live webcast refresher course on bank audit · 2020-04-09 · live webcast refresher course on bank...

Live WebcastRefresher Course on Bank Audit

Organized by EIRC its Branches, Study Circles of ICAI

09 & 10-April-2020

SpeakerCA. D. Premnath, B.Com, FCA, DISA,FAFD

C Ramachandram & Co.,Hyderabad

9347556771

The View expressed in this lecture are of

my personal

The content of this video lecture has not

been specifically discussed by the Council

of the Institute or any of its Committees

and the views expressed herein may not be

taken to necessarily represent the views of

the Council or any of its Committees. 2

Content used in this video is from public

domain and certain content used in excel

sheets is only imaginary not real. Any

resemblance of this content is not

intentional. The content is purely for

training purpose not for commercial use.

3

Bank Branch Audit – A bird’s eye view

Audit Planning

• Understand Scope

• Training

• Role Mapping

Audit Execution

• Physical

• System

• System + Physical

Audit Documentation

• Working Papers

• Reconciliation

Reporting

Bank Audit - CBS▪ Auditing Standards - Understanding Banking Control

Manual/System, Preventive, Detective, Corrective &

Compensating

Controls – Case Study

▪ Understanding – CBS Reports

▪ Use of Excel in Bank Audit

Detecting Frauds, Hidden NPAs, Diversions

▪ Audit Tools – Spread sheet, Word, Google Docs

▪ Audit Documentation, Audit Note, MRL7

Banking Industry in Indian Economy

GDP – Rs. 190 Lakhs Crores

Deposits Rs 127.80 Lakhs Crores & Bank

credit Rs 96.80 Lakhs Crores

NPAs Rs. 10.00 Lakhs Crores

Banking Frauds Rs. 2.05 Lakhs Crores during

last 11 years of 50000 cases

8

How Control Lapses : Banks Non Compliance to RBI circulars

S

#

Banks Year Fine

Rs.

Violation

1 SBI, Corp

Bank,

BOB,UBI,

AHB, AB,

BOM, IOB

Feb

2019

6.5Cr non-compliance with various directions issued by

the RBI on monitoring of end use of funds,

exchange of information with other banks,

classification and reporting of frauds, and on

restructuring of accounts, the central bank said in a

statement, SWIFT, FEMA,

2 Karnataka

Bank

Feb

2019

4 delays in the implementation of new controls

relating to the SWIFT system of international

payments. Gitanjali Gems related fraud, with an

exposure of around Rs 86 crore.

3 UBI, BOM Nov

2018

3 Cr delay in detection and reporting of fraud in some

accounts9

S

#

Banks Year Fine

Rs.Cr

Violation

4 ICICI 2018 58.9 non-compliance of its directions on direct sale of

securities from its held-to-maturity (HTM)

portfolio and specified disclosure.

5 Indian Bank 2018 1 violating cyber security guidelines.

6 Federal Bank 2018 5 KYC/Anti Money Laundering

7 Axis, IOB 2018 5 NPA, AML, KYC

8 HDFC,PNB, 2016 10 irregularities in advance import remittances,

KYC/AML

7 22 Banks 2014 49.5 flouting norms and may be allowing customers to

launder money10

How Control Lapses : Banks Non Compliance to RBI circulars

NPA RBI AQI DivergenceBank Divergence Rs. Crs

UBI 589

LVB 54.9

Indian Bank 820

UCO 1217

SBI 11932

IOB 358

BOI 329

Central Bank 2565

11

RBI told banks to disclose divergence

when the additional provisioning for NPAs

assessed by RBI exceeds 10% of the

published net profits after tax

12

RBI AQI NPA Divergence in PSU Banks 45600Crs

How far NPAs are system Driven ?????

SC Judgement on Amrapali

13

• It is observed that there was no monitoring done by the

officials of Bank of Maharashtra, Andhra Bank and other

banks by releasing of term loan to the Company.

• Even basic checks, End Use of funds were forgone

• No technical requirements followed as relating to release

of Term Loan facilities to a borrower.

• The banks acted as mute spectator to unapproved

diversion which was almost happening evidently in all

banking transactions

Bank IS Audit Experience▪ Inadequately scoped

▪ It lack coverage of end to end testing covering all its interfaces and input, processing and output control.

▪ There is no testing on configuration control of all input control in interface and all applications controls covering edit and validation check for completeness, accuracy, reference, validity and calculation, segregation of duty both in interfacing as well as cbs.

▪ There is no scoping for report generated from logic and completeness perspective only accuracy is partially checked.

▪ Mandatory field are not adequately defined as per regulation.

14

Bank IS Audit Experience

▪ Master data field, completeness, accuracy is not tested.

▪ Lack of data governance and data leakage audit

▪ There is no checking for overall impact assessment of Gap noted and compensatory and mitigating control.

▪ What is actually done is just a tip at iceberg.

▪ Those who do IS audit not understand business and vice versa is also true.

15

Bank IS Audit Experience

Solution

▪ Regulators to be educated on scope and risk Enterprise architecture of bank to be clearly documented and updated for scoping adequately

▪ Adequate training on IS audit risk and audit approach Centralized end to end testing by specialist and all observation on IS audit to be critically reviewed for impact assessment

16

CBS versions in use are different, security solutions,

controls divergent: RBI ex-ED - RBI G. Padmanabhan▪ “Customisation is varied. Security solutions and controls are divergent.

▪ Pointing out the process of merger was complex, he said the banks ought to be

conscious of the security challenges. “Banks have started discussions… but they

should focus on security as much as on functionalities or user interfaces,” he said,

adding skill set availability on security will be a greater challenge.

▪ “There is a lot of dependency on service providers. There is a significant

cybersecurity risk in that a lot of data is going back and forth and held by third

parties,” he said, asking “will a merger of different versions of CBS enhance the

challenge?”

▪ Another challenge would be merging of SOC operations of the banks.

▪ Different banks may have different set of controls and until these are fully merged the

weakest link threat needs to carefully monitored and controlled, he said.

17

18

We state in our Audit Report.

“We have conducted our audit in

accordance with generally accepted

auditing standards in India………”

Non Compliance will attract

penal action U/s 21 of CA Act

SA – 230, 300-499, 500,520, 530, 710

18

AUDIT PROCESS FLOW ASSERTIONS

CHECK CONTROLS

1. COMPLIANCE TEST

AUDIT TEST

2. SUBSTANTIVE TEST

ANALYTICAL PROCEDURES

ROMM - RISK OF MATERIAL

MISSTATEMENTS

OBSERVATIONS

DISCUSS WITH TCWG(THOSE CHARGE WITH GOVERNANCE)

AGREENO POSSIBILITY TO

RECTIFY DISAGREE

1. PROVIDE/CREATE PROVISION

2. WRITTEN OFF

DISCLOSE QUALIFY

EMPHASIS MATTER PARAGRAPH

Existence,

Completeness,

Valuation,

Rights and Obligations,

and

Presentation and

disclosure

Audit Under CBS – SA 315

Compliance Procedure –Controls around CBS

Assertions & ROMM

Substantive Procedure –inspection, observation, inquiry,

confirmation, recalculation, reperformance, or

analytical procedure

Assertions & ROMM

21

SA 315

Identifying and Assessing the Risks of Material

Misstatement Through Understanding the Entity

and Its Environment

Business of bank is collecting deposits and

lending loans/LC/Guarantees

Runs as per Banking Regulation Act, FEMA, PMLA, IT Act, GST, IBC

Negotiable Instruments Act, Etc.,

Accounting as per Accounting Standards

issued by ICAI

Major Business is operated and controlled

thru CBS & Other Standalone Applications

22

▪ BoB were alleged to have remitted Rs 6,000 crore of black money late last year.

▪ Pursuant to the internal audit of the Bank of Baroda, the Reserve Bank of India and

investigative agencies in October 2015 were advised by the bank of certain

irregularities observed

▪ The RBI carried out the investigation and noted the deficiencies which were

reflective of weaknesses and failures in internal control mechanisms in respect of

certain anti-money laundering provisions such as monitoring of transactions, timely

reporting to Financial Intelligence Unit and assigning of Unique Customer

Identification Code to customers, BoB said.

▪ In a clarification to the exchanges on October 12, 2015, BoB had said that a total of

5,853 outward foreign remittances transactions aggregating to $546.10 million

(around Rs 3,500 crore) for the purpose as ‘Advance remittance for Imports’ and for

other purposes have been remitted through 38 current accounts to various overseas

parties numbering about 400, mainly based in Hong Kong and one of them in the

UAE. PNB also informed the BSE that the RBI has imposed an aggregate penalty of

Rs 3 crore on it.

25

Evidence of Import - Physical Imports(i) If Rem. exceeds USD 100,000 or its equivalent, it is obligatory on the part of

the AD to ensure that the importer submits :-

(a) EC copy of B/E for home consumption, or

(b) EC copy B/E for warehousing, in case of 100% EOU/ or

(c) Customs Assessment Certificate or Postal Appraisal Form, as declared by the

importer to the Customs Authorities, where import has been made by post, as

evidence that the goods for which the payment was made have actually been

imported into India.

(ii) For imports on D/A basis, AD should insist on production of evidence when

effecting remittance. However, if importers fail to produce documentary

evidence due to genuine reasons such as non- arrival of consignment, delay in

delivery/ customs clearance of consignment, etc., AD may, if satisfied, allow

reasonable time, upto 3 months from the date of remittance, to the importer.

27

•Verify System /Manual Controls•Verify Preventive Controls•Verify Detective Controls•Verify Corrective Controls•Verify Compensating Controls•Extract CBS Reports

Various Application – Banking System▪ Core Banking Application – “FINACLE” of Infosys Ltd inclusive of modules

including NPA Management system (as IRCA norms), Government Business Module (GBM), etc.

▪ Core Banking Application – “FINACLE” of Infosys Ltd for Overseas branches and UK subsidiary of Bank.

▪ Application Audit for Internet Banking for Domestic and overseas branches.

▪ Treasury Application from M/s Infosys (Replaced existing KASTLE system), being used at our Treasury branch.

▪ Application purchased from CMC (TCS) for our Demat operations.

▪ LAS (Lending Automation Solution)

▪ MIS (Management Information System)

▪ PeopleSoft HRM Solution29

Various Application – Banking System▪ MFTP (Matched Fund Transfer Pricing)

▪ SWIFT

▪ ATM Switch

▪ Document Management System (Account Opening Process)

▪ Enterprise Application Integrator (EAI)

▪ Oracle GL

▪ Centralised FI gateway Application including E-KYC, DemoAuth, APBS, etc.

▪ E-Remit

▪ GSTN System

30

Materiality & Audit Risk

Loans issued are not used

for the purposes for

which it is sanctioned

Prudential norms are

not followed

Accounting treatment is

not in accordance

with AS

control under CBS is

not adequate

31

System Driven NPAs - How reliable is that ?

Can the system detect the ever greening?

1. Servicing interest/installment

▪ from CC/PC account to C/A;

▪ from C/A to TL or

▪ disbursement to CC.

2. Adhoc limits to regularise.

Limit expired 30jun, Adhoc for 3 months – 30Sep, To be renewed within 180 days – 31Mar – May be PA


3. Transfer from associate units by allowing excess in CC or new TOD.

4. New loans to Related parties and funds transferred to irregular accounts to reflect as PA

5. Cheque purchase account to CC and chequereturned next day.



6. Intra day credits & debits

7. Same credit for two quarters by interchanging balances among Related parties

8. Accounting of Devolved LCs

9. Exceeding in Bills limit

10. Inadequate/ wrong DP

11. Combined excess of CC & Devolved LC


System Driven NPAs - How reliable is that ?Non financial aspects

1. Extension of COD

2. Non satisfactory performance in restructured accounts

3. Additional Finance on restructured account

4. Stock statement older by 6 months.

5. NPI of the borrower account

6. Interest accrued during extended COD period.

7. Where the CC limit is full, credit in CC towards Term loan installments/ interest and debit to CC and transfer to TL but in CC, but other credits are not enough to CC interest debits.

System Driven NPAs - How reliable is that ?Non financial aspects

Overview of Finacle

37

Overview of Finacle

▪ Menu Block: The block houses all the menu and sub-menu options available in Finacle.

▪ Menu Option Block: Menu Code to be entered to gain access to the respective menu.

▪ Action Bar: User can execute the process of Finacle Operations by clicking on various options on this bar. The Hot-Keys are also assigned for all options, which appear on the bar.

▪ Message Bar: The message Bar displays warnings, exceptions, errors or Lists under a specific field code.

▪ Favorites: Menu items which are required and used on Regular basis can be put in favorites by copying from Menu Block. As a one time process Specific Menu Item which is required to be copied to Favorites should be located in Menu Block and with the use of Drag and Drop the function can be stored under Favorites menu.

▪ Progress Indicator: It shows the progress of the action initiated through the use of Colours (i.e.Green indicates that the System is “Ready” for processing and Red indicates that the “System is busy in Processing Activity:

38

39

Type abrep at the

menu option and

press enter it

shows the following

screen

40

ABC Bank Reports

41

ABC Bank ReportsType module name, you will get the

list by pressing F2 then select the

required module by holding Shift+F4

and then press F4 it goes to report

number and then follow the same

procedure.(by pressing F2 and then

select required no. by holding shift +

F4 ) .For Going Back screen F3

should be used. And then press F4 it

displays the following screen

42

Type Branch code , and then

date other fields are optional

and then press F4 it displays

the following screen

43

Type F/B and then Y or N in print

required press F4 for going next tab

and come to BG Queue and then

Press F10. Type y at print option it

will give the print directly. for soft

copy u have to follow the following

procedure

44

The above screen

means some working is

going on after

processing it displays the

following screen

45

Type t at box and press

CTRL+e it displays the

following screen

46

Then come to main menu screen by

clicking at menu option which is

available at down tool bar or u can

come by pressing F3 upto u get the

following screen

47

Type PR at menu option

and press enter it displays

the following screen.

49

Type t at box and press

CTRL+e it displays the

following screen

50

Then press Ctrl +e it

displays the message at

the bottom whether file has

been transferred or not like

in the following screen.

51

It saves the file

in the path given

52

LOG on Screen

53

Enter the user no., Password, Branch No., Terminal No. and then click to transmit

54

menu screen, for enquiry about the customer is Short, &

long EnquiryEvery Customer must

have a CIF no. (Customer information

form no.)

55

Click at DEPOSIT /CC/OD Accounts Menu it gives the different options and then click at Enquires again it

gives the different options.. For term

Loan there is another Menu DL/TL Accounts & Services.

56

click at transmit

click at Long Enquiry

enter account no.

57

We can see Rate of interest, Outstanding Balance, and basic

information about the customer.

58

To View the transactions in a customer account. click DEPOSIT/cc/od Accounts and then Enquires, and then at transactions it displays the following

screen.

59

It displays the above screen, if we enter the account no. and enter the start date

and end date and click at transmit, it displays the following screen.

60

It Displays the above screen, it displays only 14 transactions at a time, for next transactions we have to enter the

transactions number at (like 15 ) Next Transactions Serial No. and then click at

transmit

Audit Approach - Cash▪ Physical Verification

1. Collect prescribed procedure for physical verification of cash and confirm the samehas been adhered to.

2. Normally cash is being physically verified & signed by the joint custodians atthe end of the day, the same can be verified from daily cash register anddeviations any to be reported

▪ Foreign currency – All above points are applicable to foreign currencyalso.

▪ Additional Points1. Auditor also can comment on identification and disposal of soiled notes, counterfeit

notes, stapling of notes, use of ultra violet lamps, Note counting machine etc..2. Obtain a certificate from the bank indicating denomination-wise cash balance as on

the date of verification

Bank Reconciliationa) Were balance confirmation certificates obtained in respect of outstanding

balances as at the year end and whether the aforesaid balances havebeen reconciled? The nature and extent of differences should bereported.

b) Your observations on the reconciliation statements may be reported inthe following manner:

i. Cash transactions remaining unresponded (give details)

ii. Revenue items requiring adjustment/write-off (give details)

iii. Old outstanding balances remaining unexplained/unadjusted.

Give details for

- Outstanding between six months and one year

c) - One year and above In case any item deserves special attention ofthe management, the same may be reported.

Audit Approach - Bank Reconciliation

BRS1. Verify whether the branch has any balances with other banks.2. Obtain confirmatory letter from the bank or branch wherever

applicable.3. Ensure whether BRS is prepared periodically.4. Verify BRS on a test check basis.5. Check for unresponded credits/debits found in the BRS and report

the same.1. Pending revenue items like charges etc which requires provision in

opinion of auditor can be recommended for providing & alsomention SUCH CASES in MOC

3. MONEY AT CALL AND SHORT NOTICE

▪ Has the Branch kept money-at- call and short notice duringthe year?

▪ Concept Money lent for one day is called Money at call and

more than one day upto 14 days is called Money at short notice.

▪ Audit Collect the instructions from HO & confirm the same has been

complied.

Report any unauthorized deposits as well excess of unauthorizedlimits.

4. INVESTMENTSA. For Branches in India

a) Are there any investments held by branches on behalf of Head Office/other offices of the bank? Ifso, whether these have been made available for physical verification or evidences have beenproduced with regard to the same where these are not in possession of the branch?

b) Whether any amounts received as income on such investments have been reported to the HeadOffice?

c) In respect of investments held by branches on behalf of Head Office/other offices of the bankwhether any income is accrued/ received and recognized as income of the branch contrary to theinstructions of the controlling authorities of the bank?

d) Whether there are any matured or overdue investment which have not been encashed? If so, givedetails.

e) Whether the Guidelines of the Reserve Bank of India regarding Transactions in Securities have beencomplied with.

f) Whether the Guidelines of the Reserve Bank of India regarding Valuation of Investments have beencompiled with.

Audit Approach - InvestmentsCheck

1. Obtain Nil holding certification if br. do not hold any investments.2. Obtain list of all investments held by the branch as on year end.3. Conduct physical verification of investments and tally with the above schedule4. Do physical verification of investment certificates along with investment register.5. Verify the evidence for investments not in possession.6. Comment the cases neither certificates have been made available for physical

verification nor evidence as mentioned above are made available.7. Verify the accounting procedure for income recognition on investments.8. Comment on investments matured and overdue but still lying in branch records.9. Obtain CO Guidelines for valuation of investments. Comment in case guidelines are not

available as well deviation in valuation process.10. Obtain the schedule of investment held by the branch.

▪ Generally not applicable for most of the branches

▪ Investments in Branches outside India - Being done at CO not relevant at branch level.

Advance

▪ Areas to cover1. Credit Appraisal2. Sanctioning/Disbursement3. Documentation4. Review/Monitoring/Supervision5. Guarantees and Letters of Credit

▪ What to check In respect of large advances, all cases of major adverse features, deficiencies etc. should be

reported. In respect of other advances, the auditor may comment upon the relevant aspects generally,

along with instances of situations giving rise to his reservations or adverse remarks.

▪ Large Advance Means outstanding amount > of 5% of the aggregate advances of the branch or Rs.2 cr, WIL

5. ADVANCES contd..

a) Credit AppraisalIn your opinion, has the branch generally complied with the procedures/instructions ofthe controlling authorities of the bank regarding loan applications, preparation ofproposals for grant/ renewal of advances, enhancement of limits, etc., includingadequate appraisal documentation in respect thereof.

b) Sanctioning / Disbursement In the cases examined by you, have you come across instances of credit facilities

having been sanctioned beyond the delegated authority or limit fixed for thebranch? Are such cases promptly reported to higher authorities?

In the cases examined by you, have you come across instances where advanceshave been disbursed without complying with the terms and conditions of thesanction? If so, give details of such cases.

Audit approach – Credit Appraisal

▪ Credit Appraisal : Examine appropriate forms as being prescribed by the CO have been

used according to the nature of loan/limit.

Check list of the pre sanction documents to be obtained

Preparation of proposal for new/renewal/enhancement ofloans/limits.

Verify all legal documents obtained, executed and filled properly inToto.

Audit approach – Sanction/disbursement

Sanction/disbursement : Verify any credit facilities sanctioned beyond delegation of

powers, higher authorities ratification obtained in case of deviations. If not, mention the same.

Report the instances where loans disbursed without complying the sanction terms.

5. ADVANCES contd..

c) Documentation In the cases examined by you, have you come across instances of

credit facilities released by the branch without execution of all thenecessary documents? If so, give details of such cases.

In respect of advances examined by you, have you come acrossinstances of deficiencies in documentation, non-registration ofcharges, non-obtaining of guarantees etc.? If so, give details of suchcases.

Whether advances against lien of deposits have been properlygranted by making a lien on the deposit in accordance with theguidelines of the controlling authorities of the bank.

Audit approach – Documentation▪ Documentation :

Verify the documents obtained as per the list prescribed in the manual orbank circulars. Any deviations to be commented by giving details ofaccounts and short comings in respective a/cs.

▪ In case of loan against FDR – Verify the following Lien on FDR receipt has been marked. In case of computerized branches

lien has to be noted in the system also. FDR is properly discharged by all the parties. Signature discharging the FDR has been checked by the branch official. In case of loans against LIC/NSC/KVP lien has been got marked by LIC/PO

in favour of the branch.

5. ADVANCES contd..Review / Monitoring / Supervision

i. Is the procedure laid down by the controlling authorities of the bank, for periodic review of advancesincluding periodic balance confirmation /acknowledgement of debts, followed by the Branch?

Provide analysis of the accounts overdue for review/renewal between - 6 months and 1 year, - Over 1 year

ii. Are the stock/book debt statements and other periodic operational data and financial statements,etc., received regularly from the borrowers and duly scrutinized? Is suitable action taken on the basisof such scrutiny in appropriate cases?

iii. Whether there exists a system of obtaining reports on stock audits periodically? If so, whether thebranch has complied with such system?

iv. Indicate the cases of advances to non-corporate entities with limits beyond Rs.10 lakhs where theBranch has not obtained the accounts of borrowers, duly audited under the RBI guidelines withregard to compulsory audit or under any other statute.

5. ADVANCES contd..▪ Review and Monitoring

v. Has the inspection or physical verification of securities charged to the Bank been carried out by the branchas per the procedure laid down by the controlling authorities of the bank?

vi. In respect of advances examined by you, have you come across cases of deficiencies in value of securitiesand inspection thereof or any other adverse features such as frequent/unauthorized overdrawing beyondlimits, inadequate insurance coverage etc.?

vii. In respect of leasing finance activities, has the Branch complied with the guidelines issued by the controllingauthorities of the bank relating to security creation, asset inspection, insurance etc.? Has the Branchcomplied with the accounting norms prescribed by the controlling authorities of the bank relating to suchleasing activities?

viii. Are credit card dues recovered promptly?

ix. Has the branch identified and classified advances into standard/ substandard/doubtful/loss assets in linewith the norms prescribed by the Reserve Bank of India (The auditor may refer to the relevant H.O.Instructions for identification of NPAs and Classification of Advances).

5. ADVANCES contd..▪ Review and Monitoring

x. Where the auditor disagrees with the branch classification of advances into standard/substandard/doubtful/loss assets, the details of such advances with reasons should be given. Also indicate whether suitable changes have been incorporated/ suggested in the Memorandum of Changes.

xi. Have you come across cases where the relevant Controlling Authority of the bank has authorisedlegal action for recovery of advances or recalling of advances but no such action was taken by the branch? If so, give details of such cases.

xii. Have all non-performing advances been promptly reported to the relevant Controlling Authority of the bank? Also state whether any rehabilitation programme in respect of such advances has been undertaken, and if so, the status of such programme.

xiii. Have appropriate claims for DICGC and Export Credit Guarantee /Insurance and subsidies, if any, been duly lodged and settled? The status of pending claims giving year-wise break-up of number and amount involved should be given in the following format:

5. ADVANCES contd..

▪ Review and Monitoringxiv. In respect of non-performing assets, has the branch obtained valuation

reports from approved valuers’ for the fixed assets charged to the bank,once in three years, unless the circumstances warrant a shorter duration?

xv. In the cases examined by you, has the branch complied with the RecoveryPolicy prescribed by the controlling authorities of the bank with respect tocompromise/ settlement and write-off cases? Details of the cases ofcompromise/settlement and write-off cases involving write-offs/waivers inexcess of Rs.50.00 lakhs may be given.

xvi. List the major deficiencies in credit review, monitoring and supervision.

5. ADVANCES contd..▪ Guarantees and Letters of Credit

Details of outstanding amounts of guarantees invoked and funded by the Branch at the end of the year may be obtained from the management and reported in the following format:

▪ Guarantees invoked, paid but not adjusted:

▪ Guarantees invoked but not paid

Sl. No. Date of Invocation

Name of the party

Name of the beneficiary

Amount Date of Recovery

Remarks

Sl. No. Date of Invocation

Name of the party

Name of the beneficiary


Remarks

5. ADVANCES contd.

▪ Details of the outstanding amounts of letters of credit andco-acceptances funded by the Branch at the end of the yearmay be obtained from the management and reported in thefollowing format:

Sl. No. Date ofFunding

Name of the party

Nature (LC/co-acceptance,etc.)


Remarks

Audit approach – Review/ Monitoring Supervision▪ Review/ Monitoring Supervision :

1. Verify the procedure laid down by bank for timely review/renewal. Comment onthe deviations observed.

2. AODs obtained to ensure that documents are not time barred.

3. Collect details of accounts overdue for review/renewal and report1. Between six months and one year and

2. Over one year

4. Verify stock/book debt statements and other periodic operational data andfinancial statements etc are being received regularly and duly scrutinized. Givedetails of cases where stock statements not recd. Care to be taken stock statementsnot recd for long time may make a/c NPA. Enter such cases in MOC if branch notclassified them as NPAs.

Audit approach – Review/ Monitoring Supervision : Contd.▪ Review/ Monitoring Supervision : Contd.

5. Examine the system of obtaining reports on stock audits. Bank has to get stock audits inrespect of all borrower a/c with funded exposure of above Rs.5.00 crores. Report thecases where stock audits are due and reports not obtained.

6. Obtain from the branch list of non – Corporate entities with limits beyond Rs.10.00 lakhs.1. Check latest audited accounts of borrower are obtained by the branch.

7. Periodical physical verification of securities.

8. Report the cases of advances where deficiencies observed with regard to value ofsecurities, frequent overdrawing, unauthorized overdrawing, inadequate insurance cover.

9. Comment on the credit card dues recovery in the branch.

10. State whether advances have been classified as per IRAC norms. Report the cases wherethere is disagreement with branch in MOC.

Audit approach – Review/ Monitoring Supervision : Contd.

11. Point out the cases where legal action have approved by the HO but not initiated by the branch.

12. Obtain list of rehabilitation cases and give the present status of such cases.

13. Comment on the cases where DICGC and ECGC are required to be lodged, but still not lodged.

14. Valuation reports from approved valuers’ for securities charged to bank once in three year or shorter duration as prescribed by the bank.

15. Study the policy prescribed for compromise/settlement and write off cases Give details of cases where write offs/waivers in excess of Rs.50.00 lakhs to be furnished.

16. Obtain a list of bank guarantees invoked – paid but not adjusted, invoked but not paid.

17. Details to be obtained and furnished regarding LCs and co acceptances funded by the branch and report the same.

6. OTHER ASSETS

▪ Stationery and Stamps

i. Does the system of the Bank ensure adequate internal control over issue and custody of stationery comprising security items (Term Deposit Receipts, Pay Orders, Cheque Books, Travellers’Cheque, Gift Cheques, etc.)?

Whether the system is being followed by the branch?

ii. Have you come across cases of missing/lost items of such stationery?

6. OTHER ASSETS contd..▪ Suspense Accounts / Sundry Assets

i. Does the system of the Bank ensure expeditious clearance of itemsdebited to Suspense Account? Details of old outstanding entries maybe obtained from the Branch and the reasons for delay in adjustingthe entries may be ascertained. Does your scrutiny of the accountsunder various sub-heads reveal balances, which in you opinion are notrecoverable and would require a provision/write-off?

If so, give details in the following format:

ii. Does your test-check indicate any unusual items in these accounts?If so, report their nature and the amounts involved.

Y e a r A m o u n t ( ` ) R e m a r k s

Audit Approach : Other Assets

▪ Stationery/Stamps : Obtain schedule of Stationery Stocks + Ensure that the physical balance tallies with

the schedule.

▪ Suspense Accounts/Sundry Assets Obtain an schedule/return of suspense account

Verify & Report unusual/long outstanding items.

Review transfer to H.O during the year

Does the scrutiny of accounts under various sub-heads reveal balances, which in your opinion are not recoverable and would require provision/ write off.

Part II. Liabilities▪ DEPOSITS

i. Have the controlling authorities of the bank laid down any guidelines withrespect to conduct and operations of Inoperative Accounts? In the casesexamined by you, have you come across instances where the guidelineslaid down in this regard have not been followed? If yes, give detailsthereof.

ii. After the balance sheet date and till the date of audit, whether there havebeen any unusual large movements (whether increase or decrease) in theaggregate deposits held at the year-end? If so, obtain the clarificationsfrom the management and give your comments thereon.

iii. Are there any overdue/matured term deposits at the end of the year? Ifso, amounts thereof should be indicated.

Audit Approach : Deposits

▪ Review Any operation in in-operative accounts

▪ Unusual movement in the balances after the Balance sheet date

▪ Report Value of Overdue/matured deposits

2. Bills Payable, Sundry deposits, etc.▪ The number of items and the aggregate amount of old outstanding

items pending for three years or more may be obtained from theBranch and reported under appropriate heads. Does the scrutiny ofthe account under various sub-heads reveal old balances? If so, givedetails in the following format:

▪ Does your test-check indicate any unusual items or materialwithdrawals or debits in these accounts? If so, report their natureand the amounts involved.

Y e a r N o . o f I t e m s A m o u n t ( ` ) R e m a r k s

Audit Approach : Bills Payable + Sundry Deposits

▪ Does the scrutiny of account sunder various sub-headsreveal odd balances?

▪ Report the number of items and aggregate of amount of oldoutstanding item spending for 3 or more years

▪ Check amount received against suite filled accounts

CONTINGENT LIABILITES

▪ Contingent Liabilities other than

Guarantees,

Letters of credit,

Acceptances,

Endorsements

▪ NOT acknowledged by the Branch

Audit approach – Contingent Liabilities

▪ Verify and find out from the records whether the branch is having proper controls for recording all the contingent liabilities.

▪ Collect the following details from the branch and verify the same has been provided under the contingent liabilities.

List of cases filed against branch by any person in consumer court or any other court.

List of any litigation cases pending against the branch for claims made by any government departments.

Collect representation from the branch that all the contingent liabilities have been disclosed fully.

1.BOOKS AND RECORDSa) In case any books of account are maintained manually, does general scrutiny thereof indicates

whether they have been properly maintained, with balances duly inked out and authenticatedby the authorized signatories?

b) In respect of computerized branches:

Whether hard copies of accounts are printed regularly?

Indicate the extent of computerization and the areas of operation covered.

Are the access and data security measures and other internal controls adequate?

Whether regular back-ups of accounts and off-site storage are maintained as per the guidelines of thecontrolling authorities of the bank?

Whether adequate contingency and disaster recovery plans are in place for loss/encryption of data?

Do you have any suggestions for the improvement in the system with regard to computerized operations of thebranch?

Audit approach – Books & Records

▪ Inquire

Obtain a list of records maintained manually. Study the system how entries are being posted from manual records to system records.

▪ Collect latest IS Audit report.

Verify compliance with audit observations. Satisfy yourself with complete working of computer system at the branch.

2.RECONCILIATION OF CONTROL AND SUBSIDIARY RECORDS

Have the figures, as at the year end, in the control and subsidiaryrecords been reconciled? If not, the last date upto which such figureshave been reconciled should be given under the respective heads,preferably in the following format:

A c c o u n t D a t e G e n e r a l L e d g e r

B a l a n c e ( ` )

S u b s i d i a r y B a l a n c e ( ` )

L a s t D a t e o n w h i c h

B a l a n c e d

Audit approach – Reconciliation

▪ General In CBS this would automatically tally, hence its of less relevance if

the branch is computerized in all areas.

▪ Audit Working Obtain a list of subsidiary ledgers maintained in respect of manual

ledgers.

Verify the subsidiary ledger balance tallies with General Ledger Balance.

Differences any to be reported in the format given.

3. INTER BRANCH TRANSACTIONS

i. Does the branch forward on a daily basis to a designated cell/Head Office, a statement of debit/credittransactions in relation to other branches?

ii. Does a check of the balance in the Head Office Account as shown in the said statement during and asat the year-end reveal that the same is in agreement with the Head Office Account in the generalledger?

iii. Are there any outstanding debits in the Head Office Account in respect of inter branch transactions?

iv. Does the branch expeditiously comply with/respond to the communications from the designatedcell/Head Office as regards unmatched transactions? As at the year-end are there anyunresponded/uncomplied queries or communications? If so, give details.

v. Have you come across items of double responses in the Head Office Account? If so, give details.

vi. Are there any old/large outstanding transactions/ entries at debits as at year-end which remainunexplained in the accounts relatable to inter-branch adjustments?

Audit Approach – Inter branch transactions

▪ Verify Obtain Confirmation of Balance

Verify the MIS returns submitted by branch to HO.

Report the same if the same is not reconciled / not submitted.

▪ For unattended entries Of the debit balances pending in IB. Provision to be made if

required.

Unresponded / uncomplied queries, double responses in HO a/c,old outstanding entries to be reported.

Audits / Inspections/frauds4. Audit & Inspection

Is the branch covered by concurrent audit or any other audit / inspectionduring the year?

In framing your audit report, have you considered the major adversecomments arising out of the latest reports of the previous auditors,concurrent auditors, stock auditors or internal auditors, or in the special auditreport or in the Inspection Report of the Reserve Bank of India? State thevarious adverse features persisting in the branch, though brought out in theseaudit/inspection reports.

5. Frauds Furnish particulars of frauds discovered during the year under audit at the

branch, together with your suggestions, if any, to minimize the possibilities oftheir occurrence.

Audit Approach – Audit/inspections/frauds

1. Confirm whether the branch is subject to concurrent audit/inspectionaudit etc. Report if the same is not carried out during the year.Consider major observation pointed out in these reports to form anopinion on the accounts of the br.

2. Frauds

1. Check whether the br. is maintain record for frauds detected bythe br. Furnish the particulars of frauds in LFAR.

2. All the frauds suspected are to be reported to the Central officewithout much time gap and in turn to RBI.

6. MISCELLANEOUS

i. Does the examination of the accounts indicate possible windowdressing?

ii. Does the branch maintain records of all the fixed assets acquired andheld by it irrespective of whether the values thereof or depreciationthereon have been centralized? Where documents of title in relationto branch or other branches are available at the branch, whether thesame have been verified?

iii. Are there any other matters, which you as branch auditor would liketo bring to the notice of the management or the Central StatutoryAuditors?

Audit approach – Miscellaneous

1. Window DressingVerify any window dressing being done by verifying movements in GLbalances in first week of April.

2. FA RegisterVerify the documents available at the br. for the assets acquiredduring the year with FA register maintained. Any legal issues in titledeeds to be reported in LFAR.

3. Additional NotesMention any points which you would like to bring to the notice ofManagement and Central statutory auditors.

Specialised Branches

▪ Questionnaires to be prepared for following branches as perLFAR formats

A. Branches dealing in Foreign Exchange Transactions.

B. Branches dealing in very large advances

C. Branches dealing in recovery of NPA & Asset RecoveryManagement .

D. Branches dealing in clearing house operations, normally referredas Service Branches.

Special Points to Note

1. Avoid Abbrevative answers – Yes / NO / NIL / NAAnswers should be self explanatory.

2. Due care when copying from PY/else where

3. Build Schedules / workings papers

4. Integrate the workings as part of the Branch Audit report

5. Carry checklist of what to do / how to do / what to report.

LFAR1. Rate of interest charged less/more than base rate decided by the Bank

2. Non-Compliance of terms (Manual Verification & System check)

3. Book debts not certified by chartered accountants (Manual Verification)

4. Stock Statements not submitted regularly (Manual Verification, System check & Demo)

5. Certificate of End Use of Funds certified By Chartered Accountant not available (Manual Verification)

6. Drawing power has not been calculated at all or not properly calculated (Demo)

7. Instances where excess drawings were permitted over the sanctioned limit/delegated powers (Demo)

8. Mandatory Credit Rating Not Done (Manual Verification)

9. Diversion of Funds (Demo)

Sample List of Annexures

LFAR10. Periodic Property/Site/Unit inspection report not available (Demo)

11. ROC charge not created/search report not available (Demo)

12. Legal Audit not done (Manual Verification)

13. Incomplete/Defective Documentation (Manual Verification)

14. Insurance policy obtained is inadequate (Manual Verification & System reports)

15. Insurance Policy (of Asset/Inventory hypothecated) not obtained / not renewed (System reports)

16. Valuation report is old i.e., more than 3 years (Manual Verification)

17. Latest audited financial statements not on record i.e. 31.03.2020 (Manual Verification)

18. Particulars of Time barred debts as on 31.03.2020 (System reports)


LFAR19. NOC from Existing lenders for ceding Charge in Favour of *** Bank not available

(Manual Verification)

20. Renewals Pending from 6 months to 1 year (Demo)

21. Renewals Pending beyond 1 year (Demo)

22. Short reviewed for period beyond six months (Demo)

23. Quarterly/Half yearly statements not obtained (Manual Verification)

24. Accounts of non-corporate borrowers not audited where sanction/outstanding is beyond 10 lakhs. (Manual Verification)

25. Stock Audit not conducted(applicable in respect of advances above Rs. 5 crores) (Manual Verification)

26. Deficiencies noticed in appraisal, monitoring and supervision (Manual Verification & System check)


LFAR27. List of Accounts of Borrowers where there is diminishing in the value of security

(Demo)

28. Details of Accounts where the relevant Controlling Authority of the bank has authorized legal action for recovery of Advances (Manual Verification)

29. List of Overdue/Matured Term Deposits (System reports)

30. Major/adverse comments/issues not addressed by the branch arising out reports from previous auditors, concurrent auditors, stock or internal auditors or special audit or inspection report of RBI (Verification of Soft copy reports)

31. Whether identification and classification of advances as Standard/Sub-standard/Doubtful/Loss assets is as per RBI circular and instructions as per HO. If not, then details of accounts where there are deviations. (Demo)

32. List of Account where lien is not marked on Physical Term Deposit Receipts (Manual Verification & System check)


LFAR

32. Deficiency in FD/RD/SB/ Opening Forms (Manual Verification & System check)

33. Discrepancies in Fixed Assets/IT Assets (Verification of Soft copy reports & Physical Verification of Assets)

34. Security Items - Series found physically but not entered in Security Register at the time of our verification (Verification of Soft copy reports)

35. Multiple Customer codes issued to Same PAN holders (Demo)

36. Other matters – (Residuary and varies from case to case)


Benefits of Excel as DSS - Compliance of SA

• (Revised) Audit Documentation230

• Risk Assessment and Response to Assessed Risks300-499

• Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment315

• (Revised) Audit Evidence500

• (Revised) Analytical Procedures520

• (Revised) Audit Sampling530

• (Revised) Comparative Information—Corresponding Figures and Comparative Financial Statements710

131

1. Analytical Tests

Horizontal Analysis

Vertical Analysis

Ratios Trend analysis

Performance Measures

Statistics Stratifications Aging

Benford’s Law Regression Monte Carlo simulation

132

Data Management/ Analysis Reports

Append/Merge Calculated

Fields/Functions Cross Tabulate Duplicates

Extract/Filter Export Gaps Index / Sort

Join / Relate

133

Lesson Summary

NPA’s in a matter of minutes

Selection of cases for LFAR

verification

Documentation of Observations

on Loans

Automated Reporting of LFAR

Observations

Automated Working papers,

Peer ReviewSA Compliance

134

The tools would help us to

identify the following:

April 9, 2020Premnath D.S. B.Com., FCA 135

As the Chandokya Upanishad says:

If we apply knowledge with faith, dedication and deep analysis, our actions become stronger. This will

lead to success.

Yadaiva Vidyaya KarotiShradhaya Upanishada

Tadeva Viryavattaram Bhavati!*****

April 9, 2020Premnath D.S. B.Com., FCA 136

Special Thanks for contributing content

CA Annapura, [email protected]

CA Venugopal G, [email protected]

CA Vijaysrinivas K, [email protected]

mailto:[email protected]

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