SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES

SEMINAR ON STATUTORY AUDIT OF BANK SEMINAR ON STATUTORY AUDIT OF BANK BRANCHESBRANCHES

Audit Planning and Audit Planning and Long Form Audit Long Form Audit

Report Report

PRESENTATION BYPRESENTATION BY

CA ATUL C. BHEDA CA ATUL C. BHEDA B.COM, FCA, LLB(GEN), DISA(ICA)B.COM, FCA, LLB(GEN), DISA(ICA)

CA Atul C. Bheda MumbaiCA Atul C. Bheda Mumbai 2204/21/2304/21/23

Importance of Audit Planning Importance of Audit Planning and reporting and reporting

• Well planned is half doneWell planned is half done• One should know destination to plan well One should know destination to plan well • Good planning leads to effective reporting Good planning leads to effective reporting • Audit destination is report ( to express Audit destination is report ( to express

opinion on financial statements)opinion on financial statements)• Audit planning and reporting are two Audit planning and reporting are two

important stages important stages • Audit planning is before beginning of field Audit planning is before beginning of field

work and reporting is last stage in every work and reporting is last stage in every audit audit

• Audit planning helps in controlling audit Audit planning helps in controlling audit risks (inherent,control & detection) risks (inherent,control & detection)


Stages in Bank Audit Stages in Bank Audit

Study of appointment letterStudy of appointment letterPreliminary workPreliminary workRisk AssessmentRisk Assessment Internal Control EvaluationInternal Control EvaluationConduct of auditConduct of auditSubmission of Audit Reports, Submission of Audit Reports,

Certificates and ReturnsCertificates and Returns


Study of appointments letterStudy of appointments letter

Noting of relevant contentsNoting of relevant contentsAssessment of disqualification of the Assessment of disqualification of the

auditorauditorLetter to the previous auditor of NOCLetter to the previous auditor of NOCPreparation of Acceptance letter and Preparation of Acceptance letter and

declarationsdeclarationsAssessment of reporting Assessment of reporting

requirements (Time and contents)requirements (Time and contents)


Preliminary workPreliminary work

Knowledge of the businessKnowledge of the businessAcquiring the knowledge for effective Acquiring the knowledge for effective

conduct if Auditconduct if AuditStaff TrainingStaff TrainingRisk assessment and evaluation of Risk assessment and evaluation of

internal controlinternal controlKnowledge about the branch Knowledge about the branch

operationsoperations


Knowledge of BusinessKnowledge of Business

Acquire Information of the banking Acquire Information of the banking industryindustry

Information of past events and progress of Information of past events and progress of the bankthe bank

Study of Annual reports of the earlier Study of Annual reports of the earlier yearsyears

Banking JournalsBanking Journals Laws & Regulations applicableLaws & Regulations applicable


Laws and Regulations applicableLaws and Regulations applicable

The banking regulation Act, 1949The banking regulation Act, 1949Master Circulars and other circulars Master Circulars and other circulars

issued by the RBIissued by the RBIThe Companies Act, 1956The Companies Act, 1956Guidance Note on Audit of Banks Guidance Note on Audit of Banks

issued by ICAIissued by ICAI


Important Auditing and Assurance StandardsImportant Auditing and Assurance Standards

• SA200 AAS 1 - Basic Principles Governing an Audit

• SA 230 AAS 3 – Documentation

• SA 315AAS 6 – Risk Assessment and Internal Control

• SA 610 AAS 7 – Relying upon the work of an Internal Auditor

• SA 300 AAS 8 – Audit Planning

• SA 580 AAS 11 – Representation by the Management

• SA 320 AAS 13 – Materiality

• SA 210 AAS 26 – Terms of Audit Engagement


Risks in Bank Branch AuditRisks in Bank Branch Audit•Effect of the statutory and regulatory requirements

•The scale of banking operations and the resultant significant exposures

•Extensive dependence on IT to process transactions

•Continuing development of new services and banking practices

•Particular nature of risks associated with the transactions undertaken by banks


Risk Assessment and Risk Assessment and Evaluation of internal controlEvaluation of internal control

Branch Manager meetingBranch Manager meeting Initial review of systemInitial review of systemReview of other Audit observationsReview of other Audit observations


Branch Manager meetingBranch Manager meeting

Review of the Organization chartReview of the Organization chart Accounting policiesAccounting policies Composition of Deposits & AdvancesComposition of Deposits & Advances Staff Strength & Average ageStaff Strength & Average age Shifts & Duty timingsShifts & Duty timings Positive and grey areas of the branch : Positive and grey areas of the branch :

Branch manager’s concernsBranch manager’s concerns


Initial review of the systemInitial review of the system

Meeting with departmental headsMeeting with departmental headsDivision of work and area of Division of work and area of

operationsoperationsLogistic support expectedLogistic support expectedTentative time schedule of closing Tentative time schedule of closing

work and auditwork and auditComputerization and software used Computerization and software used List of top ten borrowersList of top ten borrowersList of top ten NPAList of top ten NPA


Review of other audit Review of other audit observationsobservations

Reporting process between the Head Reporting process between the Head Office & BranchesOffice & Branches

Review of Concurrent Audit ReportsReview of Concurrent Audit Reports Review of Internal Audit ReportsReview of Internal Audit Reports Review of RBI Inspection ReportsReview of RBI Inspection Reports Review of RBI circulars Review of RBI circulars Review of Circular issued by Head officeReview of Circular issued by Head office Review of periodical returns from BranchReview of periodical returns from Branch Review of previous years LFARReview of previous years LFAR


Planning for conduct of auditPlanning for conduct of audit

Audit TeamAudit Team Audit scheduleAudit schedule Audit ProgramAudit Program Physical aspects: Travel, boarding etc.Physical aspects: Travel, boarding etc. Reporting requirementsReporting requirements

Audit facilities, computers, software, etc.Audit facilities, computers, software, etc. FormatsFormats Timings for submissionTimings for submission Alternative plan for contingenciesAlternative plan for contingencies


The Audit can be conducted in either The Audit can be conducted in either of the following waysof the following ways

• Inspection and Observation

• Inquiry and Conformation

• Computation

• Analytical Procedures


Staff TrainingStaff Training

Familiarity with banking operations in Familiarity with banking operations in different areas (deposits, loans, different areas (deposits, loans, investments, NPA norms, etc.)investments, NPA norms, etc.)

Deliverables: Audit reports, Deliverables: Audit reports, certificates and returnscertificates and returns

Audit techniques (enquiry, Audit techniques (enquiry, explanations, verifications, sample explanations, verifications, sample checks, objective evidence, etc.)checks, objective evidence, etc.)


GeneralGeneral

Audit Team should carry :--Audit Team should carry :--Copy of appointment letterCopy of appointment letterAuthorization letter for the staff memberAuthorization letter for the staff memberStationery : pen, pencil, letterheads, Stationery : pen, pencil, letterheads,

worksheets, rubber stamps etc.worksheets, rubber stamps etc.Copy of norms for reimbursement of Copy of norms for reimbursement of

expenses such as lodging, boarding, expenses such as lodging, boarding, Traveling and local conveyance.Traveling and local conveyance.


Essential of good PlanningEssential of good Planning

Knowledge of situationKnowledge of situationKnowledge of resourcesKnowledge of resourcesKnowledge of Audit expectationsKnowledge of Audit expectationsPlan to deliver more than expected.Plan to deliver more than expected.


Audit Report and certificationAudit Report and certification

Branch Returns : correctness of Branch Returns : correctness of branch returnsbranch returns

Audit Report : True and fair viewAudit Report : True and fair viewMemorandum of Changes (MOC)Memorandum of Changes (MOC)LFARLFARTax Audit ReportTax Audit ReportCertificatesCertificates


Branch ReturnsBranch Returns

All returns should be certifiedAll returns should be certified Correctness of returns should be ensuredCorrectness of returns should be ensured No changes are to be made in returnsNo changes are to be made in returns The changes are to be reported through The changes are to be reported through

MOCMOC Corrections, overwriting, deletions etc. Corrections, overwriting, deletions etc.

Care should be taken about correct Care should be taken about correct preparation and correct reportingpreparation and correct reporting

Even NIL return should be certifiedEven NIL return should be certified


Audit reportsAudit reports

Exceptions should be noted specifically Exceptions should be noted specifically (e.g. Provision for taxation, bonus, (e.g. Provision for taxation, bonus, NPA)NPA)

Auditor’s name and membership Auditor’s name and membership number should be mentionednumber should be mentioned

Date of Audit Report and place of Date of Audit Report and place of execution should be mentionedexecution should be mentioned

The report should be on the letterheadThe report should be on the letterhead


Memorandum of Memorandum of changes(MOC)changes(MOC)

Memorandum of changes for :Memorandum of changes for :Assets and liabililitiesAssets and liabililitiesIncome and ExpenditureIncome and ExpenditureChanges in Asset classificationChanges in Asset classification

In case there is no change…MOC In case there is no change…MOC with NIL remark should be submittedwith NIL remark should be submitted

MOC is a part and parcel of the Audit MOC is a part and parcel of the Audit report…Audit report without MOC is report…Audit report without MOC is an incomplete report.an incomplete report.


MOC ……..contd.MOC ……..contd.

Signature of the Branch Manager (BM) Signature of the Branch Manager (BM) needs to be obtained on MOC as a needs to be obtained on MOC as a token of acceptancetoken of acceptance

In a situation where BM does not accept In a situation where BM does not accept the change suggested by the Auditor, the change suggested by the Auditor, The auditor should issue the MOC, and The auditor should issue the MOC, and A suitable note should be attached A suitable note should be attached

describing the reasons as to why the describing the reasons as to why the auditor feels the change is necessaryauditor feels the change is necessary


LFARLFARLONG FORM AUDIT LONG FORM AUDIT

REPORTREPORT


BasicsBasics

• LFAR is an internal control evaluation LFAR is an internal control evaluation questionnaire.questionnaire.

• Comprehensive in scope and Comprehensive in scope and coverage.coverage.

• Covers both Balance Sheet and Profit Covers both Balance Sheet and Profit & Loss Account.& Loss Account.

• Serves as an important check list for Serves as an important check list for audit planning. audit planning.

• Make LFAR part of the audit Make LFAR part of the audit programme.programme.


Must Do’sMust Do’s

Study the Questionnaire thoroughly.Study the Questionnaire thoroughly.Each answer should be precise Each answer should be precise Data should be original and be Data should be original and be

supported with source document or supported with source document or MRL and just not picked up from MRL and just not picked up from concurrent audit reportconcurrent audit report

Avoid vague or general comment.Avoid vague or general comment.



Give specific instances of Give specific instances of weakness/shortcomings.weakness/shortcomings.

Start preparing in month of march Start preparing in month of march Main Audit Report and LFAR are two Main Audit Report and LFAR are two

separate reports.separate reports.Qualificatory remarks Qualificatory remarks MUSTMUST be part be part

of the main report.of the main report.



Main Report is a self contained Main Report is a self contained document and should not contain document and should not contain any references to LFAR.any references to LFAR.

Should be sufficiently detailed and Should be sufficiently detailed and quantified to enable expeditious quantified to enable expeditious consolidation.consolidation.

Do not make current year’s LFAR Do not make current year’s LFAR a a replicareplica of previous year. of previous year.


• LFAR is of utmost importance to LFAR is of utmost importance to the management as well as the the management as well as the Central Auditors.Central Auditors.

• Finalize Statutory Report and Finalize Statutory Report and LFAR simultaneously.LFAR simultaneously.

• Should be well drafted and not Should be well drafted and not loosely worded loosely worded




• Scope of work carried out should Scope of work carried out should be clearly specified.be clearly specified.

• Extent of verification be stated Extent of verification be stated

• Should create an impact on the Should create an impact on the bank management about the bank management about the quality of work carried out.quality of work carried out.


CoverageCoverage

Cash and Bank Balances.Cash and Bank Balances. Money at call and Short Notice.Money at call and Short Notice. Investments.Investments. AdvancesAdvances Other assets.Other assets. Deposits and other liabilities.Deposits and other liabilities. Profit and Loss Account.Profit and Loss Account. General.General. Specialized Branches.Specialized Branches.


CashCash

Cash balance which vary significantly from Cash balance which vary significantly from the limit fixed by controlling authorities.the limit fixed by controlling authorities.

Excess balance reported to the controlling Excess balance reported to the controlling authorities.authorities.

Adequate Insurance Cover.Adequate Insurance Cover. Joint custody.Joint custody.

Refer Instructions, Key Movement Register.Refer Instructions, Key Movement Register. Periodic checking of cash balance.Periodic checking of cash balance.

Ascertain procedure and observe during Ascertain procedure and observe during auditaudit

General scrutiny of cash book. General scrutiny of cash book.


Balance with RBI, SBI Balance with RBI, SBI and other Banksand other Banks

Balance confirmation.Balance confirmation. Report differences.Report differences. Observation on differences.Observation on differences. Cash transactions remaining Cash transactions remaining

unresponded.unresponded. Revenue items requiring adjustment / Revenue items requiring adjustment /

write offs. (issue MOC / Qualify report)write offs. (issue MOC / Qualify report) Old outstanding balances remaining Old outstanding balances remaining

unexplained and age wise analysis. unexplained and age wise analysis.


Item requiring special attention of Item requiring special attention of management.management.

Reconciliation not done / procedure not Reconciliation not done / procedure not followed.followed.

Material amount unadjusted for a long Material amount unadjusted for a long time.time.

Items affecting financial statements may Items affecting financial statements may be reported in the Statutory Report. be reported in the Statutory Report.

Balance with RBI, SBI and other Banks (cont’d)


Money at call and Short Money at call and Short NoticeNotice

Report even if a single transactionReport even if a single transaction Confirm that the transaction is as per Confirm that the transaction is as per

the instructions/guidelines.the instructions/guidelines. Unauthorized deposits and excess of Unauthorized deposits and excess of

authorized deposits to be reportedauthorized deposits to be reported

..


InvestmentsInvestments

Physical verification on behalf of H.O.Physical verification on behalf of H.O. Ensure that income earned on such Ensure that income earned on such

Investments is not accounted by Branch.Investments is not accounted by Branch. Matured or overdue investments not Matured or overdue investments not

encashedencashed Guidelines of RBI for transaction and Guidelines of RBI for transaction and

valuation followedvaluation followed


AdvancesAdvances Examination of all large advances Examination of all large advances

and a test check of other advancesand a test check of other advances Questionnaire in four Broad Questionnaire in four Broad

categoriescategoriesCredit AppraisalCredit Appraisal Sanctioning / DisbursementSanctioning / DisbursementDocumentationDocumentationReview / Monitoring / SupervisionReview / Monitoring / Supervision


Other AssetsOther Assets

Stationery and Stamps. [Clause 6(a)]Stationery and Stamps. [Clause 6(a)] Comment on existence and Comment on existence and

compliance with. Internal control compliance with. Internal control system over valued stationery with system over valued stationery with regard to issue and custody.regard to issue and custody.

Instances of missing or lost items of Instances of missing or lost items of stationery to be given (new clause).stationery to be given (new clause).


Other Assets (Cont’d)Other Assets (Cont’d)

Suspense Accounts / Sundry Suspense Accounts / Sundry Assets.Assets.

Critically Scrutinize these accounts.Critically Scrutinize these accounts. Details and clarification in respect of Details and clarification in respect of

old unadjusted entries be obtained.old unadjusted entries be obtained. Balances which in your opinion are Balances which in your opinion are

not recoverable. not recoverable. eg: Advance against travelling.eg: Advance against travelling.Payment to merchant establishment.Payment to merchant establishment.Legal expensesLegal expensesDividend / Interest paid.Dividend / Interest paid.


Other Assets (Cont’d)Other Assets (Cont’d)

Unusual items in these accounts be Unusual items in these accounts be reportedreportedeg: Cash in transit eg: Cash in transit Difference in balancing.Difference in balancing.Difference in cash.Difference in cash.


Deposits Deposits

Compliance with guidelines in Compliance with guidelines in respect of inoperative accounts.respect of inoperative accounts.

Instances if not complied with the Instances if not complied with the guidelines.guidelines.

Seek clarification for unusual Seek clarification for unusual movements after balance sheet date.movements after balance sheet date.

Quantification of Overdue / Matured Quantification of Overdue / Matured term deposits at the year end.term deposits at the year end.


Bills Payable / Sundry Bills Payable / Sundry Deposits / Contingent Deposits / Contingent

LiabilitiesLiabilities Details of old items to be reported.Details of old items to be reported. Unusual items and matured Unusual items and matured

withdrawals or debits to be reported withdrawals or debits to be reported along with their nature and amounts.along with their nature and amounts.

List of major items of contingent List of major items of contingent liabilities other than Guarantees, LCs, liabilities other than Guarantees, LCs, Endorsements, Acceptances etc.,Endorsements, Acceptances etc.,


Profit and Loss AccountsProfit and Loss Accounts

Existence of system to compute Existence of system to compute discrepancies in interest / discount discrepancies in interest / discount income as well as interest expenditure income as well as interest expenditure & timely adjustment thereof.& timely adjustment thereof.

Discrepancies if material to be reported Discrepancies if material to be reported (MOC to be issued)(MOC to be issued) Existence of systemExistence of system Discrepancies to be checked by branchDiscrepancies to be checked by branch Findings of Concurrent Audit/Revenue Audit.Findings of Concurrent Audit/Revenue Audit.


Profit and Loss Accounts Profit and Loss Accounts (Cont’d)(Cont’d)

Compliance with Income Recognition Compliance with Income Recognition NormsNorms

System of estimation and provision System of estimation and provision of Interest on overdue / matured of Interest on overdue / matured term deposits.term deposits.

Divergent trends in major items of P Divergent trends in major items of P & L A/c if not satisfactorily explained.& L A/c if not satisfactorily explained.


GeneralGeneral

Proper maintenance of manual Proper maintenance of manual Books of Accounts.Books of Accounts.

In respect of Computerized In respect of Computerized Branches number of new areas Branches number of new areas prescribed.prescribed.

Inquire aboutInquire aboutBanks policy Banks policy Compliance of the policyCompliance of the policy Internal Control & Security measures.Internal Control & Security measures.Backups and Disaster Recovery PlansBackups and Disaster Recovery Plans


General (Cont’d)General (Cont’d)

Suggestions for the improvement in the Suggestions for the improvement in the systemsystem

Reconciliation of control and Reconciliation of control and subsidiary records.subsidiary records.



Inter Branch Accounts, (Very Inter Branch Accounts, (Very Important area)Important area)Understand the systemUnderstand the systemDaily Communication to HO/Designated Daily Communication to HO/Designated

cell statement of debit / credit cell statement of debit / credit transaction.transaction.

Agreement between balance in HO Agreement between balance in HO Account Branch Accounts.Account Branch Accounts.

Old outstanding debits in the Head Office Old outstanding debits in the Head Office Account. Account.



Expeditious compliance to Expeditious compliance to communication from HO / Designated communication from HO / Designated cell (Report unresponded entries)cell (Report unresponded entries)

Items of Double response in HO Items of Double response in HO Account.Account.

Old / Large outstanding transaction at Old / Large outstanding transaction at debits as at year end.debits as at year end.

Audit and InspectionAudit and Inspection



Particulars of frauds discovered Particulars of frauds discovered during the year together with your during the year together with your suggestions to minimize the same.suggestions to minimize the same.

Window dressing to be reported Window dressing to be reported eg. Large deposit at year end.eg. Large deposit at year end.

Under utilised facilities converted in Under utilised facilities converted in Deposits. Deposits.

Unsecured loans shown as secured.Unsecured loans shown as secured.



Maintenance of Fixed Assets Maintenance of Fixed Assets Records.Records.Documents of title in relation to branchDocuments of title in relation to branch

Non compliance with Ghosh and Jilani Non compliance with Ghosh and Jilani Committee recommendations.Committee recommendations.


Ghosh and Jilani committee Ghosh and Jilani committee recommendationsrecommendations

Ghosh committee : A high level Ghosh committee : A high level committee was set up to enquire into committee was set up to enquire into the various aspects of fraud and the various aspects of fraud and malpractices in the bank and to malpractices in the bank and to make recommendations to reduce make recommendations to reduce such instancessuch instances

Jilani committee : A working group Jilani committee : A working group was formed to review the internal was formed to review the internal control and inspection/audit system control and inspection/audit system in bankin bank


GHOSH COMMITTEE GHOSH COMMITTEE RECOMMENDATIONS RECOMMENDATIONS

WERE FOR WERE FOR Improvement in day to day administrative Improvement in day to day administrative

functionsfunctions For ensuring safety of assets For ensuring safety of assets Compliance with the let down policies and Compliance with the let down policies and

proceduresprocedures Accuracy and completeness of accounting Accuracy and completeness of accounting

and other recordsand other records Proper segregations of duties and Proper segregations of duties and

responsibilities of the staffresponsibilities of the staff Timely prevention and detection of frauds Timely prevention and detection of frauds

and malpracticesand malpractices


Ghosh Committee Ghosh Committee RecommendationsRecommendations

Recommendations divided in to four Recommendations divided in to four groupsgroups

• Group-A: Recommendations, which Group-A: Recommendations, which have to be implemented by the banks have to be implemented by the banks immediatelyimmediately

• Group-B: Recommendations requiring Group-B: Recommendations requiring Reserve Bank of India’s approvalReserve Bank of India’s approval

•


RecommendationsRecommendations

• Group-C: Recommendations Group-C: Recommendations requiring approval of Government of requiring approval of Government of IndiaIndia

• Group-D: Recommendations Group-D: Recommendations requiring further examination in requiring further examination in consultation with IBA.consultation with IBA.


Ghosh Committee Ghosh Committee

Out of 97 recommendations, Out of 97 recommendations, 27 required to be reported at the 27 required to be reported at the

branch levelbranch level43 at Regional Office (RO), Zonal 43 at Regional Office (RO), Zonal

Office (ZO), or at Head Office (HO)Office (ZO), or at Head Office (HO)27 at both the levels i.e. Branch as 27 at both the levels i.e. Branch as

well as RO/ZO/HOwell as RO/ZO/HO


JILANI COMMITTEEJILANI COMMITTEE

Working group to review the internal Working group to review the internal control and inspection and audit control and inspection and audit system in bankssystem in banks

Contains 25 questions and to indicate Contains 25 questions and to indicate the answer as either “Implemented “ the answer as either “Implemented “ or Not Implemented”.or Not Implemented”.


JILANI COMMITTEE JILANI COMMITTEE RECOMMENDATIONSRECOMMENDATIONS

Broadly divided into three categories Broadly divided into three categories • Dealing with the EDP environment in Dealing with the EDP environment in

the banksthe banks• Dealing with the inspection/Internal Dealing with the inspection/Internal

audit system in the bankaudit system in the bank• Dealing with other miscellaneous Dealing with other miscellaneous

aspects of functioning of a bank. aspects of functioning of a bank.

SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES

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Transcript of SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES