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______________________________________________________________ “BANK AUDIT- A Practical Approach”- By CA Ajay At olia Jaipur

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BANK AUDIT- A Practical Approach

CA Ajay Atolia FCA Partner

S.R.Goyal & Co. Jaipur

Banking is a dynamic activity. Therefore banks are different from most other commercial enterprises. Now a days banking has constantly been undergoing a change. Chartered Accountants are expected to carry out the bank branch audit in the shortest possible time. The responsibilities have increased manifold after prudential norms, Anti Money Laundering norms, Basel III norms, increase in certification, increased use of Information Technology and CBS etc. Over the period due to increase in NPAs in the banking system, RBI has been taking a stricter cognizance of the divergences. In the meeting of CSA, RBI has raised the following issues:

1. Exact date of NPA not recorded. 2. Classification between secured and unsecured 3. Non implementation of Restructuring packages 4. Direct v/s indirect landing 5. Non fund based exposure

Work to be done in Bank audit being divided into four parts.

• Statutory Audit as per Banking Regulation Act. • Long Form Audit Report • Certification • Tax Audit

Hence it becomes imperative to plan the audit in systematic manner to enable completion of all the important area leaving no room for any material misstatement. What is basically needed for effective execution of the job is error free documentation and effective preparation of related working papers.


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Audit Planning A systematic and meticulous planning and programming will help the auditors to ensure that he performs the audit as per the required Auditing Standards.

• Communication with previous Auditor: The incoming auditor must communicate with the previous auditor. The incoming auditor should primarily find out whether there are any professional or other reasons why he should not accept the appointment.

• Acceptance: A careful reading of appointment letter is must before

accepting the audit. Ensure that your audit firm is other wise eligible for conducting the audit. The appointment letter consist procedural requirements to be complied by audit firm such as submission of various declaration etc.

• Engagement: As required by SA 210, the auditor should send an engagement letter, preferably before the commencement of the engagement, to help avoid any misunderstanding with respect to the engagement. It is suggested that before commencement the engagement, the branch auditor should send an audit engagement letter to the appointing authority. A specimen of Engagement Letter is annexed as Annexure I

The institute had issued a general clarification on SA 210, which clarifies that audit of public sector bank is audit under statute and auditors obligation are laid down in statue, therefore it shall be sufficient compliance with the requirements related to sending the audit engagement letter, if an engagement letter is appropriately delivered to the client and auditor retains the evidence for such delivery.

• Knowledge of branch business: The auditor must know the business composition of the branch, nature and size of the branch. This understanding will help to design the audit program.

• Audit Program: The auditor should prepare a written audit program

setting fort the procedures that are needed to implement. The program should define the scope of audit, significant audit areas, set materiality level, lay down an overall time schedule. The program should have sufficient details to serve as a set of instructions to the assistants. A specimen of areas to be covered in audit program is annexed as Annexure II.


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• Communication with Branch: For smooth and timely completion of audit it is advisable that branch auditor should send a formal communication to branch specifying the time schedule, books, records, analysis and other information’s required in the course of audit. A specimen of letter is annexed as Annexure III.

• Banks guidelines for Closing and Audit: Every bank is preparing a

booklet, which contains the procedure of account closing by the branch, statements and certificates to be prepared by the branch and to be audited by the auditors. These guidelines also suggested the work not to be done at branches such as provisioning, depreciation etc. It is advisable to read the booklet and make proper notes of it.

• Accounting Policy of The bank: A complete understanding of

accounting policy will help smoothly and timely completion of audit.

• Access to System: Ensure that audit team must have access to computers of the branch.

• Materiality Level:

• Adherences of SA ( Standard of Auditing)

As you know, SAs are our performance benchmark and we all are following the same. In this regard we desired your response on following SA.

� SA- 260 and 265

SA 260 deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of financial statements. In addition, SA 265 establishes specific requirements regarding the communication of significant deficiencies in internal control the auditor has identified during the audit to those charged with governance. Every CSA are reported these matters to ACB and Board, Therefore branch Auditors must send these issues to respective CSA through separate letter.


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� SA- 600

Para 19 of SA state that there should be sufficient liaison between the principal auditor and the branch audito r. For this purpose, the principal auditor may find it necessary to issue written communication(s) to the other auditor.

� SA- 700, 705 and 706: These SA defines the manner of reporting in auditor’s report and inclusion of qualifications and matter of emphasis in auditor’s report.

A Check list for Branch Overview and Internal Contr ol is annexed as Annexure IV

Audit Procedure Statutory Audit

• As per Banking Regulation Act • Balance Sheet • Profit & Loss A/C • Other Annexure • True & Fair view • Balance Sheet and Profit and Loss Account: The balance sheet and

profit and loss account of the bank are drawn up in Forms “A” & “B” respectively of the third schedule of the banking regulation act, 1949. Assets Side Cash and Balances with RBI, Balances with Bank an d Money at call, Investments, Advances, Fixed Assets and Other Ass ets. Liabilities Side Capital, Reserve and Surplus, Deposits, Borrowings , Other Liabilities and Provisions Verified all the items in the balance sheet for the figures mentioned therein from the General Ledger. and in Profit and Loss account with Income and Expenditure Ledger. Important items of verification of expenditure are interest expended, Salaries and allowances, Rent, Printing and Stationery etc.


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Expenses • Interest Expended • Establishment Expenses ( Salary & Allowances) • Rent • Printing & Stationery Income • Interest Earned on Advances • Commission

• Income: Interest earned on advances is major income of the branch.

Auditor should, on sample basis, check the interest rates, its application on large advances etc. Auditor should made cross checks/ analytical review regarding the figures of interest income/ other income on a comparative basis.

RBI has prescribed income recognition norms for Interest on NPAs. Accordingly interests on NPAs are recognized only on receipt basis. Further in respect of newly identified NPAs, unrealized interest of past periods should be reversed. This will apply to Government guaranteed accounts also.

Accounting Software’s (System) used by Banks

Now all the bank branches are under CBS system. It is important to note that CBS system is used only for accounting of day to day transactions of the Bank. Closing Returns only in respect of Bal ance Sheet and Profit & Loss Account are generated from the CBS system. T herefore give the attention towards exception reports generated throu gh CBS system. Returns related to asset classification as per RBI guidelines on Prudential Norms on Income Recognition and Asset Cl assification for advances, calculation of capital charge on credit r isk as per BASEL II requirements, submission of CIBIL data and other v arious reports for financial reporting and regulatory compliance are b eing generated through other system

The data in this software is migrated from the CBS system with manual interventions.

Banks are heavily relying on the returns generated through this software, for various Policy decisions / MIS requir ements.


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This data is being furnished to RBI for Risk Based Supervision / DSB / RAQ returns etc., as part of Regulatory requirement s. Any deviation / error in the data of this software shall have serious implications, inclusive of attracting penal provisi ons by Regulators. It is observed that there has been wide variance in the Realizable Value of Security, Repayment Schedule and other fields. Advances: Audit of the advances covers major part of audit of branch.

Audit of advances is broadly divided in two steps:

A. Verification of Documentation B. Classification and Provisioning

• The first step towards audit of advances is to verify the procedure and documentation compliance with respect to the sanction and disbursement of the advances. All loan documents, as per the requirements of sanction letter and as per the banks approved loan policy must be executed (such as DP Note, loan Agreement, Letter of guarantee, hypothecation Agreement, etc). The following points needs to be covered.

� Whether sanction has been made as per the banks policies. � Credit appraisal reports contains adequate information’s � Check whether the terms of sanction have been complied with? � Check whether all the documentation formalities have been

complied with before release of facilities by the branch?

• Loan documents are completely filled with appropriate details and duly signed by borrower and bank officials.

• Loan documents are properly executed and approved by legal department or vetted by advocates on panel of bank.

• Fresh loan documents are obtained on change in limit, change in the constitution of the borrower.

• Original agreement, share certificate, title deeds, title clearance certificate valuation report are held on record.


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• Charge on securities offered have been registered with registrar of companies/appropriate authority

• Lien marking in case of loan against fixed deposit. • In case negative lien is marked in case of a property then

NOC of housing society should be on record. • In case of consortium advance original documents are kept

by the lead Bank. The member bank must have copy of these documents.

• Some of the banks have now started system of maintaining documents at a centralized location and therefore documents may not be available at the branch for verification. Auditor in such situation would be required to visit such location and verify document or get them at the branch.

• Some banks also execute documents in local language i.e. documents are not executed in English language. Therefore if auditor does not know that language, it would be difficult to verify the validity of documents. In such situation auditor may have to insist for translation or confirmation of validity of such documents by an expert.

• Verify that documents are not time barred

� Stock Audit Report � Rating by External Agencies. � Disbursement Process � Renewals A detailed checklist for audit of large advance is Annexed as Annexure V.


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• Asset Classification: The second step towards audit of advances is to verify the classification of advances. There are four types of classification of Advances for balance sheet purpose.

1. Facility Wise: Cash Credit\Overdraft, Term Loan\ Demand Loan

and Bills Purchased \Bill Discounted.

2. Sector Wise: Priority Sector, SSI and Others

3. Security Wise: Secured, Guaranteed and Un Secured

4. Health wise: Performing Assets (Standard assets) or Non Performing assets (NPAs). ( Sub Standard, Doubtful and Loss)

The RBI norms for classification into Performing and Non Performing are based on record of recovery and period for which the asset has remained nonperforming and the realisability of dues.

Every year in the month of July, Reserve Bank of India is issuing master circular for IRAC Norms. This circular is available on RBI website www.rbi.org.in. The circular provides prudential norms applicable for the current year in great details. Non Performing Asset Identification An asset becomes non-performing when it ceases to generate income for the bank and/or becomes non-productive assets and it can be broadly classified as given below. Type of loan Identification Term Loan Account is treated Interest and/or instalment

remains overdue for a period of more than 90 days.

Cash Credit & Overdraft accounts

Account is treated as NPA if it remains out of order for a period of more than 90 days. An account is treated as out of order if, • The outstanding balance remains continuously in excess of sanctioned /drawing power limit, or • Though the outstanding balance is less than the sanctioned limit/ drawing power. • There are no credits continuously for more than 90 days in the account i.e. the account is non-operative.


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• The credits during the aforesaid period in accounts are not sufficient to cover the interest debited during the same period.

Bill Purchased/ Discounted

Bill remains overdue for a discounted period of more than 90 days.

Agricultural Advances In case of short duration crops, the instalment of principle or interest thereon remains overdue for two crop seasons • In case of long duration crops, the instalment of principle or interest thereon remains overdue for one crop season.

Liquidity facility Remains outstanding for more than 90 days in respect of securitisation transaction.

Derivative Transactions

Overdue receivables representing positive mark to market value of a derivative contract remaining unpaid for a period of 90 days from specified due date.

Government Guaranteed advances

State government guaranteed advance treated as NPA, if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days.

Key Points

• Stress Assets Mechanism : Framework for Revitalising Distressed Assets in the Economy.

In the backdrop of the slowdown of the Indian economy, and resulting increase in Non-Performing Assets (NPAs) and restructured accounts in the Indian banking system during the recent years, a need was felt to ensure that the banking system should recognise financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.Hence before a loan account turns into a NPA, banks are required to identify incipient stress in the account by creating three subcategories under the Special Mention Account (SMA) category as given in the table below:


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SMA Subcategories

Basis for classification

SMA-0 Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress

SMA-1 Principal or interest payment overdue between 31-60 days

SMA-2 Principal or interest payment overdue between 61-90 days

SMA-0 Signs of Stress Illustrative list of signs of stress for categorisi ng an account as SMA-0:

1. Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control statements or (b) credit monitoring or financial statements or (c) non-renewal of facilities based on audited financials.

2. Actual sales / operating profits falling short of projections accepted for loan sanction by 40% or more; or a single event of non-cooperation / prevention from conduct of stock audits by banks; or reduction of Drawing Power (DP) by 20% or more after a stock audit; or evidence of diversion of funds for unapproved purpose; or drop in internal risk rating by 2 or more notches in a single review.

3. Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of non-availability of balance/DP in the account or return of 3 or more bills / cheques discounted or sent under collection by the borrower.

4. Devolvement of Deferred Payment Guarantee (DPG) instalments or Letters of Credit (LCs) or invocation of Bank Guarantees (BGs) and its non-payment within 30 days.

5. Third request for extension of time either for creation or perfection of securities as against time specified in original sanction terms or for compliance with any other terms and conditions of sanction.

6. Increase in frequency of overdrafts in current accounts.

7. The borrower reporting stress in the business and financials.

8. Promoter(s) pledging/selling their shares in the borrower company due to financial stress.


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• Appropriation of Recovery in NPAs

Recovery in NPA accounts should be appropriated in accordance with bank policy if there is no clear agreement between bank and borrower, generally first towards interest and then towards principal

• Advances under consortium: Asset classification of account under

consortium should be based on the record of recovery of the individual member banks. There is no relevance of classification of account in lead bank or in other member bank.

• Accounts with temporary deficiencies: The classification of an asset as

NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and nonrenewal of the limits on the due date, etc.

• Accounts regularized near about balance sheet date: The asset

classification of accounts where few credits are recorded should be examined thoroughly without scope for subjectivity. Where the account indicates inherent weakness on the basis of data available, the account should be deemed as a NPA.

• Asset classification to be borrower-wise not facili ty-wise

• Accounts where there is erosion in value of securit y: In respect of

accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate.

- value of security erodes by 50% or more as compared to previous

valuation, such accounts may be classified under the doubtful category.

- Value of security erodes to less than 10% of O/S amount; such accounts may classify as loss asset.


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• Restructuring of advances:

Description Restructured account – Due to Natural Calamity Restructured – Others Restructured Account – under CDR Restructured account – Due to Natural Calamity These restructuring as per the RBI circular on Guidelines For Relief Measures By Banks In Areas Affected By Natural Calamities.

Restructured – Others

RBI has harmonies the norms across all categories of Debt restructuring mechanism except those are restructuring on account of natural calamities. These norms are applicable to all restructuring including those under CDR mechanism.

GENERAL PRINCIPLE AND PRUDENTIAL NORMS FOR RESTRUCTURED ADVANCES

(i) Banks may restructure the accounts classified under ‘standard’,’ sub-standard’ and ‘doubtful’ categories.

(ii) Banks can not reschedule/ restructure/ renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration the usual asset classification norms would continue to apply.

(iii) In case there is undue delay in sanctioning a restructuring

package and in the mean time the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern

(iv) Normally, restructuring cannot take place unless alteration /

changes in the original loan agreement are made with the formal consent / application of the debtor. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.

(v) No account will be taken up for restructuring by the banks

unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.


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(vi) BIFR cases are not eligible for restructuring without their express approval. CDR core group in case of advances restructured under CDR mechanism/ the Lead bank in case of SME Debt restructuring and the individual in other cases after ensuring all the formalities in seeking the approval from BIFR are completed before implementing the package.

As per the circular the account classified as ‘standard’ should be immediately re-classified as ‘sub-standard asset’ upon restructuring. However in case of advances other than Consumer and personal advances, advances to commercial real estate and Advances classified as capital market exposures may be retained in standard assets if the fulfill the following conditions. (Special Regulatory Treatment)

(i) The dues to the bank are fully secured. The condition of

being fully secured by tangible security will not be applicable in the following cases a) MSME borrowers where the outstanding is upto Rs.25

Lakhs. b) Infrastructure projects provided the cash flows generated

from these projects are adequate for repayment of the advance.

(ii) The unit becomes viable in 8 years, if it is engaged In

infrastructure activities, and in 5 years in case of other units. (iii) The repayment period of the restructured advance including

the moratorium period, if any, dose not exceed 15 years in case of infrastructure advances and 10 years in case of other advances.

(iv) Promoter’s sacrifice and additional funds brought by them

should be a minimum of 20% of banks sacrifice or 2% of restructured debt, whichever is higher.

(v) Personal guarantee is offered by the promoter except when

the unit is affected by external factors pertaining to the economy & Industry.

(vi) The restructuring under consideration is not a repeated

restructuring.


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• Agriculture Advances: Classifications of Agriculture Advances are based on overdue crop season. The length of crop season is not defined in RBI circular. The length of crop season would be determined by SLBC in each state. There are lot of misunderstanding at branch level, regarding commencement and closure of crop season. Para 4.2.13 of Master circular July 2014, has clarified the norms, which deals with the NPA Norms for agriculture finance.

• According to these norms, a loan granted for short duration crops

will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.

• The term overdue means any amount due to the bank under any

credit facility is overdue if it is not paid on the due date fixed by the bank.

• Rabi season (planted October-November and harvested in March-

April).

• Kharif season (planted May- June and harvested in October- November).

Based on the clarifications given by RBI, and Crop Season defined by various SLBCs, following broad guidelines will explain the date of NPA in Agriculture Advances.

Particulars Rabi

Season Kharif Season

Rabi Season

Sugarcane Banana

Year of Finance

2011-12 2013 2012-13 October July

Date of Finance

From 1/10/2012

From 1/4/2013

From 1/10/2013

From 1/10/2012

From 1/7/2012

Season starts

Oct. 2012 May/June 2013

Oct. 2013 Oct-Nov.12

July-Oct.

Harvesting Time

March / April 2013

Nov. 2013

March/ April 2014

Oct/Dec.13 Sept.13-Dec.13

Repayment Due date

Up to 30/9/2013

Up to 31/3/2014

Up to 30/9/2014

Up to 31/12/2013

Up to 31/12/2013


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First Crop Season after due date :

Season starts

May/June 13

Oct., 2013

June 14 1/10/2013 1/7/2012

Harvesting Time

Nov. 2013 March/ April 14

Nov. 2014

Oct./Nov.14 Sept.13-Dec.13

Second Crop Season after due date :

Season starts

Oct/Nov 13

May/June 2014

Oct./Nov 14

Harvesting Time

March/ April 2014

Nov. 14 March 2015

NPA Date 30/6/2014 31/12/14 30/6/2015 31/12/2014 31/12/2014 Accordingly any disbursement in Agriculture loan\KCC up to 30.09.2013 (

i.e. Rabi season 2011-2012 and Kharif Season 2013) is not realised, the account will be NPA as on 31.03.2015.

• Unhedged foreign currency exposures of the entities : A high level of

unhedged foreign currency exposures of the entities can increase the probability of default in times of high currency volatility. Hence, banks are required to estimate the riskiness of unhedged position of their borrowers as per the instructions contained in our circular DBOD.No.BP.BC.85/21.06.200/2013-14 dated January 15, 2014 as well as our circular DBOD.No.BP.BC.116/21.06.200/2013-14 dated June 3, 2014 and make incremental provisions on their exposures to such entities with exposure of over Rs 25 crores.

• Compliance with Accounting Standards: Branch auditor should ensure that branch should comply with the all applicable Accounting Standards. Some of the Accounting Standards are complied at branch level and some are complied at bank as a whole. A suitable reporting should be made in respect of non compliance and compliance to be done at Head office level. Usually following Accounting Standards are being complied at Head office level:

� AS-3 Cash Flow statement � AS-15 Employee Benefits � AS-17 Segment Reporting � AS-18 Related party Disclosure � AS-22 Accounting for taxes on Income


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• Fixed Assets: In past few years banks are spending lot on computreisation, furniture and fixture etc. It was observed that most of the time amount is lying in advances and capitalization entries not passed for wants of certain testing reports etc.

• Other Important items:

• Sundry Liability, Sundry Asset of Suspense Account.

• Transaction in dormant account

• Large Value transaction in newly opened account

• Debit balance in savings account

• Reversal of Misc. Charges

• Overdue term deposits

• Credit Card Transactions

• System Testing

• Bank Guarantee

• Letter of Credits

• Frauds

• Claims not acknowledge as debts


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• Provisioning on Advances: AS per RBI guidelines provisions on

advances to be made as following:

Provision for Standard Advances The rate of provisioning for standard assets is as follows:-

Sr.

No.

Category of standard asset Rate of

provisioning

a. Direct advances to agricultural and SME sectors

0.25%

b. Commercial real estate loans

1.00%

c. Advances to Commercial Real Estate – Residential

Housing Sector (CRE - RH)

0.75%

c. i) Housing Loan at Teaser rate.

The provisioning on these assets would revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’. ii) Restructured account classified as Standard

advance. ( Will increase to 5% in phase manner)

2.00%

4.25 per cent

with effect from

March 31, 2015

(spread over the

four quarters of

2014-15)

d.

All other loans and advances not included in a, b and

c above

0.40%


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Provisioning for Sub-Standard Advances For Secured Portion without making any allowance for DICGC/ECGC guarantee cover and securities.

15%

For Unsecured Exposure

25%

For Unsecured Exposure in Infrastructure lending, infrastructure loan accounts

20%

Provision for Doubtful Advances

For Unsecured Exposure 100%

For Secured Portion Period for which advance has remained in doubtful category

i) Upto 1 year 25%

ii) 1-3 years 40%

iii) More than 3 years 100%

Provision for Loss Advances For entire outstanding, whether secured or not 100%

In most of the banks, provisions on advances been made at Zonal or Head office level. Branch Auditors are required to verify the classification only.

• Reporting:

� Auditors Report: As required by banking regulation act, auditor of the bank should state the following in his report. � Balance Sheet and Profit and Loss Account have been

drawn up in the forms ‘A’ and ‘B’ respectively of the third schedule of banking regulation act.


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� He had called for the informations and explanations and same have been given and considered satisfactory.

� Transactions of the bank, which have came to his notice,

have been within the powers of the bank. � The returns received from the offices and branches of the

banks have been found adequate for the purpose of his audit.

� Memorandum Of Changes: Banks have unique system for recording the changes suggested by the auditors during the course of the audit.

Long Form Audit Report

This is a detailed questionnaire formulated by RBI contains the matters required to be reported by Branch Auditors on system and controls. This form has one main questioner which is applicable to all branches and other is additional questioner for specialized branches and also one annexure in respect of large/ irregular/ critical advances. The main questioner has four parts viz Assets, Liabilities, Profit and Loss Account and General informations. All adverse remarks and comments must be with the instances.

A detailed checklist for LFAR is Annexed as Annexur e VI.


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Certification

� Statement of Cash & Bank Balances on 12 specified Dates for

compliance in respect of SLR\CRR.

� Certificate relating to DICGC transactions

� Certificate on Income Recognition and Asset Classification

� Certificate in respect of Subsidy claim under PMRY Scheme

� Certificate of 2% Interest Subsidy claim of Agricultural Advances

� Certification in respect of bank’s claim relating to interest

subvention in respect of rupee export credit.

� Certification for the correctness of the data furnished by the

Branches in the Returns prescribed for computation of Insurance

Premium to be payable to DICGC

� Certificate in respect of implementation of GHOSH

COMMITTEE/JILANI COMMITTEE RECOMMENDATIONS at the

branch level

� Breakup in respect of segment reporting

� Capital adequacy- Basel II and Basel III

� Interest subvention on Housing Loans

� Central sector subsidy for Education Loan

Tax Audit

• To comply with the Sec. 44AB of the Income Tax Act, 1961 and reporting in form 3CA and 3CD.


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Audit Evidence The Auditor should document matters, which are important in providing evidences that audit were carried out in accordance with the basic principles. Working papers will come to the rescue, whenever, at a later date if there is query about any matter or issue relating to the work performed by the auditor. On completion of audit, all working papers must be organized in a file in a proper sequence and must be reviewed by a partner other than the one who conducted the audit of the branch. Please feel free to call on any issue on following Ajay Atolia Partner S.R.Goyal & Co. Chartered Accountants “SRG HOUSE” 2, M.I.Road Opp. Ganpati Plaza Jaipur 302 001, India Tel : +91-141-2362363,2362365 Fax : +91-141-2362487 Email : [email protected] Cell No. + 91- 9829169260

THANKS


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ANNEXURE I

SPECIMEN LETTER OF ENGAGEMENT To, The official who has signed your appointment letter ___________Bank You have requested that we audit the Balance sheet of _______Branches of your Bank as 31st March 2015 and the related Profit and Loss account for the year ended on that date. We are please to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be conducted with the objective of our expressing the opinion on the financial statement. We will conduct our audit in accordance with auditing standard generally accepted in India and with requirements as per your terms in your appointment letter. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statements presentation. However, having regard to the test nature of an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements of financial statements, resulting from fraud, and to a lesser extent error, if either exists, may remain undetected. In addition to our report on the financial statements, we expect to provide you a Long Form Audit Report (LFAR) containing any material weaknesses in accounting and internal control system and other procedures of the bank, which might come to our notice. The responsibility for the preparation of financial statements on a going concern basis is that of the management. The management is also responsible for selection and consistent application of appropriate accounting policies, including implementation of applicable accounting standards along with proper explanations relating to any material departures from those accounting standards. The management is also responsible for making judgments and estimates that are reasonable and prudent so as to give a true and fair view of


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the state of affairs of the entity at the end of the financial year and of the Profit or Loss of the entity for that period. We also wish to invite your attention to the fact that our audit process is subject to “peer review” under the Chartered Accountants Act, 1949. The reviewer may examine our working papers including those relating to your bank during the course of Peer review. We look forward to full co-operation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit. This letter will be effective for future years unless it is terminated, amended or superseded. Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements. For_______________ Chartered Accountants (Signature) (Name of the Member) (Designation) Acknowledge on behalf of _______Bank /Branch by Name and Designation (Signature)


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ANNEXURE II

AREAS TO BE COVERED IN AUDIT PROGRAM ON

BANK AUDIT

S.No. Areas to be covered 1. General Informations Name of Bank Branch, Audit

Team, Duration etc. 2. Current Audit File A File containing photo copy of

appointment letter, circulars and instructions received, formats of various certificates, LFAR and tax audit report.

3. Review replies of letters 4. Verification of Opening Balances 5. Review of Balance Sheet 6. Review of Profit & Loss Account 7. Verification of Income On test basis 8. Interest Analysis 9. Verification of expenditures

specially Salary, Rent and Other Major items.

On test basis

10. Review of all previous reports such as statutory, concurrent, internal, RBI Inspection etc.

11. Verification of Overdue figures 12. Cash Verification 13. Verification of Deposits 14. Verification of Advances As per check list 15. Inter office Reconciliation Review,

Adjustment Entries etc.

16. Review of critical points\ queries raised by audit team.

17. Tax Audit 18. Preparation of LFAR 19. Preparation of MOCs 20. Main Audit Report Drafting.


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ANNEXURE III

SPECIMEN LETTER OF REQUIREMENTS

Dated : _____________ To, _________Bank _________Branch _________Address

Sub: Statutory Audit of your Branch for the year ending on __________ Dear Sir, With reference to the above we have to inform you that we have been appointed as statutory auditor for conducting the audit of your branch for the year ending on________. As discuss with central accounts department, we will commence the audit from -----. We are confident that you will make available the branch returns on arrival of our team. In order to enable us to finalize and furnish our report on the audit of the accounts of your branch, may we request you to get ready the information/clarifications as detailed below and make the same available to our team on its arrival to your branch: - 1. For our scrutiny the following latest reports on Branch Accounts and

compliance by the Branch on the observations contained therein: -

a) Branch Audit Report of Previous Year b) Internal Inspection Report c) All concurrent Audit Reports of the year d) RBI Inspection Report, if such inspection took place e) Limited review reports f) LFAR of Previous Year

2. Please provide us a list of consortium advances. Also provide us the

minutes of consortium meetings held during the year. 3. Please confirm the basis of valuation of stock of stationery in hand as at

the year end and whether this is based on physical verification of stationery items. In case physical verification is conducted before the year-


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end, a statement may be prepared showing reconciliation thereof with the balance as at the year-end after considering further additions/deductions.

4. Please confirm whether other than for advances, there are any matters

involving the Branch in any claims, in litigation, arbitration or other disputes in which there may be some financial implications, including for staff claims, municipal taxes, local levies etc. if so, they may be listed for our verification.

5. Advances (a) Please provide us a list of advances the limits of which are pending for

renewal as on the date. (b) Please provide us a list of settlement and compromises entered into with

the borrowers during the year by the branch. (c) Please also provide us a list of advances accounts of which are closed

during the year otherwise than in normal course of business.

(d) Please also provide us a list of advances rescheduled during the period, along with the sacrifice made by the branch in reschedulement.

(e) Large advances where documentation is pending. (f) List of accounts where valuation is older than 3 years.

6. Details of Fraud cases observed or reported to higher authorities during

last three years. 7. Please provide us a list of advances covered by Govt. guarantee, along

with the date of invocation, if any. 8. Please provide us a list of advances classified as substandard and

accounts upgraded as standard during the year. 10. Please provide us a list of suit filed and decreed account during the year

along with list of Decrees remained unexecuted. 11. Please provide us a list of advances Re-scheduled or Re-negotiated after

commencement of Commercial Production during the year along with complete scheme and approval of the board for the same.


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12. Please provide us a list of Investments held by the branch on the behalf of the Head office. Further if the investments are in the dematerialized form, a certificate from depositary participant should annex.

13. Please keep ready the information’s required in LFAR along with

annexure. 14. Please also keep ready all information required for tax audit & certificate. 15. Please provide us circulars issued by RBI/Head Office during the year

particular relating to advances. 16. Please provide us a list of claims not acknowledge as debts. We are sure that you will keep ready the point-to-point reply of this letter well before arrival of our team at your branch. However, in case you require any clarification then please write to us or contact at phone No.____________ or communicate at fax No. _______. We are sure that you will be ready in all respect by the time our team reaches to get your accounts audited. Please also confirm us about your readiness at the earliest. For_______________ Chartered Accountants (Signature) (Name of the Member) (Designation)


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ANNEXURE IV

Check list for Branch Overview: S.No. Particulars Branch Replies 1 Nature/Type of Branch:

(Whether Forex Branch/ SME Branch/ Agriculture Finance Branch/Service Branch Other)

2 Size of Branch : (Small/Medium/Large)

3 Key Business Figures : Total Deposits (No. of Accounts and amount) Total Advances Fund based & Non-Fund Based (No. of accounts and amount) Net Profit NPA (No. of Accounts and amount)

4 Operating environment (CBS) If migrated to a new environment during the year, if yes, period under migrated environment)

5 Nature of Government business/ other contractual business handled (e.g., pension, tax collection, collection of telephone bills etc.)

6 Various audits carried out at branch, period covered under audit and status of compliance thereof e.g.,

a. RBI Inspection b. Concurrent Audit c. Internal Audit d. I.S. Audit e. Migration Audit f. Stock Audit g. Others

7 Internal Audit Rating assigned : (Poor/Satisfactory/Good/Excellent) Risk rating assigned by the internal auditors/ I.S. Auditors (Low/Medium/High/Very High)


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Checklist on General Internal Control S.No. Control Branch replies

(Yes/No) 1 In case any migration to new application software

during the year, whether duly verified copies of pre-migration and post-migration GLBs, ensuring consistency and integrity of data migrated, are held on records?

2 Whether various critical day-end reports are taken printed and checked for transactional integrity and copies held? E.g.,

a. exceptional reports, b. audit-trails (financial and non-financial) c. consistency – check reports d. access log etc.

(As a sample 12 reports, one from each of the month taken on accounts)

3 Revenue Related Controls :

a. Whether periodical interest-applied/ interest-failure/ interest test-check reports are taken printed, checked for correctness, discrepancies rectified promptly and authenticated copies held?

b. Whether various charges applied reports are taken printed and checked for correctness, periodically?

c. Whether amortization of certain incomes e.g. commission on bank guarantees, LCs etc. is carried out at periodic intervals and checked for correctness?

4 Whether periodical statements received from HO are reconciled?

5 Whether outstanding of drafts payable are monitored regularly and statements from HO Reconciliation Deptt. are reconciled periodically?

6 Whether various entries outstanding in different office account e.g., sundries, suspense etc. are pruned regularly?

7 Whether periodical physical verification of fixed assets, cash and sensitive stationeries, as per banks laid down procedures, are carried out?


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8 Whether material errors and frauds/ suspected/alleged frauds have been discovered at branch and details recorded?

9 Whether staff duties have been rotated, as per bank’s guidelines, at specified periodicity?

10 Whether lease-deed of branch premises is held and valid?

11 Whether effect of MOCs, which are approved by Statutory auditors have been taken on branch records?

Deposits 1 Whether classification (as per bank guidelines) has

been carried out as per prescribed periodicity and charges are applied?

2 Whether overdue term deposits identified by the system and interest provided on them are checked for correctness?

Compliance of Tax Laws 1 Whether deduction of Income Tax, on different

items e.g., salaries, contracts, rent, interest on term deposits etc. are computed by the system? If yes, whether reports for the same are printed and checked for correctness, periodically?

2 Whether guidelines with regards to Service tax are complied with? Whether report for the same is printed and checked for correctness?


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ANNEXURE V

CHECK LIST FOR VERIFICATION OF LARGE ADVANCES

BRANCH:…………… PERIOD:…………..

S.N Particulars Remarks Name of the Borrower and Account No 1 Check whether the branch has complied with the

requirements such as obtaining loan applications, preparation of proposals, grant/renewal of advances, enhancement of limits etc.?

2 Check whether the facility has been granted beyond such delegated powers of the branch

3 If so, whether the same has been reported to the higher authorities

4 Check whether the terms of sanction have been complied with?

5 Check whether all the documentation formalities have been complied with before release of facilities by the branch?

6 Check whether in the cases of corporate borrowers due charges have been registered with the Registrar of Companies?

7 Verify receipt of stock statements, also verified that the follow up action of the branch is adequate?

8 Check whether periodic stock audits have been conducted? Check the latest stock audit report?

9 Check the procedure adopted by the branch for periodically verifying the assets charged to the bank?

10 Verify the account to ensure that there are no frequent overdraws, shortfall in the value of security?

11 Check whether the assets charged to the branch have been adequately insured?

12 Check whether account been classified as per IRAC norms?

13 If not, prepare a detailed working for proposing MOC?

14 Has the branch furnished the relevant information required for the purpose of reporting in LFAR?

15 Check whether the branch has obtained valuation reports?

16 Verify whether there is any compromise proposals/write offs in this account?


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ANNEXURE VI

CHECK LIST OF LFAR BRANCH:………………. PERIOD:…………….

S.NO PARTICULARS REMARKS 1 What is the cash retention limit of the

branch?

2 What is the insurance cover held by the branch for cash on hand and cash in transit?

3 Does the branch have an account with RBI, SBI and other banks? If yes, confirmation of balance from the respective banks

4 Does the branch have any investment? 5 List of accounts of large borrowers having

outstanding in excess of 5% of the branch advances of Rs 2 Crore whichever is less

6 List of large advances where stock audit has not been done during the year

7 List of large advances where documentation is still pending

8 List of advances where renewal has not been completed.

9 List of advances where stock statements have not been received regularly

10 List of cases where the valuation report is more than three years old

11 List of non-corporate entities with advances in excess of Rs 10 lakhs

12 List of major suits filed and other accounts classified as doubtful

13 List of BIFR and other accounts being considered for revival, rehabilitation or settlement

14 Have all credit card dues been recovered promptly?

15 DICGC/ECGC Claims a) Claims at the beginning of the year b) Claims lodged during the year, if any c) Claims settled d) Claims rejected 16 Details of outstanding amounts of


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guarantees invoked and funded by the branch at the end of the year

17 Details of outstanding amounts of letters of credit and co-acceptances funded by the branch at the end of the year

18 Details of outstanding entries in IBIT, if any

19 Details of outstanding entries in sundry Assets and suspense account

20 Details of outstanding entries in sundry deposits

21 Quantum of overdue/matured term deposits at the end of the year

22 List of major items of contingent liabilities (other than constituents’ liabilities such as guarantees, letters of credit, acceptances, endorsements, etc.) not acknowledged by the branch

23 A statement showing the variation in the accounts of interest paid, interest received and other major income and expenses heads between the current and previous years. (Please quote the branch management to give comments/reasons for any abnormal variation).

24 Particulars of fraud, if any, discovered during the year

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