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Bank Audit: A Practical Approach | Key to Success in the Modern Banking Environment

Explore the nuances of bank auditing with detailed insights on divergences, prudential norms, IT integration, and more. Learn the essential planning, procedures, and roles involved in a successful bank audit process.

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Bank Audit: A Practical Approach | Key to Success in the Modern Banking Environment

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  1. BANK AUDIT A Practical Approach By CA Ajay Atolia

  2. BANK AUDIT • Banking is a dynamic activity. Therefore Banks are different from most other commercial enterprises. Now a days banking has constantly been undergoing a change.

  3. BANK AUDIT • Significant Segment of our Practice • To be completed in shortest possible time.

  4. BANK AUDIT • Divergences observed by RBI. Over the period due to increase in NPAs in the banking system, RBI has been taking a stricter cognizance of the divergences. In the meeting of CSA, RBI has raised the following issues:

  5. BANK AUDIT • Divergences observed by RBI. • NPA not properly identified whereas the same have been identified in normal course of audit. • Exact date of NPA not recorded. • Classification between secured and unsecured • Non implementation of Restructuring packages • Direct v/s indirect landing • Non fund based exposure

  6. BANK AUDIT • Increased in Responsibility • Prudential Norms • Restructuring Norms • Anti Money Laundering Norms • Basel II and III • Increase in Certification • Information Technology and CBS • Auditing Standards

  7. BANK AUDIT Expectation- Opinion on True and Fair View • Bank: With Time Line • Auditor: ICAI With Documentation • Regulator: With Compliance • Share Holder Fair -Without any window dressing

  8. BANK AUDIT Role of Branch Auditor Role of Branch auditor is very important. All the advances and deposits of the bank are accounted at branches and being audited by branch auditors. Among the branches under audit only 20 branches being audited by CSA. Therefore Central Auditors are heavily relied on work of Branch Auditors.

  9. Type of Work • Work to be done in Bank audit being divided into four parts. • Statutory Audit • Long Form Audit Report • Tax Audit • Certificate

  10. BANK AUDIT Initial Consideration The matters to be considered by a proposed central auditor/branch auditor upon receiving intimation of appointment.

  11. Initial Consideration • Acceptance • Eligibility • Declaration • Engagement • SA210 • Audit under Statute • Delivery of letter is enough • Communication with Previous Auditor

  12. AUDIT PLANNING We have to achieve what the Auditing Standards expect from us, with in the giving timeliness. Practically we have 10 to 12 working days to plan and equipped us to complete the audit.

  13. Audit Planning • Hence it becomes imperative to plan the audit in systematic manner to enable completion of all the important area leaving no room for any material misstatement. • What is basically needed for effective execution of the job is, error free documentation and effective preparation of related working papers.

  14. Audit Planning • Knowledge of branch business: The auditor must know the business composition of the branch, nature and size of the branch. This understanding will help to design the audit program.

  15. Audit Planning • Audit Program • Define the Scope of Audit • Significant Audit Areas • Materiality Level • Over all time schedule • Sample Size • Set of instructions

  16. Audit Planning • Communication with Branch • For smooth and timely completion • Inform time schedule • List of requirements • Used as Representation letter • Banks guidelines for Closing and Audit • Accounting Policy of The bank

  17. Audit Planning • Access to System • Request for user id (view only) • Guidance Note on Bank Audit issued by ICAI • CA Journal Feb. 2017 • A Check list for Branch Overview and Internal Control is annexed as Annexure IV

  18. Audit Planning • Adherences of SA ( Standard of Auditing) • SA- 260 and 265 SA 260 deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of financial statements. In addition, SA 265 establishes specific requirements regarding the communication of significant deficiencies in internal control the auditor has identified during the audit to those charged with governance.

  19. Audit Planning • SA- 600 Para 19 of SA state that there should be sufficient liaison between the principal auditor and the branch auditor. SA- 700, 705 and 706: These SA defines the manner of reporting in auditor’s report and inclusion of qualifications and matter of emphasis in auditor’s report.

  20. AUDIT PROCEDURE

  21. Accounting Software’s (System) 1. CBS Now all the bank branches are under CBS system. It is important to note that CBS system is used only for accounting of day to day transactions of the Bank. Closing Returns only in respect of Balance Sheet and Profit & Loss Account are generated from the CBS system. Therefore give the attention towards exception reports generated through CBS system.

  22. Accounting Software’s (System) CBS- Key Points • Maker Checker concept • Password Controls • Day start/Day end activities • Master Creations • Exception Reports • Audit Trails

  23. Accounting Software’s (System) CBS- MIS • Interest Flag Report- No • Pending Insurance • Limit Expiry Report • Overdue Report of advances • Limitation Expiry Report (Loan acknowledgement) • TOD Report • Overdue Deposit Report • Dormant Flag Report

  24. Accounting Software’s (System) 2. Other Software's Returns related to asset classification as per RBI guidelines on Prudential Norms on Income Recognition and Asset Classification for advances, calculation of capital charge on credit risk as per BASEL II requirements, submission of CIBIL data and other various reports for financial reporting and regulatory compliance are being generated through other system

  25. Accounting Software’s (System) 2. Other Software's • The data in this software is migrated from the CBS system with manual interventions. • Banks are heavily relying on the returns generated through this software, for various Policy decisions / MIS requirements. • Any deviation / error in the data of this software shall have serious implications, inclusive of attracting penal provisions by Regulators.

  26. Statutory Audit • As per Banking Regulation Act, 1949 • Balance Sheet • Profit & Loss A/C • Other Annexure • True & Fair view

  27. Balance Sheet As per Form ‘A’ of Third schedule of Banking Regulation Act. Assets Side • Cash and Balances with RBI, Balances with Bank and Money at call, Investments, Advances, Fixed Assets and Other Assets. Liabilities Side • Capital , Reserve and Surplus, Deposits, Borrowings, Other Liabilities and Provisions

  28. Balance Sheet

  29. Balance Sheet

  30. Balance Sheet FIXED ASSETS • Major Computerisation and Renovation Work • It was observed that most of the time amount is lying in advances and capitalization entries not passed for wants of certain testing reports etc.

  31. Balance Sheet FIXED ASSETS -Audit Issues • Banks are using Separate module in CBS system for accounting of Fixed Assets and Depreciation. • Check that all the cost of ATM /BNA /VSAT/SSPBP/CDM/IBK etc. supplied to them by Head Office has been capitalised.

  32. Balance Sheet FIXED ASSETS -Audit Issues 3. No Entry should be pending in Region/Branch office Administrative/ Intermediary Account for responding in relation cost transfer of these Assets. 4. Inter Branch Transfers to be shown separately. 5. Sale of asset to be shown separately. 6. Date put to use to be captured correctly.

  33. Balance Sheet OTHER ASSETS • Sundry Asset and Suspense Accounts • Inter Branch accounts • Stationery and Stamps in Hands • Interest Accrued • TDS Receivables • Prepaid Expenses

  34. Balance Sheet Capital To be dealt at Head office. In same bank branches, Head Office account is considered as Capital of Branch. Reserve and Surplus To be dealt at Head office

  35. Balance Sheet Deposits • Saving Bank Deposits • Current Account/Demand Deposits • Term Deposit • INR Deposits • Foreign Currency Deposits

  36. Balance Sheet Deposits- Audit Issues • Unclaimed Deposits/ Inoperative Accounts • Depositor Education and Awareness Fund (DEAF) Scheme 2014 • Interest Accrued But Not Due • Overall Reconciliation • Translation/ Revaluation of Foreign Currency Deposit • Window-dressing • Know Your Customers Norms

  37. Balance Sheet Borrowings To be dealt at Head office Other Liabilities and Provisions • Bills Payable • Inter-office Adjustments • Interest Accrued • Others (Including Provisions)

  38. PROFIT& LOSS ACCOUNT As per Form ‘B’ of Third schedule of Banking Regulation Act. Verify the figures of Balance Sheet with General Ledger and figures of Profit and Loss account with Income and expenditure ledger.

  39. INCOME & EXPENSES • Expenses • Interest Expended • Establishment Expenses ( Salary & Allowances) • Rent • Printing& Stationery Ensure the accrual concept of accounting. Separate note for non compliance of AS-5 Prior Period items.

  40. INCOME & EXPENSES • Income • Interest Earned on Advances • Commission • Fee Based Income • Service Charges

  41. INCOME & EXPENSES • Checking of Interest rates and its application on large advances. • Accrued and Outstanding items • Accounting Standard-5 AND 9 • RBI Guidelines • Comparative Analysis • Analytical Review

  42. OTHER ANNEXURES • Fixed Assets and Depreciation • Claims Against the Bank not Acknowledged as Debts • Contra Items/ Non Fund Based Items, Gross balance of Bills for Collection and other off Balance Sheet items

  43. OTHER ANNEXURES • Fixed Assets and Depreciation(already discussed) • Claims Against the Bank not Acknowledged as Debts This return includes the information of claims made and suit filed against the branches for instance- Rent Recovery, Consumer cases, Fraud, cases by employees etc.) • Compare the return with the return of last year and last quarter. • Check that entry in the books has been passed for all claims against the Bank not acknowledged as debt and reversal of entry has been passed on settlement / deletion of a claim.

  44. OTHER ANNEXURES Contra Items/ Non Fund Based Items, Gross balance of Bills for Collection and other off Balance Sheet items. It is contra item so available from both asset and liability side.

  45. OTHER ANNEXURES • Sensitive Accounts, Nostro accounts and Local Branch Office /Local Main office/ Service branch account. • Break up of outstanding entries in GL Suspense A/c • Bad Debts Written-off • Returns related to advances.

  46. Advances

  47. AdvancesProcedure and Documentation • Nature of Borrowing arrangement ( Sole, Multiple or Consortium) • Whether sanction has been made as per the banks policies. • Credit appraisal reports contains adequate information’s • Check whether the terms of sanction have been complied with?

  48. AdvancesProcedure and Documentation • Check whether all the documentation formalities have been complied with before release of facilities by the branch? • Check whether in the cases of corporate borrowers due charges have been registered with the Registrar of Companies? • Check whether Compliance of Companies Act 2013 such as borrowing power, special resolution has been complied with?

  49. AdvancesProcedure and Documentation • Stock Audit Report • Rating by External Agencies • Disbursement Process • End use verification certificate • Renewals

  50. AdvancesClassification • Facility Wise • Cask Credit/Over Draft • Term Loan/Demand Loan • Bills Purchased /Bill Discounting • Sector Wise • Priority Sector • SSI • Others

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