Bank Branch Audit-Quick Review of –Long form of Audit Report
CA.T. R. Chandrasekaran.
Bank audit has become almost a seasonal audit as far as branch auditors are concerned despite the fact that the listed banks are supposed to conduct quarterly audit/limited review as per the listing arrangements or RBI guidelines,the involvement of branch auditors are not utilised fully by the banks. Branch auditors' job role is limited to conduct the branch audit invariably during the last week of March or first week of April of a year. Branch auditors have to face several problems during this period namely, shortage of audit assistants due to CA examinations,unavailability of rail /bus/air tickets, branches are not geared up to prepare themselves for facing the audit procedures.
Fortunately the suspense prevailed over the question of power to have appointment has taken several twists and turn and temporarily solved at present for the year 2007--2008,and the list of branch auditors will be sent by RBI to the various banks (other than the banks which have opted for appointing of auditors by form their selection) for appointment. Almost all banks unanimously follow as far as branch audit is concerned one uniform system that is predetermined date for completion of the audit as well as placing the annual audited accounts to their Boards. In this context a quick review of the audit procedures to be adopted by the branch auditors without offending the RBI instructions and the responsibilities of the auditors are discussed below.
A. General Guide lines for Branch audit.
Certain amount of planning is necessary before the commencement of the audit which includes :-
ensuring the availability of audit staff for quick completion;
Conversant with the latest circulars issued by RBI and respective banks;
Accounting Standards issued by the ICAI as applicable to banks
Collecting the information relating to the business size of the branches to be audited in order to ascertain the manpower requirements and the number of days required to complete the audit
Knowing the location of the branches,availability of transport and tickets,nearby hotels,timings of the branches etc.,6) audit team should include persons who have the knowledge of the use of computers and the various computer operating systems.
System of keeping books and the nomenclature used by banks are not identical among banks.
Moreover all banks are now under Core Banking Solutions system where transactions of the branch are processed only at the processing centers. In such branches the statements required for the purpose of audit are auto generated and require special knowledge for verifying the same .
In the case of banks since there is a good system of internal control and audit ,hence the auditor need not spend much of his time on verification of deposit items and interest calculations,random test audit may be resorted to.
However more vigil and verification is required in-respect of credit related disbursement made by the bank. Similarly, unadjusted suspense accounts both debit and credit entries requires greater scrutiny from the point of true and fair view concept.
In carrying out audit and verification, the auditor should keep in mind the concept of 'materiality' and items which do not materially affect the overall presentation of the financial statements may be ignored.
B. Master Circulars of RBI (2007-08)
Reserve Bank of India issued numerous circulars on Income Recognition,asset Classification and on provisions since april,1992. Many of these circulars are now outdated, consolidating all the earlier circulars issued by them, RBI is issuing a master circular every year. The circulars issued for the year 2007-08 Which are more relevant for the purpose of branch audit are listed here. These circulars can be downloaded from the RBI's official website www.rbi.org.in
1.-RBI/2007-2008/26 DBOD No. BP.BC. 4/21.01.002 / 2007-08 dt.02/07/07 Master Circular - Prudential Norms on Capital Adequacy
2. DBS No. FrMc. BC No. 6/23.04.001 / 2006-07 dt : 25.07.2006 - Master Circular - Frauds -Classification and Reporting.
3.DBOD.No. BP. BC.14/21.04.141 / 2006-07 dt : 02 .07.2007 - Master Circular -Master Circular - Prudential norms for classification,valuation and operation of investment portfolio by banks
4.RBI No.2007-2008/39 DBOD.No.BP.BC.12/21.04.048/2007-08 dt.02/07/07 Master Circular -Prudential Norms on Income Recognition Asset Classification and Provisioning pertaining to advances
5.RBI/2006-2007/43 DBOD No. Dir. BC. 9/13.03.00/2007-08 dt.02/07/07 Master Circular- Loans and Advances - Statutory and Other Restrictions
6 RBI/2007-08/53DBOD.BP.BC No.14 / 21.04.018/2007-08 dt 02/07/07 . Master Circular - Disclosure in Financial Statements Accounts
D. Long Form Audit Report(LFAR)
The objective of LFAR To
-report on the qualitative aspects of the various systems and procedures in all areas of banking like Credit Management ,House Keeping,Regulatory compliance, Statutory requirement etc.,
- help the management and the regulatory authorities to identify the strength and weakness of the systems and procedures prevalent in the bank.
-helps the subsequent auditor to understand the functioning and shortcomings of the branch
LFAR is not a question and answer format and usage of "yes' and"no" to be avoided. If the space provided is not adequate separate sheets has to be used. LFAR calls for a very proactive , positive and constructive approach from the auditors and in order to ensure a quality report,the branch auditors should study the various audit reports of the branch during the year like inspection report,previous statutory report, previous LFAR,RBI inspection report,EDp audit report etc.,The comments in the LFAR should not be vague but should be specific. General terms like “limits not renewed in a few cases”,”in a few ceases it was observed” “some balances did not tally”
Format for Branch LFAR is different from the Banks LFAR and Branch auditors have to be familiar with that also,so that Branch auditors can furnish feedback to the Statutory Central Auditors in order to enable them to incorporate such remarks in the banks LFAR. For doing this the branch auditor should be familiar with the points covered in the Bank's LFAR also
All details required for finalising the branch LFAR has to be collected before leaving the branch as the auditor is not entitled to claim separate TA and HA.
The main audit report and the LFAR are intended for a different purpose. Hence all the adverse comments affecting the P/L a/c and Balancesheet must be mentioned in the main report and qualified and should find a place in the LFAR also.
Regarding the audit of advances, collection of the following details would be much helpful to the Branch Auditor to complete his LFAR.
In respect of advances, reports in the following formats may be given:
(a) Promissory Notes which matured during the year were not renewed till the date of completion of our audit in the following cases :
Name of party, Nature of Advance, Date of DPN, Amount Outstanding as on the Closing date
(b) Documents executed in the following cases were incomplete
Party, Nature of Advance, Limit Sanctioned, Balance Outstanding, Remarks
Mention here about the defects in documents like omission to get signature of partner, co-obligants, omission of particulars of goods hypothecated etc.
* (a) If the Stock / Bin cards maintained at the Godown were incomplete / not written up at the time of our visit details may be given
* (b) The name board in token of the goods having been pledged to the bank was not exhibited in the following parties' godowns.
* (c) The branch does not keep the original or certified copy of invoices in respect of goods pledged, to verify the value of the goods pledged. State whether considered as secured or unsecured.
* (d) The following goods pledged were not moved for considerable time (Depending upon type of goods)
Party, Date of lodgment, Description of materials, Value Rs.
* (a) The stock statements from the following parties were not received as at the closing date.
Party , Outstanding as on the closing date , Last stock statement received, up to what date, Whether to consider the accounts as secured / unsecured
* (b) No stock records are maintained at the Shop / Godown / Factory of the following parties to verify stock shown in the statement:
Party , Nature of Goods, Value Rs., Outstanding as on the closing date Rs., Whether considered Secured / Unsecured
(c) The Insurance Cover on the Stocks were inadequate in the following cases
Party, Amount of cover Rs., Value of stocks held Rs.
* The Insurance Cover for burglary has not been made in the following cases
* Name of the Party , facility, Nature of goods.
* (e) The charge in favour of the Bank has not been created and registered with the Register of Companies till the date of audit in respect of advances to the following companies.
* (f) The name board of the bank in token of the goods having been hypothecated to the bank has not been exhibited in the shop / godown / factory of the following parties.
* (g) The following items of stocks have not moved for considerable time
* Party, Date from which it has not moved Rs., Value
Loan against own deposits
* (a) In the Loan Analysis statements relating to Loan Against Deposits, each borrowal account will not be written individually by branches. However, the borrowal accounts which have discrepancies like imperfect documentation, non-compliance of RBI directives on Loan against Deposits, balance outstanding in the Loan account exceeds the deposits and unpaid interest, margin not maintained etc., should be written individually. Total number of accounts and balance outstanding should be written with year-wise break-up as per format given below in L.A. statement.
Year No.of A/cs. Balance Outstanding Rs.
Prior 2004 -- --
2004-2005 -- --
2005-2006 -- --
2006-2007 -- --
2007-2008 -- --
* Individual A/cs Sub Total *
as per columns provided for in printout
* 1. _____________________________
* Total ___________________
* However, OD and TOD account against Deposits should be written individually as in the case of other borrowal accounts in LA statements with full particulars as per columns provided for in LA printout without any omission and the balances under Loan against Deposits, OD, TOD as per LA statements should individually tally with respective figures as per G.L.
* (b) Statutory auditors shall scrutinize individual accounts even in Loan against Deposits with documents, securities, etc. even though not written individually in LA and ensure correctness of information given by branches. The discrepancies noticed during the course of audit shall be reported in Audit Report for follow up.
* The Deposit Receipt have not been discharged in favour of the Bank in the following cases.
Party, Amount outstanding Rs.,
* (d) The RD / RP pass books have not been deposited with the branch in the following cases.
Party, Amount outstanding Rs.
* (e) The lien on FD / RD / RP others has not been noted in the branch books in the following cases:
* Name, Type of Loan, Balance outstanding Rs., Deposit details.
* Jewel Loan
* (a) In case of Jewel Loans also, the accounts which have discrepancies like advances against spurious gold, fraud, etc., alone should be reported by branches account wise in L.A. Other accounts have to be reported group wise and year wise as explained in 5(a) above. Statutory auditors shall also report the accounts which have discrepancy as explained in 5 (b) *
* (b) The certificate for value of the jewel was not produced in the following cases.
Date of Name of the Balance outstanding
Advance borrower Rs.
* Staff Housing Loan / Home Loans *
(a) The title deeds have not been deposited with the branch in the following cases. Mention whether considered secured / unsecured in the accounts.
(b) Legal opinion relating to title to the property / encumbrance certificates were not produced to us in the following cases : (Indicate how it is dealt with in the accounts) *
(c) Insurance Policy has not been taken / renewed in respect of properties offered as security in the following cases: * *
Party, Value of the Policy not taken , not renewed after
Consumer Credit Installment Loan
* We give below a list of instances where the instalments have not been paid regularly and the accounts are long overdue.
Party, Balance outstanding as at the Closing date, Number of instalment paid upto the Closing date, Due date for last instalment Payable,
Agricultural Short Term Production Loan
The following advances are long - overdue
Party, Date of Advance, Amount of Repayment Outstanding , due on
Agricultural Medium Term Loan
Schedule of repayment has not been adhered to in the following cases:
Party, Outstanding as at the closing date, Number of instalment upto
the Closing date, Due date of last instalment Payable.
(a) Assignments of the policy in favour of the bank has not been made in respect of the
Party Amount outstanding Remarks of
as at the closing date the Auditors
(b) Latest surrender value certificate has not been obtained and produced to us in respect
of the following advances:
Party, Outstanding as at the Closing date, Date of latest Surrender Value Certificate, Remarks of the Auditors
* (c) The age has not been admitted in the policies in respect of advances to the following parties:
Medium Term Loans
(a) The following advances were made to acquire machineries but the invoices for purchase of machineries were not made available to us / the machineries were not acquired till the date of completion of our audit. Please state how dealt with in the accounts.
(b) The instalment were long overdue in the following cases:
Party Amount outstanding Last instalment Paid
(c) The name of the bank has not been painted / name board has not been fixed on the
machinery as a token of the asset being hypothecated to the bank in the following cases.
* (d) (i) The Insurance policy covering the machinery was not taken / not produced to us in the following cases:
* (ii) The Insurance policy covering the machinery has not been renewed in the following cases :
(a) The following advances were long over-due as on the closing date :
Party Nature of Date of Date by outstanding Amount
Advance Advance which due
(Report also TOD's not brought to credit within the stipulated time)
(b) The following accounts were inoperative except the debits for interest (increase in working capital Accounts)
Party Nature of Amount Interest debited
during the year
(c) The repayments in the following cases were negligible compared to the amount of advances..
Party Nature of Date of Amount Amount received Interest
Advance Advance outstanding during the year accrued on
* (a) The interest for the period mentioned in the following cases were wrongly debited in the loan account instead of interest accrued account. Please state whether rectified at the time of audit.
* Party Nature of Interest for Amount
* Advance the period Rs.
* (b) The interest remained uncollected in the following cases while the loan account has been settled in full.
The following bills were long over-due as on the closing date
DA Bills : (since adjusted items may be omitted)
Bill No. Date of Party Amount Due on Place at which
Purchase Rs. drawn
Bills returned unpaid
The following bills returned unpaid remained unadjusted for a long period
Party Date of Date of Amount Remarks*
Purchase return Rs.
* Mention here the reason for not debiting the party's account or where the goods are held and reason for non-payment.