1. Bhubaneshwar Branch of EIRC of ICAI Seminar on Bank Audit – 2016 Bank Branch Audit Practical Aspects CA Niranjan Joshi 23.03.2016 CA Niranjan Joshi 23.03.2016 Restriction on Disclosure and Use of Data The data in this document contains trade secrets and confidential or proprietary information of my firm, the disclosure of which would provide a competitive advantage to others. As a result, this document shall not be disclosed, used or duplicated, in whole or in part, for any purpose other than to evaluate my firm. The data subject to this restriction are contained in the entire document.

2. Disclaimer These are my personal views and can not be construed to be the views of the ICAI or my firm. No representations or warranties are made by the EIRC with regard to this presentation. These views do not and shall not be considered as a professional advice. This presentation should not be reproduced in part or in whole, in any manner or form, without our written permission. CA Niranjan Joshi 2

3. Agenda Planning & Documentation Verification of Advances IRAC Norms LFAR & Certificates CA Niranjan Joshi 3

4. Planning & Documentation 4 CA Niranjan Joshi

5. Objective Compliance with: - RBI / ICAI Guidelines - Terms of Appointment - Accounting Standards - Standards on Auditing Other Certification work Effective Reporting Completion of Work in Time CA Niranjan Joshi 5

6. Ground Work at Office Preliminary Work Evaluation of Internal Controls Prepare Audit Program Overall Time & Manpower Planning Laying Overall Audit Plan CA Niranjan Joshi 6

7. Audit Planning Applicable Act for the Bank Appointment Letter / Acceptance Letter Closing Manual of Bank NOC of Previous Auditor. Audit Engagement Letter. Basic Information from branch. Audit Program / Checklist Study RBI Circulars Attend Trainings / Workshops / Seminars CA Niranjan Joshi 7

8. Standards on Auditing SA 200 – Basic Principles Governing Audit. SA 230 – Audit Documentation SA 500 – Audit Evidence SA 400 – Risk Assessment and Internal Control SA 300 – Audit Planning SA 220 – Quality Control for Audit Work SA 310 – Knowledge of Business Knowledge about CAAT tools CA Niranjan Joshi 8

9. Audit Planning Have knowledge of the :  Economy  Banking Industry  Government Policies  Rules & Regulations applicable to the Bank  Products handled by Bank  Complexities involved  Applicability of Accounting Standards  Applicability Auditing and Assurance Standards.  FEDAI Guidelines CA Niranjan Joshi 9

10. Audit Program Define broadly the scope of audit. Identify the thrust areas. Set materiality levels standards for each area. Lay down over all time schedule. Training to Audit staff and special skill if required. Weak areas identified during the Audit be given extra focus. Physical verification of cash and other securities / Sensitive Accounts Frauds / Sundry Assets / Suspense Account / Inter Branch reconciliation Contingent liabilities CA Niranjan Joshi 10

11. Work at Branch “First hand feel” of Branch:  Previous Years Audited Return  Concurrent Audit Report.  Internal Inspection Report.  RBI Inspection Report.  Various Other Audit Reports  Review Compliance of these Reports. 11 CA Niranjan Joshi

12. Audit Trail Manual Registers / Records Core Banking Solution CBS Lack of Adequate Information Lack of Adequate Knowledge of system Lack of audit Trail 12 CA Niranjan Joshi

13. Audit Execution SA 320 – Audit Materiality SA 520 – Analytical Procedures SA 530 – Audit Sampling SA 220 – Quality Control For Audit Work Analyse and Evaluate the errors in samples selected Get the rectification / MOC Passed Work as per Audit Program and schedule Prepare reports according to requirement Qualify in Audit Report if necessary 13 CA Niranjan Joshi

14. Documentation SA 230 – Audit Documentation Nature & Purpose of Audit Documentation Evidence of Auditors basis for a conclusion about the achievement of overall objectives of the auditor and Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements 14 CA Niranjan Joshi

15. Audit Files Permanent Audit File Working Papers File 15 CA Niranjan Joshi

16. Form and Contents To understand: The nature, timing and extent of the audit procedures performed. Results of audit procedures performed, audit evidence obtained. Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgment made in reaching those conclusions. 16 CA Niranjan Joshi

17. Documentation Audit Documentation depends on factors such as: Size and complexity of entity Nature of the audit procedures to be performed Identified risks of material misstatements Significance of the audit evidence obtained Nature and extent of exceptions identified Audit methodology and tools used 17 CA Niranjan Joshi

18. Documentation Examples of Audit Documentation: (Paper / Electronic/Other media) Audit Programms Analyses Issues memoranda Summary of Significant matters Letters of confirmations and representations Checklists Correspondence regarding significant matters. 18 CA Niranjan Joshi

19. Verification of Advances 19 CA Niranjan Joshi

20. Objective Background Material – Seminar, Guidance Note, Circulars, Appointment letters, Manuals, etc. Advances – Largest revenue earner – - Major Activity of Bank - Largest item in ASSETS - Major Source of INCOME - Most FOCUSED Audit Area Expectation – Management, SCA, RBI CA Niranjan Joshi 20

21. Audit Area CA Niranjan Joshi 21 Pre Sanction Post Sanction Loan Application Credit Appraisal Documentation External Reports Loan Application Credit Appraisal Documentation External Reports Disbursement Review Monitoring Supervision Disbursement Review Monitoring Supervision

22. Loan Application/ Credit Appraisal Prescribed Application Form Fresh / Renewal of Facilities KYC Compliance Project Report, Projected P&L, Balance Sheet & Cash Flow Latest audited financial statements Board Resolution for the availment of the facility obtained SSI registration, NOC from Government Departments Short Review / Techinical Review Adhoc Limits / Temperory limits Appraisal Note Appropriate Authorisation Levels CA Niranjan Joshi 22

23. Loan Application/ Credit Appraisal Recommendations properly noted. Adverse remarks of field officer not over ruled by seniors. Proper assessment of Financial Viability of proposal. Adequacy of security cover, credit worthiness of borrower Sanctions within the discretionary DOP Change in the terms of sanction is ratified by appropriate authority. Exposure limit – Group/Industry wise Nayak Committee Recommendations Unit inspection report (Pre Sanction). Compliance with RBI Guidelines / Bank Guidelines & Statutory Restrictions. CA Niranjan Joshi 23

24. Documentation Sanction T & C to be accepted by the borrower. Execution of Loan documents, as per the sanction letter & loan policy. Fresh loan documents are obtained on change in limit, change in constitution of the borrower Original documents are held in safe custody Charge at Appropriate Authorities Registered Updation of Information in CBS Master Compliance with Stamp Duty Adequate Insurance of Securities and Bank’s Clause. CA Niranjan Joshi 24

25. External Reports / Documents Confidential report & NOC from existing banker. CIBIL Report – Adverse comments / Score Valuation of Securities. Credit Rating – Internal / External Due Diligence Certificate [Multiple/ Consortium] Vetting of Legal Documents by Legal Expert. CA Niranjan Joshi 25

26. Disbursement Client Master in CBS Properly recorded. Verify that Disbursement done only after compliance of all terms & conditions of Sanction. Acceptance of the borrower confirming the terms & conditions of sanction is obtained. Home Loans/ term loans to be disbursed directly to the Builder / Owner/ supplier. Post Disbursement Inspection CA Niranjan Joshi 26 Monitoring of End Use of Funds

27. Review / Monitoring / Supervision Sanction/Renewal as per Bank’s Policy Stock Inspection / Unit Visit reports. Submission of stocks statements Calculation of Drawing Power. Operational Data & Financial Statements Various Registers (Insurance, Stock) Scrutiny of Exceptional Transactions Interest / Penal Interest Turnover in Account commensurate with Annual Projections. 27 CA Niranjan Joshi

28. Review / Monitoring / Supervision Consortium Meetings: Minutes & exchange of Information between the Banks Management explanation of unusual items / large transactions Over limit - TODs Any comment by inspectors/auditors 28 CA Niranjan Joshi

29. IRAC Norms Non Performing Assets 29 CA Niranjan Joshi

30. Objective (1.2) Policy of IR should be objective & based on record of recovery rather than on any subjective considerations. Classification of assets on the basis of objective criteria, which ensure a uniform & consistent application of the norms. Provisioning made on the basis of the classification of assets based on the period for which the asset has remained non-performing & the availability of security & the realisable value thereof. CA Niranjan Joshi 30

31. Asset Classification PERFORMING ASSET (STANDARD ASSET) Account is performing & does not carry more than normal risk attached to the business. NON-PERFORMING ASSET (NPA) (SUB STANDARD, DOUBTFUL, LOSS) Asset ceases to generate income. Higher risk than normal risk attached to business. Non performing as per various criteria for various types of loans. CA Niranjan Joshi 31

32. Identification of NPA Term Loans (2.1.2) Interest and/or Installment remains overdue for a period of more than 90 days Exceptions – Moratorium, Schematic Loans such as Housing / education / Staff Loans etc. Bills Purchased / Discounted Bill Purchased / Discounted remains overdue for a period of more than 90 days CA Niranjan Joshi 32

33. Identification of NPA Agricultural Advances (4.2.13) Short Duration Crop - Interest or installments remains overdue for two crop seasons (which are not long duration crops) Long Duration Crop - Interest or installments remains overdue for one crop seasons (season longer than 1 year) How to find about duration of crops? CA Niranjan Joshi 33

34. Identification of NPA Derivative Transactions Overdue receivables representing positive mark to market value of derivative contract remaining unpaid for a period of 90 days from specified due date Liquidity Facility Remains outstanding for more than 90 days in respect of securitisation transaction. Credit Card Dues (4.2.21) If minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the next statement date. CA Niranjan Joshi 34

35. Identification of NPA Cash Credit / Overdraft (2.2) The account is ‘out of order’ if: Outstanding Balance remains continuously in excess of sanctioned limit/drawing power for 90 days. or Outstanding Balance less than limit/DP, but there are no credits continuously for 90 days as on the date of Balance Sheet or Credits in the account are not sufficient to cover interest debited during the same period. CA Niranjan Joshi 35

36. Identification of NPA In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. (2.1.3) Overdue – Any amount due to bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. (2.3) CA Niranjan Joshi 36

37. Income Recognition Policy of income recognition has to be objective and based on record of recovery. Banks should not charge and take to income account interest on any NPA. (3.1.1) Interest on Advances against Term Deposits, NSC, KVP, IVP and Life Policies may be taken to income account on due date, provided adequate margin is available in the account. (3.1.2) CA Niranjan Joshi 37

38. Income Recognition Fees and commissions earned by banks as a result of renegotiation and reschedulement of outstanding debts should be recognised on accrual basis over the period of time covered by extension of credit. (3.1.3) If any advance becomes NPA, the entire interest accrued and credited to income in past periods should be reversed if the same is not realised. (3.2.1) CA Niranjan Joshi 38

39. Income Recognition In respect of NPA, fees, commission or similar income that have accrued, should cease to accrue for past periods, if uncollected. (3.2.2) Interest realised on NPA may be taken to income provided credits are not out of fresh/additional credit facility sanctioned to borrower. (3.3.1) CA Niranjan Joshi 39

40. Income Recognition Recovery in NPA – In absence of clear agreement between bank and borrower for the purpose of appropriation of recoveries in NPA (interest or principal), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. (3.3.2) On account turning NPA, Banks should reverse the interest already charged and not collected by debiting P&L Account and stop further application of interest. (3.4) CA Niranjan Joshi 40

41. Classification Norms CA Niranjan Joshi 41 Standard AssetThe account is performing Sub-Standard Asset A sub standard Asset is one which has remained a Non Performing Asset for a period of less than or equal to 12 months. DoubtfulI – up to 1 years II – 1 to 3 years III – More than 3 years Loss AssetsThese are accounts, identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off.

42. Classification Norms Availability of security or net worth should not be considered while treating advance as NPA (4.2.3) Temporary deficiencies (4.2.4) Outstanding Balance in account based on the DP calculated from stock statements older than 3 months would be deemed as irregular & if such irregular drawings are permitted for a period of 90 days, account needs to be classified as NPA. (TD) Non-renewal/ Non – regularisation of regular/ adhoc limit within 180 days from the due date. (TD) CA Niranjan Joshi 42

43. Classification Norms Upgradation (4.2.5) If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as NPA and may be classified as ‘Standard’ account. For restructured accounts refer para 12.2 and 15.2 of master circular. CA Niranjan Joshi 43

44. Classification Norms Accounts regularised near about the BS Date (4.2.6) Care should be taken that a solitary or few credits in the account made at/near the balance sheet date extinguishing the overdue interest/principal is not the only criteria for classifying the asset as standard. CA Niranjan Joshi 44

45. Classification Norms Classification Borrower wise and not facility wise (Qua borrower) (4.2.7) All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. Consortium Advances (4.2.8)  Member banks shall classify the accounts according to their own record of recovery.  Bank needs to arrange to get their share of recovery or obtain an express consent from the Lead Bank. CA Niranjan Joshi 45

46. Classification Norms Erosion in Value of Security (4.2.9) Where realisable value of security is less than 50% of the value assessed, account to be straightaway classified as Doubtful Asset. Where realisable value of security is less than 10% of outstanding balance, account to be straightaway classified as Loss Asset. CA Niranjan Joshi 46

47. Classification Norms Advances to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) ceded to commercial banks. (4.2.10) Qua borrower concept not to apply. Only facility which is overdue will be classified as NPA. CA Niranjan Joshi 47

48. Classification Norms Advances against TD/KVP/NSC/IVP/LIP etc. These advances need not be treated as NPA provided adequate margin is available. Advances against Gold loans, government securities are not covered in this criteria. (4.2.11) Central Government guaranteed advance to be classified as NPA only if Government repudiates the guarantee when invoked. (4.2.14) CA Niranjan Joshi 48

49. Project under Implementation Project Loan means any term loan which has been extended for the purpose of setting up of an economic venture. DOC – Date of Completion DCCO – Date of Commencement of Commercial Operations For all projects financed by the FIs/ banks after 28th May, 2002, the DOC and the DCCO of the project should be clearly spelt out at the time of financial closure of the project. (para 4.2.15) CA Niranjan Joshi 49

50. Project Loans - Types Project Loans of Two Types:- Infrastructure / Non Infrastructure Project Loan: A Term Loan extended for the purpose of setting up of an economic venture. A loan for an infrastructure / Non Infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and eligible for Standard classification. CA Niranjan Joshi 50

51. Project Loan – Asset Classification CA Niranjan Joshi 51 InfrastructureNon Infrastructure Classified as NPA if it fails to commence commercial operations within Two (2) years from the original DCCO, even if regular as per record of recovery. One (1) years from the original DCCO, even if regular as per record of recovery. Standard account Restructured any time during the period up to Two (2) years from the original DCCO, it can be retained as standard. Fresh DCCO is fixed 1. In cases involving court cases Upto another Two (2) years (beyond extended period of 2 years) total 4 years - 2. In cases involving other reasons beyond control of promoters Upto another One (1) years (beyond extended period of 2 years) total 3 years -

52. Project under Implementation CA Niranjan Joshi 52 InfrastructureNon Infrastructure This is subject to adherence to provisions regarding restructuring. Application to be received for restructuring before the expiry of period Two (2) years from the original DCCO, when account is standard as per record of recovery. One (1) years from the original DCCO, when account is standard as per record of recovery. ProvisioningAdditional provisioning if standard. If appointed date is extended by concession authority, this will not be restructuring

53. Project Loans – Other Issues Mere extension of DCCO within permitted time limits & consequential shift in repayment period by equal or shorter duration would not mean restructure, provided all other terms & conditions remain unchanged. Multiple revisions of DCCO within the permitted time limits will not be considered as repeated restructuring. CRE projects merely extension of DCCO would not be considered as restructuring, if the revised DCCO falls within a period of 1 year from original DCCO & there is no change in other terms & conditions except possible shift of repayment schedule and servicing of loan. Such CRE projects will be treated as Standard. CA Niranjan Joshi 53

54. Provisioning Norms CA Niranjan Joshi 54 Standard Asset (5.5) Farm Agricultural and SMEs Sectors Commercial Real Estate (CRE) Sector (CRE) Residential Housing Sector All Others not included above Housing Loans (Teaser) 0.25 % 1.00 % 0.75 % 0.40 % 2.00% Sub Standard Asset Total Outstanding If Total Outstanding is Unsecured 15.00 % 25.00% Bad & Doubtful Asset Doubtful I – upto 1 year (Secured Portion) Doubtful II – 1 to 3 years (Secured Portion) Doubtful III – more than 3 years Unsecured Portion of all I, II 25.00 % 40.00 % 100.00 % Loss AssetTotal Outstanding100.00 % Provision Coverage Ratio (PCR) Banks should have total Provisioning Coverage Ration of not less than 70% as on 30.09.2010

55. Write Off – NPA’s Banks may write off accounts at HO Level even though the advances are still outstanding at branches. (8.4) It is necessary that provision is made as per the classification accorded to the respective accounts. The banks should either make full provision as per the guidelines or write off such advances & claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. (8.3) CA Niranjan Joshi 55

56. Part B – Guidelines for Restructuring Four Broad Catagories: Advances extended to Industrial Units Advances extended to IU under CDR Advances to SME All other advances CDR mechanism available only to borrowers engaged in industrial activities. Eligibility Any account classified under standard, sub standard and doubtful categories. CA Niranjan Joshi 56

57. Eligibility Criteria for Restructuring Restructuring cannot be done retrospectively. While the restructuring proposal is under consideration, usual asset classification norms would continue to apply. Asset Classification status on date of approval of restructuring relevant to decide the asset classification status after such restructuring Restructuring should be subject to customer Application / consent for terms and conditions. Financial viability should be established and there is reasonable certainty of repayment. Borrowers indulging in frauds & malfeasance are ineligible. BIFR cases are not eligible without their express approval. CA Niranjan Joshi 57

58. Restructuring of Advances  Standard Asset would get reclassified as sub standard immediately  Account which is already NPA would continue to have the same classification.  Additional finance would be treated as standard up to a period of one year.  All restructured accounts, classified as NPA upon restructuring would be eligible for upgradation after observation of satisfactory performance during the specified period. (Annex 5 (viii) – during 1year it should not be out of order for more than 90 days and no overdue at the end) CA Niranjan Joshi 58

59. Restructuring – Provisioning Norms  Provision on restructured advance as per extant provisioning norms.  Standard restructured advances will attract higher provision for first 2 years.  NPA restructured advances when upgraded to standard attract higher provision in first year.  Diminution in fair value is an economic loss to bank & needs additional provision on each BS date.  For advances below Rs.1 crore, 5% of total exposure can be provided notionally for such diminution in faire value of advance. CA Niranjan Joshi 59

60. Restructuring of Advances Special Regulatory Treatment for asset classification.  Not available to Consumer & Personnel Advances, Advances classified as Capital Market Exposure, Advances classified as Commercial Real Estate Exposure. Incentive for quick implementation of package (up to 31.03.2015 as per 20.2.3) The asset classification status may be restored if the approved package is implemented : Within in 120 days from the date of approval under CDR mechanism Within 120 days from the date of receipt of application by Bank in other cases. CA Niranjan Joshi 60

61. Restructuring of Advances Asset classification benefits Standard advance will not be downgraded upon restructuring if following conditions are satisfied.  Dues of the bank are fully secured by tangible security (except SSI borrower with outstanding upto Rs.25 lacs & infrastructure projects)  Unit becomes viable in 8 years, if it is engaged in infrastructure activities and in 5 years in case of other units.  Repayment period including moratorium does not exceed 15 years for infrastructure & 10 years for other projects (10 years ceiling won’t apply to restructured Home Loans). CA Niranjan Joshi 61

62. Restructuring of Advances  Promoters sacrifice and additional funds brought by them should be a higher of 20% of bank’s sacrifice or 2% of restructured debt.  Prior to 30.05.2013 If promoters face genuine difficulty then 50% upfront and the balance within one year  The restructuring is not ‘repeated restructuring’ During the specified period the asset classification of sub standard / doubtful accounts will not deteriorate, if satisfactory performance is demonstrated. CA Niranjan Joshi 62

63. Part C – Early Recognition of Financial Distress Joint Lenders Forum (JLF) and Corrective Action Plan (CAP) Applicable for Consortium and Multiple Banking Advances read with Restructuring guidelines. Before an account becomes NPA, banks have to identify incipient stress in the account by creating three (3) Categories under Special Mention Accounts CA Niranjan Joshi 63

64. Early Recognition of Financial Distress CA Niranjan Joshi 64 RBI Circular No. DBS.CO.OSMOS/ B.C./4/ 33.04.006/ 2002-2003 dated 12.09.2012 SMA Subcategories Basis for classification SMA – 0Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress (Please see Appendix to Part C) SMA – 1Principal or interest payment overdue between 31-60 days SMA – 2Principal or interest payment overdue between 61-90 days

65. Early Recognition of Financial Distress RBI to set up Central Repository of Information on Large Credits (CRILC) Banks to report credit information of borrowers. Banks are advised that as soon as an account is reported by any of the lenders to CRILC as SMA-2, they should mandatorily form a committee to be called JLF if the aggregate exposure (AE) of lenders in that account is Rs. 1000 million & above. Lenders also have the option of forming a JLF even when the AE in an account is less than Rs.1000 million &/or when the account is reported as SMA-0 or SMA-1. CA Niranjan Joshi 65

66. Early Recognition of Financial Distress The JLF may explore various options to resolve the stress in the account to arrive at an early and feasible solution to preserve the economic value of the underlying assets as well as the lenders’ loans. Banks to report credit information of borrowers. Options under Corrective Action Plan (CAP) - Rectification - Restructuring - Recovery CA Niranjan Joshi 66

67. Early Recognition of Financial Distress Accelerated Provisioning Required In cases where banks fail to report SMA status of the accounts to CRILC or resort to methods with the intent to conceal the actual status of the accounts or evergreen the account, banks will be subjected to accelerated provisioning for these accounts and/or other supervisory actions as deemed appropriate by RBI. These guidelines have become effective from April 1, 2014. CA Niranjan Joshi 67

68. Early Recognition of Financial Distress CA Niranjan Joshi 68 Asset Classification Period as NPACurrent provisioning (%) Revised Accelerated provisioning (%) Sub – Standard Secured Up to 6 Months 6 M to 1 Year 15 25 Sub – Standard Unsecured Up to 6 Months 6 M to 1 Year 25 (NI) /20 (I) 25 40 Doubtful I2 nd Year25 (S)/100 (U)40 (S)/100 (U) Doubtful II3 rd & 4 th Year40 (S)/100 (U)100 (S & U) Doubtful III5 th Year onwards 100 (S & U)

69. LFAR & Certificates 69 CA Niranjan Joshi

70. Statutory Audit Report Format as per SA 700 Addressed to SCA Compliance with Accounting Standards to be mentioned in main report. Qualifications can be through Memorandum of Changes or Specific remarks in the last para. Illustrative Format Bank Audit Guidance Note 2016 CA Niranjan Joshi 70

71. Long Form Audit Report LFAR is a effective tool to the auditors to keep the Bank informed about the important matters arising out of the statutory audit exercise. LFAR for Branches is a question answer format, LFAR for HO is a narrative format. Annexure to be given along with the LFAR which is applicable for branches having large/ irregular/ critical advance accounts having large limits. LFAR introduced in 1985, subsequent revision in 1992-1993 and 2003. CA Niranjan Joshi 71

72. Long Form Audit Report The Branch is responsible for compiling the information / statements required for LFAR and the auditors should verify the same. Auditors should ensure that the documentation of files is adequate and the records and working papers are planed and filed systematically in respect of matters included in the LFAR. Regional Office / Zonal Office / Head Office / Statutory Central Auditors / External Auditors / RBI auditors etc. are the various users of the LFAR CA Niranjan Joshi 72

73. Long Form Audit Report Internal control evaluation questionnaire Comprehensive in scope and coverage Covers Balance Sheet & Profit & Loss A/c Important check list for Audit Plan CA Niranjan Joshi 73

74. LFAR Audit Approach Read All questions in LFAR Plan & Design Audit Program to cover all aspects of LFAR Prepare separate checklists for each point to be reported. Record the extent of checking / sample selected. Proper documentation & collecting SAAE during the audit. Write descriptive answers. Avoid Y/N/NA Include facts, figures and examples to the extent possible in all answers to the questions. CA Niranjan Joshi 74

75. LFAR Audit Approach Observations resulting in adjustments to account heads needs to be reported along with MOC Discuss the contents of report with Branch Management Obtain Management Representation from Branch Manager on various matters based on Audit. LFAR is an independent report, hence do not give cross reference or qualifications or MOC in LFAR. It’s a very important report for readers such as SCA and Management of Bank. CA Niranjan Joshi 75

76. I – Assets 1. Cash CA Niranjan Joshi 76 Significantly excess Cash Balances Check Limits Fixed for retention, including ATM. Check cash records for the entire audit period to report excess. Insurance cover for Cash at Branch / In Transit Check Insurance Policy. Check for cash in hand within insured limits and comment.

77. I – Assets 1. Cash CA Niranjan Joshi 77 Joint Custody of Cash Check policy of Bank Check operations during the visit. Verification of cash at periodical intervals Check policy of Bank. Check whether such verification has been conducted during the year.

78. I – Assets 2. Bank Balances CA Niranjan Joshi 78 Balance Confirmation & Reconciliation Check Balance confirmation certificate. Check reconciliations as at year end. Observations on reconciliation statements Cash transactions remaining unresponded. Revenue transactions requiring accounting in financial statements. Special observations

79. I – Assets 3. Money at Call and Short Notice CA Niranjan Joshi 79 Has the branch kept money at call and short notice during the year Check whether such transactions exist at branch. If yes, verify with deal notes and ledger accounts. Whether guidelines are complied with properly. Check Policy. Report for non compliances

80. I – Assets 4. Investments CA Niranjan Joshi 80 Are there investments held by the branch on behalf of Bank Check Limits Fixed for retention, including ATM. Check cash records for the entire audit period to report excess. Interest income whether transferred to respective HO department Check Insurance Policy. Overdue / Matured Investments Verify such investments Report deficiencies in recovery

81. I – Assets 5. Advances CA Niranjan Joshi 81 Credit Appraisal – General complaince with procedures / Instructions of Controlling Office No of borrowers tested, comments / observations in separate annexures Sanctioning / Disbursement – Delegation of Power, compliance with terms and conditions No of borrowers tested, comments / observations in separate annexures

82. I – Assets 5. Advances CA Niranjan Joshi 82 Documentation – Execution / Deficiencies No of borrowers tested, comments / observations in separate annexures Guarantees Invoked / LCs devolved Review/ Monitoring/ Supervision - No of borrowers tested, comments / observations in separate annexures

83. I – Assets 5. Advances CA Niranjan Joshi 83 Guarantees / Letter of Credit / Letter of Comfort / DPG etc. No of borrowers tested, comments / observations in separate annexures LG/LC/LoC outstanding Certificate in prescribed formats

84. I – Assets 6. Other Assets CA Niranjan Joshi 84 Stationery and Stamps – Custody, Control, Missing Items Review system, verify the ledger accounts and comment deficiencies. Suspense & Sundry Assets – Yearwise break up, unusual entries Review system, verify the ledger accounts and comment deficiencies.

85. II – Liabilities 1. Deposits CA Niranjan Joshi 85 Operation in Inoperative Accounts, unusual large movement Obtain list of inoperative accounts as per policy of bank Verify and comment on large movements Overdue / Matured Term Deposits Report such deposits. Check interest provisioning.

86. II – Liabilities 2. Other/Contingent CA Niranjan Joshi 86 Bills Payable / Sundry Deposits Obtain list and verify o/s beyond 3 years. Verify transactions during the year Contingent Liabilities Contingent Liabilities not acknowledged as debt. Check movement in CL from previous year

87. III – Profit and Loss Account CA Niranjan Joshi 87 Discrepancies in Interest Paid/ Received and timely adjustment Verify system followed by Bank Test check interest paid/received. Compliance with IRAC norms. Check divergent trends Check compliance with IRAC norms wrt income. Comparative analysis of income for divergent trend.

88. IV – General CA Niranjan Joshi 88 Manual / Computerised Books. Internal control. Back ups. CBS and Manual Registers Audit Trail Verify the controls and back ups Reconciliation of Control and Subsidiary Records Check CBS Reports

89. IV – General CA Niranjan Joshi 89 Inter Branch Account/ Control Account Yearwise entries outstanding Process of reconciliation Audit & Inspection Verify Concurrent Audit / Internal Inspection Report

90. IV – General CA Niranjan Joshi 90 Frauds Report and comment on frauds discovered during the year Window dressing Comparative analysis of GL/PL items. Any other item for attention of SCA or Management Report relevant matters.

91. LFAR for Specialised Branches CA Niranjan Joshi 91 Branches dealing in Foreign Exchange Define additional scope as per RBI Requirements Branches Dealing in Large Advanes – 100 Cr above Define additional scope as per RBI Requirements Asset Recovery Branch / Clearing House Operations Define additional scope as per RBI Requirements

92. Other Certificates Audit Report is a reasonable Assurance Audit Certificate is Absolute Assurance Types of Certificates - Branch Returns - Audit Reports - Memorandum of Changes - LFAR - Tax Audit Reports - Jilani & Ghosh Certificate - Other Certificates CA Niranjan Joshi 92

93. Other Certificates Capital Adequacy – BASEL I, II, III DICGC Claims PMRY Certification Service Tax Cash Balance 12 odd days Investment on Behalf of Head Office Agricultural Debt Relief Maturity Pattern of Loans & Advances Fixed Assets & Depreciation Interest Subvention (Exports/ Agriculture) CA Niranjan Joshi 93

94. Other Certificates IRAC / NPA Related Certificates Interest Subvention Restructured Advances Foreign Currency Assets & Liabilities CA Niranjan Joshi 94

95. Questions 95 CA Niranjan Joshi

96. 96 CA Niranjan Joshi CA Niranjan Joshi, B.Com., FCA, DISA (ICAI) Email: nvjca1@gmail.com Cell: 9819078061