1

CA Dayaniwas Sharma (FCA, FAFD,ISA)

 CONTENTS

PART – A
APPROACH TO BANK AUDIT

PART – B
LFAR & CERTIFICATION

PART – C
TAX AUDIT REPORT

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PART – D
DOCUMENTATION

All the points discussed in this presentation are my personal opinion and should not be
related to any bank or other instructions'
 PART - A
APPROACH TO BANK AUDIT

1. KNOW THE BRANCH

2. UNDERSTAND BANKING SOFTWARE

3. COMPONENTS OF FINANCIAL
STATEMENTS
3 4. AUDIT PROCEDURES

5. CONCLUSIONS
 1. KNOW THE BRANCH
 Obtain the following reports to assess the branch
performance
• Previous Year’s Auditor’s Report/ LFAR ;
• Concurrent Audit Reports for the audit period ;
• Risk Based Internal Audit Report ;
• Zonal Inspection Reports, if any ;
• Exception Report ;
• Latest Revenue Audit Report ;
• IT System Audit Report ;
• RBI Inspection Report.

4  Understand the bank portfolio

• Types of deposits and advances

• Whether branch is deposit or advance rich
• Types of customers and borrowers
  Must go through :

• RBI Master Circulars

• Bank’s Internal Circulars and Guidelines
• Relevant Closing Circulars
• Other relevant regulations under various statutes

 Reporting Requirements :

• List the Returns and Certificates to be signed

• Items to be reported in LFAR
• Audit Report Format
Auditors
Report, Long Form Audit
Returns Report
5 including MOC

Tax Audit
Certificates
reports
 2. UNDERSTAND BANKING SOFTWARE
 Understand the structure of accounting software
whether following are in different modules or same
• Recording of day-to-day transactions
• Financial Statements
• Various closing returns and certificates at branch
level
 Level of Automation
 Centralized or Decentralized accounting
 Exception Reports
 Level of access rights at branch level – editable and un-
editable fields
6  System of downgrading and upgrading of accounts
 Interest Calculations
 Generation of reports relating to advances
classification and Capital Adequacy calculation etc..
 Illustrative structure of Banking Software

Banking
Software

CBS Financial Assets

Other
(Records day Statements classification
Returns &
to day generating &Provisioning
Certificates
software) software software

All other non All advances

Like Balance
advances related Basel and
Sheet and
related Capital Adequacy
Profit & Loss
returns Returns

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 3. COMPONENTS OF FINANCIAL STATEMENTS

Components of
Financial Statements
to be verified at
Branch Level

Statement of Profit Off Balance Sheets

Balance Sheet
& Loss Items

Advances, Interest earned,

Deposits, Interest paid, Letter of Credit,
Fixed Assets, Commission Bank Guarantees,
Accrued Interest, Other income and Bills for Collection etc
FITL, Provisions etc. expenses 8
 4. 1.1 ADVANCES - OVERVIEW

ADVANCES

Fund Based Non Fund Based

1. Letter of Credit (LC)

1. Term Loan 2. Bank Guarantees (BG)
2. Cash Credit 3. Bills for Collection
3. Overdraft
4. Bills Purchased/Discounted
5. LC Devolved
6. BG Invoked

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 4.1.2 ADVANCES - AUDIT PROCEDURES
(I) ANALYTICAL PROCEDURES

 Trend Analysis for the outstanding balances :

• Year on Year Basis
• Quarter on Quarter Basis (CY Quarter to PY
Corresponding Qtr)
• Quarter on Quarter Basis (CY : Current and
Immediately preceding quarter)

 Global Check for the Interest Income :

• Calculate the interest percentage by applying the
following formula :
10 Interest Income as per P&L account
Average Balance of Loan Outstanding
• The above calculation to be performed for the period
mentioned above and analyze the interest rate for the
period.
  Comparative Analysis :
Perform comparative analysis on Year on Year basis for the
following parameters
• Customer wise
• Exposure wise

 Percentage :
Calculate category wise percentage of total loans and
advances outstanding to know the coverage of each type.

 Ratio Analysis :
• Credit to Deposit Ratio : Advances given / Deposits
• NPA Ratio : Net NPAs / Advances given
11 • Provision Coverage Ratio : Provisions / Gross NPAs
• Return on Assets : Net Profits / Avg. Total Assets
 (II) SAMPLING TECHNIQUES
 Obtain the following and consider for selecting
sample:

• Trial Balance (or similar report) and list down the

GLs and Sub GLs code of advances ;

• List of accounts (category wise) along with

borrower name and outstanding amount ;

• List of accounts
 opened,

 closed and

 opened & closed

12 during the period under review;

• Statement of potential Non-Performing Assets

(NPA) i.e., Special Mention Accounts (SMA) ;
 • List of NPAs as on reporting date ;

• List of Restructured accounts ;

• List of Upgraded during the period ;

• List of accounts continuously appearing in

exception report ;

• List of critical accounts highlighted in Concurrent

Audit Report, RBIA Report, Zonal Inspection
Report, Branch Monitoring Reports etc. ;

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 (III) AUDIT STEPS – (A) TERM LOANS
 Sanction is as per the discretionary lending powers of
bank.
 Ensure disbursement is only after compliances with pre -
disbursement conditions
 Check for security is created like equitable mortgage deed
and pari-passu rights are clearly mentioned in the
sanction letter and mortgage deed
 Ensure the latest security is correctly fed in the Asset
Classification and Provision software.
 Repayment schedule is correctly fed in CBS & Asset
Classification and Provision software.
 Verify the Interest Parameters (Regular & Penal Interest)
14  Ensure that critical amount due has reported in SMA
Report has been received by the bank.
 In case of Loan accounts ACTUAL recovery of Installments
and Interest
 (B) CASH CREDIT/OVERDRAFTS :
 Customer wise Limit Lookup
 Stock / Debtors Statements Tracking and calculation of
DP
 Turnover of CC Account based on Borrower’s Business
profile
 Verify the Interest Parameters (Regular & Penal Interest)
 Review the Overdrawn Report for the outstanding
amount exceeding sanction limits , if any
 Verify the movements in the account to ensure that
credits are routed through to suggest healthy movements
 Check interest is correctly applied on the day-end
balances.
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 (C) BILLS PURCHASED/DISCOUNTED:
 Verify the following documents:
• Letter of credit number and date
• Advising bank, beneficiary name and applicant
• Date and place of expiry
• Terms and conditions of letter of credit.
 Scrutinize the bills register to ensure there are no
overdue/matured bills for more than 90 days.
 Check whether bill wise break up is available in Asset
Classification and Provision software.
 In Foreign Bills Register, ensure that exposure in foreign
currency and equivalent Indian currency is correctly
16 reported.
 Check interest collected is correctly classified under
current and pre paid income.
 L

RESTRUCTURE ACCOUNTS
(D) RESTRUCTURE ACCOUNTS : PROVISIONING NORMS :

Types of Restructure:
There are two types of restructuring:
1) Internal Restructure by Bank
2) External Restructure by CDR Cell

Eligibility:
 Any account classified as standard, sub standard or doubtful.
 Restructuring cannot be done retrospectively and usual asset
classification norms would continue to apply.
 Restructuring should be subject to customer agreeing to terms and
conditions.
 Financial viability should be established.
 Borrowers indulging in frauds and malfeasance are ineligible.
 BIFR cases eligible for restructuring subject to approval from BIFR.

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RESTRUCTURE ACCOUNTS
(D) RESTRUCTURE ACCOUNTS : ASSET CLASSIFICATION NORMS
Restructuring of accounts could take place in following stages:
 Before commencement of commercial production
 After commencement of commercial production / operation but before
the asset has been classified as ‘Sub Standard’.
 After the commencement of commercial production / operation but
after the asset has been classified as ‘Sub Standard’ or doubtful.

 Standard Asset would get reclassified as sub standard and account

which is already NPA would continue to have the same classification.

 Additional finance would be treated as standard during specified

period under approved restructuring package.

 All restructured accounts, classified as NPA upon restructuring would

be eligible for upgradation after observation of satisfactory
performance for the period of one year.

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RESTRUCTURE ACCOUNTS
(D) RESTRUCTURE ACCOUNTS : PROVISIONING NORMS :
 Total provision required would be normal provision plus provision in lieu of
diminution in fair value of advances.

 Diminution in fair value would be required to be recomputed on each balance sheet date.

 Banks have option of notionally computing the diminution in fair value and providing at
5% in case of all restructured accounts where the total dues to bank is less than ONE
crore.

 Verify the restructuring proposal to ensure the accuracy of the sacrifice value:
1) Interest rate pre and post restructuring
2) Credit rating
3) Discounting factor (BR + Premium based on credit rating)
4) Period of loan reimbursement (pre and post restructuring)
5) Segment to which loan belongs to (Large corporate, Mid corporate etc)

 In fresh Restructure account, ensure that interest charged in the account is reversed
and FITL, Interest Capitalization account is created for the same.

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 (E) NON PERFORMING ASSETS : AUDIT STEPS :

 Review the accounts which are classified as NPA with

respect to
• Security Value

• Interest Reversal

• Date of NPA

• Provisioning thereon

 Review the annual stock audit report for the NPA with
balance of Rs. 5 crores and above and latest valuation
report for the immovable properties in case the valuation
is older than 3 years.
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 Review the accounts to ensure no interest is charged on
such accounts.
 4.2.1 DEPOSITS - OVERVIEW

DEPOSITS

Time Deposits Term Deposits

1. Current Account Deposits 1. Fixed Deposits

2. Savings Account Deposits 2. Recurring Deposits
3. Overdue Deposits 3. Margin Money

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 4.2.2 DEPOSITS - AUDIT PROCEDURES
(I) SAMPLING TECHNIQUES
 Obtain the following and consider for selecting
sample:
• Trial Balance (or similar report) and list down the
GLs and Sub GLs code of deposits ;

• List of accounts (scheme-wise) alongwith customer

name and outstanding amount ;

• List of accounts
 opened,
 closed and
22  opened & closed
during the period under review.
 (II) AUDIT PROCEDURES
 Verification of Anti Money Laundering guidelines and
Compliance with KYC norms on test check basis.
 Check Movement in Deposit vis-à-vis movement in
interest expense
 Obtain the interest report and verify interest calculation is
accurate.
 Ensure that overdue deposits, matured time deposits, cash
certificates and certificates of deposits are shown in
Demand Deposits.
 Check Interest accrued but not due is not be included in
deposits but, shown under other liability
 Check TDS compliance on the interest paid and on test
23 check basis checking of Form 15G & 15H to confirm
whether those forms are submitted with respective
Income Tax Authority.
 Review the exceptional report for deposits without PAN,
etc.
 4.3 STATEMENT OF PROFIT & LOSS
 Expenses can be verified for 1 month and thereafter
extrapolate to 12 months. Compare with P&L to ensure
whether amount calculated is approximately same or
identify and investigate for the reasons of vide
variations.

 For NPA accounts income should be recognized on

realization basis.
When an account becomes non-performing, unrealized
interest of the previous periods should be reversed or
provided.

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 5. CONCLUSIONS

 Conclusions drawn based on the above audit procedures

to be discussed with Branch head
 Based on the above discussions same shall be report in
MoC and LFAR .

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 4.4 OFF BALANCE SHEET ITEMS
Off Balance Sheet Comprises of

a) Letter of Credit (LC)

b)Bank Guarantees (BG)
c) Bills for Collections

 Care in case of devolved LC’s/invoked BG’s:

Devolved amounts adjusted by allowing excess drawings
or adhoc or TOD’s, should be verified.
 Repayments made by the customer for devolved
LC’s/invoked BG’s should also be verified.
 Non-reversal of Expired Guarantees to be looked into
26 carefully – impact on capital adequacy.
 PART B – (1) LFAR
 LFAR is an internal control evaluation questionnaire.

 It should therefore be clearly understood that LFAR by

no means is an extension of the statutory audit report
but is a supplementary report to bring awareness to the
management and/or regulators.

 It should therefore be clearly understood that any point

requiring qualification in the audit report must be
qualified there itself, with such details as would be
required and mere reference that the particular point
has been reported in the LFAR is not enough.
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 LFAR should be sufficiently detailed and quantified so
that they can be expeditiously consolidated by SCA.
 LFAR = REPORTING REQUIREMENTS - ADVANCES
 Credit Appraisal
 Complied with the procedures / instructions of the
controlling authorities of the Bank

 Sanctioning / Disbursement
 Instances of credit facilities having been sanctioned
beyond the delegated authority or limit fixed for the
Branch ;
 Instances where advances have been disbursed
without complying with the terms and conditions of
the sanction.
 Documentation
 Credit facilities released without execution of all
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necessary documents ;
 Deficiencies in documentation, non-registration of
charges, non-obtaining of guarantees etc. ;
 Advances against lien of deposits have been properly
granted by marking a lien on the deposit.
  Review/Monitoring/Supervision

 Analysis of the accounts overdue for review/renewal ;

 Stock / book debt statements, other periodic
operational data and financial statements etc.,
received regularly from the borrowers and
duly scrutinized ;
 Compliance with a system of obtaining reports on
stock audits periodically ;
 Inspection or physical verification of securities charged
to the Bank been carried out by the Branch ;
 Identification and classification of advances is in line
with the norms prescribed by the RBI ;
 Report outstanding amount of invoked Bank
Guarantees ;
29  Report outstanding amount of devolved Letter of
Credits.
 REPORTING REQUIREMENTS - DEPOSITS

 Whether controlling authorities of the Bank laid down

any guidelines with respect to conduct and operations of
inoperative accounts ;

 After the balance sheet date and till the date of audit,
whether there have been any unusual large movements
(whether increase or decrease) in the aggregate deposits
held at the year-end ;

 Report any overdue / matured term deposits at the end

of the year.

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 REPORTING REQUIREMENTS – PROFIT & LOSS
ACCOUNT
 Branch has a system to compute discrepancies in
interest / discount on advances and deposits and for
timely adjustment thereof in accordance with the
guidelines laid down ;

 Branch complied with the Income Recognition norms

prescribed by RBI ;

 Have a system of estimating and providing interest

accrued on overdue / matured term deposits ;

 Divergent trends in major items of income and

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expenditure, which are not satisfactorily explained by
the branch.
 REPORTING REQUIREMENTS – GENERAL
 Books & Records

 In case books are maintained manually, general scrutiny

is performed and are authorized.

 In respect of computerized branches :

• Indicate the extent of computerization and the
areas of operation covered.
• Are the access and data security measures and
other internal controls adequate?
• Whether regular back-ups of accounts and off-site
storage are maintained as per the guidelines of
the controlling authorities of the Bank?
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• Whether adequate contingency and disaster
recovery plans are in place for loss/ encryption of
data?
  Reconciliation of Control and Subsidiary
Records
 Whether as at the year-end, in the control and
subsidiary records been reconciled

 Inter Branch Accounts

 Ensure Inter Branch Reconciliations are performed and
report discrepanacies if any ;

 Check whether balances as per branch books tallies

with HO books ;

 Report any outstanding debits in the Head Office

Account in respect of inter branch transactions ;
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 Report any old / large outstanding transactions /
entries at debits as at year-end which remain
unexplained in the accounts relatable to inter branch
adjustments.
  Audits / Inspection
 Whether branch covered by concurrent audit or any
other audit / inspection during the year

 In framing the audit report whether adverse comments

of various audit / inspection reports are considered

 Frauds
 Furnish particulars of frauds discovered during the year
under audit at the branch ;

 Also provide suggestions, if any, to minimize the

possibilities of their occurrence.
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 PART B – (2) CERTIFICATION

Closing Returns

Certificates

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 CLOSING RETURNS
 Returns that may be required to be certified by the
Branch Auditors

S.No Details Source of Return

1 Balance Sheet

2 Profit & Loss Account

3 Inward bills for collection and outward

bills for collection
4 Claims against the bank not
acknowledged as debt
5 Gross block of fixed assets & Financial statements
depreciation generating software

6 Statement of Outstanding balances

and doubtful amounts in accounts other
than advances
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7 Outstanding entries in GL Suspense
Account
9 Bad Debts Written off to P&L
 CLOSING RETURNS
 Returns that may be required to be certified by the
Branch Auditors – Contd..

Details
S.No Source of Return

10 Capital Adequacy – Basel I Asset classification &

Provisioning software
11 Memorandum of Changes (Return 14D is Prepared by Auditor
towards Advances)
12 Advances related returns

13 Statement of Outstanding total deposits &

Asset classification &
advances for rural branches
Provisioning software
14 Maturity pattern of advances, deposit and
borrowings etc.
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 CERTIFICATES
Certificates are generally prepared manually based on the
information/data generated from Asset classification &
Provisioning software or CBS software. Following may be the
certificates to be issued by auditor

S.No Details

1 Certificate on remittance to DICGCI

2 Statement of Cash & Bank Balance for 12 odd dates

3 Certificate on exposure to Sensitive Sectors

4 Certificate on Ghosh Committee Recommendations

5 Certificate on Jilani Committee recommendations

6 Movement Chart of Gross NPA

7 Certificate on restructured accounts

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8 Certificate on subvention claim for interest relief 2013-14

9 Certificate on subvention claim for interest relief 2012-13

10 Certificate on subvention claim in respect of Rupee export credit

 CERTIFICATES – CONTD..

S.No Details

11 Certificate on incentive for timely repayment of short term crop loan

12 Scheme of 1% Interest Subvention to Housing Loans

13 Certificate in respect of Education Loan Interest Subsidy Scheme

14 Claim for Interest Subvention for Lending to Women SHG’s for the
credit upto 3 Lacs

15 Claim for Additional Interest Subvention for the prompt payment for
eligible schemes

16 Certificate under the Credit Linked Capital Subsidy Scheme

17 Certificate of remittance of recoveries made under CGTMSE claim

settled accounts
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PART C - TAX AUDIT REPORT

To be signed as per Section 44AB – both Form 3CA & 3CD - Use
Letter heads

Importance may be given to –

 TDS – correct rates, no deduction, late deduction, paid on

time to the authorities
 Rule 6DD
 Section 43B
 Prior period items
 Declarations and Management Letters

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 TAX AUDIT REPORT – RELEVANT CLAUSES
 Clause 9 (b) and (c) - Books of Accounts Maintained and Examined – Generally printed
list.
 Clause 14 - Particulars of Depreciation allowable – Details of Purchase, Sale, Transfer
and Disposal/ Write-off of Fixed Assets to be verified by Branch Auditor.- Depreciation
calculation – generally at HO.
 Clause 17(a) – Any amount of Capital Expenditure debited to Profit and Loss A/c.

 Clause 17(e) – Expenditure by way of Penalty or Fine for violation of any law debited to
Profit and Loss A/c.

 Clause 17(f) – Any amount inadmissible u/s 40(a):

(a) Amount inadmissible u/s 40(a)(i): – Any interest paid to a Non-Resident person
or to a Foreign Company without TDS.

(b) Amount inadmissible u/s 40(a)(i)(a): – Any interest, commission, brokerage, fees
for Professional/ Technical Services or Contract Amount paid to a Resident person
without TDS.

(c) Amount inadmissible u/s 40(a)(i)(a): – Any tax, interest or penalty under Income
Tax Act or Wealth Tax Act debited to P&L A/c.

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 TAX AUDIT REPORT – RELEVANT CLAUSES

Clause 27 - Compliance of TDS provisions: -

Verify TDS compliance under all relevant sections like Salary, Interest, Interest
to NRI, Contract Payments, Technical & Professional Fees etc. –

Provide Details of :
(a) Tax Deductible but not deducted at all.
(b) Shortfall on account of lesser TDS than required.
(c) Tax Deducted late
(d) Tax Deducted but not paid to Central Govt.

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 PART D – DOCUMENTATION
S. Document name Particulars
No
1 Appointment Letter Letter appointing Auditor given by Bank
2 Engagement Letter Letter confirming Engagement given by Auditor (As
required by SA 210 “Agreeing the Terms of Audit
Engagements”)

3 Management Letter obtained from Management to confirm

Representation Letter certain matters or support other audit evidence (SA
580 “Written Representations”)

4 Bank Closing Circular Annual Inhouse closing circular given by

management, other circulars like interest on
advances/deposits, DOA etc.
5 RBI Circulars Circulars issued by RBI like IRAC Norms
6 Audit Time Schedule Person name, date and work performed
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7 Analytical Review Like comparative with previous year financial
statements etc.
 PART D – DOCUMENTATION
S. Document name Particulars
No
8 Signed Financials Financials along with Returns/certificates signed by
Auditor
9 LFAR & Auditor’s Signed copy of Auditor’s Report
Report
10 Working Papers:
(a) Advances Account wise break up of Advances, Steps for Work
Performed, List of NPA and NPA, Interest Report (if any)
(b) Fixed Assets Fixed Assets schedule/register
(c) Deposits Account wise break up of Deposits, Steps for Work
Performed, Interest Report (if any)
(d) Statutory TDS, Service Tax remittances and returns (Bank may have
Compliances system of centralized payment by Head Office, in such
cases Branch Auditor has to only ensure whether liability
is correctly stated in financials)
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(e) Expenses Expenses Ledgers
 THANK
YOU
CA DAYANIWAS SHARMA, FCA, FAFD
45 +91 9885200029
daya@lncofirm.com
Hyderabad