BANK AUDIT

Read everything about statuory audit of Bank

1. DEPOSITS

Term/Saving/Current/FCNR/NRE/NRNR

• New Accounts opened and Account Operations

• Verify if the Know Your Customer (KYC) norms are complied with

• Selectively verify account ledger statements for unusual/large/overdraft transactions

• Overdue Term deposits & banks policy for its renewal

• In case of NRE and FCNR Accounts, the Branch should hold valid, current copies of the Passport and Visas of the account holders

• Large deposits placed at the end of the year (probable window dressing)

• Provisions of Prevention of Money Laundering Act should be kept in mind to ensure that ‘suspicious’ transactions are reported to the concerned authority

• All cash receipts and cash withdrawals of Rs.10 lakh and above should be reported to Regional Office. Accounts reflecting frequent cash transactions of Rs. 10 lakh and above, should be examined along with the nature of business of the entity

• Examine unusual trend in account opening or account closing, dormant accounts that have suddenly been reactivated by heavy cash withdrawals or deposits, overdrawing, etc

• Debit balance in Current and Saving accounts should be examined in detail and the outstandings exceeding 90 days should be provided for

• Selectively verify if signature scanning is pending for the saving/current/cash credit accounts

• Credit card accounts with debit balances should be treated as loss assets, if they are outstanding for more than 90 days. Review the Master Circular on Maintenance of Deposit Accounts issued by RBI from website www.rbi.org.in (latest at the time of finalising this note, dated July 1, 2009)

• Matured/ overdue Term Deposit to be classified as Demand Deposits
  Interest Rates on Renewal of such matured/ overdue deposits should be verified with reference to prevailing interest rates for the period renewed. (To ensure that the renewal is not done blindly at the old Interest rates)

• Ensure proper classification of Savings/ Current Deposit with the debit balance as Advances.

• Dormant Accounts

• Dormant accounts required should be verified for unusual movement of funds from the account.

• Last year’s Dormant Accounts list should be compared with current year’s list along with amounts to identify old Accounts which were activated during the year for verifying unusual transactions, if any.

• Verify if the specimen signature cards of dormant accounts are kept separately under joint custody of Manager/Officer. Any cash withdrawal/debits to Dormant account should be authorized by the Branch–in–charge

• Interest calculations

• Verify interest on all schemes of deposits on test check basis e.g. Verify the fields like interest rate, different Interest Rates prevalent in the year, period of interest, Amount of Deposit and accrual of interest in the account, Interest Calculation on Premature Deposit withdrawal/ Recurring Deposits/ Back Dated Renewals

• Accrual of Interest specially policy on Interest Accrual on Matured/ Overdue Term Deposit

• Ascertain reasons for frequent reversal of interest and the authorization for the same

• RBI Norms for Non–resident deposits & its operations — with due importance to opening and operation of accounts like NRE, NRNR, FCNR, RFC, etc

• Examine interest trends as compared to average annual deposits (monthly average figures)

• In case of deposits Frozen by Revenue/ Regulatory/ Government, etc, procedure given in Master Circular on Interest Rates on Rupee Deposits held in Domestic, Ordinary Non–Resident (NRO) and Non–Resident (External) (NRE) Accounts should be followed for Interest credit

• Verify that Interest on the FD matured and remaining unpaid will attract saving bank account rate of interest.

• Tax Deducted at Source

• Verify that TDS returns have been uplinked as per schedule laid down in the Income–tax Act, 1961. Also ensure if the Form 15–G and Form 15–H are filed with the Income Tax department within the specified time schedule

2. ADVANCES

1. PLEMINARY INFORMATION BEFORE AUDIT OF ADVANCES:

• Obtain the Head Office Delegation of power and duties & limit fixed for Branch and its executives

• Study the various reports issued by the concurrent auditors, RBI Inspection reports, RO inspectors. Gain understanding of various audit points and material discrepancies and irregularities reported and compliances of the same. Review monitoring reports (irregularity reports) sent by the branch to the controlling authorities in respect of irregular advances.

• Obtain the detailed list of advances to identify major borrowers, period since when granted, nature of advances and clients, major defaulters, lending under various schemes, industry wise lending, probable NPA, highly sensitive accounts, CDR & BIFR cases, Advances in D1 and D2 (which requires calculation of Asset Shortage), Restructured accounts, OTS proposals, possibility of window dressing in the account, up gradation as well as down gradation of accounts. Compare the list with previous audit to find out major recoveries

2. Verification of Advances:

Before providing any financial assistance, the branch has to follow the systems and procedures as defined by the HO. As an auditor, we have to comment on the flaws in the system, if any, and verify that branch is complying with policies and procedures of the HO before and after granting a Loan.

Efficacy of internal control on Advances can be verified with reference to following criteria:

1. Credit Appraisal:

• Review appraisal system, Files of large as well as critical borrowers, sanctions, disbursement, renewals, documentation, systems, securities, etc

• Ensure compliance of branch regarding prescribed procedures for credit appraisal

2. Sanction and Disbursement:

• Compliance of sanction terms and conditions in the case of new advances

• Verify whether any sanction is beyond the delegation power and if so, whether reporting and confirmation of the same to the higher authorities is done/ obtained

• Verify whether any advances have been disbursed without fulfilling the conditions in the sanction

3. Documentation:

• Verify the advances with reference to the Documentation requirements as per the HO’s instructions

• Review of ROC forms on test check basis to confirm whether charges have been registered

• Verify whether as per the Master circular No. DBOD No. BP. BC.46/ 08.12.001/2008–09 dated 19 September, 2008; bank has obtained declaration and certification by a professional, regarding compliance of various statutory prescripttions from the borrower enjoying the Consortium/Multiple Banking Arrangements

• Insurance policies with bank clause should be obtained for stocks and collateral, (residence, office premises, etc.) and for stocks held by third parties on Job–work basis

• Verify the consortium advances accounts with regard to:
  Status on Joint Documentation, Inspection of unit, Updated minutes of consortium, confirmation from lead bank that they are holding valid documents, monthly updation of drawing power based on lead bank’s advice

• Whether the borrower is regular in submission of stock statements, book debt statements, insurance policies, annual accounts, half yearly results, etc and whether penal interest is charged in case of default/delay in submission of such data (whether branch is marking the date of receipt on the statement). Whether the bank verifies these statements critically and seeks clarification wherever required e.g. (format is proper, details are adequate, etc). Whether year end stock statement matches with Audited Accounts Stock figure

• Obtain the list of accounts where acknowledgement of debt is not taken from the borrower

4. Supervision/ Monitoring:

• Verify if any Letter of Credit (L/C) limit is availed, the stocks under L/C are separately shown in the stock statements, to prevent double financing

• Verify that the unit submits separate stock statements for Packing Credit (PC) facility and the liquidation is out of export proceeds (if not, concessional interest has to be revised to normal interest charged to the party). Verify whether exchange translation is done regularly to check whether overall exposure is within limits in case of Foreign Currency denominated PC

• Verify if age–wise analysis of book debts is submitted

• If stocks are kept at rented godowns, No–lien letters should be obtained from the concerned owners/landlord

• Verify that non–moving stocks are reduced when calculating the DP

• Check classification of advances, income recognition and provisioning as per RBI Norms/Circulars

• Examine interest trends as compared to average annual advances (monthly average figures)

• Scrutinise the final advances statements with regard to assets classification, security value, documentation, drawing power, outstanding, provisions, etc. in line with the requirements of Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances cross check whether the guidelines issued by the Bank for the purpose of classification of advances are in line or more prudent than the RBI guidelines. Verify whether the value of security considered is proper/ realistic

• Check whether Non–Fund based (Letter of Credits/Bank Guarantees) exposure of the borrowers is within the sanctioned limits

• Compare projected financial figures given at the time of project appraisal with actual figures from audited financial statements for relevant period and ascertain reasons for large variances, if any.

• Take into account the assessment of RBI if the regional office of RBI has forwarded a list of individual advances to the bank, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels (refer the master circular — dated July 2, 2007)

• Verify the derivatives and off–balance sheet transactions entered into by constituents for any liability and ensure that Mark To Market Margins of Security is taken and amounts provided for in case of default by the party.

• Verify if the accounts are pending for review/renewal

• Status of other banks to ensure there is no excess financing against the stock/book debts

• Verify whether Non–performing accounts reported to the Head office promptly

• Whether Branch is following the Recovery policy and legal action is taken on the advances whenever required as per the Policy of the Bank

• Review the monitoring system; i.e., monitoring end use of funds, analytical system prevalent for the advances, cash flow monitoring, branch follow–up, consortium meetings, inspection reports, stock audit reports, market intelligence (industry analysis), securities updation, etc.

• Incase of advances against shares verify that branch has not given loan against Banks own shares and any other partly paid up shares

• Verify whether branch has complied with Master Circular No. DBOD. No. BP.BC. 17/ 21.04.048/ 2009–10 dated July 1, 2009 on Restructuring of advances.

Consider the following important points covered in Circular:

• Restructured account could be under 'Standard', 'Sub–standard' and 'Doubtful' categories. Banks cannot reschedule/ restructure/ re–negotiate borrowal accounts with retrospective effect

• Date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring/ rescheduling/ renegotiation

• Prior approval should be obtained in case of BIFR and CDR cases under restructuring

• An existing 'Standard asset' will not be downgraded to Sub–standard category upon restructuring and if during the specified period, the asset classification of Sub–standard/ Doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period

• Asset Classification will not be downgraded if satisfactory performance observed during the specified period, subject to:

• dues being fully secured

• unit becomes viable in 7 years (10 years for infrastructure cases)

• loan is repayable in 10 years (15 years for Infrastructure cases)

• promoter sacrifice and additional funding of at least 15 % of Bank Sacrifice

• obtaining personal Guarantee of promoters

(Specified period means period of one year from the date when the 1st payment of interest or installment of principal falls due under the terms of restructuring)

• Verify the Financial viability and reasonable certainty of repayment of each account restructured

• Verify that advance covered under restructuring should be from other than capital market exposure, personal/ consumer loan

• Verify whether borrowers indulging in frauds and malfeasance are not taken for restructuring. As per circular they remain ineligible for restructuring

• Provisioning Norms:

1. Normal Provision: Bank will hold provision against restructured advances as per the existing provisioning norms. Provision should be difference between the fair value of loan before and after restructuring

Fair value before restructuring: Present value of cash flows (Principal and interest at the existing rate charged on the advance before restructuring) discounted at bank’s BPLR plus appropriate term premium and credit risk premium for the borrower category on the date of restructuring"

Fair value of the loan after restructuring: Present value of cash flows (Principal and interest at the rate charged on the advance on restructuring) discounted at a rate equal to bank’s BPLR plus appropriate term premium and credit risk premium for the borrower category on the date of restructuring"

WCTL fair value should be computed as per actual cash flow
In case any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1 till maturity of the security

2. Option in notionally computation of Diminution in fair value: Due to lack of expertise/ appropriate infrastructure RBI has given option to provide diminution at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one crore till the financial year ending March 2011. The position would be reviewed thereafter

Diminution in the fair value may be re–computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account. Bank may provide short fall in provision or may reverse the provision held in distinct account

• Income Recognition in case additional finance is provided:

1. Incase of standard asset: May be treated as ‘standard asset’, up to a period of one year after the first interest/ principal payment

2. In case where pre–restructuring facilities were classified as ‘sub–standard’ and ‘doubtful: On cash basis only

• Conversion of principal into debt/ equity and conversion of unpaid interest into ‘Funded Interest Term Loan’ (FITL), Debt or Equity Instruments– specific guidelines to be followed

• Master circular on Agricultural Debt Waiver and Debt Relief Scheme, 2008 – Prudential Norms on Income Recognition, Asset Classification, Provisioning, and Capital Adequacy should be followed in case of agricultural advances as per debt waiver scheme

5. Review of Operations

• Verify accounts with multiple banking facility, with regard to Drawing Power

• Charge of interest and recovery for each month/quarter or as applicable to be verified

• Review operations in the large Advance Accounts and selectively in other accounts

• Verify debit/credit summation in account with the unit’s turnover in audited accounts

• Verify whether bank is charging penal interest wherever applicable

• Obtain the list of Temporary overdrafts and verify authorization and interest application on the same

• Incases of advances given against Deposits, whether lien is marked on the Deposits

• Transaction in the post balance sheet date period

3. PROFIT & LOSS ACCOUNT

• Income/ Expenditure: Verify

  • Short debit of interest/commission on advances; Excess credit of interest on deposits; In case the discrepancies are existing in large number of cases, the auditor should consider the impact of the same on the accounts; check if charges are recovered from customers on outward RTGS transactions; Determine whether the discrepancies noticed are intentional or by error; Go through the Concurrent/Internal/Revenue Audit report to assess whether the Branch has properly applied interest to deposit/advances accounts, revenue leakage detected, comments on internal control. If discrepancies are pointed out, the Statutory Auditor may ensure whether the same have been rectified. Check whether the recurrence of such discrepancies are general or in respect of some specific clients

  • Proper authority in sanction and disbursement of expenses as also the correctness of the accounting treatment given as to revenue/ capital/ deferred expenses; Check accrual of income/expenditure especially for the last month/ quarter of the financial year

  • Verify the significant systematic reversal of income and expenditure with proper reasons.

  • Verify the computation of Guarantee Commission and its application over the period of the Guarantee

• Divergent Trends

• Income/ expenditure of the current year should be compared with the figures of the previous year. Wherever a divergent trend is observed, obtain an explanation along with supporting evidences like monthly average figures, composition of the income/ expenditure, etc

• Verify major items of Expenses especially Rent with respect to the Agreement for Rent of the Branch Premises with the Landlord

4. BALANCE SHEET

• Cash & Bank Balances

  • Physically verify the Cash Balance as on the year/ period end or trace back the cash balance from the date of verification to year/ period end

  • Check instances of cash exceeding the retention limit as set by the Controlling Authorities. Frequent excesses should be reported in the Long Form Audit Report (LFAR)

  • Verify cash held at ATM and tally with General ledger

  • If substantial amount of soiled notes is held, it should be reported

  • Check Insurance cover held for cash balances with the advice sent by HO

  • Confirm and verify the reconciliation statements of the Balances with banks as on year end

  • Check whether the surprise verification of cash by the independent officer or the branch manager is carried out and frequency of the same

• Investments

• Physically verify the Investments held by the branch on behalf of Head Office and issue certificate of physical verification of investments to bank’s Investments Department/ Central Statutory Auditors

• Check receipt of interest and its subsequent credit given to Head Office

• Fixed Assets

• Check Inter–branch transfer memos relating to Fixed Assets and whether they have been correctly classified in the accounts and depreciation accounting thereof

• Check if Dead Stock Register is duly updated and signed by the concerned Manager

• Ascertain the Branch manager’s power to acquire new fixed assets and frequency of physical verification

• Verify the suspense account to identify any amount paid to vendor but still unadjusted.

• Inter–Branch Reconciliation (IBR)

• Understand the IBR system in detail and prepare an audit plan to review the IBR transactions. The large volume of Inter–Branch Transactions and the large number of unreconciled entries in the banking system makes the area fraud–prone

• Check the head office inward communication to branch to ascertain date up to which statements relating to inter–branch reconciliation have been sent

• 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 for more than a reasonable period

• Double responses to the entries in the Accounts

• Selectively verify accuracy and correctness of “Daily statements” which are prepared by the branch and sent to IBR department

• The auditor should duly consider the extent of non–reconciliation in forming his opinion on the financial statements. Where the amounts involved are material, the auditor should suitably qualify his audit report. Attention is drawn on the paper on “Certain Significant Aspect of Statutory Audit of Banks” issued by the Council of ICAI in March, 1994, published in the CA journal

• Further, vide its circular No. DBOD No. BP.BC.73/21.04.018/2002–03 dated February 26, 2003, the Reserve Bank (RBI) advised the banks to maintain category–wise (head–wise) accounts for various types of transactions put through inter–branch accounts so that the netting can be done category–wise. Further, RBI advised banks to make 100 per cent provision (category–wise) for net debit position in their inter–branch accounts arising out of the unreconciled entries, both debit and credit, outstanding for more than six months

• Suspense Accounts, Sundry Deposits, etc

• Suspense and Sundry Deposit accounts are adjustment accounts in which certain debit transactions whose authorisation is pending for approval or whose accounting head is not known are temporarily posted

• As and when the transactions are duly authorised by the concerned officials they are posted to the respective accounts and the Suspense Account/ Sundry Deposit account is credited/ debited respectively

• Ask for and analyse their year–wise break–up

• Check the nature and details of entries parked in such Accounts

• Check any movement in such old balances and whether the same is genuine and has been properly authorised by the competent authority

• Check for any revenue items lying in such accounts and whether proper treatment has been given for the same

• Auditors Report & Memorandum of Changes

• The Auditors Report should be a self contained document and should contain no reference of any point made in any other report including the LFAR

• Include Audit Qualifications in the Auditors Report and not in the LFAR

• Quantify the Audit Qualifications for a better appreciation of the point

• For suggesting any changes in the financial statements of the branch, quantify the same in the Memorandum of Changes (MOC) and make it a subject matter of qualification and annexe it to the Auditors’ Report

5. LONG FORM AUDIT REPORT (LFAR)

• Study the LFAR Questionnaire thoroughly

• Plan the LFAR work along with the statutory audit right from day one

• The LFAR questionnaire is a useful tool for planning the statutory audit of a branch

• Complete and submit Audit Report as well as the LFAR simultaneously

• Be specific while replying the LFAR

• Give instances of shortcomings/weaknesses existing in the respective areas of the branch functioning in the LFAR

• The LFAR should be sufficiently detailed and quantified so that they can be expeditiously consolidated by the bank

6. GENERAL

• Send a Letter of your requirements of records/accounts/document to the Branch before commencing the audit

• Obtain the latest status of cases involving fraud, vigilance and matters under investigation having effect on the accounts and its reporting requirement. Review the Master circular on FRAUDS – CLASSIFICATION AND REPORTING issued by RBI (latest as on date of this note dated July 2, 2007)

• Obtain a Management Representation Letter (MRL)

• Banks are advised to strictly comply with the extant regulations and in particular of Master circular on Issuance of Guarantee, not to provide guarantees or equivalent commitments for issuance of bonds or debt instruments of any kind. (Master circular on Issuance of Guarantee DBOD. No. Dir. BC.18/ 13.03.00/ 2008–09 dated July 1, 2009)

INCOME RECOGNITION & ASSET CLASSIFICATION NORMS – AT A GLANCE
 

CLASSIFICATION OF ADVANCES AS NPA

Term Loans

• Interest or installment remains overdue for a period of more than 90 days from end of the quarter

Agricultural Advances: Agricultural loans granted for short duration crops and long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons and one crop season respectively

Overdue: An amount due to the bank under any credit facility is ‘Overdue’ if it is not paid on the due date fixed by the bank

Cash Credits & Overdrafts

• The account remains continuously “out of order” i.e., Outstanding balance remains continuously in excess of the sanctioned limit/ drawing power or there are no credits continuously for a period of 90 days or credits are not enough to cover the interest debited during the same period

• Banks may not classify an account NPA merely due to existence of some deficiencies, which are of temporary nature such as non–availability of adequate drawing power temporarily, balance outstanding exceeding the limit temporarily, non–submission of stock statements and non–renewal of the limits on the due date but submitted later on, etc

• Balance outstanding in the account based on drawing power calculated from stock statements more than 3 months old would be deemed as irregular

• Further, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction respectively, will be treated as NPA

Bills Purchased & Discounted

• Bills purchased/ discounted remains overdue for a period of more than 90 days

• Overdue interest should not be charged and taken to income account in respect of overdue bills unless it is realized

Other Accounts

• Any amount to be received in respect of that facility remains overdue for a period of more than 90 days Government guaranteed advances

• State Government guaranteed advances in respect of which guarantee has been invoked and has remained in default for more than 90 days

• The credit facilities backed by guarantee of Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. However, income shall not be recognised if the interest or instalment has remained overdue or the account has remained continuously out of order or the bills or any other facility has remained overdue for a period of more than 90 days

Notes:

1. Master Circular on Prudential Norms on Income recognition, Asset Classification and Provisioning pertaining to Advance (latest as on date of this note — Circular No. DBOD. No. BP.BC. 17/21.04.048/2009–10 –dated July 1, 2009) referred to as Master Circular in this note

2. Once an account has been classified as NPA, all the facilities granted to the borrower will be treated as NPA except in respect of Primary Agricultural Credit Societies (PACS)/Farmers Service Societies (FSS). Also, in respect of additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, provision may be made after a period of one year from the date of disbursement in respect of additional facilities sanctioned under the rehabilitation package. The original facilities granted would however continue to be classified as sub–standard/ doubtful, as the case may be

3. 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. Advances against gold ornaments, government securities and all other securities are not covered by this exemption

4. Till the time the account is identified as NPA, income is recognised irrespective of whether realised or not. Where an account is identified as NPA (including Government Guaranteed NPA Accounts) during the year, unrealised income should not be recognised for the year. Also, interest accrued and credited to income account in the previous year should be reversed or provided for if the same is not realised. The finance charge component of finance income on NPA leased assets remaining unrealised, should be reversed or provided for in the current accounting period

5. Partial Recovery in respect of NPA accounts should be generally appropriated against principal amount in respect of doubtful assets till the irregularity is completely regularised

6. If the accounts of the borrowers have been regularised before the balance sheet date by repayment of overdue amounts, the same should be reviewed with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence about the manner of regularisation of the account to eliminate doubts on their performing status

7. If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning

8. In case of restructured accounts, the classification of advances should be done as per master circular

9. In cases of substantial time overrun in the projects under implementation, the asset classification, income recognition and provisioning should be done as per master circular

10. 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

11. In cases of serious credit impairment assets should be straightway classified as doubtful or loss asset as appropriate if erosion in the value of security is significant; i.e., the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be

12. If the realisable value of security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightway classified as loss asset. It may be either written off or fully provided for by the bank

13. In the case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes ‘due’ only after the moratorium or gestation period is over

14. In case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards but only when there is default in repayment of instalments of principal or payment of interest on the respective due dates

15. In cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors

16. In spite of charging of interest at monthly rests Banks should continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter

17. In case Funded Interest is recognized as income, a provision of equal amount should be made simultaneously i.e. fully provided

18. In case of Takeout Finance, if the asset is classified as NPA while taking over the asset, the branch should make provisions treating the account as NPA from the actual date of it becoming NPA even though the account was not in its books as on that date

ASSET CLASSIFICATION – AT A GLANCE

Category	Conditions to be Satisfied	Provision amount	Remarks
Standard Assets	Does not disclose problem and which does not carry more than normal risks attached to business	As per RBI Circular No. DBOD.No.BP.BC. 17/21.04.048/2009–10 dated July 1, 2009 the provisioning for all standard assets w.e.f 15 November, 2008 requirements is: Direct advances to Agricultural and SME 0.25%	The revised norms would be effective prospectively but the provisions held at present should not be reversed. However, in future, if by applying the revised provisioning norms, any provisions are required over and above the level of provisions currently held for the standard category assets, these should be duly provided for
Sub– Standard Assets	Classified as NPA for a period less than or equal to 12 months Classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory com–pliance of the required conditions at least for one year	A general provision of 10% of total outstanding should be made without making any allowance for ECGC guarantee cover and securities available Unsecured Exposures which are identified as sub–standard would attract an additional provision of 10% For detailed treatment of restructured Sub–standard Assets, refer Master Circular (Para 5.4 of Circular No. DBOD.No.BP.BC. 17/21.04.048/2009–10 dated July 1, 2009)	In respect of accounts where there are potential threats of recovery on account of erosion in the value of security or non–availability of security and existence of other factors such as frauds committed by borrowers, it will not be prudent for banks to first classify them as sub–standard and then as doubtful after expiry of twelve months from the date the account has become NPA. Such accounts should be straightway classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA
Doubtful Assets	Remained sub– standard for a period exceeding 12 months	100% of unsecured amount For the secured portion, provision should be made on the following basis: Period for which Provision the advance has requirement remained in (%)‘doubtful’ category Up to one year  20 %  20 One to three years 30% More than three years 100%	It has all the weaknesses inherent in that of a sub–standard asset with the added characteristic that the weaknesses make the collection/ liquidation in full, highly questionable and improbable, on the basis of current known facts, conditions and values
Loss Assets	Loss asset is one where loss has been identified by the bank, external or internal auditors or the RBI inspectors, but the amount has not been written off (wholly or partly)	100% of the outstanding should be provided for/written off	If the assessed realisable value of the security is less than 10 per cent of the outstanding amount, the existence of security should be ignored and the asset should be straightway classified as loss asset

DRAFT OF MANAGEMENT REPRESENTATION LETTER TO BE OBTAINED FROM THE BRANCH MANAGEMENT

April X, 20XX

M/s. XYZ & Co
Chartered Accountants
Mumbai

Dear Sirs,

Sub.: Audit for the period ended 31–3–20XX

This representation letter is provided in connection with your audit of the financial statements of _____________ branch of _______________ BANK for the period ended 31–3–20XX for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the financial position of ___________ branch of _______________ BANK as of 31–3–20XX and of the results of operations for the period then ended. We acknowledge our responsibility for preparation of financial statements in accordance with the requirements of the Reserve Bank of India and recognised accounting policies and practices, including the Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India

We confirm, to the best of our knowledge and belief, the following representations:

1. ACCOUNTING POLICIES

The accounting policies which are material or critical in determining the results of operations for the year or financial position are set out in the financial statements and are consistent with those adopted in the financial statements for the previous year. The financial statements are prepared on accrual basis except as stated otherwise in the financial statements. There are no changes in the accounting policies followed by the branch during the current year

2. ASSETS

The branch has a satisfactory title to all assets and there are no liens or encumbrances on the branch’s assets. The branch has not received any legal notices from the landlords asking them to vacate the premises that the branch is currently occupying as a lessee

3. FIXED ASSETS

The fixed assets located at the branch are accounted at the Head Office, hence they are not reflected in the branch financial statements and depreciation thereon shall be provided at the Head Office

4. 4 CAPITAL COMMITMENTS

At the balance sheet date, there were no outstanding commitments for capital expenditure, other than as reported in _________

5. OTHER CURRENT ASSETS

In the opinion of the management, other current assets have a value on realization in the ordinary course of the branch’s business which is at least equal to the amount at which they are stated in the balance sheet

6. CASH & BANK BALANCES

The Cash balance as on 31st March, 20XX is Rs. _____________

7. LIABILITIES

The branch recorded all known liabilities in the financial statements

8. CONTINGENT LIABILITIES

8.1 The branch has disclosed in notes to the financial statements all;

• guarantees that we have given to third parties

•  Letters of Credits (Local/Import)

• Letters of Comfort (Local/Import)

• Deferred Payment Credits/Guarantees (Local/Import)

• and all other contingent liabilities

8.2 Other than for advances, there are no matters involving the branch in any claims in litigation, arbitration or other disputes in which there may be some financial implications, including for staff claim, branch rentals, municipal taxes, local levies etc. except for those which have been appropriately included under contingent liabilities

8.3 Guarantees are disclosed net of margins as at the year–end, and expired guarantee where the claim year has also expired has been correctly removed from the branch return

8.4 Contingent liabilities disclosed in the notes to the financial statements do not include any contingencies, which are likely to result in a loss and which, therefore, require adjustment of assets or liabilities

8.5 No cases/ legal disputes are pending against the branch/ lodged by the branch, for which no liability has accrued/ is likely to accrue in the future

9. PROVISIONS FOR CLAIMS & LOSSES

Provision has been made in the accounts for all known losses and claims of material amounts

10. There have been no events subsequent to the balance sheet date that require adjustment of, or disclosure in, the financial statements or notes thereto

11. PROFIT & LOSS ACCOUNT

Except as disclosed in the financial statements, the results for the year were not materially affected by:

1. Transactions of a nature not usually undertaken by the branch

2. Circumstances of an exceptional or non–recurring nature

3. Charges or credits relating to prior years

4. Changes in accounting policies

12. We have made available to you all the following latest reports on the accounts of our branch, and compliance by the branch on the observations contained therein:

1. Previous year’s Branch Audit Report

2. Internal Inspection Reports

3. Report on any other Inspection Audit that has been conducted during the course of the year relevant to the financial year 20XX–XX

Apart from the above, the branch has not received any notice, show cause, inspection advice, etc from Government of India, Reserve Bank of India or any other monitoring or regulatory authority of India that could have a material effect on the financial statements of the branch during the year

13. BALANCING OF BOOKS

The books of the account are computerized and hence the subsidiary records are automatically balanced with the relevant control records

14. OVERDUE/ MATURED TERM DEPOSITS

All Overdue/ Matured Term Deposits are held as Matured Term Deposits

15. ADVANCES

15.1 In respect of all the advances against tangible securities, the branch holds evidence of existence and market value of the relevant securities as at the year–end

15.2 All the borrowers’ account have been categorised according to the prevalent RBI norms applicable for the year, into Standard, Sub–standard, Doubtful or Loss assets, with special emphasis on Non–Performing Assets (NPA)

15.3 We have examined the accounts and applied the norms borrower–wise and not account–wise for categorising the accounts

15.4 The classification of advances made as at the end of the previous year has not been changed to a better classification

15.5 No income has been adjusted/recorded to revenue, contrary to the norms of income recognition notified by the Reserve Bank of India; and particularly where the chances of recovery/realisability of the income are remote

15.6 No income has been recorded on Non–Performing Accounts other than on actual realisation

16. OUTSTANDING IN SUSPENSE/SUNDRY ACCOUNT

The year–wise/entry–wise break up of amounts outstanding in Sundry deposits/Sundry assets as on 31–3–2009 has already been submitted to you along with explanation of the nature of the amounts in brief and supporting evidences relating to the existence of such amounts in the aforesaid accounts

17. INTEREST PROVISIONS

17.1 Interest provision has been made on deposits, etc. in accordance with the extent instructions of the Head Office

17.2 Any amount recorded as income up to the year–end, which remains unrecovered or not realisable, has been reversed from the respective income heads or has been debited to corresponding expenditure head during the year

17.3 The accounting treatment as regards reversal, if any of interest/other income recorded up to the previous year end; and the amount reversed during the year under audit; i.e., income of earlier years derecognised during the year has been made in accordance with the prevalent RBI norms of Income Recognition

17.4 The interest provision for Head Office Interest shall be made at the Head Office

18. STATIONERY

Stock of unused stationery like security papers, cheque books, demand draft book, etc. have been produced for your physical verification and are in order

19. LONG FORM AUDIT REPORT — BRANCH RESPONSE TO THE QUESTIONNAIRE

In connection with the Long Form Audit Report, complete information as regards each item in the questionnaire has been made available to you in order to enable you to verify the same for the purpose of your audit

20. OTHER CERTIFICATION

Duly authenticated, information as regards other matters which, as per the bank’s letter of appointment, require certification have been made available to you

21. GENERAL

There is no enquiry going on or concluded during the year by Central Bureau of Investigation (CBI) or any other Vigilance or Investigating Agency on the branch or on its employees and no cases of Frauds or of Misappropriation of Assets of the branch have come to the notice of the Management during the year other than for amounts for which provisions have already been made in the books of account

22. The provision for non–performing assets, depreciation, provision for income tax, provision for bonus, gratuity, etc. is made at the Head Office. Therefore the same has not been provided in the branch accounts

23. There have been no irregularities involving management or employees who have a significant role in the system of internal control that could have a material effect on the financial statements

24. At the end of the year, the branch has translated its holdings of Foreign Deposit Accounts at a notional rate of Rs. __ to 1 US $. The difference between the notional rate of Rs. __ and the actual rate as at the year end will be accounted for at the Head Office

25. The financial statements are free of material misstatements, including omissions.

26. The branch has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non–compliance. There has been no non–compliance with requirements of regulating authorities that could have a material effect on the financial statements in the event of non–compliance.

27. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements.

28. he other particulars required have already been given to you and particulars and other representations made to you from time to time are true and correct in all respects.

29. TAX AUDIT FOR THE YEAR ENDED 31ST MARCH. 20XX

TAX AUDIT IN TERMS OF SECTION 44AB OF THE INCOME–TAX ACT, 1961

The information required for the tax audit under section 44AB of the Income–tax Act, 1961 has been made available to you in order to enable you to verify the same for the purpose of your report thereon. In respect of the Tax Audit under section 44AB of Income–tax Act, 1961 of ________________________ for the year ended 31st March, 20XX, we certify the following:

PART – A

29.1 Our Permanent Account No. _______________

29.2 The address as per the jurisdiction of the assessee falls under section 124 of the Income–tax Act, 1961 is _____________

29.3 The status as defined under the Income Tax Act, 1961 is Company

PART – B

29.4 There is no change in nature of business in current year as compared to preceding previous year

29.5 The books of account maintained by us have been correctly disclosed in clause 9(b) of Form 3CD

29.6 Our Profit & Loss A/c. does not include profits and gains assessable on presumptive basis under sections 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 172 of the Income–tax Act, 1961

29.7 The method of accounting followed is as per clause 11(a) which has been consistently followed in the immediately preceding previous year. There was no change in the method of accounting employed vis–à–vis the method employed in the immediately preceding previous year

29.8 Sum received from employee towards contributions to any provident fund or superannuation fund or any other fund mentioned in section 2(24)(x) which is paid/not paid within due dates to concerned authorities under section 36(1)(va) are mentioned in Clause 16 (b) of our Form 3CD and the same are correct

29.9 In Clause 17 of Form 3CD, there are no other amounts of such items debited to Profit & Loss Account

29.10 No payments are made to persons specified under section 40A(2)(b)

29.11 There is no amount of profit chargeable to tax u/s. 41 as disclosed under clause 20 of Form 3CD

29.12 Except for the items shown under clause 21(ii)(B), no tax, duty or other sum as referred to u/s. 43B has been provided as at the year end

29.13 No expenditure/ income of an earlier year has been debited/ credited to the Profit & Loss Account except to the extent disclosed under clause 22(b) of Form 3CD

29.14 No loans or deposits of Rs20,000 or more have been repaid in cash other than those specified in the statement of particulars as given in the respective clause of Form 3CD. The details of loans or deposits of Rs20,000 or more given in the said statement of particulars is true and correct

29.15 Section–wise details of deduction admissible under Chapter VI–A

No other deductions other than those mentioned in clause 26 of Form 3CD is available to the branch

29.16 Details of non deduction, non–payment or delay in payment of tax deducted at source to the credit of the Central Government are given in the statement of particulars. Apart from that, there are no other deduction, non payment or delay in payment of Tax Deducted at Source

29.17 The other particulars required have already been given to you and particulars and other representations made to you from time to time are true and correct in all respects

Thanking you, we remain.

Yours faithfully,
For & on behalf of ___________ branch of _______________ BANK
Authorised Signatory

DRAFT LETTER OF REQUIREMENTS TO BE SENT TO THE BRANCH

March X, 20XX

The Branch Manager
_____________ Bank
_____________ Branch
Mumbai

Dear Sir:

Sub.: Statutory Audit of your branch for the year 20XX–XX

As you are aware, we have been appointed as the Statutory Auditor to report on the accounts of your Branch for the year 20XX–XX.

In order to enable us to finalise the audit programme and furnish our report on the audit of the accounts for the year 20XX–XX of your branch, may we request you to keep ready the information/clarification as stated below and make the same available to our audit team at the earliest

1. Latest reports

The following latest reports on the accounts of your Bank, and compliance by the Bank on the observations contained therein may be kept ready for our perusal:

• Latest RBI Inspection Report

• Internal/ Concurrent Audit Reports

• Head Office Inspection Reports

• Internal Inspection Reports

• Revenue Audit Report (if any)

• Income and Expenditure Control Report (if any)

• Report on any other Inspection/Audit that may have been conducted during the course of the year relevant to the financial year 20XX–XX

2. Circulars in connection with accounts

Please let us have a copy of the Head Office circulars/instructions in connection with the closing of your accounts for the year, to the extent not communicated to us or incorporated in our letter of appointment

3. Accounting policies

Kindly confirm whether, as compared to the earlier year, there are any changes in the accounting policies during the year under audit

If so, please let us have a list and a copy of the accounting policy/ies amended by the bank during the year covered by the current audit and compute the financial effect thereof to enable us to verify the same

4. Balancing of Books

Kindly confirm the present status of balancing of the subsidiary records with the relevant control accounts. In case of differences between balances in the control and subsidiary records, please give the details thereof and let us know the efforts being made to reconcile/balance the same. This information may be given head–wise for the relevant control accounts, indicating the date when the balances were last tallied

5. Deposits

1. Please let us have the Interest rate structure, applicable for the current year, for all the types of deposits accepted by the branch

2. Kindly confirm having transferred Overdue/ Matured Term Deposits to Current Account Deposit. If not, details/ particulars of credit balances comprising Overdue/ Matured Term Deposits as at the year–end which continue to be shown as Term Deposit, particularly where the branch does not have any instructions/ communication for renewal of such deposits from the account holder and amount of provision of interest made on such overdue/ matured term deposits, should be separately marked out and be kept ready for our reference

6. Advances

1. Kindly confirm whether in respect of the advances against tangible securities, the branch holds evidence of existence and latest market value of the relevant securities as at the year–end

2. Kindly inform the year–end status of the accounts, particularly those which have been adversely commented upon in the latest reports of RBI/Internal Auditors/Concurrent Auditors/Statutory Auditors, etc. On the branch as also accounts in respect of which provisions have been made/recommended as at the previous year–end
   Information in relation to such advances accounts where provision computed/recommended may please be prepared indicating:

1. Name of the borrower

2. Type of facility

3. *Total amount outstanding as at the year–end (both for principal and interest) specifying the date up to which interest has been levied and recovered

4. Particulars of securities and value on the basis of latest report/statement

5. Nature of default and action taken

6. Brief history and present status of the advance

7. * Provision already made/recommended

8. NPA since when (please specify the date)

* Corresponding figures for the previous year–end may please be given

3. Kindly confirm whether the borrowers’ account have been categorised according to the norms applicable for the year into Standard, Sub–standard, Doubtful or Loss assets, with special emphasis on Non–Performing Assets (NPA) and whether such classification has also been made applicable by the branch to advances with balances of less than Rs. 25,000 each
   
   Kindly confirm whether you have examined the accounts and applied the norms borrower–wise and not account–wise for categorising the accounts. Please let us have the particulars of provisions computed/ recommended in respect of the above during the financial year under audit

4. A list of all advances accounts which have been identified as bad/ doubtful accounts and where pending formal sanction of the higher authorities, the relevant amount have not been re–classified/ re–categorised in the book of the Branch for provision/ write off. This covers all account identified by the Branch or internal/ external auditor or by RBI inspectors but the amount has not been written off wholly or partly
   
   In case the Bank has recommended action against the borrowers or for initiating legal or other coercive action for recovery of dues, a list of such borrowers’ accounts may be furnished to us

5. Please let us have a list of borrowers’ accounts where classification made as at the end of the previous year has been changed to a better classification, stating reasons for the same

6. Kindly also confirm whether any income has been adjusted/ recorded to revenue, contrary to the norms of income recognition notified by the Reserve Bank of India and/or Head Office circulars issued in this regards; and particularly where the chances of recovery/ realisablity of the income are remote

Kindly also confirm whether any income has been recorded on Non–Performing Accounts other than on actual realisation

7. Outstanding in Suspense/ Sundry Account

Kindly let us have a year–wise/ entry–wise break up of amounts outstanding in Suspense/ Sundry accounts as on 31–3–20XX. Kindly explain the nature of the amounts in brief. Supporting evidences relating to the existence of such amounts in the aforesaid accounts may be kept ready at the branch for verification. Reasons for non–adjustment of items included in these may be made known

8. Inter–branch/ Office Accounts/ Head Office Account

1. Please let us have a statement of entries (head–wise) which originated prior to the year–end at other branches, but were responded during the period after 31–3–20XX at the branch

2. Date–wise details of debits in various sub–heads relating to Inter–branch transactions and reasons for outstanding amounts particularly those, which are over 30 days as at the Balance Sheet date

9. Contingent liabilities

(a) Kindly confirm whether other than for advances, there are any matters involving the Bank in any claims in litigation, arbitration or other disputes in which there may be some financial implications, including for staff claim, municipal taxes, local levies etc. If so, these may be listed for our verification, and you may confirm whether you have included these as contingent liabilities

(b) Kindly confirm whether guarantees are being disclosed net of margins, or otherwise as at the year–end, and whether the expired guarantee where the claim year has also expired, continue to be disclosed in the Branch return. Please confirm specifically

10. Interest Provision

1. Kindly confirm whether interest provision has been made on deposits etc. in accordance with the latest instruction of the RBI/interest rate structure of the bank. A copy of such instructions/rate structure may be made available for our scrutiny

2. Kindly confirm whether any amount recorded as income up to the year–end, which remains unrecovered or not realisable, has been reversed from any of the income heads or has been debited to any expenditure head during the financial year. If so, please let us have details to enable us to verify the same

3. Kindly confirm the accounting treatment as regards reversal, if any of interest/other income recorded up to the previous year–end; and the amount reversed during the year under audit; i.e., income of earlier years derecognised during the year

11. Foreign Currency outstanding transactions

1. Kindly confirm whether amount outstanding as at the year–end have been converted as at the year–end rates prescribed by FEDAI. An authenticated copy of the FEDAI rates applied may be given for our records

2. Kindly confirm the amount of inward value of foreign currency parcels, if any, which originated prior to the year–end from other banks, but could not be recorded as these were in transit and for which entries were made after the year end

12. Investment/ stationery

For Investment held by the branch:

1. These may be produced for physical verification and/ or evidence of holding the same be made available

2. Stock of unused security paper stationery/ numbered forms like B/Rs, SGL forms, etc. may please be produced for physical verification

3. It may be confirmed whether income accrued/ collected has been accounted as per the laid down procedure

4. It may be confirmed whether Investment Valuation has been done as per the extant RBI guidelines

13. Long Form Audit Report —— Branch response to the Questionnaire

In connection with the Long Form Audit Report, please let us have complete information as regards each item in the questionnaire, to enable us to verify the same for the purpose of our audit

14. Tax Audit in terms of section 44AB of the Income–tax Act, 1961

Please let us have the information required for the tax audit under section 44AB of the Income–tax Act, 1961 to enable us to verify the same for the purpose of our report thereon

15. Other certification

Please furnish us the duly authenticated information as regards other matters, which as per the letter of appointment require certification

16. Bank Reconciliation & Confirmations

Please let us have, the duly reconciled statements for all Nostro as well as Local bank accounts. A copy of the year–end balance confirmation statements should also be called for and kept ready for our review

17. Books of account and records

Kindly keep ready all the books of account and other records like vouchers, documents, Fixed Assets Register, etc. for our verification

We shall appreciate your kind co–operation in the matter
Thanking you,
Yours truly,

Chartered Accountants

ADVANCES CHECKLIST FOR LFAR

1. In respect of common irregularities, the Auditors can give their comments borrower–wise in the LFAR in the format given hereunder:

   Name of Borrower	Name of Branch	Region	IRAC Status	Facility	Sanctioning Authority	Limit	Amount o/s. as at the year end	Irregularity No.
   1	2	3	4	5	6	7	8	9

2. In respect of Column 9 above, “Irregularity No.”, the number as given in the “Glossary to Irregularities” in Point 5, under the head “Item” below should be given for the irregularity applicable to respective borrower

In case the auditors feel that in spite of the list of irregularities given below, there are some other irregularities, which the auditor would like to bring to notice, the auditor may separately disclose under the given head by giving “appropriate number”

For the aforesaid purpose, “appropriate number” would mean, for example, if the auditors feels that in case of “Review/ Monitoring/ Supervision”, which has the number “4”, any additional irregularity has to be incorporated, he may give a number after the last number appearing in the list, such as “4.62”, and onwards. Similarly in case of “Credit Appraisal” which has the number “1”, any additional irregularity may be given “1.19”, and so on

3. The borrower–wise details may be given in descending order based on the Amount outstanding

4. GLOSSARY TO IRREGULARITIES

   Item No.	Remark
   1	Credit Appraisal
   1.1	Loan application not on record at Branch
   1.2	The appraisal form was not filled up correctly and thereby the appraisal and assessment was not done properly
   1.3	Loan application is not in the form prescribed by Head Office
   1.4	The Bank did not receive certain necessary documents and Annexures required with the application form
   1.5	Basic documents such as Memorandum & Articles of Association, Partnership deed, etc, which are a pre–requisite to determine the status of the borrower, not obtained
   1.6	Certain adverse features of the borrower not incorporated in the appraisal note forwarded to the management
   1.7	Industry/group exposure and past experience of the Bank is not dealt in the appraisal note sent to the management for sanction
   1.8	The level for inventory/book–debts/creditors for finding out the working capital is not properly assessed
   1.9	Techno–economic feasibility report, which is required to know the technical aspects of the borrower’s business, is not obtained from Technical Cell
   1.10	Credit report on principal borrowers and confidential report from their banks are not insisted from the borrowers
   1.11	The opinion reports of the associate and/or sister concerns of the borrower are not scrutinized
   1.12	The opinion reports of the associate and/or sister concerns of the borrower are not called for
   1.13	The opinion reports of the associate and/or sister concerns of the borrower are not updated
   1.14	The opinion reports of the associate and/or sister concerns of the borrower are not satisfactory
   1.15	The opinion reports of the associate and/ or sister concerns of the borrower are not scrutinised/ called for/ not updated/ not satisfactory
   1.16	The procedure/instructions of head office regarding preparation of proposals for grant not followed
   1.17	The procedure/instructions of head office regarding preparation of proposals for renewal of advances not followed
   1.18	The procedure/instructions of head office regarding preparation of proposals for enhancement of limits, etc. not followed
   1.19	No exposure limits are fixed for forward contract for foreign exchange sales/purchase transactions
   2	Sanctioning and disbursement
   2.1	Credit facility sanctioned beyond the delegated authority or limit of the branch
   2.2	Certain proposals were sanctioned pending approval of higher authorities wherever required
   2.3	Ad hoc limits were granted for which sanctions were pending since long
   2.4	Facilities were disbursed before completion of documentation
   2.5	Facilities were disbursed without following sanction terms
   2.6	Facilities were disbursed without any sanction
   2.7	Sanction letter was missing in the branch
   2.8	Guarantor as required in the sanction letter was not obtained
   2.9	Required promoters stake not invested before disbursement of loan
   2.10	Sanctions were made without proper appraisal
   2.11	Security charge not created before disbursement as required by sanction letter/renewed letter
   2.12	Full disbursement of the facility not made
   2.13	Sanction terms were not complied with or were not recorded
   2.14	Disbursement made without proper sanction
   2.15	Term loan was disbursed by creating the cash credit or savings account of the borrower
   3	Documentation
   3.1	The security against which the advance was sanctioned was not available/was not on record
   3.2	Mortgage for the property given as security is not created
   3.3	Mortgage for the property given as security created, was inadequate, as compared to terms of sanction
   3.4	Second charge as required, on assets is not created in favour of the bank
   3.5	Documents of second charge on assets is not on the record
   3.6	Documents pertaining to registration of charges with ROC or any other concerned authority requiring charging of assets is not obtained
   3.7	Copies evidencing lodgment of the original conveyance/sale deeds with the Sub–Registrars for registration not on record
   3.8	Authority letter/Power of Attorney to the Bank to collect the original documents from the Sub–Registrar not on record
   3.9	Documents pertaining to consortium advances not yet executed/not available with bank
   3.10	Documents signed by persons not duly authorised to sign or who have signed in other capacity accepted by the bank
   3.11	Signatures of the executants were not found on all the pages of the documents
   3.12	Some documents on record were blank, without signatures of Branch Manager, witnesses, or guarantors, etc.
   3.13	Revival letters in respect of documents to be reviewed from the borrowers not received
   3.14	Guarantors have expired
   3.15	Guarantors not on record
   3.16	Guarantors not renewed
   3.17	Guarantors not assigned
   3.18	Worth of the guarantors not available
   3.19	Stamping not as per the amended Stamps Act
   3.20	Documents have become mutilated, soiled, time barred or not obtained
   3.21	Opinion report by the field officer for the borrowers not found on record
   3.22	“Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No Lien Letters” not obtained for the mortgage/s
   3.23	Advances for vehicle loans, Registration certificate, transfer certificate, etc. not obtained
   3.24	Work completion certificate, sale deeds, share certificates in societies, etc. not on record for housing loans
   3.25	Documents are not duly attested/signed by concerned officials/not renewed
   3.26	The agreements for hypothecation do not contain details regarding goods hypothecated
   3.27	Copy of Bills/receipts, on the basis of which the amount was disbursed not found on record. For example, Vehicle Loans, Plant & Machinery
   	Charge on main &/or collateral securities not created in terms of sanction letter
   	Original security papers/sale deed/lease deed/title deed/agreement of sale not available on record
   3.30	TDR are not discharged or renewed
   3.31	Control returns not sent to the HO
   3.32	The branch has not taken any action for not compliance with terms of agreement
   3.33	No documents executed for enhancement of limit/document not on record
   3.34	ECGC Post shipment policy not obtained
   3.35	Credit facility released without execution of all necessary documents
   3.36	Common Seal not affixed on Letter of Comfort
   3.37	Confirm orders for export credit not found on record for facilities released
   4	Review/Monitoring/Supervision
   4.1	The account is frequently overdrawn
   4.2	The account is continuously overdrawn
   4.3	The account is overdrawn and the branches have not taken sufficient steps to regularise the accounts promptly
   4.4	The balance outstanding have exceeded the drawing power
   4.5	Balance confirmation and acknowledgment of debt not obtained
   4.6	The stock, book–debts statements not received regularly/promptly
   4.7	The FFI/financial statements/audited statements/FFR 1 & 2/other operational data, etc, not received regularly/promptly
   4.8	The stock, book–debts statements, etc, not scrutinised and no suitable action is taken
   4.9	The FFI/financial statements/audited statements/FFR 1 & 2/other operational data, etc, not received regularly/promptly/not scrutinised and no suitable action is taken
   4.10	Non–moving stock is not deducted to arrive at the drawing power
   4.11	The age–wise break–up of debtors is not found on record. The borrowers are allowed to draw money on entire outstanding debt, which must rather be for the recent debts as prescribed for particular industries and as per margin prescribed in the sanction letter
   4.12	Wide discrepancies observed in the stock statements and stock figures in the annual audited financial statements
   4.13	No penal interest has been charged for delay in submission of various statements as per the terms of agreement depending upon the type of loan/credit availed by the borrower
   4.14	Many branches have not adhered to prescribed frequency of physical verification of securities given against loans & advances
   4.15	Drawing power limits are not revised as per market value of shares for advances against security of shares
   4.16	End–use of funds not ensured/not known funds utilised for purpose other than for which granted
   4.17	The projections submitted by the borrower stay far beyond the actual performance. Further, no explanation for the same is taken from the borrower
   4.18	Major sale proceeds of the borrower not routed through the Bank
   4.19	Audited statements of non–corporate borrowers having limit beyond Rs.10 lakh not received
   4.20	Renewal proposals of advances not received on time and in many cases the limits are not renewed
   4.21	Application of wrong rate of interest, processing charges, commission, other charges, etc resulting in income leakage/excess booking of interest of the Bank
   4.22	Insurance cover for stock/property is inadequate/not on record/not renewed/not endorsed in favour of the Bank
   4.23	Inspection/physical verification of security charged, not been carried out
   4.24	Expired bills/foreign currency sight bills which are outstanding, have not been crystallized
   4.25	EBW statements on write–off of overdue export bills of ECM not found on record
   4.26	Confirmation as to genuineness of export transactions not obtained from Bank’s foreign offices/correspondents/customs department
   4.27	Import credit, bill of entry evidencing import of goods not found
   4.28	Documents are not obtained for bills discounted under Letter of Credit
   4.29	Advances eligible for whole turnover packing credit guarantee cover of ECGC, are not brought under its cover
   4.30	Though government guaranteed accounts are irregular since long, the issue of invocation of guarantee does not seem to have been considered
   4.31	Prescribed margins not maintained as per sanctions
   4.32	Allocated limits, full terms of sanctions, stock statements, inspection reports, margin, etc. not available at monitoring branches
   4.33	For allocated limits, inordinate delays were noticed in responding to transfer by the allocator branch
   4.34	Regular meetings not held with other consortium members to review the performance of borrowers and to assess the current state of affairs/not been held as per norms
   4.35	Individual members of consortium are not advised about quarterly operating limits/D. P. allocated to each of them
   4.36	Minutes of the consortium meetings not found on record/not been held as per norms
   4.37	Inspection report from the consortium members not obtained
   4.38	The capital of the borrower has eroded/networth is negative/decreasing. Close monitoring needs to be done
   4.39	Drawing power is calculated wrongly and/or hence borrower allowed to enjoy excess credit than actually eligible
   4.40	Signboard of the bank is not displayed in godown, where the pledged/hypothecated stock is stored
   4.41	Limit not fully utilised by borrower/No commitment charge is levied for limit not fully utilised by the borrower
   4.42	Loan against TDR/STDR, which is matured, is neither renewed nor credited to loan account
   4.43	The Stock and Debtors Audit Report not found on record. No audit has been done for accounts of the borrower
   4.44	The valuation report in respect of tangible security from government approved valuer have not been obtained
   4.45	Guarantees, Opinion Reports Financial statements, IT assessment orders and etc. of guarantor not found on record
   4.46	Opinion report on guarantor is not obtained
   4.47	For Small Government Sponsored loan accounts, security cover could not be ascertained since neither any record was available at branch nor physical verification conducted by the branch
   4.48	Pre–sanctions and/or post–sanctions inspection reports were not on record
   4.49	The account was overdue for repayment and/or no credit was received from the borrower for a long time
   4.50	The borrower is absconding or deceased and legal formalities are incomplete and there is wilful default from the borrower. Either establishment was closed or security was disposed of or no action taken by the branch
   4.51	Subsidy claim process was incomplete or subsidy was yet to be received or needs follow–up
   4.52	Security disposed of/Entity closed by borrower and no action taken by the branch
   4.53	Irregularity not advised to controllers
   4.54	Letter of subordination of deposits not taken
   4.55	Secured and unsecured portion not segregated properly in advance return of the branch
   4.56	Renewal of limits was done before the receipt of financial statements
   4.57	Heavy cash withdrawal for which consent of corporate guarantor is not taken
   4.58	Proper valuation of stock not done/needs critical scrutiny
   4.59	Security obtained is inadequate/lower as compared to amount of outstanding/no collateral security
   4.60	The party was dealing with other bank also though it was not permitted
   4.61	Sticky accounts require close follow–up by the management
   5	Bad and doubtful advances
   5.1	The IRAC norms for classification of advances were not followed and the same is implemented through Memorandum of Changes by auditors during audit
   5.2	Installments were not received from the borrowers
   5.3	Interest was not received from the borrowers
   5.4	Legal action for recovery of advances was not taken although authorised by the Board/Controlling Authority
   5.5	Discontinuance of application of interest not followed although authorised by the Board/Controlling Authority
   5.6	Government guarantees have expired and fresh guarantees not obtained/not renewed
   5.7	Terms of the BIFR scheme not complied
   5.8	Payment from government not received although guarantees were unconditional, irrevocable, payable on demand
   5.90	Delays in the settlement/repayment in respect of sanctioned proposals
   5.10	The repayment accepted in case of compromise cases inadequate vis–à–vis value of security
   5.11	Compromise proposals pending at various levels where guarantors are local government/outside agencies
   5.12	Copy of Search Report not on record
   5.13	Decree awarded but no further steps taken for recovery
   5.14	DI & CGC claims submitted/rejected/pending data not available
   5.15	Irregular/sticky advance not reported to the controlling authority promptly
   5.16	Compromise/OTS proposal is recommended and is under negotiation since long but not finalised. Suit is filed in the court/DRT and pending to be finalized
   5.17	ECGC claim not submitted/lodged for recovery

Source:

https://wirc-icai.org/WIRC_REFERENCER/Acconting%20&%20Auditing/Bank%20Branch%20Statutory%20Audit%20Certain%20Aspects.htm