Bank Branch Audit - bangaloreicai.org · the previous year with the current year‟s NPA statement. Comparison of the NPA‟s with the previous years MOC and the RBI inspection report

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Seminar on

“Bank Branch Audit”

Presented by:

CA P.Manohara Gupta

Partner

DAGLIYA & CO.,

Chartered Accountants

BANGALORE

organised by :

BANGALORE Branch of SIRC of ICAI

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How is Bank Branch Audit

different ?

Complex & voluminous transactions

Availability of limited time

Audit in computerised environment

Risk of frauds & errors

Numerous Reporting & Certifications

By CA P.Manohara Gupta

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PLANNING

&

DOCUMENTATION

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• Complete the acceptance formalities

• Communicate with previous Auditor

• Study HO Annual closing instructions to Branches or

guidelines on Branch Audit

• List out the Returns and Certificates required to be

verified and certified by the Branch Auditors.

• Issue letter of Engagement to the branch; include

obligations and responsibilities for issuing all

certifications, LFAR and other reports.

Contd…

Preliminary work on receipt of Appointment:


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• Letter to the Branch in-charge prior to the commencement of the audit.

• Important information to be sought in the letter:

Particulars of nature and size of the branch

Latest list of advances with asset classification

Previous audits conducted and status of compliance with the observations in those reports

List of SMA accounts generated in last three months

List of fresh advances sanctioned/ disbursed and relevant files

List of accounts restructured or under resolution plan


Preliminary work on receipt of Appointment:

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Audit Tools • Maintain record of : -

Appointment Letter and acceptance

Letter of introduction

Key contact details

• Key circulars and instructions received from the bank regarding

branch audit – „accounts closing instructions‟

• Keep soft copies of Formats of audit reports / Certificates

• GN on Bank audit (ICAI) & recent RBI circulars (especially

master circulars on prudential norms on advances and capital

adequacy)

• Ready reckoner for NPA identification

• Interact with the branch to get confirmation of availability of duly

verified and authenticated copies of key statements, returns,

reports, etc.


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• Study size of the branch and nature of its activities

Comply with SA 310 - Knowledge of Business

• Define scope identifying key areas

• Set materiality levels- SA 320

• Decide sample size keeping in mind minimum

requirements like 5 % of the advances or Rs 2 Crores

whichever is less-SA-530


Scope & Materiality:

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• Documentation (SA- 230)

• Auditors Responsibility for Fraud and error (SA- 240)

• Audit evidence (SA- 500)

• Audit Planning (SA- 300)

• Risk Assessment-(SA-315)

• Auditors Response to assessed Risk-(SA-330)

• Audit materiality (SA - 320)

• Analytical procedures (SA - 520)

• Audit sampling (SA - 530)

• Representation by management (SA - 580)

• Using the work of another Auditor (SA- 600)

Standards on Auditing


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Documentation:

• It is fundamental that any audit needs to be carried

out in accordance with Standards on Audit (SA).

• An Auditor needs to comply with SA 230 in

documenting the audit procedures adopted by him in

conducting the audit and the results obtained by him

in order to form his opinion.

• Bank Audit is no exception.


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Pre Audit Documentation :

•Prepare Audit plan & Programme to ensure

completion of the audit with in the time schedule- SA

300

•Prepare Checklist of Various Reports and

Certifications and work allocation among the staff.

•Compile important and latest RBI Master Circulars

bearing on Branch Audit.

Documentation


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During Audit Documentation :

•Document the features of CBS adopted by the Bank

and control tests carried out.

• Obtain list of Exception Reports generated by the

system and out come on review of such Reports.

• Maintain an „Advance noting sheet‟

• Retain the work sheets of documents verified by the

audit staff, duly initialed and dated; marking the same

in the checklist along with the name of team member(s)

•Ensure that relevant back up papers are taken for the

MOCs issued, Remarks/ Comments made

Documentation


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Documentation • Obtain and file various other supporting documents

taken from the System and/or the Branch

Management.

• Carryout analytical reviews and obtain explanations

from Branch Management for significant variations and

comply with SA-520.

• Compile a list of points discussed with the Branch

Management before the closure of audit and finalization

of audit report.

• Obtain Letter of Representation from the Branch

Manager in terms of SA 580

Contd…


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Documentation • Checklist/guideline for the conduct of the audit.

• Takes care of the LFAR requirements also.

• Important checks suggested (analytical reviews): Comparison of each of the NPA account as at the end of

the previous year with the current year‟s NPA statement.

Comparison of the NPA‟s with the previous years MOC and the RBI inspection report u/s 35.

Major Advances to be noted - this takes care of the requirements for the LFAR.

LFAR Questionnaire check list.

Back up papers for each of the certificate issued.


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Management Representation

SA 580 • Major confirmations to be obtained in the letter:

Observations of all the audit reports rectified

Compliance with Accounting Policies of the Bank

Compliance with all RBI circulars issued

Impairment of assets

Confirmation as to provision against all known losses

Confirmations with respect to Frauds/misappropriations during the year.

All claims against the branch and other contingent liabilities are duly disclosed

Penalties paid during the year.

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VERIFICATION

of Returns & Certifications

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• Various Returns from branches are required to be

compiled for disclosures in the Balance Sheet.

• Returns for compiling the data to be furnished in the

Balance sheet in compliance with:

RBI Disclosure requirements

Accounting Standards

Returns & Certificates required by the Bank‟s

Management

Certificates required by the Bank for submitting to

Government Authorities.

Verification of other Returns


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Verification of Certificates

• Verify the records and data relating to various

certificates required to be given.

• Ensure to keep proper working document for each

certificate data verified.

• Ensure to issue ‘NIL’ certificates where there are no

such events/ transactions.

• Contd…..


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Verification of Certificates

• While verifying the Returns & Certificates SBA‟s

should ensure to comply with „GN on Reports and

Certificates for Special Purpose’ issued by ICAI.

• List of certificates required by the Bank would be

given in the Annual Closing Manual issued by the

Bank or in the appointment letters.


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Returns for disclosure in

compliance with AS

• Segment Reporting –Retail & Corporate banking

• Return on lease commitments

• Return relating to Related Party Transactions (RPT)


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Returns & Certificates as per RBI

disclosure requirements:

• ALM reporting

• Movement of NPAs

• Provision for Un-hedged foreign currency exposure

• Sector wise lending

• Certificate relating to credit/ deposit ratio.

• Statement of accounts Re-structured/ Re-scheduled/

Re-negotiated relating to stressed accounts.

• Projects under implementation.

Contd…. By CA P.Manohara Gupta

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Returns & Certificates as per RBI

disclosure requirements:

• Certificate on Unhedged Foreign Currency Exposure in case

of Borrowal having exposure of Rs.1 crore or more.

• Certificate on exposure to sensitive sectors .i.e. exposure to

Capital Market, Infrastructure & Real Estate Sector.

• Certificate on Capital Adequacy

• Reporting on compliance with SLR requirements (12 odd

dates)

• Report about serious irregularities requiring immediate

action


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Certificates for submitting to

Government Authorities • Certification of technology up gradation fund scheme (TUFS) – non SSI

textile centre.

• Certificate relating to recoveries in claim paid accounts under Small

Loans Guarantee Scheme 1971/Small Loans (SSI) Guarantee Scheme,

1981.

• Certificate Central sector interest subsidy scheme.

• Certificate for agricultural interest subvention claim @2% for residual

period of repayment of the loans disbursed during FY.

• Certificate for agricultural interest subvention claim @2% for

disbursements made during FY.

• Certificate for additional interest subvention (Incentive @3%) for prompt

repayment for short term production


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Returns & Certificates required

by Bank’s Management

• Certificate of cash and bank balances.

• Certificate relating to MOC entries of the previous years being

accounted for.

• Certification for advances to infrastructure project and income

generated thereon.

• Certificate of advances exceeding Rs.10 Crores.

• Certificate for Gold Stocks held for Sale of Gold/Metal Gold

Loans.

• Certificate for Gold Coins Held.

• Certificate for Gold Deposit Scheme.


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• Capital Adequacy is calculated based on:

1. Fund Based exposures

2. Non Fund Based Exposures &

3. Un-availed limits both under FB & NFB

• Classification of borrowers is vital aspect.

• Different Risk weights are assigned based on LTV

Ratio. Hence security value is important.

• Jotting Sheets generated by the system needs to be

reviewed by the Branch Auditors.

• Issue MOCs for any discrepancy noticed.

Verification of Basel III


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• Any items where accrual system of accounting not followed (AS-9)

• Prior period and extra-ordinary items (AS-4)

• Contingencies and events occurring after balance sheet date (AS-5)

• Provision for retirement benefits (AS-15)

• Segment-wise reporting(AS-17)

• Lease accounting(AS-19)

• Related party disclosure(AS-18)

• Impairment of Assets(AS-28)

ICAI Regulations-Adherence to

Accounting Standards


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REPORTING

(Incl. LFAR)

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Audit Report

• Audit Report Format (as prescribed under

the Banking Regulation Act, 1949).

• Generally, the specimen format of the

Audit Report provided by the Bank.

• All Standards on Auditing (SA) for the

conduct of the Audit and Issue of Audit

Report equally applicable to Bank Audit.

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Auditors Report • Reporting format pursuant to revised SA 700

• Discuss all audit findings with the Branch Manager

• Comply with SA - 260 wherever audit report is

qualified- Communications with those charged with

governance.

• To bring out clearly impact of qualifications on

revenue, assets and liabilities, item-wise and

cumulative impact

• Non-adherence to Accounting Standards


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Reporting & MOC

• Study and understand the MOC format designed by

the Bank

• List out number of MOCs and amount involved in the

Audit Report.

• Ensure that matters reported in LFAR having impact

on asset classification or on financial statements are

duly covered by MOCs

• Ensure to give proper explanatory note is given for

each entry appearing in MOC


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LFAR & MOC • Discuss all audit findings with the Branch Manager

• Ensure that matters reported in LFAR having impact

on asset classification or on financial statements are

duly covered by MOCs

• Some Banks have introduced a system of changing

asset classification in the Credit Information Reports

itself instead of issuing separate MOC.


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Objective of LFAR

• Important inputs about the health of the bank to the Regulator

• To ensure uniformity in audit of all banks.

• Structured approach with focus on all critical areas of banking operations

• Focus on systems, controls, practices, procedures, risk management practices in the banks.

• Highlights critical areas and issues:

To the Management; and

To the Regulators.


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Status of LFAR

• LFAR is an independent report to highlight any

weaknesses to the Management.

• It is neither an Annexure to the Audit Report nor it is a

substitute.

• Should not make any reference in the Audit Report to

the comments made in LFAR

• Any adverse comment made in LFAR need not

necessarily result in qualification in the Audit Report.

• Branch Auditor should use his professional expertise

and judgement in deciding the audit qualifications.

• It is preferable to draft both LFAR and Audit Report

simultaneously.


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Features of LFAR

• Different formats for Branch LFAR and Whole Bank

LFAR.

• Branch LFAR is in a Questionnaire form

• Branch LFAR is designed to cover entire branch

operations.

• SCA‟s would review branch LFAR‟s during

consolidation process and for drafting Whole Bank

LFAR.


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• Where any of the comments made by the auditors in

their LFAR is adverse, they should consider whether

a qualification in their main report is necessary.

• A comment in LFAR in lieu of issuing MOC should

be strictly avoided.

LFAR Points to be considered


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Cost of deposits and yield on advances needs to be

analysed while answering clauses in Part III of LFAR.

Inter Branch reconciliations

Any Frauds particulars discovered during the year

Any possible window dressing of borrower accounts

Adequacy of data security , storage , back up , disaster

recovery plans & other internal control measures

LFAR Check Points


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LFAR CHECK POINTS

CASH

• Whether Cash Balance is within the limits prescribed

by Controlling Authorities.

• Regular reporting of Excess Cash Balance

• Insurance for Cash-in-custody and Cash-in-Insurance cover available in respect of cash

• System for Disposal of Soiled Notes, Missing Tokens,

Stapling of Notes etc

• Verification of cash balance in ATMs & Extension

counters , if any


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Balances with RBI, SBI and

Other Banks:

• - Verify Balance Confirmation Certificates and

Reconciliation Statements, in case of difference.

• - Analyze Pending/ Outstanding entries in Reconciliation

and Explanation to be obtained from the Branch.

• - If there are any revenue entries pending in

reconciliation which require Write Off – the same should

be reported in LFAR.

• - If there are pending entries in Reconciliation Statement

outstanding for a period of more than 6 months, specific

details of such pending entries should be given in LFAR.


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INVESTMENTS

Physical verification of Investments ,if any held by

branches on behalf of Head Office

Note: Branches are not permitted to make any kind of

investments. All investment portfolio of the bank as a whole is

carried out by Treasury department at Central Office. Branches

may hold securities on behalf of Treasury Department. In such

case physical verification has to be carried out and certificate

should be sent to Central Office/ concerned Statutory Central

Auditor.

LFAR CHECK POINTS contd…


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LFAR CHECK POINTS

ADVANCES

Credit Appraisal

Sanctioning / Disbursement

Documentation

Review/Monitoring/Supervision

Guarantees & Letter of Credit

Restructuring & Rescheduling of borrowers A/c


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LFAR CHECK POINTS

OTHER ASSETS

Stationary & Stamps

Suspense Accounts / Sundry Assets

LIABILITES

Deposits

Other Liabilities like bills payable, sundry deposits

etc.,

Contingent Liabilities


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LFAR CHECK POINTS

PROFIT & LOSS ACCOUNT

Verification of Charges-ensure all outstanding

exp are duly provided for.

Income recognition norms prescribed by RBI

Depreciation

Any divergent trends in major areas of income &

expenditure (Variance Analysis)


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LFAR on Computerised environment

“ Detailed audit checklist/procedures for audit in a computerised bank branch are listed on folios 133 to 142 of the Comprehensive Guide on Information Systems Audit issued by the ICAI”

1. Whether hard copies of accounts are printed regularly?

2. Indicate the extent of computerisation and the areas of operations covered.

Contd…


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“Are the access and the data security measures and other internal controls adequate?” (Environmental ,Physical access and logical access controls)

• Major checks:

Transferred, retired or resigned users need to be deleted

Check that more than 3 unsuccessful attempts results in unauthorised access.

Time for password duration should be restricted to branch hours

Root passwords of the server need to be enclosed in a sealed envelope.

Contd… .


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Whether regular back-ups of accounts and off-site storage are maintained as per the guidelines of the controlling authorities of the bank?

Whether adequate contingency and disaster recovery plans are in place for loss/encryption of data?

• Major checks: Designated system administrator responsible for

daily backups.

Onsite and offsite backups.

Backups to be in a fireproof cabinet.


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Comments in LFAR

Following types of general comments in the LFAR

should be avoided:

• Loan against Bank deposit sanctioned beyond

discretionary power of The Manager (Banking

Operations)/Branch Manager.

• Installments are not recovered in 17 Housing loan

accounts for long time.

• Stock statements are not obtained in several cash credit

accounts through out the year.

• 24 limits have expired and not renewed.


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Case Study

Following comment is made in LFAR:

“X Ltd was sanctioned a CC limit of Rs 60 lakhs, which has

expired on 5.3.2018. But the outstanding in the account is

Rs.137.00 lacs as on 31.3.2018 on account of permitting

excess drawings by way of adhoc limits through out the year.

The limit has been increased to Rs.1.00 crore by the

Sanctioning authority on 19.3.2018. Documents for the revised

limits are not obtained as on 31.3.2018 till the date of audit.”

This is a clear case for issuing MOC instead of making a

comment in LFAR.


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OTHER MATTERS…

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Additional areas applicable to

specialised Branches

• Branches dealing with Foreign Exchange transactions

• Branches dealing with large advances. Total advances

exceeding Rs 100 Crores

• Branches dealing in NPAs ie., Asset Recovery

Management Branches.

• Service branches- dealing in clearing house

operations


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Annexure for Large Branches

• Branch Auditor needs to attach data in structured

format relating to advances of Rs 2 Crores and above

• This data should be prepared by the Branch Manager

• Branch Auditor is not required to sign these data

formats but is expected to review to ensure that the

information furnished is proper and does not

contradict with his findings


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Compliance of Ghosh & Jilani

Committee recommendations

• Ghosh Committee has made recommendations with

regard to action taken by the branch to prevent frauds

and malpractices.

• Jilani committee has made recommendations with

regard to action taken by the branch on internal

control issues, inspections and audit compliances.

• Implementation status of above recommendations

needs to be verified by the branch auditor and report.


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Mitra Committee recommendations

• Statutory, Internal and Concurrent Auditors of the banks are now required to:

“to specifically report, simultaneously , to the Chief

Executive of the bank and Central Office of the Department of Banking Supervision, RBI, Mumbai, any matter susceptible to be fraud or fraudulent activity or any foul play in any transactions.

Any deliberate failure on the part of the auditor should render himself liable for action.”


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Expectations

• Comments in LFAR having bearing on asset

classification should be covered in MOC.

• Explanatory note to entries in MOC with reasons

would help the Bank and Central Auditors.

• LFAR observations and MOC entries should be

discussed with the Branch Manager.

• Ensure that all Returns/ certificates prescribed are

prepared including NIL Returns and signed.


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Risk Relationship between Risk and Awareness: Taking risk is not in itself a problem but the ignorance of the potential consequences is an entirely different matter.


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Risk mitigation:

Risk due to accident mitigated by wearing a head gear (helmet)

Risk due to accident was not mitigated by wearing a head gear (helmet) – lead to fatal injury


How do we deal with Risk? • By Risk Mitigation

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Future challenges

• Broad based Quality Review Board and /or NFRA

would monitor audit profession.

• CAs would be under deep scanner

• Branch Audit System may go away unless we give

value addition to the Management

• We should raise to the occasion and meet the

challenges, if you have strength! or Magic Stick


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Parting thought

“To err is human but when the eraser

wears out before the pencil you are

overdoing it”


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THANK YOU
