Statutory Bank Branch Audit Technical and Practical Aspects
CA. Rajkumar S. Adukia
[email protected] /
[email protected] http://www.carajkumarradukia.com 093230 61049/098200 61049
Agenda 1. 2. 3. 4. 5. 6.
General Pre commencement of work Understanding the banking business Audit Planning Audit procedures Audit Reports
Agenda 1. 2. 3. 4. 5. 6.
General Pre commencement of work Understanding the banking business Audit Planning Audit procedures Audit Reports
General
History of banks
In 1920 Imperial bank was established The Reserve Bank of India was established as the Central bank of the country in 1935 under an act called Reserve Bank of India Act,1934 In 1955, the Imperial Bank of India was nationalised and was given the name "State Bank of India". On the suggestions of Narsimham Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new private sector banks were opened.
Types of banks 1) 2) 3) 4) 5)
Nationalised banks Co-operative banks Private sector banks Foreign banks Regional rural banks
Special kinds of business undertaken by bank branches 1. 2. 3.
4. 5. 6. 7. 8.
Foreign exchange business NPA recovery business Service branches dealing in Clearing house operations business Corporate banking and Industrial finance business Personal banking business Housing finance business SSI business Agricultural finance business
Pre-commencement Work
Pre-commencement Work 1.
2.
3.
4.
5.
Beginning of audit cycle is from receipt of appointment letter Check the compliance u/s. 226 (3) with regard to qualifications and disqualifications of auditors (concurrent ,Internal,Revenue, Stock,System, Credit Risk or other Special Audits conducted in same previous year) Decision for Acceptance or Rejection of Assignment ( Cost Benefit analysis, other considerations e.g. time available, expertise available) Communication with Previous Auditor by Registered AD (clause 8 of First Schedule to the Chartered Accountants Act, 1949 Finding Out Expected date of submission of reports
Pre-commencement Work 6. 7. 8.
9.
Finding out Scope of work Issue of Engagement Letter under AAS 26. Copy of all circulars of RBI applicable to branch have to be obtained and kept ready for reference Attending bank branch audit seminars could enhance the auditor‟s knowledge on bank audits
10.
11.
12.
Banking terminology and schemes should be well understood A reading of Guidance note on audit of banks by ICAI would provide valuable guidance. It should be ensured that minimum fees is set as per RBI circular dated 17th March 2004
Disqualifications
1. 2. 3.
4.
5.
It should be ensured before accepting the assignment that you do not come into following category of persons ( Section 226(3) of Companies Act 1956) Body Corporate An officer or employee of the Bank A person who is a partner, or who is in the employment, of an officer or employee of the Bank A person who is indebted to the Bank for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the bank for an amount exceeding one thousand rupees person holding any security of that bank, Security means an instrument which carries voting rights.
Understanding the Banking Business
Knowledge of bank business
The auditor needs to obtain a level of knowledge of bank business that will enable him to identify the events, transactions and practices that may have significant effect on the financial information
Knowledge of bank business can be obtained from-
1.
Bank‟s annual report to shareholders
2. 3. 4.
5.
Internal financial management reports for current and previous periods including budget if any Previous year audit working papers Discussion with and Letters seeking Information from bank branch Manager Bank policy and procedures manual
Knowledge of bank business Usage of knowledge of bank business 1. 2. 3.
4.
To develop an overall audit plan To identify areas of special audit consideration To evaluate the reasonableness of accounting estimates and management representations To make judgments regarding the appropriateness of accounting policies and disclosures
Letter seeking information
1. 2.
3. 4. 5.
Before actual commencement of audit a letter may be written to the management of bank asking for following information Organizational chart of bank and bank branch List of departments in the bank branch along with name of head of department. Authority and responsibility of each officer in the bank Special feature of each banking product Areas where work has been outsourced to outsiders
Letter seeking information 6.
7. 8. 9. 10. 11. 12.
Copies of last year annual accounts and current year quarterly/half yearly accounts Information of top 10 borrowers for each kind of loan Instructions issued by Head office for closing of accounts Details of software used by bank List of reports generated by the software Accounting policy followed by the bank Copy of day book
Areas where special special knowledge about about the business of Bank Branch is required
Special Features of Banking Business Special audit audit considerations considerations in bank branch audits Laws applicable to the banking business Internal controls in banks Additional Controls for Computerised Environment Accounting System Accounting standards applicable applicable to bank Formats of Financial Statements ( as per schedule III section 29 of Banking Regulation Act ,1949) Important Circulars of RBI
Peculiar features of banking business
Custody of large volumes of monetary items, including cash and negotiable instruments, whose physical security has to be ensured Deals in a large large volume and variety of transactions in terms of both number and value. Operate through a wide network of branches and departments, which are geographically dispersed The nature of business which makes it susceptible to Frauds by Customers.
Special audit considerations in bank branch audits
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
Internal controls in bank branch 1.
2. 3.
4.
Work of one staff member is invariably supervised / checked by another staff member, irrespective of the nature of work Banks have a system of job rotation among staff The financial and administrative powers of each official / each position are fixed and communicated to all persons concerned Branch managers have to send periodic confirmation to their controlling authority on compliance of the laid down systems and procedures.
Internal controls in bank branch 5.
6.
7.
8.
All branches of a bank have a unique code number which is circulated amongst all offices of the bank All books are to be balanced periodically. Balancing is to be confirmed by an official Particulars of lost security forms are immediately advised to controlling so that they can exercise caution Fraud prone items like currency, valuables, draft forms, term deposit receipts, traveller‟s cheques and other such security
forms are in the custody of at least two officials of the branch
Additional Controls for Computerised Environment 1) 2)
3)
4)
The system maintains a record of all log-ins and log-outs If the transaction is sought to be posted to a dormant (or inoperative) account, the processing is halted and can be proceeded with only with a supervisory password The system checks whether the amount to be withdrawn is within the drawing power. The system flashes a message if the balance in a lien account would fall below the lien amount after the processing of the transaction
Additional Controls for Computerised Environment 5)
6) 7)
8) 9)
Access to the system is available only between stipulated hours and specified days only. Individual users can access only specified directories and files Exception situations such as limit excess, reactivating dormant accounts, etc. can be handled only with a valid supervisory level password. A user timeout is prescribed Once the end-of-the-day process is over, the ledgers cannot be opened without a supervisory level password
Laws applicable to the banking business 1) 2)
3)
4) 5) 6) 7) 8)
Banking Regulation Act, 1949 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 State Bank of India Act, 1955 State Bank of India (Subsidiary Banks) Act, 1959 Regional Rural Banks Act, 1976 Companies Act, 1956 Co-operative Societies Act, 1912 or the relevant state Cooperative Societies Act.
Laws applicable to the banking business 9) 10) 11) 12) 13) 14) 15) 16)
Information Technology Act, 2000 Prevention of Money Laundering Act, 2002 Credit Information Companies Regulation Act, 2005 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Banking Cash Transaction Tax (Chapter VII of Finance Act, 2005) Service Tax (Chapter V of Finance Act,1994) Income Tax Act ,1961 Securities Transaction tax (Chapter VII of Finance (No 2) Act , 2004
Laws applicable to the banking business Regulations relating to Foreign exchange FEMA 1999 Notifications ( Nos 1,3,5,8,23 and 26) Master circular issued by RBI on exports and good of services dated 1 st Oct 2005 Master circular issued by RBI on Rupee export credit and export credit in foreign currency dated 1 st July 2005 Foreign Trade Policy 2004-09 FEDAI Guidelines Bank s Internal Guidelines
’
Four categories of Transactions are usually undertaken at a branch Export related transactions Import related transactions Remittances (Inward/Outward) Treasury Operations (Dealing Room/Investments) The bank is required to take an undertaking under section 10(5) of FEMA, 1999 from the applicant to ascertain and satisfy itself about the purpose of transaction
Application of other laws not barred
As per the section 2 of Banking Regulation Act ,1949 the provisions of this Act shall be in addition to, and not, in derogation of the Companies Act, 1956 , and any other law for the time being in force The provisions of the other laws shall apply to all proceedings unless they are inconsistent with the Banking Regulation act,1949
Accounts and balancesheet
Sub-section (1) of section 29 of the Banking Regulation Act, 1949 requires every banking company to prepare a balance sheet and a profit and loss account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance Sheet Form B contains the form of Profit and Loss account
Contents of Balance sheet (Form A)
Schedule –1 Schedule –2 Schedule –3 Schedule –4 Schedule –5 Schedule –6 Schedule –7 notice Schedule –8 Schedule –9 Schedule –10 Schedule –11 Schedule –12
Capital Reserve and surplus Deposits Borrowings Other Liabilities and provisions Cash and bank balance with RBI Balance with bank and money at call and short Investments Advances Fixed Assets Other Assets Contingent Liability
Classification of Advances as per schedule 9 Three ways of classification of advances in balance sheet as schedule 9 of banking regulation act ,1949 A)Classification by nature i)Bills purchased and discounted ii)Cash credits, overdrafts and loans repayable on demand iii)Term loans B) Classification by security i)Secured by tangible assets
Classification of Advances ii)Covered by bank/ government guarantees iii) Unsecured C) Classification by location I. Advance in India (i) Priority sector (ii) Public sector (iii) Banks (iv) Others
Classification of Advances II. Advances outside India (i) Due from banks (ii) Due from others (a) Bills purchased and discounted (b) Syndicated loans (c) Others
Some disclosure items in balance sheet 1. 2. 3. 4. 5. 6. 7. 8.
Capital Adequacy Ratio Movements in NPAs Movement of provisions held towards NPAs Business (deposits plus advances) per employee Maturity Patterns of deposits, borrowings, loans and advances Exposures to real estate sector,Capital market Disclosure of Penalties imposed by RBI Details of Single Borrower/Group Borrower Limit exceeded by the bank
Contents of Profit and Loss accounts (Form B)
Schedule-13 Schedule-14 Schedule-15 Schedule-16
Interest Earned Other income Interest expended Schedule Operating expenses
Types of accounting softwares 1. 2. 3. 4. 5. 6.
Stand alone branch-level packages Multi-branch solutions Foreign branches Packages for specialized areas Packages for Service branch IT services like KYC Some of the softwares used by banks are Finacle (Infosys), Bancs (TCS), and Flex cube (I Flex)
Possible Segments in bank business as per AS-17 Business segments Treasury 1) Other bank operations 2) Residual operations 3) Geographic Segments Domestic 1) International 2)
Possible Related party in banks as per AS-18
Parent Subsidiaries Associates/ Joint ventures Key management personnel Relatives of key management personnel
Circulars issued by RBI
Disclosure in balance sheets dated July 1, 2006 Prudential norms on Income recognition,asset classification and provisioning relating to advances dated 1st July 6 Management of advances dated January 22, 2007 Loans and advances-statutory and other restrictions dated 1st July 2006 Guarantees and co-acceptances dated July 1,2006 Guidelines for securitisation of standard assets dated 1st Feb 2006 Prudential Norms on Capital Adequacy dated July 1,2006 Para-banking Activities dated July 1,2006 Exposure norms dated October 10 ,2006 Cash Reserve ratio and Statutory Reserve ratio dated October 11,2006 Provisioning Requirement for Standard Assets dated Feb 19, 2007
Definition of Non performing assets as per Circular dated 01-07-06 An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank (Para 2.1.1) A non-performing asset (NPA) is a loan or an advance where; interest and/ or instalment of principal remain overdue for a i. period of more than 90 days in respect of a term loan the account remains „out of order‟ in respect of an ii. Overdraft/Cash Credit (OD/CC)
Definition of Non performing assets as per Circular dated 01-07-06 iii.
iv.
v.
the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted a loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. (Para 2.1.2 )
INCOME RECOGNITION on NPA
Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received (Para 3.1.1) The Accounting Standard 9 (AS 9) on `Revenue Recognition' issued by the Institute Of Chartered Accountants of India (ICAI) requires that the revenue that arises from the use by others of enterprise resources yielding interest should be recognized only when there is no significant uncertainty as to its measurability or collect ability.
INCOME RECOGNITION on NPA
Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts (Para 3.1.2) Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit (Para 3.1.3)
Reversal of income
If any advance becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised.(Para 3.2.1) This will apply to Government guaranteed accounts also. Fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. (Para 3.2.2)
Categories of NPA
Classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the banks balance sheet
Categories of NPA
Sub-standard Assets - which has remained NPA for a period less than or equal to 12 months (Para 4.1.1) Doubtful Assets - has remained in the sub-standard category for a period of 12 months (Para 4.1.2) Loss Assets - 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. (Para 4.1.3)
Provisioning norms
The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. (Para 5.1.1) The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.(Para 5.1.1)
Provision on standard assets
The banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis Banks would continue to make provision at 0.25 per cent for direct advances to agricultural and SME sectors in the standard category (as per circular issued by RBI on 8th of Nov 2005) A small scale industrial unit is an undertaking in which investment in plant and machinery does not exceed 1 crore except in certain specified items under hosiery,hand tools, drugs. Pharmaceuticals. Stationery items and sport goods where investment limit has been extended to Rs. 5 crore Units with investment in Plant and machinery in excess of SSI limit and upto Rs 10 crore may be treated as medium enterprise (circular dated 19/08/2005)
Provision on sub standard assets (Para 5.4)
A general provision of 10 percent on total outstanding should be made The „unsecured exposures‟ which are identified as „substandard‟
would attract additional provision of 10 per cent.
The provisioning requirement for unsecured „doubtful‟ assets is
100 per cent. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank is not more than 10 percent
Provision on Doubtful assets ( Para 5.3)
100 percent of the extent to which the advance is not covered by the realisable value of the security In regard to the secured portion, provision may be made on, at the rates ranging from 20 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful
Provision on Doubtful assets ( Para 5.3) Contd Period for which the advance has remained in doubtful category
Provision requirement (%)
Up to one year
20
One to three years
30
‘
’
More than three years (i) outstanding stock of NPAs as on 60 per cent with effect from March 31, March 31, 2004 2005 75 per cent with effect from March 31, 2006 100 per cent with effect from March 31, 2007 100 percent with effect from March 31, (ii) advances classified as doubtful 2005 more than three years on or after ‘
’
April 1, 2004
Provision on Loss assets (Para 5.2)
Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for
Audit Planning
Importance of Audit Planning 1. 2. 3.
4.
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 helps in controlling audit risks
Considerations for overall audit Plan 1. 2. 3. 4. 5. 6.
The terms of his engagement and any statutory responsibilities The nature and timing of reports or other communication The applicable legal or statutory requirements The accounting policy adopted by bank and changes in these polices The identification of significant audit areas The degree of reliance he expects to be placed on accounting systems and internal control
Considerations for overall audit Plan 7. 8. 9. 10.
11.
The nature and timing of audit evidence obtained The work of internal auditors and extent of their involvement The involvement of expert The allocation of work to be undertaken between joint auditors and procedures for its control and review Establishing and coordinating staffing requirements
Audit Programme An audit program can contain following columns Particulars Closing Balance Sample Size Criteria for selection of data in sample Date/ Months/ Period Action to be taken Person In charge
Audit Procedures
Audit Procedures 1. 2. 3. 4. 5.
Inspection Observation Inquiry & confirmation Computation Analytical Procedures
Audit Documentation and Audit Evidence are outcome of Audit procedures AAS 3 and AAS 5
Inspection and observations Inspection consists of examining records, documents, or tangible assets The auditor inspects in order to: Be satisfied as to the physical existence of material negotiable 1. assets that the bank holds Obtain the necessary understanding of the terms and 2. conditions of agreements (including master agreements) that are significant individually or in the aggregate in order to: - Consider their enforceability; and - Assess the appropriateness of the accounting treatment they have been given.
Inquiry and Confirmation The auditor inquires and confirms in order to: Obtain evidence of the operation of internal controls; Obtain evidence of the recognition by the bank‟s customers and counter parties of amounts, terms and conditions of certain transactions; Obtain information not directly available from the bank‟s accounting records.
Key ratios for analysis
Non-performing loans to total loans Cash and liquid securities (for example, those due within 30 days) to total assets Interest income as a percentage of average interest bearing assets Non-interest expense as a percentage of operating income Capital adequacy ratios Return on average total assets
Analytical procedures
Analytical procedures consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts By using analytical procedures, the auditor may detect circumstances that call into question the appropriateness of the going concern assumption, such as undue concentration of risk in particular industries or geographic areas and potential exposure to interest rate, currency and maturity mismatches.
Verification of Advances 1) 2) 3) 4) 5) 6) 7) 8)
General Verification of Advances against goods Verification of advances against fixed deposits Verification of advances vehicles Verification of advances immovable property Verification of advances against insurance policy Verification of advances against shares Verification of advances against bills purchased and discounted
1. Verification of loans and advances (General)
Check the individual balance in each loan ledger with the trial balance book Verify the head office sanction /renewal for advances sanction as per appropriate authorities See that margins are maintained in respect of secured advances Examine that the operation of each advance is reviewed at least once in a year
Verification of loans and advances (General)
Examine that advances represent amount due to the bank All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation, etc.) should be executed by the parties before advances are made Advances are classified in such a way that information required in schedule 9 of Banking Regulation Act, 1949 can be gathered.
2.Verification of advances against goods
Examine the stock statements and ascertain that the loans availed is with in the drawing power/limits sanctioned Verify that letter of hypothecation has been executed in favour of bank Verify that charge is duly registered with ROC in case of loan on hypothecation to limited company Verify the fire insurance policy and ascertain that polices are alive as at 31st March 2006 Banks should have a system in place to ensure that the borrower does not avail the advantage double financing on same stock, i.e., financing from bank for the portion of stock not paid to the creditors
3. Verification of advances against fixed deposits
See that bank‟s lien have been marked on deposit receipts as in
their respective ledger folio See that no advance is granted against duplicate receipt without proper verification In case of advances against deposit receipts of other branches ,to verify the intimation to that branch to mark the lien and to see that the same has been acknowledged by other branch See that deposit receipts /pass books/ cash certificates have been duly discharged in favor of bank at the time of discharge
4. Verification of advances against vehicle
Verify the copies of registration certificate See that vehicle has been comprehensively insured and verify the banker‟s clause in insurance policy
Test check the original certificate and ascertain that endorsement is made in favor of bank
5.Verification of advances against immovable property
Go through the legal opinion of bank‟s lawyer about title of
property to the borrower Verify the latest tax receipts towards the payment of property tax and verify the encumbrance certificate Verify the valuation reports for the fixed assets charged to bank Verify whether building has been properly insured and policy has been taken in the joint name of bank and the mortgagor
6.Verification of advances against insurance policy
Scrutinise the insurance policy and ascertain the surrender value If surrender value is subject to payment of certain premium the amount of such premium has been deducted from the surrender value Verify the latest premium receipts Verify whether policies have been duly assigned by the insured in favour of bank and assignment is noted by insurance company
7. Verification of advances against shares
Loan against security of shares to individuals should not exceed Rs 10 lakh per individual borrower in case securities are in physical form and Rs 20 lakh if securities are held in demat form (Para 3.4.3 of Master circular exposure norms) A uniform margin of 50% shall be applied on all advances against shares ( Para 3.4.6 ) Bankers‟ lien should be noted in Demat account of the client
If the person in whose name the securities are registered is other than the borrower, the bank satisfy itself that the person has a good title to the security. The bank also obtains a letter of renunciation from the person in whose name the securities are registered.
8.Verification of advances against bills purchased and discounted
All the outstanding bills have been taken in the balance sheet All the details, including the nature of the bills and documents, are mentioned in the register and that the bills have been correctly classified The bills purchased or discounted from different parties are in accordance with the agreements with them and the total of outstanding bills of each party is not in excess of the sanctioned limit The bills are not overdue. If there are any overdue bills, the auditors should ascertain the reasons for the delay and the action taken by the bank
Advances against working capital
The assessment of working capital requirement of borrowers, other than SSI units, requiring fund based working capital limits upto Rs.1.00 crore and SSI units requiring fund based working capital limits upto to Rs.5.00 crore from the banking system may be made on the basis of their projected annual turn over (Para 2.1 of Management of advances) The working capital requirement is to be assessed at 25% of the projected turnover(including excise duty) to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as net working capital (NWC) and bank providing finance at a minimum of 20% of the turnover.(Para 2.2) For example, in case, annual turnover of a borrower is projected at Rs. 60.00 lakh, the working capital requirement will be computed at Rs. 15.00 lakh (i.e. 25%) of which Rs. 12 lakh (i.e. 20%) may be provided by the banking system, while Rs. 3.00 lakh (i.e. 5 %) should be borrower's contribution towards margin money. (Para
2.6)
End use of Funds
In cases of project financing, banks ensure end use of funds by, inter alia, obtaining certification from the Chartered Accountants In case any falsification of accounts on the part of the borrowers is observed by banks, Banks can lodge a formal complaint against the auditors of the borrowers, with Institute of Chartered Accountant of India (ICAI) if it is observed that the auditors were negligent or deficient in conducting the audit to enable the ICAI to examine and fix accountability of the auditors (Para 6.8 of Management of advances )
Diversion of Funds
Diversion of funds would be construed to include any one of the under-noted occurrences Utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanctions; Deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned; Transferring funds to the subsidiaries / group companies or other corporates by whatever modalities Routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender Investment in other companies by way of acquiring equities / debt instruments without approval of lenders Short fall in deployment of funds vis- à-vis the amounts disbursed / drawn and the difference not being accounted for. (Para 6.3 of management of advances )
Documentation
A certificate stating that the Branch did not hold any investments on behalf of the Head Office (if there are no such investments held by the Branch List of large advances i.e. those in respect of which the outstanding amount is in excess of 5% of the aggregate advances of the Branch or Rs.2.00 crores whichever is less duly certified by the Branch Manager A copy of the letter from Head Office regarding Sanction limit of the Branch Manager;
Documentation
List of cases where the Branch has not obtained stock/book debts statements at the end of the year; List of cases where insurance copies are yet to be received at the end of the year A copy of the Head office instructions for identification of NPAs and classification of advances List of major items pending for reconciliation under Inter-Branch Accounts List of all fraud cases reported to RBI as fraud upto March 31st
Documentation AAS 3 Following certificates should be obtained from management Cash Retention Limit duly certified by the Branch Manager A photo copy each of the confirmation certificates for Balances with RBI, SBI and other banks A copy of the reconciliation statement in respect of differences in such balances with RBI, SBI and other banks List of overdue or matured investments at the end of the year duly confirmed by the Branch Manager;
Computer Assisted Audit Techniques (CAAT) CAAT are computer programs and data that the auditor uses as part of the audit procedures to process data of audit significance, contained in an entity‟s information systems
1.
CAAT may be used in performing various auditing procedures, including the following: Tests of details of transactions and balances, for example, the use of audit software for recalculating interest or the extraction of invoices over a certain value from computer records
Computer Assisted Audit Techniques (CAAT) 2.
3.
4. 5.
Analytical procedures, for example, identifying inconsistencies or significant fluctuations Tests of general controls, for example, testing the set-up or configuration of the operating system or access procedures to the program libraries or by using code comparison software to check that the version of the program in use is the version approved by management ; Sampling programs to extract data for audit testing Reperforming calculations performed by the entity‟s
accounting systems.
Audit Reports
Various Reports/Certificates 1. 2. 3. 4. 5. 6. 7. 8.
Tax Audit Report Position of Advances above certain amount PMRY Audit Certificate DICGC Certificate Verification on Friday Statements Certificate(Form X sec 27) Service Tax Certificate Income on Insurance Business Frauds
Various Reports/Certificates(Contd.) 9. 10. 11. 12. 13. 14. 15.
Ghosh Committee Recommendations Jilani Committee Recommendations LFAR MOC-Classification MOC-Income Recognition Other reports AUDIT REPORT- U/S 30 OF The Banking Regulation Act,1949 r.w.s.228(3) of the Companies Act,1956
Special purpose certificates in banks
Certificate for advances to infrastructure project and income generated thereon Certificate of reconciliation of securities by the bank Certificate of advances exceeding 10 crores Certificate pertaining to credit/deposit ratio Certificate of cash and bank balances
Plan for each Report separately
Effective planning requires separate plan for each report Find out common data and interlinking in various reports (Jilani committee is on internal control Ghosh committee is on Fraud, EDP controls, internal Checks LFAR has many issues on internal control it is like audit programme and check list)
LFAR
Reserve bank of India (RBI) advised the current format of LFAR (LFAR) for the banks from their auditors vide circular number DBS.CO.PP.BC.11/11.01.005/2001-2002 DBS.CO.PP.BC.11/11.01.00 5/2001-2002 dated April 17, 2002 This report is not substitution of the statutory report, neither a part of the said report. LFAR is actually a management Report. Matters required to be reported by the auditor in LFAR are illustrative not exhaustive The Statutory Branch Auditors should address LFAR to Chairman of Bank, Copy to Central Statutory Auditors (Para 1 of LFAR) At times though audit qualifications are included in the LFAR, they are not highlighted in the main Audit Report Every adverse comment would not result in Qualification in main audit report. Auditor has to use his professional judgment having regard to the facts and circumstances of each case. (Para 3 of LFAR Questionnaire)
Major Clauses in LFAR I
Assets
1. Cash 2. Balance with RBI ,SBI and other banks 3. Money at call and short notice 4. Investments 5. Advances 6. Other Assets
II
Liabilities
1. Deposits 2. Other Liabilities 3. Contingent liabilities
III Profit and Loss account
Major Clauses in LFAR IV
General 1. Books and records 2. Reconciliation of Control and subsidiary records 3. Inter branch accounts 4. Audits/ Inspections 5. Frauds 6. Miscellaneous
Questionnaires Applicable to Specialized Branches 1. For Branches dealing in Foreign Exchange Transactions 2. For Branches dealing in very large advances in excess of Rs. 100 crores 3. For Branches dealing in Non Performing Assets such as Asset Recovery Management Branches. 4. For Branches dealing in Clearing House Ho use Operations, normally referred to as Service Branches
Ghosh Committee
High level Committee on fraud and malpractice in banks under chairmanship of Shri A. Ghosh ex deputy governor
To enquire into various aspects of frauds and malpractices in bank
To make recommendations to reduce such incidence.
Committee submitted report in June,1992
The report is divided into Groups A,B,C,D with A, B and D having 2 parts each, Group C having one part. Out of 97 Recommendations 27 required to be reported exclusively at Branch level, 43 exclusively at RO/ZO/HO level and 27 at both levels
Four groups under Ghosh Committee
Group A -Recommendations which have to be implemented by the banks immediately Group B- Recommendations requiring RBI approval Group C- Recommendations requiring approval of Government of India Group D – Recommendations requiring further examination in consultation with IBA
Main objectives of Ghosh Committee
Safety of assets
Compliance with laid down policies and procedures
Proper segregation of duties and responsibilities of staff
Timely prevention and detection of frauds and malpractices
Jilani Committee
“Working group to review the internal control and inspection and audit system in banks” under the chairmanship of Mr.
Rashid Jilani. The committee submitted its report in July 1995
Objective was to review the efficacy and adequacy of internal control and inspection and audit system in a bank with a view to strengthening the supervisory system and reliability of data The Implementation form is divided into 25 points,10 of them are applicable on a Bank branch.
S No
Recom no in WG report
Nature of recommendation
13
39
Follow up on major/serious irregularities detected during Concurrent audit to be immediately taken up with HO. Time bound plan for rectification should be made. Fraudulent transactions to be reported to vigilance/ chief of inspection
14
41
Small and Medium sized Branches to rectify irregularities pointed out during inspection/audit within 4 months
Imple mentat ion Status at Branch
Imple menta tion Status at RO\ZO
Imple mentat ion Status at HO
S No
Reco Nature of recommendation m no in WG repor t
15
44
Auditors and inspector to get the majority of irregularities rectified during their stay at branches concerned and guide them with it.
16
45
Immediate action to be taken to plug gaps in serious irregularities\Revenue leakages which have surfaced due to loopholes in existing procedures
Imple mentat ion Status at Branch
Imple menta tion Status at RO\ZO
Imple mentat ion Status at HO
S No
Recom no in WG report
Nature of recommendation
19
53
Appropriate Control Measures should be devised and documented to prevent the computer system from attack of unscrupulous elements.
20
54
Various Tests to be carried out to ensure that EDP applications have resulted in consistent and reliable system for inputting, processing and generation of output of data
’
Imple mentat ion Status at Branch
Imple menta tion Status at RO\ZO
Imple mentat ion Status at HO
S No
Recom‟
Nature of recommendation
no in WG report
22
59
Entire domain of EDP activities be brought under scrutiny of Inspection and Audit department.
23
61
For bringing about uniformity of software, a formal method of change be approved by the management.
Imple mentat ion Status at Branch
Imple menta tion Status at RO\ZO
Imple mentat ion Status at HO
S No
Recom no in WG report
Nature of recommendation
24
71
Completion of enquiries expeditiously and bringing to book delinquent staff so as to deter other from frauds. Internal vigilance machinery to be strengthened and reviewed by board every 6 months
25
74
Regular checking by inspectors and auditors to verify correctness of information regarding asset classification, Income recognition and provisioning.
’
Implem entation Status at Branch
Implem entatio n Status at RO\ZO
Implem entation Status at HO
Reporting under Banking Regulation act,1949 As per section 30(3) of a banking regulation act ,1949 an auditor is required to state in his report of a banking company incorporated in India the following :-(a) whether or not the information and explanations required by him have been found to be satisfactory; (b) whether or not the transactions of the company which have come to his notice have been within the powers of the company;
Reporting under banking regulation act ,1949 (c)
whether or not the returns received from branch officers of the company have been found adequate for the purposes of his audit (not applicable to bank branch) (d) whether the profit and loss account shows a true balance of profit or loss for the period covered by such account; (e) any other matter, which he considers should be brought to the notice of the shareholders of the company
Non applicability of CARO, 2003 Statement of companies (Auditor‟s Report ) order 2003 is not applicable to banking company as defined in clause (c) of section 5 of Banking regulation act.1949 Banking company means any company, which transacts the business of banking in India; Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking
PEER REVIEW CONSIDERATIONS
Compliance with technical standards Office system and procedure Quality of reporting Training of staff Quality Review Board ( Proposed Section 28A to 28 D ) All services will be covered
