This is a composite, illustrative scenario, not an account of a named client. A fixed deposit of roughly ₹40 lakh appeared in the client's fixed deposit schedule as a standalone investment, with no note against it. The standard bank confirmation letter sent as part of balance confirmation procedures came back with its usual paragraph on liens and charges, and that paragraph specifically named this deposit as held under lien against a overdraft facility sanctioned to a group company — a fact that did not appear anywhere in the client's own records, schedules, or draft financial statement disclosures.
Why the client's own schedule did not show it
The fixed deposit had originally been opened as a plain investment of surplus funds. Eighteen months later, when a group company needed an overdraft facility and the bank wanted collateral, the deposit was pledged as security by a board resolution passed at the group level — a transaction the client's own finance team, who maintained the fixed deposit register, was never formally informed of. The register continued to carry the deposit as unencumbered because nobody updated it; the lien existed only in the bank's records and the group-level board minutes.
What the confirmation reply triggered
- 01Flagged the discrepancy against the client's own records immediatelyThe fixed deposit schedule and the confirmation reply were compared line by line, and the lien reference was the only item that did not reconcile.
- 02Obtained the underlying lien documentation from the bankA copy of the pledge agreement and the board resolution authorising it, to establish when the lien was created and for what facility.
- 03Checked whether the overdraft facility it secured was itself disclosedIt was, in the group company's own books, but the cross-reference back to this entity's pledged asset had never been made in either set of financial statements.
- 04Assessed the disclosure gap against Schedule III requirementsAssets pledged as security must be separately disclosed; an unencumbered-looking fixed deposit that is in fact pledged misstates the company's actual free-asset position to any reader relying on the balance sheet, including other lenders.
| Before | After |
|---|---|
| Fixed deposit shown as free and unencumbered | Disclosed as pledged, with the facility and group company it secures identified |
| No note on assets given as security | Note added under Schedule III disclosure requirements for assets pledged |
| Finance team unaware of the pledge | Fixed deposit register updated and a process agreed for group-level pledges to be communicated to the entity holding the asset |
What went into the file
- The confirmation reply with the lien paragraph highlighted, and the pledge documentation obtained from the bank.
- The disclosure note drafted and agreed with management before finalisation.
- A control observation on the lack of communication between group-level treasury decisions and the entity-level asset register.
Common practice, not a requirement
The standard bank confirmation format used across most Indian audits includes a line on liens, charges and encumbrances almost as boilerplate. It is tempting to skim past it when the client's own schedule shows nothing pledged. Reading that paragraph against the client's records every single time, rather than assuming it will just confirm the balance, is the only reason this one surfaced.
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 & treasuryFixed deposit audit procedure: verification and classificationVerifying FD receipts, checking for liens against loans and guarantees, getting the current/non-current split right, and testing accrued interest.
- 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.
- Bank, cash & treasuryThe bank guarantee nobody had disclosed as a contingent liabilityThe bank's confirmation letter listed a guarantee outstanding. The client's draft notes to accounts didn't mention it at all.
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