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Approach To Bank Audit DNS 17 18 Final
Approach To Bank Audit DNS 17 18 Final
PART – A
APPROACH TO BANK AUDIT
PART – B
LFAR & CERTIFICATION
PART – C
TAX AUDIT REPORT
2
PART – D
DOCUMENTATION
All the points discussed in this presentation are my personal opinion and should not be
related to any bank or other instructions'
PART - A
APPROACH TO BANK AUDIT
3. COMPONENTS OF FINANCIAL
STATEMENTS
3 4. AUDIT PROCEDURES
5. CONCLUSIONS
1. KNOW THE BRANCH
Obtain the following reports to assess the branch
performance
• Previous Year’s Auditor’s Report/ LFAR ;
• Concurrent Audit Reports for the audit period ;
• Risk Based Internal Audit Report ;
• Zonal Inspection Reports, if any ;
• Exception Report ;
• Latest Revenue Audit Report ;
• IT System Audit Report ;
• RBI Inspection Report.
Reporting Requirements :
Tax Audit
Certificates
reports
2. UNDERSTAND BANKING SOFTWARE
Understand the structure of accounting software
whether following are in different modules or same
• Recording of day-to-day transactions
• Financial Statements
• Various closing returns and certificates at branch
level
Level of Automation
Centralized or Decentralized accounting
Exception Reports
Level of access rights at branch level – editable and un-
editable fields
6 System of downgrading and upgrading of accounts
Interest Calculations
Generation of reports relating to advances
classification and Capital Adequacy calculation etc..
Illustrative structure of Banking Software
Banking
Software
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3. COMPONENTS OF FINANCIAL STATEMENTS
Components of
Financial Statements
to be verified at
Branch Level
ADVANCES
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4.1.2 ADVANCES - AUDIT PROCEDURES
(I) ANALYTICAL PROCEDURES
Percentage :
Calculate category wise percentage of total loans and
advances outstanding to know the coverage of each type.
Ratio Analysis :
• Credit to Deposit Ratio : Advances given / Deposits
• NPA Ratio : Net NPAs / Advances given
11 • Provision Coverage Ratio : Provisions / Gross NPAs
• Return on Assets : Net Profits / Avg. Total Assets
(II) SAMPLING TECHNIQUES
Obtain the following and consider for selecting
sample:
• List of accounts
opened,
closed and
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(III) AUDIT STEPS – (A) TERM LOANS
Sanction is as per the discretionary lending powers of
bank.
Ensure disbursement is only after compliances with pre -
disbursement conditions
Check for security is created like equitable mortgage deed
and pari-passu rights are clearly mentioned in the
sanction letter and mortgage deed
Ensure the latest security is correctly fed in the Asset
Classification and Provision software.
Repayment schedule is correctly fed in CBS & Asset
Classification and Provision software.
Verify the Interest Parameters (Regular & Penal Interest)
14 Ensure that critical amount due has reported in SMA
Report has been received by the bank.
In case of Loan accounts ACTUAL recovery of Installments
and Interest
(B) CASH CREDIT/OVERDRAFTS :
Customer wise Limit Lookup
Stock / Debtors Statements Tracking and calculation of
DP
Turnover of CC Account based on Borrower’s Business
profile
Verify the Interest Parameters (Regular & Penal Interest)
Review the Overdrawn Report for the outstanding
amount exceeding sanction limits , if any
Verify the movements in the account to ensure that
credits are routed through to suggest healthy movements
Check interest is correctly applied on the day-end
balances.
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(C) BILLS PURCHASED/DISCOUNTED:
Verify the following documents:
• Letter of credit number and date
• Advising bank, beneficiary name and applicant
• Date and place of expiry
• Terms and conditions of letter of credit.
Scrutinize the bills register to ensure there are no
overdue/matured bills for more than 90 days.
Check whether bill wise break up is available in Asset
Classification and Provision software.
In Foreign Bills Register, ensure that exposure in foreign
currency and equivalent Indian currency is correctly
16 reported.
Check interest collected is correctly classified under
current and pre paid income.
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RESTRUCTURE ACCOUNTS
(D) RESTRUCTURE ACCOUNTS : PROVISIONING NORMS :
Types of Restructure:
There are two types of restructuring:
1) Internal Restructure by Bank
2) External Restructure by CDR Cell
Eligibility:
Any account classified as standard, sub standard or doubtful.
Restructuring cannot be done retrospectively and usual asset
classification norms would continue to apply.
Restructuring should be subject to customer agreeing to terms and
conditions.
Financial viability should be established.
Borrowers indulging in frauds and malfeasance are ineligible.
BIFR cases eligible for restructuring subject to approval from BIFR.
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RESTRUCTURE ACCOUNTS
(D) RESTRUCTURE ACCOUNTS : ASSET CLASSIFICATION NORMS
Restructuring of accounts could take place in following stages:
Before commencement of commercial production
After commencement of commercial production / operation but before
the asset has been classified as ‘Sub Standard’.
After the commencement of commercial production / operation but
after the asset has been classified as ‘Sub Standard’ or doubtful.
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RESTRUCTURE ACCOUNTS
(D) RESTRUCTURE ACCOUNTS : PROVISIONING NORMS :
Total provision required would be normal provision plus provision in lieu of
diminution in fair value of advances.
Diminution in fair value would be required to be recomputed on each balance sheet date.
Banks have option of notionally computing the diminution in fair value and providing at
5% in case of all restructured accounts where the total dues to bank is less than ONE
crore.
Verify the restructuring proposal to ensure the accuracy of the sacrifice value:
1) Interest rate pre and post restructuring
2) Credit rating
3) Discounting factor (BR + Premium based on credit rating)
4) Period of loan reimbursement (pre and post restructuring)
5) Segment to which loan belongs to (Large corporate, Mid corporate etc)
In fresh Restructure account, ensure that interest charged in the account is reversed
and FITL, Interest Capitalization account is created for the same.
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(E) NON PERFORMING ASSETS : AUDIT STEPS :
• Interest Reversal
• Date of NPA
• Provisioning thereon
Review the annual stock audit report for the NPA with
balance of Rs. 5 crores and above and latest valuation
report for the immovable properties in case the valuation
is older than 3 years.
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Review the accounts to ensure no interest is charged on
such accounts.
4.2.1 DEPOSITS - OVERVIEW
DEPOSITS
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4.2.2 DEPOSITS - AUDIT PROCEDURES
(I) SAMPLING TECHNIQUES
Obtain the following and consider for selecting
sample:
• Trial Balance (or similar report) and list down the
GLs and Sub GLs code of deposits ;
• List of accounts
opened,
closed and
22 opened & closed
during the period under review.
(II) AUDIT PROCEDURES
Verification of Anti Money Laundering guidelines and
Compliance with KYC norms on test check basis.
Check Movement in Deposit vis-à-vis movement in
interest expense
Obtain the interest report and verify interest calculation is
accurate.
Ensure that overdue deposits, matured time deposits, cash
certificates and certificates of deposits are shown in
Demand Deposits.
Check Interest accrued but not due is not be included in
deposits but, shown under other liability
Check TDS compliance on the interest paid and on test
23 check basis checking of Form 15G & 15H to confirm
whether those forms are submitted with respective
Income Tax Authority.
Review the exceptional report for deposits without PAN,
etc.
4.3 STATEMENT OF PROFIT & LOSS
Expenses can be verified for 1 month and thereafter
extrapolate to 12 months. Compare with P&L to ensure
whether amount calculated is approximately same or
identify and investigate for the reasons of vide
variations.
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5. CONCLUSIONS
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4.4 OFF BALANCE SHEET ITEMS
Off Balance Sheet Comprises of
Sanctioning / Disbursement
Instances of credit facilities having been sanctioned
beyond the delegated authority or limit fixed for the
Branch ;
Instances where advances have been disbursed
without complying with the terms and conditions of
the sanction.
Documentation
Credit facilities released without execution of all
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necessary documents ;
Deficiencies in documentation, non-registration of
charges, non-obtaining of guarantees etc. ;
Advances against lien of deposits have been properly
granted by marking a lien on the deposit.
Review/Monitoring/Supervision
After the balance sheet date and till the date of audit,
whether there have been any unusual large movements
(whether increase or decrease) in the aggregate deposits
held at the year-end ;
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REPORTING REQUIREMENTS – PROFIT & LOSS
ACCOUNT
Branch has a system to compute discrepancies in
interest / discount on advances and deposits and for
timely adjustment thereof in accordance with the
guidelines laid down ;
Frauds
Furnish particulars of frauds discovered during the year
under audit at the branch ;
Closing Returns
Certificates
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CLOSING RETURNS
Returns that may be required to be certified by the
Branch Auditors
1 Balance Sheet
Details
S.No Source of Return
S.No Details
S.No Details
14 Claim for Interest Subvention for Lending to Women SHG’s for the
credit upto 3 Lacs
15 Claim for Additional Interest Subvention for the prompt payment for
eligible schemes
To be signed as per Section 44AB – both Form 3CA & 3CD - Use
Letter heads
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TAX AUDIT REPORT – RELEVANT CLAUSES
Clause 9 (b) and (c) - Books of Accounts Maintained and Examined – Generally printed
list.
Clause 14 - Particulars of Depreciation allowable – Details of Purchase, Sale, Transfer
and Disposal/ Write-off of Fixed Assets to be verified by Branch Auditor.- Depreciation
calculation – generally at HO.
Clause 17(a) – Any amount of Capital Expenditure debited to Profit and Loss A/c.
Clause 17(e) – Expenditure by way of Penalty or Fine for violation of any law debited to
Profit and Loss A/c.
(b) Amount inadmissible u/s 40(a)(i)(a): – Any interest, commission, brokerage, fees
for Professional/ Technical Services or Contract Amount paid to a Resident person
without TDS.
(c) Amount inadmissible u/s 40(a)(i)(a): – Any tax, interest or penalty under Income
Tax Act or Wealth Tax Act debited to P&L A/c.
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TAX AUDIT REPORT – RELEVANT CLAUSES
Verify TDS compliance under all relevant sections like Salary, Interest, Interest
to NRI, Contract Payments, Technical & Professional Fees etc. –
Provide Details of :
(a) Tax Deductible but not deducted at all.
(b) Shortfall on account of lesser TDS than required.
(c) Tax Deducted late
(d) Tax Deducted but not paid to Central Govt.
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PART D – DOCUMENTATION
S. Document name Particulars
No
1 Appointment Letter Letter appointing Auditor given by Bank
2 Engagement Letter Letter confirming Engagement given by Auditor (As
required by SA 210 “Agreeing the Terms of Audit
Engagements”)