Long Form Audit Report in Case of Bank Branches

By – CA Shriniwas Y. JoshiJaipur

02.03.2017

In the case of branches, the auditors have to answer a detailed questionnaire formulated by the RBI. Such a report is usually termed as Long Form Audit Report (LFAR).

The operations and audits of a bank are mainly based on the effective internal controls and this report serves the purpose of bringing to the notice of the management the lacunae, shortcomings and failures in respect of compliance or adherence to the internal control measures adopted by the Banks.

LFAR is a separate report to be submitted to the Management, in the format prescribed by the RBI. The latest format of LFAR has been revised in the year 2003 and was made effective from 31st March, 2003.

RBI vide its Circular No. RBI/2014-15/626 DBS.CO.ARS.BC 8/08.91.001/2014-15 dated June 4, 2015 provides that the branches below the cut-off point, which are subject to concurrent audit by chartered accountants, henceforth, LFARs and other certifications done earlier by SBAs will now be submitted by the concurrent auditors and such branches may not generally be subject to statutory audit.

Concurrent Auditors, who are chartered accountants, of branches below the cutoff point will submit LFAR only to the Chairman of the bank.

GENERAL

i. STUDY the LFAR Questionnaire thoroughly

Some important areas to be noted while preparing LFAR are as follows:

(a) The auditor should be aware of the limits fixed or of various Instructions given by the controlling authorities of the bank with respect to various aspects covered in the LFAR.

(b) The auditor should note that in certain questions he has to specifically give an opinion. (Credit Appraisal – Whether in his opinion, branch has generally complied with the procedures / instructions of the Controlling Authorities of the Bank regarding loan applications, preparation of proposals for grant / renewal of advances, enhancement of limits, etc., including adequate appraisal documentation in respect thereof.)

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(c) In certain questions replies are to be given specifically based on the cases examined/test checks done. (Advances > 2 crore or 5%)

(d) In certain cases he has to study the system presently in operation in the bank so as to give his reply. (Valuation of investments as per RBI Guidelines, dual control on cash)

(e) In certain questions he has to specifically give suggestions, especially, regarding improvement in computerized information system and minimizing possibility of frauds.

Branch auditors do not give any guidance on generic queries to SCAs – Interest not charge on C/C accounts. – Capitalization of computers

In the LFAR, replies are given only to questions enumerated in the LFAR. The LFAR is only indicative in nature and additional areas like, KYC compliance/Demat accounts/ Lockers/ Security arrangements/ Risk based audits// Service/ ATM’s/ TDS, etc., can also be covered.

ii. PLAN the LFAR work along with the statutory audit right from day oneAsk information required from branch for LFAR on day one of the audit

iii. COMPLETE & submit the Main Audit Report as well as the LFAR SIMULTANEOUSLY

iv. There should be no vague/general comments wherever possible elaborate i.e. the answers should not be only Yes/ No/ Not Applicable.

Auditor’s have casual approach to audit and therefore the quality of overall financial statements suffer. 1000 LFARs – 900 Yes/No/Not Applicable.

v. Give INSTANCES of shortcomings/weaknesses in the LFAR Reservations and adverse comments/remarks should be given along with the reasons. Write detailed explanation especially for MOC.

vi. DO NOT make the current year’s LFAR a REPLICA of the previous year’s LFAR

vii. The MAIN AUDIT REPORT and LFAR are two separate reports. Many times the comments in LFAR are QUALIFICATORY in nature but are not included in the Main Audit Report. Include the AUDIT QUALIFICATIONS in the Main Audit Report and not in the LFAR. In deciding whether a qualification in the main report is necessary, the auditor should use his discretion in the facts and circumstances of each case

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It is advisable to discuss the contents of the LFAR with the branch head and get his responses before finalising the same. The object is to ensure correct presentation so as to state facts which have been verified during the course of audit.

It should be noted that specific disclosure, such as, in respect of extent of checking, manner of sample selection, limitations of documents verified, representations received, etc., should be made in the LFAR.

Important work to be done by partners rather than articles.

Training to staff is required.

The auditor may also give disclaimer in LFAR with respect to any significant problem faced by him in the preparation of LFAR. Some of such problems are as follows:

(a) Lack of availability of necessary information; (Statements not prepared, staff on leave, queries not solved, MOCs not allowed to be passed – Branch Auditors do not contact SCAs for difficulties faced by them.)

(b) Lack of availability of computer systems to conduct audit;

(c) Instructions of Controlling Authorities not recorded or not shown to the auditors; - Auditors should be updated on RBI Circulars and ICAI’s Guidance Notes.

(d) Reliance placed on the computer system in operation should be stated if a system audit has not been done; and

(e) Reliance placed, if any, on the previous year’s LFAR/concurrent and other audit reports.

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Bank Branch LFAR Questionnaire along with some indicative audit steps (given in italics):

1. Cash

a) Does the branch generally carry cash balances, which vary significantly from the limits fixed by the Controlling Authorities of the Bank? Whether excess balances have been reported to the Controlling Authorities of the Bank?

i. To check limit fixed by Controlling Authorities for Branch as well as ATM

ii. To check review cash record and report days on which cash balance exceeds limit and whether same is reported to Controlling Authorities

b) Does the branch hold adequate insurance cover for cash on hand and cash-in-transit?

i. If insurance cover is taken at Branch, to check insurance records and comment

ii. If insurance cover is taken at HO, need to obtain confirmation for same from Branch Head and mention fact about same.

iii. If insurance cover is taken based on Cash limit fixed for branch and there is frequent breach in Cash Limit at Branch, it may result in under insurance

iv. If there is over insurance, auditors may give suitable recommendation for cost saving.

c) Is cash maintained in effective joint custody of two or more Officials, as per the instructions of the Controlling Authorities of the Bank?

• To obtain and read instructions of the Controlling Authorities

• To carry out checking of joint custody during visit to Branch, to evaluate effectiveness of same and report

d) Have the cash balances at the branch been checked at periodic intervals as per the procedure prescribed by the Controlling Authorities of the Bank?

i. To obtain and read instructions of the Controlling Authorities ii. To carry out checking of procedure followed for cash balances during visit to

Branch, to evaluate effectiveness of same and report

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2. Balances with Reserve Bank of India, State Bank of India and other Banks

a) Were balance confirmation certificates obtained in respect of outstanding balances as at the year-end and whether the aforesaid balances have been reconciled? If not, the nature and extent of differences should be reported.

• To review balance confirmation, reconciliation and report on nature and extent of reconciliation

• To review reconciliation process and give suitable recommendation

b) The observation on the reconciliation statements may be reported in the following manner:

• Cash transactions remaining unresponded

• Revenue items requiring adjustments/write-off

• Old outstanding balances remaining unexplained/unadjusted:

a) Outstanding between six months to one year

b) One year and above

• In case, any item deserves special attention of the management, the same may be reported

The above items may have impact on financial statements; hence suitable adjustment needs to be recommended for same.

3. Money at call and Short Notice :

Has the branch kept money-at-call and short notice during the year? If so, whether instructions/ guidelines, if any, laid down by Controlling Authorities of the Bank has been complied with?

• To check financial statements, trial balance and carry out ledge scrutiny to ensure, whether branch had kept money-at-call and short notice.

• To obtain and read instructions of the Controlling Authorities

• To report non compliance if any

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4. Investments :

Normally, Investment function is centralized and branches do not hold any investment. To check financial statements, trial balance and carry out ledge scrutiny to ensure, the branch does not hold any investments. To obtain management representation for same as well.

A. For Branches in India:

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

• To carry out physical verification of all investments with holding statements, physical certificates or other relevant evidence of investment holding

• To report discrepancy observed in physical verification

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

• To check amount income on investment during the year and reporting of same to HO. Normally income is accounted in branch’s financial statements and gets consolidated with HO

c) In respect of investments held by the branches on behalf of Head Office / other offices of the bank, whether any income is accrued / received and recognized as income of the branch contrary to the instructions of the Controlling Authorities of the Bank?

• To obtain and read instructions of the Controlling Authorities and report discrepancy

d) Whether there are any matured or overdue investments, which have not been encashed? If so, give details

• To review trial balance, financial statements and review terms of investments to get list of matured or overdue investment

e) Whether the Guidelines of the Reserve Bank of India regarding Transactions in Securities have been complied with?

• To review and ensure compliance with RBI Master circular which is issued on first day of July Month every year and other relevant instructions issued by RBI

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f) Whether the Guidelines of the Reserve Bank of India regarding Valuation of Investments have been complied with?

• To review and ensure compliance with RBI Master circular which is issued on first day of July Month every year and other relevant instructions issued by RBI

5. Advances

With regard to the nature and extent of auditors’ response to the various questions relating to the advances, the questionnaire states as below:

(The answers to the following questions may be based on the auditor’s examination of all large advances and a test check of other advances. 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. For this purpose, large advances are those in respect of which the outstanding amount is in excess of 5% of the aggregate advances of the branch or ` 2 crore, whichever is less)

a) Credit Appraisal

In your opinion, has the branch generally complied with the procedures/ instructions of the controlling authorities of the bank regarding loan applications, preparation of proposals for grant/renewal of advances, enhancement of limits, etc, including adequate appraisal documentation in respect thereof

• Ensure whether prescribed forms and procedures/ instructions for preparation of proposals/ grant/ renewal/ enhancement of limits has been followed or not & report • If in the auditors’ opinion there are major short comings in appraisal, the application form or the procedures need improvement, suggestions for improving the appraisal system, application form or the procedures may be given

• Whether the branch has a policy of maintaining Rejected Proposals. Details along with reasons should be hosted on bank’s intranet for knowledge of other Branches

• Whether Branch is conducting credit rating of major advances accounts on periodic basis

• Review loans approved by an Executive before retirement

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b) Sanctioning/Disbursement

(i) 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 the branch? Are such cases promptly reported to higher authorities?

• Obtain Operations Manual/ Circulars prescribing delegated authority or limits of the branch officials. Whether telephonic sanctions by higher authorities are followed up by written confirmations. Adhoc limits (increase) given to borrower for temporary/ seasonal/ peak periods – whether reported to controlling authorities and whether liquidated in time.

• Report non–compliance and non–repayment strongly

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

Examples/instances of non-implementing of terms and conditions of sanction:

• Promoters contribution not brought in

• Guarantors’ Networth not furnished

• Unit not inspected

• Borrower instructed to close other bank accounts. But the same is not complied with

• Security not created e.g.equitable mortgage of immovable property

• End use of the loan not verified

• Share application money – not converted to share capital

• Confidential Reports of other banks not obtained before disbursement

• In case of takeover of limits from other banks, pay order should be made in favour of the said bank and a No–due Certificate obtained. Also,loan documents should be obtained from that bank on timely basis

• Advances given to a group in excess of RBI norms during the year

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c) Documentation

(i) In the cases examined by you, have you come across instances of credit facilities released by the branch without execution of all the necessary documents? If so, give details of such cases

• Serious, since incomplete documents made the case weak for recovery – Report instances

(ii) In respect of advances examined by you, have you come across instances of deficiencies in documentation, non–registration of charges, non–obtaining of guarantees, etc? If so, give details of such cases

• Blank or incomplete documentation (All required documents should be properly filled up)

• Overwriting, Change in handwriting, use of different ink in documentation

• Joint ‘consortium’ documentation not executed or confirmation of holding joint documents by one bank not there

• Documents for WCDL under loan delivery system not done

• Documents for inter– changeability of limits not there Guarantees not obtained

• Charge of hypothecation of stocks/ mortgage of immovable properties not registered with ROC, Negative lien on immovable properties not registered with Co–op. Societies, etc, technically makes the account unsecured, to that extent

• Documents kept in safe custody or not

• Sanction letter not signed by borrower

• Under stamping of document

• Do not put audit ticks on main documents

• NOC of Housing Society not there

• Time barred documents

• LIC Policies/ demat shares – lien marked by Insurance company/ Depository Participant

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• In cases where Stocks are held at rented godowns, No–lien Letters should be obtained from Godown Owners

• Whether Equitable Mortgage Register is duly updated?

• Multiple loans given against property, bogus Income Tax Papers, Photograph of the flat/ building, Independent verification of Registration Documents/ borrower

(iii) Whether advances against lien of deposits have been properly granted by marking a lien on the deposit in accordance with the guidelines of the controlling authorities of the bank

• Lien not marked on deposits/ system/ register against the deposits on which loan/ overdraft given

• NOC not obtained from other joint holders in case of joint deposit

• FDR not discharged by the deposit holders

• In case of Third–party borrowing against Branch Fixed Deposits, normal lending rate of interest should be applied as against concessional rate and proper documentation for third party borrowing should be maintained

d) Review/Monitoring/Supervision

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

Provide analysis of the accounts overdue for review/ renewal

– between 3 months and 1 year, and

– over 1 year

• Comment whether procedure is being followed or not. Give break–up over one year also to highlight the long overdue accounts pending for review

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 basis of such scrutiny in appropriate cases?

• Whether stock/ book debt statements are being received regularly? If not, report

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• Whether Quarterly Book Debts statements are duly certified by Statutory Auditors/ CA, if stipulated in Terms of Sanction?

• Whether the unit is providing age–wise analysis of Book–debts?

• Whether debts due from associate/ group companies are treated in accordance with the terms of sanction?

• Whether the unit is providing for Bad and Doubtful Debts?

• Whether Litigation in respect of certain debts has been considered and whether the same has been provided for?

• Whether stocks are being critically scrutinised for non–moving/ obsolete/ damaged stock and action taken thereon?

• Whether such year–end stock/ book debt statements are compared with audited Balance Sheet to ascertain variance in Stocks/ book debts?

• How are the stock/ book debts more than three months considered for DP and for classifying the loans (secured/ unsecured)?

• Is the unit excluding Stocks received for Job–Work in calculation of its total stock and D P?

• Whether the unit is properly reporting sundry creditors and stocks under LC?

• Whether stocks against Packing Credit availed are properly reported in monthly stock statements?

• Whether the Branch monitors Packing Credit Limit (PCL) with regard to overdues, liquidation of PCL, ECGC cover obtained for exports, etc.

• Whether branch is charging Commercial Rate of interest on PCL Liquidated from local proceeds

• Whether the Branch compares Debit/ Credit summation in the Account with turnover of the company to ascertain diversion of funds

• In cases where borrower is availing Multiple banking Facility, whether the branch obtains outstanding position from each Bank and compares the limits availed with stocks held and DP applicable, in order to know whether the borrower is over– financed, and any margin is to be introduced

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

• Stock audit for large advances is essential for effective monitoring of the advance. Comment on its adequacy and frequency – Review the stock audit reports critically

iv Indicate the cases of advances to non–corporate entities with limits beyond ` 10 lac where the Branch has not obtained the accounts of borrowers, duly audited under the RBI guidelines with regard to compulsory audit or under any other statute

• Report other than the Tax Audit Report. Refer Guidance Note on the subject

issued by ICAI

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

• Obtain and check the statement of “inspections due” and “inspections actually done”

• Scrutinise the inspection reports submitted by the inspector

• Verify the action taken on inspection report

• Report case of non compliance of procedures

• Whether assistance of technical valuers is taken for peculiar securities like, diamonds, chemicals, etc, in case of large advances

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

• Stock is Insufficient or valuation of stock not properly done

• Value of fixed assets/immovables exaggerated or liabilities there against not considered

• Cases of frequent overdrawing may be carefully examined

• Inadequate insurance

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

• Generally leasing not done through bank branches, but by a separate division

viii Are credit card dues recovered promptly?

• Verify and report cases of non recovery

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

• On some issues, Bank Circular may interpret differently from the intention of RBI Circulars. Rely on RBI Circulars

• If auditor does not agree to any classification, mention detailed reasons and include in MOC and Main Audit Report

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

• If auditor does not agree to the branch’s classification. Mention detailed reasons and include in MOC and Report

xi Have you come across cases where the relevant Controlling Authority of the bank has authorised legal 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

• To check all correspondence with Controlling Authority of the Bank. To report where suitable action is not take by Branches

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

• To check and report on process for reporting nonperforming advances to Controlling Authority. To report weakness observed in process.

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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 amounts involved should be given in the following format:

Particulars Number Amount (Rs)

Claims as at the beginning of the year (Give year-wise details)

Further claims lodged during the year

Total AAmounts representing:

(a) claims accepted/settled (give year–wise details)

(b) claims rejected (give year–wise details)

Total BBalance as at the year–end (give year–wise details)

A–B

xiv 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?

• The introduction of NPA norms (especially doubtful & loss category) makes it essential to value securities at regular intervals to ascertain the adequacy of provision and realistic realisable value of security

xv In the cases examined by you has the branch complied with the Recovery Policy prescribed by the controlling authorities of the bank with respect to compromise/ settlement and write-off cases? Details of the cases of compromise/ settlement and write-off cases involving write-offs/waivers in excess of ` 50.00 lac may be given

• Due to increasing number of such cases, this question was considered necessary

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

• Insurance coverage should be available for all securities pledged/ hypothecated/ mortgaged to the bank

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• Such insurance policies should be in the joint name of the bank

• Timely submission of Quarterly Information System (QIS) statements. If the same is not submitted, whether penal interest is charged?

• Whether there is proper follow up by the Bank Officer in case of irregular accounts

• Whether the recovery process has stopped after the advance has been classified as doubtful/ loss assets?

• Where decree has been passed, whether the same has been served and the assets are attached?

• Report other major deficiencies in credit supervision, particularly those which are not covered in questions of advances above Rs. 2 crore

• Post sanction terms not complied with

• Borrower doing job work and such material is reflected as own stock

• Loan against shares wherein shares are frequently replaced by borrower. In the process partly paid non– transferable shares given as security

• Valuation of shares not done periodically in case loan against shares

• Consortium leader not having adequate supervision

• Consortium Accounts not properly monitored by way of periodic joint meetings

• Monitoring of sub–limit transferred to other branches Borrower Operating accounts with other non lending banks

• Diversion of funds/ operation in accounts

• Security may be overvalued

• Frequent devolvement of LCs or Invocation of Bank Guarantees Returning of bills discounted unpaid on due date

• Whether further have been bills discounted though earlier bills remained unpaid/ realised late

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e) Guarantees and Letters of Credit

I 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:

A Guarantees invoked, paid but not adjusted:

Sr.No.

DateOfinvocation

NameOf the Party

NameOfBeneficiary

Amount Date ofRecovery

Remarks

b Guarantees invoked but not paid

Sr.No.

DateOfinvocation

NameOf the Party

NameOfBeneficiary

Amount Date ofRecovery

Remarks

ii Details of the outstanding amounts of letters of credit and co–acceptances funded by the Branch at the end of the year may be obtained from the management and reported in the following format:

Sr.No.

DateOfFunding

NameOf the Party

Nature (L.C/Co. acceptance etc.)

Amount Date ofRecovery

Remarks

• Due to increasing number of invocation of guarantees and devolvement of LCs as also increasing use of non–fund based limits being converted into fund based loans, it is essential to inquire into this area by obtaining information in the tabulated format

• Non–Fund Based activities like LCs and Guarantees require critical scrutiny in terms of – sanctioning, devolvement/ invocation, over–exposure of such facilities to certain parties, sanctioning huge non–fund based limits without proper margins, whether opening of such documents are for genuine trade transactions, etc

• Frequent invocation/ devolvement and reasons thereof should be inquired and selectively verified and appropriately reported after analyzing the guarantee/ LC register for the year

• Comment on Guarantees expired but not cancelled

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• Over exposure of such facilities to certain parties

6. Other Assets

a) Stationery and Stamps:

i) Does the system of the Bank ensure adequate internal control over issue and custody of stationery comprising of Security Items (Term Deposit Receipts, Drafts, Pay Orders, Cheque Books, Traveller’s Cheques, 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?

• To review system of the Bank and comment on flaws in internal controls if any.

• To check whether system is followed by Branches and all controls are effective.

• Primarily to check effective maker checker controls, records updation, reconciliation of records with physical inventory etc.

• This is most fraud prone area, hence auditor may consider doing surprise check during visit to Branch for audit

b) Suspense Accounts/Sundry Assets

i) Does the system of the Bank ensure expeditious clearance of items debited to Suspense Accounts? Details of old outstanding entries may be obtained from the branch and the reasons for delay in adjusting the entries may be ascertained. Does your scrutiny of the accounts under various sub-heads reveal balances, which in your opinion are not recoverable and would require a provision/write off? If so, give details in the format.

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

• To review system of Bank for clearance of items debited to Suspense Account like regular reporting to HO, Follow-up for long o/s entries etc.

• Scrutinize suspense account, to evaluate normal time taken for clearance of items in suspense account and o/s entries in suspense account

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• In case any item debited to suspense accounts, needs provision/ write-off, same need to be done. For e.g.Travel advance, expense on behalf of other branch etc.

• To review all entries in suspense account critically and obtain details of same from Branch. In case of any exceptional item debited or credited, same needs to be discussed with Branch’s management and report in LFAR For e.g. Amount debited to suspense account instead of client account to protect same from being classified as NPA, Some item of income or expense accounted to suspense account instead of PL account.

II. LIABILITIES

1. Deposits

a) Have the Controlling Authorities of the bank laid down any guidelines with respect to conduct and operations of in-operative accounts? In the cases examined by you, have you come across instances where the guidelines laid down in this regard have not been followed? If yes, give details thereof.

• To obtain and read instructions of the Controlling Authorities

• To obtain list of all inoperative accounts at start of the year. Normally accounts are flagged as inoperative in the system; hence auditor can extract same from system. To check transaction carried out in inoperative account are properly authorized by appropriate authority

b) After the balance sheet date and till the date of audit, whether there have been any unusual large movements (whether increase or decrease) in the aggregate deposits held at the year end? If so, obtain the clarifications from the management and give your comments thereon.

• To obtain list of deposit as on date of audit and report any unusual movement. Primary objective is to report window dressing in deposit amount.

b) Are there any overdue/matured term deposits at the end of the year? If so, amounts thereof should be indicated.

• To review list of deposit with terms and report overdue/mature term deposit

2. Other liabilities

Bills Payable, Sundry Deposits etc.

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a) The number of items and the aggregate amount of old outstanding items pending for three years or more may be obtained from the branch and reported under appropriate heads. Does the scrutiny of the accounts under various sub-heads reveal old balances? If so, give details in the format:

• To obtain and report list of old outstanding items pending for three years and more

• To carry out ledger scrutiny and ensure completeness of list obtained from Branch

b) Does your test check indicate any unusual item or material withdrawals or debits in these accounts? If so, report their nature and the amounts involved.

• To verify entries relating to material withdrawals or debits in these accounts and report unusual transactions

Contingent Liabilities

List of major items of the contingent liabilities (other than Constituents’ liabilities such as guarantees, letters of credit, acceptances, endorsements, etc.) not acknowledged by the branch?

• To inquire and review process of reporting of contingent liabilities

• To review all correspondence with regulators, lawyers, vendors like lease obligation under litigation, local taxes etc

• To review all agreements or contracts entered by branches and report contingent liability if any

• To review legal and professional fees account and evaluate whether any contingent liability relating to any matter need to be reported

• Obtain the representation from management that all contingent liabilities have been disclosed

III. PROFIT & LOSS ACCOUNT

a) Whether the branch has a system to compute discrepancies in interest / discount and for timely adjustment thereof in accordance with the guidelines laid down in this regard by the Controlling Authorities of the Bank? Has the test checking of interest revealed excess/ short credit of material amount? If so, give details thereof.

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• To obtain and read instructions issued by Controlling Authorities

• To review system and process followed by branch to check interest and discount on periodic basis

• To check process or report if any, over the year to ensure the control is effective and process is followed through-out the year

• To recomputed interest and discount for sample transactions and report if any excess/ short credit.

• In case any discrepancy observed in logic of system for computation of interest, need to report same which may have material impact at Bank level.

b) Has the branch complied with the Income recognition norms prescribed by RBI? (The Auditor may refer to instructions of the Controlling Authorities of the Bank regarding charging of interest on non-performing assets).

• To check income recognition by Branch and ensure same is in compliance with Master circular issued by RBI

• To obtain and read instructions of Controlling Authorities for interest on NPA

• To ensure interest on NPA is not accrued and recognized only to the extent of receipt

• Interest accrued prior to classifying account as NPA also need to be reversed

c) Whether the branch has a system to compute discrepancies in interest on deposits and for timely adjustment of such discrepancies in accordance with the guidelines laid down in this regard by the Controlling Authorities of the Bank? Has the test check of interest on deposits revealed any excess / short debit of material amount? If so, give details thereof.

• To follow same steps for interest on deposit as mentioned in point (a) for advances

d) Does the bank have a system of estimating and providing interest accrued on overdue / matured term deposits?

• To check process of interest accrual on overdue/ matured term deposit • Normally it’s done by system, need to check system logic and report

discrepancy observed if any

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e) Are there any divergent trends in major items of Income and expenditure, which are not satisfactorily explained by the branch? If so, the same may be reported upon. For this purpose, an appropriate statement may be obtained from the branch management explaining the divergent trends in major items of Income and Expenditure.

• To obtain explanation from branch management on variance of income and expenses for current year as compared to previous year

• To obtain month on month yield analysis and cost analysis of interest income and expense respectively and analyze reasoning for variances

• In case, variances are not properly explained or justified, need to report same in LFAR

IV. GENERAL

1. Books and Records

a) In case any books of account are maintained manually, does general scrutiny thereof indicate whether they have been properly maintained, with balances duly inked out and authenticated by the authorized signatories?

• To obtain list of manual register (primarily having impact on financial statements) maintained by the branches

• To review manual records and evaluate whether manual records have been inked and authenticated

• To report discrepancy or give recommendation to improve process

b) In respect of computerised branches:

• Whether hard copies of accounts are printed regularly?

• To check whether branch is taking print of accounts. Normally it is practical to print all accounts, hence auditor need to understand from Branch about process followed and report same in LFAR

• Indicate the extent of computerisation and the areas of operation covered.

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• In core banking environment, most of the operations are computerised. To report if any of area of operations is manually managed. Example can be Fixed Asset register etc.

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

• To review access & data security measures and other internal controls at branch and report discrepancy observed.

• Some such instances are:

a. Sharing of passwords/login id

b. Restricted access of important data/files and entries in inoperative account

c. Report the adverse features reported in system audit report, if pending for compliance.

• Whether regular back-ups of accounts and offsite storage are maintained as per guidelines of the Controlling Authorities of the bank?

• To obtain and read guidelines issued by the Controlling Authorities

• To check whether guidelines are followed by branches and report discrepancy observed

• Whether adequate contingency and disaster recovery plans are in place for loss/encryption of data? To obtain and read contingency and disaster recover policy at Branch.

• To report any discrepancy observed and to give recommendation to strengthen policy

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

• Based on audit, the auditor needs to give suggestions for the improvement in the system with regard to computerised operations

2. Reconciliation of Control and Subsidiary Records

Have the figures, as at the year end, in the control and subsidiary records been reconciled? If not, the last date up to which such figures have been reconciled should be given under the respective heads, in the prescribed Performa.

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• To check the reconciliation of control and subsidiary records.

• Normally in core banking environment, all control accounts, subsidiary accounts and GL balances should tally.In case any discrepancy observed,need to report same.

• To review and report on process followed by branch to ensure all balances are tallied and properly reconciled. In case deficiency observed in process, need to give suggestions to improve process

3. Inter-Branch Accounts

a) Does the branch forward on a daily basis to a designated cell / Head Office, a statement of debit / credit transactions in relation to other branches?

• In Core Banking environment, this may be not applicable

• To inquire and understand, whether any such process followed by branch. If yes, to check same on test basis and report on same.

b) Does a check of the balance in the Head Office Account as shown in the said statement during and as at the yearend reveal that the same is in agreement with the Head Office account in the General Ledger.

• To check balance as per Branch trial balance and reconcile same with Head Office account.

• To obtain confirmation from HO or If balance can be viewed from CBS system, to reconcile the balance from same.

c) Are there any outstanding debits in the head office account in respect of inter branch transactions?

• To review transactions in head office account and report outstanding debit entries relating to inter branch transactions

d) Does the branch expeditiously comply with / respond to the communications from the designated cell / Head office as regards unmatched transactions? As at the year-end are there any un-responded/ un-complied queries or communications? If so, give details.

• To understand process of maintaining records of all correspondences with designated cell/ Head Office.

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• To obtain and review all correspondences and report any un responded/ uncomplied queries or communications

e) Have you come across items of double responses in the head office account? If so, give details.

• To review and scrutinize head office account,

• To report any item of double responses observed

f) Are there any old / large outstanding transactions / entries at debits as at year end which remains un-explained in the accounts relatable to inter branch adjustments?

• To review and scrutinise all inter branch, head office account

• To inquire, understand and report all old / large outstanding transactions / entries at debits as at year end which remains unexplained

4. Audits/Inspections

a) Is the branch covered by concurrent audit or any other audit / inspection during the year?

• To inquire and report fact whether branch covered by concurrent audit or any other audit / inspection during the year

b) In framing your audit report, have you considered the major adverse comments arising out of the latest reports of the previous auditors, concurrent auditors, stock auditors or internal auditors or in the special audit report or in the inspection report of the Reserve Bank of India ?. State the various adverse features persisting in the branch though brought out in these audit / inspection reports.

• To review comments of previous auditors, concurrent auditors, stock auditors or internal auditors or in the special audit report or in the inspection report of the Reserve Bank of India carried out at branches and suitably consider same in framing auditor’s report

• To report all adverse features persisting in the branch

5. Frauds

Furnish particulars of frauds discovered during the year under audit at the Branch, together with your suggestions, if any, to minimise the possibilities of their occurrence.

• To inquire and understand process followed by branch to record frauds

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• To inquire with branch manager whether any fraud discovered during the year

• To review all register maintained by the branches and reporting done to Head office relating to fraud

• To evaluate and examine reasoning for occurrence of fraud and give suitable suggestion to minimise same.

6. Miscellaneous

a) Does the examination of the accounts indicate possible window dressing?

• Verify whether large amount of deposits accepted at year end and refunded immediately after the date of balance sheet. Deposits and advances from/to same borrower/ sister concern / group at year end.

• Auditor may ask for all

• To analyze advances and deposit balances as at year end vis a vis audit report date. In case significant movement observed, need to review same and report accordingly.

• In case auditor is of opinion that there is possibility of window dressing same need to be reported.

b) Does the branch maintain records of all the fixed assets acquired and held by it irrespective of whether the values thereof or depreciation thereon have been centralised? Where documents of titles in relation to branch or other branches are available at the branch, whether the same have been verified.

• To check records maintained by branches for fixed assets and report discrepancy observed in same

• To verify title deeds with the records maintained at branch, whether all title deeds are available at branch. If any document is missing, same need to be reported.

c) Are there any other matters which you, as branch auditor, would like to bring to the notice of the management or the Central Statutory Auditors?

• Central Statutory Auditors reviews all LFAR reports and suitably incorporates critical observations in Banks LFAR.

• Branch auditors may report any lapse in control or any discrepancy in IT process or system which may have material impact for Bank as whole

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• Branch auditor can include suggestion on over-all operations of branch, System/Processes.

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