1. SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES
Audit Planning and Long Form Audit Report
PRESENTATION BY
CA ATUL C. BHEDA
B.COM, FCA, LLB(GEN), DISA(ICA)

2. Importance of Audit Planning and reporting
Well planned is half done
One should know destination to plan well
Good planning leads to effective reporting
Audit destination is report ( to express opinion on financial statements)
Audit planning and reporting are two important stages
Audit planning is before beginning of field work and reporting is last stage in every audit
Audit planning helps in controlling audit risks (inherent,control & detection)
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CA Atul C. Bheda Mumbai

3. Stages in Bank Audit Study of appointment letter Preliminary work
Risk Assessment
Internal Control Evaluation
Conduct of audit
Submission of Audit Reports, Certificates and Returns
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CA Atul C. Bheda Mumbai

4. Study of appointments letter
Noting of relevant contents
Assessment of disqualification of the auditor
Letter to the previous auditor of NOC
Preparation of Acceptance letter and declarations
Assessment of reporting requirements (Time and contents)
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CA Atul C. Bheda Mumbai

5. Preliminary work Knowledge of the business
Acquiring the knowledge for effective conduct if Audit
Staff Training
Risk assessment and evaluation of internal control
Knowledge about the branch operations
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6. Knowledge of Business Acquire Information of the banking industry
Information of past events and progress of the bank
Study of Annual reports of the earlier years
Banking Journals
Laws & Regulations applicable
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CA Atul C. Bheda Mumbai

7. Laws and Regulations applicable
The banking regulation Act, 1949
Master Circulars and other circulars issued by the RBI
The Companies Act, 1956
Guidance Note on Audit of Banks issued by ICAI
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CA Atul C. Bheda Mumbai

8. Important Auditing and Assurance Standards
SA200 AAS 1 - Basic Principles Governing an Audit
SA 230 AAS 3 – Documentation
SA 315AAS 6 – Risk Assessment and Internal Control
SA 610 AAS 7 – Relying upon the work of an Internal Auditor
SA 300 AAS 8 – Audit Planning
SA 580 AAS 11 – Representation by the Management
SA 320 AAS 13 – Materiality
SA 210 AAS 26 – Terms of Audit Engagement
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CA Atul C. Bheda Mumbai

9. Risks in Bank Branch Audit
Effect of the statutory and regulatory requirements
The scale of banking operations and the resultant significant exposures
Extensive dependence on IT to process transactions
Continuing development of new services and banking practices
Particular nature of risks associated with the transactions undertaken by banks
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CA Atul C. Bheda Mumbai

10. Risk Assessment and Evaluation of internal control
Branch Manager meeting
Initial review of system
Review of other Audit observations
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CA Atul C. Bheda Mumbai

11. Branch Manager meeting
Review of the Organization chart
Accounting policies
Composition of Deposits & Advances
Staff Strength & Average age
Shifts & Duty timings
Positive and grey areas of the branch : Branch manager’s concerns
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CA Atul C. Bheda Mumbai

12. Initial review of the system
Meeting with departmental heads
Division of work and area of operations
Logistic support expected
Tentative time schedule of closing work and audit
Computerization and software used
List of top ten borrowers
List of top ten NPA
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CA Atul C. Bheda Mumbai

13. Review of other audit observations
Reporting process between the Head Office & Branches
Review of Concurrent Audit Reports
Review of Internal Audit Reports
Review of RBI Inspection Reports
Review of RBI circulars
Review of Circular issued by Head office
Review of periodical returns from Branch
Review of previous years LFAR
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CA Atul C. Bheda Mumbai

14. Planning for conduct of audit
Audit Team
Audit schedule
Audit Program
Physical aspects: Travel, boarding etc.
Reporting requirements
Audit facilities, computers, software, etc.
Formats
Timings for submission
Alternative plan for contingencies
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CA Atul C. Bheda Mumbai

15. The Audit can be conducted in either of the following ways
Inspection and Observation
Inquiry and Conformation
Computation
Analytical Procedures
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CA Atul C. Bheda Mumbai

16. Staff Training
Familiarity with banking operations in different areas (deposits, loans, investments, NPA norms, etc.)
Deliverables: Audit reports, certificates and returns
Audit techniques (enquiry, explanations, verifications, sample checks, objective evidence, etc.)
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CA Atul C. Bheda Mumbai

17. General Audit Team should carry :-- Copy of appointment letter
Authorization letter for the staff member
Stationery : pen, pencil, letterheads, worksheets, rubber stamps etc.
Copy of norms for reimbursement of expenses such as lodging, boarding, Traveling and local conveyance.
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CA Atul C. Bheda Mumbai

18. Essential of good Planning
Knowledge of situation
Knowledge of resources
Knowledge of Audit expectations
Plan to deliver more than expected.
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CA Atul C. Bheda Mumbai

19. Audit Report and certification
Branch Returns : correctness of branch returns
Audit Report : True and fair view
Memorandum of Changes (MOC)
LFAR
Tax Audit Report
Certificates
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CA Atul C. Bheda Mumbai

20. Branch Returns All returns should be certified
Correctness of returns should be ensured
No changes are to be made in returns
The changes are to be reported through MOC
Corrections, overwriting, deletions etc. Care should be taken about correct preparation and correct reporting
Even NIL return should be certified
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CA Atul C. Bheda Mumbai

21. Audit reports
Exceptions should be noted specifically (e.g. Provision for taxation, bonus, NPA)
Auditor’s name and membership number should be mentioned
Date of Audit Report and place of execution should be mentioned
The report should be on the letterhead
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CA Atul C. Bheda Mumbai

22. Memorandum of changes(MOC)
Memorandum of changes for :
Assets and liabililities
Income and Expenditure
Changes in Asset classification
In case there is no change…MOC with NIL remark should be submitted
MOC is a part and parcel of the Audit report…Audit report without MOC is an incomplete report.
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CA Atul C. Bheda Mumbai

23. MOC ……..contd.
Signature of the Branch Manager (BM) needs to be obtained on MOC as a token of acceptance
In a situation where BM does not accept the change suggested by the Auditor,
The auditor should issue the MOC, and
A suitable note should be attached describing the reasons as to why the auditor feels the change is necessary
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CA Atul C. Bheda Mumbai

24. LFAR
LONG FORM AUDIT REPORT
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CA Atul C. Bheda Mumbai

25. Basics LFAR is an internal control evaluation questionnaire.
Comprehensive in scope and coverage.
Covers both Balance Sheet and Profit & Loss Account.
Serves as an important check list for audit planning.
Make LFAR part of the audit programme.
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CA Atul C. Bheda Mumbai

26. Must Do’s Study the Questionnaire thoroughly.
Each answer should be precise
Data should be original and be supported with source document or MRL and just not picked up from concurrent audit report
Avoid vague or general comment.
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CA Atul C. Bheda Mumbai

27. Must Do’s Give specific instances of weakness/shortcomings.
Start preparing in month of march
Main Audit Report and LFAR are two separate reports.
Qualificatory remarks MUST be part of the main report.
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CA Atul C. Bheda Mumbai

28. Must Do’s
Main Report is a self contained document and should not contain any references to LFAR.
Should be sufficiently detailed and quantified to enable expeditious consolidation.
Do not make current year’s LFAR a replica of previous year.
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CA Atul C. Bheda Mumbai

29. Must Do’s
LFAR is of utmost importance to the management as well as the Central Auditors.
Finalize Statutory Report and LFAR simultaneously.
Should be well drafted and not loosely worded
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CA Atul C. Bheda Mumbai

30. Must Do’s Scope of work carried out should be clearly specified.
Extent of verification be stated
Should create an impact on the bank management about the quality of work carried out.
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CA Atul C. Bheda Mumbai

31. Coverage Cash and Bank Balances. Money at call and Short Notice.
Investments.
Advances
Other assets.
Deposits and other liabilities.
Profit and Loss Account.
General.
Specialized Branches.
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CA Atul C. Bheda Mumbai

32. Cash
Cash balance which vary significantly from the limit fixed by controlling authorities.
Excess balance reported to the controlling authorities.
Adequate Insurance Cover.
Joint custody.
Refer Instructions, Key Movement Register.
Periodic checking of cash balance.
Ascertain procedure and observe during audit
General scrutiny of cash book.
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CA Atul C. Bheda Mumbai

33. Balance with RBI, SBI and other Banks
Balance confirmation.
Report differences.
Observation on differences.
Cash transactions remaining unresponded.
Revenue items requiring adjustment / write offs. (issue MOC / Qualify report)
Old outstanding balances remaining unexplained and age wise analysis.
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CA Atul C. Bheda Mumbai

34. Balance with RBI, SBI and other Banks (cont’d)
Item requiring special attention of management.
Reconciliation not done / procedure not followed.
Material amount unadjusted for a long time.
Items affecting financial statements may be reported in the Statutory Report.
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CA Atul C. Bheda Mumbai

35. Money at call and Short Notice
Report even if a single transaction
Confirm that the transaction is as per the instructions/guidelines.
Unauthorized deposits and excess of authorized deposits to be reported .
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CA Atul C. Bheda Mumbai

36. Investments Physical verification on behalf of H.O.
Ensure that income earned on such Investments is not accounted by Branch.
Matured or overdue investments not encashed
Guidelines of RBI for transaction and valuation followed
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CA Atul C. Bheda Mumbai

37. Advances
Examination of all large advances and a test check of other advances
Questionnaire in four Broad categories
Credit Appraisal
Sanctioning / Disbursement
Documentation
Review / Monitoring / Supervision
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CA Atul C. Bheda Mumbai

38. Other Assets Stationery and Stamps. [Clause 6(a)]
Comment on existence and compliance with. Internal control system over valued stationery with regard to issue and custody.
Instances of missing or lost items of stationery to be given (new clause).
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CA Atul C. Bheda Mumbai

39. Suspense Accounts / Sundry Assets.
Other Assets (Cont’d)
Suspense Accounts / Sundry Assets.
Critically Scrutinize these accounts.
Details and clarification in respect of old unadjusted entries be obtained.
Balances which in your opinion are not recoverable.
eg: Advance against travelling.
Payment to merchant establishment.
Legal expenses
Dividend / Interest paid.
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CA Atul C. Bheda Mumbai

40. Other Assets (Cont’d) Unusual items in these accounts be reported
eg: Cash in transit
Difference in balancing.
Difference in cash.
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CA Atul C. Bheda Mumbai

41. Deposits
Compliance with guidelines in respect of inoperative accounts.
Instances if not complied with the guidelines.
Seek clarification for unusual movements after balance sheet date.
Quantification of Overdue / Matured term deposits at the year end.
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CA Atul C. Bheda Mumbai

42. Bills Payable / Sundry Deposits / Contingent Liabilities
Details of old items to be reported.
Unusual items and matured withdrawals or debits to be reported along with their nature and amounts.
List of major items of contingent liabilities other than Guarantees, LCs, Endorsements, Acceptances etc.,
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CA Atul C. Bheda Mumbai

43. Profit and Loss Accounts
Existence of system to compute discrepancies in interest / discount income as well as interest expenditure & timely adjustment thereof.
Discrepancies if material to be reported (MOC to be issued)
Existence of system
Discrepancies to be checked by branch
Findings of Concurrent Audit/Revenue Audit.
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CA Atul C. Bheda Mumbai

44. Profit and Loss Accounts (Cont’d)
Compliance with Income Recognition Norms
System of estimation and provision of Interest on overdue / matured term deposits.
Divergent trends in major items of P & L A/c if not satisfactorily explained.
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CA Atul C. Bheda Mumbai

45. General Proper maintenance of manual Books of Accounts.
In respect of Computerized Branches number of new areas prescribed.
Inquire about
Banks policy
Compliance of the policy
Internal Control & Security measures.
Backups and Disaster Recovery Plans
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CA Atul C. Bheda Mumbai

46. General (Cont’d) Reconciliation of control and subsidiary records.
Suggestions for the improvement in the system
Reconciliation of control and subsidiary records.
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CA Atul C. Bheda Mumbai

47. General (Cont’d) Inter Branch Accounts, (Very Important area)
Understand the system
Daily Communication to HO/Designated cell statement of debit / credit transaction.
Agreement between balance in HO Account Branch Accounts.
Old outstanding debits in the Head Office Account.
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CA Atul C. Bheda Mumbai

48. General (Cont’d) Audit and Inspection
Expeditious compliance to communication from HO / Designated cell (Report unresponded entries)
Items of Double response in HO Account.
Old / Large outstanding transaction at debits as at year end.
Audit and Inspection
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CA Atul C. Bheda Mumbai

49. General (Cont’d)
Particulars of frauds discovered during the year together with your suggestions to minimize the same.
Window dressing to be reported
eg. Large deposit at year end.
Under utilised facilities converted in Deposits.
Unsecured loans shown as secured.
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CA Atul C. Bheda Mumbai

50. General (Cont’d) Maintenance of Fixed Assets Records.
Documents of title in relation to branch
Non compliance with Ghosh and Jilani Committee recommendations.
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CA Atul C. Bheda Mumbai

51. Ghosh and Jilani committee recommendations
Ghosh committee : A high level committee was set up to enquire into the various aspects of fraud and malpractices in the bank and to make recommendations to reduce such instances
Jilani committee : A working group was formed to review the internal control and inspection/audit system in bank
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CA Atul C. Bheda Mumbai

52. GHOSH COMMITTEE RECOMMENDATIONS WERE FOR
Improvement in day to day administrative functions
For ensuring safety of assets
Compliance with the let down policies and procedures
Accuracy and completeness of accounting and other records
Proper segregations of duties and responsibilities of the staff
Timely prevention and detection of frauds and malpractices
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CA Atul C. Bheda Mumbai

53. Ghosh Committee Recommendations
Recommendations divided in to four groups
Group-A: Recommendations, which have to be implemented by the banks immediately
Group-B: Recommendations requiring Reserve Bank of India’s approval
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CA Atul C. Bheda Mumbai

54. Recommendations
Group-C: Recommendations requiring approval of Government of India
Group-D: Recommendations requiring further examination in consultation with IBA.
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CA Atul C. Bheda Mumbai

55. Ghosh Committee Out of 97 recommendations,
27 required to be reported at the branch level
43 at Regional Office (RO), Zonal Office (ZO), or at Head Office (HO)
27 at both the levels i.e. Branch as well as RO/ZO/HO
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CA Atul C. Bheda Mumbai

56. JILANI COMMITTEE
Working group to review the internal control and inspection and audit system in banks
Contains 25 questions and to indicate the answer as either “Implemented “ or Not Implemented”.
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CA Atul C. Bheda Mumbai

57. JILANI COMMITTEE RECOMMENDATIONS
Broadly divided into three categories
Dealing with the EDP environment in the banks
Dealing with the inspection/Internal audit system in the bank
Dealing with other miscellaneous aspects of functioning of a bank.
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CA Atul C. Bheda Mumbai

58. ANY QUESTIONS

59. THANK YOU