Bank concurrent audit


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Bank concurrent audit

  1. 1. BANK CONCURRENT AUDIT General Audit Procedures, Methods and Reporting byDINESH M, B.Com., A.C.A.PartnerKNMA & ASSOCIATES, Chartered Accountants,Chennai.Email:
  3. 3. INTRODUCTIONBank Concurrent audit was introduced and implemented primarily to attainthe following objectives: To supplement the efforts of the bank in carrying out simultaneous internal checks, not just reporting the errors identified. To reduce the interval between a transaction and its examination by an independent person not involved in its documentation. To improve the functioning of the bank, resulting in the upgradation of the working of the bank. KNMA & ASSOCIATES.
  4. 4. INTRODUCTION To identify whether the Systems & Procedures of the bank have been properly complied and implemented by the bank. To perform substantive checking of various areas of the bank operations and to make adequate rectification of deficiencies in the earliest possible period. To give advisory opinions to bank in areas such as taxation, financial analysis, etc., as and when it is necessary. KNMA & ASSOCIATES.
  6. 6. SCOPE OF CONCURRENT AUDIT Verification of Advances –  Appraisal,  Pre-sanction  Documentation  Post-sanction  Unit inspection  Review & Renewal, etc., Verification of Deposits –  New accounts opened including operations in SB/CA,  Transactions regarding Term deposits, KNMA & ASSOCIATES.
  7. 7. SCOPE OF CONCURRENT AUDIT  Inoperative accounts,  KYC Norms, etc., Verification of House keeping –  Cash Management,  Cheques & DDs,  Vouchers,  Periodical returns to Controlling office,  Maintenance of Specified Registers and Records KNMA & ASSOCIATES.
  8. 8. SCOPE OF CONCURRENT AUDIT Sensitive stationeries, Locker maintenance, etc., Verification of Revenue Leakage – Identification of Under recovery & Excess recovery of Income & Expenditure including Interest credited & paid, P&L Analysis, Budgetary comparison, etc., KNMA & ASSOCIATES.
  9. 9. SCOPE OF CONCURRENT AUDIT Verification of FOREX transactions –  NRE/NRO/FCNR accounts,  FCRA transactions,  Packing Credit,  Foreign currency business,  Submission of Returns, etc., Verification of Other Key areas –  TDS, Service tax,  Staff matters, Government transactions, etc., KNMA & ASSOCIATES.
  11. 11. DISCLAIMER The Areas covered herein are ONLY GENERAL and would be includedMOSTLY in concurrent audits of the All the banks. There are also CERTAIN AREAS which may be covered exclusively by Eachbank. Hence, the SPECIFIC AREAS would have to be examined and understoodon CASE to CASE basis, subject to the requirement of each bank. KNMA & ASSOCIATES.
  13. 13. GENERAL AUDIT PROCEDURE Concurrent Audit is not a ONE TIME activity. It is CONTINUOUS process wherein each aspects of banking operations are covered periodically & repeatedly The General audit procedures includes of 2 kinds of verification:  ON-SITE  OFF-SITE KNMA & ASSOCIATES.
  14. 14. GENERAL AUDIT PROCEDUREON-SITE: Verification of Loan and other related documents. KYC Norms. Voucher verification (including income & expenses) Cash management, Collection & clearing of Cheques. Checking of Daily reports generated. Unit inspection, Verification of Stock statements, Audited & Projected Financials of the Borrowers. KNMA & ASSOCIATES.
  15. 15. GENERAL AUDIT PROCEDUREON-SITE: Application of Interest (received/paid) for all the accounts. Verifying the suspicious transactions in all the accounts including Staff accounts. Checking the Various compliance functions to be adhered by the Branch such as TDS & Service tax (Remittances & Returns), Monthly & Quarterly returns & Certificates submitted to the Controlling office, etc., KNMA & ASSOCIATES.
  16. 16. GENERAL AUDIT PROCEDUREON-SITE: Physical verification of Sensitive items such as Cheque books, blank DDs & Term deposit Forms, Jewels, etc. Collection of Data regarding Loans accounts for the purpose of creating a DATABASE. KNMA & ASSOCIATES.
  17. 17. GENERAL AUDIT PROCEDUREOFF-SITE: Analysis of Various reports generated by us from the CBS regarding areas such as  Irregular/Overdue Loans, TOD/Excess allowed, NPA & Watch category accounts, Interest deviation, Day end reports, VVR, Cash Transactions, BS & PL, etc., Reporting of Key deficiencies identified. KNMA & ASSOCIATES.
  18. 18. GENERAL AUDIT PROCEDUREOFF-SITE: Identification of Accounts & Transactions that are subjected to further verification(verification can be done either ON-SITE or OFF-SITE). Comparison & Analysis of Branch performances in achieving its TARGETS and Positions of its ACTUALS. Comparative Analysis of BALANCE SHEET & PROFIT and LOSS Creation and Updating the DATABASE for Loan accounts and scrutinizing it periodically. KNMA & ASSOCIATES.
  20. 20. ESSENTIAL DOCUMENTATION & OTHER RECORDS Scope of the audit includes Verification of Several and Diversified operations of the bank. Concurrent audit requires PROPER DOCUMENTATION of the Auditor with:  Completeness  Timely Updation DOCUMENTATION refers both to the  Manuals concerning the Banking operations; &  Audit findings corroborating the discrepancies identified. KNMA & ASSOCIATES.
  21. 21. ESSENTIAL DOCUMENTATION & OTHER RECORDSBEFORE COMMENCEMENT OF AUDIT – (Permanent Files) Following Documents to be collected and maintained :  BOOKS OF INSTRUCTIONS – Rules regarding Operations & Functioning  MANUAL OF DOCUMENTATION – Advances & Deposits.  LOAN POLICY DOCUMENT – Objectives & Stipulations for each financial year.  MANAGER’S DISCRETIONARY LENDING POWER– Credit facilities sanctioned by the Branch Manager.  LOAN & DEPOSIT PRODUCTS – Category of Loans & Deposits & its conditions which can be traced from the Bank’s website or Intranet. KNMA & ASSOCIATES.
  22. 22. ESSENTIAL DOCUMENTATION & OTHER RECORDSBEFORE COMMENCEMENT OF AUDIT – (Permanent Files) Following Documents to be collected and maintained :  INTEREST RATES AND OTHER SERVICE CHARGES – Revenue Aspect.  CIRCULARS – Amendments & Highlights.  CBS MANUAL – Menus & Reports generated  BRANCH PROFILE – regarding Basic Data, Scale of Operations, etc., of the branch. KNMA & ASSOCIATES.
  23. 23. ESSENTIAL DOCUMENTATION & OTHER RECORDS Perusal of following reports:  CONCURRENT AUDIT REPORT OF THE PREVIOUS MONTH – to understand the Current Status of concurrent audit.  RBI/CO INSPECTION REPORT (Latest) – to make note of the Major findings & observations regarding any account, particularly Advances.  STOCK AUDIT REPORTS – regarding Cash credit accounts more than Rs. One crores.  REVENUE AUDIT REPORTS – to understand the major deficiency found in the Revenue aspect of the Branch  SPECIAL AUDITS (if any) – regarding any prime issue covered under such audits. KNMA & ASSOCIATES.
  24. 24. ESSENTIAL DOCUMENTATION & OTHER RECORDSAFTER COMMENCEMENT OF AUDIT – (Current Files) Following Documents to be collected and maintained:  MONTHLY REPORTS & WORKINGS – includes all the reports generated from CBS, audit workings & findings, other data collected, etc. for the Respective month.  PENDING & FOLLOW –UP REGISTER– regarding the Areas which are pending and are required to be followed-up in succeeding months.  UPDATION OF PERMANENT FILES – particularly concerned with recent Circulars issued by RBI/Bank HO, Loan products, Changes in Interest rates & Service charges.  AUDIT NOTE ON KEY AREAS – based on matters discussed with Branch officials. KNMA & ASSOCIATES.
  26. 26. BRIEF INTRODUCTION Advances (or Credit Facility) are of following types: FUND BASED & NON-FUND BASED Fund based:  Term Loans – ex: Housing loan, Education loan, Car loan, Jewel loan, etc.,  Cash credit – ex. : Loan against Hypothecation of Stock/Debtors.  Overdrafts Non-Fund based:  Letter of Guarantee & Letter of Credit  Co-acceptance of bills  Deferred Payment guarantee (for capital goods purchase) KNMA & ASSOCIATES.
  27. 27. ADVANCES KEY ASPECTS & THEIR VERIFICATION The following are steps followed by banks in sanctioning a Credit facility:  Appraisal  Pre-sanction  Documentation  Post-sanction compliances  Periodical assessing of the Working of the Account KNMA & ASSOCIATES.
  28. 28. ADVANCES KEY ASPECTS & THEIR VERIFICATION APPRAISAL:  In this process, the Bank would WEIGH & RATE the Financial Worth of the prospective borrower in order to sanction the Credit facility.  Such WEIGHING & RATING would be based on following criteria:  Purpose of the loan – either Business or Personal  Income potential of the borrower – based on Income tax returns, Project reports,  Nature & Value of Security available with Borrower – ex: Property, Jewellary, Bank deposits, Etc.,  Net-worth of the Guarantor – providing guarantee to the loan KNMA & ASSOCIATES.
  30. 30. ADVANCES KEY ASPECTS & THEIR VERIFICATION VERIFICATION OF APPRAISAL: Following are the GENERAL steps to be employed by auditor for verification:  ASCERTAIN the Loan products regarding the pre-requisites, Eligibility criteria, Essential documents to be obtained, etc.,  COMPARE these conditions with the procedures adhered by the Branch.  CRITICALLY ANALYSE whether borrower is eligible & has the potential to repay specific loan.  CONSOLIDATE & REPORT any discrepancy noted during verification. KNMA & ASSOCIATES.
  31. 31. ADVANCES KEY ASPECTS & THEIR VERIFICATION VERIFICATION OF APPRAISAL: Following PRECAUTIONS to be considered:  Verify the Manager’s Discretionary Power to ascertain whether the amount of loan falls under his Lending powers. If the limit exceeds the allotted power, then only the HIGHER AUTHORITY can process the loan.  Examine carefully whether the branch has obtained all the documents as stipulated by the bank.  Critical Analysis regarding Borrower’s potential should be done with UTMOST DUE DILIGENCE so as to report any serious matters. KNMA & ASSOCIATES.
  32. 32. ADVANCES KEY ASPECTS & THEIR VERIFICATION PRACTICAL ISSUE IN APPRAISAL:  Since the verification is based on case-case basis, auditor should verify each loan distinctly & not by same procedures.  Most of the banks have created separate Cell/Centre for processing Important loans such as Housing loans, Business loans, High value Term loans, etc.  In such cases, it is out of our scope of verification since we are concerned mainly with the Branch’s operations. KNMA & ASSOCIATES.
  33. 33. ADVANCES KEY ASPECTS & THEIR VERIFICATION PRE-SANCTION :  Once the Appraisal has been completed & the Loan has been processed, the Next stage is PRE-SANCTION.  In this stage, the branch has the following functions:  Preliminary inspection of the Business unit or Residence of the Borrower.  Inspecting the nature of the securities offered particularly immovable properties.  Preparing Reports after such inspection stating Specific reasons for either SANCTIONING/REJECTING the loan. KNMA & ASSOCIATES.
  34. 34. ADVANCES KEY ASPECTS & THEIR VERIFICATION VERIFICATION OF PRE-SANCTION :  Perusal of the Inspection Reports – so as to ascertain the nature of business functioning or regarding the immovable property charged as Security.  Validating the remarks/comments mentioned in such report with the areas verified under Appraisal. KNMA & ASSOCIATES.
  35. 35. ADVANCES KEY ASPECTS & THEIR VERIFICATION PRACTICAL ISSUE IN PRE-SANCTION :  Branches generally do not perform Pre-Sanction in REAL terms; but just for the COMPLIANCE purpose.  Our scope is limited only to the verification of Inspection report at this stage of loan.  We can verify the information given in this report only during OUR UNIT INSPECTION.  Also, as specified earlier, when the loans are processed by Separate Loan cells, Pre-sanction is done by their Officials not by the branch. KNMA & ASSOCIATES.
  36. 36. ADVANCES KEY ASPECTS & THEIR VERIFICATION DOCUMENTATION:  Documentation deals with preparation of Essential documents before the Disbursement of the Loan sanctioned.  The type & Number of the document would be enlisted in the Manual of Documentation.  Branch will prepare the Complete set of All documents signed by the Borrower and the Officer Concerned.  These Documents should be maintained & kept separately in a SAFE manner. KNMA & ASSOCIATES.
  37. 37. ADVANCES KEY ASPECTS & THEIR VERIFICATION VERIFICATION OF DOCUMENTATION:  Auditor should peruse the Loan Documents obtained & compare with the list specified in the Documentation manual.  He should verify whether:  All the particulars in the document have been FILLED IN.  All the particulars filled in are CORRECT.  Signature and Acceptance from the BORROWER has been obtained including the Sanction letter.  Branch official concerned have verified & authorized that all the documents have been duly obtained. KNMA & ASSOCIATES.
  38. 38. ADVANCES KEY ASPECTS & THEIR VERIFICATION PRACTICAL ISSUES IN DOCUMENTATION:  Most Banks would not allow the Concurrent Auditors to mention any Error in documentation.  They would convince us stating they would change it immediately. But they may forget/omit to change those errors.  So, it is HIGHLIGHTED that the errors noticed in the documentation should be specified in the Concurrent report. KNMA & ASSOCIATES.
  39. 39. ADVANCES KEY ASPECTS & THEIR VERIFICATION POST-SANCTION COMPLIANCES:  After the disbursement of the loan, the branch should monitor and comply all the term & conditions specified in Loan sanction letter.  This compliance includes the following:  Verification of End-use of funds – whether they are utilized for intended purpose.  In case of Immovable property offered as Security:  Mortgage has created & registered.  Valuation report, Legal opinion report, Latest Encumbrance certificate have been obtained. KNMA & ASSOCIATES.
  40. 40. ADVANCES KEY ASPECTS & THEIR VERIFICATION POST-SANCTION COMPLIANCES:  This compliance includes the following:  In case of vehicle loan – whether Registration certificate & Insurance policy has been obtained with one month of Loan.  In case Building and/or Stock given as security: Insurance policy has been duly done with adequate value covering the risk. KNMA & ASSOCIATES.
  41. 41. ADVANCES KEY ASPECTS & THEIR VERIFICATION VERIFICATION OF POST-SANCTION COMPLIANCES:  Even though Post-Sanction compliances vary for each category of loan, they would be enlisted completely in the sanction letter.  So, the Auditor should study it carefully & check whether all the points are adhered 100% by the branch .  Any lapses should be reported both to the Branch officials & Higher authority through audit report.  Also, Auditor should document the Key areas in the sanction letter so as to verify it later during the periodical review of the account. KNMA & ASSOCIATES.
  42. 42. ADVANCES KEY ASPECTS & THEIR VERIFICATION PRACTICAL ISSUES IN POST-SANCTION COMPLIANCES:  Certain terms & conditions might not be complied immediately due to some delays that are beyond the control of Branch authority. Ex: Mortgage registration for Immovable property, Vehicle registration from RTO, etc.  In such cases, Auditor should note these areas in his Follow up register and has to verify them in the forthcoming months.  When they are pending for longer time, it should be reported by the auditor. KNMA & ASSOCIATES.
  43. 43. ADVANCES KEY ASPECTS & THEIR VERIFICATION PERIODICAL ASSESSMENT OF THE LOAN ACCOUNT:  After all the Compliance enlisted above have been done, Loan amount will be disbursed to the borrower.  After Disbursement, the Bank has to CAREFULLY follow-up & monitor the following points:  Repayment of EMI & Servicing of Interest.  Utilising of Limit, Adequate Turnover, Submission of Periodical Stock/Debtor statements, Unit inspection, Audited financial statements, (in Case of Business accounts).  Overdue, if any, has been pending for longer period of time. KNMA & ASSOCIATES.
  44. 44. ADVANCES KEY ASPECTS & THEIR VERIFICATION PERIODICAL ASSESSMENT OF THE LOAN ACCOUNT:  The verification of auditor includes the following:  Assess the position of each loan account at the end of the month & inform the bank regarding any IRREGULAR accounts.  Verify & analyse the FACTS & FIGURES presented in PERIODICAL STATEMENTS filed by the Borrower.  Examine the Frequent UNIT INSPECTION done by the branch & highlight any serious lapses. (Auditor may also accompany the bank officials in any of the unit inspection.)  Verify & comment the recovery efforts done by the Branch in case of NPA accounts & Potential NPA accounts. KNMA & ASSOCIATES.
  45. 45. ADVANCES KEY ASPECTS & THEIR VERIFICATION PERIODICAL ASSESSMENT OF THE LOAN ACCOUNT:  The verification of auditor includes the following:  Examine periodically INSURANCE details of each loan & report to bank regarding EXPIRY date or INADEQUATE insurances.  Verify the accounts that are due for REVIEW/RENEWAL.  Check whether ACKNOWLEDGEMENT OF DEBT (AOD)/REVIVAL LETTER(RL) has been obtained for all loans that are more than 36 months old. (Exception: Jewel Loan & Loan against bank deposits) KNMA & ASSOCIATES.
  46. 46. ADVANCES IMPORTANT TECHNICAL TERMS MORTGAGE:  It is an official registration which gives right to bank to hold it as security for the loan.  Mortgage is done for Immovable property.  Mortgage is of TWO TYPES:  SIMPLE MORTGAGE  EQUITABLE MORTAGE KNMA & ASSOCIATES.
  47. 47. ADVANCES IMPORTANT TECHNICAL TERMS MORTGAGE Simple Mortgage or Equitable mortgage Registered MortgageIt is a proper mortgage It is just Depositing ofwhere it is registered in Original Title deeds to the the name of the Bank. Property with the Bank. Hence, The borrower Hence, The Bank’s name is not cannot dispose of this official registered, even though property without Bank’s Property cannot be sold permission KNMA & ASSOCIATES.
  48. 48. ADVANCES IMPORTANT TECHNICAL TERMS MORTGAGE Simple Mortgage or Equitable mortgage Registered MortgageGenerally done for properties It is MOST COMMON that do not have Original practice followed all over title deeds India (since procedures is simple) Ex: Inherited Properties OPTIONAL COMPULSORY REGISTRATION REGISTRATION Exception: Tamilnadu KNMA & ASSOCIATES.
  49. 49. ADVANCES IMPORTANT TECHNICAL TERMS HYPOTHECATION:  It is similar to Mortgage but it is applicable to MOVABLE PROPERTIES that are given as security.  Even though the bank does not have Direct control over these securities, Still the bank has the right to take the possession of them whenever required.  Unlike Mortgage, there are no Stringent Procedures to be followed. Ex: STOCK, DEBTORS, VEHICLES, ETC., KNMA & ASSOCIATES.
  50. 50. ADVANCES IMPORTANT TECHNICAL TERMS PLEDGE OR LIEN:  Pledge or Lien is surrendering of the Security to the bank’s control for the loan.  Hence, the Bank have 100% control over the asset. Ex: Jewel Loan, Loan against deposits KNMA & ASSOCIATES.
  51. 51. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS Cash credit (CC)/Overdraft loans accounts are distinct from Other type of loan accounts due to following reasons:  It is Limit based account mainly given for Business purposes. (Mostly to meet the Working capital gap)  It is a continuous account wherein the Borrower utilizes the limit as & when required.  There is no Fixed EMI repayment to this loan.  The Bank expects the borrower to route all this business turnover through this account.  The Credits in this account should be sufficient enough to atleast service the Interest debited. KNMA & ASSOCIATES.
  52. 52. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS Cash credit (CC)/Overdraft loans accounts are distinct from Other type of loan accounts due to following reasons:  Every month Bank fixes the Drawing power periodically (mostly monthly) for this account.  Bank reviews the functioning & operation of this account periodically (mostly quarterly). KNMA & ASSOCIATES.
  53. 53. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS DRAWING POWER(DP):  It is common term associated with CC accounts.  DP is fixed by the Bank each month based on the Stock statement/Debtors statement filed by the borrower.  Significance of DP is that it determines the limit up to which amount can be withdrawn from CC account, i.e., Max. Max. If Limit < If DP > Amount Amount DP Limit = Limit = DP KNMA & ASSOCIATES.
  55. 55. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS VERIFICATION OF DRAWING POWER(DP): Important points:  In case of Stock statement, auditor should verify, based on the nature of the Business of the borrower, whether particulars given are SUFFICIENT ENOUGH.  UNPAID STOCKS should be reduced for the computation.  In case of Debtors statement, the auditor should not take into account the Value of debtors who are outstanding for more than 90 days.  Also, the Borrower should submit CA certificate for the Debtors balance outstanding for every quarter. KNMA & ASSOCIATES.
  56. 56. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS PRACTICAL ISSUES IN DRAWING POWER:  Creditors for Stock (or Unpaid stocks) are not reduced.  Debtors aging more than 90 days are not reduced.  Quarterly CA certificate not submitted by borrower.  Particulars regarding Stock not furnished comprehensively. KNMA & ASSOCIATES.
  57. 57. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS TEMPORARY OVERDRAFT (TOD)/EXCESS ALLOWED:  Branch manager has the power to sanction an account holder to draw amount in excess of the available limit or balance based on his credibility & business expediency. Such excess is called TOD.  TOD is generally for a shorter period of time, say 30 to 60 days within which the borrower has to repay the amount.  For this, Bank charges additional interest at prescribed rate.  TOD can also be sanctioned for SB & Current accounts. KNMA & ASSOCIATES.
  58. 58. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS TEMPORARY OVERDRAFT (TOD)/EXCESS ALLOWED:  Auditor has to verify whether:  Branch manager has used his powers judiciously.  Frequent TODs granted to the same account more than the prescribed times.  Proper documents & security have been obtained.  TODs have been settled within the due dates or there are still outstanding in such accounts. KNMA & ASSOCIATES.
  59. 59. ADVANCES NPA & WATCH CATEGORY ACCOUNTS NON-PERFORMING ASSETS (NPA):  NPA is one which does not generate any income to the bank.  Following may be causes to become NPA:  Interest/EMI overdue for more than 90 days.  OD/CC account is out of order for more than 90 days.  In case of NPA, the bank should  Make Provision for Bad debts  Should Recognise Income only on RECEIPT basis not on ACCRUAL BASIS  For better understanding, Refer RBI Master Circular on Prudential Norms on IRAC dated 1.7.2011 KNMA & ASSOCIATES.
  60. 60. ADVANCES NPA & WATCH CATEGORY ACCOUNTS VERIFICATION OF NPA:  Auditor is concerned with whether the bank has  Correctly Classification of Each of Loan account as per IRAC norms  Provisioning has been done accurately.  Interest & other incomes have been charged as per the norms  Auditor should examine the Efforts taken by the Bank for recovery of these accounts. Recovery procedures may be as follows:  Regular Follow-up of the accounts & the borrower.  Filing Suits in the Courts.  Taking action under the Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act, 2002. (SARFAESI act) KNMA & ASSOCIATES.
  61. 61. ADVANCES NPA & WATCH CATEGORY ACCOUNTS WATCH CATEGORY ACCOUNTS:  These are the Loan accounts which have the potential to become NPA in the near future.  Every bank applies Different norms & uses Different names for classifying these category of accounts.  General norm is that:  Account overdue for more than 30 days.  Interest not serviced for more than 30 days. KNMA & ASSOCIATES.
  62. 62. ADVANCES NPA & WATCH CATEGORY ACCOUNTS VERIFICATION OF WATCH CATEGORY ACCOUNTS:  On the basis of the norms fixed by the Bank, Auditor should scrutinize the accounts.  Identify such accounts & report to the Bank to take adequate steps to prevent from becoming NPA.  Auditor should ensure that after the commencement of audit, Accounts should not be classified as NPA without being reported under Watch category list. KNMA & ASSOCIATES.
  64. 64. DEPOSITS BRIEF INTRODUCTION DepositsSavings Current Term Bank account deposits KNMA & ASSOCIATES.
  65. 65. DEPOSITS KEY ASPECTS & THEIR VERIFICATION In the deposits accounts, the auditor has to verify the following things: Account opening forms Adherence KYC guidelines (including AML) Conduct in the Newly opened Accounts Inoperative accounts KNMA & ASSOCIATES.
  66. 66. DEPOSITS KEY ASPECTS & THEIR VERIFICATION Account opening forms:  Auditor should verify all the Deposit account forms with regard to whether :  All the particulars have been properly filled in.  Account holder has signed in all the appropriate places.  Photo have been properly affixed & attested.  Branch officials have authorized & signed.  PAN or Form 60 has been duly obtained.  Proof of Identity & Proof of Address have been Correctly obtained.  Details of the account holder keyed in the CBS correctly KNMA & ASSOCIATES.
  67. 67. DEPOSITS KEY ASPECTS & THEIR VERIFICATION Adherence to KYC norms: Know Your Customer (KYC) norms have been prescribed so as to:  Confirm regarding Identity & Existence of the customer.  Bank Account is not used for Illegal purposes.  Money laundering is strictly prevented. (as per PMLA, 2002) KYC norms are as follows:  Introductory reference by Existing customer.  Obtaining Valid documents as Proof of Id & Address and Verifying them with the original.  Ceiling on the Cash transactions to be entered by the Customer: Ex: Issue of DD against cash for Rs. 50,000/- & more. KNMA & ASSOCIATES.
  68. 68. DEPOSITS KEY ASPECTS & THEIR VERIFICATION Adherence to KYC norms: Auditor’s responsibility is to check & examine whether the  Sufficient & Adequate Documents have been obtained to corroborate KYC adherence.  Bank has in REAL terms implemented the policy of KYC norms.  Operations of the Accounts opened during last 6 months does not involve High value transactions. KNMA & ASSOCIATES.
  69. 69. DEPOSITS KEY ASPECTS & THEIR VERIFICATION Inoperative accounts:  If the Deposits Accounts (particularly SB & Current) are not operated for a longer period of time, CBS of the bank automatically categorize it into Inoperative/Dormant status.  Once an account is flagged Dormant, the Bank monitors all the transactions done after that & also the Specimen signature is automatically blocked.  Since there is a possibility that fraud can happen through Inoperative accounts, Auditor has to be very cautious with Inoperative accounts. KNMA & ASSOCIATES.
  70. 70. DEPOSITS KEY ASPECTS & THEIR VERIFICATION Inoperative accounts:  The Auditor has to verify the Operations & Status of the Inoperative Accounts once in a week in Off-site.  If any discrepancy is noticed, it should be examined so as to ensure NO SERIOUS issue pertains to it.  Auditor should also discuss with the bank when any dormant is shifted to ACTIVE status. KNMA & ASSOCIATES.
  72. 72. HOUSE-KEEPING CASH MANAGEMENT:  Surprise verification of Cash by Auditor & Branch official  How many days Excess cash held by branch against the Retention limit.  Amount of Cut-notes & Soiled notes held by Branch.  Nature of Dealing of Counterfeit currencies.  Inward & Outward remittance of Cash (including Insurance)  How Excess/shortage of cash by cashier is dealt with. KNMA & ASSOCIATES.
  73. 73. HOUSE-KEEPING CHEQUES:  Issue of Cheque books to the customers.  Procedure for Collection & Clearing of Cheques.  Reconciling of Inward & Outward cheques with Clearing house.  In case of Cheque returns, collecting appropriate charges. DEMAND DRAFTS & PAY ORDER:  Procedure of Issue of Demand drafts & Pay Order  Collection of appropriate charges.  Service branch for making Payments against DD & Pay order. KNMA & ASSOCIATES.
  74. 74. HOUSE-KEEPING VOUCHERS:  Vouchers are the basic input documents which the Bank maintains invariably for all the transactions.  Voucher Verification gives the auditor the COMPREHENSIVE OPINION on the operations dealt with by the bank.  General procedures followed:  Vouchers should be stitched properly & in order.  Vouchers stitched should be kept safely & securely for prescribed period of years.  Voucher verification report is prepared in CBS. (in some Banks, this is not in practice.) KNMA & ASSOCIATES.
  75. 75. HOUSE-KEEPING VOUCHERS:  Voucher includes the following documents:  Deposit & withdrawal forms.  DD vouchers  Transfer challans  Cash Scrolls & EOD reports, etc.,  Auditor should examine  Whether All the vouchers are properly secured.  The Transactions represented by the Voucher & should get clarified from the Branch officials in case of Queries. KNMA & ASSOCIATES.
  76. 76. HOUSE-KEEPING PERIODICAL RETURNS:  Branch should submit Certain Periodical returns to its Higher authority as may be prescribed them.  Auditors should get the list of Such Returns to be filed along with the Due Date of submission.  Each month, he should verify:  The Returns have been filed promptly.  The Facts mentioned in such returns & examine it accuracy. KNMA & ASSOCIATES.
  77. 77. HOUSE-KEEPING MAINTENANCE OF REGISTERS & RECORDS:  The Bank has prescribed the Branch to maintain Certain registers & records in the Book of Instructions.  The auditor shall go through it & shall verify whether:  Prescribed registers & records are maintained.  Particulars written are complete & accurate.  The Records & Registers are Updated periodically.  Auditor should also mention in his report:  List of registers not maintained by the branch.  Any Factual errors identified in the report. KNMA & ASSOCIATES.
  78. 78. HOUSE-KEEPING SENSITIVE STATIONERY:  Sensitive Stationeries include  Cheque books  Demand Drafts & Pay orders  Term deposits Receipts  ATM cards & pin-mailers  Auditor should examine whether  Inward & Outward movement of these stationeries entered in the Movement register.  Physically verify these items periodically  Proper control is exercised over Wasted items or Lost items. KNMA & ASSOCIATES.
  79. 79. HOUSE-KEEPING LOCKER MAINTENANCE:  Safe Custody Lockers are provided by Banks to their customers for storing & maintaining their Essential items & documents.  For Locker operations, One key is provided to the Customer & Another key is available with the concerned official. Only with these two keys, lockers can be accessed.  Lockers of different size are held by Bank.  For this service, the Bank charges appropriate Locker rent. KNMA & ASSOCIATES.
  80. 80. HOUSE-KEEPING LOCKER MAINTENANCE:  Auditor should verify whether:  Locker Accessing Register are signed by customer before operating the locker.  Locker rent is collected each year.  In case of Locker Rent Arrears, Reminders has been sent & customers are prohibited from accessing the locker.  After the Locker is closed, the bank should interchange the Lock & Keys before sanctioning it to another customer.  In case of a locker not being accessed for a longer time, the Branch has referred the higher authority for breaking the lock. KNMA & ASSOCIATES.
  83. 83. REVENUE LEAKAGE REVENUE LEAKAGE:  Revenue Leakage refers to the  Under Recovery in the Income of the bank.  Excess charging of the Expenditure of the Bank.  Banks generally STRESS more this aspect of the audit.  Auditor has to CAREFULLY & CRITICALLY examine each and every transaction so as to ascertain whether there is a possibility of leakage.  When leakage is found out, he should ensure that the amount has been properly recovered for such transactions. KNMA & ASSOCIATES.
  84. 84. REVENUE LEAKAGE REVENUE LEAKAGE:  In case of Income, since there are large avenues covered by the Branch, the Auditor should go thorough all the manuals regarding to Interest rates & other charges levied by the bank.  He should be SPOT-ON in identifying the lapse & report it immediately to the branch officials.  In case of Expenditure, auditor should go through the powers & limits of Manager and should confirm whether Expenditure are done accordingly.  Also, he should analyse the prudence & mode of operation in incurring such expense. KNMA & ASSOCIATES.
  85. 85. REVENUE LEAKAGE INCOME LEAKAGE: Common reasons: • Interest rate wrongly keyed in the CBS INTERST ON • Changes done in the Interest rates LOANS without Authorisation • Interest debited not serviced. • Mistake in the calculation of PROCESSING Processing charges CHARGES • Non-recovery or Under recovery of PC • Omission to collect it properly. OTHER • Mistake in calculating the correct INCOMES amount. KNMA & ASSOCIATES.
  86. 86. REVENUE LEAKAGE EXPENDITURE LEAKAGE: Common reasons: • Interest rate wrongly keyed INTERST in the CBS PAID ON • Changes done in the DEPOSITS Interest rates without Authorisation • Incurring expenditure over & above the powers of the OPERATING Manager. & OTHER • Incurring without proper EXPENSES bills & vouchers. • Unreasonable amount KNMA & ASSOCIATES.
  87. 87. REVENUE LEAKAGE P&L ANALYSIS:  The auditor should analyse the P&L account of the branch at the end of each month.  Profitability should compared for each month with the previous month.  Any such following discrepancies should be noted & reported:  Debit Balance in Income head & Credit balance in Expenditure head.  Abnormal transactions occurred during the month  Revenue vs. Capital expenditure  Any other uncommon features. KNMA & ASSOCIATES.
  88. 88. REVENUE LEAKAGE BUDGETARY ANALYSIS:  Auditor should compare the ACTUALS vs. BUDGETARY TARGETS of the Branch.  Any sudden spurt or fall should be examined & discussed with the branch official.  This analysis is applicable both for Revenue items & Advances- deposits items. KNMA & ASSOCIATES.
  89. 89. OTHER KEY AREAS TDS & SERVICE TAX: With respect to TDS, auditor should verify the following:  TDS on Interest paid on Fixed deposits have been properly deducted.  Form 15G/H have duly obtained & submitted for applicable cases.  TDS made on other applicable expenses such as Rent, Professional charges, etc. should be examined.  Whether TDS deducted is remitted within due date (i.e, 7th of next month)  Quarterly TDS return has been filed.  Form 16A has been given to respective deductees. KNMA & ASSOCIATES.
  90. 90. OTHER KEY AREAS TDS & SERVICE TAX: With respect to SERVICE TAX, auditor should verify the following:  Service tax collected on incomes such as Processing charges, Charges on Specific services rendered have been done at Statutory rate of tax.  ST collected have been remitted within due date (i.e. 6th of next month)  Half yearly return have been filed properly. KNMA & ASSOCIATES.
  91. 91. OTHER KEY AREAS STAFF MATTERS:  With respect to Staff, the Bank gives various concessions & privileges to be enjoyed by them in banking operations.  Also, each staff enjoys certain administrative powers based on the position of Duty.  Hence, it is possible that he/she may misuse the powers assigned to them.  Thus, Auditor has the scope of verifying the Accounts & other operations of the Staff. KNMA & ASSOCIATES.
  92. 92. OTHER KEY AREAS STAFF MATTERS:  Salary & other allowances to Staff are controlled directly by the higher authority. Hence it is OUT OF AUDIT SCOPE.  Auditor should scrutinize the Bank accounts of the Staff maintained in the respective branch so as to ensure that:  No Abnormal or Unrelated transactions are recorded frequently in their account.  Staff does not misuse their powers to indulge in frauds or other serious issues.  Auditor should verify each & every staff accounts in this respect. KNMA & ASSOCIATES.
  93. 93. OTHER KEY AREAS GOVERNMENT TRANSACTIONS:  Generally, Banks accepts & process Government challans thereby acting as its Collecting agent.  Example of Transactions are:  Direct tax & Indirect tax collections  Pension payments for Government employees, etc.  For these transactions, they may/may not be given any commission by the bank.  In case of commission being given, the auditor should check whether the commission has been properly received & duly accounted for. KNMA & ASSOCIATES.
  94. 94. OTHER KEY AREAS PENSION PAYMENTS:  For most government retired employees, Bank acts as collecting agent for the pension paid by the government.  The government directly credits the pension to the Bank account provided by the employees.  For such function, the Bank has the following functions which the auditor has to verify:  Obtaining & submitting promptly the Life Certificate & other prescribed documents (once in a year)  Pension payment register & master is maintained.  Securing safely the Records such as Pension payment orders, Life certificate, Nomination form, etc., KNMA & ASSOCIATES.