Bank audit

BANK BRANCH STATUTORY AUDIT – CERTAIN ASPECTS

Important Audit Checks

1.Deposit

i.Term

ii. Saving

iii.Current

iv. FCNR / NRE / NRNR

Verify transactions during the year relating to:

New Accounts opened
Compliance of KYC norms
Accounts closed
Dormant Accounts
Overdue Term deposits & banks policy for its renewal & interest provision thereon.
RBI Norms for Non–resident deposits & its operations – with due importance to opening and operation of accounts like NRE, NRNR, FCNR, RFC, etc
Interest on various types of deposits including savings account; Tax Deducted at Source and year end interest provisions.

Large deposits placed at the end of the year (probable window dressing)
Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, over drawings, etc
Examine interest trends as compared to average annual deposits (monthly average figures)

2.Advances

Extent of Checking :

Verify:

All the advances whose balance is lower of 5% of total advance or Rs.2 Cr.
Advances which are sanctioned during the year and other advances on test check basis depending on the balance outstanding.
Advances which are adversely commented by RBI inspection team, concurrent auditors, bank’s internal inspection

Some of the important areas to be examined /reviewed in respect of advances are:

Pre sanction stage:

Review of credit appraisal system before sanction of loan, system of renewal/review of loan.

Post sanction stage:

Whether terms of sanction have been complied with in case of new advances
Whether documents in respect of all the facilities are obtained as per the bank manual and charge has been created in respect of securities available to the bank
Whether end use of funds in case of new loans is verified.

Review and Monitoring of advances:

Whether the borrower is regular in submission of the stock & book debt statements and same are scrutinized by an officer and Drawing Power correctly calculated.
Whether insurance policies are on record and assets which are charged as security are adequately insured.
Whether regular inspection/stock verification of the borrowers is done by the Bank/ by a firm of CA as per laid down procedure of the Bank.
Whether frequently overdrawn accounts are properly monitored and reported to the Controlling Office.
Whether the borrower regularly submits its quarterly reviewed results (in case of listed companies) and annual audited financial statements. Whether they are scrutinized by the Officer to verify that actual results match with the projections. If not, whether clarification is sought.
Review the operations in the accounts on test check basis
Whether interest and penal interest in case of delayed submission of stock statements, overdrawn accounts etc. is charged.

Verification of statement of advances:

Check that classification of advances, income recognition and provisioning is done as per RBI guidelines
Scrutinize the final advances statement with regard to asset classification, ,security value, classification in secured and unsecured, drawing power, outstanding balance

3.Profit & Loss Account

Income/ Expenditure: Verify

Short debit of interest/ commission on advances with special emphasis on penal interest, commitment charges etc.
Excess/short credit of interest on deposits
Miscellaneous income like locker rent, income on forex business etc on test check basis.
Proper authority in sanction and disbursement of expenses as also the correctness of the accounting treatment given as to revenue & capital expenditure
Check accrual of income/ expenditure especially for the last month of the financial year
Divergent Trends

Divergent trends in income/ expenditure of the current year may be analysed with the figures of the previous year
Wherever a divergent trend is observed, obtain an explanation along with supporting evidences like monthly average figures, composition of the income/ expenditure, etc

4.Balance Sheet

Cash & Bank Balances

Physically verify the Cash Balance as on March 31, 2010 or reconcile the cash balance from the date of verification to March 31, 2010
Confirm and reconcile the Balances with banks as on March 31, 2010
Verify that the cash is held in dual custody

Investments

Physically verify the Investments held by the branch on behalf of Head Office and issue certificate of physical verification of investments to bank’s Investments Department
Check receipt of interest and its subsequent credit to be given to Head Office

Fixed Assets

Check that accounting of fixed assets is done in accordance with AS-10. Also check accounting of major capital expenditure especially in branches located in leased premises
Check Inter–branch transfer memos relating to Fixed Assets and whether they have been correctly classified in the accounts and depreciation correctly provided thereon

Inter Branch Reconciliation (IBR)

Understand the IBR system and accordingly prepare an audit plan to review the IBR transactions. The large volume of Inter Branch Transactions and the large number of un reconciled entries in the banking system makes the area fraud–prone
Check up head office inward communication to branch to ascertain date up to which statements relating to inter–branch reconciliation have been sent

Check and report

Reversal of any large/ old/ unexplained entries, which had remained outstanding in IBR
Items of revenue nature, cash–in–transit (for example, cash meant for deposit into currency chest) which remains pending for more than a reasonable period

Double responses to the entries in the Accounts
Test Check accuracy and correctness of “Daily statements” which are prepared by the branch and sent to IOR Department

Further, vide its circular no. DBOD No. BP.BC. 73 /21.04.018/2002–03 dated February 26, 2003, the Reserve Bank (RBI) advised the banks to maintain category–wise (head–wise) accounts for various types of transactions put through inter–branch accounts so that the netting can be done category–wise. Further, RBI advised banks to make 100 percent provision (category–wise) for net debit position in their inter–branch accounts arising out of the un reconciled entries, both debit and credit, outstanding for more than six months [Refer to the master circular (www.rbi.org.in)]

Suspense Accounts, Sundry Deposits, etc

Suspense accounts are adjustment accounts in which certain debit transactions are temporarily posted whose authorisation is pending for approval

Sundry Deposit accounts are adjustment accounts in which certain credit transactions are temporarily posted whose authorisation is pending for approval

As and when the transactions are duly authorised by the concerned officials they are posted to the respective accounts and the Suspense account/ Sundry Deposit account is credited/ debited respectively

Ask for and analyse their year–wise break–up
Check the nature of entries parked in such Accounts
Check any movement in such old balances and whether the same is genuine and has been properly authorised by the competent authority
Check for any revenue items lying in such accounts and whether proper treatment has been given for the same
Provision should be recommended against old debit balances which are unexplained or in opinion of the auditors is non recoverable.

5.Auditing in CBS/Computerised environment

Overall scope of audit does not change but audit procedure is affected. Conduct audit as per AAS 29- Auditing in CIS environment
Familiarize with EDP/CBS system, gain the understanding of the flow of transactions and specific control procedures by reviewing sample reports.
Review system audit report to understand the system, weakness in the system and suggestions made to improve the system
Verify various controls like a) control in respect of access to system, password protection, b) input control in respect of rate of interest, value of security, drawing power etc.
Verify how start of (SOD) and End of Day (EOD) procedure is handled.
Verification of system of uploading of transactions during down time.
Verify controls during transfer of data from CBS to software used for preparation of financial statements.
Verify controls in respect of access to data base, restriction on change in master data and back up controls
Verify Exceptional Reports.

6.Auditors Report & Memorandum of Changes

The Auditors Report should be a self contained document and should contain no reference of any point made in any other report including the LFAR
Include Audit Qualifications in the Auditors Report and not in the LFAR
Quantify the Audit Qualifications for a better appreciation of the point made to the reader
For suggesting any changes in the financial statements of the branch, quantify the same in the Memorandum of Changes (MOC) and make it a subject matter of qualification and annexe it to the Auditors Report
Certain items like provisions for employees benefit, provision on NPA etc. is done at Head Office and many Accounting Standards are complied with at Head Office. Auditors Report should contain qualification in respect of the same.

6.Long Form Audit Report(LFAR)

Study the LFAR Questionnaire thoroughly
Plan the LFAR work along with the statutory audit right from day one
The LFAR questionnaire is a useful tool for planning the statutory audit of a branch
Complete & submit the Auditors Report as well as the LFAR simultaneously
Comments in LFAR should be specific and not vague.
Give instances of shortcomings/ weaknesses existing in the respective areas of the branch functioning in the LFAR
The LFAR should be sufficiently detailed and quantified so that they can be expeditiously consolidated by the bank.

7.Certificates

There are number of certificates required to be issued by the Branch Auditors. Some of these certificates are relating to disclosures for the Bank as a whole. These are:

i)Certification of figures for capital adequacy as per Basel-II norms.

ii)Asset Liability management (ALM)

iii)Details of restructured account/interest sacrifice etc.

Branch auditor need to take due care while certifying the figures of these certificates. In respect of data for compliance of Basel II norms and ALM, the branch auditor need to ensure that data generated by the system are reliable. He need to apply appropriate audit checks to ensure that data generated by the system are reliable. Also refer the relevant Master Circular.

Certification of Ghosh and Jilani Committee recommendations is another important certification for which auditor should give suitable disclaimers wherever required.

8.General

Send a Letter of your Requirements to the Branch before commencing the audit [Draft Letter enclosed herewith]
Obtain the latest status of cases involving fraud, vigilance and matters under investigation having effect on the accounts and report it appropriately.
Obtain a Management Representation Letter (MRL) [Draft MRL enclosed herewith]