Auditing foreign currency bank accounts and EEFC balances

Auditing a foreign currency bank account, including an Exchange Earners' Foreign Currency (EEFC) account, means confirming the foreign currency balance directly with the bank, restating that balance into rupees at the closing exchange rate applicable at the balance sheet date, recomputing the resulting exchange gain or loss against what the client has recognised, and sighting the underlying documentation — shipping bills, foreign inward remittance certificates, and the bank's own foreign currency statement — that supports the balance and the transactions that moved through it during the year.

What an EEFC account is, for audit purposes

An EEFC account lets an exporter or other eligible recipient of foreign exchange retain a portion of their foreign currency earnings in a foreign currency account with an authorised dealer bank in India, rather than converting all receipts into rupees immediately. The balance stays denominated in the foreign currency — typically USD, EUR or GBP — and the entity draws on it for permitted foreign currency payments, converting to rupees only when it chooses to.

For the audit, the account behaves like any other bank account in terms of procedure — it needs a reconciliation, a confirmation, and a sighting of the statement — but it adds a currency translation step that a rupee account does not require.

Restating the balance at the closing rate

1. 01Obtain the foreign currency balance as of the balance sheet date from the bank statement, in the original currencyDo this before any conversion — the foreign currency figure, not a rupee figure the client's software may have already applied.
2. 02Identify the closing rate used by the clientThe applicable accounting standard requires foreign currency monetary items to be restated using the closing rate at the balance sheet date. Ask which source the client used — RBI reference rate, the rate published by a specific bank, or an average of buy/sell rates — and confirm the same source is used consistently for all foreign currency monetary balances, not a different source for EEFC than for foreign currency payables.
3. 03Recompute the rupee-equivalent balance independentlyMultiply the foreign currency balance by the closing rate from an independently obtained source and compare to the client's restated figure; a difference usually means either the wrong rate or the wrong date was used.
4. 04Confirm the restated balance agrees to what is shown in the balance sheet and the bank reconciliationThe BRS for an EEFC account should itself be prepared and reviewed on the same cycle as any other bank account, with the added step of showing both the foreign currency figure and its rupee restatement.

Testing the exchange gain or loss

The exchange difference on an EEFC balance arises from two sources during the year: the restatement of the opening balance from last year's closing rate to this year's closing rate, and the exchange difference on individual receipts and payments that moved through the account at the rate prevailing on each transaction date.

Once each component is tested, the three should sum to the total exchange gain or loss recognised in the profit and loss account for that account. A difference that cannot be explained by these three components usually means a transaction was booked at an incorrect or stale rate, or that an intervening movement in the account was missed entirely.

Documentation worth sighting

An auditor's job here is to corroborate that the balance and the flows through it are genuine and correctly recorded — not to form a view on whether the client has complied with FEMA regulations governing EEFC accounts, retention limits, or permitted end uses, which is a separate compliance matter outside the scope of a financial statement audit unless specifically engaged for it.

• The bank's foreign currency account statement for the year, in the original currency, as the primary source for the closing balance and all movements.
• Foreign Inward Remittance Certificates (FIRCs) or equivalent bank advices for significant credits, corroborating that a credit represents an actual export realisation or other permitted receipt rather than an unexplained inflow.
• Shipping bills or export invoices for amounts credited that relate to export proceeds, to the extent needed to corroborate the nature of significant receipts, not to re-perform export documentation compliance.
• The bank confirmation letter, which should list the EEFC balance in its original currency alongside the entity's rupee accounts.