Bank Branch Audit PLANNING AND DOCUMENTATION. CA. V.K.Viswanathan. B.Sc, F.C.A., DISA (ICA) BANK AUDIT - CPE SEMINAR 25/03/2017 BANK BRANCH AUDIT

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1 Bank Branch Audit PLANNING AND DOCUMENTATION CA. V.K.Viswanathan B.Sc, F.C.A., DISA (ICA) BANK AUDIT - CPE SEMINAR 25/03/2017 BANK BRANCH AUDIT INTEGRATED WORK PAPER FILE Bank Name Branch Year Date of Commencement Date of Completion Partner In Charge File reference Number of Staff deployed Advances Value Rs. Address of the Branch Name of the Manager Phone Number Circle Office Contact 1

2 INTRODUCTION A well planned audit will make the entire assignment of bank branch audit more pleasurable while an ill-planned audit will end in chaos. Impact of Information Technology Right approach and Techniques For quality audit and completion of audit within a small time span. 1. Objective and Scope of audit: 1.1. We have been appointed as the Statutory Auditors of the Branch of.. Bank for the year The appointment letter dated has been accepted by us on. after due communication to the previous year auditor vide letter dated The key terms of reference is to certify the financial statements of the branch as at March 31, 2017 with reference to a True and Fair perspective 1.4. The Branch audit instructions as received from the Head / Circle office have been duly cognised for in the preparation of this integrated work paper document 1.5. The following key reports / certificates are required to be issued by us Branch Auditors report Memorandum of Changes if any Certified / Attested financial statements Long Form Audit Report Schedules and Certificates as per index attached in the next segment Tax Audit report under Section 44AB of the Income tax Act 1.6. The audit was commenced on. and completed on. By the following team 1.7. The Key risks in Bank Branch Audits are as under Misstatement of income, expenses, Assets or Liabilities. Unrecorded liabilities and contingent liabilities Asset Classification and NPA provisions not adequate for impaired assets, Asset Classification and Income Recognition especially for restructured assets KYC / AML norm compliance related issues Internal control failures over banking operations including potential / undetected / detected frauds Wrong certification 2

3 Name Designation Days From To Partner Qualified Paid Assistant Audit Assistant Articleship trainee 1.8. The details of Bank Staff from whom data / records / information and explanations were solicited / obtained for the purpose of this audit are as under Branch Manager Loans Officer Deposit Officer Other Officers Designation Name Grade 2. ACCEPTANCE OF APPOINTMENT: Disqualifications As per The Companies Act, 2013 The following persons shall not be eligible for appointment as an auditor of a company, namely:- Sec. 141 (3)(a) - a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008; Sec. 141 (3)(d) (i) A person or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding company or associate company or a subsidiary of such holding company. Provided that the relative may hold security or interest in the company of face value not exceeding Rs. 1 lakh See also Rule 10 of Companies (Audit and Auditors) Rules, 2014 Rule 10 of Companies (Audit and Auditors) Rules, 2014 Sub-Rule (1) For the purpose of proviso to sub-clause (i) of Sec.141 (3) (d), a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh: Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities: 3

4 Sec. 141 (3) (d) (ii) A person or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of Rs.5 lakh - See also Rule 10 of Companies (Audit and Auditors) Rules, 2014 Rule 10 of Companies (Audit and Auditors) Rules, 2014 Sub-Rule (2) For the purpose of sub-clause (ii) of clause (d) of Sec.141 (3) (d), a person who or whose relative or partner is indebted. to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakh shall not be eligible for appointment. Sec. 141 (3)(d) (iii) - A person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for Rs. 1 lakh See also Rule 10 of Companies (Audit and Auditors) Rules, 2014 Rule 10 of Companies (Audit and Auditors) Rules, 2014 Sub-Rule (3) For the purpose of sub-clause (iii) of clause (d) of Sec.141 (3) (d), a person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not be eligible for appointment. Sec. 141 (3)(f) - a person whose relative is a director or is in the employment of the company as a director or key managerial personnel; It is suggested to refer Sec. 141of The Companies Act, 2013 to get a first hand information about Eligibility, Qualification and Disqualification of Auditors Change in constitution of the firm since application to ICAI If there is any change in constitution inform the bank and wait for confirmation Acceptance letter and Secrecy and Fidelity letter to Head Office. To send by Registered Post and A/D due. Communication with previous auditor 4

5 3. REFRESHER COURSE FOR AUDIT TEAM; RBI circulars - Income Recognition and Provisioning Norms Master circular on IRAC Norms - Advances Certificates to be issued Account closing instructions H.O / Z.O Circulars Salient features of LFAR and Tax Audit Audit procedure in a computerised environment. 4. CONDUCT AUDIT IN TWO STAGES: Pre-closure and post-closure of books Pre-closure Review of sanction of large advances, terms and conditions 5% of Total Advances or Rs. 2 Crore whichever is less Status of accounts already identified as NPA Stock statements and insurance cover Documentation Generate at the Branch the Reports like Special Watch Accounts or Weekly Alert A/c s Status regarding overdue Compare February 2017 Report with March 2017 Report Problem accounts becoming good or regular Unit visit or inspection Test check of interests received and interest paid Test check of major heads of Income and Expenditure Post-closure Account closing statements Certificates Verification of advance accounts closed during the fag end of the year Source of funds for closure 5. DEVELOPMENT OF AN OVERALL AUDIT PLAN: In developing an overall plan for the audit, the auditor needs to give particular attention to: - the assessment of materiality - the assessment of audit risk - the expected degree of reliance on internal control - the extent of EDP and EFT systems used by the bank - the work of internal audit - the complexity of the transactions undertaken by the bank and the documentation in respect thereof 5

6 - the existence of significant areas of audit concern not readily apparent from the bank s financial statements - the existence of related party transactions - the involvement of other auditors - management s representations, and - the work of supervisors 6. PLANNING ACTIVITY: Plan the audit by establishing audit strategy commensurate with nature and size of the branch under audit by: - Selecting the important areas for the audit - Audit Materiality and Audit Risk with respect to the size and scale of the branch, To enable detection of material misstatements. - Understand the Materiality as per the accounting policy of the bank for different items of income / expenditure / asset or liability - Plan to cover all advances above Rs.2 crore or 5% of outstanding advances of the branch, preferably a lower limit is desirable - Orient the team members, by updating them with the extent, scope and changes in the norms when compared to previous year - Go through the closing circular as well as the Master Circulars of RBI and the latest issue of Guidance Note on Audit of Banks issued by the Institute of Chartered Accountants of India, mark important areas of concern for the branch / branches under audit - Based on the information received, plan out the audit of financial statements, in respect of the statement of affairs, audit of incomes, expenditures, or advances with specific reference to / Potential NPA accounts under Standard Category, verification of restructured accounts vis a vis their Asset Classification 6

7 7. Branch Overview 7.1. Key data Total Assets Total liabilities Total Advances Total Deposits Income Expenditure Profit / Loss Description Rs. lakhs Rs. lakhs 7.2. Target Vs Accomplishment Description Total Advances Total Deposits Rating of the Branch Target Rs. lakhs Actual Rs. Lakhs 7.3. Advances Overview - top 10 advance categories of the branch S No Category of advances Rs. lakhs No of accts Rs. lakhs No of accts 1 Cash Credit 2 Overdraft 3 Term loans 4 Crop loans 5 Housing loans 6 Jewel loans 7 Other advances Total Advances 7

8 7.4. Large Advance Profiling List of advances greater than Rs 2 Crores or individually accounting for 5% of the total advances whichever is lower to be covered for detailed checking are as under S No Account reference / name Rs. lakhs No of accts Rs. lakhs No of accts 7.5. Customer wise advances Based on our discussions with the branch manager, these advances belong to the same party and are considered for checking on a collective basis as slippage in one account could result in NPA status for all accounts S No Customer Name Facilities Rs. lakhs 7.6. Advance profiling by value S No Slab - Rs Lakhs outstanding < Rs 1 lakh 2 Rs 1 5 lakhs 3 Rs 5 10 lakhs 4 Rs lakhs 5 Rs 50 lakhs Rs 1 Crore 6 Rs 1 to 2 Crores 7 Rs 2 to 5 Crores 8 Rs 5 to 10 Crores 9 > Rs 10 Crores Rs. lakhs No of accts 8

9 7.7. Deposit profiling S No Category of deposit accounts Rs. lakhs No of accts Rs. lakhs No of accts Others Total Deposits 7.8. Restructured advances The following are the advances restructured by the branch and to be reviewed for compliance with restructuring terms and conditions as per revised sanctions. Repeated restructured accounts will also be reviewed 1 2 S No Account reference / Name During Upto Rs. lakhs Rs. Lakhs Rs. lakhs 7.9. Interest rate and other charges on major advances Advances Type Interest % Charges % Charges % Charges % Interest rate on deposits Deposit type Days Interest % Any frauds reported Note on frauds reported at the branch in the last few years 9

10 8. Various Internal/Special/Other Audits carried out at Branch, period covered under audit and status of compliance thereof eg. RBI Inspection Concurrent Audit I.S. Audit Migration Audit Stock Audit Others Internal Audit Rating assigned: (Poor/Satisfactory/Good/Excellent) Risk rating assigned by the internal auditors/i.s.auditors. (Low/Medium/High/very High) 9. Review Notes of Concurrent, Risk Based Audit, Inspection Reports Concurrent Audit S No Account reference / nature of issue / date of report Amount Present Status Rectified, LFAR, MoC, Unadjusted Impact, if any on audit strategy Risk Based Internal Audit S No Account reference / nature of issue / date of report Amount Present Status Rectified, LFAR, MoC, Unadjusted Impact, if any on audit strategy 10

11 Inspection Reports S No Account reference / nature of issue / date of report Amount Present Status Rectified, LFAR, MoC, Unadjusted Impact, if any on audit strategy Previous Year LFAR / Audit report issues S No Account reference / nature of issue / date of report Amount Present Status Rectified, LFAR, MoC, Unadjusted Impact, if any on audit strategy 10. Audit Strategy Based on our high level review of the branch data, loans and deposits CBS files and based on discussions with the Branch manager the following is proposed as the audit strategy Top Down Approach to audit The audit strategy will envisage a top down approach which involves understanding the Balance Sheet and P & L and a drill down to perform compliance and substantive procedures at a component / transaction level Utilisation of Other Audit reports The branch has been covered under Concurrent audits / Risk based internal audits as well as Inspections. These reports will be reviewed to gain a quick understanding of the control framework and the efficient functioning at the branch Sample selection CBS reports will be downloaded converted to excel and samples selected across loan types, accounting periods, rates, value slabs Advances Understand and appreciate target related pressures and potential impact on misstatements Top accounts ( Rs 2 Crs / 5% advance ) will be checked 100% to cover all accounts 11

12 Samples of.. accounts will be taken across all categories of advances to check sanction, documentation, income accrual and monitoring controls Particular attention will be paid to the following accounts based on our review of the Concurrent / inspection reports o.. o. o. The following unit visits will be undertaken to perform inspection of books / assets held by customers o.. o. o. All accounts with irregularities as indicated in CBS ( based on loan balance file ) will be undertaken for review with bank manager to identify potential NPA cases. The Irregular loan balance report will also be reviewed in detail and documented Sanity checks of advances file will be undertaken for interest rate inconsistencies / sub rate / off standard rates for the particular categories Interest and processing charge accruals will be test checked for 10 random months across. Loan files and CCOD files ( periodic / daily interest computation ) Large disbursements close to year / quarter end will be reviewed in detail on a test basis Clean loans / bullet loans to be reviewed in detail Special emphasis on restructured advances Deposits Top deposit accounts will be checked to review completeness, adequacy, relevance of documentation Large deposits placed at year end will be reviewed in detail Sanity checks of advances file will be undertaken for interest rate inconsistencies / sub plr / off standard rates for the particular categories Other items Checklist driven approach guided by key control aspects as stated in the LFAR 12

13 11. Key Reports from CBS to be used for audit The following key reports have been obtained from CBS Balance sheet Profit and Loss account Loan Balance file CC OD file Deposit balance file Interest ledger NPA file SMA file Irregular loans file Previous year NPA file TDS ledgers Guarantee Commission register 12. Advances and General Audit plan General Audit plan for advances Obtain the Loan listing as at the Date of Audit Loans greater than Rs.2Crore limit or Rs 2 Cr balance outstanding to be taken up for detailed review documentation for LFAR Generate the following reports: o Special Watch Report o Restructured accounts report o Suspended Accounts o NPA Listing Identify samples of loans to be checked Ensure 100% of files selected for samples are available to confirm that no file is lost Review loans against checklist prepared category wise in relation to o Application o Credit appraisal o Sanction letter o Disbursement o Master data updation in CBS o Interest computation o Principal repayment o Fixation of drawing power 13

14 o Verification of securities o Submission of stock and book debts o Submission of financial statements Any other documentation 13. Special Note on Audit of Restructured Advances Indicative Checklist Obtain a general understanding of the type of advance which has been restructured project / non project advances, prior to or after Commencement of Commercial production etc as per the RBI master circular which deals in detail on manner and mode of treatment of restructured advances Restructured advances to be reviewed with reference to revised terms of sanction properly approved by the relevant sanctioning authority Repeated restructuring to be reviewed for NPA classification All terms of revised sanction are complied with ( including but not limited to revision in commercial production, interest rate revision, rescheduling of repayments, additional security cover, promoters contribution enhancements, escrow requirements etc ). In case of non-compliance, appropriate reclassifications have been considered Alteration in the terms & conditions of the sanctioned limits and Alteration in repayment period. Alteration in installment amounts without changing the total repayment period or ballooning amount of repayments. For e.g. Qly installments of Rs.5 Lakh may be altered to Rs. 4 Lakh for the first few years and thereafter be increased to Rs.5.5 Lakh etc.. Alteration in ROI to benefit the borrower. Fresh moratorium period Where unserviced interest has been funded as FITL Funded Interest Term Loan. The following accounts cannot be restructured i) Loss accounts ii) Fraud accounts iii) Willful defaulters. 14

15 14. SPECIMEN CHECKLIST FOR REVIEW OF MAJOR ADVANCES 1. BORROWER a) Name of the Borrower. b) Address c) Nature of Business.. d) Constitution (Tick) Proprietor / Firm / Pvt. Ltd. / Public / Society / Trust e) Limit last renewed on.. f) Note for Trust/Society whether Deed/Bye Law permits mortgage of Property) SECURITY Yes / No 1. Primary Security Stock/Book Debt Statement latest available Month Whether Stock & Book Debts Statements are received in time Yes / No 2. Collateral Whether Valuation done once in 3 years. Last Valuation date 3. Date of Inspection of Unit/Go down / Factory etc Date of Visit Name of Official Policy No & date Sum Insured Deficiency 15

16 5. Insurance Rs. In Lakhs... Expiry Date of Policy For Term Loan whether assets are properly insured Value of Stock Sum Insured Deficiency Policy No & Date Expiry Date of Policy GENERAL Latest Audited accounts available. 2. Whether explanations for any divergent trends noticed and reason obtained? a) Loss making? Yes/No b) High Sundry Debtors/High Stocks/ Yes/No c) Has the borrower advance money to Sister Concerns (Inter firm advance) Yes/No If YES is the Advance amount substantial compared to Loan? 3. Whether there is deficiency in document noticed/cited in the RBI/Other Audit Reports NOTE YOUR COMMENTS AND VIEWS ABOUT THIS ACCOUNT. THAT SHOULD BE CONSIDERED FOR REPORTING IN LFAR ETC. MARK SEPERATELY ITEMS Verified by Name and Signature Name and Signature of Partner 16

17 15. SPECIMEN CHECKLIST FOR NEW LOAN DOCUMENTATION BRANCH Name of Borrower FUND BASED NON FUND BASED NATURE OF LOAN BAL O/S. IN LAKHS LIMIT IN LAKHS A/C. NO. NATURE OF BUSINESS Sl ITEM PLEASE OBJECTIVE FILL THE No. TICK EVIDENCE DETAILS 1 Loan application received Date of Application 2 Project report received and appraised Report prepared by 3 Income Tax return of Promoters received Asst. year 4 Statement of associate concerns obtained 5 Memorandum & Articles of Association / Partnership deed is available and registered with Registrar of firms Name of Concerns Date of Deed & Registration No. or Certificate of incorporation details 6 Risk in the project are identified 7 Feasibility report if necessary obtained 8 Whether previous banks reference obtained 9 Opinion report of sister concerns obtained Name of Bank Procedure from HO regarding proposal preparation followed correctly 17

18 10 Whether the power is correctly exercised for sanction Date of Sanction & Authority Facility are disbursed after complying sanction letter Sanction letter in file Amount brought in Name of Lawyer & Opinion date Promoters contribution is properly made Mortgage of property proper Date of filling return Regn. Certificate Date Legal opinion valid-give details All documents in legal opinion obtained Date of filling Form No Copy of IT Acknowledgement obtained Original of documents for Vehicle loan obtained Interest rate in sanction letter vis a vis computer 19 Registration of charges available 20 Interest rates fed in computer is tallying with sanction letter Verified by : Name and Signature Name and Signature of Partner 18

19 16. Check list and questionnaire to be submitted to the Branch before commencement of audit. 1. Copy of other Audit Reports, period covered, status of there a) Previous year Branch Audit Report b) RBI Inspection Report, Concurrent Audit, I.S. Audit, Revenue Audit, Stock Audit, Migration Audit Others. compliance List of Large Advances Having Limits or Balance outstanding in excess of 5% of the branch or Rs.2 Crore, whichever is less List of Advances sanctioned during the year List of Advances where documentation is still pending List of Advances where Renewal was due during the year, but not completed. List of DPNs to be renewed during the year List of Rescheduled/Rephased advances List of BIFR accounts and accounts considered for revival, rehabilitation List of accounts closed on one time settlement List of Advances where stock statements have not been received regularly. 19

20 11. List of cases where valuation report of securities is more than 3 years old List of non-corporate entities where aggregate advances is more than Rs.20 lacs The accounts where Audit Report as per RBI guidelines have been obtained. Have all the credit card dues have been recovered promptly. It not, the dues as on DICGC/ECGC claims a) Claims at the beginning of the year b) Claims lodged during the year c) Claims settled d) Details of sharing of recoveries, in claims settled accounts Details of outstanding amount of guarantees invoked and funded by the branch as at the end of the year Details of outstanding amounts of letters of credit and coacceptances funded by the branch. Details of outstanding entries in IBIT, if any Details of outstanding entries in Sundry Assets and Suspense a/c. Details of outstanding entries in Sundry Deposits. a) Quantum of overdue/matured term deposits at the end of the year b) Details of interest accrued and provided on overdue deposits. 19. List of major items of contingent liabilities (other than Liabilities such as guarantees, letters of credit, acceptances, endorsements etc.) not acknowledged as debt by the branch. Particulars of fraud, if any, discovered during year and details of report to H.O. compliant lodged with police etc. 20

21 PMRY Loans a) No. of loans sanctioned during the year b) Details of limits, amount disbursed c) Subsidy claims d) Subsidy received 20. Cash Department Cash Retention limit Dates on which cash balance exceeded the limit Reporting to controlling authorities and approval thereof Whether any steps have been taken to increase the cash retention limit, if the frequency of cash balance exceeding the limits is more. Insurance coverage held by the branch for cash on hand and cash in transit whether in force. Cash Remittance Register Cash outward remittance Cash inward remittance Key Movement Register Joint custody Exchange of custody between officers of the branch Cash verification done by Officers of Other branch of the bank Does the branch have accounts with RBI, SBI or any other banks Balance confirmation letter as at the end of the year BRS if needed. Does the branch have any investments on behalf of H.O. If yes, details thereof List of advances where stock audit, has to be conducted during the years. 21

22 Advances where stock audits, have been completed. Compliance Report on stock audit Statements to be kept ready for Audit. a) Statement of Final Asset & Liabilities b) Profit and Loss a/c. c) Classification of Advances d) NPA Statements e) LFAR f) Tax Audit Report etc. 26. Tax Audit. 1. Capital expenditure debited to profit and loss account, if any, 2. Payment made to clubs towards fees & for services 3. Personal expenses debited to P&L a/c. 4. Any payment in the nature of fine & penalty 5. Deposits repaid in cash exceeding Rs.20000/- 6. Payments exceeding Rs.20000/- paid otherwise than by crossed cheque or crossed D.D. 7. Particulars of Income & Expenditure relating to earlier years 8. Total amount of TDS deducted during the year: a) on salary b) on Interest on Term Deposits c) on Interest on NRO Deposits d) on Contract payment e) on Rent f) on Professional Fees g) on brokerage and commission h) on other Payments (Specify) 22

23 9. Date of filing of TDS Returns (Quarterly) 10. Details of Form 15G & 15H obtained & submission to Commissioner of Income Tax. 27. Other Items a) Amount recovered during the year out of bad debts written off in earlier years b) Locker rent arrears due during the year and remains unrecovered. 17. Exceptional Reports Signature of the Manager. Date Major Audit Tools Contains dishonored cheques, large withdrawals, overdrawn accounts etc. Generally contain following details Debit / credit balance change Maturity record deleted Inactive accounts reactivated Excess allowed over limits Debits to Income head accounts Overdue bills and returned Withdrawals against clearings Deposits accounts debit balance Temporary O/D beyond sanctioned limit Standing instruction failed in day Irregular term loan accounts with number of arrears of installments and interest with amounts Time barred demand promissory notes Unchecked transactions Password errors Debit balance accounts without interest rate inter-branch transactions with age-wise details 23

24 18. CHECK LIST FOR VERIFICATION OF ADVANCES Facility Name of the Borrower and Account No. A/c. No. 1. Have you checked whether the branch has complied with the requirements such as obtaining loan applications, preparation of proposals, grant / renewal of advances, enhancement of limits etc. 2. Have you checked whether the facility has been granted beyond such delegated powers of the branch? 3. If so, whether the same has been reported to the higher authorities. 4. Have you checked whether the terms of sanction has been complied with? 5. Have you checked whether all the documentation formalities have been complied with before release of facilities by the branch? 6. Have you checked whether in the cases of corporate borrowers due charges have been registered with the Registrar of Companies? 7. Have you verified receipt of stock statements? Have you verified that the follow up action of the branch is adequate? 8. Have you checked whether periodic stock audits have been conducted? Have you perused the latest stock audit report? 9. Have you checked the procedure adopted by the branch for periodically verifying the assets charged to the bank? 10. Have you perused the account to ensure that there are no frequent over drawls, shortfall in the value of security? 11. Have you checked whether the assets charged to the branch have been adequately insured? 12. Has the account been classified as per IRAC norms? 13. If not, have you made out a detailed working for proposing MOC? 14. Has the branch furnished the relevant information required for the purpose of reporting in LFAR? 15. Have you checked whether the branch has obtained valuation reports? 16. Have you verified whether there is any compromise proposals/write offs in this account? 24 (For various Accounts)

25 19. TREATMENT OF ASSETS FALLING UNDER CLASSIFICATION OF RESTRUCTURING The classification of a Restructured account depends on the following guidelines: a) Restructuring done before commencement of commercial production b) Restructuring done after commencement of commercial production but before the asset has been classified as sub-standard c) Restructuring done after commencement of commercial production and after the asset has been classified as sub-standard Rescheduling of Principal alone Rescheduling of Interest Before commencement of production Account will continue as Standard Asset provided the loan/credit facility is fully secured Account will continue as Standard Asset subject to the condition that the amount of sacrifice, if any in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. After commencement of commercial production but before the asset has become sub-standard Do - Do - After commencement of commercial production and after the asset has become sub-standard Account will continue in the substandard category for specified period of one year provided the loan/credit facility is fully secured Account will continue in the sub-standard category for specified period of one year subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved 20. WHETHER NPA AND PRUDENTIAL NORMS ARE APPLICABLE TO ALL STAFF ACCOUNTS the respective due dates and interest can be continued to be recognized in spite of non-recovery The answer is in the affirmative. There is no specific exemption given to the staff accounts regarding classification as Non performing Asset. However, in the case of housing loan or similar advances granted to staff members where interest is payable after recovery of entire principal, interest need to be considered as overdue from the first month onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of installment of principal or payment of interest on. 25

26 21. Checklist of documents to be taken from Management Following certificates/ documents should be in the audit file after audit of Bank branch S.No Description of the certificate Obtained on Date of certificate 1 A certificate from the Branch Manager stating that the excess cash holding is being reported to the controlling authority on a regular basis; 2 A certificate from the Branch Manager to the effect that the closing instructions submitted by the Branch are the latest updated instructions and no instruction have been issued after that date. Checked by 2 A photo copy each of the confirmation certificates for Balances with RBI, SBI and other banks; 3 A copy of the reconciliation statement in respect of differences in such balances with RBI, SBI and other banks; 4 A copy of the Demat Account relating to investments; investments at the end of the year duly confirmed by the Branch Manager; 26

27 5 List of large advances i.e. those in respect of which the outstanding amount is in excess of 5% of the aggregate advances of the Branch or Rs.2.00 crores whichever is less duly certified by the Branch Manager; 6 List of renewal proposals pending at Branch Level at the end of the year duly confirmed by the Branch Manager; 7 A copy of the letter from Head Office regarding Sanction limit of the Branch Manager; 8 List of proposals sanctioned during the year; 9 List of cases where registration of creation of charge with Registrar of Companies pending at the end of the year; 10 List of cases where the prescribed period of 30 days for registration of creation of charge is over as at the end of the year;

28 11 List of cases where search reports obtained from professionals for loans sanctioned to various companies; 12 List of cases where the Branch has not obtained acknowledgement of Debt (AOD)/ Balance Confirmation letters at the end of the year; 13 List of cases where the Branch has not obtained stock/book debts statements at the end of the year; 14 List of cases where the stock audit is mandatorily required to be carried out 15 Compliance on Adverse features noted in stock audit reports and whether all issues are closed. 16 A certificate from the Branch Manager for inspection or physical verification of securities charged to the Bank; 28

29 17 Statement from the Branch Head regarding cases of inspection due as on March 31st and inspection actually carried out during the year; 18 List of cases where copies of insurance policies are yet to be received at the end of the year; 19 Statement of credit card dues at the year end; 20 Copy of Head office instructions for identification of NPAs and classification of advances; 21 Copies of Master circular issued by the Reserve Bank of India; 22 List of cases where authorized legal action for recovery of advances are pending at the end of the year; 23 A list of cases where legal action for recovery of advances or recalling of advances was authorized by 29

30 22. Auditing Review and Other Standards The work has been planned and performed in accordance with the following Auditing, Review and Other Standards as prescribed by the Institute of Chartered Accountants of India to the extent applicable for the engagement SA reference SA 200 SA210 SA220 SA230 SA240 SA250 SA265 SA300 SA315 SA320 SA330 SA402 SA450 SA500 SA501 SA530 SA540 SA560 SA580 SA600 SA610 SA700 Description OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING. AGREEING THE TERMS OF AUDIT ENGAGEMENTS. QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS. AUDIT DOCUMENTATION. THE AUDITOR S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS. CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS. COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT. PLANNING AN AUDIT OF FINANCIAL STATEMENTS. IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT. MATERIALITY IN PLANNING AND PERFORMING AN AUDIT. THE AUDITOR S RESPONSES TO ASSESSED RISKS. AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING A SERVICE ORGANISATION. EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT. AUDIT EVIDENCE. AUDIT EVIDENCE SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS. AUDIT SAMPLING. AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING ESTIMATES, AND RELATED DISCLOSURES. SUBSEQUENT EVENTS. WRITTEN REPRESENTATIONS. USING THE WORK OF ANOTHER AUDITOR. USING THE WORK OF INTERNAL AUDITORS. FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS. SA706 EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN THE INDEPENDENT AUDITOR S REPORT. 30

31 23. PEER REVIEW Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the Peer Review Period shall be subjected to Review. The Reviewer is required to adopt a combination of compliance approach and substantive approach in the Review process. As per SA 230 Audit Documentation is a record of audit procedures performed, relevant audit evidence obtained and conclusions reached by the auditor Audit Documentation assists The auditor in planning and performing the audit In supervision and review work In creating accountability in work In retaining a record of significant matters for future audits In enabling the conduct of quality control reviews and inspections in accordance with SQC-1 Form of Documentation can be in any of the following forms Paper working papers Electronic System files Other media Examples of Audit Documentation Audit Plan Audit Programmes Copies of agreements entered into by the client Checklists Analysis done ratio analysis Letter of Representation Correspondence (including s) regarding significant matters 31

32 Nature, Timing & Extent of Audit Documentation Identifying the characteristics of the specific items or matters tested Who performed the audit work and the date such work was completed Who reviewed the audit work performed and the date and extent of such review Documentation of significant matters discussed with the management and others (including the nature of the significant matters discussed and when and with whom the discussions took place) and related significant professional judgements If there was information about a significant matter which was identified as not being in concurrence with the auditor s final conclusion regarding it, the auditor shall document how the inconsistency was addressed A pivotal factor in determining the form, content and extent of audit documentation for significant matters is the extent of professional judgement exercised in performing and reviewing the work 24. Ensure that the following are available in the bank audit file 1) Copy of letter sent to the previous auditors 2) Engagement letter as envisaged by AAS 26 3) Audit plan 4) Audit program 5) Papers and records which would provide the basis for relying on the internal controls 6) The basis for deciding on the sample selection for scrutiny 7) All confirmations and certificates wherever necessary 8) In areas where difference of opinion exists, the views of the organization should be obtained in writing and recorded. 9) Significant ratio and trend analysis 10) Significant audit observations culled out from other audit reports 11) Circulars, notifications and directives from Government / Regulatory Authority etc which have a bearing on the audit 32

33 12) Checklists duly filled up, indexed and cross referenced to the working papers 13) Note on resolution of major observations with specific reference to NPA & provisioning 14) Management letter of representation 25. OTHER SALIENT FEATURES 1. Sharing of recoveries made in DI&CGC claim settled accounts Certificate 2. PMRY subside claim certificate 3. Technology Up gradation Fund Scheme TUF Scheme Interest subsidy certificate 4. Verification of Miscellaneous expenditure accounts. 5. Verification of Miscellaneous Income accounts 6. EPF Turnover commission 7. Interest subvention for Agricultural Loans Certificate 8. Interest subvention for Housing Loan 9. Interest subvention for Education Loan 26. COMPILING THE REPORT Two Audit Reports One Short Form Expressing Opinion on the Financial Statements of the branch Other Long Form Audit Report Ensure that all queries and observation have been discussed with the Branch Manager and replies obtained Discussion on a daily basis Obtain a Management letter of representation At the end of audit (before you leave the branch) Obtain certificate from Branch Manager with regard to persons attended, No of days taken for audit. Receive one set of all statements meant for the auditor. Prepare list of traveling and conveyance expenses Ensure that permanent and current files are properly prepared and all the papers pertaining to the audit are serially numbered 33

34 27. Members are requested to visit Branch web site which contains the following materials. i ) List of various laws applicable to the branch ii) Specimen of No Objection Letter iii) Specimen Management Representation Letter iv) Specimen Checklist for Special Considerations in CBS environment v) Non corporate entities- W. C. limit exceeding Rs 20 lakh- RBI Audit Report Format LAST WORDS IF YOU FAIL TO PLAN, YOU PLAN TO FAIL Thank you V.K.V CA V.K. VISWANATHAN Off : Mob: , vkvca@yahoo.in and cavkvres@gmail.com 34