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Sripriya Study Cases Audit Imp
Sripriya Study Cases Audit Imp
Sripriya Study Cases Audit Imp
A C2C INITIATIVE
CONCEPT TO COMPLETION
CA P R SURESH
CA SRIPRIYA KUMAR
Presentation Path
• The basic objective of Bank Branch audits is to provide an opinion on True and Fair
status of the financial statements as at the Balance Sheet date
• A Unique feature in a bank audit is that unlike in corporates, we are also required to
confirm if the transactions of the branch which have come to our notice have been
within the powers of the bank.
Bank Branch Audits – The Auditors Perspective
• Audit as you would if you OWNED
Assurance on the branch, then it is very simple !
Internal
Controls • All bank audit documents that are
certified are mostly directed only
at the these four perspectives at
the Core of True and Fair
Assets
Impairment
Bank Branch Audits – Unique Dynamics
Internal LFAR
controls and
fraud risks
Fin.
statements Master
Concurrent Compliance
Audit
Engage and Audits , RB Tests and
Circular on working Reports
Planning audits, Substantive
IRAC norms papers
Specific Certificates
Inspections Tests
Certifications
Bank Branch Audits – The delicate balance
Against us For Us
Enormous Guidanc
e and
Training and Litera
ture
Robust Control
frameworks and CB
S
Availability of Tim Inspection, RBIA an
e d
Concurrent audit
process
Volume and compl
exity GAAP – benefit of
sampling
Understanding Financial statements
Schedule –1 Capital
Schedule –2 Reserve and surplus
Schedule –3 Deposits
Schedule –4 Borrowings
Schedule –5 Other Liabilities and provisions
Schedule –6 Cash and bank balance with RBI
Schedule –7 Balance with bank and money at call and short notice
Schedule –8 Investments
Schedule –9 Advances
Schedule –10 Fixed Assets
Schedule –11 Other Assets
Schedule –12 Contingent Liability
Engagement formalities
• Master data , transaction data , access restrictions and business process logic is
all in built in the CBS platform minimising and mostly eliminating need for
manual intervention beyond input stages
• Work flow integration for documentation aspects is not complete across all
banks. Hence documentation and security cover lapses may still impair asset
quality
Bills Purchased and Bill remains overdue for a Discounted period of more than 90
discounted days.
Agricultural Advances Interest or installment remains overdue for two crop seasons
for short duration crop, one crop season for long duration crop.
• TOD : Outstanding Balance in account based on the drawing power calculated from stock statements older than
3 months would be deemed as irregular & if such irregular drawing are permitted for a period of 90 days,
account needs to be classified as NPA.
• Non-renewal/ Non-regularisation of regular/ adhoc limit within 180 days from the due date would also qualify
for NPA
• Advances against term deposits, NSCs, IVPs, KVPs and Life Insurance Policies need not be treated as NPAs, till
security cover is sufficient to cover outstanding balance.
• Consortium Advance - Member banks shall classify the accounts according to their own
• record of recovery. Bank needs to arrange to get their share of recovery or obtain an
express consent from the Lead Bank
Exceptions / Clarifications …
Straightaway Classification
Where realisable value of security is less than 50% of the value assessed, account
to be straightaway classified as Doubtful Asset.
Where realisable value of security is less than 10% of outstanding balance, account
to be straightaway classified as Loss Asset.
Valuation of Securities
In respect of NPAs with the balance of Rs. 5.00 crores & above, bank needs to
formulate policy for annual stock audit by external agencies & in respect of
immovable properties, valuation to be carried out once in 3 years by approved
valuer.
Exceptions / Clarifications …
Solitary Credit Entry
Care should be taken that a solitary or few credits in the account made at/near the
balance sheet date extinguishing the overdue interest/principal is not the only
criteria for classifying the asset as standard.
Regularisation of Account
Account need not be classified as NPA if account has been regularised by the date of
Balance sheet by payment of overdue through genuine sources & not by sanction of
additional facility or transfer of funds between accounts.
Income Recognition
For NPA accounts income should be recognised on realisation basis.
When an account becomes non-performing, unrealised interest of the previous periods
should be reversed or provided.
Interest income on additional finance in NPA account should be recognised on cash
basis.
In project loan, funding of interest in respect of NPA if recognised as income, should be
fully provided.
If interest due is converted into equity or any other instrument, income recognised
should be fully provided.
Income Recognition…
Adjustment of Recoveries - Priority
Unrealised Expenses
Unrealised Interest
Clarification vide Master Circular - in the absence of clear agreement between the Bank
and the Borrower, an appropriate policy to be followed in uniform and consistent
manner.
Classification Norms
Standard Asset
Sub-Standard Asset
A sub standard Asset is one which has remained NPA for a period of less than or equal
to 12 months.
Loss Assets
These are accounts, identified by the bank or internal or external auditors or by RBI
Inspectors as wholly irrecoverable but the amount for which has not been written off.
Classification Norms…
Doubtful Asset - Three Categories
Category Period
Sub-standard Asset
Secured exposure - 15% of total outstanding
Unsecured Expsoure – Infrastructure – 20% of total outstanding
Unsecured – other than Infrastructure - 25% of total outstanding
unsecured
Provisioning Norms…
Doubtful Assets:
Period Provision (Secured + Unsecured)
Up to 1 year 25% + 100%
1to 3 years 40% + 100%
More than 3 years 100% + 100%
Loss Asset:
100% should be provided for
Provisioning Norms
Provision Under Special Circumstances
Advance under rehabilitation programme approved by BIFR / Institutions, Provision
should be continued to be made on existing facilities.
i. Industrial Units.
ii. Industrial Units under CDR Mechanism
iii. SMEs
iv. All other advances.
Infrastructure lending
Eligibility
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.
Guidelines on Restructuring of Advances…
framework
• Seamless integration of work done and working
Integration papers for the audit
Report exceptions in
Use function Data - Finish the Action by Sort by Loan type by
LFAR / provision for
text to columns clicking finish amount
NPA
Practical Issues in audit of advances
• Drawing Power
• Classification Date of NPA
• Realisable Security Value
• Inter Company transactions
• Ever greening/ Restructured Advances
• Temporary Deficiencies - renewal
• Temporary Deficiencies – Stock Statements
• Term Loans
• EMI Concepts
• Circular Credits
• SARFAESI notice
• Financial Statement Analysis - threat of recovery
• Sale of Assets – Threat of recovery
Practical Issues in audit of advances
• Diversion of Funds.
• Devolved Letters of Credit / Bank Guarantees invoked
• Borrower Wise Classification
• Knowledge of business
• Physical Stock Verification
• Government Guaranteed Advances
• Agricultural Advances
• Continuous Overdrawing – Discretionary power
• Staff Advances against Shares
• Window dressing
• Premises Loans
• PMRY Loans
Case Studies on Advances – Drawing Power
A & Co, a Partnership firm enjoys a Cash Credit Limit of Sanction letter, terms
Rs.1,00,000/-, the account is operated within the sanctioned limit. of sanction, margin
The borrowers Statements Contains the following details stock stipulated to be
Rs.1,50,000/- Debtors Rs.50,000/- and creditors Rs.60,000/- verified for
determining DP
C & Associates, has reported a stock of Rs.10,00,000/- in their Access to other
monthly stock statements, the Cash Credit limit enjoyed by them is information
Rs.5,00,000/-. The inspection report of the Concurrent auditors available at branch
states that the stock figures reported includes dead and slow in determining DP
moving stocks to the tune of Rs.1,75,000/-, creditors is Rs.300000
Darshini, a small hotel, enjoys a Cash Credit Limit of Rs.100000/- Knowledge of business
against hypothecation of stocks in rural area, their annual turnover
is Rs.1080000/-. Operation in the account is satisfactory and within
the limit.
Case Studies on Advances – Classification Date of NPA
Gopi Aqua Ltd., an NPA account had 100 acres of coastal land on Realisable Value of
which aqua culture was carried on. The land was pledged as Security - Land
security against its loan outstanding of Rs.2 crores. The unit was
infested with a disease and hence the account turned sick on
30.9.2009.
During the boom period for aqua culture the price of these lands Validity of valuation
was Rs.3 lacs an acre, the valuation report dated 31.3.2010 report
showed the value of land to be Rs.0.5 lac per acre.
Harsha P Ltd., engaged in leather garments, had an outstanding Common sense
of Rs.50 laksh the account was classified as a NPA by the branch approach to audit
auditor since August 2012, the unit is not functioning since July
2012, As per stock statement of January 2013 it has a stock of
Rs.100 lacs consisting of raw hides / leather of Rs.20 lakhs, Semi
finished goods of 70 lakhs and Finished goods of Rs.10 lacs
(manufactured to a particular specification)
Case Studies on Advances – Realisable Security Value
(Cont…)
Imaging links, Who had availed of a Term Loan for Purchase of Application of
Machinery worth Rs.10 lacs during 2010 has defaulted to repay generally accepted
the loan, the guestimated machinery value as per the branch principles
management as at 29th January 2013 is Rs.10lacs.
Jessi & co, owes a bank Rs. 25 lakhs, the owner has given his Impossibility of
property in his remote native village, the single largest land of performance
1000 acres values at Rs.25 lakhs.
Case Studies on Advances – Inter Company
Transaction
Khan Bros, is a group concern, enjoying loan facilities along with Caution in cases of
ghan bros in the same branch, each with Rs.5 lakhs limit. There circular credits
are periodic inter transfer of funds between these two firms. But
there is no business transactions between the same.
Best Shoes is a shoe exporter enjoying Rs.5 crores Packing Credit Exclusion of credit
Limit, Best Leathers is also in the business of exporting of shoe summations of
uppers, shoe intermediaries etc., enjoying Rs.2 crores Packing circular and non
Credit Limit. genuine credits
Best Shoes did job works for best leathers to the tune of Rs. 50 Accomodation and
lakhs during financial year ending 2012. The Turnover of Best diversion
Shoes for the year ended 31.3.2012 was Rs.25 crores and that of
Best Leathers was Rs.10 Crores, During the year Best Shoes
received an advance of Rs. 1.50crores from Best leathers
Both the companies Fund based Limits are fully utilized Audit processes
throughout the year and periodically beyond the limits, however enable
not for 90 days continuously. determination
Case Studies on Advances – Ever Greening /
Restructured Accounts
Lawrance & co, enjoying a Cash Credit limit of Rs.5 lakhs Temporary
sanctioned on 1st October 2011 has been a very good account deficiencies – non
operating within the sanctioned limit, however due to the branch renewal
not having adequate officers his C/C limits has not been renewed
since 1.10.2012.
Mohan, a Machinery Manufacture obtained a Temporary Exceptions to asset
Overdraft for 6 months against LIC Policies of Rs.25000/- on 1st classification
July 2012.
Nath, a trader was sanctioned an adhoc limit of Rs.1 lac on Provisions on Adhoc
15.4.2012 for 6 months and the same was further extended for 4
months on 18.10.2012.
Jewel Loans Obtained by Jugraj on 30th December 2010 for a Security not a cover
period of 2 years is still not redeemed for asset
classification
Case Studies on Advances – Temporary Deficiency - Renewal of Cash
Credit, Overdraft and Demand Loans.
Varadaraj a spare part dealer does not submit his stock 90 days after the
statements for 3 months. delay / non
submission.
The branch auditor during the course of verification of the stock Consideration of facts
statement of X finds that out of the total stocks reported 25 and info in audit.
percent is reported as non moving and 15 damaged, the
drawings power is less that the limit sanctioned. The borrower
has been operating within the Sanctioned Limit.
Case Studies on Advances – Term Loans
O' Coffee, has defaulted in repaying their Instalments and are Determination of
classified as a Sub Standard Asset, they have not paid 3 monthly date of NPA
instalments as on 31.3.2013, a scrutiny of the ledger reveals that obligation on
the instalments not paid pertains to the period 1.4.2011 to auditors
30.6.2011.
Prince Pens have paid their Term Loan dues of 6 months on Window dressing –
3.2.2013 by issuing a cheque of Rs.60000/- from their Cash Credit analytical
Account. Upon transfer the balance Loan outstanding in the Cash procedure enable
Credit Account was Rs.135000/- as against a sanctioned limit of proper
Rs.100000/-. The manager has reported the excess drawing to classification –
the controlling authority. human intelligence
Case Studies on Advances – EMI Concepts
Thomas & Unni are related entities both enjoying Cash Credit Circular credits
Limits of Rs.50000/- each. During the year the Credit summation
of Thomas was Rs.200000/- and unni was Rs.250000/-, the Cross
transfer of funds from Thomas to Unni was Rs.150000/- and from
unni to Thomas Was Rs.225000/-.
Case Studies on Advances – SARAFEASI Cases
Zaheer Ltd, Could not repay their Term Loan instalment of Rs.5 Events occuring after
lacs for the months of January, February & March 2013 due on balance sheet date
10th of every month, During April the borrower was served with
notice u/s 13 for possession of the securities.
Case Studies on Advances – Financial Statement
Sheet Analysis – Threat of recovery
Zen who had obtained a Term Loan for buying a car had an Loss of primary
outstanding of Rs.150000/- in his account, he has not paid 2 security – threat of
months installment, however it came to the notice of the branch recovery – loss
that he has sold the car on 28th March 2013, there are no other asset
securities/ assets with Zen.
Case Studies on Advances – Diversion of funds
Rohan bought a Hyundai Accent Car, his balance sheet reflected Absence of drawing
capital including Current Account of Rs.5 lakhs, fixed assets power – diversion
including the car Rs.15 lakhs. He enjoys Rs.10 lakhs Cash Credit of funds
Limit and there are no other loans.
Case Studies on Advances – Letters of Credit
Devolved / Bank Guarantees Invoked
On 30th March 2013 Vikrams Letters of Credit and Bank Accounting treatment
Guarantees were devolved and invoked by the respective and grouping
persons, the branch paid the same on 1st April 2013, by keeping
them under other assets.
Case Studies on Advances – Borrower Wise Asset
Classification
Raghuram has three accounts with the branch, a Term Loan Borrower wise
which was a standard Asset, A Cash Credit account which was classification
also a standard asset however a Bill Purchased for Rs.10,000/- on
18th December 2012 had not been realized as on 31st March
2013 by oversight.
Restructured Accounts – fresh limits. Exceptions to
borrower wise
classification
Case Studies on Advances – Knowledge of business
The Total Turnover of Yash for the current year is Rs.6,00,000/- Knowledge of
which is 10% higher than their previous year turnover, the stocks business reflect
held by them are Rs.3,00,000/- as against a Cash Credit Limit of reality
Rs.2,00,000/-. Yash is engaged in Bakery business.
Rao, the branch statutory Auditor, during his visit to one of the Inclusion of stock
borrowers premises observed the following: verification of
single largest client
a. Stock books are not properly maintained. of the branch to
b. The stocks reflected in the stock statement and physical form part of the
verification showed significant variance audit program
c. There was slow moving / seconds stocks
d. There was damaged goods.
Case Studies on Advances – Government Guaranteed
Advances
Ramappa had also done the same thing as above towards his Drought hit – SLBC -
sugarcane crop which was affected by drought during the year norms
2012 -13.
Case Studies on Advances – Continuous Overdrawing
– Discretionary power
Mahesh Associates ledger account in the branch reflected that Discretionary power
they had continuously been using Rs.110000/-as against the not a substitute to
sanctioned limit of Rs.100000/- for four months, the branch sanctioned limit
manager has stated that he has used his discretionary power (up
to 20% of sanctioned limit) and hence the account is a
performing asset.
Case Studies on Advances – Staff Advances against
Shares
Prabhu a staff of a bank apart from availing other loans has also Staff loan does it fall
availed loans against shares, the market value of such shares has outside the scope
reduced by 50% for the last 1year due to huge volatility in the for asset
stock market. classification
Case Studies on Advances – Window Dressing
There is a solitary credit of Rs.15000/-on 31st March into the Window dressing
account of Venkat in his Cash Credit account of Rs.112000/-, by
discounting of a cheque.
Case Studies on Advances – Premises Loan
A Term Loan was given to Raja the landlord by the branch, the Terms of sanction –
terms of repayment was the entire rent to be adjusted towards non compliance –
the Term Loan, The EMI was Rs.8,000/- per month, rent was asset downgrade
Rs.7,000/- per month. The land lord has not been paying the
additional Rs.1000 from his pocket since the repayment
commenced during January 2010, the accountwas not classified
as a non performing asset since the branch has the possession
and security of the premises.
The Landlord has also been asking for an increase in the rent of Moc for increased
the extent of Rs.10,000/- being the market rent, however as per rent or increase in
the agreement rent is to be enhanced one in two years of 10% Contingent liability
the matter is pending settlement. provision as the
case may be.
Case Studies on Advances – PMRY Loans
One • Call the Branch manager to confirm the size of the branch and the unique
advances of the branch, restructuring, audit level ( covered under concurrent
etc)
• Document the key data on total advances, total deposits ( value and volume )
to form an idea on the time to be taken and the resources to be deployed
• The audit can be commenced and completed even for a date prior to March
31, 2013 and the final movements can be analysed after the Balance Sheet
date
• Understand the CBS reports that are being pushed on a daily basis ( 200+ )
including Specially Marked Accounts, Irregular loans, NPA reports
• Obtain opening balance files for NPA as at April 1, 2012 and reconcile to
previous Balance Sheet
AUDIT SAMPLING
Phase Actions
Two • The Balance Sheet totals ( general ledger ) are reflected in the loan
balances , CC OD and deposits file
Three • Audit procedures are the same for bank audits like in the case of other
audits and include the following
Inspection
Observation
Inquiry & confirmation
Computation
Analytical Procedures
Phase Actions
The key risks associated with audit of Deposits are KYC, AML compliance,
deposit related documentation, interest rate application , TDS compliance
and Lien on deposits
SB / CURRENT ACCOUNTS – CHECKLIST
The key risks associated with audit of Deposits are KYC, AML compliance,
related documentation, authorization to operate, identity of entity, interest
rate application. The checklist should cover all entity types to be filled up
after audit as Yes, No or Not applicable
CHECKLIST – LOAN AGST DEPOSITS
Bank Branch audit reports will be covered by SA700 and stands revised for the present year and
audit reports in respect of audits of financial statements for periods beginning on or after 1 st
April 2012 are to be issued in this revised format. T
he text of the revised auditor’s report format appears in the Appendix to the Revised SA 700 and
can be downloaded from website of the Institute of Chartered Accountants of India at URL:
http://220.227.161.86/17874sa700annx1.pdf .
For the ready reference of members carrying out audit of banks/ bank branches, the Auditing
and Assurance Standards Board of ICAI has developed relevant audit report formats in line
with the requirements of the revised SA 700 which are once again attached for your perusal.
Further, members undertaking bank branch audits are also requested that, pursuant to a recent
communication by the Reserve Bank of India to ICAI in this regard, the total number and amount
of debits/ credits arising pursuant to the Memorandum of Changes submitted by them, be given
under the heading “Other Matters Paragraph” on the face of the bank branch audit report/s
issued by them.
Necessary guidance in this regard is being provided in the 2013 Guidance Note on Audit of Banks
which would be issued soon.
PRECAUTIONS
Questions ?