Association (NICASA) NIRC of The ICAI. Welcomes

Transcription

1 Northern India Chartered Accountants Students Association (NICASA) Of NIRC of The ICAI Welcomes CA Students for the seminar on Bank Audit

2 Statutory Bank Branch Audit - OVERVIEW CA. S Narayanan snarayanan23@gmail.com

3 Understanding the Banking Business Bank Branch Audit 3

4 Knowledge of bank business Bank business Generally Comprise of Deposits operations- savings current term depsits Lending Operation- Funded and Non Funded Investment/Treasury Operations Foreign Exchange Operations Trading operations- Sale of Gold etc Significant feature of Modern Day Banking - Banks Operate in highly computerised environment- Fair Knowledge of the Banking Software is essential Some of the softwares used by banks are Finacle (Infosys), Bancs (TCS), and Flex cube (I Flex) Call for and study System operational Manual Bank Branch Audit CA. S Narayanan 4

5 Laws applicable to the banking business 1) Banking Regulation Act, ) Reserve Bank of India Act,1934 3) Banking Companies (Acquisition and Transfer of Undertakings) Act, ) Banking Companies (Acquisition and Transfer of Undertakings) Act, ) State Bank of India Act, ) Regional Rural Banks Act, ) Companies Act, ) Co-operative Societies Act, 1912 or the relevant state Co-operative Societies Act. Bank Branch Audit CA. S Narayanan 5

6 Laws applicable to the banking business 9) Information Technology Act, ) Prevention of Money Laundering Act, ) Credit Information Companies Regulation Act, ) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, ) Service Tax (Chapter V of Finance Act,1994) 15) Income Tax Act, ) Securities Transaction tax (Chapter VII of Finance (No 2) Act, ) CGST, SGST and IGST Acts Bank Branch Audit CA. S Narayanan 6

7 Application of other laws not barred As per the section 2 of Banking Regulation Act,1949 the provisions of this Act shall be in addition to, and not, in derogation of the Companies Act,2013, and any other law for the time being in force The provisions of the other laws shall apply to all proceedings unless they are inconsistent with the Banking Regulation act,1949 Bank Branch Audit CA. S Narayanan 7

8 Non applicability of CARO, 2015 Statement of Companies (Auditor s Report ) order 2016 is not applicable to banking company as defined in clause (c) of section 5 of Banking regulation act.1949 Banking company means any company, which transacts the business of banking in India; Internal Financial Controls Reporting is not applicable to Public Sector Banks as they are Covered by special Laws. Bank Branch Audit CA. S Narayanan 8

9 Steps before Commencement 1 Attend seminar if any organised by the bank 2 Go through the Annual report of the bank of the preceding year 3 A reading of Guidance note on audit of banks by ICAI would provide valuable guidance. 4 Go through the closing Instruction given to the branches 5 Go through the Accounting Policy of the Bank thoroughly and Changes in them

10 Scope of Work 1. Finding out Scope of work General Understanding Branch advances, deposits, Profit & Loss, Number of deposits & Advances account, Level of NPA, Bank exposure in Non Funded Areas Number of Extension counters, ATMs 2. Copy of all circulars of RBI applicable to accounts & Audit have to be obtained and kept ready for reference. 3 Obtain Copy of Previous Statutory Audit (MOCs), Tax Audit, revenue Audit, Inspection Audit, System audit, stock audit Annual Financial Inspection reports if any and read through IT Manual if any 4 Study Accounting Policies of the Bank and Closing Instructions issued by Head office and formats of MOCs Bank Branch Audit CA. S Narayanan 10

11 Letter seeking information Before commencement of audit a letter may be written to the bank asking for following information- 1. List of departments in the bank branch with name of head of department. 2. Name of the Nodal Officer for Audit 3. Copy of Annual Financial Statement and other banking returns and schedules. 4. Login and Password for operation of the system (Auditors/Clerical Menu) 5. List of deposit accounts under different schemes with Balances as on Balance sheet 6. List of Advances accounts under different schemes with Balances 7. Circulars of the Bank relating operations and interest Rates changes 8. List of Books which are manually Maintained Bank Branch Audit CA.S Narayanan 11

12 Letter seeking information 9. Relevant Reports of the Previous year 10. Information of top 10 borrowers for each kind of loan 11. Reports generated by the software including Exception Reports 12. Closing Instruction and accounting Policy of the Bank 13. Copy of Trial Balance pre closure, post closure and any date after Balance sheet Date 14. List of NPA Accounts with Balances 15. List of NPA Accounts upgraded during the year with reason 16. List of Accounts Restrucured during the year 17. Bank s Procedural, system and documentation Manual 18. Irregularity Report of Dec 2017 and March 2018 Bank Branch Audit CA. S Narayanan 12

13 Audit in an Computerised Environment 1. The Auditor has to conversant with system environment 2. The Auditor has to examine the reports generated at the day end, week end month end and half year end. 3. The interest applications are generally automated and they apply interest at the specified periodicity 4. The interest parameters are generally modified by the head office through system. 5. The auditors to take print out of rates parameters in the system and compare with changes with relevant circulars. 6. The auditor should scrutinise accounts subject facility to edit interest parameters 7. The auditor should call for exception reports like no interest flag accounts both from revenue and application of interest on non performing accounts Bank Branch Audit CA. S Narayanan 13

14 Accounts and balance-sheet Sub-section (1) of section 29 of the Banking Regulation Act, 1949 requires every banking company to prepare a balance sheet and a profit and loss account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance Sheet Form B contains the form of Profit and Loss account Bank Branch Audit CA. S Narayanan 14

15 Classification of Advances as per schedule 9 Three ways of classification of advances in balance sheet as schedule 9 of banking regulation act,1949 A)Classification by nature i)bills purchased and discounted ii)cash credits, overdrafts and loans repayable on demand iii)term loans B) Classification by security i)secured by tangible assets Bank Branch Audit CA. S Narayanan 15

16 Classification of Advances ii)covered by bank/ government guarantees iii) Unsecured C) Classification by location I. Advance in India (i) Priority sector (ii) Public sector (iii) Banks (iv) Others Bank Branch Audit CA.S Narayanan 16

17 Classification of Advances II. Advances outside India (i) Due from banks (ii) Due from others (a) Bills purchased and discounted (b) Syndicated loans (c) Others Bank Branch Audit CA S Narayanan. 17

18 Some disclosure items in balance sheet 1. Capital Adequacy Ratio 2. Movements in NPAs 3. Movement of provisions held towards NPAs 4. Business (deposits plus advances) per employee 5. Maturity Patterns of deposits, borrowings, loans and advances 6. Exposures to real estate sector, Capital market 7. Disclosure of Penalties imposed by RBI 8. Details of Single Borrower/Group Borrower Limit exceeded by the bank 9. Segment Reporting information Units of 5 crore or turnover of 50 Crores ( Last three Years Coporate Sector) Bank Branch Audit CA.S Narayanan 18

19 Additional Disclosures I. Concentration of Deposits, Advances, Exposures and NPAs II. Sector-wise NPAs III. Movement of NPAs IV. Overseas assets, NPAs and revenue V. Off-balance sheet SPVs sponsored by banks Bank Branch Audit CA. S Narayanan 19

20 Audit Procedures Audit Procedures Following Parts Audit of the Financial Statements and Expression of Opinion of True and fair view of Profit or Loss and state of affairs on Balance sheet date Long Form Audit Report Audit of Additional information given in notes to accounts and other Balance sheet disclosures Certifications required by Head office Tax Audit Audit Evidence and documentations and Peer Review

21 Application of Accounting Standards All standards are applicable Except Accounting Standard 7 Construction Contracts Accounting for Amalgamations AS 14 AS 16 Borrowing Cost Accounted at H O AS 20 EPS Disclosed by H O AS 21 Consolidated Fin Statements at Ho AS 21 Discounting Operation, AS 25 Interim Financial Reporting, AS 26 Intangible Asset. AS 27 Financial Reporting Joint Ventures at Head Office AS-2 Inventory Valuation Stationery, Precious Metals etc AS 11 The effects of Changes in Foreign Exchange Rates as per circular dated 15/03/2005

22 Verifications of Items of Balance Sheet & Profit & Loss Account Cash Verify the Cash at branch either opening or closing including Foreign Currency Notes, ATM Cash, Cash at extension counter at the time of Visit for audit Obtain Cash Balance certificate at the date of Verification and the cash on the Balance sheet date ensure that all cash including ATMs cash has been properly accounted for. May Take Photocopy of cash Balance Book after due attestation by branch and auditors Foreign Currency Notes are generally recorded at notional rate on the date of transaction and not revalued at branch level. Verify and obtain necessary assurance and documentation for reporting in LFAR Verification of high denomination issued prior to 2005 not containing year of issue

23 Verification of Balance Sheet & P & L Contd Security Items Physically Verify the security Items in stock Verify accounting of Consumption of Security item has been followed as per instructions Reporting in LFAR Under the other Assets Stationery and Stamps Balancing of Books Check balances as per General ledger and subsidiary Ledger Obtain list of Books maintained manually and check for Balancing. Reporting Under LFAR Balance with RBI SBI and other Banks Obtain confirmation of Balances check for Charges debited or income credited and give MOC for them. Reporting in LFAR in Point No 2 under the head Assets

24 Verification of Balance Sheet & P & L Contd Inoperative Accounts Check for debits to inoperative accounts Check for Transfer of Dormant Accounts to in operative Accounts Check that Interst has been credited to in operative saving accounts Reporting in Long Form Audit Report Suspense and Sundry Account Check that there no items of revenue nature outstanding in sundry suspense account If yes report through MOC Check provisions for expenses normally parked In creditors account Compliance of SLR\CRR on 12 odd Days Overdue Deposits- Transfer from time to demand liabilies

25 Verification of Balance Sheet Profit & Loss Account Fixed Asset Verify in the fixed schedule that opening balance tallies with closing Balance as per last audited Balance Sheet Ensure that additions and transfer are properly classified under correct heads. Check Depreciation has been Correctly worked out as per policy of the bank and closing Instructions. Check the depreciation and W D V tallies with books and correctly presented in Financial Statements. Status of Physical Verification. Guarantees and Letter of Credit Check Correct Accounting for Unexpired portion Investments Held at Branch on behalf of Head Office DICGC\ECGC Claims Deposits-Term Deposit, Savings and Current Deposits Overdue Term Deposit Transfer from Time to Demand Liabities

26 Verification of Balance Sheet & P & L Contd Income Check the accounting policy of the bank as regards accounting for revenue Interest Earned on cash credit term loans and bills has to be checked Call for few highly value accounts and check the application of interest Take the help of exception reports Scrutinize the P & L Ledger for monthly credits to Income heads for any variation in between the months Check whether any income head has debit balance on any day if so then enquire as to nature and how corrected In case of Bills discounted check that unexpired of the income has been correctly accounted for Call party wise and period wise list of balance in unexpired discount account Also check for unexpired portion of Commission on LG and LC has been correctly accounted for Check that Income from Govt Business has been correctly accounted for on accrual basis depending on accounting policy Income from NPA should not accounted for untill realised Check that there should not be any reduction in NPA balance if so may that recoveries have not taken to Income. Compare the balances with P year MOC Balances

27 Verification of Balance Sheet & P & L Contd Verification of Expenditure Conduct the scrutiny of Profit & Loss Ledger for the year to observe the monthly application of Interest on deposits Call for few highly value accounts and check the calculation of Interest of few saving and time deposit Accounts Check that interest has been provided on inoperative accounts. Check the provision of interest on overdue time deposits. Check whether year end provisions have been made (electricity, rent, telephone etc) No Provision for Bonus, Audit Fees, Employee Benefits & NPA Check the in case advances for tour etc where journey has been completed before close provision for expenses have been made Check the provision of rent for clearing house if any Check the reversal of Interest debited but not realised on NPA Account at the year end. Examine divergent trends in income and expenditure and take suitable explanation.

28 Audit Reports Bank Branch Audit 28

29 1. Tax Audit Report 2. PMRY Audit Certificate 3. DICGC Certificate Various Reports/Certificates 4. Certificate for compliance of CRR/SLR for 12 Odd Days 5. Service Tax Certificate 6. Income on Insurance Business 7. Frauds 8. Certificate of Effecting previous year MOC 9. Interest Subvention Certificate 10. Certificate of Commission on Government Business 11. Certification as regards DFV Calculations. 12. Certification of Investments held by the branch. Bank Branch Audit CA. S Narayanan 29

30 Various Reports/Certificates(Contd.) 9. Ghosh Committee Recommendations 10. Jilani Committee Recommendations 11. LFAR 12. MOC-Classification 13. MOC-Income Recognition 14. Other reports 15. AUDIT REPORT- U/S 30 OF The Banking Regulation Act,1949 and SA 700,705,706 Bank Branch Audit CA. S Narayanan 30

31 Major Clauses in LFAR IV General 1. Books and records 2. Reconciliation of Control and subsidiary records 3. Inter branch accounts 4. Audits/ Inspections 5. Frauds 6. Miscellaneous Questionnaires Applicable to Specialized Branches 1. For Branches dealing in Foreign Exchange Transactions 2. For Branches dealing in very large advances in excess of Rs. 100 crores 3. For Branches dealing in Non Performing Assets such as Asset Recovery Management Branches. 4. For Branches dealing in Clearing House Operations, normally referred to as Service Branches Bank Branch Audit CA. S Narayanan 31

32 Reporting under Banking Regulation act,1949 As per section 30(3) of a banking regulation act,1949 an auditor is required to state in his report of a banking company incorporated in India the following :-- (a) whether or not the information and explanations required by him have been found to be satisfactory; (b) whether or not the transactions of the company which have come to his notice have been within the powers of the company; Bank Branch Audit CA. S Narayanan 32

33 Reporting under banking regulation act,1949 (c) whether or not the returns received from branch officers of the company have been found adequate for the purposes of his audit (not applicable to bank branch) (d) whether the profit and loss account shows a true balance of profit or loss for the period covered by such account; (e) any other matter, which he considers should be brought to the notice of the shareholders of the company Bank Branch Audit CA. S Narayanan 33

34 Fraud Standard on Auditing SA 240 The Auditors Responsibility in Relating to Fraud in an Audit of Financial Statements LFAR-Reporting of Fraud Loss Provision in Books Management vs Employee Related Fraud Fraud arise esentially due System Gaps Inoperative Accounts- Risk area Exceptions Reports generated by system Auditor to view from Material Mis Statement point of view

35 THANK YOU