CA Dayaniwas Sharma (FCA, FAFD,ISA)

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CONTENTS

PART – A APPROACH TO BANK AUDIT

PART – BLFAR & CERTIFICATION

PART – C TAX AUDIT REPORT

PART – DDOCUMENTATION

All the points discussed in this presentation are my personal opinion and should not be related to any bank or other instructions'

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PART - A

APPROACH TO BANK AUDIT

1. KNOW THE BRANCH

2. UNDERSTAND BANKING SOFTWARE

3. COMPONENTS OF FINANCIAL STATEMENTS

4. AUDIT PROCEDURES

5. CONCLUSIONS

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1. KNOW THE BRANCH

• Previous Year’s Auditor’s Report/ LFAR ;

• Concurrent Audit Reports for the audit period ;

• Risk Based Internal Audit Report ;

• Zonal Inspection Reports, if any ;

• Exception Report ;

• Latest Revenue Audit Report ;

• IT System Audit Report ;

• RBI Inspection Report.

• Types of deposits and advances

• Whether branch is deposit or advance rich

• Types of customers and borrowers

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Obtain the following reports to assess the branchperformance

Understand the bank portfolio

• RBI Master Circulars

• Bank’s Internal Circulars and Guidelines

• Relevant Closing Circulars

• Other relevant regulations under various statutes

• List the Returns and Certificates to be signed

• Items to be reported in LFAR

• Audit Report Format

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Reporting Requirements :

Must go through :

Auditors Report, Returns

including MOC

Long Form Audit Report

Tax Audit reports

Certificates

2. UNDERSTAND BANKING SOFTWARE

Understand the structure of accounting softwarewhether following are in different modules or same

• Recording of day-to-day transactions

• Financial Statements

• Various closing returns and certificates at branchlevel

Level of Automation

Centralized or Decentralized accounting

Exception Reports

Level of access rights at branch level – editable and un-editable fields

System of downgrading and upgrading of accounts

Interest Calculations

Generation of reports relating to advancesclassification and Capital Adequacy calculation etc..

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Illustrative structure of Banking Software

Banking Software

CBS

(Records day to day

software)

Financial Statements generating

software

Like Balance Sheet and

Profit & Loss

All other non advances

related returns

Assets classification

&Provisioning software

All advances related Basel and Capital Adequacy

Returns

Other Returns &

Certificates

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3. COMPONENTS OF FINANCIAL STATEMENTS

Components of Financial Statements

to be verified at Branch Level

Balance Sheet

Advances,

Deposits,

Fixed Assets,

Accrued Interest,

FITL, Provisions etc.

Statement of Profit & Loss

Interest earned,

Interest paid,

Commission

Other income and expenses

Off Balance Sheets Items

Letter of Credit,

Bank Guarantees,

Bills for Collection etc

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4. 1.1 ADVANCES - OVERVIEW

ADVANCES

Fund Based

1. Term Loan

2. Cash Credit

3. Overdraft

4. Bills Purchased/Discounted

5. LC Devolved

6. BG Invoked

Non Fund Based

1. Letter of Credit (LC)

2. Bank Guarantees (BG)

3. Bills for Collection

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4.1.2 ADVANCES - AUDIT PROCEDURES

• Year on Year Basis

• Quarter on Quarter Basis (CY Quarter to PYCorresponding Qtr)

• Quarter on Quarter Basis (CY : Current andImmediately preceding quarter)

• Calculate the interest percentage by applying thefollowing formula :

Interest Income as per P&L account

Average Balance of Loan Outstanding

• The above calculation to be performed for the periodmentioned above and analyze the interest rate for theperiod.

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Trend Analysis for the outstanding balances :

Global Check for the Interest Income :

(I) ANALYTICAL PROCEDURES

Perform comparative analysis on Year on Year basis for thefollowing parameters

• Customer wise

• Exposure wise

Calculate category wise percentage of total loans andadvances outstanding to know the coverage of each type.

• Credit to Deposit Ratio : Advances given / Deposits

• NPA Ratio : Net NPAs / Advances given

• Provision Coverage Ratio : Provisions / Gross NPAs

• Return on Assets : Net Profits / Avg. Total Assets

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Comparative Analysis :

Percentage :

Ratio Analysis :

• Trial Balance (or similar report) and list down theGLs and Sub GLs code of advances ;

• List of accounts (category wise) along withborrower name and outstanding amount ;

• List of accounts

opened,

closed and

opened & closed

during the period under review;

• Statement of potential Non-Performing Assets(NPA) i.e., Special Mention Accounts (SMA) ;

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Obtain the following and consider for selecting sample:

(II) SAMPLING TECHNIQUES

• List of NPAs as on reporting date ;

• List of Restructured accounts ;

• List of Upgraded during the period ;

• List of accounts continuously appearing inexception report ;

• List of critical accounts highlighted in ConcurrentAudit Report, RBIA Report, Zonal InspectionReport, Branch Monitoring Reports etc. ;

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(III) AUDIT STEPS – (A) TERM LOANS

Sanction is as per the discretionary lending powers ofbank.

Ensure disbursement is only after compliances with pre -disbursement conditions

Check for security is created like equitable mortgage deedand pari-passu rights are clearly mentioned in thesanction letter and mortgage deed

Ensure the latest security is correctly fed in the AssetClassification and Provision software.

Repayment schedule is correctly fed in CBS & AssetClassification and Provision software.

Verify the Interest Parameters (Regular & Penal Interest)

Ensure that critical amount due has reported in SMAReport has been received by the bank.

In case of Loan accounts ACTUAL recovery of Installmentsand Interest

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Customer wise Limit Lookup

Stock / Debtors Statements Tracking and calculation of DP

Turnover of CC Account based on Borrower’s Business profile

Verify the Interest Parameters (Regular & Penal Interest)

Review the Overdrawn Report for the outstanding amount exceeding sanction limits , if any

Verify the movements in the account to ensure that credits are routed through to suggest healthy movements

Check interest is correctly applied on the day-end balances.

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(B) CASH CREDIT/OVERDRAFTS :

(C) BILLS PURCHASED/DISCOUNTED:

Verify the following documents:

• Letter of credit number and date

• Advising bank, beneficiary name and applicant

• Date and place of expiry

• Terms and conditions of letter of credit.

Scrutinize the bills register to ensure there are no overdue/matured bills for more than 90 days.

Check whether bill wise break up is available in Asset Classification and Provision software.

In Foreign Bills Register, ensure that exposure in foreign currency and equivalent Indian currency is correctly reported.

Check interest collected is correctly classified under current and pre paid income.

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Types of Restructure:There are two types of restructuring:1) Internal Restructure by Bank2) External Restructure by CDR Cell

Eligibility: Any account classified as standard, sub standard or doubtful. Restructuring cannot be done retrospectively and usual asset

classification norms would continue to apply. Restructuring should be subject to customer agreeing to terms and

conditions. Financial viability should be established. Borrowers indulging in frauds and malfeasance are ineligible. BIFR cases eligible for restructuring subject to approval from BIFR.

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(D) RESTRUCTURE ACCOUNTS : PROVISIONING NORMS :

RESTRUCTURE ACCOUNTS

Restructuring of accounts could take place in following stages: Before commencement of commercial production After commencement of commercial production / operation but before

the asset has been classified as ‘Sub Standard’. After the commencement of commercial production / operation but

after the asset has been classified as ‘Sub Standard’ or doubtful.

Standard Asset would get reclassified as sub standard and account which is already NPA would continue to have the same classification.

Additional finance would be treated as standard during specified period under approved restructuring package.

All restructured accounts, classified as NPA upon restructuring would be eligible for upgradation after observation of satisfactory performance for the period of one year.

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RESTRUCTURE ACCOUNTS

(D) RESTRUCTURE ACCOUNTS : ASSET CLASSIFICATION NORMS

Total provision required would be normal provision plus provision in lieu of diminution in fair value of advances.

Diminution in fair value would be required to be recomputed on each balance sheet date.

Banks have option of notionally computing the diminution in fair value and providing at 5% in case of all restructured accounts where the total dues to bank is less than ONE crore.

Verify the restructuring proposal to ensure the accuracy of the sacrifice value:1) Interest rate pre and post restructuring2) Credit rating3) Discounting factor (BR + Premium based on credit rating)4) Period of loan reimbursement (pre and post restructuring)5) Segment to which loan belongs to (Large corporate, Mid corporate etc)

In fresh Restructure account, ensure that interest charged in the account is reversed and FITL, Interest Capitalization account is created for the same.

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RESTRUCTURE ACCOUNTS

(D) RESTRUCTURE ACCOUNTS : PROVISIONING NORMS :

(E) NON PERFORMING ASSETS : AUDIT STEPS :

Review the accounts which are classified as NPA with respect to

• Security Value

• Interest Reversal

• Date of NPA

• Provisioning thereon

Review the annual stock audit report for the NPA with balance of Rs. 5 crores and above and latest valuation report for the immovable properties in case the valuation is older than 3 years.

Review the accounts to ensure no interest is charged on such accounts.

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4.2.1 DEPOSITS - OVERVIEW

DEPOSITS

Time Deposits

1. Current Account Deposits

2. Savings Account Deposits

3. Overdue Deposits

Term Deposits

1. Fixed Deposits

2. Recurring Deposits

3. Margin Money

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• Trial Balance (or similar report) and list down theGLs and Sub GLs code of deposits ;

• List of accounts (scheme-wise) alongwith customername and outstanding amount ;

• List of accounts opened, closed and opened & closed

during the period under review.

Obtain the following and consider for selecting sample:

(I) SAMPLING TECHNIQUES

4.2.2 DEPOSITS - AUDIT PROCEDURES

Verification of Anti Money Laundering guidelines and Compliance with KYC norms on test check basis.

Check Movement in Deposit vis-à-vis movement in interest expense

Obtain the interest report and verify interest calculation is accurate.

Ensure that overdue deposits, matured time deposits, cash certificates and certificates of deposits are shown in Demand Deposits.

Check Interest accrued but not due is not be included in deposits but, shown under other liability

Check TDS compliance on the interest paid and on test check basis checking of Form 15G & 15H to confirm whether those forms are submitted with respective Income Tax Authority.

Review the exceptional report for deposits without PAN, etc.

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(II) AUDIT PROCEDURES

4.3 STATEMENT OF PROFIT & LOSS

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Expenses can be verified for 1 month and thereafterextrapolate to 12 months. Compare with P&L to ensurewhether amount calculated is approximately same oridentify and investigate for the reasons of videvariations.

For NPA accounts income should be recognized onrealization basis.When an account becomes non-performing, unrealizedinterest of the previous periods should be reversed orprovided.

5. CONCLUSIONS

Conclusions drawn based on the above audit procedures to be discussed with Branch head

Based on the above discussions same shall be report in MoC and LFAR .

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4.4 OFF BALANCE SHEET ITEMS

Off Balance Sheet Comprises of

a) Letter of Credit (LC)b)Bank Guarantees (BG)c) Bills for Collections

Care in case of devolved LC’s/invoked BG’s:

Devolved amounts adjusted by allowing excess drawingsor adhoc or TOD’s, should be verified.

Repayments made by the customer for devolvedLC’s/invoked BG’s should also be verified.

Non-reversal of Expired Guarantees to be looked intocarefully – impact on capital adequacy.26

PART B – (1) LFAR

LFAR is an internal control evaluation questionnaire.

It should therefore be clearly understood that LFAR byno means is an extension of the statutory audit reportbut is a supplementary report to bring awareness to themanagement and/or regulators.

It should therefore be clearly understood that any pointrequiring qualification in the audit report must bequalified there itself, with such details as would berequired and mere reference that the particular pointhas been reported in the LFAR is not enough.

LFAR should be sufficiently detailed and quantified sothat they can be expeditiously consolidated by SCA.

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LFAR = REPORTING REQUIREMENTS - ADVANCES

Complied with the procedures / instructions of thecontrolling authorities of the Bank

Instances of credit facilities having been sanctionedbeyond the delegated authority or limit fixed for theBranch ;

Instances where advances have been disbursedwithout complying with the terms and conditions ofthe sanction.

Credit facilities released without execution of allnecessary documents ;

Deficiencies in documentation, non-registration ofcharges, non-obtaining of guarantees etc. ;

Advances against lien of deposits have been properlygranted by marking a lien on the deposit.

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Credit Appraisal

Sanctioning / Disbursement

Documentation

Analysis of the accounts overdue for review/renewal ;

Stock / book debt statements, other periodicoperational data and financial statements etc.,received regularly from the borrowers andduly scrutinized ;

Compliance with a system of obtaining reports onstock audits periodically ;

Inspection or physical verification of securities chargedto the Bank been carried out by the Branch ;

Identification and classification of advances is in linewith the norms prescribed by the RBI ;

Report outstanding amount of invoked BankGuarantees ;

Report outstanding amount of devolved Letter ofCredits.

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Review/Monitoring/Supervision

REPORTING REQUIREMENTS - DEPOSITS

Whether controlling authorities of the Bank laid downany guidelines with respect to conduct and operations ofinoperative accounts ;

After the balance sheet date and till the date of audit,whether there have been any unusual large movements(whether increase or decrease) in the aggregate depositsheld at the year-end ;

Report any overdue / matured term deposits at the endof the year.

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REPORTING REQUIREMENTS – PROFIT & LOSS

ACCOUNT

Branch has a system to compute discrepancies ininterest / discount on advances and deposits and fortimely adjustment thereof in accordance with theguidelines laid down ;

Branch complied with the Income Recognition normsprescribed by RBI ;

Have a system of estimating and providing interestaccrued on overdue / matured term deposits ;

Divergent trends in major items of income andexpenditure, which are not satisfactorily explained bythe branch.

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REPORTING REQUIREMENTS – GENERAL

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Books & Records

In case books are maintained manually, general scrutinyis performed and are authorized.

In respect of computerized branches :• Indicate the extent of computerization and the

areas of operation covered.• Are the access and data security measures and

other internal controls adequate?• Whether regular back-ups of accounts and off-site

storage are maintained as per the guidelines ofthe controlling authorities of the Bank?

• Whether adequate contingency and disasterrecovery plans are in place for loss/ encryption ofdata?

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Reconciliation of Control and SubsidiaryRecords

Whether as at the year-end, in the control andsubsidiary records been reconciled

Ensure Inter Branch Reconciliations are performed andreport discrepanacies if any ;

Check whether balances as per branch books tallieswith HO books ;

Report any outstanding debits in the Head OfficeAccount in respect of inter branch transactions ;

Report any old / large outstanding transactions /entries at debits as at year-end which remainunexplained in the accounts relatable to inter branchadjustments.

Inter Branch Accounts

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Audits / Inspection

Whether branch covered by concurrent audit or anyother audit / inspection during the year

In framing the audit report whether adverse commentsof various audit / inspection reports are considered

Furnish particulars of frauds discovered during the yearunder audit at the branch ;

Also provide suggestions, if any, to minimize thepossibilities of their occurrence.

Frauds

PART B – (2) CERTIFICATION

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Closing Returns

Certificates

CLOSING RETURNS

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Returns that may be required to be certified by theBranch Auditors

S.No Details Source of Return

1 Balance Sheet

Financial statements generating software

2 Profit & Loss Account

3 Inward bills for collection and outward bills for collection

4 Claims against the bank not acknowledged as debt

5 Gross block of fixed assets & depreciation

6 Statement of Outstanding balances

and doubtful amounts in accounts other than advances

7 Outstanding entries in GL Suspense Account

9 Bad Debts Written off to P&L

CLOSING RETURNS

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Returns that may be required to be certified by theBranch Auditors – Contd..

S.NoDetails

Source of Return

10 Capital Adequacy – Basel I Asset classification & Provisioning software

11 Memorandum of Changes (Return 14D is towards Advances)

Prepared by Auditor

12 Advances related returns

Asset classification & Provisioning software

13 Statement of Outstanding total deposits & advances for rural branches

14 Maturity pattern of advances, deposit and borrowings etc.

CERTIFICATES

Certificates are generally prepared manually based on theinformation/data generated from Asset classification &Provisioning software or CBS software. Following may be thecertificates to be issued by auditor

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S.No Details

1 Certificate on remittance to DICGCI

2 Statement of Cash & Bank Balance for 12 odd dates

3 Certificate on exposure to Sensitive Sectors

4 Certificate on Ghosh Committee Recommendations

5 Certificate on Jilani Committee recommendations

6 Movement Chart of Gross NPA

7 Certificate on restructured accounts

8 Certificate on subvention claim for interest relief 2013-14

9 Certificate on subvention claim for interest relief 2012-13

10 Certificate on subvention claim in respect of Rupee export credit

CERTIFICATES – CONTD..

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S.No Details

11 Certificate on incentive for timely repayment of short term crop loan

12 Scheme of 1% Interest Subvention to Housing Loans

13 Certificate in respect of Education Loan Interest Subsidy Scheme

14 Claim for Interest Subvention for Lending to Women SHG’s for the credit upto 3 Lacs

15 Claim for Additional Interest Subvention for the prompt payment for eligible schemes

16 Certificate under the Credit Linked Capital Subsidy Scheme

17 Certificate of remittance of recoveries made under CGTMSE claim settled accounts

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PART C - TAX AUDIT REPORT

To be signed as per Section 44AB – both Form 3CA & 3CD - Use Letter heads

Importance may be given to –

TDS – correct rates, no deduction, late deduction, paid ontime to the authorities

Rule 6DD Section 43B Prior period items Declarations and Management Letters

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TAX AUDIT REPORT – RELEVANT CLAUSES

Clause 9 (b) and (c) - Books of Accounts Maintained and Examined – Generally printed

list.

Clause 14 - Particulars of Depreciation allowable – Details of Purchase, Sale, Transfer

and Disposal/ Write-off of Fixed Assets to be verified by Branch Auditor.- Depreciation

calculation – generally at HO.

Clause 17(a) – Any amount of Capital Expenditure debited to Profit and Loss A/c.

Clause 17(e) – Expenditure by way of Penalty or Fine for violation of any law debited to

Profit and Loss A/c.

Clause 17(f) – Any amount inadmissible u/s 40(a):

(a) Amount inadmissible u/s 40(a)(i): – Any interest paid to a Non-Resident person

or to a Foreign Company without TDS.

(b) Amount inadmissible u/s 40(a)(i)(a): – Any interest, commission, brokerage, fees

for Professional/ Technical Services or Contract Amount paid to a Resident person

without TDS.

(c) Amount inadmissible u/s 40(a)(i)(a): – Any tax, interest or penalty under Income

Tax Act or Wealth Tax Act debited to P&L A/c.

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Clause 27 - Compliance of TDS provisions: -

Verify TDS compliance under all relevant sections like Salary, Interest, Interest

to NRI, Contract Payments, Technical & Professional Fees etc. –

Provide Details of :

(a) Tax Deductible but not deducted at all.

(b) Shortfall on account of lesser TDS than required.

(c) Tax Deducted late

(d) Tax Deducted but not paid to Central Govt.

TAX AUDIT REPORT – RELEVANT CLAUSES

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PART D – DOCUMENTATION

S.

No

Document name Particulars

1 Appointment Letter Letter appointing Auditor given by Bank

2 Engagement Letter Letter confirming Engagement given by Auditor (As required by SA 210 “Agreeing the Terms of Audit Engagements”)

3 Management Representation Letter

Letter obtained from Management to confirm certain matters or support other audit evidence (SA 580 “Written Representations”)

4 Bank Closing Circular Annual Inhouse closing circular given by management, other circulars like interest on advances/deposits, DOA etc.

5 RBI Circulars Circulars issued by RBI like IRAC Norms

6 Audit Time Schedule Person name, date and work performed

7 Analytical Review Like comparative with previous year financial statements etc.

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PART D – DOCUMENTATION

S.No

Document name Particulars

8 Signed Financials Financials along with Returns/certificates signed by Auditor

9 LFAR & Auditor’s Report

Signed copy of Auditor’s Report

10 Working Papers:

(a) Advances Account wise break up of Advances, Steps for Work Performed, List of NPA and NPA, Interest Report (if any)

(b) Fixed Assets Fixed Assets schedule/register

(c) Deposits Account wise break up of Deposits, Steps for Work Performed, Interest Report (if any)

(d) Statutory Compliances

TDS, Service Tax remittances and returns (Bank may have system of centralized payment by Head Office, in such cases Branch Auditor has to only ensure whether liability is correctly stated in financials)

(e) Expenses Expenses Ledgers

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CA DAYANIWAS SHARMA, FCA, FAFD

+91 9885200029daya@lncofirm.com

Hyderabad

THANK YOU