AUDIT PLAN, PROGRAM AND PROCEDURES PRASHANT P. TIDKE, F.C.A. PARTNER, P.G. JOSHI & CO., CHARTERED ACCOUNTANTS

AUDIT PLAN, PROGRAM AND PROCEDURES PRASHANT P. TIDKE, F.C.A. PARTNER, P.G. JOSHI & CO., CHARTERED ACCOUNTANTS

AUDIT PLAN Considerations * Number of Branches to be audited. * Number, experience and qualifications of the Audit team. * Schedule of completion and submission of reports. * Business Mix at the Branches, size and number of Advances accounts. * Target is to complete the audit efficiently and ensure timely submission of reports and returns to the Controlling Office of the Bank within a limited Time Framework.

AUDIT PLAN- Contd. Sending of Acceptance Letter to the Bank. Sending Letters to Previous Branch Auditors. Contact the Branches or Controlling Office of the Bank to get the details about the information of Business Mix of the Branches to be audited. In case of Local Branches, Plan to start the audit before March end and inform the Branch Manager accordingly. Go through the Letter of Appointment, which would normally contain the various returns/ certificates to be certified in addition to LFAR and Tax Audit Report and importantly the Time schedule to be adhered to. Make a comprehensive list of such returns/certificates in the form of check-list, so that no return/certificate remains to be checked and/or certified. In the aforesaid check list, make a column for allocation of work to a particular team member. Draft a suitable Audit Plan depending upon the number of branches to be audited and composition of audit team. Normal time available for completion of audit and submission of reports would be around 6 to 8 days.

AUDIT PROGRAMME Considerations/Important Points Get a feel of the Branch from latest earlier reports of Inspectors, External auditors, Concurrent Auditors, RBI Auditors, Revenue Auditors. Previous year s Statutory audit report should also be studied, (mainly NPA statements and LFAR) Go through the Balance Sheet/Profit and Loss account at the Branch and get a feel of the Business level. LONG FORM AUDIT REPORT shall serve the purpose of Audit Program as well as Check-list.

DIVISION AND ALLOCATION OF WORK Basically the Audit assignment can be divided into sections :- 1- Audit of Balance Sheet and Profit and Loss account along-with the supporting schedules. These would include Fixed assets and depreciation, Suspense Accounts, Sundry deposits accounts, Bills Payable account, Bank Guarantee/Letter of credits and other contra accounts like IBC/OBC, Stamps account, etc. 2- Statement showing Classification of Advances into Standard/Sub-standard/Doubtful/Loss assets, security-wise classification, Sectoral classification. 3- Verification of Other Statutory returns like CRR/SLR statements, Movement of NPA s, Capital Adequacy statement, ALM Statements, Statement of Advances to Sensitive sector, Statement of restructured accounts, Compliance certificate on Ghosh and Jilani Committee reports, Certificate in respect of DICGC claims, Certificate in respect of PMRY subsidy, Tax audit report u/s 44 AB of the Income-tax Act, etc. 4 - Verification of Assets and Liabilities like Scrutiny of large advances/scrutiny of deposit accounts portfolio. Verification of cash/security forms/stamped documents,etc. 5- Compilation of Long Form Audit Report, Main Audit report, Memorandum of Changes, discussions of audit findings with Branch Management, interaction with Controlling authorities of the Branch/Central Statutory Auditors (if needed). Covering the areas not covered in 1 to 4 above like Scrutiny of latest audit and inspection reports of the branch, Verifying the security of the computerized system and other matters to be reported in LFAR relating to Systems Audit, Scrutiny of Inter Branch accounts.

Allocation of Work Junior members of the team can be given the work given in section 1 above relating to B/S and P/L set and also some of the returns specified in section 3 above. Senior members/ semi-qualified persons in the team should be assigned the work mentioned in section 2 and 4 above. Proprietor/Partner/s may also undertake the areas covered in the above 2 sections. However, Proprietor and/or Partner signing the audit report should be involved in the work mentioned in Section 5 above. At the time of discussion or meeting relating to audit findings and at the time of finalization of the report, he along-with the respective team leaders should be present. Proprietor/Partner along with the team leader who may be a qualified or semiqualified person should hold a meeting with the team members and clearly specify the allocation of work and reporting requirements to the team leader and the team leader shall report to the Proprietor/Partner. At the meeting, the proprietor/partner shall brief the team about the scope of work, latest RBI circulars and changes in the norms relating to asset classification, income recognition and provisioning, disclosure norms, changes in accounting policies of the bank, etc. which would have a bearing on the Branch audit. The team would be given a time bound schedule to complete the assignment and the draft report and audit findings should be available with the team leader at least 1 or 2 days earlier of the scheduled completion date.

AUDIT PROCEDURES Section I- Audit of Balance Sheet and Profit and Loss account set. 1)Verification of balances from the General Ledger/Trial balance generated from the system, before closing as well as after closing. 2) Verification of all the schedules and statements which form part of Balance sheet and Profit and Loss account. Please verify whether the balance of the schedule or statement tallies with the main Balance sheet or P&L account. 3) Verification of rates of depreciation as per the Bank s circular. Verify earlier year s Schedule for Opening WDV. 4) Concentrate on Suspense debit items of high value, and old entries which may warrant a provision. 5) Verification of Opening/Closing cash balance and stationery and stamps at the beginning of the audit. Verify numbered items of stationery carefully (eg. Unused Demand drafts, Cheque books, Fixed deposit receipts, etc). 6) Verification of Contra items like IBC/OBC, BG/LC, FIBC/FOBC,etc. from the register to the list and to the final balance in the Balance sheet. 7) Verify the figures in all the 4 or 5 sets.

AUDIT PROCEDURES- Contd Important Point:- Please do not make the changes in the Balance sheet and Profit and loss account sets directly, because these are already consolidated at the Controlling office. All changes/ rectifications should be done only by way of MOC. SECTION II- VERIFICATION OF STATEMENT OF CLASSIFICATION OF ADVANCES. 1) Obtain earlier year s classification certified by the previous branch auditor (i.e. for the year 31-3-13). Date of old NPA accounts given in the aforesaid statement can be verified from that statement. 2) Also obtain latest classification for the previous quarter ended on 31 st December, 2013 and if the Bank/branch is under quarterly review, then obtain the certified classified statement by the Branch auditor. 3) Obtain the List of Potential NPA accounts for the last quarter i.e. 31-12-2013 and also as on 31-3-2014 and closely monitor the border cases of high value. 4) In case of Large advances, which have become NPA and also Suit filed accounts or Protested Bills account verify the valuation of security is supported by the Valuation reports of the Approved Valuers and Stock audit reports from CA firms in case of Cash-credit accounts. In case of Doubtful accounts, the provision may change in case there is shortfall in security. 5) It the Bank is using software for classification of advances or it is generated through system, verify whether Systems Audit has been carried out recently or the software being used has been tested. Some sample cases can be verified manually to confirm the results. 6) Identify wrong classification of advances or discrepancies on account of wrong income recognition and include them in MOC, giving the reasons or circumstances leading to wrong classification. 7) Verify the advances accounts which have been upgraded to standard accounts. Verify the genuineness/source of the credits in the account.. 8) Verify whether devolved letters of credits or invoked guarantees are parked separately and not transferred to the cash-credit or current accounts of the borrower. 9) Classification is borrower-wise and not facility wise.

AUDIT PROCEDURES 1) Note important changes in NPA Classification and provisioning by referring to the latest RBI/Bank circular. 2) In case of Large advances held at the branch also verify the review/renewal position and position of submission of stock statements. 3) Certain accounts can be directly treated as doubtful or loss asset in case of fraud/erosion in value of security, etc. eg. Housing loan frauds. 4) Consortium accounts/restructured accounts to be closely monitored /verified whether correctly classified. 5) Verify the calculation of those accounts for which ECGC cover are available. Confirm the documentary evidence of admission of claim by these authorities. 6) Also verify the status of Central and State Government guaranteed accounts.

AUDIT PROCEDURES- Contd. SECTION III- VERIFICATION OF OTHER STATUTORY RETURNS. Return relating to capital adequacy- Verify whether the figures of contingent liabilities taken in the return are same as shown in the Balance Sheet and its supporting schedule and also the cash margin held on these items has to be correctly recorded. Also credit balances of the borrowers account which are not marked under lien should be correctly taken and verified. Following further deductions are required to be made in respect of claims received from DICGC pending adjustment and subsidies received from IRDP/PMRY. This is one of the important disclosures. BASEL I & II Return relating to Maturity Pattern of assets and liabilities (ALM):- Bucketing of various assets and liabilities, loans and advances and Borrowings which have classified in various time buckets. In addition to checking the proper bucketing as per behavioral pattern, whether the control figures of these items ultimately tally with the balance shown in the balance sheet. This is one of the important disclosures.

AUDIT PROCEDURES Movement of NPA and Provision of NPA:- Verify the Opening balances from the earlier year s return. If there is a difference, verify whether MOC relating to earlier year has been incorporated and then the opening balance will tally. Verify whether the figures relating to addition to NPA and/or removal of NPA as well as changes in classification within sub-standard to doubtful to loss, as well as cash recoveries/write-offs etc. are tallied as per main classification statement. This is also one of the important disclosures in the Bank s Audit report. Advances to sensitive sectors like Capital market (direct as well as indirect advances like advances against shares, etc), and to Real Estate sector. These are identified as sensitive and exposure to these sectors is kept limited by every bank as a policy matter. At branch level, it should be ensured that all those accounts which need to be classified as such have been included and at the same time no wrong classification has been done. Consolidated disclosure is reflected in the main audit report of the Bank. Provisioning norms for Real Estate Sector Standard advances is to be made at 1% for FY 2013-14. Certificate relating to SLR/CRR requirements :- Normally the data relating Time and demand liabilities of the Branch relating to 12 odd dates being non reporting Friday is required to be certified by the Branch auditors. The dates are selected by CSA s with consultation with the Bank management. At the Branch, the data needs to be verified for accuracy from the Branch accounting records.

AUDIT PROCEDURES- Contd. Compliance certificate regarding implementation status of Ghosh committee (in respect of frauds and malpractices in banks) and Jilani committee (in respect of review of internal control and inspection/audit system in banks):- As branch auditors, it would not be advisable to go into the entire clauses of the reports, but the review/report (latest one) of their implementation as reported by the Inspectors/internal auditors of the Bank or the concurrent auditors needs to be scrutinized, audit findings are studied, correction/compliance level verified and if necessary, test check some of the compliances and based on the test check and review, and report only the exceptions. Clause by clause verification for reporting of various matters contained therein is not warranted, but only those clauses which need negative or qualified opinion need be listed and reported with a specific comment or observation leading to such comment. Certificate relating to Country risk management:- At the branch level the auditors are required to verify the fund and non fund exposures to various countries, which may be by way of cash and bank balances, deposit placements, loans and advances trade credit/receivables, overdrafts in VOSTRO accounts, etc. The return would be compiled by the branch, auditor needs to verify the same.

AUDIT PROCEDURES-Contd. Tax audit Report under section 44 AB of the Income tax Act, 1961:- 1) All the statements need to be filled up and if any reporting is NIL or NA, it should be properly marked as such in the pre-printed schedules. 2) In case of schedule relating to deduction and payment of TDS, the recent provisions of Section 40 (i)(a) should also be kept in mind. 3) Membership no. should be mentioned in FORM 3 CA without fail. 4) All the respective columns and all the sets should be properly and completely filled up and these are to be signed by the Branch auditors Based on the branch auditors reports, main tax audit report for Bank as a whole is compiled at the Head Office level by consolidation of tax audit reports of all the branches. The certificate given in FORM 3 CA is true and correct and therefore extra caution is necessary in compilation and finalization of tax audit report.

AUDIT PROCEDURS-Contd. SECTION IV- VERIFICATION OF ASSETS AND LIABILITIES. Checklist as per Long Form Audit Report. Verification of Large advances- Scope of work should be restricted to comprehensive checking of the accounts having outstanding (in fund based as well as non fund based) over 5% of the outstanding as on 31 st March, 2014 or Rs. 2 crore which ever is less and in respect of other accounts it can be covered on a test check basis. Focus areas :- Credit appraisal- loan applications/preparation of proposals/adequacy of appraisal documentation./working of Credit rating for determination of rate of interest (Presanction scrutiny) Sanctioning/Disbursement- Delegated authorities/compliance of terms and conditions of sanction. Documentation- Proper stamping/documents are properly filled up/signed/executed. Full set of documents as per Book of instructions of the bank or as advised by Bank s advocate has been obtained/registration of charges with ROC/ Registration of mortgages/ obtaining of necessary guarantees, etc. /noting lien on Fixed deposit receipts/nsc s etc.

AUDIT PROCEDURE- Contd. Re-view /Monitoring /supervision- Annual review/renewal/balance confirmation certificate/letter of acknowledgement of debt/obtaining regular stock statements/operational data like MSOD/FFR statements/scrutiny of these reports and action taken thereon. Obtaining stock audit reports in certain accounts, scrutiny thereof and verify ATR (Action Taken Reports) on negative observations of the Stock Auditors and report material non compliances. Obtaining of audited statements in case of limits beyond Rs. 10 lacs as per RBI guidelines in case of non-corporate borrowers. Inspection of stocks by bank officers/concurrent auditors and scrutiny of their reports. Scrutiny of the latest valuation of securities, inspections on a test check basis, scrutiny of operations in the accounts and noting of adverse features like overdrawing beyond limits/dp, frequent return of cheques. Adequacy and risks covered by the Insurance Policies. Scrutiny of lease financing activities and verification of compliance with the accounting norms and guidelines by the controlling authorities. Prompt recovery of credit card dues. Proper classification of advances and provisioning thereon as per RBI guidelines/ho instructions. Cases of disagreement relating to classification and provisioning to be reported in LFAR and impact to be quantified in MOC.

AUDIT PROCEDURES- Contd. Scrutiny of Suit filed accounts and in respect of those accounts Controlling authorities have authorized a legal action, but not taken by the branch. Auditors to take review of efficiency of branch management in expediting the legal cases and ensuring fast settlement and prompt execution of decrees for recovery. Reporting of NPA promptly to the Controlling authorities. Status of those accounts where Rehabilitation programme have been undertaken to be reported. Lodging of claims with ECGC and their follow-up for faster settlement. Report the age-wise claims pending admission/settlement. Obtaining of latest valuation reports (not older than 3 years) in respect of NPA accounts. Compliance with Recovery Policy of the Bank in respect of compromise settlement /write-off. Details of such cases in excess of Rs. 50 lacs are to be reported in LFAR.

AUDIT PROCEDURE-Contd. Scrutinize transactions in Non fund based limits, Invoked bank guarantees paid as well as not paid/adjusted to be reported and also about funded letter of credit on account of devolvement to be separately reported. Scrutiny of Liabilities - Deposits- In-operative accounts. - Scrutinize any unusual large movements in deposits as on balance sheet date and as on the date of audit in deposits. (window dressing). -Matured deposits not renewed. -Scrutiny of Bills payable/sundry deposits- old entries - Scrutiny of Contingent liability- outside balance sheet. * Scrutiny of Profit and Loss account - Internal control on revenue leakages. - Compliance with Income recognition norms. - Accuracy of provision of Interest payable on matured fixed deposits - Divergent trends in income and expenses, not satisfactorily explained

AUDIT PROCEDURE- Contd. SECTION-V LFAR/ MAIN AUDIT REPORT/ MOC/ GENERAL. - LFAR Compilation of audit findings from the team and to consolidate the same and prepare draft LFAR. Whether any adverse comment warrant qualification, circumstances/instances leading to qualification to be clearly reported. Whether any qualification involves quantification to be reported in MOC, cross reference to be given in LFAR/MOC. Before finalization of LFAR/MOC it needs to be discussed with the branch manager. Qualified opinion given in the LFAR, needs to be incorporated in the MAIN AUDIT REPORT. - Memorandum of Changes (MOC)- If it is NIL, NIL MOC is to be certified. It should be prepared for a material amount. It should be complete and all the necessary effects should be given eg. In case of wrong classification of advances in addition to provisioning and interest, suitable modifications in classification in security-wise also needs to be modified. Reason of MOC should be mentioned in the remarks column. Before passing MOC, it needs to be discussed with the Branch manager. Arithmetical accuracy and Debit and credit effects should be correctly stated. - Scrutiny of latest previous reports of Inspectors/Internal auditors/ concurrent auditors/ stock auditors/systems auditors /Special reports/rbi Inspection reports. Identification of major adverse comments and report to the extent of non compliance or non rectification of these major adverse comments in LFAR.

AUDIT PROCEDURES- Contd. In respect of Computerized branches, aspects of systems security need to be verified :- - hard copies of accounts printing on daily basis. - extent of computerization- i.e modules covered ALPM/LAN whether any parallel /manual operations are carried out eg. Foreign transactions, etc - Physical and logical access controls. - Back up facilities/ Off site storage. - Availability of Disaster recovery plan or contingency plan and its documentation and capacity of its implementation. - Any suggestions for improvement in Systems at the Branch. - whether software programme has been subjected to audit. - whether master data updations is carried out regularly. Like rate of interest on deposits and advances. - scrutiny of exceptional transaction report by the Branch Manager. - Comments to be incorporated in LFAR.

AUDIT PROCEDURES- Contd. Matters related to Fraud discovered during the year concerned. Circumstances leading to fraud and whether corrective action has been taken for prevention of such frauds. Scrutiny of Inter branch accounts.- Scrutinize debit entries of high value standing for a longer time (which remain un-reconciled at Head Office). whether daily transactions are reported to HO on daily basis. whether branch is prompt is attending to the memos sent by the Controlling office in respect un-reconciled entries relating to the branch. observe the no. of entries outstanding in these accounts in HODD/IBT, etc. * In case of Branches handling Foreign exchange business, there is a separate LFAR. Branch auditors to see the compliance of HO/RBI/ FEDAI guidelines in respect of such business. * Separate annexure to be prepared for Large advances (given along with LFAR for specialized branches). Branch to prepare these annexure and auditors are supposed to verify the same

CONCLUDING REMARKS ALL THE CERTIFICATIONS/REPORTS SHOULD BE SENT AT THE SAME TIME INCLUDING LFAR. IT IS ADVISABLE TO COMPILE AND FINALISE LFAR AND TAX AUDIT REPORT AT THE BRANCH ITSELF AND IT IS ADVISED TO SEND THE SAME FROM THE BRANCH ITSELF INSTEAD OF DEFERING IT. IN CASE OF ANY DIFFICULTY/NON CO-OPERATION AT BRANCH LEVEL, CONTROLLING OFFICE MAY BE CONTANCTED. TIME SCHEDULE SHOULD BE STRICTLY ADHERED TO. RO/ZO/HO CONSOLIDATIONS ARE DEPENDANT ON THE BRANCH AUDITS. QUALITY AUDIT IS TO BE CARRIED OUT IN A VERY LIMITED TIME INCLUDING COMPLETION AND SUBMISSION OF REPORTS. TIME MANAGEMENT IS MOST IMPORTANT. ENTIRE AUDIT EXERCISE IS EXPECTED TO BE COMPLETED BY 5 TH TO 8 TH APRIL FOR MOST OF THE BANKS.