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Bank Audit Manual by CA. Sanjay K Agarwal Page No.1 * *** *** * BANK AUDIT MANUAL : 0 ::::::: 000 ::::::: 0 : 2015-2016 CA. Sanjay K Agarwal B.Sc., FCS, FCA, CPA(USA) 83 / 8 5, N S Road , S ui t e: 41 7 Kolkata -700 001 Cell: +91 9331023275    +91-33-3291 3756, 2243 1088 Fax: +91-33-2243 1088 E-mail: --- BE HAPPY MAKE HAPPY --- Bank Audit Manual by CA. Sanjay K Agarwal Page No.2 Index of Pages: Particulars Page Nos Key Points 3 Asset Classification & Provisioning – a ready reckoner 4 Income Recognition & Asset Classification Norms - at a Glance 5-6 Important Points 7-10 Asset Classification – at a Glance 11-12 Important Audit Checks 13-15 Draft Management Representation Letter 16-18 Format of Letter to Branch 19-22 Checklist for Audit of Advances accounts 23-25 Checklist for Audit of LFAR 26-31 Remuneration to Auditors 32-34 Overall Audit Plan- Audit Programme 35-36 Format of Certificate from Bank Branch 36 Audit Program for Branch Audit of a Bank 37 Other Charts / Formats (including Audit Report Format) which may be used during Audit 38-42 Prudential Guidelines on Restructuring of Advances by Banks 43-47 Bank Audit Manual by CA. Sanjay K Agarwal Page No.3 KEY POINTS  Break Even Date for NPA is 02.01.2016 for the year 2015-2016  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 Agricul tural Credit Societies (PACS)/Farmers Service Societies (FSS).  Overdue period starts immediately on expiry of due date, concept of ‘past due’ has already been dispensed with in past years.  Stock statements older than 3 months should not be considered  Interest on advances (accrued and outstanding) shou ld be calculated as on 31st March (few banks charges interest on advances few days prior to 31 st March which should not be considered)  Long outstanding entries (unexplainable and where t here is no movement at all) in suspense account should be suggested for provisioning.  ‘NIL’ MOC Certificate should be issued even if ther e is no MOC  MOC should also be countersigned by Branch Manager (views of the BM if any has to be attached on a separate sheet duly signed by him)  Submit all the REPORTS including TAX AUDIT REPORTS & LFAR immediately on completion of Audit and before leaving the branch  Make a columnar list of documents to be submitted t o branch/regional/zonal/other office before commencement of Audit. (it is advisable to get all documents in your custod y duly signed b y the Branch Manger at the beginning of Audit)  Must get CERTIFICATE OF ATTENDENCE signed b y Branch Manager in duplicate before leaving the branch  Availability of security or net worth of borrower/g uarantor should not be considered for the purpose of NPA recognition – it should always be ba sed on recovery  100% provision is required for assets which has bec ome doubtful for more than 3 years i.e. NPA date on or before 31.03.2012.  To specifically report simultaneously to the CEO of the bank (and Audit Committee or Board as per the requirement of the Companies Act, 2013) and regional office of the Dept of Banking Supervision RBI where the HO of the bank is situate d, any matter susceptible to be fraud or fraudulent activity or an y foul play in any transac tions. Any deliberate failure on part of the Auditors should render himself liable for action. I f amount of fraud involve Rs 1 Crore or more – central office of the Dept of Banking Supervision, RBI, Mumbai (and Central Govt in Form ADT-4 as per the requirements of section 143(12) of the Companies Act, 2013 and Rules thereon) to be reported immediately. Bank Audit Manual by CA. Sanjay K Agarwal Page No.4 Asset Classification & Provisioning as on 31.03.201 6 – A Ready Reckoner Quarter of NPA ASSET CLASSIFICATION Provision for 2015-2016 Year Quarter March 2012 March 2013 March 2014 March 2015 March 2016 2 0 1 2 Mar SST D1 D2 D2 D3 100 % of outstanding for all NPAs on or before 31.03.2012, irrespective of securities available Jun SST D1 D2 D2 40 % of Secured portion of outstanding and 100% of Unsecured portion of outstanding for NPAs from 01.04.2012 to 31.03.2014 Sep SST D1 D2 D2 Dec SST D1 D2 D2 2 0 1 3 Mar SST D1 D2 D2 Jun SST D1 D2 Sep SST D1 D2 Dec SST D1 D2 2 0 1 4 Mar SST D1 D2 Jun SST D1 25 % of Secured portion of outstanding and 100% of Unsecured portion of outstanding for NPAs from 01.04.2014 to 31.03.2015 Sep SST D1 Dec SST D1 2 0 1 5 Mar SST D1 Jun SST General – 15% of outstanding (25% of outstanding if ab-initio unsecured) for NPAs on or after 01.04.2015 Sep SST Dec SST 2016 Mar SST Bank Audit Manual by CA. Sanjay K Agarwal Page No.5 INCOME RECOGNITION AND ASSET CLASSIFICATION NORMS - AT A GLANCE 1. An asset, including a leased asset, becomes non per forming when i t ceases to generate income for the bank. 2. Banks should, classify an account as NPA only if th e interest due and charged during any quarter is not servi ced full y within 90 days from the end o f the quarter. 3. FACILITY WISE CHART: Credit Facility Basis for treating a Credit Facility as NPA Remarks Term loans Interest and/or instalment of principal remain overdue for a period of more than 90 days. Agricultural Advances : Position upto 29 th Sept 2004: In respect of advances granted for agricultural purposes where interest and/or instalment of princi pal remai ns overdue for a period of more than two harvest seasons but for a period not exceeding two half years, the advance should be treated as NPA. Position wef 30 th Sept 2004 : A loan granted for short duration crops will be treated as NPA, if the instal ment of princi ple or interest remain overdue for two crop season and a loan granted for long duration crops will be treated as NPA, if the instal ment of princi ple or interest remain overdue for one crop season Long duration crops means crops with crop season longer than one year Short duration crops are those other than long duration crops Overdue : An amount due to the bank under any credit facility i s ‘Overdue’ if i t is not paid on the due date fixed by the bank. Crop Season : The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State. Cash Credits and Overdrafts The account remains continuously “out of order” for a period of more than 90 days; 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 as on the date of Bal ance Sheet or credi ts are not enough to cover the interest debited during the same period. Banks may not classify an account merely due to exi stence of some deficiencies, which are of temporary nature such as non-availability of adequate drawing power, bal ance outstanding exceeding the li mi t, non-submission of stock statements and non-renewal of the li mi ts on the due date, etc. However, generall y stock statements older than three months would be deemed irregular and the working capital borrowal account will become NPA i f such irregular drawings are permitted in the account for a continuous period of 90 days even though the uni t may be working or the borrower’s financial posi tion is satisfactory. Regular and ad hoc credit limits need to be reviewed/ regularised not later than three Bank Audit Manual by CA. Sanjay K Agarwal Page No.6 months from the due date/date of ad hoc sanction. In case of constraints such as non- availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, 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 will be treated as NPA. Bills Purchased and Discounted The bills purchased/discounted remains overdue for a period of more than 90 days. Overdue interest should not be charged and taken to i ncome account in respect of overdue bills unless it i s realised. Securitisation Transaction The amount of liquidity facility remains outstanding for more than 90 days Securi tisation Transacti on undertaken in terms of guidelines dated 01.02.2006. Derivative Transactions the overdue receivables representing posi tive mark-to-market value of a derivative contract, if these remain unpai d for a period of 90 days from the specified due date for payment. Other Accounts Any amount to be received i n respect of that facili ty remains overdue for a period of more than 90 days. Government guaranteed advances As on 31.03.2016, State government guaranteed advances and investment in State government guaranteed Securiti es would attract asset classification and provi si oning norms if interest and/or princi ple or any other amount due to the bank remains overdue for more than 90 days. The credit facilities backed by gu arantee of Central government though overdue may be treated as NPA only when the government repudi ates i ts guarantee wh en invoked. However, income shall not be recognised if the interest or instalment has remai ned overdue or the account has remai ned continuously out of order or the bills or any other facility has remained overdue for a period of more than 90 days. Bank Audit Manual by CA. Sanjay K Agarwal Page No.7 Important Points Key Words Particulars Exclusion Undernoted categories of advances should be exclude d, as NPA norms are not normally applicable to them:  Advances granted on or afte r 02.01.2016;  All staff loans sanctioned under various staff loan schemes including housing loans;  Project Finance (within Moratorium), Education Loan , Agriculture Loan etc. wherein moratorium period is not complete d and interest/installment have not fallen due;  Advances against Banks deposits, NSC, IVP, KVP and LIP etc provided adequate margin is available to cover the unrealized interest;  Relief granted to the Agricultural borrowers affect ed by natural calamities in the form of conversion of short term loan or re- schedulement of term loan;  Credit facilities backed by Central Govt Guaranteed (if not repudiated) ;  Restructured accounts under Standard category;  Credit facilities backed by State Govt. Guarantees where the default does not exceed 90 days as on 31.03.2016;  All Standard and Regular Advances. All Facilities Once an account has been classified as NPA, all the facilities granted by a bank to a borrower and investment in all the securi ties issued by the borrower will have to be treated as NPA/NPI except in respect of advances granted under on-landing facility to Primary Agricu ltural Credit Societies (PACS)/Farmers Service Societies (FSS). Also, in re spect of additional facilities sanctioned as per package finalised by B IFR and/or term lending institutions, provision may be made after a period of one year from the date of disbursement in respect of additional facil ities sanctioned under the rehabilitation package. The original facilities granted would however continue to be classified as sub-standard/doubtful, as the case may be Adequate Margin Interest on advances against term deposits, NSCs, I VPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Advan ces against gold ornaments, government securities and all other secu rities are not covered by this exemption. Reversal of Income Till the time the account is identified as NPA, inc ome is recognised irrespective of whether realised or not. Where an a ccount is identified as NPA during the year, unrealised income should not b e recognised for the year. Banks should reverse the interest already cha rged and not collected by debiting Profit and Loss account, and stop furth er application of interest. However, banks may continue to record suc h accrued interest in a Memorandum account in their books. For the purpos e of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account. This will apply to Government guaranteed Bank Audit Manual by CA. Sanjay K Agarwal Page No.8 accounts also. In respect of NPAs, fees, commission and similar in come that have accrued should cease to accrue in the current perio d and should be reversed with respect to past periods, if uncollect ed. Leased Assets The finance charge component of finance income [as defined in ‘AS 19 Leases’ issued by the Council of the Institute of C hartered Accountants of India (ICAI)] on the leased asset which has accrued and was credited to income account before the asset became nonperformin g, and remaining unrealised, should be reversed or provided for in t he current accounting period. Regularised before balance sheet date The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data availabl e, the account should be deemed as a NPA. In other genuine cases, the ban ks must furnish satisfactory evidence to the Statutory Auditors/Ins pecting Officers about the manner of regularisation of the account to elim inate doubts on their performing status. Upgradation of loan accounts classified as NPAs If arrears of interest and principal are paid by th e borrower in the case of loan accounts classified as NPAs, the account shoul d no longer be treated as non-performing and may be classified as ‘standar d’ accounts. With regard to upgradation of a restructured/ reschedule d account which is classified as NPA contents please check master circ ular of RBI at the end of this booklet. Fees and commissions (re- negotiations) Fees and commissions earned by the banks as a resul t of re-negotiations or rescheduling of outstanding debts should be reco gnized on an accrual basis over the period of time covered by the re-neg otiated or rescheduled extension of credit. LOC or guarantees If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the ba lance outstanding in that account also should be treated as a part of th e borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provis ioning. Appropriation of recovery in NPAs Interest realised on NPAs may be taken to income ac count provided the credits in the accounts towards interest are not ou t of fresh/ additional credit facilities sanctioned to the borrower concer ned. In the absence of a clear agreement between the ban k and the borrower for the purpose of appropriation of recoveries in N PAs (i.e. towards principal or interest due), banks should adopt an a ccounting principle and exercise the right of appropriation of recoveries i n a uniform and consistent manner. Income recognition Income on NPA accounts to be recognized on realisat ion basis (conservative approach). However, banks may recogni se income on accrual basis in respect of the projects under impl ementation, which are classified as ‘standard’. Funded Interest: Income recognition in respect of the NPAs, regardless of whether these are or are no t subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, Bank Audit Manual by CA. Sanjay K Agarwal Page No.9 should be done strictly on cash basis, only on real isation and not if the amount of interest overdue has been funded. If, how ever, the amount of funded interest is recognised as income, a provisio n for an equal amount should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognised as incom e, should be fully provided for. Loans with moratorium for payment of interest i. In the case of bank finance given for industrial p rojects or for agricultural plantations etc. where moratorium is a vailable for payment of interest, payment of interest becomes 'due' only af ter the moratorium or gestation period is over. Therefore, such amounts o f interest do not become overdue and hence do not become NPA, with re ference to the date of debit of interest. They become overdue afte r due date for payment of interest, if uncollected. ii. In the case of housing loan or similar advances gra nted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first qu arter onwards. Such loans/advances should be classified as NPA only whe n there is a default in repayment of instalment of principal or payment of interest on the respective due dates. Credit Card Accounts In credit card accounts, the amount spent is billed to the card users through a monthly statement with a definite due dat e for repayment. Banks give an option to the card users to pay eithe r the full amount or a fraction of it, i.e., minimum amount due, on the du e date and roll-over the balance amount to the subsequent months’ billin g cycle. A credit card account will be treated as non-perfor ming asset if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the next statement date. The ga p between two statements should not be more than a month. Banks should follow this uniform method of determin ing over-due status for credit card accounts while reporting to credit information companies and for the purpose of levying of penal charges, vi z. late payment charges, etc., if any. Signs of Stress SMA-0 Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress SMA-1 Principal or interest payment overdue between 31-60 days SMA-2 Principal or interest payment overdue between 61-90 days Illustrative list of signs of stress for categorisi ng an account as SMA-0 1. Delay of 90 days or more in (a) submission of stock statement / other stipulate d operating control statements or (b) credit monitoring or financial st atements or (c) Non- renewal of facilities based on audited financials. 2. Actual sales / operating profits falling short o f projections accepted for loan sanction by 40% or more; or a single event of non-cooperation / prevention from conduct of stock audits by banks; o r reduction of Drawing Power (DP) by 20% or more after a stock audit; or e vidence of diversion of funds for unapproved purpose; or drop in interna l risk rating by 2 or more notches in a single review. 3. Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of non-availability of balance/DP in the Bank Audit Manual by CA. Sanjay K Agarwal Page No.10 account or return of 3 or more bills / cheques disc ounted or sent under collection by the borrower. 4. Devolvement of Deferred Payment Guarantee (DPG) instalments or Letters of Credit (LCs) or invocation of Bank Guara ntees (BGs) and its non-payment within 30 days. 5.Third request for extension of time either for cr eation or perfection of securities as against time specified in original sa nction terms or for compliance with any other terms and conditions of s anction. 6. Increase in frequency of overdrafts in current a ccounts. 7. The borrower reporting stress in the business an d financials. 8. Promoter(s) pledging/selling their shares in the borrower company due to financial stress. Wilful Defaulters The provisioning in respect of existing loans/expos ures of banks to companies having director/s (other than nominee dir ectors of government/financial institutions brought on board at the time of distress), whose name/s appear more than once in th e list of wilful defaulters will be 5% in cases of standard accounts ; if such account is classified as NPA, it will attract accelerated prov isioning. This is a prudential measure since the expected losses on exp osures to such borrowers are likely to be higher. It is reiterated that no additional facilities should be granted by any bank/FI to the listed wilful defaulters, in terms of paragraph 2.5 (a) of Master Circular of RBI on Wilful Defaulters dated July 1, 2014. With a view to discouraging borrowers/defaulters fr om being unreasonable and non-cooperative with lenders in th eir bonafide resolution/recovery efforts, banks may classify suc h borrowers as non- cooperative borrowers, after giving them due notice if satisfactory clarifications are not furnished. Banks will be req uired to report classification of such borrowers to CRILC. Further, If any particular entity reported as non-cooperative, any fresh exposure to such a borrower will by implication entail greater risk necessitating hi gher provisioning. Banks/FIs will therefore be required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers as also new loans sanctioned to any other company that has on its board of directors any of the whole time directors/promoters of a non-cooperative borrowing company or any firm in which such a non- cooperative borrower is in charge of management of the affairs. However, for the purpose of asset classification and income recognition, the new loans would be treated as standard assets. This is a prudential measure since the expected losses on exposures to such non- cooperative borrowers are likely to be higher. Bank Audit Manual by CA. Sanjay K Agarwal Page No.11 ASSET CLASSIFICATION — AT A GLANCE Category Conditions to be satisfied Provision amount Remarks Standard Assets Does not disclose any problem and which does not carry any more than normal ri sks attached to busi ness Agriculture/SME Adv – 0.25% Commercial Real Estate ( CRE) - 1% CRE-Residential Housing Sector – 0.75% HL (teaser rate period) – 2% Other Loan & Advances – 0.4% [ Special rates for restructured advances as mentioned in remarks column] Such an asset is not a NPA. [Provision requirement in case of Restructured account from Standard – 4.25% for 2014- 15 ( for two years from restructuring /moratorium date), Restructured (upgraded from NPA to Standard) – as prescribed from ti me to time ( for one year from the date of upgradation)] Sub- Standard Assets Classified as NPA for a period not exceeding Twelve months. Such an asset will have well defined credit weaknesses that jeopardi se the liquidation of the debt and are characteri sed by the distinct possi bility that the banks will sustain some loss, if deficiencies are not corrected. Classification of an asset should not be upgraded merel y as a result of rescheduling, unless there is sati sfactory compliance of the required conditions at l east for one year.  A general provision of 15% on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available .  Additional provision of 10% on unsecured exposure. Unsecured Exposure means exposure where realizable value of security is not more than 10%, ab-initio, of the outstanding exposure. 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 classi fy them as sub-standard and then as doubtful after expiry of 12 mths from the date the account has become sub-standard. Such accounts should be straightaway classi fied as doubtful or loss asset, as appropriate, irrespective of the period for which it has remained as NPA. a. Erosion in the value of security can be reckoned as significant when 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. Such NPAs may be straightaway classified under doubtful category. b. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. Bank Audit Manual by CA. Sanjay K Agarwal Page No.12 Doubtful Assets Remained Substandard for a peri od of Twelve months. 100% to the extent to which the advances are not covered by the realisable value of the security to which the bank has a valid recourse and the realizable value is esti mated on realistic basi s. Over and above the aforesaid, depending upon the period for whi ch the asset h as remained doubtful, provision on the secured portion to be made on the following basis: 1. Up to 1 year 25% 2. 1 to 3 years 40% 3. Over 3 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. Stock Audit required in cases involving NPAs balances above 5 Crores. Valuation of Security to be done every three years. Loss Assets Loss asset is one where loss has been identified by the bank, external or internal auditors or the RBI inspection, but the amount has not been wri tten off (wholly/partl y). 100% of the outstanding should be provided for/wri tten off. Such an asset is considered uncollecti ble and of such littl e value that its continuance as a bankabl e asset i s not warranted although there may be some sal vage or recoverable value. Bank Audit Manual by CA. Sanjay K Agarwal Page No.13 IMPORTANT AUDIT CHECKS Deposit (Term/Saving /Current /FCNR/NRE/NRNR)  Verify transactions during the year relating to: New Accounts opened; Accounts closed; Dormant Accounts; Interest calculations; Scrutiny o f account statements for unusual /l arge/overdraft transacti ons; Overdue Term deposits & its policies and practi ces of renewal ; Accrual of interest; RBI Norms for Non-res ident deposits & its operations - giving due i mportance to opening and operation of accounts lik e NRE, NRNR, FCNR, RFC, etc.; interest on various types of deposits; Tax Deducted at Source.  Large deposits placed at the end of the year ( probable window dressing).  Examine unusual trend in account opening or account closing, dormant accounts that have suddenl y been reactivated by heavy cash wi thdrawals or deposits, overdrawi ngs, etc.  Examine interest trends as compared to average annu al deposi ts (monthl y average fi gures). ADVANCES  Review monitoring reports (irregularity reports) se nt by the branch to the controlling authorities in respect of irregular advances.  Review appraisal system, Files of large as well as critical borrowers, sanctions, disbursement, renewal s, documentation, systems, securiti es, etc.  Review on test check basis operations in the Advanc es Accounts.  Compli ance of sanction terms and conditions in the case of new advances.  Whether the borrower is regular in submission of st ock statements, book debt statements, insurance policies, bal ance sheets, half yearly res ults, etc. and whether penal interest i s charged in case of default/delay in submission of such data.  Charge of interest and recovery for each quarter or as applicable to be veri fied.  Review th e monitoring system, i.e. moni toring end u se of funds, analyti cal system prevalent for the advances, cash fl ow monitoring, branch follow-u p, consortium meeti ngs, inspection reports, stock audi t reports, market intelligence (industry an alysis), securiti es updation, etc.  Check classification of advances, i ncome recognitio n and provisioning as per RBI Norms/Circulars.  Examine interest trends as compared to average annu al advances (monthly average figures).  Scrutini ze the final advances statements with regar d to assets classifi cation, security value, documentation, drawing power, outstandings, provisi ons, etc.  Check whether Non-Fund based (Letter of Credits/Ban k Guarantees) exposure of the borrowers is wi thin the sancti oned limits.  Compare projected financial figures given at the ti me of project appraisal with actual figures from audited financial statements for relevant period and ascertain reasons for larg e variance. Profit & Loss Account  Income/Expenditure: Verify:  Short debit of interest/commission on advances;  Excess credi t of interest on deposits;  In case the di screpancies are existing in large num ber of cases, the auditor should consider the impact of the same on the accounts;  Determine whether the di screpancies noticed are int entional or by error;  Check whether the recurrence of such discrepanci es are general or in respect of some specific clients;  Proper authority in sanction and di sbursement of ex penses as also the correctness of the accounting treatment gi ven as to revenue/capital /de ferred expenses.  Check accrual of income/expenditure especi all y for the last month of the financial year.  Divergent Trends :  Divergent trends i n income/expenditure of the curre nt year may be analysed wi th the figures of the previous year.  Wherever a divergent trend is observed, obtai n an e xplanation along with supporti ng evidences like monthly average figures, composition of the in come/expenditure, etc. Bank Audit Manual by CA. Sanjay K Agarwal Page No.14 Balance Sheet Cash & bank balances  Physically verify the cash balance/ATM cash balance as on March 31, 2016 or reconcile the cash balance from the date of verification to March 31, 2016.  Confi rm and reconcile the balances with banks as on March 31, 2016. Investments  Physically verify the investments hel d by the branc h on behalf of Head Office and issue certificate of physical verification of investments to bank’s Investments Department.  Check recei pt of interest and its subsequent credi t to be given to Head Offi ce. Advances provisioning  As per RBI norms, unreali sed i nterest on NPA accoun ts should be reversed and not charged to “Advance Accounts”. Reversal of unrealised interest of previous years in case of NPA accounts is requi red to be checked.  Partial recovery in respect of NPA accounts should be generally appropriated against principal amount in respect of doubtful assets. Fixed assets Check inter-branch transfer memos rel ating to fixed assets and whether they have been correctl y classifi ed in the accounts and depreciation account ing thereof. Inter Branch Reconciliation (IBR)  Understand the IBR system and accordingly prepare a n audit plan to review the IBR transactions. The large volume of Inter Branch Tran sactions and the large number of unreconciled entries in the banking system makes th e area fraud-prone.  Check up head office inward communi cation to branch to ascertain date up to which statements relating to inter-branch reconciliation have been s ent. Check and report  Reversal of any large/old/unexplained entries, whic h had remained outstanding in IBR.  Items of revenue nature, cash-in-transit (for examp l e, cash meant for deposi t into currency chest) which remains pending for more than a reason abl e period.  Doubl e responses to the entri es in the accounts.  Test check accuracy and correctness of “Dail y state ments” which are prepared by the branch and sent to IOR department. The auditor should dul y consider the extent of non- reconciliation in forming his opinion on the financial statements. Wh ere th e amounts involved are material , the auditor should sui tably qualify his audit report. Attention is drawn on the paper on “Certain Signifi cant Aspect of Statutory Audit of banks” issued by the Council of ICAI in March 1994, publis hed in the C. A. journal. Further, vi de its circular No. BP.BC.22/21.04.018/9 9 dated March 24, 1999, the Reserve Bank of Indi a (RBI) advised the banks to maintain category-wise ( head-wise) accounts for various types of transactions put through inter-branch accounts so t hat the netting can be done category-wise. Further, RBI advised banks to make 100 percent provision (ca tegory-wise) for net debit position in their inter- branch accounts ari sing out of the unreconciled ent ries, both debit and credi t, outstanding for more than two years. Bank Audit Manual by CA. Sanjay K Agarwal Page No.15 Suspense accounts, sundry deposits, etc. Suspense accounts are adjustment accounts in which certain debit transactions are temporarily posted whose authorisation is pending for approval. Sundry Deposit accounts are adjustment accounts in which certain credit transactions are temporaril y posted whose authorisation is pending for approval . As and when the transactions are dul y authorised by the concerned offi ci als they are posted to th e respective accounts and the Suspense account/Sundry Deposi t account i s credi ted/debited respectively.  Ask for and analyse thei r year-wise break-up.  Check the nature of entries parked in such Accounts .  Check any movement in such old bal ances and whether the same is genuine and has been properly authori sed 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 Audi tors Report should be a self contained docu ment and should contain no reference of any point made in any other report including the LF AR;  Include Audit Qualifications in the Auditors Report and not in the LFAR;  Quanti fy the Audit Quali fications for a better appr eciation of the point made to the reader;  For suggesting any changes in the financial stateme nts of the branch, quanti fy the same in the Memorandum of Changes (MOC) and make it a subject m atter of qualification and annexe it to the Auditors Report. Summary of Memorandum of Chang es (MOC) is required to be given in Auditors Report as per revised format as issued by ICAI. Long Form Audit Report (LFAR)  Study the LFAR Questi onnaire thoroughly;  Plan the LFAR work along with the statutory audit r i ght from day one;  The LFAR questionnaire i s a useful tool for pl annin g the statutory audi t of a bank’s branch;  Complete and submit the Auditors Audit Report as we ll as the LFAR simultaneously;  Be speci fic while repl ying the LFAR;  Give instances of shortcomings/weaknesses existing in the respecti ve areas of the branch functioning in the LFAR;  Advances check-list for giving list of accounts wit h adverse features;  The LFAR should be sufficiently detailed and quanti fi ed so that they can be expeditiously consolidated by the bank. System  Revi ew off-site backup and dail y backup procedure of Bank  Exception reports viz. password errors, limit verif icati on, irregul ar advances  Custodi an of pass word and unauthorized access of p assword, computer room  Periodical report to controlling authori ty on funct ioning of computerised system and compliance of controlling authori ty instructions in this respe ct General  Send a l etter of your requi rements to the branch be fore commencing the audit.  Obtain the latest status of cases invol ving fraud, vigilance and matters under investigation having effect on the accounts and its reporting req uirement.  Obtain a Management Representati on Letter (MRL)  Obtain a certificate from Branch-in-charge on speci fic issues (format as per page 33 ) Bank Audit Manual by CA. Sanjay K Agarwal Page No.16 Draft of Management Representation Letter to be obt ained from the Branch Management Date: ____________ M/s. XYZ & Co. Chartered Accountants Mumbai Dear Sirs, Sub.: Audi t for the period ended 31-3-2016 This representation letter i s provided in connectio n wi th your audit of the financial statements of _____________ branch of _______________ BANK for the period ended 31-3-2016 for the purpose of expressi ng an opinion as to whether the financial s tatements give a true and fair vi ew of the financial position of ___________ branch of _______________ BANK as of 31-3-2016 and of the results of operations for the period then ended. We acknowledg e our responsibility for preparation of financial statements in accordan ce with the requirements of t he Reserve Bank of Indi a and recognised accounti ng policies and practi ces, incl uding the Ac counting and Auditing Standards i ssued by the Institute of Chartered Accountants of India. We confirm, to the best of our knowl edge and belief , the following representations: ACCOUNTING POLICIES 1. The accounti ng policies, which are material or crit ical in determining the results of operati ons for the period or financial position are set out in the financi al statements and are consi stent wi th those adopted in the financial statements for the p revious peri od. The financi al statements are prepared on accrual basis except as stated otherwis e in the financial statements. ASSETS 2. The branch has a satisfactory title to all assets a nd there are no liens or encumbrances on the company's assets. FIXED ASSETS 3. The net book values at whi ch fixed assets are state d in the balance sheet are arrived at: . after taking into account all capital expenditure o n addi tions thereto, but no expenditure properly chargeable to revenue; a. after eliminating the cost and accumulated deprecia tion relati ng to items sold, discarded, demolished or destroyed; b. after provi ding adequate depreci ation on fixed asse ts during the period. CAPITAL COMMITMENTS 4. At the bal ance sheet date, there were no outstandin g commitments for capital expenditure excepting those discl osed in Note No. ___ to the fi nanci al statements. INVESTMENTS 5. The current investments as appeari ng in the balance sh eet consist of onl y such investments as are by their nature readil y reali sabl e and intended to be held for not more than one year from the respective dates on which they were made. All o ther investments have been shown in the balance sheet as `long-term investments'. Bank Audit Manual by CA. Sanjay K Agarwal Page No.17 6. Current investments h ave been valued at the lower o f cost or fair value. Long-term investments have been valued at cost, except that any permanent di mi nution in their value has been provi ded for in ascertaining their carrying amount. 7. In respect of offers of ri ght i ssues received durin g the year, the rights have been ei ther been subscribed to, or renunci ated, or allowed to lapse. In no case have they been renunciated in favour of third parties wi thout considerati on which has been properly accounted for in the books of account. 8. All the investments produced to you for physical ve rification belong to the entity and they do not include any investments held on behal f of any o ther person. 9. The entity has cl ear titl e to all its investments i ncluding such investments whi ch are in the process of being registered i n the name of the enti ty or which are not held in the name of the entity. There are no charges against the investment s of the entity except those appearing in the records of the entity. LOANS AND ADVANCES 10. The following items appearing in the books as at 31 st March, 2016 are consi dered good and fully recoverable wi th the exception of those speci fi call y shown as "doubtful " in the Balance Sheet: Loans and Advances Rs. OTHER CURRENT ASSETS 11. In the opinion of the Board of Directors, other cur rent assets have a value on realizati on in the ordinary course of the company's business, which i s atleast equal to the amount at whi ch they are stated in the bal ance sheet. CASH & BANK BALANCES 12. The cash balance as on 31st March, 2016 is Rs._____ _. The bank balances as on ________________ is as unde r: __________________ Bank Rs.______________ __________________ Bank Rs.______________ __________________ Bank Rs.______________ LIABILITIES 13. We have recorded all known liabilities in the finan cial statements. 14. We have disclosed in notes to the financi al stateme nts all guarantees th at we have given to third parties and all other contingent liabiliti es. 15. Contingent liabilities disclosed in the notes to th e financial statements do not include any contingenci es, which are li kely to resul t i n a loss and which, therefore, require adjustment of assets or liabiliti es. PROVISIONS FOR CLAIMS AND LOSSES 16. Provision has been made in the accounts for all kno wn losses and claims of material amounts. 17. There have been no events subsequent to the balance sheet date, which require adjustment of, or disclosure in, the financial statements or notes thereto. PROFIT AND LOSS ACCOUNT 18. Except as disclosed in the financial statements, th e results for the peri od were not materiall y affected by: . Transactions of a nature not usually undertaken by the bank; a. Circumstances of an excepti onal or non-recurring na ture; b. Charges or credits relating to prior years; c. Changes i n accounting policies. GENERAL Bank Audit Manual by CA. Sanjay K Agarwal Page No.18 19. The following have been properl y recorded and, when appropriate, adequatel y disclosed in the financial statements: . Losses ari si ng from sale and purchase commitments. a. Agreements and options to buy back assets previousl y sold. b. Assets pledged as collateral. 20. There have been no irregul ariti es involving managem ent or empl oyees who have a significant rol e in the system of internal control that could h ave a material effect on the financial statements. 21. The financial statements are free of material misst atements, including omissions. 22. The company has complied with all aspects of contra ctual agreements that coul d have a material effect on the financial statements in the event of non-compliance. There has been no non-compliance with requirements of regularity auth ori ties that could have a materi al effect on the financial statements in the event of non-compli ance. 23. We have no pl ans or intentions that may materiall y affect th e carrying value or classi fication of assets and liabilities reflected in the financial s tatements. 24. The branch has not received any notice, show cause, i nspection advice, etc. from Government of India, Reserve Bank of India or any other monito ring authority of India that could have a material effect on the financial statements. For & on behalf of ___________ branch of _______________ Bank Authorised Signatory Bank Audit Manual by CA. Sanjay K Agarwal Page No.19 Draft Letter of Requirements to be sent to the Bran ch April 1, 2016 The Branch Manager _____________ Bank _____________ Branch Mumbai Dear Sir : Sub.: Statutory Audit of your branch for the year 2015-20 16 As you are aware, we have been appointed as the Sta tutory Auditor to report on the accounts of your Branch for the year 2015-2016. Our Tentative Program for Branch Visit is as below: ……………………………………………………………………………………………….. In order to en able us to finali se the audi t program me and furnish our report on the audit of the accounts for the year 2015-2016 of your branch, may we request you to keep ready th e information/clarifi cation as stated below and make the same available to our audit team at the earliest. a. Latest Reports The following l atest reports on the accounts of yo ur bank, and compliance by the bank on the observati ons contained therein may be kept ready for our perusal: a. Latest RBI Inspection Report; b. Internal/Concurrent Audi t Reports; c. Previous Statutory Audit Report d. Head Office Inspecti on Reports; e. Internal Inspection Reports; f. Revenue Audi t Report (if any); g. Income and Expenditure Control Report (if any); h. Report on any other Inspection/Audit that may have been conducted during the course of the year relevant to the financial year 2015-201 6. b. Circulars in connection with accounts Please let us have a copy of the Head Office circul ars/instructions in connection with the closing of your accounts for the year, to the extent not co mmunicated to us or incorporated in our letter of appointment. c. Accounting policies Ki ndl y confirm whether, as compared to the earlier year, there are any ch anges in the accounti ng policies during the year under audi t. If so, please let us have a list and a copy of the accounti ng policy/i es amended by the bank during the year covered by the current audit and co mpute the financial effect thereof to enable us to verify the same. Bank Audit Manual by CA. Sanjay K Agarwal Page No.20 d. Balancing of books Ki ndl y confirm the present status of balancing of t he subsidiary records with the relevant control accounts. In case of differences between balances i n the control and subsidiary records, please give the details thereof and let us know the effort s bei ng made to reconcil e/balance the same. This informati on may be given head-wise for the rel evant control accounts, i ndi cating the date when the bal ances were last tallied. e. Deposits a. Please let us have the interest rate structure, app licable for the current year, for all the types of deposits accepted by the branch. b. Ki ndl y confirm having transferred Overdue/Matured T erm Deposits to Current Account Deposi t. If not, details/particulars of credit bala nces comprising Overdue/Matured Term Deposi ts as at the year-end which continue to be sh own as Term Deposit, particularl y where the branch does not have any instructions/com munication for renewal of such deposits from the account holder and amount of prov ision of interest made on such overdue/matured term deposits, should be separately marked out and be kept ready for our reference. b. Advances a. Ki ndl y confirm whether in respect of the advances a gainst tangible securities, the branch holds evi dence of existence and latest market value of the relevant securiti es as at the year-end. b. Ki ndl y inform the year-end status of the accounts, particularly those which have been adversely commented upon in the latest repo rts of R BI/Internal Auditors/Concurrent Auditors/Statutory Audi tors, etc. on the branch as also accounts in respect of which provi si ons have been made/recommended as at the pre vious year-end. Information in rel ation to such advances accounts w here provision computed/recommended may please be prepared indicat ing: a. Name of the borrower b. Type of facility c. * Total amount outstanding as at the year-end (both for princi pal and interest) speci fyi ng the date up to which interest has been l evi ed and recovered. d. Particul ars of securiti es and value on the basis of l atest report/statement. e. Nature of defaul t and action taken. f. Brief history and present status of the advance. g. * Provision already made/recommended. h. NPA since when (please specify the date) * Corresponding figures for the previous year-end m ay please be gi ven. c. Ki ndl y confirm whether the borrowers’ account have been categori sed according to the norms applicable for the year into Standard, Sub-st andard, Doubtful or Loss assets, wi th speci al emphasi s on Non-Performing Assets (NPA) and whether such cl assification has also been made appli cabl e by the branch to advances with bal ances of l ess than Rs. 25,000 each. Ki ndl y confirm whether you have examined the accoun ts and applied the norms borrower-wise and not account-wise for categorising the accounts. Pl ease let us have th e particul ars of provisions computed/recommended in r espect of the above during the financial year under audit. d. A list of all advances accounts which have been ide nti fied as bad/doubtful accounts and where pending formal sanction of the higher authori ti es, the relevant amount have not been re-classifi ed/re-categori sed in the book of th e branch for provision/write off. This covers all account identi fied by the branch or inte rnal/external auditor or by RBI inspectors but the amount has not been written-off wholly or partl y. In case the bank has recommended action against the borrowers or for initiati ng legal or Bank Audit Manual by CA. Sanjay K Agarwal Page No.21 other coerci ve action for recovery of dues, a list of such borrowers’ accounts may be furnished to us. e. Please let us have a li st of borrowers’ accounts wh ere classi fication made as at the end of the previous year has been changed to a better c lassifi cation, stating reasons for the same. f. Ki ndl y also confirm whether any income has been adj usted/recorded to revenue, contrary to the norms of income recognition notifie d by the Reserve Bank of India and/or Head Office circulars issued in this regards; and p articularl y where the chances of recovery/reali sability of the income are remote. Ki ndl y also confi rm whether any income has been rec orded on Non-Performing Accounts other than on actual realisation. c. Outstanding in Suspense/Sundry Account Ki ndl y l et us have a year-wise/entry-wise break up of amounts outstanding in Suspense/Sundry accounts as on 31-3-2016. Kindly explain the nature of the amounts in brief. Supporting evidences relating to the existence of such amounts in the aforesai d accounts may be kept ready at the branch for verifi cation. Reasons for n on-adjustment of i tems included in these may be made known. d. Inter-branch/Office Accounts/Head Office Account a. Please let us have a statement of entri es (head-wis e) whi ch originated prior to the year- end at other branches, but were responded during th e period after 31-3-2016 at the branch. b. Date-wise detail s of debits in various sub-heads re lating to Inter-Branch transactions and reasons for outstanding amounts particul arly th ose, which are over 30 days as at the Balance Sheet date. e. Contingent liabilities a. Ki ndl y confirm whether other th an for advances, the re are any matters involving the bank in any claims in litigation, arbitrati on or ot her disputes in which there may be some financial i mplications, including for staff clai m, muni ci pal taxes, local levies etc. If so, these may be listed for our verification, and you m ay confirm whether you have included these as conti ngent liabilities. b. Ki ndl y confirm whether guarantees are being disclos ed net of margi ns, or otherwise as at the year-end, and whether th e expired guarantee wh e re the cl aim year has also expired, continue to be di sclosed in the branch return. Plea se confirm specifi cally. f. Interest provision a. Ki ndl y confirm whether interest provi sion has been made on deposi ts etc. in accordance with the latest instruction of the RBI/interest rat e structure of the bank. A copy of such instructions/rate structure may be made available f or our scrutiny. b. Ki ndl y confirm whether any amount recorded as incom e up to the year-end, which remains unrecovered or not realisable, has been rev ersed from any of the income heads or has been debited to any expenditure head during the financial year. If so, please l et us have details to enable us to verify the same. c. Ki ndl y confirm the accounting treatment as regards reversal, if any of interest/other income recorded up to the previous year-end; and th e amount reversed during the year under audit; i.e., income of earli er years derecogn i sed during the year. g. Foreign currency outstanding transactions a. Ki ndl y confirm whether amount outstanding as at the year-end have been converted as at the year-end rates prescribed by FEDAI. An authe nticated copy of the FEDAI rates applied may be gi ven for our records. b. Ki ndl y confirm the amount of inward value of foreig n currency parcels, if any, which originated prior to the year-end from other banks, but coul d not be recorded as these were in transit and for which entries were made aft er the year end. Bank Audit Manual by CA. Sanjay K Agarwal Page No.22 h. Investment/Stationery For Investment held by the branch: a. These may be produced for physical verifi cation and /or evidence of holding the same be made availabl e. b. Stock of unused security paper stationery/numbered forms like B/Rs, SGL forms, etc. may please be produced for physical verifi cation. c. It may be confirmed whether income accrued/collecte d has been accounted as per the laid down procedure. d. It may be confi rmed whether Investment Valuation ha s been done as per the extant RBI guidelines. i. Long Form Audit Report - Branch response to the Que stionnaire In connecti on with the Long Form Audit Report, plea se let us have complete information as regards each item in the questi onnaire, to enable u s to verify the same for the purpose of our audi t. j. Tax Audit in terms of section 44AB of the Income-ta x Act, 1961 Please let us have the information required for the tax audi t under secti on 44AB of the Income- tax Act, 1961 to enable us to veri fy the same for t he purpose of our report thereon. k. Other certification Please furnish us the duly authenticated informatio n as regards other matters, which as per the letter of appointment require certification. l. Bank reconciliation and confirmations Please let us have the dul y reconcil ed statements f or all Nostro as well as Local bank accounts. A copy of the year-end bal ance confirmation stateme nts shoul d also be called for and kept ready for our review. m. Books of account and records Ki ndl y keep ready all the books of accounts an d oth er records like vouchers, documents, fi xed assets register, etc. for our verifi cation. We shall appreciate your kind co-operation in the m atter. Thanking you, Yours truly, Chartered Accountants Bank Audit Manual by CA. Sanjay K Agarwal Page No.23 Check-list for Audit of Advance Accounts 1. Name of the borrower 2. Address 3. Constitution 4. Nature of business/activi ty 5. Other units in the same group 6. Total exposure of the branch to the Group - Fund ba sed (Rs. in lakhs) - Non-fund based (Rs. in lakhs) 7. Name of Proprietor/Partners/Di rectors 8. Name of the Chi ef Executive, if any 9. Asset classi fication by the branch a. during the current year b. during the previous year 10. Asset classi fication by the Branch Auditor a. during the current year b. during the previ ous year Are there any adverse feat ures pointed out in rel ation to asset cl assification by the Reserve Bank of Indi a Inspection or any other audi t. 11. Date on which the asset was first classified as NPA (where appli cable) 12. Facilities sanctioned: Date of Sanction Nature of facilities Limit (Rs. in Lakhs) Margin% Balance outstanding at the year-end Prime security Collateral security Current Year Previous Year Provision made: Rs.________ lakhs 13. Whether the advance i s a consortium advance or an a dvance made on mul tipl e- bank basis 14. If Consorti um, a. names of parti ci pating banks with their respective shares b. name of the Lead Bank in Consortium 15. If on multiple banking basis, names of other banks and evidence thereof 16. Has the Branch classified the advance under the Cre dit Rating norms i n accordan ce with the guidelines of the controlling authorities of the Bank 17. a. Detail s of verification of primary security and evi dence thereof; b. Detail s of val uation and evi dence thereof Date verified Nature of security Value Valued by Insured for Rs. _______ lakhs (expiring on ________ ) 18. i. Detail s of verification of collateral security and evidence thereof ii. Detail s of val uation and evi dence thereof Bank Audit Manual by CA. Sanjay K Agarwal Page No.24 Date verified Nature of security Value Valued by Insured for Rs. _______ lakhs (expiring on ________ ) 19. Give detail s of the guarantee in respect of the advance a. Central Government guarantee; b. State Government guarantee; c. Bank guarantee or financial institution guarantee; d. Other guarantee Provi de the date and value of the guarantee in resp ect of the above. 20. Compliance with the terms and conditions of the sanction Terms and Conditions i. Pri mary Security i. Charge on primary security ii. Mortgage of fixed assets iii. Registration of charges with Registrar of Companies iv. Insurance with date of validity of policy ii. Collateral Security i. Charge on collateral security ii. Mortgage of fixed assets iii. Registration of charges with Registrar of Companies iv. Insurance with date of validity of policy iii. Guarantees - Existence and execution of valid guara ntees iv. Asset coverage to the branch based upon the arrange ment (i.e., consortium or multiple-bank basis) v. Others: i. Submission of Stock Statements/Quarterly Informatio n Statements and other Information Statements ii. Last inspection of the unit by the Branch officials : Give the date and details of errors/omissions noticed iii. In case of consortium advances, whether c opies of documents executed by the company favouring the consortium ar e availabl e Compliance 21. Key financial indicators for the last two years and projections for the current year (Rs. i n lakhs) Indicators Audited year ended 31st March___ Audited year ended 31st March___ Estimates for year ended 31st March ___ Turnover Increase in turnover % over previous year Profi t before depreci ation, interest and tax Less: Interest Net Cash Profit before tax Less: Depreciation Less: Tax/Net Profit after Depreciation and Tax Net Profit to Turnover Ratio Capital (Paid-up) Reserves Net Worth Bank Audit Manual by CA. Sanjay K Agarwal Page No.25 Turnover to Capi tal Employed Ratio (The term capital employed means th e sum of Net Worth and Long Term Liabili ties) Current Ratio Stock Turnover Ratio Total Outstanding Liabilities/total Net Worth Ratio In case of listed companies, Market Value of Shares a. High; b. Low; and c. Closing Earnings Per Share Whether the accounts were audited? If yes, up to what date; and are there any audit qualifi cations 22. Observations on the operations in the account: Excess over drawing power Excess over limit 1. No of occasions on which the Bal ance exceeded the drawing power/sanctioned limi t (give details) Reasons for excess drawi ngs, if any Whether excess drawings were reported to the Contro lling Authority and approved Debit summation (Rs. in lakhs) Credit summation (Rs. in lakhs) 2. Total summation in the account during the year Less: Interest Balance 23. Adverse observations in other audit reports/Inspect ion Reports/Concurrent Auditor’s Report/Internal Audi t Report/Stock Audit Report/Special Audit Report or Reserve Bank of Indi a Inspection wi th regard to: 1. Documentation; 2. Operations; 3. Security/Guarantee; and 4. Others 24. Branch Manager’s overview of the account and its op eration. 25. 1. In case the borrower has been identified/cl assified as Non-performing Asset during the year, whether any unrealised income incl uding income accrued in the previ ous year has been accounted as income, contrary to the Income Recognition Norms. 2. Whether any action has been i niti ated to recover ac counts identified/classified as Non-performing Assets. Date: Signature and Seal of Branch-in-Charge Bank Audit Manual by CA. Sanjay K Agarwal Page No.26 Advances checklist for LFAR a) In respect of common irregulari ties, the Audi tors c an give thei r comments borrower-wise in the format given hereunder: Name of borrower Name of branch Region IRAC status Sanctioning authority Facility Limit Amount o/s. as at the year end Irregularity No. 1 2 3 4 5 6 7 8 9 b) 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 irregulari ty applicable to respective borrower. In case the auditors feel that in spi te of the list of irregularities given below, there are some other i rregularities, which the audi tor would like to bring to noti ce, the auditor may separatel y disclose under the given head by giving “appropri at e number”. For the aforesaid purpose, “appropriate number” wou ld mean, for example, if the auditors feels that in case of “Review/Monitoring/Supervision” , which has the number “4”, any additional irregulari ty has to be incorporated, he may gi ve a number after the last number appeari ng in the list such as “4.52”, and onwards. Simil arly in case of “Credit Appraisal” which has the number “1”, any additional irregulari ty may be give n “1.14”, and so on. c) The borrower-wise details may be given in descending order based on the Amount outstanding . d) In addition to the above, auditors wanting to give notes in respect of Critical Advances (large or small) wi th gross irregularities should give the sa me as per the format given in “Point 6” bel ow. e) GLOSSARY TO IRREGULARITIES Item REMARK 1 Credit Appraisal 1.1 Loan application not on record at branch. 1.2 The apprai sal form was not filled up correctly and thereby the appraisal and assessment was not done properl y. 1.3 Loan application is not in the form prescribed by Head Offi ce. 1.4 The bank did not receive certain necessary document s and Annexures required with the application form. 1.5 Basic documents such as Memorandum & Articles of Associ ation, Partnershi p 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 incorp orated in the appraisal note forwarded to the management. 1.7 Industry/group exposure and past experi ence of the bank i s not dealt in the apprai sal 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-economi c feasibility report, which is required to know the technical aspects of the borrower’s business, is not obtained from Technical Cell. 1.10 Credi t report on principal borrowers and confidenti al 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 scrutinised. Bank Audit Manual by CA. Sanjay K Agarwal Page No.27 1.12 The opinion reports of the associ ate 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 proposal s 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 limi ts, 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 Credi t facility sanctioned beyond the del egated authority or limit of the branch 2.2 Certain proposal s 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 sancti on. 2.7 Sanction letter was missing in the branch. 2.8 Guarantor as required in the sanction letter was no t obtained. 2.9 Required promoters stake not invested before disbur sement of loan. 2.10 Sanctions were made wi thout proper appraisal . 2.11 Security charge not created before disbursement as required by sanction letter/renewed l etter. 2.12 Full di sbursement of the facility not made. 2.13 Sanction terms were not complied wi th or were not recorded. 2.14 Di sbursement made without proper sanction. 2.15 Term loan was di sbursed by creating the cash credit or savings account of the borrower. 3 Documentation 3.1 The security against which the advance was sanction 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 a s securi ty created, was inadequate, as compared to terms of sanction. 3.4 Second charge as required, on assets is not cre ated in favour of the bank. 3.5 Documents of second charge on assets i s not on the record. 3.6 Documents pertaining to registration of charges with ROC or any other concerned authority requi ring charging of assets is not obtai ned. 3.7 Copi es evidencing lodgment of the original conv eyance/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 docume nts from the Sub-Registrar not on record. 3.9 Documents pertaining to consortium advances not yet executed/not avail able with bank. 3.10 Documents signed by persons not duly authorised to sign or who have signed i n other capacity accepted by the bank. Bank Audit Manual by CA. Sanjay K Agarwal Page No.28 3.11 Signatures of the executants were not found on all the pages of the documents 3.12 Some of the documents on record were blank, without signatures of Branch Manager, witnesses, or guarantors, etc. 3.13 Revival l etters in respect of documents to be reviewed from the borrowers not recei ved. 3.14 Guarantors have expired. 3.15 Guarantors not on record. 3.16 Guarantors not renewed. 3.17 Guarantors not assi gned. 3.18 Worth of the guarantors not available. 3.19 Stamping not as per the amended Stamps Act. 3.20 Documents have become mutilated, soil ed, time barre d or not obtained. 3.21 Opinion report by the fiel d officer for the borrowers not found on record. 3.23 “Nil Encumbrance Certifi cate/s” or “No Dues Certificate/s” or “No Lien Letters” not obtained for the mortgage/s. 3.24 Advances for vehicle loans, Regi stration certi ficate, transfer certificate, etc. not obtained. 3.25 Work completion certifi cate, sale deeds, share cert ificates i n societies, etc. not on record for housing loans. 3.26 Documents are not duly attested/signed by concerned officials/not renewed. 3.27 The agreements for hypothecation do not contain det ails regarding goods hypothecated. 3.28 Copy of Bills/receipts, on the basis of which the amount was di sbursed not found on record. For example Vehi cl e Loans, Plant and Machin ery. 3.29 Charge on main &/or coll ateral securiti es not creat ed in terms of sancti on letter. 3.30 Ori ginal security papers/sale deed/l ease deed/ti tle deed/agreement of sale not availabl e on record. 3.31 TDR are not discharged or renewed. 3.32 Control returns not sent to the H.O. 3.33 The branch has not taken any action for not complia nce with terms of agreement 3.34 No documents executed for enhancement of limit/docu ment not on record. 3.35 ECGC post shi pment policy not obtained. 3.36 Credi t facility released wi thout execution of all n ecessary documents. 3.37 Common Seal not affixed on Letter of Comfort. 3.38 Confirm orders for export credit not found on recor d for faciliti es 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 promptl y. 4.4 The balance outstandi ng have exceeded the drawi ng power. 4.5 Balance confi rmation and acknowledgment of debt not obtained. 4.6 The stock, book-debts statements not received regul arly/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 sui table 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 arri ve at the drawing power. 4.11 The age-wise break-up of debtors i s not found on record. The borrowers are allowed to draw money on entire outstanding debt, whi ch must r ather be for the recent debts as prescribed for particul ar industri es and as per margi n prescri bed in the sanction letter. 4.12 Wide discrepanci es observed i n the stock statements and stock figures in the annual Bank Audit Manual by CA. Sanjay K Agarwal Page No.29 audited financial statements. 4.13 No penal interest has been charged for delay in sub mission of various statements as per the terms of agreement depending upon the type of l oan/credit availed by the borrower. 4.14 Many branches have not adhered to the prescribed frequency of physical verification of securities given against loans and advances. 4.15 Drawing power li mi ts 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 utili sed for purpose other than for which granted. 4.17 The projecti ons submitted by the borrower stay far beyond the actu al 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 Audi ted statements of non-corporate borrowers having limi t beyond Rs. 10 l akh s not received. 4.20 Renewal proposals of advances not recei ved on time and in many cases the li mits are not renewed. 4.21 Application of wrong rate of interest, processing charges, commission, other charges, etc. resulting in income l eakage/excess booki ng of interest of the Bank. 4.22 Insurance cover for stock/property is inadequ ate/no t on record/not renewed/not endorsed in favour of the Bank. 4.23 Inspection/physical verification of securi ty charged, not been carried out. 4.24 Expired bills/foreign currency si ght bills which are outstanding, have not been crystallised. 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 transactio ns not obtained from Bank’s foreign offices/correspondents/customs department. 4.27 Import credi t, bill of entry evidencing i mport of goods not found. 4.28 Documents are not obtained for bill s discounted under Letter of Credit. 4.29 Advances, which are eligibl e for whol e turnover pac ki ng credit guarantee cover of ECGC, are not brought under its cover. 4.30 Though government guaranteed accounts are i rregular si nce 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 availabl e at moni toring branches. 4.33 For allocated limits, inordinate delays were notice d in responding to transfer by th e allocator branch. 4.34 Regular meetings not held wi th other consortium mem bers 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 the consortium are not advise d about the quarterly operating limits/D. P. allocated to each one 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 o btained. 4.38 The capi tal of the borrower has eroded/networth is negative/decreasing. Close monitoring needs to be done. 4.39 The drawing power i s calculated wrongly and/or henc e the borrower is allowed to enjoy excess credit than actually eligibl e. 4.40 Signboard of SBI is not displayed in godown, where the pledged/hypothecated stock is stored. 4.41 Limit not fully utili sed by the borrower/No commitment charge i s levied for the limit not fully utilised by the borrower. 4.42 Loan against TDR/STDR, whi ch is matured, is nei ther renewed nor credited to loan account. Bank Audit Manual by CA. Sanjay K Agarwal Page No.30 4.43 The Stock and Debtors Audit Report not found on rec ord. No audi t has been done for accounts of the borrower. 4.44 The valuation report in respect of tangi ble security from government approved valuer have not been obtained. 4.45 Guarantees, Opinion Reports Financial statements, IT assessment orders and etc. of the guarantor are not found on record. 4.46 Opinion report on guarantor is not obtained. 4.47 For small Government sponsored loan accounts, secur ity cover could not be ascertained since neither any record was availabl e at branch nor physical veri fication conducted by the branch. 4.48 Pre-sancti ons and/or post-sanctions inspection reports were not on record. 4.49 The account was overdue for repayment and/or no cre di t was received from the borrower for a long ti me. 4.50 The borrower i s absconding or deceased and l egal formali ties 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 incompl ete or subsi dy was yet to be received or needs follow- up. 4.52 Security disposed of/entity cl osed by borrower and no action taken by the branch. 4.53 Irregul arity not advised to controllers. 4.54 Letter of subordinati on 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 whi ch consent of corporate Gu arantor is not taken. 4.58 Proper val uation of stock not done/needs critical scrutiny. 4.59 Security obtained i s inadequate/lower as compared t o amount of outstanding/no collateral security. 4.60 The party was dealing with other bank also tough 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 cl assification of advances were not followed and the same is i mplemented through Memorandum of Changes by audito rs during audit. 5.2 Instalments were not recei ved from the borrowers. 5.3 Interest was not recei ved from the borrowers. 5.4 Legal action for recovery of advances was not taken although authori sed by the Board/Controlling Authority. 5.5 Di scontinuance of appli cation of interest not follo wed al though authorised by the Board/Controlling Authority. 5.6 Government guarantees have expired and fresh gu arantees not obtained/not renewed. 5.7 Terms of the BIFR scheme not complied. 5.8 Payment from government not received although guara ntees were unconditional, irrevocable and payable on demand. 5.9 Delays in the settlement/repayment in respect o f 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 wher e local government/outside agencies are invol ved as guarantors. 5.12 Copy of Search Report not on record. 5.13 Decree awarded but no further steps taken for recov ery. 5.14 DI&CGC claims submitted/rejected/pending data not a vailable. 5.15 Irregul ar/sticky advance not reported to the contro lling authority promptl y. Bank Audit Manual by CA. Sanjay K Agarwal Page No.31 5.16 Compromise/OTS proposal is recommended an d is under negotiation since long but not finalised. Suit i s filed in the court/DRT and pending to be finali sed. 5.17 ECGC claim not submitted/lodged for recovery. f) Format for reporting Large/Irregular Advances Name of the Branch & Region : Name of the Borrower : Asset Classification (IRAC Status) : (Rupees in lakhs) Facility Sanctioned Limit Drawing Power Outstanding as on 31.3.2015 Fund based: Non-Fund based: g) Security : h) Pri mary : i) Collateral : Financial performance : Operational comments : Other comments (if any) : Bank Audit Manual by CA. Sanjay K Agarwal Page No.32 ( A. Remuneration for Branch Audit work of the Bank Category of bank branch (on the basis of quantum of advances) Rates of audit fees ( ` ) Up to ` 10 crore 40250/- Above ` 10 crore up to ` 20 crore 57500/- Above ` 20 crore up to ` 30 crore 79350/- Above ` 30 crore up to ` 50 crore 120750/- Above ` 50 crore up to ` 75 crore 138000/- Above ` 75 crore up to ` 125 crore 182850/- Above ` 125 crore up to ` 175 crore 228850/- Above ` 175 crore up to ` 300 crore 287500/- Above ` 300 crore up to ` 500 crore 324300/- Above ` 500 crore up to ` 1000 crore 359950/- Above ` 1000 crore up to ` 5000 crore 395600/- Above ` 5000 crore 431250/- The main operating office of the bank (irrespective of the fact whether it is attached to Head / Central Office of the bank or functions as a separate unit) , CPUs/LPUs/and other centralized hubs by whatever nomenclature called which are taken up for the purp ose of statutory branch audit during a particular year so as to cover 90% of advances of a bank will be treated as any other branch and the fees admissible for the audit work thereof will be on th e basis of the above mentioned schedule. For branches where there is no advances portfolio s uch as service branches, specialised branches etc., or those operating as NPA recovery branches t he banks, in consultation with the Audit Committee of the Board, should propose the revised fees depen ding on the volume of business of the branches, existing fee, etc. for the approval of RBI on a cas e to case basis. B. Fees for LFAR Head Office / Controlling Offices 25% of the basic audit fee excluding fee for scrutiny and incorporation of branch returns. Branches 10% of the basic audit fee payable for audit of respective branch. In respect of branches below the cut-off point of t he threshold limit of branches to be taken up for statutory audit, as stipulated from time to time, w hich may not generally be subjected to statutory au dit but are subjected to concurrent audit by chartered accountants and where LFARs and other certifications done earlier by SBAs are required to be submitted by the concurrent auditors, the fees payable to the concurrent auditors may be based on the above prescription. No separate TA/HA shall be payable for LFAR / Tax A udit of Head / Controlling Offices and branches. C. Fees for additional certifications It has been decided that an additional remuneration @ 12% of the basic audit fees shall be payable for the following certifications/validations required t o be made in terms of various circulars/guidelines Remuneration payable to the Statutory Central and B ranch Auditors from the year 2012- 2013 as per RBI circular No. DBS.ARS.No.BC. 08/ 08.92.001/ 2012-13 June 25, 2013 Bank Audit Manual by CA. Sanjay K Agarwal Page No.33 issued by RBI and any other certification/validatio n included from time to time as per RBI requirements. i) Verification of SLR requirements under Section 24 of BR Act, 1949 on 12 odd dates in different months in a year, not being Fridays. ii) A certificate to the effect that the bank has been following RBI guidelines regarding (a) asset classification, (b) income recognition (c) provisio ning, and also to the effect that the bank has followed RBI guidelines in regard to the investment transactions/treasury operations. iii) A certificate in respect of reconciliation of bank’s investments (on own account as also under PMS). iv) A certificate for compliance in key areas by t he banks. v) A certificate in respect of custody of unused B R forms. vi) Authentication of bank’s assessment of Capital Adequacy Ratio in the ‘Notes on Accounts’ attached to the balance sheet and various other rat ios / items to be disclosed in the ‘Notes on Accounts’. vii) Certificate regarding loan portfolio review if the bank seeks World Bank assistance (Capital Restructuring Loan). viii) Certification regarding DICGC items. ix) Verification of SLR and CRR returns submitted by the bank to RBI during the period under audit and confirming the same to RBI and the bank under a udit. x) To comment upon the status of compliance by the bank as regards the implementation of the recommendations of the Ghosh Committee and the Work ing Group on internal controls. xi) Commenting upon the credit deposit ratio in th e rural areas as per the instructions of Government of India. xii) Reporting of instances of suspected fraud if any, noticed during the course of statutory audit a s per Mitra Committee Recommendations. As hitherto, no fee is payable to branch auditors f or additional attestations. D. Fees for additional certifications required by S ecurities and Exchange Board of India (SEBI) As regards fee for additional certificates / attest ations prescribed by SEBI and other regulators, the banks may decide in consultation with the Audit Com mittee of the Board/ Board. E. Fees for auditing of consolidated financial stat ements For this purpose banks may pay a maximum of Rs.20,6 25/- only per subsidiary / associate whose accounts are to be consolidated in the balance-shee t of a bank. The banks have freedom to offer lesser fee if the subsidiary / associate concerned is not active or is dormant. F. Fee for quarterly / half yearly limited review The fee for carrying out quarterly / half yearly li mited review to be paid to statutory central audito rs may continue to be 20% of the basic audit fee. It is fu rther clarified that revised basic audit fee payable from 2012-13 will be applicable for computing the fee fo r limited review from the quarters ending June 30, 2013 onwards and not for the review carried out dur ing the quarters ended June 30 / September 30 / December 31, 2012. The concurrent auditors assisting the review proces s may continue to be paid a reasonable token fee as advised in our circular letter DBS.ARS.No.BC.17/ 08.91.001/2002-03 dated June 05, 2003. H. Reimbursement of Travelling and Halting Allowanc es and Daily Conveyance Charges Bank Audit Manual by CA. Sanjay K Agarwal Page No.34 1. For reimbursement of the lodging & boarding charges , travelling allowance and daily conveyance payable to statutory auditors, the banks are given the discretion to decide the same in a cost effective manner in mutual consent with the auditors. Further , in no circumstances should the rate exceed the IBA prescription for the respective ceiling. The ca tegories of officers linked for the purpose of deciding the ceiling limits are given below: Sl. No. Category of Audit officials Equivalent scale of Bank officials (as per IBA) 1 Partners/proprietors VII – General Manager 2 Qualified Assistants III – Senior Manager 3 Un-Qualified Assistants I - Officers 2. With regard to the reimbursement of travelling, hal ting allowance and daily conveyance charges, following observations may be noted: i) Wherever banks have Guest House or Visiting Offi cers’ Flats, the same may be utilized to cater to the needs of the auditors. ii) Banks should call for such details as are neces sary for verification of bills in this regard and the statutory central auditors as well as branch audito rs shall furnish such details for verification of the actual expenses. iii) Where the statutory central auditors have thei r headquarters at a place different from that where the Head/Central Office of the bank is situated, bu t have an office at the same place as the Head/Central Office of the bank, the TA/HA, if any, should be nominal for the central audit. However, to ensure the quality of audit, there should be no objection to the partners of the firm visiting the Head/Central Office of the bank as and when they deem it necessary. iv) Where the statutory central auditors or branch auditors have an office at the place where the branches/offices of the bank to be audited are situ ated, they will not be reimbursed TA/HA. However, local conveyance may be reimbursed. v) The TA/HA should be kept to the minimum. vi) In case of dispute between the auditors and the bank regarding settlement of their bills, the CMD/MD of the bank shall be the final authority to decide the claims. The CMD/MD has to satisfy himself that the actual expenses have been incurred by a particular auditor and the claims are settled keeping in view the aforesaid RB I guidelines. Bank Audit Manual by CA. Sanjay K Agarwal Page No.35 Overall Audit Plan - Audit Programme A. Whil e drafting the audit programme, the type of rep orts to be submitted have to be considered. There are four types of reports. a. Unqualified Report b. Qualified Report c. Discl aimer of Opinion d. Adverse Report B. Various types of reports include : • Jilani Committee Report • Ghosh Committee Report • Special Reports as applicabl e (Prime Minister Rojga r Yojana Scheme Report etc.) • Long Form Audit Report • Tax Audit Report • Main Report (Sec. 30(3) of Banking Regulation Act, 1949) C. Accounting standards not applicable to bank Of the effective twenty eight standards, the follow ing standards are not applicable to banks to the extent specified. (a) AS 13, Accounting for Investments, does not apply t o investments of banks. (b) AS 11, “The Effects of Changes in Foreign Exchange Rates”, does not apply to accounting of exchange difference arising on a forward exchange contract entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. D. Considerations for overall audit Plan 1. The terms of his engagement and any statutory respo nsibilities 2. The nature and timing of reports or other communica tion 3. The applicable legal or statutory requirements 4. The accounting policy adopted b y bank and changes i n these polices 5. The identification of significant audit areas 6. The degree of reliance he expects to be placed on a ccounting systems and internal control 7. The nature and timing of audit evidence obtained 8. The work of internal auditors and extent of their i nvolvement 9. The involvement of expert 10. The allocation of work to be undertaken between joi nt auditors and procedures for its control and review 11. Establishing and coordinating staffing requirements E. Documentation Following certificates should be obtained from management  Cash Retention Limit duly certified by the Branch M anager  A photo copy each of the confirmation certificates for Balances with RBI, SBI and other banks  A cop y of the reconciliation statement in respect o f differences in such balances with RBI, SBI and other banks  List of overdue or matured investments at the end o f the year duly confirmed by the Branch Manager;  A certificate stating that the Branch did not hold any investments on behalf of the Head Office (if there are no such investments held by the Branch)  List of large advances i.e. those in respect of whi ch the outstanding amount is in excess of 5% of the aggregate advances of the Branch or Rs.2.00 crores whichever is less duly certified by the Branch Manager  A cop y of the letter from Head Office regarding San ction limit of the Branch Manager;  List of cases where the Branch has not obtained sto ck/book debts statements at the end of the year; Bank Audit Manual by CA. Sanjay K Agarwal Page No.36  List of cases where insurance copies are yet to be received at the end of the year  A cop y of the Head office instructions for identifi cation of NPAs and classification of advances  List of major items pending for reconciliation unde r Inter-Branch Accounts;  List of all fraud cases reported to RBI as fraud up to March 31st F. Auditor should plan his work based on the client? s business to enable him to conduct an effective audit in an efficient and timel y manner as per AAS 8 G. Non applicability of CARO, 2015 Statement of companies (Auditor’s Report ) order 2 015 i s not applicable to banking company as defined in cl ause (c) of section 5 of Banking regulation Act, 1949 Banking company means an y compan y, which transacts the business of banking in India; Any company which is engaged in the manufacture of goods or carri es on any trade and which accepts deposits of money from the publi c merely for the purpose of financing i ts business as such manufacturer or trader sh all not be deemed to trans act the busi ness of banking FORMAT OF CERTIFICATE FROM BRANCH MANAGER Bank: XYZ Bank Branch: Year: 2015-2016 To, M/s ABC & Co Chartered Accountants Certified Date: 1 Our Cash Retention Limit is 2 Our Balances with RBI, SBI and other Banks are 3 List of accounts where Stock Statements are not received 4 List of accounts where Insurance is pending or Insu rance Policy not received 5 List of accounts where Review / Renewal not Recei ved 6 Status of our Lease Agreement for Premises 7 My Sanction Limit is: 8 Number of Fraud Cases a) Detected in Branch during the year, and their current status b) previous cases - disposal still pending 9 Our Branch was covered with following audits duri ng the year: Date of Report Status (open/closed) Inspection Audit Yes / No Revenue Audit Yes / No Concurrent Audit Yes / No Statutory Audit (last such audit) Yes / No 10 We further certify that, all payments relating to a ny expenditure covered under section 40(A)(3) of the Income Tax, 1961 were made by account payee che ques drawn on a bank or account payee bank draft, as the case may be. Bank Audit Manual by CA. Sanjay K Agarwal Page No.37 Specimen Audit Program ABC & Co Chartered Accontants Bank: XYZ Bank Date of Commencement: Branch Date of Finalisation: Audit Program Accounting Year : 2015-2016 Sl. Job Performed By Initials 1 B/S and P/L from Abstract 2 Advance Ledgers (CC, TL, DL, BG) 3 Advance Files 4 Form - 3CA & 3CD 5 LFAR 6 Other Certificates 7 Statutory Audit Report 8 Records & Register 9 TDS Challan/Returns 10 Service Tax Challan/Returns 11 Cash Verification 12 Fixed Assets - Addition and Depreciation 13 Expenses 14 Interest Calculation on Deposits 15 Unit Visit 16 Stock Statement Analysis 17 Previous Audit Reports (Revenue, Statutory, Inspection, Concurrent) 18 Certificate to be obtained Attendance Certificate Cash Retention Limit etc Cash Balance Certificate Receipts for documents submitted TEAM: Bank Audit Manual by CA. Sanjay K Agarwal Page No.38 OTHER CHARTS/FORMATS WHICH MAY BE USED IN THE COURS E OF AUDIT ADVANCE DETAILS ABC & Co Chartered Accountants XYZ Bank Branch: ……… Year Ended: 31.03.2016 Sl Type A/C No Limit Name o/s as on 31st March Date of NPA Unrealised Interest Provision Required Remark STOCK STATEMENT ANALYSIS ABC & Co Chartered Accountants Bank: XYZ Bank Branch: Year: 2015-2016 Signature Sl Account No Type of Account Name Dec Jan Feb Mar BM Party Bank Audit Manual by CA. Sanjay K Agarwal Page No.39 DOCUMENTS ANALYSIS ABC & Co Chartered Accountants Bank: XYZ Bank Branch: Year: 2015-2016 Account No Type of Account Name Financials Sanction Security Insurance Renewal / Review Remarks FORMAT OF CASH BALANCE CERTIFICATE Bank: XYZ Bank Branch: Date Opening Balance Total Receipt Total Payment Closing Balance (1) (2) (3) (1+2-3) 31 st Mar 2016 1st April 2016 2nd April 2016 3rd April 2016 4th April 2016 5th April 2016 6th April 2016 7th April 2016 8th April 2016 Bank Audit Manual by CA. Sanjay K Agarwal Page No.40 FORMAT OF RECEIPT BY BRANCH (ON BRANCH’S LETTER HE AD) Re: ABC & Co, Chartered Accountants Year: 2015-2016 We hereby certify that following representatives of above referred Chartered Accountants Firm Visited our Branch as given below for the purpose o f Statutory Audit for the year Sl Name & Designation From To Date Time Date Time 1 2 3 4 5 We further certify that we hav e received following documents from them in respect of our statutory audit for the year: Sl Particulars No of Copies Remarks if any 1 2 3 4 5 6 7 Bank Audit Manual by CA. Sanjay K Agarwal Page No.41 An Illustrative Format of Report of the Branch Auditor of a Nationalised Bank Independent Bank Branch Auditor’s Report To, The Statutory Central Auditors ________ Bank Report on Financial Statements 1. We have audited the accompanying Financial State ments of _______________Branch of ____________ (name of the Bank) which comprise the Balance Sheet as at 31 st March 20XX, Profit and Loss Account for the year then ended, and other explanat ory information. Management’s Responsibility for the Financial State ments: 2. Management of the Branch is responsible for the preparation of these Financial Statements that give true and fair view of the financial position and fi nancial performance of the Branch in accordance wit h the Banking Regulation Act, complying with Reserve Bank of India Guidelines from time to time. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are f ree from material misstatement, whether due to frau d or error. Auditors’ Responsibility : 3. Our responsibility is to express an opinion on t hese financial statements based on our audit. We conducted our audit in accordance with the Standard s on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and pe rform the audit to obtain reasonable assurance about whet her the financial statements are free from material misstatement. 4. An audit involves performing procedures to obtai n audit evidence about the amounts and disclosures in the financial statements. The Procedures selected d epend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor consider s internal control relevant to the entity’s preparation and fair presentation of the financial statements in or der to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating th e appropriateness of accounting policies used and t he reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 5. We believe that the audit evidence we have obtai ned is sufficient and appropriate to provide a basis for our Audit opinion. Opinion 6. In our opinion, and to the best of our informati on and according to the explanation given to us, read with the Memorandum of Changes mentioned in paragraph 11 below, the financial statements give a true and fair view in conformity with the accounting principles g enerally accepted in India: (a) in the case of the Balance Sheet, of the state of affairs of the Branch as at March 31, 20XX; and (b) in the case of Profit and Loss Account, of the Profit / Loss for the year ended on that date; Report on Other Legal and Regulatory Requirements 7. The Balance Sheet and the Profit and Loss Accoun t have been drawn up in accordance with Section 29 of the Banking Regulation Act, 1949; 8. Subject to the limitations of the audit as indic ated in Paragraphs 3 to 5 above and paragraph 10 be low, we report that: a. We have obtained all the information and explana tions which to the best of our knowledge and belief were necessary for the purpose of the audit and have fou nd them to be satisfactory. b. The transactions of the branch which have come t o my/our notice have been within the powers of the Bank. 9. We further report that: Bank Audit Manual by CA. Sanjay K Agarwal Page No.42 a. the Balance Sheet and Profit and Loss account de alt with by this report are in agreement with the books of account and returns; b. in our opinion, proper books of account as requi red by law have been kept by the branch so far as appears from our examination of those books; Other Matters 10. No adjustments/provisions have been made in the accounts of the Branch in respect of matters usually dealt with at Central Office, including in respect of: (a) Bonus, ex-gratia, and other similar expenditu re and allowances to branch employees; (b) Terminal permissible benefits to eligible emplo yees on their retirement (including additional retirement benefits), Gratuity, Pension, liability for leave e ncashment benefits and other benefits covered in terms of ‘AS 15 –Employee Benefits’ issued by the I nstitute of Chartered Accountants of India; (c) Arrears of salary/wages/allowances, if any, pay able to staff; (d) Staff welfare contractual obligations; (e) Old unreconciled/unlinked entries at debit unde r various heads comprising Inter branch/office Adjustments; (f) Interest on overdue term deposits; (g) Depreciation on fixed assets; (h) Auditors’ fees and expenses; (i) Taxation (Current Tax and Deferred Tax). 11. The following is a summary of Memorandum of Cha nges submitted by us to the branch management 1. Memorandum of Changes (summary) No. Increase Decrease In respect of Income In respect of expenditure In respect of Assets In respect of Liabilities In respect of Gross NPAs In respect of Provision on NPAs2 In respect of Classification of Advances In respect of Risk Weighted Assets Other items (if any) For ABC and Co. Chartered Accountants Signature (Name of the Member Signing the Audit Report) (Designation) 3 Membership Number Firm registration number Place of Signature Date 1 W here Applicable 2 Applicable in cases where banks det ermine provisi on at Branch level. 3 Partner or propriet or as the case may be Bank Audit Manual by CA. Sanjay K Agarwal Page No.43 Prudential Guidelines on Restructuring of Advances by Banks (RBI Master Circular No RBI/2015-16/101 DBR.No.BP.BC.2/21.04.048/2015-16 dated 01.07.2015) Link to download full text of circular s.aspx?id=9908 15. Background 15.1 The guidelines issued by the Reserve Bank of I ndia on restructuring of advances (other than those restructured under a separate set of guidelines iss ued by the Rural Planning and Credit Department (RPCD) of the RBI on restructuring of advances on a ccount of natural calamities) are divided into the following four categories : (i) Guidelines on restructuring of advances extende d to industrial units. (ii) Guidelines on restructuring of advances extend ed to industrial units under the Corporate Debt Restructuring (CDR) Mechanism (iii) Guidelines on restructuring of advances exten ded to Small and Medium Enterprises (SME) (iv) Guidelines on restructuring of all other advan ces. In these four sets of guidelines on restructuring o f advances, the differentiations were broadly made based on whether a borrower is engaged in an industrial a ctivity or a non-industrial activity. In addition, an elaborate institutional mechanism was laid down for accounts restructured under CDR Mechanism. The major difference in the prudential regulations was in the stipulation that subject to certain conditions, the accounts of borrowers engaged in industrial activit ies (under CDR Mechanism, SME Debt Restructuring Mechanism and outside these mechanisms) continued t o be classified in the existing asset classification category upon restructuring. This benefit of retent ion of asset classification on restructuring was not made available to the accounts of borrowers engaged in n on-industrial activities except to SME borrowers. Another difference was that the prudential regulati ons covering the CDR Mechanism and restructuring of advances extended to SMEs were more detailed and co mprehensive than that covering the restructuring of the rest of the advances including the advances ext ended to the industrial units, outside CDR Mechanis m. Further, the CDR Mechanism was made available only to the borrowers engaged in industrial activities. 15.2 Since the principles underlying the restructur ing of all advances were identical, it was felt that the prudential regulations needed to be aligned in all cases. Accordingly, the prudential norms across all categories of debt restructuring mechanisms, other than those restructured on account of natural calam ities which will continue to be covered by the extant gui delines issued by the RPCD, were harmonised in Augu st 2008. 15.3 In the backdrop of extraordinary rise in restr uctured standard advances, these prudential norms w ere further revised by taking into account the recommen dations of the Working Group (Chairman: Shri B. Mahapatra) to review the existing prudential guidel ines on restructuring of advances by banks/financia l institutions. These prudential norms applicable to all restructurings including those under CDR Mechan ism are included in this circular. The details of the i nstitutional / organizational framework for CDR Mec hanism and SME Debt Restructuring Mechanism are given in A nnex - 4. 15.4 The CDR Mechanism (Annex - 4) will also be ava ilable to the corporates engaged in non-industrial activities, if they are otherwise eligible for rest ructuring as per the criteria laid down for this pu rpose. Further, banks are also encouraged to strengthen th e co-ordination among themselves in the matter of restructuring of consortium / multiple banking acco unts, which are not covered under the CDR Mechanism . 16. Key Concepts Key concepts used in these guidelines are defined i n Annex - 5. 17. General Principles and Prudential Norms for Res tructured Advances The principles and prudential norms laid down in th is paragraph are applicable to all advances including the borrowers, who are eligible for special regulatory treatment for asset classification as specified in para 20. 17.1 Eligibility criteria for restructuring of advances 17.1.1 Banks may restructure the accounts classifie d under 'standard', 'sub- standard' and 'doubtful' categories. 17.1.2 Banks cannot reschedule / restructure / rene gotiate borrowal accounts with retrospective effect. While a restructuring proposal is under considerati on, the usual asset classification norms would cont inue to apply. The process of re- classification of an a sset should not stop merely because restructuring Bank Audit Manual by CA. Sanjay K Agarwal Page No.44 proposal is under consideration. The asset classifi cation status as on the date of approval of the restructured package by the competent authority wou ld be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation. In case there is undue delay in san ctioning a restructuring package and in the meantime the ass et classification status of the account undergoes deterioration, it would be a matter of supervisory concern. 17.1.3 Normally, restructuring cannot take place un less alteration / changes in the original loan agreement are made with the formal consent / application of t he debtor. However, the process of restructuring ca n be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions. 17.1.4 No account will be taken up for restructurin g by the banks unless the financial viability is established and there is a reasonable certainty of repayment fr om the borrower, as per the terms of restructuring package. Any restructuring done without looking int o cash flows of the borrower and assessing the viab ility of the projects / activity financed by banks would be treated as an attempt at ever greening a weak cr edit facility and would invite supervisory concerns / ac tion. Banks should accelerate the recovery measures in respect of such accounts. The viability should be d etermined by the banks based on the acceptable viab ility benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. Illustratively, the parameters may inclu de the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Re turn and Cost of Funds and the amount of provision required in lieu of the diminution in the fair valu e of the restructured advance. As different sectors of economy have different performance indicators, it w ill be desirable that banks adopt these broad benchmarks with suitable modifications. Therefore, it has been decided that the viability should be determined by the banks based on the acceptable via bility parameters and benchmarks for each parameter determined by them. The benchmarks for the viabilit y parameters adopted by the CDR Mechanism are given in the Appendix to Part – B of this Master Ci rcular and individual banks may suitably adopt them with appropriate adjustments, if any, for specific secto rs while restructuring of accounts in non-CDR cases . 17.1.5 While the borrowers indulging in frauds and malfeasance will continue to remain ineligible for restructuring, banks may review the reasons for cla ssification of the borrowers as wilful defaulters, specially in old cases where the manner of classification of a borrower as a wilful defaulter was not transparen t, and satisfy itself that the borrower is in a position t o rectify the wilful default. The restructuring of such cases may be done with Board's approval, while for such a ccounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Gr oup only. 17.1.6 BIFR cases are not eligible for restructurin g without their express approval. CDR Core Group in the case of advances restructured under CDR Mechanism, the lead bank in the case of SME Debt Restructuring Mechanism and the individual banks in other cases, may consider the proposals for restructuring in such cases, after ensuring that al l the formalities in seeking the approval from BIFR are completed before implementing the package. 17.2 Asset classification norms Restructuring of advances could take place in the f ollowing stages: (a) before commencement of commercial production / operation; (b) after commencement of commercial production / o peration but before the asset has been classified as 'sub-standard'; (c) after commencement of commercial production / o peration and the asset has been classified as 'sub- standard' or 'doubtful'. 17.2.1 The accounts classified as 'standard assets' should be immediately re- classified as 'sub-standard assets' upon restructuring. 17.2.2 The non-performing assets, upon restructurin g, would continue to have the same asset classification as prior to restructuring and slip into further low er asset classification categories as per extant as set classification norms with reference to the pre-rest ructuring repayment schedule. 17.2.3 Standard accounts classified as NPA and NPA accounts retained in the same category on restructuring by the bank should be upgraded only w hen all the outstanding loan/facilities in the account perform satisfactorily during the ‘specified period ’ (Annex - 5), i.e. principal and interest on all facilities in the account are serviced as per terms of payment during that period. Bank Audit Manual by CA. Sanjay K Agarwal Page No.45 17.2.4 In case, however, satisfactory performance a fter the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms wi th reference to the pre-restructuring payment schedule . 17.2.5 Any additional finance may be treated as 'st andard asset' during the specified period (Annex – 5) under the approved restructuring package. However, in the case of accounts where the pre-restructuring facilities were classified as 'sub-standard' and 'd oubtful', interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at the end o f the above specified period, the additional finance shal l be placed in the same asset classification catego ry as the restructured debt. 17.2.6 If a restructured asset, which is a standard asset on restructuring in terms of para 20.2, is subjected to restructuring on a subsequent occasion, it shoul d be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjec ted to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion ma y be allowed to be upgraded to standard category after the specified period (Annex-5) in terms of th e current restructuring package, subject to satisfactory performance. 17.3 Income recognition norms Subject to provisions of paragraphs 17.2.5, 18.2 an d 19.2, interest income in respect of restructured accounts classified as 'standard assets' will be re cognized on accrual basis and that in respect of th e accounts classified as 'non-performing assets' will be recognized on cash basis. 17.4 Provisioning norms 17.4.1 Provision on restructured advances (i) Banks will hold provision against the restructu red advances as per the extant provisioning norms. (ii) Restructured accounts classified as standard a dvances will attract a higher provision (as prescribed from time to time) in the first two years from the date of restructuring. In cases of moratorium on pa yment of interest/principal after restructuring, such advanc es will attract the prescribed higher provision for the period covering moratorium and two years thereafter. (iii) Restructured accounts classified as non-perfo rming assets, when upgraded to standard category wi ll attract a higher provision (as prescribed from time to time) in the first year from the date of upgradation. (iv) The above-mentioned higher provision on restru ctured standard advances (2.75 per cent as prescrib ed vide circular dated November 26, 2012) would increa se to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2 013 and increase in a phased manner for the stock o f restructured standard accounts as on May 31, 2013 a s under :  3.50 per cent - with effect from March 31, 2014 (s pread over the four quarters of 2013-14)  4.25 per cent - with effect from March 31, 2015 (s pread over the four quarters of 2014-15)  5.00 per cent - - with effect from March 31, 2016 (spread over the four quarters of 2015-16) 17.4.2 Provision for diminution in the fair value of restr uctured advances (i) Reduction in the rate of interest and / or resc hedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in valu e is an economic loss for the bank and will have impact on the bank's market value of equity. It is, therefore, necessary for banks to measure such diminution in t he fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision s hould be held in addition to the provisions as per existing provisioning norms as indicated in para 17.4.1 abov e, and in an account distinct from that for normal provisions. For this purpose, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank's BPLR or b ase rate 5 (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term 5 This change has been i ntroduced as a resul t of the i ntroduction of Bas e Rate System w.e.f. J uly 1, 2010 vi de circular DBOD.No.Dir.BC.88/13.03.00/2009-10 dat ed April 9, 2010 on ‘Guidelines on the Base Rat e’. Bank Audit Manual by CA. Sanjay K Agarwal Page No.46 premium and credit risk premium for the borrower ca tegory on the date of restructuring. Fair value of the loan after restructuring will be computed as the pr esent value of cash flows representing the interest at the rate charged on the advance on restructuring and th e principal, discounted at a rate equal to the bank's BPLR or base rate (whichever is applicable to the b orrower) as on the date of restructuring plus the appropriate term premium and credit risk premium fo r the borrower category on the date of restructuring. The above formula moderates the swing in the diminu tion of present value of loans with the interest rate cycle and will have to be followed consistently by banks in future. Further, it is reiterated that the provisions required as above arise due to the action of the ba nks resulting in change in contractual terms of the loan upon restructuring which are in the nature of finan cial concessions. These provisions are distinct from the provisions which are linked to the asset classifica tion of the account classified as NPA and reflect t he impairment due to deterioration in the credit quali ty of the loan. Thus, the two types of the provisions are not substitute for each other. ii) It was observed that on a few occasions, there were divergences in the calculation of diminution o f fair value of accounts by banks. Illustratively, diverge nces could occur if banks are not appropriately fac toring in the term premium on account of elongation of repaym ent period on restructuring. In such a case the term premium used while calculating the present value of cash flows after restructuring would be higher than the term premium used while calculating the present val ue of cash flows before restructuring. Further, the amount of principal converted into debt/equity inst ruments on restructuring would need to be held unde r AFS and valued as per usual valuation norms. Since these instruments are getting marked to market, the erosion in fair value gets captured on such valuati on. Therefore, for the purpose of arriving at the erosion in the fair value, the NPV calculation of the portion of principal not converted into debt/equity has to be carried out separately. However, the total sacrifice involv ed for the bank would be NPV of the above portion p lus valuation loss on account of conversion into debt/e quity instruments. Banks are therefore advised that they should correc tly capture the diminution in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also o n the amount of sacrifice required from the promoters (Re f. para 20.2.2.iv). Further, there should not be any effort on the part of banks to artificially reduce the net present value of cash flows by resorting to any so rt of financial engineering. Banks are also advised to pu t in place a proper mechanism of checks and balance s to ensure accurate calculation of erosion in the fa ir value of restructured accounts. (iii) In the case of working capital facilities, th e diminution in the fair value of the cash credit / overdraft component may be computed as indicated in para (i) above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amo unt and taking the tenor of the advance as one year . The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded In terest Term Loan) would be computed as per actual cash flows and taking the term premium in th e discount factor as applicable for the maturity of the respective term loan components. (iv) In the event 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. Thi s will ensure that the effect of charging off the e conomic sacrifice to the Profit & Loss account is not negat ed. (v) The diminution in the fair value may be re-comp uted on each balance sheet date till satisfactory completion of all repayment obligations and full re payment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR or base rate (whichever is applica ble to the borrower), term premium and the credit categ ory of the borrower. Consequently, banks may provid e for the shortfall in provision or reverse the amoun t of excess provision held in the distinct account. (vi) If due to lack of expertise / appropriate infr astructure, a bank finds it difficult to ensure com putation of diminution in the fair value of advances, as an alt ernative to the methodology prescribed above for computing the amount of diminution in the fair valu e, banks will have the option of notionally computing the amount of diminution in the fair value and providin g therefor, at five per cent of the total exposure, in respect of all restructured accounts where the tota l dues to bank(s) are less than rupees one crore. 17.4.3 The total provisions required against an acc ount (normal provisions plus provisions in lieu of diminution in the fair value of the advance) are ca pped at 100% of the outstanding debt amount. Bank Audit Manual by CA. Sanjay K Agarwal Page No.47 17.5 Risk-Weights a. Restructured housing loans should be risk weight ed with an additional risk weight of 25 percentage points. b. With a view to reflecting a higher element of in herent risk which may be latent in entities whose obligations have been subjected to restructuring / rescheduling either by banks on their own or along with other bankers / creditors, the unrated standard / p erforming claims on corporates should be assigned a higher risk weight of 125% until satisfactory perfo rmance under the revised payment schedule has been established for one year from the date when the fir st payment of interest / principal falls due under the revised schedule. c. For details on risk weights, Master Circular DBR .No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015 on ‘Basel III Capital Regulations’ may be referred.

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