Bank branch statutory audit in Computer environment; CBS systems and Long form audit report

1. Annual Bank Audit Conference,
ICAI, Madurai Chapter.
Hearty Welcome
To
Delegates/Members of ICAI, Madurai

2. Bank Audit- Definitions
• “Banking” is Accepting for the purpose of lending or
investment, of deposits of money from the public, repayable
on demand or otherwise, and withdraw able by cheque,
draft, order or otherwise”
• “Auditing “ is defined as an independent examination of
financial information of an entity with a view to expressing
an opinion thereon”

3. BranchAudit-Considerations
• Bank deals directly with cash and public money.
• Protection of public interest is top priority of regulator and
statutes
• Sec (30) of B R Act mandates that “the Balance sheet and P&L
account of the Bank should be audited by a duly qualified
auditor”.
• Audit of branches is required under sec 228 of companies Act
except where exemptions are obtained under Companies
(branch audit exemption rules 1961) and RBI guidelines.
• Increasing Frauds
• Advent of Technology
• Regulatory prescriptions

4. Peculiarities of Bank Audit
• Carried out once in a year and time for completing the audit is
very limited
• Increase in instances of fraud and new techniques of frauds
• Extensive dependency on information technology for
processing the transactions.
• Continuing development of new products, services and
technology
• Large volume and value of the transactions
• Statutory and regulatory requirements
• There is need for trained personnel to carry out the audit .
• Auditors should constantly update themselves on latest
status, RBI guidelines and technologies

5. Audit steps
• Pre-commencement- preparation
• Understanding the business of the branch
• Audit planning
• Substantive procedures
• Reporting

6. Audit in computerizedenvironment:
• CBS Systems :
CBS Vendor Banks
FINACLE INFOSYS PNB,OBC,ICICI
Flex-cube ORACLE Canara , syndicate, LVB,
KVB, Kotak
B@NKS24 TCS SBI Group , Indian bank

7. Risks in CIS environment:
• Potential for errors and irregularities due to :
• Invisibility of Data
• No visible evidence for unauthorized access /alter to data
• Errors in system handled transactions remain undetected due
to no human intervention.
• Errors in design or modification of programs may remain
undetected
• Manual controls depends upon system generated reports ,
hence error in report will affect even manual controls

8. Auditing and assurance standards (AAS)
• AAS -2- Objectives and scope of audit of financial
statements
• AAS -29 – Auditing in Computerized system environment
• AAS – 6 – Risk assessment and internal control
• AAS -9 - Using the work of an expert
• AAS -10- Using the work of other auditors

9. Before Commencement
• Send a Letter of your Requirements to the Branch before
commencing the audit
• Take note of level of computerization
• Acquaint with the system/manual /circulars
• Identify the reports available and map them to the data
required for auditing
• Verify year end processes prescribed by central office
• Review latest I S Audit report
• User account management review like logging register, access
rights assigned, maker/checker
• Password secrecy, complexity
• Avoidance of conflicting duties
• Exception transaction reports and mechanism for review of the
same

10. Deposits
Verify transactions during the year relating to:
• New Accounts opened; Accounts closed;
• Dormant Accounts;
• Interest calculations;
• Test check account statements for unusual/ large/ overdraft
transactions;
• Interest on various types of deposits; Tax Deducted at Source.
• Examine unusual trend in account opening or account closing,
dormant accounts that have suddenly been reactivated by
heavy cash withdrawals or deposits, overdrawing, etc.
• Examine interest trends as compared to average annual
deposits (monthly average figures).

11. Income /Expenditure:
• Review of interest application procedure
• Verify parameters of interest application/earlier audit report if
any
• Verify penal interest parameters
• Other charges- parameters – test check collection
• Test check the interest debit in large value accounts and
compare with computer generated amount
• Short debit of interest/ commission - on advances;
• Excess credit of interest - on deposits; Back dated opening;
• Check interest application of sample accounts of premature
closed accounts
• Divergent trends in income/ expenditure of the current year
may be analyzed with the figures of the previous year and
clarification obtained, wherever major divergence observed

12. Advances
• Obtain Balance Book of Loans and advances and tally the total with advances
figure reported in the Balance sheet.
• Review monitoring reports (irregularity reports) sent by the branch to the
controlling authorities in respect of irregular advances.
• Review appraisal system, Files of large as well as critical borrowers ,
sanctions, disbursement, renewals, documentation, systems, securities, etc.
• Review on test check basis operations in the Advances Accounts.
• Compliance of sanction terms and conditions in the case of new advances.
• Whether the borrower is regular in submission of stock /book debt
statements, insurance policies, balance sheets, half yearly results, etc.
• Verify Charging of interest and recovery for each quarter or as applicable
• Examine interest trends as compared to average annual advances (monthly
average figures).
• Check whether Non-Fund based (Letter of Credits/ Bank Guarantees)
exposure of the borrowers is within the sanctioned limits.

13. Advances - NPA
• Check classification of advances, income recognition and
provisioning as per RBI Norms/ Circulars.
• Scrutinize the final advances statements with regard to assets
classification, security value, documentation, drawing power,
out standings, provisions, etc.
• Review SMA-1 and SMA-II accounts report for few months-
check high value accounts for adherence to IRAC norms
• Review cases of compromise/ write off / waiver
• Review the devolved LCs and invoked guarantees and
amounts pending to be recovered and asset classification
• As per RBI norms, unrealized interest on NPA accounts should
be reversed and not charged to “Advance Accounts”. Reversal
of unrealized interest of previous years in case of NPA
accounts is required to be checked.

14. Balance sheet
• Verify List of assets and check availability of major listed assets
• Verify Depreciation on assets- F&F
• Whether cash is maintained reasonably within the limit fixed,
fully insured and dual control effective?
• Check reconciliation of interbank accounts and comment
along with age wise o/s entries
• Long pending sundry assets, suspense, sundry liability
• Any manual ledgers maintained , check and report deficiencies
observed , if any

15. Misc
• Whether all guidelines of FEMA and RBI adhered to?
• Nostro accounts, if any whether reconciled? Any long pending
debits?
• TDS deduction and remittance report
• TDS deduction/ Form 15-g/15-H accepting and submission /
PAN obtained status
• Staff accounts transactions verification process
• Deposit payments in cash for Rs. 20,000 -00 and above
• Particulars of fraud committed and suggestions for preventing ,
if any.

16. Audit Report and MOC
• 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 annex it to the
Auditors Report.

17. 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 statutory Audit Report as well as the
LFAR simultaneously;
• 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 / central
statutory auditor.

18. LFAR - Annex
• Advances disbursed without complying with the terms and
conditions of the sanction
• Credit facilities released by the branch without execution of all
the necessary documents
• Instances of deficiencies in documentation, non-registration of
charges, non-obtaining of guarantees, etc.
• Position of review / renewal of borrower accounts
• Instances of irregular submission of stock/book debt
statements and other periodic operational data and financial
statements etc.
• Instances where audited accounts were not received from
non-corporate borrowers enjoying credit facilities beyond
Rs.10 lacs.
• Instances of non-compliance of instructions with regard to
inspection / physical verification of security

19. LFAR- II
• Details of the cases of compromise settlement, write-off involving
write-off/waiver in excess of Rs.50.00 Lacs
• Details of outstanding amount of guarantees invoked and funded by
the branch as on details of old outstanding entries. Remarks should
include reasons for delay and whether in the opinion of auditor are
not recoverable and would require a provision/ write-off.
• Year-wise break-up of outstanding amount under other liabilities
• Reconciliation of general ledger and subsidiary ledger balance
• Questionnaire in connection with the long form audit report in case
of bank branches. (for large/irregular/critical advance accounts) (for
all accounts of rs.2 cr & above)
• List the accounts (with outstanding in excess of rs. 1.00 crore), which
have either been downgraded or upgraded with regard to their
classification as non-performing asset or standard asset during the
year and the reasons therefor.
• Statement showing details of suit filed accounts wherein the amount
involved is rs.10.00 lakhs and above.

20. IRAC Norms
• Interest or installment remains overdue for a period of more
than 90 days .
• The OD/CC account remains continuously “out of order” for a
period of more than 90 days i.e. Outstanding balance remains
continuously in excess of the sanctioned limit/ drawing power
or there are no credits continuously for a period of 90 days as
on the date of Balance Sheet or credits are not enough to
cover the interest debited during the same period.
• The bills purchased/ discounted remains overdue for a period
of more than 90 days.
• Agri Loans overdue for two short term crop seasons/one long
term crop season
• Once an account has been classified as NPA, all the facilities
granted to the borrower will be treated as NPA

21. IRAC – contd.,
• If the debits arising out of devolvement of letters of credit or
invoked guarantees are parked in a separate account, the balance
outstanding in that account also should be treated as a part of the
borrower’s principal operating account.
• If any advance, including bills purchased and discounted, becomes
NPA, the entire interest accrued and credited to income account in
the past periods, should be reversed if the same is not realised. This
will apply to Government guaranteed accounts also.
• However, interest on advances against Term Deposits, NSCs, Indira
Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may
be taken to income account on the due date, provided adequate
margin is available in the accounts.
• The asset classification of borrowal accounts where a solitary or a
few credits are recorded before the balance sheet date should be
handled with care and without scope for subjectivity. Where the
account indicates inherent weakness on the basis of the data
available, the account should be deemed as a NPA

22. Asset Classification
• a substandard asset would be one, which has remained NPA
for a period less than or equal to 12 months.
• an asset would be classified as doubtful if it has remained in
the substandard category for a period of 12 months
• A loss asset is one where 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.

23. Q & A ?
sathyanandaprabhu@gmail.com
Mob : 9442502094