bank branch audit –audit planning

8/6/2019 Bank Branch Audit Audit Planning

1/36

Bank Branch Audit

Audit Planning


2/36

19.03.2011 2

Need for Planning :

Primary Objective of Audit to ensure that AnnualAccounts of the Branch give a True and Fair View.

Features of Bank Audit :

Balance Sheet Audit

Rapidly changing Accounting Software, Technological

up-gradation by banks like CBS, RTGS etc.

Frequent RBI Guidelines to Banks and Auditors

Frequent Pronouncements by ICAI.

Tight Audit Schedules. Limited Time period.

Effective Internal Check and Internal Control System.

Number of Audit Reports/ Certificates to be signed by

Branch Auditor.


3/36

19.03.2011 3

Audit Planning :

IF YOU FAIL TO PLAN,

YOU PLAN TOFAIL.

If an auditor overlooks importance of Audit

planning, he is likely to spend more time on

collection of data etc. and it will disturb the

entire audit schedule.

Poor Audit Planning Poor Allocation ofWork Inadequate attention to high risk

areas Poor Audit Quality.


4/36

19.03.2011 4

* Bank Branch Audit Process:

1) Appointment of auditor

2) Pre-commencement Work- Types of BankBranches- Peculiar features of banking business-Types of accounting software

3) Bank Branch Audit Planning and Reporting-Making effective Audit plan/ Audit Programme-Audit Procedures Reporting.

4) Internal Controls in Banks

5) Use of Audit Software (CAAT-Computer Assisted

Audit Techniques- Inbuilt Audit Trails)6) Form and Contents of Financial Statements

7) Compilation of Information and Reports to besigned.


5/36

19.03.2011 5

Bank Audit Process:

Pre-commencement Work

Understanding the business of

Bank BranchEffective Audit Planning

Audit Procedures

Reporting


6/36

19.03.2011 6

Pre-commencement Work

Audit Planning starts with the Receipt ofAppointment Letter.

Check the compliance u/s. 226 (3) with

regard to qualifications/disqualifications.Decision for Acceptance or Refusal of

Audit Assignment.

Communication with Previous Auditors

Expected Date of Submission of Reports Finding out the Scope of Work.

Issue Engagement Letter under SA 210-Agreeing the terms of Audit Engagements.


7/36

19.03.2011 7

Understanding the Business of Bank

Branch:

Type of Branch and Nature of Business

handled by the Branch.

Laws applicable to Bank*

Accounting Standards applicable to Bank*

Obtain management representation letter

for each type of report like - LFAR, Tax

Audit Report, Ghosh and Jilani committee Type/Nature of transactions at Branch.

Quantum of Transactions.


8/36

19.03.2011 8

Understanding the Business of Bank

Branch:

Computerization System software

Internal Control Risk Assessment

Risk Management Back up system

Obtain previous year audit reports

RBI inspection reports, Internal

Inspection/ Concurrent audit reports

Attend the Meeting of Statutory

Auditors and Bank Audit seminar.


9/36

19.03.2011 9

Audit Planning and Reporting

Audit Planning and Reporting are two

critical stages in the entire audit process.

Audit Planning is before the start of audit

process and beginning of the field workand Reporting is the last stage in bank audit

process.

Good Planning leads to Effective Reporting.

SA-300 - Planning an Audit of Financial

Statements emphasizes the need for Audit

Planning.


10/36

19.03.2011 10

Audit Planning(SA-300) :

The auditor should plan his work to

enable him to conduct an effective

audit in an efficient and timely manner.

Audit Plan should be based on -

knowledge of the clients business.

Plans should be further developed and

revised as necessary during the

course of a audit.


11/36

19.03.2011 11

Audit Planning:

The Process of Audit Planning shouldcover, amongst other things:

a)acquiring knowledge of clients accountingsystem, policies and internal control

procedures;b)Determining the expected degree of

reliance to be placed on internal controls;

c) determining the nature, timing, and extent

of the audit procedures to be performed;and preparing the audit plan accordingly.

d)Allocation and Coordination of the work tobe performed.


12/36

19.03.2011 12

Audit Planning:

Audit Planning - Divided into two stages : a) In-house Planning/ Planning at Office

b) On-site Planning/ Ground work at Branch

A) IN-HOUSE PLANNING :

Starts with Appointment Letter

Obtain basic information about the Nature andType of Branch, Regional/Head Office, CentralStatutory Auditors, Previous Auditors, TimeLimit for completion of Audit, Reports/

Certificates to be signed etc.Send Acceptance Letter to Bank with necessary

declarations.

Obtain NOC from Previous Auditors

Communication with Branch.


13/36

19.03.2011 13

Audit Planning (Contd.):

Prepare Detailed Branch profile covering thedetails about Nature and Type of Branch (CBB/IFB/ SME/ AFB/

Service Br/ Asset Recovery Br.etc.)

Size of the Branch (Small/Medium/Large/Very Largeetc.) No. of Extension Counters/ATMs

Key Business Figures Deposits, Advances, NetProfit, NPA Level, New NPA Accounts etc.

Operating Environment (CBS, Internet Banking, RTGSetc.)

Details of Government / Other Contractual Businesshandled by the Branch

Details of

Audits/ Inspections d

uring the year Obtaincopies of the reports

Internal Audit Rating/ Risk rating of the Branchassigned by Internal Auditors

Collect Closing Instructions Circular, Important H.O.Circulars and details of Changes in AccountingPolicies.


14/36

19.03.2011 14

Audit Planning (Contd.)

On-Site Planning at Branch:

a)Evaluation of the Accounting andInternal Control System.

b) Development ofAudit Programme.

c)Allocation of Work according to AuditProgramme

d)Review of Progress of Work andRevision ofAudit Plan, if necessary.

e)Compilation of Information forReporting and Summary of AuditQueries & Observations


15/36

19.03.2011 15

Evaluation ofAccounting System and

Internal Controls :

SA-265 (EarlierAAS-01) States:

Management is primarily responsible formaintaining an adequate accounting system

incorporating various internal controls to theextent appropriate according to the size andnature of the business.

The auditor should examine and study theaccounting system and related internalcontrols and should evaluate the operationof those internal controls upon which hewishes to rely in determining the nature,timing and extent of other audit procedures.


16/36

19.03.2011 16

Evaluation ofAccounting System and

Internal Controls :

Where the auditor concludes that hecan rely on certain internal controls,his substantive procedures would

normally be less extensive and mayalso differ as to their nature andtiming.

If he observes any deficiencies in theinternal controls in any area- hissubstantive procedures would bemore extensive.


17/36

19.03.2011 17

Evaluation of Internal Controls:

The auditor should obtain information in respect of InternalControl Systems in the following areas:

General Software related controls

Revenue Items Related Controls

Controls related to General Administration andHousekeeping

Controls related to certain Special Accounts like Sundriesand Suspense Accounts

Controls with respect to Advances- Sanctions, Renewals,Credit Appraisal, Disbursement, Documentation,Recovery etc.

Controls related to Classification of Advances andIncome Recognition

Deposit related Controls and Controls with respect toInoperative/ Dormant Accounts

Controls with respect to Compliance of Tax Laws.


18/36

19.03.2011 18

System Controls in Banks:

Access to the system is available only betweenstipulated hours and specified days only.

Individual users can access only specified

directories and files Exception situations such as limit excess,

reactivating dormant accounts, etc. can behandled only with a valid supervisory level

password.A user timeout is prescribed

Once the end-of-the-day process is over, theledgers cannot be opened without a supervisory

level password.


19/36

19.03.2011 19

System Controls in Banks:

The system maintains a record of all log-ins andlog-outs

If the transaction is sought to be posted to a

dormant (or inoperative) account, the processingis halted and can be proceeded with only with asupervisory password

The system checks whether the amount to be

withdrawn is within the drawing power. The system flashes a message if the balance in a

lien account would fall below the lien amountafter the processing of the transaction.


20/36

19.03.2011 20

Internal controls in bank branch

Work of one staff member is invariablysupervised / checked by another staff member,irrespective of the nature of work

Banks have a system of job rotation among staff

The financial and administrative powers of eachofficial / each position are fixed andcommunicated to all persons concerned

Branch managers have to send periodicconfirmation to their controlling authority oncompliance of the laid down systems andprocedures.


21/36

19.03.2011 21

Internal controls in bank branch

All branches of a bank have a unique codenumber which is circulated amongst all officesof the bank

All books are to be balanced periodically.Balancing is to be confirmed by an official

Particulars of lost security forms areimmediately advised to branches so that theycan exercise caution

Sensitive items like currency, valuables, draftforms, term deposit receipts, travellers chequesand other such security forms are in the custodyof at least two officials of the branch.


22/36

19.03.2011 22

Audit Planning Why?

SA 300 -Audit Planning emphasizes thatthe auditor should plan his audit work toenable him to conduct an effective audit inefficient and timely manner.

In Bank Branch Audit, adequate auditplanning is required because it facilitatesthe following:

i. ensures that appropriate attention isdevoted to all important areas of audit likedeposits,advances,Bank charges etc

ii. Ensures that potential problems areproperly identified e.g frauds


23/36

19.03.2011 23

Audit Planning Why?

iii. Ensure that work is completed

expeditiously and effectively.

iv. Effective Utilization of Audit Staff. No

important area of work is left out and

No work is duplicated.

v. Coordination of the work done by

other auditors Important Points ofOther Inspection/Audit Reports are

taken care of.


24/36

19.03.2011 24

Considerations for Overall Audit

Plan: (SA-300)

1. The terms of engagement- scope of workand statutory responsibility.

2. The nature and timing of reports to be

submitted.3. Applicable Legal/Statutory Requirements

4. The accounting policies adopted by Bankand changes in these policies.

5. The identification of significant audit areas6. The degree of reliance by Auditor on

accounting systems and internal controls.


25/36

19.03.2011 25

Considerations for Overall Audit

Plan: (SA-300)

7. The nature and timing of audit evidenceobtained

8. The work of internal auditors and extent of

their involvement9. The involvement of expert

10. The allocation of work to be undertakenbetween joint auditors and procedures for

its control and review11. Establishing and coordinating staffing

requirements


26/36

19.03.2011 26

Other Factors to be considered

for audit planning:

1. Size and Complexity of audit

2. Environment in which Bank operates Past Experience with the Entity.

3. Qualification and Experience of AuditTeam in bank audit work.

4. Knowledge of Banks Business-

Type of Business handled by theBranch.

5. Discussion with Bank Manager.


27/36

19.03.2011 27

Audit Procedures to be Applied:

1. Inspection e.g. Vouching.

2. Observation

3. Inquiry & confirmation e.g.Confirmation of Bank Balances

4. Computation e.g. Interest

Calculations.

5. Analytical Procedures like

Comparisons- Ratio Analysis etc.


28/36

19.03.2011 28

Documents/ Certificates to be Collected:

Following certificates should be obtained fromBranch Management:

Cash Retention Limit duly certified by the BranchManager.

A photo copy each of the confirmation certificatesfor Balances with RBI, SBI and other banks.

A copy of the reconciliation statement in respectof differences in such balances with RBI, SBI andother banks.

List of overdue or matured investments at theend of the year duly confirmed by the Branch

Manager;


29/36

19.03.2011 29


A certificate stating that the Branch did nothold any investments on behalf of the HeadOffice (if there are no such investmentsheld by the Branch).

List of large advances i.e. those in respectof which the outstanding amount is inexcess of 5% of the aggregate advances ofthe Branch or Rs.10.00 crores whichever is

less duly certified by the Branch Manager A copy of the letter from Head Office

regarding Sanction Powers of the BranchManager.


30/36

19.03.2011 30


List of cases where the Branch has notobtained stock/book debts statements atthe end of the year;

List of cases where insurance copies are

yet to be received at the end of the yearA copy of the Head office instructions for

identification of NPAs and classification ofadvances.

List of major items pending for reconciliation under Inter-Branch Accounts;List of all fraud cases reported to HO/RBI.


31/36

19.03.2011 31

Compilation and Verification of Information

relating to different Reports:

Main Audit Report as per (sec.30(3) of)Banking Regulation Act, 1949.

Long Form Audit Report

Tax Audit Report

Jilani Committee Report

Ghosh Committee Report

Special Certificates/ Reports asapplicable (e.g. Prime Minister Rojgar YojanaScheme Certificate etc.)


32/36

19.03.2011 32

Reporting under

Banking Regulation Act,1949:

As per section 30(3) of a Banking RegulationAct,1949; an auditor of a banking company isrequired to state in his report :--

(a) whether or not the information andexplanations required by him have been found tobe satisfactory;

(b) whether or not the transactions of the companywhich have come to his notice have been withinthe powers of the company;


33/36

19.03.2011 33

Reporting under


(c) whether or not the returns received frombranch offices of the company have been found

adequate for the purposes of his audit (not

applicable to bank branch)(d) whether the profit and loss account shows a

true balance of profit or loss for the period

covered by such account;

(e)any other matter, which he considers should be

brought to the notice of the shareholders of the

company.


34/36

19.03.2011 34

Reporting under


Distinct Feature of Bank Branch Audit:Memorandum of Changes (MOC)

In other audits, normally errors found during theaudit are modified/ given effect in the books ofaccounts and modified financial statements areprepared; But, in case of banks, by the time, thebranch audit is completed, there is compilation ofdata at regional and zonal level hence, anymodification in the financial statements is giveneffect through MOC. The main report must stateabout this and shall also mention whether MOC isNIL or it contains any items affecting the financialstatements or Statement of Advances.


35/36

19.03.2011 35

Points to be noted for Final

Reporting:

Address the Report to the Central StatutoryAuditors (sec.228 (3)(c) of the Co.Act,1956).

Financial statements to be approved by Branch

Manager. Take Management Representation Letter for each

type of report.

Before the final report is submitted, ensure thatyour queries are solved to your satisfaction.

Take acknowledgement of submission of report.

Submit the professional fees bill (after chargingservice tax) to the relevant authorities.


36/36

THANK YOU