculated based on asset classification and regulatory norms.
Incorrect classification can result in under-provisioning, which can materially affect the financial statements of the bank branch.
Important Audit Checks for Bank Branch Audits
The manual outlines several critical checks that auditors should perform during branch audits.
Verification of Advances
Auditors must examine loan accounts to ensure:
- Proper sanction of loans.
- Compliance with lending policies.
- Adequate documentation.
- Correct calculation of drawing power.
Stock and Book Debts
Where advances are secured against stock or receivables, auditors must verify:
- Timely submission of stock statements.
- Accuracy of drawing power calculations.
- Adequate margin requirements.
Stock statements older than three months should not be relied upon.
Interest Application
Auditors must ensure:
- Correct application of interest rates.
- Proper recognition of income.
- No accrual of interest on NPA accounts.
Audit of Advances Accounts
The manual provides a checklist for the audit of advances accounts which includes:
- Verification of sanction limits
- Review of security documentation
- Checking insurance coverage
- Review of irregular accounts
- Monitoring of overdue amounts
- Examination of restructuring or rescheduling of loans
Advances constitute the largest asset class for most banks, making this area central to the audit.
Long Form Audit Report (LFAR)
The manual contains a detailed checklist to assist auditors in preparing the Long Form Audit Report (LFAR).
LFAR requires auditors to comment on various operational aspects of the bank branch, including:
- Loan portfolio quality
- Internal control systems
- Fraud detection and monitoring
- Compliance with banking regulations
- Recovery procedures for NPAs
The checklist ensures that auditors systematically cover all required reporting areas.
Audit Planning and Audit Programme
The manual also outlines an overall audit plan and programme to guide auditors in organizing their work.
Typical stages include:
- Understanding the branch operations
- Reviewing internal control systems
- Evaluating advances and deposits
- Verifying income and expenditure
- Reviewing NPA classification
- Preparing audit reports and certificates
Structured planning helps auditors allocate time efficiently and focus on high-risk areas.
Audit Documentation and Communication
The manual includes several formats used during the audit process, such as:
- Draft Management Representation Letter
- Letter to Branch Management
- Certificate formats issued by auditors
- Audit report templates
- Various audit working formats
These documents assist auditors in maintaining proper documentation and communicating observations to branch management.
Remuneration of Bank Auditors
The manual also includes information on remuneration payable to auditors for bank branch audits. This section helps auditors understand the fee structure applicable for statutory branch audits.
Practical Formats and Tools
In addition to explanatory material, the manual contains practical tools including:
- Audit checklists
- Advance verification formats
- LFAR reporting formats
- Branch audit certificate templates
These formats can be used during audit execution to maintain consistency and completeness.
Conclusion
The Bank Audit Manual 2025–2026 serves as a practical reference for auditors conducting bank branch audits. It provides consolidated guidance on asset classification, income recognition, provisioning norms, and audit procedures. The inclusion of ready-reckoner charts, checklists, and reporting formats helps auditors carry out audits in a structured and systematic manner.
By focusing on key risk areas such as loan classification, advances verification, and regulatory compliance, the manual assists auditors in ensuring that branch financial statements and operational practices are properly examined during the audit process.
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