Embed Size (px)
Citation preview
Northern India Chartered Accountants Students’
Association (NICASA)
Of
NIRC of The ICAI
Welcomes
CA Students for the seminar on Bank Audit
Bank Branch Audit 3
Understanding the Banking Business
Bank Branch Audit CA. S Narayanan 4
Knowledge of bank business Bank business Generally Comprise of Deposits operations- savings current term depsits Lending Operation-
Funded and Non Funded Investment/Treasury Operations Foreign Exchange Operations Trading operations- Sale of Gold etc Significant feature of Modern Day Banking - Banks Operate in highly computerised environment- Fair Knowledge of the Banking Software is essential Some of
the softwares used by banks are Finacle (Infosys), Bancs (TCS), and Flex cube (I Flex)
Call for and study System operational Manual
Bank Branch Audit CA. S Narayanan 5
Laws applicable to the banking business
1) Banking Regulation Act, 1949 2) Reserve Bank of India Act,1934 3) Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970 4) Banking Companies (Acquisition and Transfer of Undertakings) Act,
1980 5) State Bank of India Act, 1955 6) Regional Rural Banks Act, 1976 7) Companies Act, 2013 8) Co-operative Societies Act, 1912 or the relevant state Co-operative
Societies Act.
Bank Branch Audit CA. S Narayanan 6
Laws applicable to the banking business
9) Information Technology Act, 2000 10) Prevention of Money Laundering Act, 2002 11) Credit Information Companies Regulation Act, 2005 12) Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 14) Service Tax (Chapter V of Finance Act,1994) 15) Income Tax Act ,1961 16) Securities Transaction tax (Chapter VII of Finance (No
2) Act , 2004 17) CGST, SGST and IGST Acts
Bank Branch Audit CA. S Narayanan 7
Application of other laws not barred
As per the section 2 of Banking Regulation Act ,1949 the provisions of this Act shall be in addition to, and not, in derogation of the Companies Act,2013, and any other law for the time being in force
The provisions of the other laws shall apply to all proceedings unless they are inconsistent with the Banking Regulation act,1949
Bank Branch Audit CA. S Narayanan 8
Non applicability of CARO, 2015
Statement of Companies (Auditor’s Report ) order 2016 is not
applicable to banking company as defined in clause (c) of section 5 of Banking regulation act.1949
Banking company means any company, which transacts the business of banking in India;
Internal Financial Controls Reporting is not applicable to
Public Sector Banks as they are Covered by special Laws.
Steps before Commencement
1 Attend seminar if any organised by the bank 2 Go through the Annual report of the bank of
the preceding year 3 A reading of Guidance note on audit of banks
by ICAI would provide valuable guidance. 4 Go through the closing Instruction given to the
branches 5 Go through the Accounting Policy of the Bank
thoroughly and Changes in them
Bank Branch Audit CA. S Narayanan 10
Scope of Work
1. Finding out Scope of work General Understanding Branch advances, deposits, Profit & Loss,
Number of deposits & Advances account, Level of NPA, Bank exposure in Non Funded Areas Number of Extension counters, ATMs
2. Copy of all circulars of RBI applicable to accounts & Audit have to be
obtained and kept ready for reference.
3 Obtain Copy of Previous Statutory Audit (MOCs), Tax Audit, revenue Audit, Inspection Audit, System audit, stock audit Annual Financial Inspection reports if any and read through IT Manual if any
4 Study Accounting Policies of the Bank and Closing Instructions issued by Head office and formats of MOCs
Bank Branch Audit CA.S Narayanan 11
Letter seeking information Before commencement of audit a letter may be written to the bank asking for
following information- 1. List of departments in the bank branch with name of head of
department. 2. Name of the Nodal Officer for Audit 3. Copy of Annual Financial Statement and other banking returns and
schedules. 4. Login and Password for operation of the system (Auditors/Clerical
Menu) 5. List of deposit accounts under different schemes with Balances as
on Balance sheet 6. List of Advances accounts under different schemes with Balances 7. Circulars of the Bank relating operations and interest Rates changes 8. List of Books which are manually Maintained
Bank Branch Audit CA. S Narayanan 12
Letter seeking information
9. Relevant Reports of the Previous year 10. Information of top 10 borrowers for each kind of loan 11. Reports generated by the software including Exception Reports 12. Closing Instruction and accounting Policy of the Bank 13. Copy of Trial Balance pre closure, post closure and any date after Balance
sheet Date 14. List of NPA Accounts with Balances 15. List of NPA Accounts upgraded during the year with reason 16. List of Accounts Restrucured during the year 17. Bank’s Procedural, system and documentation Manual 18. Irregularity Report of Dec 2017 and March 2018
Bank Branch Audit CA. S Narayanan 13
Audit in an Computerised Environment 1. The Auditor has to conversant with system environment 2. The Auditor has to examine the reports generated at the day end, week
end month end and half year end. 3. The interest applications are generally automated and they apply interest
at the specified periodicity 4. The interest parameters are generally modified by the head office
through system. 5. The auditors to take print out of rates parameters in the system and
compare with changes with relevant circulars. 6. The auditor should scrutinise accounts subject facility to edit interest
parameters 7. The auditor should call for exception reports like no interest flag
accounts both from revenue and application of interest on non performing accounts
Bank Branch Audit CA. S Narayanan 14
Accounts and balance-sheet Sub-section (1) of section 29 of the Banking Regulation Act, 1949 requires
every banking company to prepare a balance sheet and a profit and loss account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit.
Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance Sheet
Form B contains the form of Profit and Loss account
Bank Branch Audit CA. S Narayanan 15
Classification of Advances as per schedule 9
Three ways of classification of advances in balance sheet as schedule 9 of banking regulation act ,1949
A)Classification by nature i)Bills purchased and discounted ii)Cash credits, overdrafts and loans repayable on
demand iii)Term loans B) Classification by security i)Secured by tangible assets
Bank Branch Audit CA.S Narayanan 16
Classification of Advances ii)Covered by bank/ government guarantees iii) Unsecured C) Classification by location I. Advance in India
(i) Priority sector (ii) Public sector (iii) Banks (iv) Others
Bank Branch Audit CA S Narayanan. 17
Classification of Advances
II. Advances outside India (i) Due from banks (ii) Due from others (a) Bills purchased and discounted (b) Syndicated loans (c) Others
Bank Branch Audit CA.S Narayanan 18
Some disclosure items in balance sheet
1. Capital Adequacy Ratio 2. Movements in NPAs 3. Movement of provisions held towards NPAs 4. Business (deposits plus advances) per employee 5. Maturity Patterns of deposits, borrowings, loans and
advances 6. Exposures to real estate sector, Capital market 7. Disclosure of Penalties imposed by RBI 8. Details of Single Borrower/Group Borrower Limit exceeded
by the bank 9. Segment Reporting information Units of 5 crore or turnover
of 50 Crores ( Last three Years Coporate Sector)
Additional Disclosures
I. Concentration of Deposits, Advances, Exposures and
NPAs
II. Sector-wise NPAs
III. Movement of NPAs
IV. Overseas assets, NPAs and revenue
V. Off-balance sheet SPVs sponsored by banks
Bank Branch Audit 19 CA. S Narayanan
Audit Procedures Audit Procedures –Following Parts Audit of the Financial Statements and Expression of Opinion
of True and fair view of Profit or Loss and state of affairs on Balance sheet date
Long Form Audit Report Audit of Additional information given in notes to accounts and
other Balance sheet disclosures Certifications required by Head office Tax Audit Audit Evidence and documentations and Peer Review
Application of Accounting Standards
All standards are applicable Except Accounting Standard 7 –Construction Contracts Accounting for Amalgamations AS 14 AS 16 Borrowing Cost Accounted at H O AS 20 EPS Disclosed by H O
AS 21 Consolidated Fin Statements at Ho AS 21 Discounting Operation, AS 25 Interim Financial
Reporting, AS 26 Intangible Asset. AS 27 Financial Reporting Joint Ventures at Head Office
AS-2 Inventory Valuation –Stationery, Precious Metals etc AS 11 –The effects of Changes in Foreign Exchange Rates as
per circular dated 15/03/2005
Verifications of Items of Balance Sheet & Profit & Loss Account
Cash Verify the Cash at branch either opening or closing including
Foreign Currency Notes, ATM Cash, Cash at extension counter at the time of Visit for audit
Obtain Cash Balance certificate at the date of Verification and the cash on the Balance sheet date ensure that all cash including ATMs cash has been properly accounted for. May Take Photocopy of cash Balance Book after due attestation by branch and auditors
Foreign Currency Notes are generally recorded at notional rate on the date of transaction and not revalued at branch level.
Verify and obtain necessary assurance and documentation for reporting in LFAR
Verification of high denomination issued prior to 2005 not containing year of issue
Verification of Balance Sheet & P & L Contd Security Items
Physically Verify the security Items in stock
Verify accounting of Consumption of Security item has been followed as per instructions
Reporting in LFAR Under the other Assets –Stationery and Stamps Balancing of Books Check balances as per General ledger and subsidiary Ledger Obtain list of Books maintained manually and check for Balancing. Reporting Under LFAR
Balance with RBI SBI and other Banks Obtain confirmation of Balances check for Charges debited or income credited and give MOC for them.
Reporting in LFAR in Point No 2 under the head Assets
Verification of Balance Sheet & P & L Contd Inoperative Accounts Check for debits to inoperative accounts Check for Transfer of Dormant Accounts to in operative Accounts Check that Interst has been credited to in operative saving accounts Reporting in Long Form Audit Report Suspense and Sundry Account Check that there no items of revenue nature outstanding in sundry suspense account If
yes report through MOC Check provisions for expenses normally parked In creditors account Compliance of SLR\CRR on 12 odd Days Overdue Deposits- Transfer from time to demand liabilies
Verification of Balance Sheet Profit & Loss Account
Fixed Asset Verify in the fixed schedule that opening balance tallies with closing Balance as per last audited
Balance Sheet Ensure that additions and transfer are properly classified under correct heads. Check Depreciation has been Correctly worked out as per policy of the bank and closing
Instructions. Check the depreciation and W D V tallies with books and correctly presented in Financial
Statements. Status of Physical Verification.
Guarantees and Letter of Credit Check Correct Accounting for Unexpired portion
Investments Held at Branch on behalf of Head Office DICGC\ECGC Claims Deposits-Term Deposit, Savings and Current Deposits Overdue Term Deposit Transfer from Time to Demand Liabities
Verification of Balance Sheet & P & L Contd
Income Check the accounting policy of the bank as regards accounting for revenue Interest Earned on cash credit term loans and bills has to be checked Call for few highly value accounts and check the application of interest Take the help of exception reports Scrutinize the P & L Ledger for monthly credits to Income heads for any variation in between the
months Check whether any income head has debit balance on any day if so then enquire as to nature and how
corrected In case of Bills discounted check that unexpired of the income has been correctly accounted for Call
party wise and period wise list of balance in unexpired discount account Also check for unexpired portion of Commission on LG and LC has been correctly accounted for Check that Income from Govt Business has been correctly accounted for on accrual basis depending
on accounting policy Income from NPA should not accounted for untill realised Check that there should not be any reduction in NPA balance if so may that recoveries have not
taken to Income. Compare the balances with P year MOC Balances
Verification of Balance Sheet & P & L Contd Verification of Expenditure Conduct the scrutiny of Profit & Loss Ledger for the year to observe the monthly
application of Interest on deposits Call for few highly value accounts and check the calculation of Interest of few saving
and time deposit Accounts Check that interest has been provided on inoperative accounts. Check the provision of interest on overdue time deposits. Check whether year end provisions have been made (electricity, rent, telephone etc) No
Provision for Bonus, Audit Fees, Employee Benefits & NPA Check the in case advances for tour etc where journey has been completed before close
provision for expenses have been made Check the provision of rent for clearing house if any Check the reversal of Interest debited but not realised on NPA Account at the year end. Examine divergent trends in income and expenditure and take suitable explanation.
Bank Branch Audit 28
Audit Reports
Bank Branch Audit CA. S Narayanan 29
Various Reports/Certificates 1. Tax Audit Report 2. PMRY Audit Certificate 3. DICGC Certificate 4. Certificate for compliance of CRR/SLR for 12 Odd Days 5. Service Tax Certificate 6. Income on Insurance Business 7. Frauds 8. Certificate of Effecting previous year MOC 9. Interest Subvention Certificate 10. Certificate of Commission on Government Business 11. Certification as regards DFV Calculations. 12. Certification of Investments held by the branch.
Bank Branch Audit CA. S Narayanan 30
Various Reports/Certificates(Contd.)
9. Ghosh Committee Recommendations 10. Jilani Committee Recommendations 11. LFAR 12. MOC-Classification 13. MOC-Income Recognition 14. Other reports 15. AUDIT REPORT- U/S 30 OF The Banking Regulation Act,1949 and
SA 700,705,706
Bank Branch Audit CA. S Narayanan 31
Major Clauses in LFAR
IV General 1. Books and records 2. Reconciliation of Control and subsidiary records 3. Inter branch accounts 4. Audits/ Inspections 5. Frauds 6. Miscellaneous
Questionnaires Applicable to Specialized Branches 1. For Branches dealing in Foreign Exchange Transactions 2. For Branches dealing in very large advances in excess of Rs. 100 crores 3. For Branches dealing in Non Performing Assets such as Asset Recovery
Management Branches. 4. For Branches dealing in Clearing House Operations, normally referred to as
Service Branches
Bank Branch Audit CA. S Narayanan 32
Reporting under Banking Regulation act,1949 As per section 30(3) of a banking regulation act ,1949 an auditor is required to
state in his report of a banking company incorporated in India the following :--
(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;
Bank Branch Audit CA. S Narayanan 33
Reporting under banking regulation act ,1949
(c) whether or not the returns received from branch officers 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
Fraud Standard on Auditing –SA 240 The Auditors Responsibility in Relating to Fraud in an Audit
of Financial Statements LFAR-Reporting of Fraud Loss Provision in Books Management vs Employee Related Fraud Fraud arise esentially due System Gaps Inoperative Accounts- Risk area Exceptions Reports generated by system Auditor to view from Material Mis Statement point of view
THANK YOU
