bank branch audit
TRANSCRIPT
Annual Bank Audit Conference,
ICAI, Madurai Chapter.
Hearty Welcome
To
Delegates/Members of ICAI, Madurai
Bank Audit- Definitions
• “Banking” is Accepting for the purpose of lending orinvestment, of deposits of money from the public, repayableon demand or otherwise, and withdraw able by cheque,draft, order or otherwise”
• “Auditing “ is defined as an independent examination offinancial information of an entity with a view to expressingan opinion thereon”
Branch Audit - Considerations
• Bank deals directly with cash and public money.
• Protection of public interest is top priority of regulator and statutes
• Sec (30) of B R Act mandates that “the Balance sheet and P&L account of the Bank should be audited by a duly qualified auditor”.
• Audit of branches is required under sec 228 of companies Act except where exemptions are obtained under Companies (branch audit exemption rules 1961) and RBI guidelines.
• Increasing Frauds
• Advent of Technology
• Regulatory prescriptions
Peculiarities of Bank Audit
• Carried out once in a year and time for completing the audit isvery limited
• Increase in instances of fraud and new techniques of frauds
• Extensive dependency on information technology forprocessing the transactions.
• Continuing development of new products, services andtechnology
• Large volume and value of the transactions
• Statutory and regulatory requirements
• There is need for trained personnel to carry out the audit .
• Auditors should constantly update themselves on lateststatus, RBI guidelines and technologies
Audit steps
• Pre-commencement- preparation
• Understanding the business of the branch
• Audit planning
• Substantive procedures
• Reporting
Audit in computerized environment:
• CBS Systems :
CBS Vendor Banks
FINACLE INFOSYS PNB,OBC,ICICI
Flex-cube ORACLE Canara , syndicate, LVB,
KVB, Kotak
B@NKS24 TCS SBI Group , Indian bank
Risks in CIS environment:
• Potential for errors and irregularities due to :
• Invisibility of Data
• No visible evidence for unauthorized access /alter to data
• Errors in system handled transactions remain undetected due to no human intervention.
• Errors in design or modification of programs may remain undetected
• Manual controls depends upon system generated reports , hence error in report will affect even manual controls
Auditing and assurance standards (AAS)
• AAS -2- Objectives and scope of audit of financial statements
• AAS -29 – Auditing in Computerized system environment
• AAS – 6 – Risk assessment and internal control
• AAS -9 - Using the work of an expert
• AAS -10- Using the work of other auditors
Before Commencement
• Send a Letter of your Requirements to the Branch before commencing the audit
• Take note of level of computerization
• Acquaint with the system/manual /circulars
• Identify the reports available and map them to the data required for auditing
• Verify year end processes prescribed by central office
• Review latest I S Audit report
• User account management review like logging register, access rights assigned, maker/checker
• Password secrecy, complexity
• Avoidance of conflicting duties
• Exception transaction reports and mechanism for review of the same
DepositsVerify transactions during the year relating to:
• New Accounts opened; Accounts closed;
• Dormant Accounts;
• Interest calculations;
• Test check account statements for unusual/ large/ overdraft transactions;
• Interest on various types of deposits; Tax Deducted at Source.
• Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, overdrawing, etc.
• Examine interest trends as compared to average annual deposits (monthly average figures).
Income /Expenditure:
• Review of interest application procedure
• Verify parameters of interest application/earlier audit report if any
• Verify penal interest parameters
• Other charges- parameters – test check collection
• Test check the interest debit in large value accounts and compare with computer generated amount
• Short debit of interest/ commission - on advances;
• Excess credit of interest - on deposits; Back dated opening;
• Check interest application of sample accounts of premature closed accounts
• Divergent trends in income/ expenditure of the current year may be analyzed with the figures of the previous year and clarification obtained, wherever major divergence observed
Advances• Obtain Balance Book of Loans and advances and tally the total with advances
figure reported in the Balance sheet.
• Review monitoring reports (irregularity reports) sent by the branch to thecontrolling authorities in respect of irregular advances.
• Review appraisal system, Files of large as well as critical borrowers ,sanctions, disbursement, renewals, documentation, systems, securities, etc.
• Review on test check basis operations in the Advances Accounts.
• Compliance of sanction terms and conditions in the case of new advances.
• Whether the borrower is regular in submission of stock /book debtstatements, insurance policies, balance sheets, half yearly results, etc.
• Verify Charging of interest and recovery for each quarter or as applicable
• Examine interest trends as compared to average annual advances (monthlyaverage figures).
• Check whether Non-Fund based (Letter of Credits/ Bank Guarantees)exposure of the borrowers is within the sanctioned limits.
Advances - NPA• Check classification of advances, income recognition and
provisioning as per RBI Norms/ Circulars.
• Scrutinize the final advances statements with regard to assetsclassification, security value, documentation, drawing power,out standings, provisions, etc.
• Review SMA-1 and SMA-II accounts report for few months-check high value accounts for adherence to IRAC norms
• Review cases of compromise/ write off / waiver
• Review the devolved LCs and invoked guarantees andamounts pending to be recovered and asset classification
• As per RBI norms, unrealized interest on NPA accounts shouldbe reversed and not charged to “Advance Accounts”. Reversalof unrealized interest of previous years in case of NPAaccounts is required to be checked.
Balance sheet
• Verify List of assets and check availability of major listed assets
• Verify Depreciation on assets- F&F
• Whether cash is maintained reasonably within the limit fixed, fully insured and dual control effective?
• Check reconciliation of interbank accounts and comment along with age wise o/s entries
• Long pending sundry assets, suspense, sundry liability
• Any manual ledgers maintained , check and report deficiencies observed , if any
Misc• Whether all guidelines of FEMA and RBI adhered to?
• Nostro accounts, if any whether reconciled? Any long pending debits?
• TDS deduction and remittance report
• TDS deduction/ Form 15-g/15-H accepting and submission / PAN obtained status
• Staff accounts transactions verification process
• Deposit payments in cash for Rs. 20,000 -00 and above
• Particulars of fraud committed and suggestions for preventing ,if any.
Audit Report and MOC
• The Auditors Report should be a self contained document and should contain no reference of any point made in any other report including the LFAR;
• Include Audit Qualifications in the Auditors Report and not in the LFAR;
• Quantify the Audit Qualifications for a better appreciation of the point made to the reader;
• For suggesting any changes in the financial statements of the branch, quantify the same in the Memorandum of Changes (MOC) and make it a subject matter of qualification and annex it to the Auditors Report.
LFAR• Study the LFAR Questionnaire thoroughly;
• Plan the LFAR work along with the statutory audit right from day one;
• The LFAR questionnaire is a useful tool for planning the statutory audit of a branch;
• Complete & submit the statutory Audit Report as well as the LFAR simultaneously;
• Give instances of shortcomings/ weaknesses existing in the respective areas of the branch functioning in the LFAR;
• The LFAR should be sufficiently detailed and quantified so that they can be expeditiously consolidated by the bank / central statutory auditor.
LFAR - Annex• Advances disbursed without complying with the terms and
conditions of the sanction
• Credit facilities released by the branch without execution of all the necessary documents
• Instances of deficiencies in documentation, non-registration of charges, non-obtaining of guarantees, etc.
• Position of review / renewal of borrower accounts
• Instances of irregular submission of stock/book debt statements and other periodic operational data and financial statements etc.
• Instances where audited accounts were not received from non-corporate borrowers enjoying credit facilities beyond Rs.10 lacs.
• Instances of non-compliance of instructions with regard to inspection / physical verification of security
LFAR- II• Details of the cases of compromise settlement, write-off involving
write-off/waiver in excess of Rs.50.00 Lacs
• Details of outstanding amount of guarantees invoked and funded bythe branch as on details of old outstanding entries. Remarks shouldinclude reasons for delay and whether in the opinion of auditor arenot recoverable and would require a provision/ write-off.
• Year-wise break-up of outstanding amount under other liabilities
• Reconciliation of general ledger and subsidiary ledger balance
• Questionnaire in connection with the long form audit report in caseof bank branches. (for large/irregular/critical advance accounts) (forall accounts of rs.2 cr & above)
• List the accounts (with outstanding in excess of rs. 1.00 crore), whichhave either been downgraded or upgraded with regard to theirclassification as non-performing asset or standard asset during theyear and the reasons therefor.
• Statement showing details of suit filed accounts wherein the amountinvolved is rs.10.00 lakhs and above.
IRAC Norms• Interest or installment remains overdue for a period of more
than 90 days .
• The OD/CC account remains continuously “out of order” for aperiod of more than 90 days i.e. Outstanding balance remainscontinuously in excess of the sanctioned limit/ drawing poweror there are no credits continuously for a period of 90 days ason the date of Balance Sheet or credits are not enough tocover the interest debited during the same period.
• The bills purchased/ discounted remains overdue for a period of more than 90 days.
• Agri Loans overdue for two short term crop seasons/one long term crop season
• Once an account has been classified as NPA, all the facilities granted to the borrower will be treated as NPA
IRAC – contd.,• If the debits arising out of devolvement of letters of credit or
invoked guarantees are parked in a separate account, the balanceoutstanding in that account also should be treated as a part of theborrower’s principal operating account.
• If any advance, including bills purchased and discounted, becomesNPA, the entire interest accrued and credited to income account inthe past periods, should be reversed if the same is not realised. Thiswill apply to Government guaranteed accounts also.
• However, interest on advances against Term Deposits, NSCs, IndiraVikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies maybe taken to income account on the due date, provided adequatemargin is available in the accounts.
• The asset classification of borrowal accounts where a solitary or afew credits are recorded before the balance sheet date should behandled with care and without scope for subjectivity. Where theaccount indicates inherent weakness on the basis of the dataavailable, the account should be deemed as a NPA
Asset Classification
• a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.
• an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months
• 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.
