Auditing fixed deposits means verifying the existence of each deposit through the bank's receipt or advice and, preferably, independent confirmation; checking whether any deposit is lien-marked as security for a loan, overdraft or bank guarantee, since a lien-marked deposit is not freely available to the company even though it still belongs to it; classifying each deposit as current or non-current based on its remaining maturity from the balance sheet date, not its original tenure; and recomputing the interest accrued to confirm it has been booked for the correct period at the correct rate.
Verifying existence
- 01Obtain the FD register maintained by the clientA complete listing should show the deposit number, bank and branch, principal, rate of interest, date of placement, maturity date, and whether it is lien-marked.
- 02Trace each deposit to the physical receipt or the bank's digital adviceMost banks now issue a digital FD advice through net banking rather than a physical certificate; either is acceptable evidence as long as it carries the deposit number, principal and maturity date.
- 03Confirm the deposit independently through the bank confirmation letterThe same confirmation sought for bank accounts should list fixed deposits held, their balances, and any lien marked against each — this is often the most reliable source of the lien information, more reliable than the client's own FD register.
- 04Verify deposits placed or matured during the year through the bank statementA deposit placed from the current account and a matured deposit credited back should both be traceable in the bank statement for the relevant account, confirming the deposit is real and the cash actually moved.
- 05For deposits held in the name of the company but at a branch or bank not otherwise used for banking, treat with extra careAn unusual bank relationship holding a large deposit is worth a direct enquiry into why that bank was chosen and who authorised the placement.
Checking for liens
A fixed deposit lien-marked against a loan, overdraft limit or bank guarantee remains an asset of the company and continues to earn interest, but it is not available for the company to break or withdraw without the lender's consent. The balance sheet does not ordinarily need a different presentation for this, but the restriction should be known to the auditor and disclosed where it is material, particularly where the deposit secures a facility availed by a related party rather than by the company itself.
- Cross-check every lien reported in the bank confirmation against the loan or guarantee it secures, confirming the loan or guarantee actually appears in the company's own books.
- Where a deposit secures a facility taken by a related party, group company or director, this is a related-party transaction and needs separate disclosure consideration, regardless of how small the deposit.
- Confirm the lien-marked deposit has not been netted off against the related loan in the balance sheet — the deposit and the loan it secures are both gross assets and liabilities and should not be presented net unless a genuine right of set-off exists and is actually exercised.
- Where a lien has lapsed during the year because the underlying loan was repaid, confirm the deposit's status has been updated in the FD register and with the bank.
A fixed deposit used as margin money for a bank guarantee or letter of credit is particularly easy to overlook, because the deposit sits quietly on the balance sheet as a normal investment while the guarantee it supports sits off balance sheet as a contingent liability. The two need to be checked together, not separately, or the link between them is missed entirely.
Classification: current versus non-current
Classification turns on the deposit's remaining maturity measured from the balance sheet date, not from the date it was originally placed. A five-year deposit placed four years and seven months ago matures in five months and is current, regardless of how it was classified when it was first booked.
| Situation | Classification | Point to check |
|---|---|---|
| Deposit matures within twelve months of the balance sheet date | Current asset | Recompute from the balance sheet date, not the placement date |
| Deposit matures beyond twelve months | Non-current asset | Confirm the client has re-assessed classification at each year end, not just carried forward last year's label |
| Deposit auto-renewed on maturity during the year | Classify based on the new maturity from the balance sheet date | Confirm the renewal is evidenced by a fresh advice, not assumed |
| Deposit lien-marked against a current liability (overdraft) | Classification by the deposit's own maturity, not by the liability it secures | Disclose the lien in the notes; it does not change the current/non-current call |
Testing accrued interest
- 01Obtain the rate of interest for each deposit from the receipt or the bank confirmationDo not rely on a rate stated only in the client's FD register; rates sometimes get mistyped when deposits are renewed at a different rate from the original.
- 02Recompute interest accrued for the period from last interest payment or deposit date to the balance sheet dateSimple day-count recomputation: principal, rate, and the exact number of days outstanding in the year, applying the bank's own compounding convention if interest is compounded rather than paid out.
- 03Agree TDS deducted on the interest, where applicable, to Form 26AS for the entityA mismatch between interest income booked and interest reflected in 26AS, net of TDS, usually points to either a wrong rate being used or a deposit missing from the register altogether.
- 04Trace interest received in the bank statement to the amount recognised as incomeFor deposits that pay interest periodically rather than on maturity, the statement credit is a hard check against the books.
Common practice, not a requirement
Keeping the FD register updated continuously, with lien status and maturity flagged automatically as deposits approach their renewal date, is common in treasury-mature organisations but is not something smaller clients maintain on their own. Where it does not exist, the auditor effectively has to build it from the bank confirmations and receipts each year.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Bank, cash & treasuryBank guarantee verification in a statutory auditWhy BGs are off-balance-sheet contingent liabilities, confirming with the bank, tracking expiry, and verifying the margin money behind each one.
- Bank, cash & treasuryLoans and borrowings audit checklistSanction letter checks, charge verification against ROC filings, covenant compliance, interest testing, and current/non-current classification.
- Bank, cash & treasuryBank confirmation letters: what to request and verifyWhat a bank confirmation covers beyond the balance, how to keep the request genuinely independent, and what to do when the bank is late.
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