SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES

1. SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES Audit Planning and Long Form Audit Report PRESENTATION BY CA ATUL C. BHEDA B.COM, FCA, LLB(GEN), DISA(ICA)

2. Importance of Audit Planning and reporting • Well planned is half done • One should know destination to plan well • Good planning leads to effective reporting • Audit destination is report ( to express opinion on financial statements) • Audit planning and reporting are two important stages • Audit planning is before beginning of field work and reporting is last stage in every audit • Audit planning helps in controlling audit risks (inherent,control & detection) CA Atul C. Bheda Mumbai

3. Stages in Bank Audit • Study of appointment letter • Preliminary work • Risk Assessment • Internal Control Evaluation • Conduct of audit • Submission of Audit Reports, Certificates and Returns CA Atul C. Bheda Mumbai

4. Study of appointments letter • Noting of relevant contents • Assessment of disqualification of the auditor • Letter to the previous auditor of NOC • Preparation of Acceptance letter and declarations • Assessment of reporting requirements (Time and contents) CA Atul C. Bheda Mumbai

5. Preliminary work • Knowledge of the business • Acquiring the knowledge for effective conduct if Audit • Staff Training • Risk assessment and evaluation of internal control • Knowledge about the branch operations CA Atul C. Bheda Mumbai

6. Knowledge of Business • Acquire Information of the banking industry • Information of past events and progress of the bank • Study of Annual reports of the earlier years • Banking Journals • Laws & Regulations applicable CA Atul C. Bheda Mumbai

7. Laws and Regulations applicable • The banking regulation Act, 1949 • Master Circulars and other circulars issued by the RBI • The Companies Act, 1956 • Guidance Note on Audit of Banks issued by ICAI CA Atul C. Bheda Mumbai

8. Important Auditing and Assurance Standards • SA200 AAS 1 - Basic Principles Governing an Audit • SA 230 AAS 3 – Documentation • SA 315AAS 6 – Risk Assessment and Internal Control • SA 610 AAS 7 – Relying upon the work of an Internal Auditor • SA 300 AAS 8 – Audit Planning • SA 580 AAS 11 – Representation by the Management • SA 320 AAS 13 – Materiality • SA 210 AAS 26 – Terms of Audit Engagement CA Atul C. Bheda Mumbai

9. Risks in Bank Branch Audit • Effect of the statutory and regulatory requirements • The scale of banking operations and the resultant significant exposures • Extensive dependence on IT to process transactions • Continuing development of new services and banking practices • Particular nature of risks associated with the transactions undertaken by banks CA Atul C. Bheda Mumbai

10. Risk Assessment and Evaluation of internal control • Branch Manager meeting • Initial review of system • Review of other Audit observations CA Atul C. Bheda Mumbai

11. Branch Manager meeting • Review of the Organization chart • Accounting policies • Composition of Deposits & Advances • Staff Strength & Average age • Shifts & Duty timings • Positive and grey areas of the branch : Branch manager’s concerns CA Atul C. Bheda Mumbai

12. Initial review of the system • Meeting with departmental heads • Division of work and area of operations • Logistic support expected • Tentative time schedule of closing work and audit • Computerization and software used • List of top ten borrowers • List of top ten NPA CA Atul C. Bheda Mumbai

13. Review of other audit observations • Reporting process between the Head Office & Branches • Review of Concurrent Audit Reports • Review of Internal Audit Reports • Review of RBI Inspection Reports • Review of RBI circulars • Review of Circular issued by Head office • Review of periodical returns from Branch • Review of previous years LFAR CA Atul C. Bheda Mumbai

14. Planning for conduct of audit • Audit Team • Audit schedule • Audit Program • Physical aspects: Travel, boarding etc. • Reporting requirements • Audit facilities, computers, software, etc. • Formats • Timings for submission • Alternative plan for contingencies CA Atul C. Bheda Mumbai

15. The Audit can be conducted in either of the following ways • Inspection and Observation • Inquiry and Conformation • Computation • Analytical Procedures CA Atul C. Bheda Mumbai

16. Staff Training • Familiarity with banking operations in different areas (deposits, loans, investments, NPA norms, etc.) • Deliverables: Audit reports, certificates and returns • Audit techniques (enquiry, explanations, verifications, sample checks, objective evidence, etc.) CA Atul C. Bheda Mumbai

17. General • Audit Team should carry :-- • Copy of appointment letter • Authorization letter for the staff member • Stationery : pen, pencil, letterheads, worksheets, rubber stamps etc. • Copy of norms for reimbursement of expenses such as lodging, boarding, Traveling and local conveyance. CA Atul C. Bheda Mumbai

18. Essential of good Planning • Knowledge of situation • Knowledge of resources • Knowledge of Audit expectations • Plan to deliver more than expected. CA Atul C. Bheda Mumbai

19. Audit Report and certification • Branch Returns : correctness of branch returns • Audit Report : True and fair view • Memorandum of Changes (MOC) • LFAR • Tax Audit Report • Certificates CA Atul C. Bheda Mumbai

20. Branch Returns • All returns should be certified • Correctness of returns should be ensured • No changes are to be made in returns • The changes are to be reported through MOC • Corrections, overwriting, deletions etc. Care should be taken about correct preparation and correct reporting • Even NIL return should be certified CA Atul C. Bheda Mumbai

21. Audit reports Exceptions should be noted specifically (e.g. Provision for taxation, bonus, NPA) • Auditor’s name and membership number should be mentioned • Date of Audit Report and place of execution should be mentioned • The report should be on the letterhead CA Atul C. Bheda Mumbai

22. Memorandum of changes(MOC) • Memorandum of changes for : • Assets and liabililities • Income and Expenditure • Changes in Asset classification • In case there is no change…MOC with NIL remark should be submitted • MOC is a part and parcel of the Audit report…Audit report without MOC is an incomplete report. CA Atul C. Bheda Mumbai

23. MOC ……..contd. • Signature of the Branch Manager (BM) needs to be obtained on MOC as a token of acceptance • In a situation where BM does not accept the change suggested by the Auditor, • The auditor should issue the MOC, and • A suitable note should be attached describing the reasons as to why the auditor feels the change is necessary CA Atul C. Bheda Mumbai

24. LFAR LONG FORM AUDIT REPORT CA Atul C. Bheda Mumbai

25. Basics • LFAR is an internal control evaluation questionnaire. • Comprehensive in scope and coverage. • Covers both Balance Sheet and Profit & Loss Account. • Serves as an important check list for audit planning. • Make LFAR part of the audit programme. CA Atul C. Bheda Mumbai

26. Must Do’s • Study the Questionnaire thoroughly. • Each answer should be precise • Data should be original and be supported with source document or MRL and just not picked up from concurrent audit report • Avoid vague or general comment. CA Atul C. Bheda Mumbai

27. Must Do’s • Give specific instances of weakness/shortcomings. • Start preparing in month of march • Main Audit Report and LFAR are two separate reports. • Qualificatory remarks MUST be part of the main report. CA Atul C. Bheda Mumbai

28. 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. CA Atul C. Bheda Mumbai

29. Must Do’s • LFAR is of utmost importance to the management as well as the Central Auditors. • Finalize Statutory Report and LFAR simultaneously. • Should be well drafted and not loosely worded CA Atul C. Bheda Mumbai

30. Must Do’s • Scope of work carried out should be clearly specified. • Extent of verification be stated • Should create an impact on the bank management about the quality of work carried out. CA Atul C. Bheda Mumbai

31. 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. CA Atul C. Bheda Mumbai

32. Cash • 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. CA Atul C. Bheda Mumbai

33. Balance with RBI, SBI and other Banks • Balance confirmation. • Report differences. • Observation on differences. • Cash transactions remaining unresponded. • Revenue items requiring adjustment / write offs. (issue MOC / Qualify report) • Old outstanding balances remaining unexplained and age wise analysis. CA Atul C. Bheda Mumbai

34. Balance with RBI, SBI and other Banks (cont’d) • 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. CA Atul C. Bheda Mumbai

35. 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 . CA Atul C. Bheda Mumbai

36. 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 CA Atul C. Bheda Mumbai

37. 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 CA Atul C. Bheda Mumbai

38. 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). CA Atul C. Bheda Mumbai

39. 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. CA Atul C. Bheda Mumbai

40. Other Assets (Cont’d) • Unusual items in these accounts be reported eg: Cash in transit • Difference in balancing. • Difference in cash. CA Atul C. Bheda Mumbai

41. 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. CA Atul C. Bheda Mumbai

42. 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., CA Atul C. Bheda Mumbai

43. 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. CA Atul C. Bheda Mumbai

44. 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. CA Atul C. Bheda Mumbai

45. 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 CA Atul C. Bheda Mumbai

46. General (Cont’d) • Suggestions for the improvement in the system • Reconciliation of control and subsidiary records. CA Atul C. Bheda Mumbai

47. 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. CA Atul C. Bheda Mumbai

48. General (Cont’d) • Expeditious compliance to communication from HO / Designated cell (Report unresponded entries) • Items of Double response in HO Account. • Old / Large outstanding transaction at debits as at year end. • Audit and Inspection CA Atul C. Bheda Mumbai

49. 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. CA Atul C. Bheda Mumbai

50. General (Cont’d) • Maintenance of Fixed Assets Records. • Documents of title in relation to branch • Non compliance with Ghosh and Jilani Committee recommendations. CA Atul C. Bheda Mumbai