LFAR and Other Reporting Requirement - PuneICAIpuneicai.org/wp-content/uploads/2015/03/session-3B.pdf · LFAR and Other Reporting Requirement Statutory Audit of Branches of Nationalised

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LFAR and Other Reporting Requirement

Statutory Audit of Branches of Nationalised Banks

18.March.2014

Pune Branch of WIRC of Institute of Chartered Accountants of India

DisclaimerThe views expressed in the presentation are mypersonal views and should not be construed to bethe views of ICAI or WIRC or my firm.

No representations or warranties are made by ICAI ,WIRC or my firm with regard to this presentation.

These views do not and should not be considered asa professional advice.

This presentation should not be reproduced in partor in whole, in any manner or form, without ourwritten permission.

2M/s. Dhananjay J. Gokhale & Co., Chartered Accountants

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Objectives

• Statutory Audit Report• LFAR• Tax Audit Report• Other Certifications


Statutory Audit Report

• Addressed to whom?– Statutory Central Auditors of the Region /

Zone

• Deliverable– Similar to any other statutory audit report

wherein auditor comments on True and Fairview of the financials of the branch

– Compliance of Accounting Standards to bespecified

– Qualifications / Disclaimers to be givethrough MOCs and / or in the report


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LFAR

• Purpose?

– An effective tool for auditors to keep themanagement of the bank informed aboutimportant matters arising out of statutoryaudit


LFAR

• About LFAR ......– Last revised format was issued by Reserve

Bank of India for FY: 2002-03– ICAI issued guidance notes for conducting

statutory bank audit– Revised format question answer format

retained for branch audits though forRegional Office & Head Office in narrativeform

– Branch is responsible for compilation ofinformation required for LFAR


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LFAR

• Precautions to be taken– Have adequate back up papers in working

paper files with required Representations– LFAR to be signed by the branch manager

too– LFAR and statutory audit report to be sync

with each other especially w.r.t adversecomments and qualifications

– Write descriptive answers instead of Yes / No/ Not Applicable, along with factual detailsand quantification where ever possible


LFAR

• Users of LFAR– Management of the Bank– Statutory Central Auditors– RBI Auditors


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You can please some of the people some of the time…

But you can’t please all of the people all of the time.


Overview of LFAR ... AssetsParticulars Check Points

I. 1. Cash

Significantly excess cashbalance

1. Check Retention Limits for MainCash and ATM Cash

2. Verify the limit vis-à-vis closing cash balance

3. Report the datesInsurance Cover for Cash at branch / Cash-in-Transit

1. Verify the Insurance Policy w.r.t. Adequacy of insurance cover with reference to Cash Retention Limit

2. Report excess insurance coverJoint Custody of Cash 1. Review effectiveness of joint

custody of Cash Vault / ATM

Verification of cash at periodic intervals

1. Refer Bank’s internal policy2. Check adherence to the same

M/s. Dhananjay J. Gokhale & Co., Chartered Accountants

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2. Balance with RBI, SBI and Other Banks

Balance Confirmation 1. Obtain balance confirmationsReview of ReconciliationStatement

1. Review reconciliation process andits consistency through out theyear

Any special Observations 1. Review the reconciliation itemscompelling MoCs and specialattention items

2. CFS Report of SBI Group


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3. Money at Call and at short Notice

Whether “branch” has keptanytime during the year

1. Generally not observed in PSUBank’s Branches (applicable toTreasury Department)

If yes, whether guidelines complied in this regards

1. If observed, verify compliance withHO guidelines issued in thisregards


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4. Investments – Branches in India

Whether held on behalf ofHO ?

1. Investments held in physical form2. Physical verification is to be done

and certificate is required to beissued

Interest income, transferredto respective department?

1. Frequency and mode of incomereceipt needs to be verified withreference to HO guidelines

Investment / Interest overdue and not received?

1. To be reported with details of no.of days for which interest isoverdue and / or received delayed

Compliance with Guidelines of RBI

1. Reference to Master Circular ofInvestments needs to be done


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5. Advances

Credit Appraisal

In your opinion, has thebranch generally compliedwith the procedures/instructions of thecontrolling authorities of thebank regarding loanapplications, preparation ofproposals for grant /renewal of advances,enhancement of limits, etc.,including adequateappraisal documentation inrespect thereof.

1. Specify the test data, i.e., theaccounts reviewed / verified byyou

2. Refer Credit Policy of the Bankalong with authority matrix

3. Opinion about adherence withLoan Application / Preparation ofProposal / Review

4. Prepare and attach separateannexure detailing discrepancies,account-wise


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5. Advances

Sanctioning and disbursementFacilities sanctionedbeyond delegated authority

1. Refer Credit Policy and authoritymatrix

Disbursement withoutcomplying with terms andconditions

1. Refer terms and conditions andmoratorium period given if any forcompliance

Acceptance andcompliance with Sanctionletter

1. Signatures of the borrower / co-borrower and guarantor required

Disbursement withoutexecuting loan documents

1. Partially filled up / documentsexecuted blank


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5. Advances

Sanctioning and disbursementDeficiencies inDocumentation

1. Adequacy of stamp duty withreference to state laws

Marking of lien on BankDeposits

1. Lien marking physically and insystem

2. System of renewal of such FDRsReview / Monitoring / SupervisionPeriodic Review / BalanceConfirmation / Letter ofAcknowledgement of Debts

1. Blank undated AoD2. AoD to be obtained as per HO

PolicyScrutiny of Stock & BookDebts Statements / OtherFinancial Statements

1. Review system of calculation ofDrawing Power vis-à-vis financials

2. Maintain test data records


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5. Advances

Review / Monitoring / SupervisionStock Audit Reports 1. Review stock audit reports on

sample basis with special thruston adverse comments

Non-corporate entities withlimits beyond Rs.10 lacs,Audited as per RBIguidelines

1. Compliance with regulation to bereviewed

Inspection / Verification ofsecurities charged to Bank

1. Verify Inspection Register /Inspection Reports for complianceand adverse comments


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5. Advances

Review / Monitoring / SupervisionDeficiencies observed byAuditors in value of security/ Insurance Policies /frequent overdrawingincluding against clearing,etc.

1. Adequateness and risk coverageto be verified

2. Instances of frequent overdrawingincluding against clearing to bespecified

IRAC Classification ofAdvances

1. System of (auto-stamping) auto-identification and marking of NPAs

2. Classification and reporting of ofAdvances

3. Lodgment of claims for DICGC /ECGC (in chart format), etc.


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5. Advances

Review / Monitoring / SupervisionOther major deficiencies 1. Obtaining of valuation report w.r.t.

NPA accounts once in three years,“unless circumstances warrantshorter period”

2. Compliance with recovery policyand details of compromise /settlement / w/off cases withamount w/off in excess of Rs. 50lakhs

3. Separate Annexure to be preparedgiving account-wise instances ofmajor deficiencies


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5. Advances

Review / Monitoring / SupervisionCoverage of Advances 1. Annexure to LFAR for large

advances account (IFB / Overseas– 5 cr or 5% of Advance & Others– 2 cr or 10% of Advance, whichever is lower)

Provision on Advances “Whether appropriate provisionstowards advances have been madeas per the RBI norms, AccountingStandards and generally acceptedaccounting practices and to thesatisfaction of the auditor (Refersection 15 (2) (iii) of the BankingRegulation Act, 1949)”


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5. Advances

Guarantees / Letter of credit / Letter of ComfortGuarantees invoked andfunded by branch

1. Verify the correspondence andGuarantees paid and also forclaims lodged for BG invoked

2. Verify the BG outstandingLCs invoked and funded bybranch (including co-acceptances)

1. Review LCs devolved2. Verify the LCs outstanding and

effect of partially utilised LCs to beverified

No mention of LoC (Letterof Comfort) in this clause


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6. Other Assets

Stationery and Stamps

Internal Control overReceipt / Custody /issuance of Security Forms& Stamps

1. Review the system of control andcustody over security forms

2. Verify effective maker / checkercontrol over issuance

3. Special attention to be given as it’sa fraud prone area

Missing / Lost Items 1. Give list of missing / lost itemsalong with reasons, if any

Suspense Account / Sundry AssetExpeditious clearance ofitems / Year-wise break-uprequired to be given

1. Age-wise and item-wise jotting withappropriate narrations to be obtained


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6. Other Assets

Suspense Account / Sundry AssetUnusual Items /Withdrawals through thisaccount

1. Ledger scrutiny of yearly ledgeraccount to be done in the view ofpossibility of teaming and ladingand other transactions with malafide intentions


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Overview of LFAR ... LiabilitiesParticulars Check Points

1. Deposits

Conduct / Operations in in-operative A/Cs

1. Controls over marking andunmarking of inoperative accountto be reviewed and tested

Unusual moment in depositaccounts at year-end

1. Abnormal increase / decreasebefore and after year-end to beverified and clarifications thereofto be obtained

Overdue / Matured TDRs atthe year-end

1. Policy of the bank to be reviewedalong with appropriate mention ofthe same in the account openingform to be verified


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Overview of LFAR ... LiabilitiesParticulars Check Points

2. Other Liabilities

Bills Payable / Sundry DepositsNo. of items and aggregateamount outstanding formore than three years

1. Obtain age-wise break-up frombranch and verify the same withdetails and narrations related toold entries

Unusual items / moment /withdrawals / debits in suchaccounts

1. Verify the transactions throughledger scrutiny

3. Contingent LiabilitiesContingent Liabilities Notacknowledged as debts(other than guarantees /letter of credits /acceptances/endorsements)

1. Obtain list of contingent liabilities2. Review the list for bifurcation

between liabilities and contingentliabilities (rent)


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Overview of LFAR ... P & L A/CParticulars Check Points

Comment on discrepanciesin interest / discount andtimely adjustments thereof

1. Verify the interest calculation ontest-check basis

2. Obtain information on verificationby management

Compliance with theIncome Recognition normsprescribed by RBI

1. Auto-stamping of NPAs andsystem adequateness of RBIcompliances

Verification of provision forinterest accrued on overdue/ matured term deposits

1. Review the adherence to thepolicy of bank and provision onMFD @ SB RoI

Comment on any divergenttrends in major items ofincome and expenditure,which are not satisfactorilyexplained by the branch

1. Comparative analysis to be doneand divergent trends if notsatisfactorily explained by thebranch to be reported


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Overview of LFAR ... GeneralParticulars Check Points

1. Books and RecordsManual / computerized 1. Obtain list of records maintained

manually or wherein softwaremodules are not enabled

Whether Inked out / HardCopies printed

1. Verify Manual Registersmaintained

Adequate Internal Controls 1. Verify data access and securitypolicies of the bank and its

Back ups / Disasterrecovery plan (DRP)

1. Verify adherence with HO Policies

2. Reconciliation of Control and Subsidiary Ledgers

Have the figures, as at theyear-end, in the control andsubsidiary records beenreconciled

1. Verify “All Ok” report and reviewTrail Balance


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3. Inter Branch AccountsOld & large outstandingentries

1. Obtain age-wise and value-wiseoutstanding entries from CentralOffice

Whether outstandingentries responded properlyto HO / Branches?

1. Review the process of respondingof entries with special attention tobranch originating entries

Double responding ofentries

1. Review and report such instances,if any

4. Audit and Inspection

Concurrent/Revenue/IS orany other Audit

1. Obtain list of all audits carried outduring the year


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4. Audit and Inspection

Major irregularities /adverse comments arisingout of these various reports

1. Review and report all majoradversities in these reports

5. FraudsFurnish particulars of fraudsdiscovered during the yearunder audit at the branch,together with yoursuggestions, if any, tominimize possibilities oftheir occurrence

1. Obtain list of frauds discoveredduring the year (including ‘Nil’statement)

2. Refer Master Circular on Fraud toensure compliance with reportingof Frauds, if have occurred duringthe year

3. Review the status of fraudsreported in earlier years


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6. Miscellaneous

Possible Window Dressing 1. Review Weekly Trail Balances ofMarch and subsequent TrialBalances

Fixed Assets Register andcalculation of depreciation

1. Verify the calculation ofdepreciation vis-à-vis accountingpolicy of the bank

2. Verify the cases of assetstransferred during the year

Any matter for the notice ofthe Statutory CentralAuditors

1. Mode of communication for branchauditor with Central StatutoryAuditors of the bank


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LFAR for specialised BranchesParticulars Check Points

1. Branches dealing in Foreign Exchange Transactions

Adverse features pointedout by other auditorregardingNRE/NRO/NRNR/FCNR/EEFC/RFC and othersimilar accounts

1. Specify the test-data verified2. Adverse features to be reported by

the auditor

Compliance to instructionsissued by Controlling Office

1. To be verified by the auditor alongwith relevant FEMA guidelines

NOSTRO Accountsmaintained / operated,Their conduct andreconciliation

1. Verify balances with balanceconfirmations and reconciliationitems to be reviewed and verified


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2. Branches dealing in very large advances like CFB / IFB withadvances > 100 croresAdvances above Rs.2crores, Annexure to beattached with LFAR (not tobe signed by auditor)

1. The Annexure is required to beprepared and given by the branchofficials

2. The Annexure is not to be signedby the statutory auditor

The advances of Rs.1 croreand above, upgraded ordowngraded in NPAClassification, with reasons

1. To be verified by the auditor foradherence with the RBI MasterCircular


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3. Branches dealing in recovery of Non-Performing Assets such asAsset Recovery BranchesAdvances above Rs.2 crores, Annexure to be attached with LFAR.

The advances of Rs.1 crore and above, upgraded or downgraded inNPA Classification, with reasons.

Age-wise analysis of recovery in suit filed accounts

Delayed and Time barred decrees.

Recoveries / account settled / written off / closed

New Transferred Account details such as documents / security, etc.


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2. Branches dealing in Clearing House Operations, normallyreferred to as Service BranchesPeriodic review ofoutstanding entries inclearing adjustment account

1. Obtain age-wise outstandingentries

2. Review the list for requirement ofprovision for old outstanding debitentries, especially in caseswherein the bank has soughtpermission of one timecrystallization of net debit andcredit entries which are very old

Method of squaring off /clearing the old entries

1. Review the method of matching ofold entries


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TAX AUDIT - OVERVIEWFORM 3CA

• Statutory Audit is conducted in pursuance ofthe provisions of the Banking Companies(Acquisition and transfer of undertaking)Act, 1970

• Name of the partner and Firm RegistrationNumber to be specified


TAX AUDIT - OVERVIEW

FORM 3CD

• Most of the bank send pre-printed / pre-filledforms either is soft / hard copy

• No specific books of accounts areprescribed u/s 44AA for the Bankingcompanies

• Point No. 11(a) – The Accounting Policiesfollowed by the Bank are generally given tothe Branch Auditors. The answer should be –Mercantile except as otherwise stated inAccounting Policies


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TAX AUDIT - OVERVIEWFORM 3CD …..

• Point no. 13(d) – Interest on NPA Advances• Point no.14, 15 – Not applicable at the

branch level• Point No. 27 (a) & (b) – Whether TDS is paid

within the time limits specified – Delay indetail to be reported

• All other points to be answered “NIL”, “NotApplicable”

• Branch Managers Signature to be obtained


Other Certifications

Difference between an audit report and aCertificate

•Audit Report is a reasonable assurance

•Audit Certificate is an absolute assurance


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1.Branch Returns2. Audit Reports3. Memorandum of Changes4. LFAR5. Tax Audit Reports6. Jilani & Ghosh Certificate7. Other Certificates8.Capital Adequacy9.DICGS Claims10.PMRY



11.Service Tax12.Cash balance on 12 odd days13.Investment on Behalf of Head Office14.Maturity Pattern of Loans & Advances (ALM)15.Fixed Assets & Depreciation16.Interest Subvention (Exports/Agriculture)17.IRAC / NPA Certification18.Restructured Advances19.Foreign Currency Assets and Liabilities


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REPORTING SUMMARY• Discussion with the Branch Manager• Discuss with the central auditor or higher

authorities at bank, wherever required• Record the extent of checks carried out• Minute the discussions with Branch Manager• All changes to be reported through MOC• Concept of materiality to be observed while

reporting• Notes and observations to be drafted in clear

and unambiguous language


REPORTING SUMMARY• Quantification should be made wherever

possible• Qualification to be made in main report and

not in LFAR• Main report should be self contained

documents and should not make referenceto LFAR

• If possible submit all reports simultaneously,but do not hold back the main report for theLFAR


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QUESTIONS ???


THANK YOU

Dhananjay J. GokhalePartner

M/s. Dhananjay J. Gokhale & Co. & Co.Chartered Accountants


Documents

LFAR and Other Reporting Requirement - PuneICAIpuneicai.org/wp-content/uploads/2015/03/session-3B.pdf · LFAR and Other Reporting Requirement Statutory Audit of Branches of Nationalised