Aurangabad Branch of Western India Regional Council The Institute of Chartered Accountants of India Seminar on Bank Branch Audit Verification of Balance Sheet CA Prakash P. Kulkarni March 25, 2018
Presentation Outline Components of Financial Statements Aspects Covered in Closing Returns Verification of: ü Financials : Key Considerations ü Deposits & Interest Paid ü Other Liabilities ü Cash & Bank balances ü Advances & Interest Income ü Fixed Assets & Depreciation ü Other Assets ü Contingent Liabilities ü Other Income & Expenses Sum Up 2
Components of Financial Statements Balance Sheet (with Schedules) Profit & Loss Account (with Schedules) Closing Returns & Statements Certificates Format of Financial Statements Laid Down by the Banking Regulations Act, 1949 Schedule III Horizontal Format for Commercial Banks Vertical Format for Cooperative Banks 3
Aspects covered in Closing Returns Sundry/ Suspense Accounts Clearing Difference Statement of Asset Classification & Provisioning Account-wise NPA provision Movement in NPA & Provisioning Provision for Standard Assets Information required for Segment Reporting Contingent Liabilities & Claims against Bank Information required for CRAR Un-hedged Foreign Currency Exposure 4
Aspects covered in Closing Returns Cash & Bank Balances 12 Odd dates Classification of Advances Priority Sector Compliance Exposure to Commercial Real Estate Capital Market Exposures Closing Returns essentially help the bank in compilation of: Financials Notes on Accounts/ RBI Disclosure Requirements 5
Verification of Financials: Key Considerations Focus of Audit tends to shift to Advances & NPA Financials: a primary deliverable Automated Compilation Financials Adequate Audit Trail?? Maker- Checker?? Increasing Number & Scope of Closing Returns & Certifications Planning of resources for Financials Documentation 6
Verification of Financials: Key Considerations Availability of Closing Guidelines System of Compilation of Financials: Compilation: Fully Automated Separate Applications which talk to CBS CBS generates trial balance/ Balancing Report for verification. Focus area for Auditors Mapping of account heads from Trial Balance to Financials Manually Prepared Closing Returns 7
Closing Guidelines/ Circulars Issued by Head Office for facilitating closing exercise Key Contents Closing Process & Timelines Formats of Closing Returns & Audit Reports Guidelines on Advances, CRAR etc Accounting Aspects controlled Centrally & Locally Accounting Estimates/Provisions: manner for calculation & Accounting Closing circulars - a good source for: Fine tuning our audit programs Ensuring completeness of Audit Procedures Documentation 8
Verification of Deposits Bifurcation of Deposits into Savings, Term & Current Disclosure of Deposits from Banks Credit Balances in CCOD Accounts Review of Systemic Controls Risk Categorisation of Deposits PMLA Alerts (CTR, STR) Scrutiny of Staff Accounts Inoperative Accounts Overdue Deposits Compliance with Income Tax Act: TDS deductions Careful Review of controls over Death Claims 9
Verification of Interest Paid on Deposits Verification of Masters & Interest Rate Tables KYC Norms for Deposits (Challenge when storage of documents is centralized) Special Interest Rates Senior Citizen, Staff Bulk Deposits (generally controlled by treasury) Interest credit frequency: important for verification of interest paid & payable Recalculation of Interest on Deposits on a test basis 10
Verification of Other Liabilities & Provisions Drafts/Pay-slips Payable System Reports for Balancing Master of Charges Drafts paid without advice (DPWA) Items Pending > 10 years: Transfer to DEAF Sundry Credits Recovery held in Suspense Accounts pending adjustment with the Advances (Relevant for NPA Provisions) Income Collected in Advance (Guarantees, LCs, Bills etc) Provisions for Operating Expenses by branches Important Aspects Correct Aging of Liabilities Provision for Differences in Balancing of old heads 11
Verification of Cash & Bank Balances Cash on Hand & at ATM Physical Verification: Systems & Controls Dual Custody & Other Controls Cash in transit (with vendors) reflected as Cash at ATM Un-responded Entries for Cash in Transit to branches/ Currency Chest Cash Balance over Retention Limits Balances with Banks Appropriate reflection in Current & Other Accounts Non Availability of Confirmation/ Reconciliations Un-responded Debits/ charges in Banks Necessity of closing Return capturing Provision required for items pending in reconciliation 12
Verification of Advances Disclosure in the Balance sheet Appropriate Disclosure as per BR Act Debits in Deposit Accounts Debits of advances nature held in suspense. Advances granted to staff Correctness of Closing Returns for Disclosure and Notes on Accounts Reconciliation process List of advances with Trial Balance/Balancing Report Trial Balance/BR with Balance sheet List of Advances with CRAR Disclosure/ Standard Assets Provision Disclosure 13
Verification of Interest Income Variations Analysis with Average Advances Interest Rates Review of Parameter Setting of Master/Tables Linking of correct table to borrowers Rate Spreads based on Credit Ratings Rates linked with MCLR/BR/Lead Bank Rates disputed by borrowers/concessions Recalculation on a test basis Reversal of URI for NPAs, Appropriation of Recovery in NPAs (OTS) Accounting Policy Compliance 14
Verification of Fixed Assets & Depreciation Fixed Assets: controls over physical custody Numbering of items Physical verification by the bank & its report Assets in possession of employees Assets destroyed/ not in use. Reconciliation of Dead stock with Financials Depreciation Compliance with accounting policy & rates Componentization of rates (compliance with companies act) Depreciation on Revalued Assets: compliance with revised Accounting Standard: PPE 15
Verification of Other Assets Suspense Account: aging analysis, pending items Use of Pointing Feature Availability of System Reports for Aging Scrutiny by Bank: review of controls in place Fraud Risk Controls Closing Returns for provision on suspense accounts Inter Branch Reconciliation System based reconciliation of Pending Items & aging Scrutiny by branch officials: controls in place Branch s Share of common expenses wrong left parked in inter branch items Differences in Clearing A/cs 16
Verification of Other Assets Non Banking Assets Acquired in satisfaction of claims Compliance with RBI prescription of 7 years Adequate provisioning Adequate supporting for security deposits (Assets) Expenditure pending capitalization, accounting as expenses Calculation of Prepaid Expenses Temporary Advances to staff Control & monitoring over reversal Delegation of Powers 17
Verification of Contingent Liabilities LCs, Guarantees, LOCs/LOUs Reconciliation of item-wise record with the trial balance. Translation of items pending in foreign currency Appropriate Disclosure of Financial & Performance Guarantees (relevant from CRAR perspective as well) Correct feeding/ linking of Margins Reversal of expired items Invocation/Devolvement: procedural delays Reconciliation with transaction source LOCs/LOUs with Swift Messages Issuance of Guarantees with software records Claims against bank not acknowledged as debts 18
Verification of Other Income Processing Charges for advances This aspect is still manually controlled Reconciliation with sanctioning report Charges challenged/disputed by borrower Delegation of Powers for concessions Fees received for restructuring: spread over life of advances Interest disguised as fees (recovered as upfront) Other Income/Service Charges Verification of master Parameters Accounts marked as N for charges Review of batch activity & error reports Spreading LC/BG/Bills Commission 19
Verification of Other Income Analysis of Divergent Trends Recovery in NPAs/ Written off accounts Bancassurance Income: mostly accounted manually Accounting of borrower charges commonly recovered by the consortium leader with other banks. Compliance with GST Overdue Income: linking with IRAC Norms Debits to income heads/ manually passed entries 20
Verification of Other Expenses Accounting of Staff Salaries: whether centralized or decentralized? Compliance with Delegation of Power and manner of ratifications in case of breach Capital V/s Revenue Expenditure Variations Analysis: a Key audit procedure TPM Exercise: compliance with closing guidelines Careful scrutiny of other expenses, Expenses of personal nature which are allowed as per contractual terms with employees/ industry practice 21
Sum Up: Important Points Comprehensive Analysis of Variations Balancing Reports/ Item Wise Details Automatic matching of debit/credits items by system Automated report for aging & pending items Reconciliation of BR with TB Review of master parameters Ensuring access to all required master tables Matching with records, such as circulars, schedule of charges Review of Linking of Trial Balance with Financials Cross Referencing of Financials with Schedules, Closing Returns & Certifications 22
Sum Up: Important Points Unambiguous & Quantified Disclosure in LFAR Non compliance with accounting policies Incorrect Linking of TB with Financials Shortfall in provisioning (with MOCs) Non Availability of Audit Trail: system reports, masters etc. Aspects with are intervened manually and not automated Aspects missing in Closing Guidelines Obtaining Comprehensive Management Representation from the branch on Financials 23
Questions??? Comments?? Suggestions? 24
Thanks!!! 25