Statutory Bank Branch Audit Technical and Practical Aspects

Statutory Bank Branch Audit -
Technical and Practical

Aspects
CA. Rajkumar S. Adukia

radukia@vsnl.com /rajkumarfca@gmail.com
http://www.carajkumarradukia.com
093230 61049/098200 61049
Agenda
1. General
2. Pre commencement of work
3. Understanding the banking business
4. Audit Planning
5. Audit procedures
6. Audit Reports
Bank Branch Audit Rajkumar S.Adukia 2

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) Nationalised banks
2) Co-operative banks
3) Private sector banks
4) Foreign banks
5) Regional rural banks

Special kinds of business
undertaken by bank branches
1. Foreign exchange business
2. NPA recovery business
3. Service branches dealing in Clearing house
operations business
4. Corporate banking and Industrial finance business
5. Personal banking business
6. Housing finance business
7. SSI business
8. Agricultural finance business

Pre-commencement Work

1. Beginning of audit cycle is from receipt of appointment
letter
2. 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)
3. Decision for Acceptance or Rejection of Assignment ( Cost
Benefit analysis, other considerations e.g. time available,
expertise available)
4. Communication with Previous Auditor by Registered AD
(clause 8 of First Schedule to the Chartered Accountants
Act, 1949
5. Finding Out Expected date of submission of reports

6. Finding out Scope of work
7. Issue of Engagement Letter under AAS 26.
8. Copy of all circulars of RBI applicable to branch have to
be obtained and kept ready for reference
9. Attending bank branch audit seminars could enhance the
auditor’s knowledge on bank audits
10. Banking terminology and schemes should be well
understood
11. A reading of Guidance note on audit of banks by ICAI
would provide valuable guidance.
12. It should be ensured that minimum fees is set as per RBI
circular dated 17th March 2004

Disqualifications
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)
1. Body Corporate
2. An officer or employee of the Bank
3. A person who is a partner, or who is in the employment, of an
officer or employee of the Bank
4. 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
5. 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. Internal financial management reports for current and
previous periods including budget if any
3. Previous year audit working papers
4. Discussion with and Letters seeking Information from bank
branch Manager
5. Bank policy and procedures manual

Knowledge of bank
business
Usage of knowledge of bank business
1. To develop an overall audit plan

2. To identify areas of special audit consideration
3. To evaluate the reasonableness of accounting estimates and
management representations
4. To make judgments regarding the appropriateness of accounting
policies and disclosures

Letter seeking information
Before actual commencement of audit a letter may be
written to the management of bank asking for following
information
1. Organizational chart of bank and bank branch
2. List of departments in the bank branch along with name of
head of department.
3. Authority and responsibility of each officer in the bank
4. Special feature of each banking product
5. Areas where work has been outsourced to outsiders

Letter seeking information
6. Copies of last year annual accounts and current year quarterly/half
yearly accounts
7. Information of top 10 borrowers for each kind of loan
8. Instructions issued by Head office for closing of accounts
9. Details of software used by bank
10. List of reports generated by the software
11. Accounting policy followed by the bank
12. Copy of day book

Areas where special knowledge about
the business of Bank Branch is required
 Special Features of Banking Business
 Special audit 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 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 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. Work of one staff member is invariably supervised / checked
by another staff member, irrespective of the nature of work
2. Banks have a system of job rotation among staff
3. The financial and administrative powers of each official / each
position are fixed and communicated to all persons concerned
4. 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. All branches of a bank have a unique code number which is
circulated amongst all offices of the bank
6. All books are to be balanced periodically. Balancing is to be
confirmed by an official
7. Particulars of lost security forms are immediately advised to
controlling so that they can exercise caution
8. 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) The system maintains a record of all log-ins and log-outs
2) 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
3) The system checks whether the amount to be withdrawn is
within the drawing power.
4) 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) Access to the system is available only between stipulated
hours and specified days only.
6) Individual users can access only specified directories and files
7) Exception situations such as limit excess, reactivating dormant
accounts, etc. can be handled only with a valid supervisory
level password.
8) A user timeout is prescribed
9) 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) Banking Regulation Act, 1949
2) Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970
3) Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980
4) State Bank of India Act, 1955
5) State Bank of India (Subsidiary Banks) Act, 1959
6) Regional Rural Banks Act, 1976
7) Companies Act, 1956
8) Co-operative Societies Act, 1912 or the relevant state Co-
operative Societies Act.

banking business
9) Information Technology Act, 2000
10) Prevention of Money Laundering Act, 2002
11) Credit Information Companies Regulation Act, 2005
12) Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002
13) Banking Cash Transaction Tax (Chapter VII of Finance Act,
2005)
14) Service Tax (Chapter V of Finance Act,1994)
15) Income Tax Act ,1961
16) Securities Transaction tax (Chapter VII of Finance (No 2)
Act , 2004

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 1st Oct 2005
 Master circular issued by RBI on Rupee export credit and export credit in foreign
currency dated 1st 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 balance-
sheet
 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 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

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


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

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. Capital Adequacy Ratio
2. Movements in NPAs
3. Movement of provisions held towards NPAs
4. Business (deposits plus advances) per employee
5. Maturity Patterns of deposits, borrowings, loans and advances
6. Exposures to real estate sector,Capital market
7. Disclosure of Penalties imposed by RBI
8. Details of Single Borrower/Group Borrower Limit exceeded by
the bank

Contents of Profit and Loss
accounts (Form B)
 Schedule-13 Interest Earned
 Schedule-14 Other income
 Schedule-15 Interest expended Schedule
 Schedule-16 Operating expenses

Types of accounting
softwares
1. Stand alone branch-level packages
2. Multi-branch solutions
3. Foreign branches
4. Packages for specialized areas
5. Packages for Service branch
6. 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
1) Treasury
2) Other bank operations
3) Residual operations
Geographic Segments
1) Domestic
2) International

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;
i. interest and/ or instalment of principal remain overdue for a
period of more than 90 days in respect of a term loan
ii. the account remains ‘out of order’ in respect of an
Overdraft/Cash Credit (OD/CC)

Definition of Non performing assets
as per Circular dated 01-07-06
iii. the bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted
iv. 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.
v. 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 re-
negotiations 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 Provision requirement (%)
remained in ‘doubtful’ category
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
(ii) advances classified as ‘doubtful 100 percent with effect from March 31,
more than three years’ on or after April 2005
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. Well planned is half done
2. One should know destination to plan well
3. Good planning leads to effective reporting. Audit
destination is report ( to express opinion on financial
statements)
4. Audit planning helps in controlling audit risks

Considerations for overall
audit Plan
1. The terms of his engagement and any statutory
responsibilities
2. The nature and timing of reports or other communication
3. The applicable legal or statutory requirements
4. The accounting policy adopted by bank and changes in these
polices
5. The identification of significant audit areas
6. The degree of reliance he expects to be placed on accounting
systems and internal control

Considerations for overall
audit Plan
7. The nature and timing of audit evidence obtained
8. The work of internal auditors and extent of their involvement
9. The involvement of expert
10. The allocation of work to be undertaken between joint
auditors and procedures for its control and review
11. 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. Inspection
2. Observation
3. Inquiry & confirmation
4. Computation
5. 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:
1. Be satisfied as to the physical existence of material negotiable
assets that the bank holds
2. Obtain the necessary understanding of the terms and
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) General
2) Verification of Advances against goods
3) Verification of advances against fixed deposits
4) Verification of advances vehicles
5) Verification of advances immovable property
6) Verification of advances against insurance policy
7) Verification of advances against shares
8) 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

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

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

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

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
CAAT may be used in performing various auditing procedures,
including the following:
1. 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. Analytical procedures, for example, identifying inconsistencies
or significant fluctuations
3. 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 ;
4. Sampling programs to extract data for audit testing
5. Reperforming calculations performed by the entity’s
accounting systems.

Audit Reports

Various Reports/Certificates
1. Tax Audit Report
2. Position of Advances above certain amount
3. PMRY Audit Certificate
4. DICGC Certificate
5. Verification on Friday Statements Certificate(Form X sec 27)
6. Service Tax Certificate
7. Income on Insurance Business
8. Frauds

Various
Reports/Certificates(Contd.)
9. Ghosh Committee Recommendations
10. Jilani Committee Recommendations
11. LFAR
12. MOC-Classification
13. MOC-Income Recognition
14. Other reports
15. 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 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 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 Nature of recommendation Imple Imple Imple
no in mentat menta mentat
WG ion tion ion
report Status Status Status
at at RO\ at HO
Branch ZO
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

S No Reco Nature of recommendation Imple Imple Imple
m no mentat menta mentat
in ion tion ion
WG Status Status Status
repor at at RO\ at HO
t Branch ZO
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

S No Recom’ Nature of recommendation Imple Imple Imple
WG ion tion ion
at at RO\ at HO
Branch ZO
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

S No Recom’ Nature of recommendation Imple Imple Imple
WG ion tion ion
at at RO\ at HO
Branch ZO
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.
S Recom’ no Nature of recommendation Implem Implem Implem
No in WG entation entatio entation
report Status n Status
at Status at HO
Branch at RO\
ZO
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.

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

THANK YOU

Statutory Bank Branch Audit Technical and Practical Aspects

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Statutory Bank Branch Audit -

Technical and Practical

CA. Rajkumar S. Adukia

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 Knowledge of bank business can be obtained from-

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1. To develop an overall audit plan

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Four categories of Transactions are usually undertaken at a branch -

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An audit program can contain following columns

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Audit Documentation and Audit Evidence are outcome of Audit

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