BANK AUDIT........
March 2007 The Chartered Accountant 1391
ACCOUNT ING AND AUDI T ING
Bank Branch Audit – An Overview
The rapid advancement in information
technology has revolutionised the
Indian banking sector—perhaps one of
the largest in the world as far as its extensive
branch network is concerned. Not a day passes
without a new ATM being opened or a new
financial product being introduced. The impact
of information technology has to be borne in
mind while carrying out the branch audits. It
is imperative to adopt the right approach and
techniques to ensure that the audit is completed
with best quality and within the shortest time
possible.
Acceptance of the Appointment
Before accepting the appointment as branch
auditor, ensure that your firm does not suffer
from any of the disqualifications like:
l Change in the constitution of the firm since
your application to the ICAI.
l Being indebted to the bank for a sum
exceeding Rs 1000/-.
l Holding any security of the bank carrying
voting rights.
In case of a change in the constitution of the
firm since the date of application to ICAI, you
need to inform the bank regarding the change
and wait for their confirmation before accepting
the appointment.
Ensure that the acceptance letter is sent in
the specified format along with the required
declaration of secrecy and fidelity to the
concerned authority within the specified time.
Communicate with the previous auditor as a
matter of good ethical practice.
Plan for the Audit
Prepare a file for each branch to be audited
containing photocopies of the appointment letter,
circulars and instructions received, formats
of various certificates, audit report, LFAR and tax
audit report.
Ensure that each audit team has copies of the
latest ICAI guidance note on bank audit, recent
RBI master circular and an audit programme.
Prepare a letter of authority for each team
setting out the names, qualification and
specimen signature of the team members.
Send a questionnaire to the branch calling
for specific details well in advance, which will
help, in timely completion of audit. (A sample
questionnaire is set out below)
LFAR
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.
Come the month of March and Chartered Accountants all over the country begin to
sharpen their skills for conducting audit of several thousands of bank branches in the
country. A well-planned audit will make the entire assignment of bank branch audit
totally pleasurable while an ill-planned audit will end in chaos. This article aims to
serve as a ready reckoner for the auditors entrusted with the responsibility of carrying
out the branch audits.
(The author is a member of the
Institute. He can be reached at
srm@bhaskarandramesh.com)
– CA. S. Ramesh
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ACCOUNT ING AND AUDI T ING
4. Does the branch have any investment?
5. List of accounts of large borrowers having
limit/ balance outstanding in excess of
5% of the branch advances or 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
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 expense heads
between the current and previous years.
(Please request the branch management to
give comments / reasons for any abnormal
variation).
24. Particulars of fraud, if any, discovered during
the year.
PMRY
1. Number of loans granted during the year
under PMRY.
2. Amount advanced.
3. Subsidy claim amount.
TAX AUDIT
1. Capital expenditure debited to Profit and
Loss account, if any.
2. Payment made to clubs towards fees and
for services.
3. Total amount of TDS deducted during the
year:
a) on salary
b) on Interest on Term Deposits
c) on Interest on NRO Deposits
d) On contract payments
e) on Rent
f ) on professional fees
g) on other payments (specify)
4. Has any amount been recovered during the
year out of bad debts, written-off in earlier
year?
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5. Locker rent accrued during the period
1.04.2006 – 31.03.2007.
Audit Programme
Ensure that a comprehensive audit
programme is chalked out. The size of the
branch, the volume of transactions, the level
of computerisation and the classification of the
branch must be taken into to account while
drawing up the audit programme. The size and
skill sets of the audit team can be determined
based on the above parameters.
The audit programme should ensure that
a compliance test of the internal controls to
identify areas of weaknesses is carried out.
Based on the results of the compliance testing,
one may have to prepare a programme for
substantive testing.
The following areas require full checking
irrespective of the level of internal controls:
l Verification of Balance Sheet and Profit and
Loss account with the main and subsidiary
ledgers
l Verification of all closing returns with the
ledgers and registers
l Verification of all large advances granted
during the year with specific reference to
terms of sanction and documents
l Verification of all large NPA advances and
the provisioning thereof
l Balancing of books
l Inter branch items and clearing differences
l PMRY loans granted during the year
Verification of Advances
As advances constitute a very high percentage
of the assets of the branch, verification of
the same is probably one of the most important
aspects of a bank branch audit. It may be advisable
to draw up a programme separately for
verification of advances.
Design a format for noting down the
particulars of each advance while perusing the
borrower credit files and the account statement.
The format should be designed to ensure that
none of the significant information is missed
out. The format will also help at the time of
compilation of the audit report and LFAR. (A
specimen format is set out in Table A.)
Table - A
XYZ BANK
Branch
CHECK LIST FOR VERIFICATION OF ADVANCES
Facility
A/c No
Name of the borrower and acount No. 1 2 3 4 5 6 7 8 9 10
1. Have you checked 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. Have you checked whether the facilitiy has been granted
beyond such delegated powers of the branch?
3. If so, whether the same has been reported to the higher
authorities.
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Check the files of all large borrowers with
specific reference to Credit appraisal, sanction
and disbursement, documentation, review and
supervision and house keeping.
Ensure that you peruse the delegated powers;
Banks advance manual, circulars, guidelines
etc before commencing the verification of
advances.
A perusal of the latest RBI inspection report,
concurrent audit reports and the inspection
reports will aid in identifying continuing
irregularities and internal control weaknesses.
The RBI Inspection report highlights cases of
short provisioning and it is the duty of the
branch auditor to ensure that provisioning
had been made as per the IRAC norms duly
paying heed to the recommendations of the RBI
inspection team.
Verification of Compliance with IRAC
Norms
Verify all existing NPA accounts and fresh
NPAs identified by the branch during the year.
Ensure that the date of NPA has been correctly
entered since the quantum of provisioning
depends on the same.
Identifying Fresh NPA
(a) Term Loans
Check if interest debited up to and including
interest debited on 31.12.2006 and principal
up to 31.12.2006 is recovered in full before
4. Have you checked whether the terms of sanction has been
complied with?
5. Have you checked whether all the documentation formalities
have been complied with before release of facilities by the
branch?
6. Have you checked whether in the cases of corporate
borrowers due charges have been registered with the Registrar
of Companies?
7. Have you verified receipt of stock statements. Have you
verified that the follow up action of the branch is adequate?
8. Have you checked whether periodic stock audits has been
conducted? Have you perused the latest stock audit report?
9. Have you checked the procedure adopted by the branch for
periodically verifying the assets charged to the bank?
10. Have you perused the account to ensure that there are no
frequent overdrawls, shortfall in the value of security?
11. Have you checked whether the assets charged to the
branch have been adequately insured.
12. Has the account been classified as per IRAC norms?
13. If not, have you made out a detailed working for proposing
MOC?
14. Has the branch furnished the relevant information required
for the purpose of reporting in LFAR?
15. Have you checked whether the branch has obtained
valuation reports?
16. Have you verified whether there is any compromise
proposals/ write offs in this account?
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31.03.2007. If recovered it is not an NPA else it
has to be classified as NPA.
(b) CC/OD accounts
(c) BP/BD accounts
Verify if any bill due on 31.12.2006 is
outstanding as on 31.03.2007. If it is outstanding,
the account will have to be classified as NPA.
(d) Other Advance Accounts
In respect of other advances if any amount
due on or before 31.12.2006 has not been
received as on 31.03.2007 then the account will
have to be treated as an NPA
(e) Important Points to be considered while
ascertaining whether an account is NPA
or PA
(i) If an account has not been renewed
within a period of 180 days from due
date, the account will become NPA.
(ii) Drawing Power based on stock statement
beyond 90 days will make the account
out of order and consequently NPA.
Asset Classification
All performing assets are Standard assets
while NPAs fall under the category of Sub
Standard, Doubtful or Loss assets depending on
the period for which the account has remained
NPA.
With effect from 31st March 2005, a substandard
asset would be one, which has
remained NPA for a period less than or equal to
12 months.
With effect from March 31, 2005, an asset
would be classified as doubtful if it has remained
in the sub-standard category for a period of 12
months.
A loss asset is one where loss has been
identified by the bank or internal or external
auditors or the RBI inspection but the amount
has not been written off wholly. In other words,
such an asset is considered uncollectible and
of such little value that its continuance as a
bankable asset is not warranted although there
may be some salvage or recovery value.
Refresher Course for Audit Team
In order to carry out the audit effectively and
within the stipulated time ensure that all the
team members are familiar with the following:
i. RBI circulars relating to income recognition,
asset classification and provisioning
norms. The latest master circular covering
all these aspects (DBOD No. BP. BC.
15/21.04.048/2006-2007 dated July 01,
2006) is available on the RBI website (www.
rbi.org.in).
ii. Guidelines issued to the auditors by the
banks with reference to certificates to be
issued by them.
iii. Accounts closing instructions issued to the
branches by the central office.
iv. The accounting system of the bank and the
related internal controls.
v. Salient features of the LFAR.
vi. Audit procedure to be adopted in a
computerised environment.
Conduct Audit in Two Stages
The audit needs to be done in two stages
YES
NO
YES
NO
Does the balance outstanding
exceed the DP/Sanctioned
limit continuously for any 90
days during the year?
No credit or the credits are not
sufficient to cover the interest
debited during that 90 days
during the year.
Not NPA NPA
1396 The Chartered Accountant March 2007
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– pre closure and post closure of books.
In the first leg of audit one may take up the
following areas for scrutiny:
i. Review the file of major borrowers.
ii. Peruse the sanction/renewal letter to ensure
compliance with the terms and conditions
of sanction.
iii. Review the status of the accounts already
identified as NPA during the year.
iv. Peruse the stock statements and insurance
cover.
v. Review the quality of credit appraisal of
loans granted during the year.
vi. Ensure that the documentation has been
completed in all respects as set out in the
terms of sanction.
vii. Study all accounts which are featured in the
‘watch list’.
viii. Study problem accounts that have since
become good.
ix. Visits of select borrowers if necessary can
also be completed prior to March 31.
x. Test checking of interest received, interest
paid and other major heads of income and
expenditure can also be carried out.
Computerised Audit Environment
It is imperative that auditing methodology
and tools used must be modified to suit the IT
environment. For example, if one of the audit
objectives is to check whether an account was
in excess of the sanctioned limit or drawing
power during a particular period, the manual
method would be to review all the accounts
and list out those accounts which have
been in excess for all the specified days. In a
computerised environment the audit procedure
to be performed should include generation of
an exceptional report of all accounts in excess
of the DP/sanctioned limits during a specified
period.
One needs to obtain an overall understanding
of the computer system in operation at the
branch. A discussion with the systems manager
or officer in charge will be of immense help.
Compiling the Report
Every branch auditor needs to prepare two
audit reports: one the short form wherein he
expresses his opinion on the financial statements
of the branch and the other a Long Form Audit
Report (LFAR).
Before starting to compile your report ensure
that all the audit queries and observations have
been discussed with the branch management
and their replies obtained. It is suggested that
the queries be discussed with the officers and
branch manager on a daily basis.
Discuss the draft report in detail with the
manager preferably in the presence of the officer
in charge of advances and ensure that they fully
understand your views. Obtain a Management
letter of representation.
Several Central Statutory Auditors in various
forums have remarked that many branch
auditors just state YES, NO or NA for most of
the points in LFAR. It should be ensured that all
points are answered setting out the full facts
clearly. Avoid vague and general comments.
Working Papers
Last but not the least, ensure that all the
working papers are organised properly. The
need for organising and preserving the working
papers assumes greater significance in the light
of the Peer Review Process. Working Papers:
l Aid in the planning and performance of the
audit.
l Aid in the supervision and review of the
audit work.
l Provide evidence of the audit work
performed to support the auditors’ opinion.
l Become the basis for drafting the auditors’
report.
Normally, working papers should include -
l Nature of engagement
l The audit plan
l Papers and records which would provide
March 2007 The Chartered Accountant 1397
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the basis for relying on the internal controls
l The basis for deciding on the ‘sample
selection’ for scrutiny
l All confirmations and certificates wherever
necessary
l In areas where difference of opinion exists,
the views of the organisation should be
obtained in writing or minuted
l Significant ratio and trend analysis
l Significant audit observations culled out
from other audit reports
l Copies of expert opinion where the auditor
has placed reliance on the opinion of the
expert
l Directive from Government/Regulatory
authority, etc which have a bearing on the
audit
Working papers are the property of the auditors
and should be retained for a reasonable
period to satisfy the professional and possible
legal requirements. Lack of proper/inadequate
working papers has landed many professionals
in trouble with the Disciplinary Committee of
the ICAI.
Conclusion
Before beginning, plan carefully. A wellplanned
audit will make the entire assignment
of bank branch audit totally pleasurable while
an ill planned audit will end in chaos. Spend
time and energy on drawing up a detailed
audit programme, framing checklists and
questionnaires, familiarising the team members
about the various aspects of bank audit and you
will surely reap the benefits at the end of the
assignment. r
As you are aware that the permission
of foreign direct investment in the equity
capital and investment by foreign institutional
investors in Security Receipts (SRs) of Asset
Reconstruction Companies (ARCs) has opened
the possibilities of channeling the funds for NPA
resolution. To address the concerns of ARCs,
the Ministry of Company Affairs, Government
of India has requested the Institute to give its
views/suggestions on the issue of conversion of
loan into equity by ARCs under Section 81(3) of
the Companies Act, 1956.
To formulate the views of the Institute, an
announcement has been hosted in the website
of the Institute requesting the members to
send their views/suggestions in this regard.
Committee on Corporate and Allied laws of
the Institute is considering constituting a
Study Group to formulate the views on the
issues involved. Members are requested to
give their views/suggestions immediately to
the Committee at corporatelaws@icai.org. The
members may also give comments on other
issues relating to ARC including report/research
on global practices vis a vis Indian Law, practices
and impediments, if any.
Considering the merit of the views/
suggestions, the Committee at its discretion
may invite the members to participate in
the meetings of the Study Group. ICAI may
also consider publishing some comments/
analysis/article in full or in part or extracts
in “The Chartered Accountant” at the sole
discretion of Editorial Board.
STUDY GROUP ON ASSET RECONSTRUCTION
COMPANIES INVITATION FOR VIEWS
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