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Showing posts with label Auditing. Show all posts
Showing posts with label Auditing. Show all posts
15 March 2010
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Auditing
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Credit Facility | Basis for treating a Credit Facility as NPA | Remarks |
Term Loans |
Agricultural Advances: In respect of advances granted for agricultural purposes where interest and/ or instalment of principal remains overdue for a period of more than two crop seasons for short duration crops and one crop season for long duration crops, the advance should be treated as NPA | Overdue: An amount due to the bank under any credit facility is ‘Overdue’ if it is not paid on the due date fixed by the bank |
Cash Credits & Overdrafts |
| Banks may not classify an account merely due to existence of some deficiencies, ––which are of temporary nature such as non–availability of adequate drawing power, balance outstanding exceeding the limit, non–submission of stock statements and non–renewal of the limits on the due date, etc However, outstanding in an account based on stock statements older than three months would be deemed irregular. Such account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower’s financial position is satisfactory. Further, an account where the regular/ ad–hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad–hoc sanction respectively, will be treated as NPA |
Bills Purchased & Discounted | The bills purchased/ discounted remains overdue for a period of more than 90 days | Overdue interest should not be charged and taken to income account in respect of overdue bills unless it is realised |
Other Accounts | Any amount to be received in respect of that facility remains overdue for a period of more than 90 days | |
Government guaranteed advances | State Government guaranteed advance would attract asset classification and provisioning norms, if interest and/ or principal or any other amount due to the bank remains overdue for more than 90 days | Credit facilities backed by guarantee of Central Government though overdue may be treated as NPA only when the government repudiates its guarantee when invoked. However, income shall not be recognised if the interest or installment has remained overdue or the account has remained continuously out of order or the bills or any other facility has remained overdue for a period of more than 90 days |
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DRAFT LETTERS
Draft of Management Representation Letter to be obtained from the Branch Management
April 7, 2010
Francischarlesassoc.
Chartered Accountants
Chennai
Dear Sirs,
Sub.: Audit for the year ended March 31, 2010
This representation letter is provided in connection with your audit of the financial statements of _____________ branch of _______________ BANK for the year ended March 31, 2010 for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the financial position of ___________ branch of _______________ BANK as of March 31, 2010 and of the results of operations for the year then ended. We acknowledge our responsibility for preparation of financial statements in accordance with the requirements of the Reserve Bank of India and recognised accounting policies and practices, including the Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India
We confirm, to the best of our knowledge and belief, the following representations:
1 ACCOUNTING POLICIES
The accounting policies which are material or critical in determining the results of operations for the year or financial position are set out in the financial statements and are consistent with those adopted in the financial statements for the previous year. The financial statements are prepared on accrual basis except as stated otherwise in the financial statements
There are no changes in the accounting policies followed by the branch during the current year
2 ASSETS
The branch has a satisfactory title to all assets and there are no liens or encumbrances on the branch's assets. The branch has not received any legal notices from the landlords asking them to vacate the premises that the branch is currently occupying as a lessee
3 FIXED ASSETS
The Fixed Assets held by Branches have been properly accounted and have been physically verified at the year end. No discrepancies are noticed on such verification. Depreciation on these assets have been adequately provided as per the policy of the Bank.
4CAPITAL COMMITMENTS
At the balance sheet date, there were no outstanding commitments for capital expenditure
5 OTHER CURRENT ASSETS
In the opinion of the management, other current assets have a value on realization in the ordinary course of the branch’s business which is at least equal to the amount at which they are stated in the balance sheet
6 CASH & BANK BALANCES
The Cash balance as on March 31, 2010 is Rs._____________
7LIABILITIES
The branch has recorded all known liabilities in the financial statements
8 CONTINGENT LIABILITIES
8.1 The branch has disclosed in notes to the financial statements all;
guarantees that we have given to third parties;
Letters of Credits (Local/ Import);
Letters of Comfort (Local/ Import);
Deferred Payment Credits/ Guarantees (Local/ Import);
and all other contingent liabilties
8.2 Other than for advances, there are no matters involving the branch in any claims in litigation, arbitration or other disputes in which there may be some financial implications, including for staff claim, branch rentals, municipal taxes, local levies etc except for those which have been appropriately included under contingent liabilities
8.3 Guarantees are disclosed net of margins as at the year–end, and expired guarantee where the claim year has also expired has been correctly removed from the branch return
8.4 Contingent liabilities disclosed in the notes to the financial statements do not include any contingencies, which are likely to result in a loss and which, therefore, require adjustment of assets or liabilities
8.5 No cases/ legal disputes are pending against the branch/ lodged by the branch, for which no liability has accrued/ is likely to accrue in the future
9 PROVISIONS FOR CLAIMS & LOSSES
Provision has been made in the accounts for all known losses and claims of material amounts
10 There have been no events subsequent to the balance sheet date that require adjustment of, or disclosure in, the financial statements or notes thereto
11 PROFIT & LOSS ACCOUNT
Except as disclosed in the financial statements, the results for the year were not materially affected by:
(a) transactions of a nature not usually undertaken by the branch;
(b) Circumstances of an exceptional or non–recurring nature;
(c) Charges or credits relating to prior years;
(d) Changes in accounting policies
12 We have made available to you all the following latest reports on the accounts of our branch, and compliance by the branch on the observations contained therein:
a) Previous year’s Branch Audit Report;
b)Internal Inspection Reports;
c) Report on any other Inspection Audit that has been conducted during the course of the year relevant to the financial year 2009-2010
Apart from the above, the branch has not received any notice, show cause, inspection advice, etc from Government of India, Reserve Bank of India or any other monitoring or regulatory authority of India that could have a material effect on the financial statements of the branch during the year
13 BALANCING OF BOOKS
The books of the accounts are computerized and hence the subsidiary records are automatically balanced with the relevant control records
14 OVERDUE/ MATURED TERM DEPOSITS
All Overdue/ Matured Term Deposits are held as Matured Term Deposits
15 ADVANCES
15.1 In respect of all the advances against tangible securities, the branch holds evidence of existence and market value of the relevant securities as at the year–end
15.2 All the borrowers’ account have been categorised according to the prevalent RBI norms applicable for the year, into Standard, Sub–standard, Doubtful or Loss assets, with special emphasis on Non–Performing Assets (NPA)
15.3 We have examined the accounts and applied the norms borrower–wise and not account–wise for categorising the accounts
15.4 The classification of advances made as at the end of the previous year has not been changed to a better classification
15.5 No income has been adjusted/ recorded to revenue, contrary to the norms of income recognition notified by the Reserve Bank of India; and particularly where the chances of recovery/ realisability of the income are remote
15.6 No income has been recorded on Non–Performing Accounts other than on actual realisation
16 OUTSTANDING IN SUSPENSE/ SUNDRY ACCOUNT
The year–wise/ entry–wise break up of amounts outstanding in Sundry deposits/ Sundry assets as on March 31, 2009 has already been submitted to you along with explanation of the nature of the amounts in brief and supporting evidences relating to the existence of such amounts in the aforesaid accounts
17 INTEREST PROVISIONS
17.1 Interest provision has been made on deposits, etc in accordance with the extant instructions of the Head Office
17.2 Any amount recorded as income upto the year–end, which remains unrecovered or not realisable, has been reversed from the respective income heads or has been debited to corresponding expenditure head during the year
17.3 The accounting treatment as regards reversal, if any of interest/ other income recorded upto the previous year end; and the amount reversed during the year under audit i.e. income of earlier years de–recognised during the year has been made in accordance with the prevalent RBI norms of Income Recognition
17.4 The interest provision for Head Office Interest shall be made at the Head Office
18 STATIONERY
Stock of unused stationery like security papers, cheque books, demand draft book, etc have been produced for your physical verification and are in order
19 LONG FORM AUDIT REPORT–BRANCH RESPONSE TO THE QUESTIONNAIRE
In connection with the Long Form Audit Report, complete information as regards each item in the questionnaire has been made available to you in order to enable you to verify the same for the purpose of your audit
20 OTHER CERTIFICATION
Duly authenticated, information as regards other matters which, as per the bank’s letter of appointment, require certification have been made available to you
21GENERAL
There is no enquiry going on or concluded during the year by Central Bureau of Investigation (CBI) or any other Vigilance or Investigating Agency on the branch or on its employees and no cases of Frauds or of Misappropriation of Assets of the branch have come to the notice of the Management during the year other than for amounts for which provisions have already been made in the books of accounts
22 The provision for non–performing assets, depreciation, provision for income tax, provision for bonus, gratuity, etc is made at the Head Office. Therefore the same has not been provided in the branch accounts
23 There have been no irregularities involving management or employees who have a significant role in the system of internal control that could have a material effect on the financial statements
24 At the end of the year, the branch has translated its holdings of Foreign Deposit Accounts at a notional rate of Rs.38 to 1 USD. The difference between the notional rate of Rs.38 and the actual rate as at the year end will be accounted for at the Head Office
25 The financial statements are free of material mis–statements, including omissions
26 The branch has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non–compliance. There has been no non–compliance with requirements of regulating authorities that could have a material effect on the financial statements in the event of non–compliance
27 We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements
28 The other particulars required have already been given to you and particulars and other representations made to you from time to time are true and correct in all respects
29 TAX AUDIT FOR THE YEAR ENDED March 31, 2010
TAX AUDIT IN TERMS OF SECTION 44AB OF THE INCOME–TAX ACT, 1961
The information required for the tax audit under section 44AB of the Income–tax Act, 1961 has been made available to you in order to enable you to verify the same for the purpose of your report thereon. In respect of the Tax Audit under section 44 AB of Income Tax Act, 1961 of _____________ branch of _______________ BANK for the year ended March 31, 2010, we certify the following:
PART – A
29.1Our Permanent Account No. is ______________
29.2 The address as per the jurisdiction of the assessee falls under section 124 of the Income Tax Act, 1961 is ______________________
29.3 The status as defined under the Income Tax Act, 1961 is Company
PART – B
29.4 There is no change in nature of business in current year as compared to preceding previous year
29.5 The books of accounts maintained by us have been correctly disclosed in clause 9(b) of Form 3CD
29.6 Our Profit & Loss account does not include profits and gains assessable on presumptive basis under section 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 172 of the Income–Tax Act, 1961
29.7 The method of accounting followed is as per clause 11(a) which has been consistently followed in the immediately preceding previous year. There was no change in the method of accounting employed vis–Ã –vis the method employed in the immediately preceding previous year
29.8 Sum received from employee towards contributions to any provident fund or super annuation fund or any other fund mentioned in section 2(24)(x) which is paid/ not paid within due dates to concerned authorities under section 36(1)(va) are mentioned in Clause 16 (b) of our Form 3CD and the same are correct
29.8 In Clause 17 of Form 3CD, there are no other amounts of such items debited to Profit & Loss Account
29.9 No payments are made to persons specified under section 40A(2)(b)
29.10 There is no amount of profit chargeable to tax u/s. 41 as disclosed under clause 20 of Form 3CD
29.11 Except for the items shown under clause 21 (ii) (B), no tax, duty or other sum as referred to u/s. 43B has been provided as at the year end
29.12 No expenditure/ income of an earlier year has been debited/ credited to the Profit & Loss Account except to the extent disclosed under clause 22 (b) of Form 3CD
29.13 No loans or deposits of Rs.20,000 or more have been repaid in cash other than those specified in the statement of particulars as given in the respective clause of Form 3CD. The details of loans or deposits of Rs.20,000 or more given in the said statement of particulars is true and correct
29.14 Section–wise details of deduction admissible under chapter VI–A
No other deductions other than those mentioned in clause 26 of Form 3CD is available to the branch
29.15 Details of delay in payment of tax deducted at source to the credit of the Central Government are given in the statement of particulars. Apart from that, there are no other delay in payment of Tax Deducted at Source
29.16 The other particulars required have already been given to you and particulars and other representations made to you from time to time are true and correct in all respects
Thanking you
Yours faithfully
For & on behalf of ___________ branch of _______________ BANK
Authorised Signatory
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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]
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Auditing
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About This Blog
FRANCIS CHARLES & ASSOCIATES
chartered Accountants
The firm is managed by Mr.Francis Charles and Mr.Antony Francis, who are partners and have vast experience in all aspects of Accounting, auditing, taxation, Company law Matters etc.
Notification 2010
