15 Banking Terms that will make you a Banking Expert

1. Repo Rate - Repo stands for repurchase option rate. Repo rate means the rate at which the commercial banks borrows money from central bank. 
a) It is basically a contract in which the bank provides securities such as treasury bills, commercial paper etc while availing loans with a commitment to repay at a predetermined price. 
b) Central bank gives 1 day or overnight loan to commercial banks. Banks repay the loan and repurchase the securities given as collateral. 
c) Repo rate is the important part of monetary policy of India as central bank used it to regulate the inflation. 
d) When inflation is on the rise, the purpose of central bank is to reduce the money supply in the economy for which it increases the repo rate, so that commercial bank gets loans at higher rate and it provide loans to customers at higher rate of interest, so that less customer takes loan and spend less. Thus causing the reduction in money supply in the economy.
e) On the other hand, when the central banks wants to increase the money flow in the economy. It reduces the repo rate, so that commercial banks get loan at lower rate and it provides loan to customers at lower rate, then more and more customer takes loans and spend more. Thus, increasing the money flow in the economy.


2. Reverse Repo Rate 
a) Reverse repo rate means the rate at which interest is earned by commercial banks on the surplus amount deposited with central bank. When the banks have idle cash that is not used for lending, then they deposit the amount with central bank to earn interest on the idle funds. 
b) Reverse repo rate has a inverse relationship with inflation. In case of inflation, central bank increase reverse repo rate because in case of inflation less people will take loans as interest rate increases, so banks have more idle funds. Therefore, central bank encourage commercial banks to deposit the idle funds with central bank by increasing the reverse repo rate.  



3. Cash Reserve Ratio (CRR) 
a) CRR is the amount that the commercial banks are required to kept in the form of cash and cash equivalents with central bank and this amount cannot be given as loan to customers. CRR is calculated as percentage of their Net Demand and Time Liabilities (NDTL). The objective of CRR is to ensure the liquidity and solvency of the Banks.  
b) When CRR is reduced, the banks have to kept less amount of money with central bank and it increases the money supply in the economy. This means banks have more money to provide as loans and due to this interest rates comes down.
c) When CRR is increased, the banks have to kept more amount of money with central bank and it reduces the money supply in the economy. This means banks have less money to provide as loans and due to this interest rate increases.
d) No interest is received on amount kept as CRR with central bank. Therefore banks prefer to have lower CRR because they can earn interest on the amount disbursed as loan.
e) CRR is to be maintained daily as percentage of NDTL on last friday of second preceding fortnight.
f) Banks have to pay penalties in case they not maintain CRR of bank rate + 3% on shortfall in case of one day and bank rate + 5% on shortfall in case of subsequent default days.


4. Statutory Liquidity Ratio (SLR) 
a) SLR is the amount that is calculated as a percentage of  their Net Demand and Time Liabilities (NDTL) that the banks has to kept in the form of liquid assets like cash, gold , government securities etc.
b) All the commercial banks in India are required to maintain SLR asper section 24 and section 56 of the Banking Regulations Act 1949.
c) The main objective of maintaining SLR is to impose restriction on banks to liquidate their liquid assets when the CRR is raised by central bank because when CRR is raised, the commercial banks have to kept more money with central bank and banks have less money to disburse as loan in the economy. So, to avoid liquidating liquid assets, central bank has made mandatory for banks to maintain SLR every day.
d) Interest is received on amount kept in the form of liquid assets for the purpose of SLR.
e) SLR is to be maintained daily as percentage of NDTL on last friday of second preceding fortnight.  
f) In order to monitor the flow of money in the economy, central bank uses the tool of SLR.



5. Marginal Cost of Funds based Lending Rate (MCLR) 
a) History 
i) In April 2003, Benchmark Prime Lending Rate (BPLR) policy was introduced which says that banks have to charged interest rate to its creditworthy customers, every bank has to approve its BPLR by its Board but no fixed formula is defined and there is no transparency. No effect of Repo Rate on Interest Rate.
ii) In July 2010, Base Rate was introduced in which banks are defined to charge minimum rate of interest to its customers. Formula was defined to calculate base rate. In this interest rate is calculated by base rate plus spread. Banks clearly defines the base rate and the extra rate charged to customers. But there is flexibility in calculating the bank's cost of funds and there is still no transparency in base rate.
iii) In April 2016, MCLR policy was introduced. In this RBI has mentioned the exact formula for calculating MCLR. So, the banks used to charged the MCLR plus spread.       
b) Marginal cost of funds is calculated by taking 92% of marginal cost of borrowings plus 8% return on net worth.
c) Marginal cost of borrowings includes marginal rate (rate given on new deposits) on current, savings and term deposits and marginal rate on short term (Repo), long term (other banks & bonds) & foreign currency borrowings, interest not earned on CRR deposit with central bank, operating cost of banks and tenor premium (banks charged premium for long term loans).
d) MCLR is applicable only on commercial banks not on NBFCs they have PLR (Prime lending rate).
e) MCLR is to published every month for atleast overnight MCLR, one-month MCLR, three-month MCLR, six-month MCLR, one year MCLR. It means interest rate is reset after the defined period and MCLR is also changed.
f) Still Repo rate changes are not directly reflected in interest rates. Central bank need to consider the issues and come out with changes in regulations related to MCLR. 



6. CIBIL Report
a) CIBIL is a credit bureau or credit information company. The registered banks and several other financial institutions periodically submit their information to CIBIL. On the basis of information, CIBIL provides CIR (Credit Information Report) as well as credit score.
b) CIBIL offers :-
i) Credit Score - It refers to a 3 digit numeric value which defines the creditworthiness of the customer. It ranges between 300 to 900. Customer having score of 750 or more are considered creditworthy and assumed that they are able to pay the sum due to them.

ii) Credit Report - Credit report contains various information that CIBIL fetches from various financial institutions.The important part of this report are credit score, individual's personal information, employment details, contact information and account details.

iii) Credit Report for Companies - Credit report for companies contains its past credit history. Companies potential lenders, existing credit which the company has, any pending lawsuits and outstanding amount.

c) Credit score provided by CIBIL report can be influenced by the repayment history of the borrower, the amount of credit utilize by the borrower against the credit authorize to him, increase in the number of credit cards and loans sanctioned to you which simply provide the amount of increase in debt.



7. Non - Performing Assets 
a) Non - performing assets are the loans which are disbursed by the banks and financial institutions and on which payments are not received regularly.
b) Following are the different conditions in which the loans disbursed by banks are considered as NPA as per master circular RBI/2012-13/39 issued by RBI dated July 2, 2012 :-
i) Interest and/or installment or principal remain overdue for a period of more than 90 days in respect of a term loan.
ii) The accounts remains out of order in respect of an Overdraft/ Cash Credit (CC).
iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
iv) The installment of principal or interest there on remains overdue for two crop seasons for short duration crops.
v) The installment of principal or interest there on remains overdue for one crop season for long duration crops.
vi) The amount of liquidity facility remains outstanding for more than 90 days in respect of securitisation transaction undertaken.
vii) In respect of derivative transactions, the overdue receivables representing positive mark to market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.     
c) Income from non performing asset is not recognised on accrued basis but on the basis when income is actually received.
d) Categories of Assets
i) Standard Assets - Assets which are not NPA and on which regular payment of installment and/ or interest are received.
ii) Substandard Assets - Assets which remain NPA for a period less than or equal to 12 months.
iii) Doubtful Assets - Assets which remains under substandard category for a period of 12 months.
iv) Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
e) Provisioning of NPA
i) Standard Assets - Banks should make general provision for standard assets at the following rates:
- Direct advances to agricultural and small and medium enterprises (SME) sectors at 0.25 percent.
- Advances to commercial real estates (CRE) sector at 1 percent.
- All other loans and advances not included above at 0.40 percent.

ii) Substandard Assets 
- In case of loans which are secured by collateral security like immovable property,movable property, fixed deposits, life insurance policy etc, the provision on NPA loans is 15%.
- In case of loans which are not secured, the provision on NPA loans is 25% because in case of unsecured loans, risk is more than secured loans as in case of secured loans, banks/financial institutions have collateral security to recover the money in case of loans become NPA.

iii) Doubtful Assets
- If loans remained doubtful for upto one year, then in case of secured loan provision is 25%.
- If loans remained doubtful for one to three years, then in case of secured loan provision is 40%.
- If loans remained doubtful for more than three years, then in case of secured loan provision is 100%.
- In case of unsecured loans, irrespective of period of loans, the provision is 100%.

iv) Loss Assets - In case of loss assets, provision is for 100%.

8. Letter of Credit
i) Letter of credit is a secure way to make payments in case of import of goods.
ii) Steps involved in the process of letter of credit:-
- Buyer (Importer) in India make a sales contract for the sale of goods with the seller (exporter).
- Buyer (Importer) makes a request to open the letter of credit to the importer's bank (opening bank/issuing bank) in India.
- Importer's bank send the letter of credit to the exporter's bank (advising bank) outside India.
- Seller's (exporter's) bank deliver the letter of credit to the seller (exporter).
- After receiving the letter of credit, the seller releases the goods to buyer.
- After releasing the goods, seller present the documents to the nominated or negotiating bank and the nominated bank make payment to seller.
- Nominated bank demands payment by sending documents to opening bank and opening bank send all documents to the importer and take approval of applicant (buyer) whether the goods are received as per the requirement.
- After that the opening bank demands payment from applicant.
-Then, applicant makes payment to opening bank.
- After receiving payment from applicant, opening bank makes payment to the nominated bank. 
iii) An letter of credit is a way to ensure payment will be received correctly in international transaction. It guarantees the buyer's payment will be paid to the seller on time. 
iv) A letter of credit is issued against collateral security like Bank Deposits, Fixed Deposits etc.
v) Bank charges fees for issuing letter of credit.
vi) All parties in letter of credit deal in documents and not goods or services.
vii) Payment will not depend on defects in goods or services.
viii) Advantages of Letter of Credit
a) For Seller
- Protection against buyer's payment default.
- Reduced production risk in case order is changed or cancelled as if buyer cancels the order and letter of credit is issued then buyer has to take the goods already ordered.    
b) For Buyer
- Certainty of goods to be received.
- Letter of credit shows solvency for the buyer and allows the buyer to reduce or eliminate initial payment.

9. Bank Guarantee
i) A promise from a bank that the liabilities of a borrower will be met in the event that the borrower fails to fulfill his contractual obligations.
ii) If the borrower makes payment as per the contract or fulfills his obligations as per the contract, bank need not to pay. It reduces the transaction risk and trust issues.
iii) Important features of Bank Guarantee
- It defines the validity period of bank guarantee like 3 months, 6 months, 12 months, 10 years etc.
- It mentions the specific amount of which bank guarantee is given.
- It mentions the purpose of bank guarantee.
- Events under which it can be invoked.
- Bank guarantees given against collateral security like bank deposits, fixed deposits, mutual funds, any other securities etc.
- Bank charges a fee to issue bank guarantee.
iv) Bank provides guarantee for contracts, government tenders etc.
v) Both the parties does not have trust on each other, bank guarantee reduces the risk and execute the transaction.

10. Banking Ombudsman
i) Banking ombudsman is an authority formed to resolve the complaints of customer of banks.Initially commercial banks, regional rural banks and scheduled primary co-operative banks are covered but now RBI has extends it to NBFC also.
ii) Following are the few grounds of compliant under banking ombudsman:-
- Non payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.
- Non acceptance, without sufficient cause, of small denomination notes tendered for any purpose and for charging of commission in respect thereof.
- Non acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof.
- Non acceptance or delay in payment of inward remittances.
- Failure to issue or delay in issue of drafts, pay orders or bankers cheques.
- Non-adherence to prescribed working hours.
- Failures to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct or its direct selling agents.
- Other grounds of complaints 
iii) A complaint filed can be rejected if:
- The bank has not approached for redressal of grievance.
- No complaint has been made within one year from the date of receipt of the reply of the bank of if no reply is received and the complaint to banking ombudsmen is made after the time period of one year and one month from the date of complaint to the bank.
- The subject matter of the complaint is pending for disposal/ has already been dealt with at another forum.
- If the complaint has the same subject matter that was settled in the past through the office of banking ombudsman in any proceedings.
- Frivolous (not having any serious purpose) or vexatious (causing or tending to cause annoyance, frustration or worry) complaints.
iv) Procedure for filing complaint with banking ombudsman
- A complaint can be filed online by visiting the following link:
Banking Ombudsman
- Following questions will be asked:-
a) Have you made a written complaint to the bank? - Yes/No
b) If yes, whether 30 days are over from the date of lodging the complaint? - Yes/No
c) If the above two questions are answered Yes, then the following details are required:
- Bank Name
- Account Number
- Complainant Name
- Mobile Number
d) Once the details are filled, the website is redirected to the complaint form.
e) There is also an option to upload documents against the concerned bank.
v) Limit on the amount of compensation (Award)
- The amount to be paid by bank to the complainant by way of compensation for any loss suffered by the complainant is the lower of
a) Loss suffered due to any act or omission of the bank.
b) Rs 20 lakhs.
- In case of mental agony and harassment, the banking ombudsmen may award compensation not exceeding Rs 1 lakh to the complainant and while passing an award the banking ombudsmen may consider the time lost by the complainant, expenses incurred by the complainant and harassment and mental agony suffered by the complainant.
vi) If one is unhappy with the decision of banking ombudsman, an option is given to file an appeal with the Appellate Authority within a period of 30 days from the date of receipt of award.

11. Bank Overdraft
i) Overdraft stands for a credit facility which is provided to an individual or company against their collateral security from the bank. It is similar to taking loans from bank.
ii) An overdraft limit is determined on the basis of credit worthiness of a borrower and the availability of collateral or a guarantee.
iii) There are different types of overdraft facility provided by the banks like overdraft against salary, overdraft on savings account, overdraft against time deposits, overdraft against mortgages.
iv) Interest is calculated on the overdrawn amount. A business only pays interest on the amount of overdraft facility used.
v) If the overdraft facility is based on security, then the maximum limit of overdraft is 60-85% of security value and if there is no security provided for overdraft, then it is upon bank's discretion for the limit of overdraft.
vi) In case of secured overdraft, security can be fixed deposits, life insurance policies, mutual funds etc and the unsecured overdraft is based on average balance in current account and past relationship with the bank.

12. Cash Credit
i) Cash credit is a short term load provided to the business entity to meet its working capital requirements.
ii) There is a cash cycle period comprising the period starting from purchase of raw material, conversion of raw material into work in progress, conversion of work in progress into finished goods, sale of finished goods to customer and payment received from customer. Till whole period there is no outflow, only your working capital is blocked. So, to run the business in that period, organisation has to take short term working capital loan.
iii) Cash credit is a secured loan against inventories and receivables.
iv) Maximum limit of cash credit is 50 to 60% of total value of inventory and receivables.
v) Purpose of cash credit is only for purchasing and keeping inventory and receivables.

13. Drawing Power (DP)
i) Drawing power is a term used in cash credit and it means the limit upto which the amount can be withdrawn from cash credit account.
ii) It is calculated on receivables plus inventory less payables.
iii) Banks have a practice to update the drawing power on monthly or quarterly basis. 
iv) The customer has to periodically submit the stock statements and the value of receivables and payables to calculate the amount of drawing power.
v) Stock considered for calculating drawing power should be insured stock as stock not covered under insurance does not reflect the true drawing power and increases the risk of bank.
vi) The margin is deducted from the amount net of creditors and stock and the margin on debtors is also deducted.
vii) Less than 90 days debtors are considered for calculating drawing power.

14. Nostro Account
i) A Nostro account is an account denominated in foreign currency established through your local bank at a bank in the respective country of the currency desired.
ii) The nostro word is derived from latin terms meaning ours.
iii) A nostro account is always in foreign currency.
iv) For example, Citi Bank, America uses nostro account to refer to account that's held by SBI means citi bank says our money deposited in SBI. 

15. Vostro Account
i) A Vostro account is an account denominated in local currency maintained by foreign bank.
ii) The vostro word is derived from latin word meaning yours.
iii) A vostro account is always in local currency.
v) In above example of nostro account, similarly SBI refers to Citi Bank account as vostro means your money deposited in our account. 

Thank you for Reading!

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2. How Government Earn and Spend


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Standards on Auditing - Practical Approach

1. SA - 200 (Overall Objectives of an Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing) - We should see to it that all the relevant laws, standards and regulations relating to that company are getting complied while preparation of financial statements. The audit evidence for the same are to be collected and documented. None of the audit procedures applied should hamper the independence of the auditor. 

2. SA - 210 (Agreeing the Terms of Audit Engagements) - The auditor before the start of the audit should collect engagement letter from the management which specify the scope of audit and describe the auditor's and management responsibility.

3. SA - 220 (Quality Control for an Audit of Financial Statements) - The engagement leader should keep control on the overall performance of the audit. The engagement leader should see that professional ethics and standards are taken care of while performing the audit.

4. SA - 230 (Audit Documentation) - Documentation of each audit procedure conducted and the audit working papers provided by the clients should be maintained either in hard or soft form.

5. SA - 240 (The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements) - It is expected that the auditor should use professional skepticism (questioning mind) in conduct of audit. This means he should not blindly accept whatever information is provided by management. The auditor for assurance should obtain management representation letter (MRL). If any kind of fraud is identified during the audit it should be reported. 

6. SA - 250 (Consideration of Laws & Regulations in an Audit of Financial Statements) - The auditor should verify the measures that are being taken by the staff of the entity under review for complying with relevant laws and regulations. The internal controls of the entity can also be verified so as to ensure the check points relating to such applicable laws.

7. SA - 260 (Communication with Those Charged with Governance) - The auditor should see to it that all audit observations which required attention of the top management should be communicated to them.

8. SA - 265 (Communicating Deficiencies in Internal Control to Those Charged with Governance) - The deficiencies noted in Internal Financial Control (IFC) testing should be informed to higher authorities of the entity as well as to those who are actually involved in carrying out that particular process.

9. SA - 299 (Responsibility of Joint Auditors) - In case of joint audit we need to properly communicate about the scope of work of each joint auditor. There should be proper communication and reliance on each of the auditor's work. Joint responsibility should be signed and confirmed by each of the joint auditor.

10. SA - 300 (Planning an Audit of Financial Statements) - All the details relating to the business under audit should be taken into consideration and the audit plan should be developed accordingly. The audit plan should be documented.

11. SA - 315 (Identifying and Assessing the Risks of Material Misstatements through Understanding the Entity and its Environment) - The auditor should after gaining the knowledge about the business and having a discussion with the management of the organisation under review should set the materiality level for the purpose of the audit assignment. This involves assessing the probable areas where there are chances of occurrence of errors.

12. SA - 320 (Materiality in Planning & Performing an Audit) - The auditor should for the purpose of audit assignment decide what can be material transaction for the entity. This may include deciding the value and volume of vouchers that are to be worked. 

13. SA - 330 (The Auditor's Responses to Assessed Risks) - On the basis of risks identified in SA - 315, the auditor should decide in what way it should be presented in the report and the course of action to be taken on it.

14. SA - 402 (Audit Considerations Relating to an Entity Using a Service Organisation) - This SA is applicable where the organisation under review is using the services of other organisations for such items those are having an impact on the financial statements of the entity.

15. SA - 450 (Evaluation of Misstatements Identified during the Audit) - If any kind of errors are identified in the financial statements during audit then proper call should be taken regarding the same on the basis of the materiality of the amount which is misstated.

16. SA - 500 (Audit Evidence) - The audit evidence obtained should form the basis of the points reported in the financial statements and the audit report.

17. SA - 501 (Audit Evidence - Specific Considerations for Selected Items) - This SA is applicable on specific items like inventory, litigation and claims and presentation and disclosure of segment information.

18. SA - 505 (External Confirmation) - This SA is to be considered when the auditor is to obtain external confirmations as audit evidence. The design and performance is mentioned in the standard.

19. SA - 510 (Initial Audit Engagements - Opening Balances) - As per this SA when we are doing the audit for the first time, we need to verify whether the financials and the accounting policies mentioned are not contradicting with each other. While starting the audit of a new financial year we are supposed to verify the opening balances.          

20. SA - 520 (Analytical Procedures) - Financial analytical procedures include use of ratios, analysing prior period items, checking relevance of budgets and forecasts etc.

21. SA - 530 (Audit Sampling) - Audit sampling is dependent on the materiality level set while doing the audit of a particular organisation. Sampling refers to the selecting data for the purpose of vouching and verification.

22. SA - 540 (Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures) - This SA is to be referred when there is use of accounting estimates in the preparation of financial statements. The auditors responsibilities relating to the same are stated in this SA.

23. SA - 550 (Related Parties) - Firstly the related parties of the entity are to be identified. Then the transactions pertaining to them are to be identified and reported as per the accounting standard.

24. SA - 560 (Subsequent Events) - The events occurring after the balance sheet date are to be identified and appropriate actions and reporting is to be done accordingly.

25. SA - 570 (Going Concern) - We need to identify if there are any items which have occurred that affect the continuity of the business. If so the same have to be reported.

26. SA - 580 (Written Representations) - The written representation is a kind of confirmation obtained from the management regarding the overall transactions of the entity. This SA is to be considered for the preparation of written representation.

27. SA - 600 (Using the Work of Another Auditor) - This SA is regarding the approach of the engagement leader as well as engagement partner when he is using and relying on the work done by his subordinate or another auditor.

28. SA - 610 (Using the Work of Internal Auditors) - This SA is applicable when the statutory auditor is using the work of internal auditor for the purpose of audit.

29. SA - 620 (Using the Work of an Auditor's Expert) - This SA becomes relevant when the expertise of other party is to be used and obtained for the purpose of obtaining audit evidence.

30. SA - 700 (Forming an Opinion and Reporting on Financial Statements) - The auditor can give the following types of opinion:
a) Unqualified Opinion
b) Qualified Opinion
c) Modified Opinion
d) Disclaimer of Opinion
This SA is to be referred while giving any of th opinion mentioned above.

31. SA - 701 (Communicating Key Audit matters in the Independent Auditor's Report) - The points that are mentioned in the audit report are to be discussed with the auditee's top management and their respective staff.   

32. SA - 705 (Modifications to the Opinion in the Independent Auditor's Report) - When the auditor feels that modification of the opinion given in the previous report is required, then this SA becomes relevant and is to be referred.

33. SA - 706 (Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report) - When there are circumstances when qualified or disclaimer of opinion is not required but emphasis is to be given on certain items then emphasis on matter paragraph is used while reporting. This SA then becomes relevant in such circumstances.

34. SA - 710 (Comparative Information - Corresponding Figures and Comparative Financial Statements) - When conducting the audit of current financial year we are supposed to report the figures of the previous financial year as well so we need to check those figures as well whether those are true and correct.

35. SA - 720 (The Auditor's Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements) - This SA becomes applicable when there is any other information disclosed in the financial statements.

36. SA - 800 (Special Considerations - Audit of Financial Statements Prepared in Accordance with Special Purpose Frameworks) - The special frameworks applicable to the entity are to be identified if any and the care is to be taken if those are correctly followed.

37. SA - 805 (Special Considerations - Audit of Single Financial Statements and specific elements, Accounts or Items of a Financial Statements) - This SA is relevant only when there are any such specific assignments as mentioned in this SA. The approach of the auditor pertaining to the same is mentioned in the SA.

38. SA - 810 (Engagements to report on Summary Financial Statements) - This SA is relevant when the auditor is conducting the audit of summary financial statements which are less detailed than the normal financials. 

39. SRE - 2400 (Engagements To Review Financial Statements) - The purpose of this SRE is to provide guidance on practitioners professional responsibilities when a practitioner, who is not the auditor of an entity, undertakes an engagement to review financial statements and on the form and content of the report that the practitioner issues in connection with such review. The objective of review of financial statements is to enable the practitioner to state whether on the basis of procedures anything has come to practitioner's attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.

40. SRE - 2410 (Review of Interim Financial Information Performed by the Independent Auditor of the Entity) - The purpose of this SRE is to provide guidance on the auditor's professional responsibilities when the auditor undertakes an engagement to review interim financial information of an audit client.

41. SAE - 3400 (The Examination of Prospective Financial Information) - The term prospective financial information means statements prepared on the basis of future assumptions and best judgment estimates of the management. The auditor has to verify whether the management has made reasonable and consistent assumptions with the purpose of information required.

42. SAE - 3402 (Assurance Reports On Controls At A Service Organisation) - This standard deals with assurance engagements undertaken by a professional accountant in public practice to provide a report for use by user entities and their auditors on the control at a service organisation that provides service to user entities that is likely to be relevant to user entities internal control as it relates to financial reporting.

43. SAE - 3420 (Assurance Engagements to Report on the Compilation of Pro Forma Financial Information included in a Prospectus) - The objective of the practitioner are to obtain reasonable assurance about whether the pro forma financial information has been compiled in all material respects by the responsible party on the basis of applicable criteria and to report in accordance with the practitioner's findings.

44. SRS - 4400 (Engagements to Perform Agreed Upon Procedures Regarding Financial Information) - The objective is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

45. SRS - 4410 (Engagements to Compile Financial Information) - This deals with practitioners responsibilities when engaged to assist the management with the preparation and presentation of historical financial information without obtaining any assurance on that information, and to report on the engagement.  

Source - The Chartered Accountant Journal

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2. Types of Directors under Companies Act 2013

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Best Investment Opportunities in 2019

There are numerous opportunities available for investment in 2019 to make your money grow by using the tools of compounding and time value of money.

Why Investment in Necessary?
Everyone in today's world want to earn more and save more to secure the future of their families and to make the best use of time to make more money with less span of time. 
Investment is necessary because it helps to earn more by investing the idle money kept in your home in the form of cash or the money kept in your saving bank account in which the interest rates are 4-6%.

Where to Invest?
Following are the ways to invest the idle money kept by you and to earn more income :-

a) National Pension Scheme (NPS) - NPS is a Government Scheme aimed to help individuals with a steady income after retirement. It was initially launched for only Central Government employees, but later was opened up for all individuals.
There are 2 kinds of accounts under NPS, these are – Tier 1 account and Tier 2 account.

Tier 1 account is an account wherein the money in the account cannot be withdrawn till the person reaches the age of 60.

However, partial withdrawal is allowed (even before 60 years) from this account in specific cases. Such cases include critical illness, children’s education, wedding expenses, buying or constructing a house.

This account is compulsory for all central government employees. Under this account, they are required to contribute 10% of their basic monthly salary along with DA and DP.

The minimum amount that is required to be invested in this account is Rs 6000 in a year.

An investor who invests in the NPS Tier 1 account has tax benefits of up to Rs 2 lakh per annum under Chapter VI-A of Income Tax Act..

Deduction amounting to Rs 1.5 lakh under the NPS is covered under the overall ceiling of section 80C of the Income-tax Act, 1961.

Moreover, the investor is also eligible to get an additional tax deduction of Rs 50,000 under section 80CCD(1B).

On the other hand, the Tier II NPS account is more like a savings account and there is no restriction on withdrawal of money, at any point in time whatsoever.

The subscribers of this account are free to withdraw their money as and when they require.

In this, the minimum amount to open the account is Rs 1000 and the minimum balance required at the end of the year is Rs 2000.

However, there are no tax benefits for Tier II. Be it at the time of contribution or at the time of withdrawal.

You can register and contribute through the below mentioned link.

https://enps.nsdl.com/eNPS/NationalPensionSystem.html

b) Mutual Funds - Mutual Funds refers to a pool of money collected from investors who aim at saving and making money through investment. The money so collected is invested in various asset classes like debt funds, equity oriented funds, tax saving funds, money market funds etc.

Types of Mutual Funds based on Asset Class
i) Equity Oriented Funds (EOF) - refers to the fund under the scheme of mutual fund and
a) in case where the fund invested in the units of another fund which is traded on a recognised stock exchange - 
- a minimum of 90% of the total proceeds of such fund is invested in the units of such other fund and
- such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange.
b) in any other case a minimum of 65% of total proceeds collected from investors are invested in equity shares of a domestic company. EOF are more risker than other funds and provide higher returns if compared to other category of funds. 

ii) Debt Oriented Funds (DOF) - refers to the funds where the proceeds collected are invested in a fixed interest bearing instruments like debentures, fixed income assets, government securities etc. DOF are less risker than EOF and provide lower return as compared to EOF but it provides better return than fixed deposit in a bank.

iii) Money Market Funds - These funds are invested in liquid instruments like commercial paper, treasury bills etc. They are considered quite safe investment option as you get immediate yet moderate return on your investment. 

iv) Hybrid or Balanced Funds - These type of funds are invested in different asset classes. These are time when the proportion of debt is lower than equity. These funds typically invest in mix of stocks and bonds.

v) Index Funds - Indexed funds track the indexes like Nifty 50 on NSE, Sensex on BSE and it has same stocks in its portfolio and in same proportion. As stocks come in and out of the indexes, similarly the fund managers changes the portfolio of index funds and in same proportion.

vi) Tax Saving Funds -  Tax Saving funds are mutual funds that has the benefit of tax saving under sec 80 C of Income Tax Act. Most of the tax saving funds are Equity Linked Saving Scheme (ELSS) and make investment in equity markets.

Taxation of Mutual Funds
i) As per sec 111A of Income Tax Act, tax on short term capital gains (STCG) on sale of equity oriented fund (EOF) on which STT is chargeable is at the rate of 15%. In the case of Individual and HUF, the short term capital gain shall be reduced by the unexhausted basic exemption limit and the balance shall be taxed at 15%. For STCG, period of holding of EOF is 12 months or less and debt oriented fund is 36 months or less.

ii) As per sec 112A of Income Tax Act, tax on long term capital gains (LTCG) on transfer of units of equity oriented fund shall be liable to tax at the rate of 10% on such capital gain, if STT has been paid on acquisition of such units. In the case of Individual and HUF, the short term capital gain shall be reduced by the unexhausted basic exemption limit and the balance shall be taxed at 10%. For LTCG, period of holding of EOF is more than 12 months and debt oriented fund is  more than 36 months.

c) National Saving Certificate (NSC) 
- NSC is a type of investment which can be made in a post office in india and it gives rate of interest higher than fixed deposit in a bank and it is a fixed income investment.
- Currently NSC VIII issue is open for investment. 
- Any person can invest upto Rs 1.5 lakhs to claim the benefit of deduction under section 80C of Income Tax Act. 
- Maturity period of NSC is 5 years and 6 years. 
- Interest on NSC is taxable under income from other sources. 
- Banks and NBFC's accept NSC as a collateral for secured loans.
- NSC are currently issued in the denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000.
- Premature withdrawal of NSC is permitted in following cases only:-
i) On the death of NSC holder.
ii) On forfeiture by pledgee who is a Gazetted Government Officer.  
iii) On the order of court for premature withdrawal of NSC.


d) Public Provident Fund (PPF) - If you go by its name it is a provident fund just like employee provident fund (EPF), recognised provident fund (RPF), government provident fund (GPF) but the only difference is that it is for general public. If you are doing business then you can also open the PPF account and start investing unlike the other provident funds which are only open when you are employee of an organisation whether government or private.
- PPF account can be open with any bank or post office.
- PPF account has a minimum tenure of 15 years and if the account holder wants to withdraw the funds before 15 years, then he/she can do so after completion of 6 years from the date of opening of PPF account.    
- Amount deposited in PPF account can be claimed as a deduction under section 80C of Income Tax Act and the interest received on PPF is also exempt.
- Maximum amount deposited in a PPF account is Rs 1.5 lakhs.

e) Share Market - Anyone can invest in share market through mutual funds or directly in share market by opening a DEMAT account with any of the stock brokers registered with SEBI.
- Share market is basically you are investing in the companies listed on National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).
- Investment in companies depend upon various factors like management of the company, whether you are able to understand the business of the company, return on equity, return on capital employed, how much company is dependent on long term debt for the operations of the company?, what is the future of business the company is currently doing?   

f) Bonds - The main difference between the bondholders and shareholders are that bondholders are lenders of the company whereas shareholders are owners of the company. Following are the type of bonds that you can invest in India:-

i) Government Bonds - These type of bonds are issued by Reserve Bank of India (RBI) on behalf of Government of India (GOI) to raise money for the development of the country and to meet fiscal deficit and offer fixed rate of interest on them. Government bonds are considered as a viable investment by corporates, banks as well as financial institutions, however now it is suitable for individual investors also. Various types of government bonds are treasury bills, cash management bills, dated government securities, 

ii) Corporate Bonds - These types of bonds are basically issued by companies in india to raise money for daily operation or future expansion. Companies can either raise money through equity or debt. Bonds are quite economical than bank loans for companies as they have to lower rate of interest on bonds as compared to bank loans. Corporate bonds are basically risker than government bonds, so the rate of interest is higher than government bonds. 

iii) Zero Coupon Bonds - These bonds are basically issued by the companies in india. These are different from corporate bonds because in this no interest is paid at the time of maturity as bonds are issued at discount, so the investor earns the difference between the issue price and maturity value over the period of bond.

iv) Gold Bonds - In 2018 Sovereign Gold Bond (SGB) Scheme was introduced by RBI. Their value is denominated in multiples of gold grams. They are more basically more beneficial than physical gold because in this there is no risk to store the gold and the RBI also provides fixed rate of interest on the value bonds as in case of physical gold, there is no assurance of getting fixed return as the value of gold is keep fluctuating based on different scenarios in the world. 
- Person resident in India as defined under Foreign Exchange Management Act (FEMA), 1999 are eligible to invest in SGB.
- Eligible investors include individuals, HUFs, trusts, universities and charitable institutions.
- Minimum investment is 1 gram and maximum investment is 4 kg for individuals, HUFs and 20 kg for trusts, universities and charitable institutions.
- The bonds bear the rate of interest of 2.50% per annum on the amount of initial investment.


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25 Amendments in Income Tax Act applicable for FY 2018-19

1) Standard deduction to salaried individuals and pensioners (Section 16)

Transport allowance and Medical Reimbursement are two tax deductions which almost every salaried taxpayer easily claims. The Finance Act, 2018 eliminated these two tax benefits. The tax benefit from transport allowance is Rs 19,200 p.a. (Rs 1,600 p.m.), while from reimbursement of medical expenses, it is Rs 15,000 p.a. At first, it may appear to be a loss of Rs 34,200 to you (Rs 19,200 + Rs 15,000). But, you don’t need to worry as a standard deduction of Rs 40,000 has been brought in their place. This is, in fact, a good news for you since the overall tax benefit has increased by Rs 5,800 (Rs 40,000 – Rs 34,200).

This tax benefit has also been extended to the pensioners. Pensioners were not allowed any tax benefit of transport allowance and medical reimbursement. Therefore, they can gain Rs 40,000 as tax-free income.

2) Enhanced deduction under section 80D

You must be familiar with this deduction under section 80D that you can claim when you pay a premium for medical insurance giving coverage to you or your family. The tax deduction currently allowed is up to Rs 30,000 of the insurance covers you, your spouse or your children. You can get additional deduction of Rs 30,000 on premium paid if you have a medical cover for your parents aged 60 years and above. If they are aged below 60 years, then the tax deduction cannot exceed Rs 25,000.

However, if anyone of you, your spouse or your parents is not covered under any insurance policy, then you can claim a tax deduction up to Rs 30,000 for the medical expenses incurred on them. Union budget 2018 has extended this benefit to senior citizens as well and increased the deduction limit from Rs 30,000 to Rs 50,000.

3) Increase in the deduction limit under section 80DDB

The tax deduction given to taxpayers for expenses incurred on treatment of his own or any family member’s critical illness has also been raised. Currently, the tax deduction is Rs 80,000 for super senior citizen, Rs 60,000 for senior citizen and Rs 40,000 in any other case.

The upper limit of deduction has been increased to Rs 1,00,000 for both senior as well as super senior citizens but the limit remains the same for the taxpayers up to 60 years of age.

4) Increase in exemption limit on bank interest for senior citizens

In the AY 2019-20, senior citizens will be able to claim deduction up to Rs 50,000 on interest earned from bank deposits, post offices or co-operative banks as per the provisions of a new section 80TTB of the Income Tax Act, 1961. Any senior citizen who claims the tax deduction under section 80TTB will not be allowed to claim the benefits of section 80TTA from AY 2019-20. Section 194A has also been amended to disallow banks from deducting tax from payment of interest up to Rs 50,000 made to a senior citizen.

5) Enhanced tax benefit on gratuity [Section 10(10)]

The tax exemption allowed on gratuity has also been increased in the Union budget 2018. The taxpayers currently get a tax exemption of Rs 10 lakh which will be raised to Rs 20 lakh. The taxpayers receiving gratuity on or after 1st April 2018 will be able to enjoy the increased tax benefit on gratuity.

6) NPS withdrawal exemption extended to non-employees

Employees investing in NPS get exemption up to 40% of the total accumulated balance in their NPS account at the time of withdrawal when they opt out or close the scheme. The budget 2018 has extended this tax benefit to everyone investing in NPS.

7) Long Term Capital Gains(Sec 112A) 
    
LTCG on transfer of Equity Share in a company, unit of an equity oriented fund and unit of business trust is 10% if LTCG is more than Rs 1 lakhs. If LTCG is upto Rs 1 lakhs then it is exempt.

8) Health & Education Cess @ 4%

From Finance Act 2018, Health & Education Cess @ 4% is charged on Net Income Tax Payable in place of Education & Secondary Higher Education Cess of 3%.

9) Rate of Tax in case of Companies 

  In case of turnover is more than Rs 50 crores in FY 2015-16 and Rs 250 crores or less in FY 2016-17, then rate of tax is increased to 30% from 25%.  
In case of turnover is less than Rs 50 crores in FY 2015-16 and more than Rs 250 crores in FY 2016-17, then rate of tax is increased to 30% from 25%.

10) Amendment in Sec 80 DDB

     Sec 80 DDB provides deduction to a resident individual and HUF for medical treatment or specified disease of dependent amounting to Rs 60,000/- in case of Senior Citizen (60 years or more) and Rs 80,000/- (80 years or more) in case of Very Senior Citizen. From Finance Act 2018, the deduction which can be allowed under this section increased to Rs 1,00,000/- in case of any type of Senior Citizen.

11) Applicability of Section 40A(3), 40A(3A) and 40(a)(ia) in case of Trusts

      From Finance Act 2018, section 40A(3), 40A(3A) and 40(a)(ia) is applicable to religious or charitable trusts.

Accordingly, no deduction is allowable for any expenditure:
a) In case of expenditure exceeding Rs 10,000/- made to a person in a day in cash as per sec 40(A)(3).
b) In case of payment of outstanding Balance exceeding Rs 10,000/- to a person in a day by cash mode as per sec 40(A)(3A).
c) 30% of the amount of expense will be disallowed in case such trust do not deduct any TDS on payments being made to residents as per sec 40(a)(ia).

12) Amendment under presumptive taxation in case of Goods Carriage - Section 44 AE

Section 44 AE of the Act provides a presumptive taxation scheme for the transporters having upto 10 vehicles at any time during the previous year. It provides that such transporters have an option to pay tax on presumptive basis by declaring income @ Rs 7,500/- per month or part thereof per vehicle.
As per Finance Act 2018, vehicles having more than 12 MT gross weight, then instead of Rs 7,500 per month per vehicle, Rs 1,000 per tonne capacity per month per vehicle shall be deemed as Income.

13) Deduction under Sec 80-IAC of the Income Tax Act

Section 80-IAC of the Income Tax Act provides that 100% deduction of profits to start-ups for 3 consecutive years out of 7 years if it is incorporated between 01/04/2016 to 31/03/2018 and the turnover is upto Rs 25 crores per year between 01/04/2016 to 31/03/2021.

As per Finance Act 2018, startups incorporated between 01/04/2019 to 31/03/2021 can also avail the benefit of this section.  


14) Mandatory Quoting of PAN in certain cases

From Finance Act 2018, Section 139A of the Act provides that 
a) PAN is mandatory for such non-individual entities which enters into financial transaction valuing more than Rs 2,50,000/-.
b) PAN is also mandatory for the authorized signatories like managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer of such entities irrespective of their financial transactions and income.

15) Trading in Agricultural Commodities

a) Amendment has been made in Sec 43(5) of the Act in order to provide that trading in agricultural commodities is now considered as non-speculative transaction, previously it was considered as speculative transaction.
b) After the Amendment, loss from trading in agricultural commodities can also be set off from other non-speculative business losses.
c) Further, such losses can now be carried forward for 8 Assessment Years instead of 4 Assessment Years.

16) Prosecution relating to failure to furnish Return of Income

Section 276CC of the Act provides that in case assessee fails to furnish Return of Income upto the end of assessment year, then he shall be liable to following:
a) Imprisonment of 6 months to 7 years with fine, if tax evaded exceeds Rs 25 lakhs.
b) Imprisonment of 3 months to 2 years with fine, if tax evaded is upto Rs 25 lakhs.
The above provisions are not applicable if tax amount is less than Rs 3,000/-.
As per Finance Act 2018, limit of Rs 3,000/- is not applicable to a Company in order to mandate all companies to file Return of Income.

17) Amendment in Section 54 EC (Exemption related to Long Term Capital Gains)

a) Long term capital asset for making any investment under this section means -
i) on or after 01/04/2007 but before 01/04/2018 means any bond issued by NHAI, RECL, redeemable after 3 years and issued on or after 01/04/2007 but before 01/04/2018.
ii) on or after 01/04/2018, means any bond issued by NHAI, RECL redeemable after 5 years and issued on or after 01/04/2018.

b) Long term capital asset means land or building or both.

18) Amendment in Section 43

Explanation 1A - Where a capital asset referred to in clause (via) of section 28 (where inventory is converted or treated as capital asset) is used for the purposes of business or profession, the actual cost of such asset to the assessee shall be the fair market value which has been taken into account for the purposes of the said clause.

19) New Section Inserted Sec 43 AA

 1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards (ICDS) notified under sub-section (2) of section 145. 

2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to— 
(i) monetary items and non-monetary items; 
(ii) translation of financial statements of foreign operations; 
(iii) forward exchange contracts; 
(iv) foreign currency translation reserves.”.

20) Sec - 43CA(Special provision for full value of consideration for transfer of assets other than capital assets in certain cases)

Following proviso shall be inserted in sub-section (1) by Finance Act 2018:
Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed 105% of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration.

21) Amendment in Section 47

Following clause (viiab) shall be inserted
any transfer of a capital asset, being-
a) bond or Global Depository Receipt referred to in sec 115AC (1), or
b) rupee denominated bond of an Indian company, or
c) derivative,
made by a non-resident on a recognised stock exchange located in any International Financial Services Centre (IFSC) and where the consideration for such transaction is paid or payable in foreign currency.

22) Amendment in Section 49(Cost with reference to certain mode of acquisition)

Where the capital gain arises from the transfer of a capital asset referred to in clause (via) of section 28, the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause.

23) Amendment in Section 80 JJA (Deductions in respect of employment of new employees) 

Provided that in the case of an assessee who is engaged in the business of manufacturing of apparel [or footwear or leather products], the provisions of sub-clause (c) shall have effect as if for the words "240 days", the words "150 days" had been substituted.

Provided further that where an employee is employed during the previous year for a period of less than 240 days or 150 days, as the case may be, but is employed for a period of 240 days or 150 days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly.

24) Amendment in Sec 115 JB (Minimum Alternate Tax) 

(a) in Explanation 1,— 
(A) after clause (iig), the following clause shall be inserted, namely:–– 
‘(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016.

25) Substitution of new sections 145A & 145B in place of section 145A

Section 145A For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,–– 

(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; 
(ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; 
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; 
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: 

Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard: 
Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise.

Section 145B

(1) Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received.

(2) Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.

(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.’

Do Read - 
1. How to Determine Residential Status under Income Tax Act
2. Classification of Financial Markets


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