BANK AUDIT

1. BANK AUDIT JAIPUR BRANCH OF ICAI 30-03-2019 By CA Ajay Atolia S R GOYAL & CO. JAIPUR

2. BANK AUDIT Current Scenario and Developments Audit Planning Advances Agriculture Advances Bank Guarantees and Letter of Credits MOC, LFAR and Certificates Other Items

3. 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. Moneyis the product for banks.

4. 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

5. 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:

6. 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

7. BANK AUDIT RECENT DEVELOPMENTS • RBI Directives for Enforcement 29-06-2018 • UDIN • Key Audit Matters (KAM) • Revised format of Audit Reports • IBC – NCLT Reference

8. BANK AUDIT RECENT DEVELOPMENTS • PNB Fraud/ILFS Fraud • Restructuring of MSME Advances • Loan Waiver Schemes • Society Expectation • NAFRA

9. RBI Directives for Enforcement 29-06-2018 In exercise of statutory powers, in case of those auditors whose audit quality or conduct is not found satisfactory by the RBI, it decides on enforcement action against them by way of not approving their appointments for undertaking statutory audit in commercial banks for a specified period. Further, the RBI may also not approve auditor/s, who have been debarred by other regulators/law-enforcement agencies / government agencies.

10. RBI Directives for Enforcement 29-06-2018 As regards the cases pending against auditors with the aforesaid agencies, the RBI would debar such audit firms, provided the case is of serious nature, where public interest is involved and it is established, prima facie, that the firm is culpable, either by the RBI or by the above entities and brought to the RBI’s notice.

11. RBI Directives for Enforcement 29-06-2018 Types of lapses to be considered The lapses on the part of the Statutory Auditors (SAs) that would be considered for invoking the enforcement framework would, illustratively, cover the following areas: a) Lapses in carrying out audit assignments resulting in misstatement of a bank’s financial statements;

12. RBI Directives for Enforcement 29-06-2018 Types of lapses to be considered b) Wrong certifications given by the auditors with respect to list of certifications as advised by the RBI to banks; c) Wrong information given in the Long Form Audit Report (LFAR);

13. RBI Directives for Enforcement 29-06-2018 Types of lapses to be considered d) Issues related to misconduct by auditors in respect of their bank audit assignments; and e) Any other violations/lapses vis-à-vis the RBI’s directions/guidelines regarding the role and responsibilities of the SAs in relation to banks.

14. RBI Directives for Enforcement 29-06-2018 Parameters for determining the fact of the lapse : a) Statutory provision and directive / guideline issued thereunder and violation thereof; and /or b) Variance between the figures / statements as appearing in audited financial statements/ certifications/LFAR given by the SA of the bank and the actuals, as determined later by the RBI; and/or

15. RBI Directives for Enforcement 29-06-2018 Parameters for determining the fact of the lapse : c) Non-adherence to/violation of the RBI’s instructions/guidelines, etc.; and/or d) Any other lapse/violation like misconduct of the SA.

16. RBI Directives for Enforcement 29-06-2018 The adjudication process • Show Cause Notice • Personal Hearing • Materiality • Decision • Public Disclosure

17. 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.

18. Type of Work • Work to be done in Bank audit being divided into four parts. • Statutory Audit • Long Form Audit Report • Tax Audit • Certificate At HO level each of above reports are considered as independent reports. Therefore don’t make the references of each other. Complete the Audit in One Go

19. Unique Document Identification Number {UDIN} The ICAI vide announcement dated 26th September, 2018 has introduced the concept of UDIN. Initially it was applicable mandatory w.e.f. 1st January, 2019 which was later postponed to be applicable w.e.f. 1st February, 2019 in phased manner. ICAI has issued an announcement dated 14th March, 2019 wherein the applicability of UDIN is clarified.

20. Unique Document Identification Number {UDIN} In the first phase, the ICAI had made it mandatory to generate and mention UDIN on all certifications done by Practicing Chartered Accountants. However, it had specifically excluded the audit and attest functions from the first phase that was mandatory with effect from 1st February, 2019. The illustrative list consisted of 29 types of certificates and 1 general heading ‘others’ for which UDIN has to be generated. Under that list point number 21 (i.e. roman xxi) states about “Certificate issued by Statutory Auditors of Banks.”

21. Unique Document Identification Number {UDIN} • In the second phase, the UDIN is applicable to all GST and Tax Audit Reports with effect from 1st April, 2019. The statutory auditors of banks are also required to conduct and sign the tax audit of the bank also. Accordingly, the auditors have to generate and use UDIN on the tax audit reports signed on or after 1st April, 2019. There is no need to generate separate UDINs for Form 3CA, 3CD and related annexures and certificates coming under the purview of Tax Audit. Again, a blanket UDIN can be generated for all of these.

22. Unique Document Identification Number {UDIN} The Requirement of UDIN in Bank Audit is as Below: • Statutory Audit - NO • Long Form Audit Report- No • Tax Audit- YES • Certificates- YES

23. Unique Document Identification Number {UDIN} One UDIN or UDIN for each certificate

24. Unique Document Identification Number {UDIN} – FAQ Reply Sometimes there are multiple reports in one Assignment. Is separate UDIN is to be generated for all such reports? No. UDIN is to be generated for Assignment wise and same UDIN is to be used in all documents signed under that assignment. Say for Example while signing the various certificates while doing Bank Audit, same UDIN can be used for all certificates to be signed for that particular Bank Audit Assignment.

25. Unique Document Identification Number {UDIN} – Online Process • General Details • Document Type- Certificate • Type of Certificate- “Certificate issued by Statutory Auditors of the Bank” • Date of Signing of document- Date of signing of Audit Report/Certificate

26. Unique Document Identification Number {UDIN} – Online Process • Financial Figures and Particulars (Space for 3 lines and Minimum 2 lines) • If no financial figure then fill ‘0’ • Nature of Figure •  Document Description : “20 Certificate in respect of Bank Branch Audit of One Branch”

27. UDIN – Important Points • UDIN has to be generated separately for each branch. • UDIN has to be generated separately for each type of assignment per branch, e.g. tax audit, certification, etc. • If certificates for one branch are issued and signed on different dates, separate UDIN is to be generated on daily basis.

28. UDIN – Important Points • In case of certificates issued and signed in a digital form, where there is no provision to mention UDIN, UDIN has to be generated and to be intimated separately. • There is no need to upload any certificate for generating UDIN.

29. AUDIT PLANNING We have to achieve what the Auditing Standards expect from us, with in the giving timeliness. Planning of work from office itself

30. Audit Planning • Guidance Note on Bank Audit issued by ICAI • Knowledge of branch business • Banks guidelines for Closing and Audit • Accounting Policy of The bank • Communication with Branch • RBI Regulations and Master Circular • RBI Mail Box Clarification

31. Audit Planning • Access to System • Request for user id (view only) • CA Journal February 2019 • Training to Staff -Audit Team to be well Trained • Materiality Level

32. Audit Planning Accounting and Reporting Software's I. CBS- FINACLE or BaNCS or Flexcube The bank is maintaining its regular transactions in CBS system-FINACLE or BaNCS. The data maintained in FINACLE or BaNCS is being migrated to Both systems. II. Balance Sheet Preparation Software This is used for preparation of closing return. III. Asset Classification Software Banks are using separate System for classification of advances as per RBI norms

33. Audit Planning Major Policy Guidelines- (Issued by Bank HO) • Loan Policy • Recovery Policy • Guidelines on Documentation • Books of Instructions of the Bank supplemented by circulars / guidelines from time to time.

34. ADVANCES

35. Advances

36. Advances- Asset Classification • Facility Wise: Cash Credit\Overdraft, Term Loan\ Demand Loan and Bills Purchased \Bill Discounted. • Sector Wise: Priority Sector, SSI and Others • Security Wise: Secured, Guaranteed and Un Secured • Health wise: Performing Assets (Standard assets) or Non Performing assets (NPAs). ( Sub Standard, Doubtful and Loss)

37. Advances- NPA Identification An asset becomes non-performing when it ceases to generate income for the bank and/or becomes non-productive assets and it can be broadly classified as given below. Term Loan Account is treated Interest and/or instalment remains overdue for a period of more than 90 days.

38. Advances- NPA Identification Cash Credit & Overdraft accounts Account is treated as NPA if it remains out of order for a period of more than 90 days. An account is treated as out of order if, • The outstanding balance remains continuously in excess of sanctioned /drawing power limit, or • Though the outstanding balance is less than the sanctioned limit/ drawing power. • There are no credits continuously for more than 90 days in the account i.e. the account is non-operative. • The credits during the aforesaid period in accounts are not sufficient to cover the interest debited during the same period.

39. Advances- NPA Identification Bill Purchased/ Discounted • Bill remains overdue for a discounted period of more than 90 days. Agricultural Advances • In case of short duration crops, the instalment of principle or interest thereon remains overdue for two crop seasons • • In case of long duration crops, the instalment of principle or interest thereon remains overdue for one crop season.

40. Advances- NPA Identification Liquidity facility • Remains outstanding for more than 90 days in respect of securitisation transaction. Derivative Transactions • Overdue receivables representing positive mark to market value of a derivative contract remaining • unpaid for a period of 90 days from specified due date.

41. Advances- NPA Identification Government Guaranteed advances • State government guaranteed advance treated as NPA, if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days.

42. Advances- Key Issues It is observed that there has been wide variance in the original data maintained in CBS system and data available in other system, which used for assets classification. Especially in the following fields. • Realizable Value of Security • Review date • Balance of borrower

43. Advances- Key Issues • Repayment schedule and first installment date. • Change in Sanction Limit • Continues excess date • Credits in CBS and Other System • Re schedulement date • Review date • Stock Statement date

44. Audit issue in FINACLE • No Flagging of Identified NPA • Un due removal of NPA flag • Interest charged in NPA Accounts • Interest reversal considered as recoveries • Same account Debit and credit • System Generated Credits and Vouchers

45. Advances- Key Issues-How to Tackle • Stress Assets Mechanism: Framework for Revitalising Distressed Assets in the Economy. (SMA Classification) Now it is mandatory for each bank to classify the every advance and report such classification in CRILIC system for advance above Rs. 5 Crore.

46. Advances- Key Issues-How to Tackle

47. Advances- Key Issues-How to Tackle • Concurrent Audit Report • RBI Inspection Report • Internal Inspection Report • Stock Audit Report • Rating by External Agencies. • Disbursement Process • Renewals- Whether on time or Not

48. Advances- Key Issues-How to Tackle • Same Account Debit and Credit • No credits in account • Compare with last quarter classification and last year end classification •  Drawing Power Calculation- IBA Clarification

49. Advances- Key Issues-How to Tackle • Increase in frequency of overdrafts in current accounts/ CC Accounts. • The borrower reporting stress in the business and financials. • Window Dressing- Compare the business figures • Regulatory Changes

50. Advances- Other Points Appropriation of Recovery in NPAs Recovery in NPA accounts should be appropriated in accordance with bank policy if there is no clear agreement between bank and borrower, generally first towards interest and then towards principal