LFAR and Other Important Aspects of Bank Audit Mayur Swadia Chartered Accountant.
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Transcript of LFAR and Other Important Aspects of Bank Audit Mayur Swadia Chartered Accountant.
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LFAR and Other Important Aspects of Bank Audit
Mayur SwadiaChartered Accountant
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Contents
Shifting role of the Auditor. Audit Programme. Profit and Loss Account. Basics of LFAR Posers LFAR Para-wise Ghosh and Gilani Committee Reports
04/19/23 CA Mayur Swadia 2
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Bank Branch Audit is like an IPL – a very short game in which we have to bat like ‘Yusuf Pathan’ and WIN
High quality output in a short period of time
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04/19/23 CA Mayur Swadia 4
Shifting role of the Auditor
Challenge to do quality audit in a limited time frame.
Proper audit planning critical. Quality of audit and value addition –
key issues. All of us must strive to do our best
in the larger interest of our profession.
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Audit Programme
No planning, is planning to fail. Go through last year’s Profit and
Loss Account and Balance Sheet. Carry out comparative analysis. Find out major variations. Probe for major reasons.
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Audit Programme
Go through last inspection, internal audit, concurrent audit, revenue reports and compliance by the branch.
Identify key risk areas for special focus.
Prepare work schedule on the basis of the overall analysis with special focus on identified key areas.
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04/19/23 CA Mayur Swadia 7
Profit and Loss Accounts Existence of system to compute
discrepancies in interest / discount income as well as interest expenditure & timely adjustment thereof.
Discrepancies if material to be reported (MOC to be issued) Existence of system Discrepancies to be checked by branch Findings of Concurrent Audit/Revenue Audit.
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Audit of Profit and Loss Account
Test Check interest calculations. Verify rates of interest and changes
therein. Check interest charge on NPA
accounts Analysis of yield on advances. Test check commission income etc.
– whether as per revenue recognition norms.
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Audit of Profit and Loss Account
Check provisions for expenses. Check depreciation charged correctly. General ledger scrutiny and
reconciliation with subsidiary ledgers. Compare expenses with previous year. Test check major/exceptional expenses. Check the powers of the branch to incur
expenses.
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04/19/23 CA Mayur Swadia 10
Profit and Loss Accounts (Cont’d)
Compliance with Income Recognition Norms.
System of estimation and provision of Interest on overdue / matured term deposits.
Divergent trends in major items of P & L A/c if not satisfactorily explained.
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04/19/23 CA Mayur Swadia 11
Basics of LFAR Why ‘LFAR’? Should it be ‘BCAR’? LFAR is an internal control evaluation
questionnaire. Comprehensive in scope and coverage.
Where as MAOCARO is not so comprehensive
Covers both Balance Sheet and Profit & Loss Account.
Serves as an important check list for audit planning. Make LFAR part of the audit programme.
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04/19/23 CA Mayur Swadia 12
Must Do’s Study the Questionnaire thoroughly. Each answer should be precise. Avoid vague or general comment. Give specific instances of
weakness/shortcomings. Main Audit Report and LFAR are two
separate reports. Qualificatory remarks MUST be part of
the main report.
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04/19/23 CA Mayur Swadia 13
Must Do’s
Main Report is a self contained document and should not contain any references to LFAR.
Should be sufficiently detailed and quantified to enable expeditious consolidation.
Do not make current year’s LFAR a replica of previous year.
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04/19/23 CA Mayur Swadia 14
LFAR is of utmost importance to the management as well as the Central Auditors.
Finalize Statutory Report and LFAR simultaneously.
Should be well drafted. Scope of work carried out should be
clearly specified. Should create an impact on the bank
management about the quality of work carried out.
Must Do’s
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04/19/23 CA Mayur Swadia 15
Mr. CA has taken a housing loan from Bank of NAMO.
Monthly installment (principle + Interest) due on 31st December, 2013 not paid by 31st March, 2014. Whether the account is NPA?
Would it make any difference if the said installment was due on 30/12/2013 or 1/1/2014?
Refreshers…….
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04/19/23 CA Mayur Swadia 16
Term Loans (Posers???) Mr. FCA has taken a term loan from bank
of Italy. Installment for the October-December
quarter debited on 30th December, 2013 Rs. 1 lac (Incl. int. of Rs. 25,000/-
Amount paid by 31st March, 2014 against the same Rs. 95,000/-. Branch Manager has classified the account as a Performing Asset. Your audit assistant has approved the same. Do you have any counter view?
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04/19/23 CA Mayur Swadia 17
Term Loans
Mr. Article has taken a housing loan from a bank. Equated Installments (principal + interest) are payable on a monthly basis. Mr. Article is generally regular in repayment. However, installments for the months of October and November, 2013 could not be paid by 31/3/2014? All the other installments are paid for the year ended 31/3/2014.
Is he OUT??? or NOT OUT???
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04/19/23 CA Mayur Swadia 18
Term Loans
Any loan account where the monthly/quarterly/half yearly/annual installment (principle + Interest) falls due on or before 30th December, 2013 and if the same is not FULLY paid by 31st March, 2014, the account would have to be classified as an NPA for the financial year ending 31st March, 2014.
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04/19/23 CA Mayur Swadia 19
Posers??? A Ltd. Has availed Cash Credit facilities.
Interest for the quarter October-December, 2013 is Rs. 2,50,000/-. Credit during the quarter Rs. 2,45,000/-.
Interest for the quarter January-March, 2014 is Rs. 2,80,000/-.
Credits during the period January-March, 2014 are Rs. 2,79,000/-.
The Branch Manager requests for your valued opinion?
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04/19/23 CA Mayur Swadia 20
Cash Credit
Y Ltd has taken Cash Credit from a bank. Interest debited during the quarter January-March, 2014 is Rs. 50,000/-. No credits in the account for last quarter except one credit entry for reversal for excess charge of commission in the past for Rs. 51,000/-.
HOWZZZTHAT?????
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04/19/23 CA Mayur Swadia 21
Posers??? B Ltd. has a Cash Credit facility (based on
hypothecation of inventory and debtors). The sanctioned limit is Rs. 10 lacs. Drawing power is Rs. 7.5 lacs. Outstanding balance in the account is around Rs. 7 lacs for January-March, 2007. Your assistant has noticed that inventory statement includes dead stock of Rs. 3 lacs and statement of debtors includes non-realizable debtors of Rs. 2 lacs. Hence the actual DP is only Rs. 4.5 lacs. How would you classify the account?
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04/19/23 CA Mayur Swadia 22
Posers???
C Ltd. has CC facilities. The account is healthy and there are no outstanding overdue as at 31/3/2014. On verifying DP calculation, you notice that DP is worked out based on last available stock statement of August, 2013. The account is classified as a Performing Asset. Is it OK?
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04/19/23 CA Mayur Swadia 23
Posers??
D Ltd. again has CC facilities. It is a blue-chip company with strong Balance Sheet. The account is healthy with no overdue outstandings. The limit was due for review on October 1, 2013. However, the same could not be reviewed by 31/3/2014? The account is classified as a PA. How say you?
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04/19/23 CA Mayur Swadia 24
Posers???
Y Ltd. Is a chemical manufacturing concern. The unit is not in operation for 6 months. Inventory of Rs. 20 lacs is carried forward for last six months. Outstanding dues in CC account are Rs. 10 lacs. Account is fully serviced as at the Balance Sheet date. You have noticed that inventory of Rs. 15 lacs had expiry period of 120 days. How would you classify the account?
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04/19/23 CA Mayur Swadia 25
Posers???
H Ltd. Has CC facility of Rs. 100 lacs. The account is healthy. There is overdrawing in the account in the month of January by Rs. 10 lacs for 10 days. In the month of March the account is overdrawn by Rs. 15 lacs for the period 25th March, 2013 to 3rd April, 2014. How would you classify the account?
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04/19/23 CA Mayur Swadia 26
Posers??? Ram Ltd. and Laxman Ltd. are
sister(brother??) concerns. The account of Ram Ltd. has become NPA. The other account is Standard. Laxman Ltd. was sanctioned additional facilities as at the year end. Laxman Ltd. gave a loan to Ram Ltd. Out of the same, Ram Ltd. cleared its outstanding dues of the bank at the year end. Ram Ltd. is classified as Performing asset at the year end. Is it correct?
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04/19/23 CA Mayur Swadia 27
Posers???
M Ltd. is a healthy manufacturing unit with no overdue outstanding in either CC/TL/BPBD account. Fire takes place on 31/3/2024 and all the assets are destroyed. There is no insurance cover. Bank has classified the account as a Standard asset based on the norms. As an auditor, what is your call?
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04/19/23 CA Mayur Swadia 28
Posers??
In the case referred to in the previous slide, assume that the fire takes place on April 1, 2014. Would there be any change in your opinion with respect to classification of the said account as at 31st March, 2014?
What is the date on which the account would become NPA?
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04/19/23 CA Mayur Swadia 29
Bills Purchased/Discounted
X Ltd. Has facilities from Metro Bank Ltd. Cash Credit and Term loans are serviced regularly. Bills account is also regular except for one bill due on 29th December, 2013, which is overdue. How would you classify the various facilities of X Ltd?
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04/19/23 CA Mayur Swadia 30
Posers???
Bank of Vadodara is a listed bank. You are the branch auditor of the bank.
Borrower X has obtained loan against pledge of shares.
The list of shares pledged includes shares of Bank of Vadodara.
Is there any audit objection?
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04/19/23 CA Mayur Swadia 31
Posers???
Robert Ltd. Has availed loan from PQR bank. You are the auditor of the bank.
On scrutiny of the account of Robert Ltd., you notice that wife of the director of the bank has 26% stake in the company. However, she is neither director or employee of the company.
Is there any irregularity on the part of the bank?
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04/19/23 CA Mayur Swadia 32
Posers???
Loan granted against 10% Government of India security. Interest and installments of last two quarters not paid.
Manager has classified the account as NPA.
Interest has been accounted on cash basis.
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04/19/23 CA Mayur Swadia 33
Posers???
X has taken loan against his term deposits?/NSC’s/IVP’s/KVP’s and life insurance policies. Interest has remained overdue for 120 days as 31/3/2014. The branch has recognized the interest income on accrual basis. Is it correct? What would be the asset classification?
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04/19/23 CA Mayur Swadia 34
Posers???
Z Ltd. Is an NPA account (outs principle Rs. 50 lacs + Outs interest Rs. 25 lacs) It has paid Rs. 5 lacs during the year against its overdue loan. Bank has accounted the same as income for the year. Z Ltd. Had requested to settle the same against outstanding principle amount. What is your call?
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04/19/23 CA Mayur Swadia 35
Posers??
A Ltd. Has a CC facility with bank against inventory. Facility is for Rs. 50 lacs. Inventory is Rs. 100 lacs. Sundry creditors against goods are Rs. 50 lacs. Margin specified is 25%. What would be the DP?
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04/19/23 CA Mayur Swadia 36
Coverage Cash and Bank Balances. Money at call and Short Notice. Investments. Advances Other assets. Deposits and other liabilities. Profit and Loss Account. General. Specialized Branches.
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04/19/23 CA Mayur Swadia 37
Cash balance which vary significantly from the limit fixed by controlling authorities.
Excess balance reported to the controlling authorities.
Adequate Insurance Cover. Joint custody. Refer Instructions, Key Movement Register. Periodic checking of cash balance. Ascertain procedure and observe during
audit General scrutiny of cash book.
Cash
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04/19/23 CA Mayur Swadia 38
Balance confirmation. Report differences. Observations on differences.• Cash transactions remaining
unresponded (very serious observation).• Revenue items requiring adjustment /
write offs. (issue MOC / Qualify report)• Old outstanding balances remaining
unexplained and age wise analysis.
Balance with RBI, SBI and other Banks
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04/19/23 CA Mayur Swadia 39
Item requiring special attention of management.
Reconciliation not done / procedure not followed.
Material amount unadjusted for a long time.
Items affecting financial statements may be reported in the Statutory Report.
Balance with RBI, SBI and other Banks (cont’d)
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04/19/23 CA Mayur Swadia 40
Money at call and Short Notice
Report even if a single transaction. Confirm that the transaction is as
per the instructions/guidelines. Unauthorized deposits and excess
of authorized deposits to be reported.
Normally not applicable to branches.
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04/19/23 CA Mayur Swadia 41
Investments
Physical verification on behalf of H.O. Ensure that income earned on such
Investments is not accounted by Branch. Matured or overdue investments not
encashed. Guidelines of RBI for transaction and
valuation followed. Examine evidence of securities not in
possession of the branch. Generally not maintained at branch level.
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Advances
Examination of all large advances and a test check of other advances
Questionnaire in four Broad categories Credit Appraisal Sanctioning / Disbursement Documentation Review / Monitoring / Supervision
Higher of advances exceeding Rs. 2 crores or 5% of the advances of the branch needs to be individually audited.
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Credit Appraisal Opinion is sought on compliance of
Procedure / Instruction of controlling authorities
Whether loan application in prescribed format.
Whether intelligent appraisal done by competent person.
Adequate appraisal documentation. As per the old format required to report
on major shortcomings in credit appraisal.
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04/19/23 CA Mayur Swadia 44
Sanctioning / Disbursement
Credit facilities beyond the delegated authorities.
Are such cases promptly reported to higher authorities?
Verify control returns. Advances disbursed without compliance
of terms of sanction (give details) eg: Necessary funds not brought in by the
borrower.
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04/19/23 CA Mayur Swadia 45
Sanctioning / Disbursement (Cont’d)
Net worth of the guarantor not furnished.
Unit not inspected. End use of the funds not verified. Borrower continuing to have
operations with other Banks.
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04/19/23 CA Mayur Swadia 46
Documentation Instances of credit facilities released
without execution of all the necessary documents? Verify legal status. Government recognized status. Type of Loan. Securities.
Instances of deficiencies in documentation, non registration of charge etc., (give details)
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04/19/23 CA Mayur Swadia 47
Documentation (Cont’d) Some instances of deficiencies
Documents left blank. Overwriting in documents, change in hand
writing, incomplete documents. Joint documentation in case of consortium
advance. Documents inadequately stamped. Documents time bared.
Additional reporting requirement on advances against lien of deposits.
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04/19/23 CA Mayur Swadia 48
Review / Monitoring / Supervision
Periodic review of advances including balance confirmation / acknowledgement of debts etc. Analysis of such accounts overdue for review.
System of receipt of Stock / Book Debt and other statement and scrutiny thereof.
System of obtaining Stock Audit Report. Audited accounts as per RBI guidelines
from non corporate entities with limit beyond Rs.10.00 lacs.
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04/19/23 CA Mayur Swadia 49
Review / Monitoring / Supervision (Cont’d)
Physical verification of securities as per procedure laid down?
Deficiencies in value of securities, frequent / unauthorized drawings, inadequate insurance etc.
New clauses relating to lease finance activities and credit card dues.
Clauses relating to Prudential Norms. Clause relating to DICGC. (modified
formats)
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04/19/23 CA Mayur Swadia 50
Review / Monitoring / Supervision (Cont’d)
Compliance by Branch with Recovery Policy / in respect of Compromise / Settlements / Write off. Details of such cases where waiver / write
off >50 lacs.
Major deficiencies in credit review / monitoring / supervision.
New Clause relating to guarantee and letter of credit (clause 5 (e).
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04/19/23 CA Mayur Swadia 51
Other Assets
Stationery and Stamps. [Clause 6(a)] Comment on existence and
compliance with Internal control system over valued stationery with regard to issue and custody.
Instances of missing or lost items of stationery to be given (new clause).
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04/19/23 CA Mayur Swadia 52
Other Assets (Cont’d)
Suspense Accounts / Sundry Assets. Critically Scrutinize these accounts. Details and clarification in respect of old
unadjusted entries be obtained. Balances which in your opinion are not
recoverable. eg: Advance against travelling. Payment to merchant establishment. Legal expenses Dividend / Interest paid.
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04/19/23 CA Mayur Swadia 53
Other Assets (Cont’d)
Unusual items in these accounts be reportedeg: Cash in transit • Difference in balancing.• Difference in cash.
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04/19/23 CA Mayur Swadia 54
Deposits
Compliance with guidelines in respect of inoperative accounts.
Instances if not complied with the guidelines.
Seek clarification for unusual movements after balance sheet date.
Quantification of Overdue / Matured term deposits at the year end.
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04/19/23 CA Mayur Swadia 55
Bills Payable / Sundry Deposits / Contingent Liabilities
Details of old items to be reported. Unusual items and matured
withdrawals or debits to be reported along with their nature and amounts.
List of major items of contingent liabilities other than Guarantees, LCs, Endorsements, Acceptances etc.,
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04/19/23 CA Mayur Swadia 56
General
Proper maintenance of manual Books of Accounts.
In respect of Computerized Branches number of new areas prescribed.
Inquire about Banks policy Compliance of the policy Internal Control & Security measures. Backups and Disaster Recovery Plans
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04/19/23 CA Mayur Swadia 57
General (Cont’d)
Suggestions for the improvement in the system
Reconciliation of control and subsidiary records.
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04/19/23 CA Mayur Swadia 58
General (Cont’d)
Inter Branch Accounts, (Very Important area) Understand the system. Daily Communication to HO/Designated
cell statement of debit / credit transaction. Agreement between balance in HO
Account Branch Accounts. Old outstanding debits in the Head Office
Account.
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04/19/23 CA Mayur Swadia 59
General (Cont’d)
Expeditious compliance to communication from HO / Designated cell (Report unresponded entries).
Old / Large outstanding transaction at debits as at year end.
Audit and Inspection.
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04/19/23 CA Mayur Swadia 60
General (Cont’d)
Particulars of frauds discovered during the year together with your suggestions to minimize the same.
Window dressing to be reported eg. Large deposit at year end. Under utilised facilities converted
in Deposits. Unsecured loans shown as secured.
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04/19/23 CA Mayur Swadia 61
General (Cont’d)
Maintenance of Fixed Assets Records. Documents of title in relation to
branch Non compliance with Ghosh and
Jilani Committee recommendations.
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04/19/23 CA Mayur Swadia 62
GHOSH COMMITTEE RECOMMENDATIONS WERE FOR
Improvement in day to day administrative functions.
For ensuring safety of assets. Compliance with the let down policies
and procedures. Accuracy and completeness of
accounting and other records. Proper segregations of duties and
responsibilities of the staff. Timely prevention and detection of
frauds and malpractices.
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04/19/23 CA Mayur Swadia 63
Ghosh Committee Recommendations
Recommendations divided in to four groups
Group-A: Recommendations, which have to be implemented by the banks immediately.
Group-B: Recommendations requiring Reserve Bank of India’s approval.
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Recommendations
Group-C: Recommendations requiring approval of Government of India.
Group-D: Recommendations requiring further examination in consultation with IBA.
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04/19/23 CA Mayur Swadia 65
JILANI COMMITTEE
Working group to review the internal control and inspection and audit system in banks.
Contains 25 questions and to indicate the answer as either “Implemented “ or Not Implemented”.
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04/19/23 CA Mayur Swadia 66
GILANI COMMITTEE RECOMMENDATIONS
Broadly divided into three categories Dealing with the EDP environment
in the banks. Dealing with the inspection/Internal
audit system in the bank. Dealing with other miscellaneous
aspects of functioning of a bank.
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Thank you