ISSUES IN BANK BRANCH AUDIT STUDY CIRCLE SEMMINAR

WIRC, RAJKOT BRANCH

CA. BHAVESH PABARI

AUDIT OF BANK BRANCHES

Bank utilize the service of chartered accountants for different types of audits in an extensive manner i.e. for Non Statutory Audit/Inspection Statutory Audit

Non Statutory audits Concurrent Audit Internal Audit Revenue Audit Stock Audit System Audit Special/Snap Audit Statutory Audit The audit in accordance with the provision of statute governing it -u/s. 30 of The Banking Regulation Act, 1949. -u/s. 10 of The Banking Companies Act, 1970/1980. -u/s. 41 of The State Bank of India(Subsidiaries Bank) Act, 1959 -u/s. 19 of The Regional Rural Bank Act, 1976. -u/s. 224 of The Companies Act, 1956. -Provides for the audit of the accounts of the bank.

TYPES OF AUDIT

Appointment & Role of Auditor

Banks appoints Chartered Accountants to carry out the audit and certification of their books and returns, out of panel compiled by ICAI and Role of the auditor is to carry out audit and submit the report to the central auditor. What to do on appointment? - Letter of Engagement (AAS 26) - Communication with the previous chartered accountant

AUDIT PLANNING & PROGRAMING

Before we plan the audit, we must have an idea of the following matters/criteria of the Bank Branch Business mix of the Bank Branch Types of the Advances and Nature of Advances Bigger Advance No. of Accounts NPA and Amount of NPA Software deployed at the Branch
Cont..

Cont
On the basis of above, an audit team is to be determined to carry out the audit.

Before we start an audit, it is necessary to go through the following reports/Returns Study of Closing Instruction Circular Various Audit Reports/Inspection Reports including last year statutory audit reports and effect of MOC if any Study of Important Circulars / guidelines Study of Annual Closing Returns including Form A and Form B On the basis of above, issue a letter of requirement to the Branch in charge/Manager that needs to complete the audit assignment

AUDIT & ASSURANCE STANDARD

Auditor has to consider the applicability of the Audit and Assurance Standards while audit of the bank branch. All the standards are applicable to bank branch audit except below: AAS 10 Using the work of another auditor AAS 12 Responsibility of joint auditor AAS 31 Engagement to compile financial information AAS 32 Engagement to perform agreed upon procedures regarding Financial Information AAS 33 Engagement to Review Financial Statements

ACCOUNTING STANDARDS & DISCLOSURES

Reserve Bank of India has issued Master Circular No. RBI/200506/32 dated 01.07.2006 regarding the disclosure required to be made in the Balance sheet. The Circular depicts as below:

Disclosures as per accounting standards - Where RBI has issued guidelines Accounting Standards ,9,15,17,18,21,22,23,24 & 25 - Other Accounting Standards Banks are require to comply with the disclosure norms stipulated under the various accounting standards issued by ICAI Enhanced Disclosures There are certain other disclosures are required to be made as specified by the RBI and the same is called as enhanced disclosures, the same have been achieved through revision of Balance sheet and Profit & Loss Account of banks and enlarging the scope of disclosures to be made in Notes on Account

ANALYSIS & VERIFICATION OF ACCOUNTS

Following are the key/Check points to analyze the accounts. Physical Verification - Cash, Adhesive Stamps, Postage and tally with GL - Physical verification of valuable stationery and fixed assets. Verification of Balances - Opening Balance with last year audited accounts - Closing Balance of GL with subsidiary records - Verification of the Returns and certificates with Balance sheet and Profit & Loss Account and other records available at the Bank Branch - Verification of the Exceptional Transaction Report

Cont..

Cont

Deposits

Obtain the weekly statements, Review the movement in the deposits and if any, divergent trend, obtain the clarification for the same. Review the difference of deposits as on 31.03.2007 and date of audit. Review the Target with achievement. Review the Overdue/Matured Term Deposits shown in demand deposits, whether interest provision have been made or not. Check the date when interest applied on the deposits. Verification of Staff Accounts Whether the segregation of In-operative accounts have been made or not? Review the Operations in In-operative accounts Review overdraft in Deposit accounts Verify premature withdrawals of Term Deposits. Cont

Cont

From the Weekly Statements, verify the movements in the Advances. Verify the difference of advances as on 31.03.2007 and date of audit. Verify the Target with Achievement Verify the Loan Application Register and Sanctioned Register Review the powers of the Branch Manager Verify the documents of Advances Fund based and Non Fund based disbursed adopting LIFO method Review the security available against the advances disbursed Scrutinize the Ledger of Advances including BP/BD limits and Review the disbursement made. Obtain the List of Potential NPA Accounts Verify the NPA Register and Movement in NPA Accounts Verify the suit filed and decreed accounts & their follow up Verify the invoked Non-Fund based Advances, BG, LC Verify the statement of the Overdue accounts Cont..

Advances

Cont

Analysis of entries outstanding in the Suspense Accounts, Sundry Debtors, Sundry Creditors Checking of Addition/deduction to the fixed assets. Review Locker Register and Locker Rent and provision of the same. Review the Inter branch reconciliation, whether any repetitive entries? Need reporting? Verify all the balances are shown under proper heads Verify credit balance of Advance and Debit Balance in Deposits are not netted off and shown properly Verify the Interest accrued but not due in case of deposits and advances are not included in respective heads but shown separately Verify the Inward/Outward collection and outstanding entries if any Compare all the figures with previous years figures Verify the TDS deducted paid in time/Form 15G, 15H obtained and submitted to the I.T. department in time. Verify that Service Tax payment have been made by the branch in time. Verify the lease Deed and AMC in force. Review other internal controls and checks

Others

VERIFICATION OF THE ADVANCES

While verification of the advances, we must have knowledge of the following
aspects: Provision of The Banking Regulation Act override the one in any other law. Restriction on certain advances by the RBI and/or HO of the Bank. RBI has issued a Master Circular No. RBI/2006-07/17 dated 01.07.2006 viz. Loans & Advances Statutory & Other restrictions. Some important aspects of the circulars are: Bank can not finance against its own shares Generally Bank can not finance directly or indirectly to the directors of its own bank No advance shall be granted to the relatives of the directors without prior approval of the Board of the Bank. Restriction to grant of financial assistance to industries producing /consuming Ozone Depleting Substance No loan granted against partly paid shares No loans to be granted to proprietorship/partnership concern against the primary security of shares/debentures No loans granted against the FDR of the Other Banks Bank can not grant advance against certificate of deposit Bank can not grant finance to construct building meant purely for govt. or semi govt. Bank should not advance against bullion/Primary Gold/Silver There are other restrictions to the advances mentioned in the above sited circulars.

Verification of Documents for Advances

Verification of the documents bifurcated in three parts:

A. CREDIT APPRAISAL
Credit appraisal is the verification of the pre sanctioned documents of the advances disbursed. Following are the list of some of documents which required review while verification of the advances: - Contribution of the promoter (Project Report) - Justification of the Projections, existing or new venture - Branch Visit Report (Pre-Sanction Visit Report) - CR of other Banks and No Dues - Powers to borrow of the borrower. - Valuation Reports of the Property/Properties. - Title Clear Reports of the mortgaged property

Cont
B. BRANCH DOCUMENTATION Before we start a verification of the documents, we have following aspects in our knowledge. TYPES OF ADVANCES There are following types of advances given by the bank against the different securities. Fund Based Advances
Overdraft against securities Working Capital Finance/Packing Credit Term Loan/WCTL Bills Purchase/Bill Discount/Factoring

Bank Guarantee - Letter of Credit

Non Fund Based Advances

Cont
TYPES OF SECURITIES
There are different types of securities against which the above said advances are generally granted by the banks
Prime Security Collateral Security

Prime Security is the security under the charge of the

bank for which bank has given the finance to create/build/construct/purchase the same.

Collateral security is the additional security under the

charge of the bank on which charge is created to cover the risk / minimize the risk /reduce the risk of advance where the bank is having no actual possession of/mortgage over the prime security.

Cont
TYPES OF SECURITIES Security may be of the following: Land/Real Estate Stocks/Shares Debentures Goods Life Policies Book Debt Fixed Deposits Supply Bills Guarantee etc.

Cont
MODE OF CHARGING
1. Mortgage A. Simple Mortgage [sec 58(b) of the Transfer of Property Act] Simple mortgage is the mortgage of the immovable property without delivering possession of the property, sale of such mortgage requires prior approval of the court. B. Mortgage by way of Conditional Sale [Sec 58(c)] This mortgage is nothing but conditional sale of the immovable property with certain terms and condition, sale become void if certain condition not fulfilled as mentioned in the deed of mortgage.

Cont..

C. Usufructuary Mortgage [sec 58(d)] In this type of mortgage actual possession of the immovable property is transferred to the financer. The possession of the property released after all the dues of financer get cleared. D. Equitable Mortgage [Sec 58(f)] Equitable mortgage is nothing but the Deposits of the Title Deeds with the financer, such mortgage only effected in the town notified by the state govt. Title Deeds means documents or deeds or legal instrument which proves the right of a person in a particular property. E. Anomalous Mortgage [Sec 58(g)] Mortgage Created not covered by above types of mortgage, means it is generally combination of the above two or three mortgages.

Cont..
2. Pledge Pledge means bailment of goods for the purpose of providing security for the payment of debt or performance of promise There must be a actual delivery of goods. 3. Hypothecation Hypothecation means a charge against movable property for an amount of debt where neither possession nor ownership is passed to the creditors. Goods remain in the possession of the borrower, only equitable charge is created over movables. 4. Assignment 5. Lien, and 6. Set-off

Cont

With this Knowledge Read the Sanction Letter carefully, what type of charge is mentioned in the same and Review the documents that the same is obtained is in consonance with the stipulations of the sanction or not? For Guarantee, Letter of Guarantee For Hypothecation, Hypothecation Deed For, Assignment, Lien and Set-off, Deed of General Letter of Lien and Letter of Set-off. For Pledge, Deed of Pledge For Mortgage, Generally memorandum of deposits of title deeds In Case of Bank Guarantee, Counter Guarantee Letter of Partnership/Proprietorship/Resolution Insurance/ECGC/Forward Contracts Any other undertaking mentioned in the Sanction Letter

Cont
C. REVIEW OF THE ACCOUNTS - Audited Accounts - Achievements with Targets - Account with other banks - Turnover with Bank and in Books - Adhoc facilities granted, request letter from the borrower and justification - M.O. Reports i.e. Branch Visit Reports - Other Audit Remarks - Letter of Acknowledgement of Debt.

Important RBI Circulars

Bank have ceased to issue a pass book to the savings account holders (Individual), Bank are advised to invariably offer the pass book facility to all its savings bank account holders (Individual) without any charges. TDS required to be deducted from the payment of interest paid/payable under senior citizen savings account scheme 2004 or to obtain Form No. 15H. Bank Shall Obtain the Certificate from the approved architect that construction of the property is as per the approved plan & affidavit from the borrower in this regard shall also be obtained in case of housing loans.

RBI/2006-07/139 dated 04.10.2006 RBI/2006-07/171 dated 10.11.2006

RBI/2006-07/182 dated 17.11.2006

Cont
If locker not operated for more than one and three years, bank should immediately contact the locker hirer and advise them to operate the locker or surrender the locker though rent paid regularly by the locker hirer.

RBI/2006-07/198 dated 04.12.2006

In case of senior citizen savings scheme 2004, if nominees are NRI and/or PIOs, in case of death of senior citizen, the nominees can neither continues the account nor repatriate the proceeds of the accounts.

RBI/2006-07/217 dated 22.12.2006

Bank should do away with the stapling of any note packets. Bank should sort notes into re-issuable and non-issuable, soiled notes in unstapled condition may be tendered at RBI inward remittance through currency chest. Bank should forthwith stop writing of any kind on watermark window of Bank notes

RBI/2006-07/241 dated 31.01.2007

Cont
Bank should obtain minimum two independent valuation reports for the properties valued at Rs. 50.00 crores or above.

RBI/2006-07/224 dated 04.01.2007

Bank should not grant fresh loan or renew existing loans in excess of Rs. 20.00 lakh against NR(E)RA and FCNR(B) Deposits, either to depositors or to third party.

RBI/2006-07/244 dated 31.01.2007

Thank You
Worry is the Interest you pay on trouble (Loan) before it comes (disbursed)