AUDIT PLANNING,PROCEDURE 1 AUDIT PLANNING,PROCEDURE Bank Branch Audit & RBI Guideline _______________ CA MANISH BAXI 1

Banking Industry – facebook Dynamic Industry Financial reporting and disclosure Auditor’s Role Expectations from RBI , Banks , ICAI . Discharge of duties in time. Bank Branch Audit is T20 – Not Test Match- Be like a Sachin & Dhavan CA MANISH BAXI

Planning Planning is Vital in any part of management and AUDITING assignment, Bank Audit is not an exception Plan to WIN------Win Plan to Perform Plan to do Quality Job in time. Plan to avoid disciplinary action by ICAI CA MANISH BAXI

Planning We never fail !!! We fail to Plan . Planning has No Alternative!!! CA MANISH BAXI

Audit Planning Knowledge Management Time Management Men-power Management Compliance Management Reporting Management CA MANISH BAXI

Objective of Audit Planning To Ensure Compliance with RBI / ICAI Guidelines Compliance of Auditing and Assurance Standards Effective Job & Reporting Timely Completion of the assignment Certifying Balance Sheet & Profit & Loss account and other certificates Annexure to Balance Sheet & P & L account Compliance with Terms of Appointment CA MANISH BAXI

Objective of Audit Planning Simultaneous coverage of allied assignments including: Ghosh & Jilani Committee Reports Responses to the LFAR questionnaire Tax Audit report under Section 44AB of the income- Tax Act , 1961 Other certification work indicated in the letter of appointment like – DICGC Claims, etc PMRY Scheme, Provident Fund Scheme Statutory Requirements ( ICAI, Peer Review, Statutory Authorities) CA MANISH BAXI

Part I : Off Site Planning Audit Planning CA MANISH BAXI

Pre-Audit Planning- Off Site Planning Pre audit plan – Program Old Audit reports – Working papers, certifications, etc.– Refresh yourself KNOWLEDGE Identify the staff – Experienced, train the staff Visiting the branches CA MANISH BAXI

Pre Audit Planning- Off site REFRESH Standards on Auditing like Knowledge of Business (SA 310) Terms of Audit Engagement( SA 210) Audit Planning( SA 300) Audit Sampling (SA 530) Audit Documentation (SA 230) Using the work of another auditor (SA 600) Audit Evidence (SA 500) Audit Materiality (SA 320) Written Representations( SA 580) Analytical Procedures (SA 520) CA MANISH BAXI

Circulars issued by RBI- Off site Disclosure in balance sheets dated July 1, 2006 Prudential norms on Income recognition,asset classification and provisioning relating to advances dated 1.07.2006==19.02.2007==01.07.2009=01.07.2010= 01.07.2011==02.07.2012 Management of advances dated January 22, 2007 Loans and advances-statutory and other restrictions dated 1st July 2006 Guarantees and co-acceptances dated July 1,2006 Guidelines for securitisation of standard assets dated 1st Feb 2006 Exposure norms dated October 10 ,2006 CA MANISH BAXI

Why ? -----Audit Planning…. CA MANISH BAXI

SA 240- “Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” Audit Plan be effective not only to detect errors but also material mis-statement. Auditor is required to report to RBI any thing susceptible to fraud, fraudulent activities, any act of excess power , any foul play in any transaction Ref. : Para 08 CA MANISH BAXI

Audit Planning(SA-300) : The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on -knowledge of the client’s business. Plans should be further developed and revised as necessary during the course of a audit. CA MANISH BAXI

Audit Planning: Plans should be made to cover, among other things: acquiring knowledge of client’s accounting system, policies and internal control procedures; Determining the expected degree of reliance to be placed on internal controls; determining the nature, timing, and extent of the audit procedures to be performed; and preparing the audit plan accordingly. Allocation and Coordination of the work to be performed. CA MANISH BAXI

Part II : On Site Planning Audit Planning CA MANISH BAXI

Audit Acceptance – On Site Planning Appointment letter Acceptance, Engagement letter , Declarations NOC from previous auditors Requirement letter to Branch Management representation letter CA MANISH BAXI

Audit Acceptance- On Site Communicate with the branch Visit the branch – before year end & meet the staff Discuss with the Concurrent Auditors Liaison with Branch staff for access and other arrangements Detailed Check list on audit - To Review ( As per Annexure ) CA MANISH BAXI

Preliminary Work – On Site Obtaining knowledge of business of bank/branch - Advances, Deposits, Large borrowers, NPA A/cs, CBS, etc. Document the discussions Briefing Audit Team and Training Review of reports, viz: Closing Guidelines issued by the bank Circulars (interest & Service charges) CA MANISH BAXI

Preliminary Work- On site To review Credit Policy Delegation of Authority & Financial powers Branch Audit Report/ LFAR of previous year Latest Internal Inspection/ Concurrent Audit report/s Branch’s RBI Inspection Report, if any Revenue Audit Report, Special Audit Report (on accounts or any segment ) Status and level of compliance by the branch, on adverse features pointed out in reports CA MANISH BAXI

Evaluation of Internal Control-On site Evaluate the knowledge of accounting software, policies and strength of internal control systems existing at the branch Internal Control would include: Accounting Controls Administrative Controls CA MANISH BAXI

Evaluation of Internal Control Determine the effectiveness of control systems – segregation of duties, exception reports, financial powers, roles & responsibilities of staff, awareness of circulars and systems. Emphasize on Risk prone areas Control Weakness – Fraud areas Test Check or substantive checking CA MANISH BAXI

Audit Planning- Program Ascertain the thrust of operations and nature of banking activities at the branch (deposits/advances) Audit Program to cover all heads like Liabilities, Asset, Income, Expenditure, Off Balance Sheet items, with special emphasis on verification of advances, deposits Allocate the work (Deposits, Advances, Misc. items, etc.). Who does what?, how many days, time constraints, outstation audits, other arrangements, etc. CA MANISH BAXI

Audit Planning- Program Simultaneous compilation of data as per checklist for Reporting Any issues in getting the information or non-cooperation may be referred to Controlling Authorities Statutory Central Auditors- Communication CA MANISH BAXI

Part III : Execution Audit Planning CA MANISH BAXI

Execution of Work Modify the audit plan in certain areas depending on the inherent weaknesses existing in those areas Obtaining Audit Evidence and Management Representations Audit working papers Timely discussion and rectification of queries CA MANISH BAXI

Execution of Work Staff to be adequately trained to carry out the assignment satisfactorily Execution must be done as per the audit program Checks should be extended in areas of weaknesses, including those identified during the course of audit CA MANISH BAXI

Inter Branch Reconciliation (IBR) Understand the IBR system Fraud Area – Look for large volume of Inter Branch Transactions Large number of un-reconciled entries Check up head office inward communication to branch to ascertain date up to which statements relating to inter-branch reconciliation have been sent CA MANISH BAXI

IBR Check and report: Reversal of any large/old/unexplained entries, which had remained outstanding in IBR Items of revenue nature, cash-in-transit (for example, cash meant for deposit into currency chest) which remains pending since long Double responses to the entries in the Accounts Test Check accuracy and correctness of “Daily statements” sent to IBR department CA MANISH BAXI

Documentation –SA 230 Auditors should document matters which are important in providing evidence that the audit was carried out in accordance with the basic principles governing an audit Address communication after accepting appointment for inquiring the readiness of financial statements & other statements and records requiring authentication as well as for carrying out certain year- end procedures CA MANISH BAXI

Documentation SA -230 Auditor should address letters seeking information on matters where he desires to strengthen his procedures and substantiate his work. In case of non- readiness / partial readiness of branch records, non-co-operation of branch management, etc communicate and politely place on record, the facts of the case CA MANISH BAXI

Documentation –SA 230 Document ‘Evaluation of Internal Control Systems’ and its effectiveness Obtain copies of documents which have been relied upon, like internal/ concurrent/ revenue auditor’s report, branch’s RBI inspection report, etc. Document the Extent of check applied in all the areas and the names of persons who covered these areas of audit CA MANISH BAXI

Documentation Proper minutes should be made of important discussions held with the branch management on critical issues and how it was concluded. Obtain management’s representation on critical areas of branch operations Well- documented queries and responses should be also placed on record Obtain a Management Representation Letter CA MANISH BAXI

REPORTING Requirements Audit Planning CA MANISH BAXI

Different Reports: Main Audit Report as per (sec.30(3) of) Banking Regulation Act, 1949. Long Form Audit Report Tax Audit Report Jilani Committee Report Ghosh Committee Report Special Certificates/ Reports as applicable CA MANISH BAXI

Reporting under Banking Regulation Act,1949: As per section 30(3) of a Banking Regulation Act,1949; an auditor of a banking company is required to state in his report :-- (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; CA MANISH BAXI

Reporting under Banking Regulation Act,1949: (c) whether or not the returns received from branch offices 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. CA MANISH BAXI

Report & MOC Main Report should be a self contained and no reference of any point made in the LFAR Audit Qualifications in the Main Report only and not in LFAR Report needs to be made out in the form and manner prescribed, subject to the qualifications being incorporated in the report and duly quantified in the Memorandum of Changes (MOC) CA MANISH BAXI

Audit Report & MOC For suggesting any changes Quantify in MOC (qualification)- MOC – Auditors prerogative and need not take confirmations from the branch manager The Audit Reports in respect of audits of financial statements for period beginning on or after 1.4.2012 are to be issued in the revised format. CA MANISH BAXI

Audit Report SA 700 ( revised ) has the full text of the said format To be reviewed by the Bank Branch Auditors. Any debits/ credits arising pursuant to the MOC needs to be reported in the main report under the head” Other Matters “. CA MANISH BAXI

Ghosh & Jilani Committee Report Ghosh Committee – Fraud & Malpractices in banks at Branch level Jilani Committee – Internal Control and Audit/Inspection system in banks Internal Control and reporting at the branch level Compliances Questionnaire – To say Yes/No Beginning of the audit Discussion certification and written representations from the branch may be obtained CA MANISH BAXI

Tax Audit Report To be signed as per Section 44AB – both Form 3CA & 3CD Importance may be given to – TDS – correct rates, no deduction, late deduction, paid on time to the authorities Rule 6DD Section 43B Prior period items Letter heads CA MANISH BAXI

Other Points Audit Planning CA MANISH BAXI

Other Points: Obtain the latest status of cases involving fraud, vigilance and matters under investigation having effect on the accounts and its reporting requirement Disclaimers: Use of Audit sampling – Testing or substantive as the case may be Checking Written representations and observations Reliance on the audit reports of others Reliance on the information systems in place No of days spent for the audit CA MANISH BAXI

Other Points RBI Master Circular on NPA In CBS environment –balancing of subsidiary ledgers Impersonal Accounts like Suspense , Sundry Credits, Special debits , Clearing adjustment In appropriate grouping of impersonal accounts into GL RBI Master Circular on NPA CA MANISH BAXI

Important Concept : Proactive Approach KITE RISES AGAINST AND NOT WITH THE WIND BE A SELF STARTER CA MANISH BAXI

Thank YOU You can reach to CA. MANISH BAXI e-mail : manish@talatiandtalati.com | Mob. : +91 98240 59005 CA MANISH BAXI

Circulars issued by RBI Disclosure in balance sheets dated July 1, 2006 Prudential norms on Income recognition,asset classification and provisioning relating to advances dated 1.07.2006==19.02.2007==01.07.2009=01.07.2010= 01.07.2011 Management of advances dated January 22, 2007 Loans and advances-statutory and other restrictions dated 1st July 2006 Guarantees and co-acceptances dated July 1,2006 Guidelines for securitisation of standard assets dated 1st Feb 2006 Prudential Norms on Capital Adequacy dated July 1,2006 Exposure norms dated October 10 ,2006 CA MANISH BAXI

I Income Recognisation II Asset Classification III Provisioning Prudential Norms I Income Recognisation II Asset Classification III Provisioning CA MANISH BAXI

I- INCOME RECOGNITION on NPA Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received (Para 3.1.1) The Accounting Standard 9 (AS 9) on `Revenue Recognition' issued by the Institute Of Chartered Accountants of India (ICAI) requires that the revenue that arises from the use by others of enterprise resources yielding interest should be recognized only when there is no significant uncertainty as to its measurability or collect ability. CA MANISH BAXI

I - INCOME RECOGNITION on NPA Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts (Para 3.1.2) Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit (Para 3.1.3) If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised ( Para 3.1.4) CA MANISH BAXI

Reversal of income on NPA If any advance becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised.(Para 3.2.1) This will apply to Government guaranteed accounts also. Fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. (Para 3.2.2) CA MANISH BAXI

Reversal of Income on NPA Leased Assets The finance charge component of finance income [as defined in ‘AS 19 Leases’ issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on the leased asset which has accrued and was credited to income account before the asset became nonperforming, and remaining unrealised, should be reversed or provided for in the current accounting period. CA MANISH BAXI

II - ASSET Classification – Categories of NPA Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues: i. Substandard Assets ii. Doubtful Assets iii. Loss Assets This Classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the banks balance sheet. Schedule 9 of the Balance Sheet CA MANISH BAXI

Categories of NPA Sub-standard Assets - which has remained NPA for a period less than or equal to 12 months (Para 4.1.1) Doubtful Assets - has remained in the sub-standard category for a period of 12 months (Para 4.1.2) Loss Assets - loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. (Para 4.1.3) CA MANISH BAXI

III - Provisioning norms -NPA The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. (Para 5.1.1) The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.(Para 5.1.1) CA MANISH BAXI

Provision on standard assets ( Para 5.5) The banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio. Banks would continue to make provision at 0.25 per cent for direct advances to agricultural and SME sectors in the standard category (as per circular issued by RBI on 8th of Nov 2005). Advances to Commercial Real estate ( CRE) sector at 1.00 percent. CA MANISH BAXI

Provision on sub standard assets (Para 5.4) A general provision of 10 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available. The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent. The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank is not more than 10 percent. CA MANISH BAXI

Provision on Doubtful assets (Para 5.3) 100 percent of the extent to which the advance is not covered by the realisable value of the security ( UNSECURED PORTION). In regard to the secured portion, provision may be made on, at the rates ranging from 20 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful. CA MANISH BAXI

Provision on Doubtful assets (Para 5.3) . Period for which the advance has remained in ‘doubtful’ category Provision requirement (%) OF SECURED PORTION Up to one year 20 One to three years 30 More than three years 100 CA MANISH BAXI

Provision on Loss assets (Para 5.2) Loss assets should be written off. If loss assets are permitted to remain in the books for any reason. 100 percent of the outstanding should be provided for. CA MANISH BAXI

Thank You You can reach to CA. MANISH BAXI e-mail : manish@talatiandtalati.com | Mob. : +91 98240 59005 CA MANISH BAXI