Statutory Bank Branch

Audit - Technical and

Practical Aspects

CA. Rajkumar S. Adukia

radukia@vsnl.com /
rajkumarfca@gmail.com
http://www.carajkumarradukia.com
093230 61049/098200 61049

Agenda
1.
2.
3.
4.
5.
6.

General
Pre commencement of work
Understanding the banking business
Audit Planning
Audit procedures
Audit Reports

Bank Branch Audit

Rajkumar S.Adukia

General

Bank Branch Audit

Rajkumar S.Adukia

History of banks

In 1920 Imperial bank was established

The Reserve Bank of India was established as
the Central bank of the country in 1935 under an
act called Reserve Bank of India Act,1934
In 1955, the Imperial Bank of India was
nationalised and was given the name "State
Bank of India".
On the suggestions of Narsimham Committee,
the Banking Regulation Act was amended in
1993 and thus the gates for the new private
sector banks were opened.
Bank Branch Audit

Rajkumar S.Adukia

Types of banks
1)
2)
3)
4)
5)

Nationalised banks
Co-operative banks
Private sector banks
Foreign banks
Regional rural banks

Bank Branch Audit

Rajkumar S.Adukia

1.
2.
3.

4.

5.
6.
7.
8.

Special kinds of business

undertaken by bank
Foreign exchange business
branches
NPA recovery business
Service branches dealing in Clearing house
operations business
Corporate banking and Industrial finance
business
Personal banking business
Housing finance business
SSI business
Agricultural finance business
Bank Branch Audit

Rajkumar S.Adukia

Pre-commencement
Work

Bank Branch Audit

Rajkumar S.Adukia

Pre-commencement Work
1.

2.

3.

4.

5.

Beginning of audit cycle is from receipt of

appointment letter
Check the compliance u/s. 226 (3) with regard to
qualifications and disqualifications of auditors
(concurrent ,Internal,Revenue, Stock,System, Credit
Risk or other Special Audits conducted in same
previous year)
Decision for Acceptance or Rejection of Assignment
( Cost Benefit analysis, other considerations e.g.
time available, expertise available)
Communication with Previous Auditor by Registered
AD (clause 8 of First Schedule to the Chartered
Accountants Act, 1949
Finding Out Expected date of submission of reports

Bank Branch Audit

Rajkumar S.Adukia

Pre-commencement Work
6.
7.
8.

9.

10.

11.

12.

Finding out Scope of work

Issue of Engagement Letter under AAS 26.
Copy of all circulars of RBI applicable to branch
have to be obtained and kept ready for reference
Attending bank branch audit seminars could
enhance the auditors knowledge on bank audits
Banking terminology and schemes should be well
understood
A reading of Guidance note on audit of banks by
ICAI would provide valuable guidance.
It should be ensured that minimum fees is set as
per RBI circular dated 17 th March 2004

Bank Branch Audit

Rajkumar S.Adukia

Disqualifications

1.
2.
3.

4.

5.

It should be ensured before accepting the assignment that

you do not come into following category of persons ( Section
226(3) of Companies Act 1956)
Body Corporate
An officer or employee of the Bank
A person who is a partner, or who is in
the
employment, of an officer or employee of the Bank
A person who is indebted to the Bank for an amount
exceeding one thousand rupees, or who has given any
guarantee or provided any security in connection with the
indebtedness of any third person to the bank for an amount
exceeding one thousand rupees
person holding any security of that bank, Security means an
instrument which carries voting rights.
Bank Branch Audit

Rajkumar S.Adukia

10

Understanding the Banking

Business

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Rajkumar S.Adukia

11

Knowledge of bank
business

The auditor needs to obtain a level of knowledge of

bank business that will enable him to identify the
events, transactions and practices that may have
significant effect on the financial information

Knowledge of bank business can be obtained fromBanks annual report to shareholders

Internal financial management reports for current and
previous periods including budget if any
Previous year audit working papers
Discussion with and Letters seeking Information from
bank branch Manager
Bank policy and procedures manual

1.
2.
3.
4.

5.

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Rajkumar S.Adukia

12

Knowledge of bank
business
Usage of knowledge of bank business
1.
2.
3.

4.

To develop an overall audit plan

To identify areas of special audit consideration
To evaluate the reasonableness of accounting estimates
and management representations
To make judgments regarding the appropriateness of
accounting policies and disclosures

Bank Branch Audit

Rajkumar S.Adukia

13

Letter seeking information

1.
2.

3.
4.
5.

Before actual commencement of audit a letter may

be written to the management of bank asking for
following information
Organizational chart of bank and bank branch
List of departments in the bank branch along with
name of head of department.
Authority and responsibility of each officer in the bank
Special feature of each banking product
Areas where work has been outsourced to outsiders

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Rajkumar S.Adukia

14

Letter seeking information

6.

7.
8.
9.
10.
11.
12.

Copies of last year annual accounts and current year

quarterly/half yearly accounts
Information of top 10 borrowers for each kind of loan
Instructions issued by Head office for closing of accounts
Details of software used by bank
List of reports generated by the software
Accounting policy followed by the bank
Copy of day book

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Rajkumar S.Adukia

15

Areas where special knowledge

about the business of Bank Branch
is required

Special Features of Banking Business

Special audit considerations in bank branch audits
Laws applicable to the banking business
Internal controls in banks
Additional Controls for Computerised Environment
Accounting System
Accounting standards applicable to bank
Formats of Financial Statements ( as per schedule III
section 29 of Banking Regulation Act ,1949)
Important Circulars of RBI

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Rajkumar S.Adukia

16

Peculiar features of
Custody of large volumes of monetary items, including
banking
business
cash and negotiable
instruments, whose physical

security has to be ensured

Deals in a large volume and variety of transactions in
terms of both number and value.
Operate through a wide network of branches and
departments, which are geographically dispersed
The nature of business which makes it susceptible to
Frauds by Customers.

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Rajkumar S.Adukia

17

Special audit
considerations in bank
Effect of the statutory and regulatory requirements
branch
The scale of audits
banking operations and the resultant

significant exposures
Extensive dependence on IT to process transactions
Continuing development of new services and banking
practices
Particular nature of risks associated with the
transactions undertaken by banks

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Rajkumar S.Adukia

18

Internal controls in
bank branch
1.

2.
3.

4.

Work of one staff member is invariably supervised /

checked by another staff member, irrespective of the
nature of work
Banks have a system of job rotation among staff
The financial and administrative powers of each official
/ each position are fixed and communicated to all
persons concerned
Branch managers have to send periodic confirmation
to their controlling authority on compliance of the laid
down systems and procedures.

Bank Branch Audit

Rajkumar S.Adukia

19

Internal controls in bank

branch
5.

6.

7.

8.

All branches of a bank have a unique code number

which is circulated amongst all offices of the bank
All books are to be balanced periodically. Balancing is
to be confirmed by an official
Particulars of lost security forms are immediately
advised to controlling so that they can exercise
caution
Fraud prone items like currency, valuables, draft
forms, term deposit receipts, travellers cheques and
other such security forms are in the custody of at least
two officials of the branch

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Rajkumar S.Adukia

20

Additional Controls for

Computerised
The system maintains a record of all log-ins and logEnvironment
outs
1)

2)

3)

4)

If the transaction is sought to be posted to a dormant

(or inoperative) account, the processing is halted and
can be proceeded with only with a supervisory
password
The system checks whether the amount to be
withdrawn is within the drawing power.
The system flashes a message if the balance in a lien
account would fall below the lien amount after the
processing of the transaction

Bank Branch Audit

Rajkumar S.Adukia

21

Additional Controls for

Computerised
Access to the system is available only between
Environment
stipulated hours and specified days only.
5)

6)

7)

8)
9)

Individual users can access only specified directories

and files
Exception situations such as limit excess, reactivating
dormant accounts, etc. can be handled only with a
valid supervisory level password.
A user timeout is prescribed
Once the end-of-the-day process is over, the ledgers
cannot be opened without a supervisory level
password

Bank Branch Audit

Rajkumar S.Adukia

22

Laws applicable to the

banking business
1)
2)

3)

4)
5)
6)
7)
8)

Banking Regulation Act, 1949

Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970
Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980
State Bank of India Act, 1955
State Bank of India (Subsidiary Banks) Act, 1959
Regional Rural Banks Act, 1976
Companies Act, 1956
Co-operative Societies Act, 1912 or the relevant state
Co-operative Societies Act.

Bank Branch Audit

Rajkumar S.Adukia

23

Laws applicable to the

banking
business
Information Technology Act, 2000
9)

10)
11)
12)
13)
14)
15)
16)

Prevention of Money Laundering Act, 2002

Credit Information Companies Regulation Act, 2005
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002
Banking Cash Transaction Tax (Chapter VII of Finance
Act, 2005)
Service Tax (Chapter V of Finance Act,1994)
Income Tax Act ,1961
Securities Transaction tax (Chapter VII of Finance
(No 2) Act , 2004

Bank Branch Audit

Rajkumar S.Adukia

24

Laws applicable to the

banking business
Regulations relating to Foreign exchange

FEMA 1999 Notifications ( Nos 1,3,5,8,23 and 26)

Master circular issued by RBI on exports and good of services dated 1 st Oct
2005

Master circular issued by RBI on Rupee export credit and export credit in
foreign currency dated 1st July 2005

Foreign Trade Policy 2004-09

FEDAI Guidelines

Banks Internal Guidelines

Four categories of Transactions are usually undertaken at a branch
Export related transactions

Import related transactions

Remittances (Inward/Outward)

Treasury Operations (Dealing Room/Investments)

The bank is required to take an undertaking under section 10(5) of FEMA, 1999
from the applicant to ascertain and satisfy itself about the purpose of
transaction
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Rajkumar S.Adukia

25

Application of other laws

As per the section 2 of Banking Regulation
not
barred
Act ,1949 the provisions of this Act shall be in

addition to, and not, in derogation of the

Companies Act, 1956 , and any other law for
the time being in force

The provisions of the other laws shall apply to

all proceedings unless they are inconsistent
with the Banking Regulation act,1949

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Rajkumar S.Adukia

26

Accounts and balancesheet

Sub-section (1) of section 29 of the Banking Regulation

Act, 1949 requires every banking company to prepare a
balance sheet and a profit and loss account in the forms
set out in the Third Schedule to the Act or as near
thereto as the circumstances admit.
Form A of the Third Schedule to the Banking Regulation
Act, 1949, contains the form of Balance Sheet
Form B contains the form of Profit and Loss account

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27

Contents of Balance
sheet
Schedule 1 Capital
(Form
Schedule 2 A)
Reserve and surplus

Schedule 3
Schedule 4
Schedule 5
Schedule 6
Schedule 7
short notice
Schedule 8
Schedule 9
Schedule 10
Schedule 11
Schedule 12

Bank Branch Audit

Deposits
Borrowings
Other Liabilities and provisions
Cash and bank balance with RBI
Balance with bank and money at call and
Investments
Advances
Fixed Assets
Other Assets
Contingent Liability
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28

Classification of
Advances as per
Three ways of classification of advances in balance sheet
schedule
9 regulation act ,1949
as schedule 9 of banking
A)Classification by nature
i)Bills purchased and discounted
ii)Cash credits, overdrafts and loans repayable on
demand
iii)Term loans
B) Classification by security
i)Secured by tangible assets

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Rajkumar S.Adukia

29

Classification of
Advances

ii)Covered by bank/ government guarantees

iii) Unsecured
C) Classification by location
I. Advance in India
(i) Priority sector
(ii) Public sector
(iii) Banks
(iv) Others

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Rajkumar S.Adukia

30

Classification of
Advances
II. Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others

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31

Some disclosure items

in balance sheet
1.
2.
3.
4.
5.

6.
7.
8.

Capital Adequacy Ratio

Movements in NPAs
Movement of provisions held towards NPAs
Business (deposits plus advances) per employee
Maturity Patterns of deposits, borrowings, loans and
advances
Exposures to real estate sector,Capital market
Disclosure of Penalties imposed by RBI
Details of Single Borrower/Group Borrower Limit
exceeded by the bank

Bank Branch Audit

Rajkumar S.Adukia

32

Contents of Profit and

Loss accounts (Form B)

Schedule-13
Schedule-14
Schedule-15
Schedule-16

Bank Branch Audit

Interest Earned
Other income
Interest expended Schedule
Operating expenses

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33

Types of accounting
softwares
1.
2.
3.
4.
5.
6.

Stand alone branch-level packages

Multi-branch solutions
Foreign branches
Packages for specialized areas
Packages for Service branch
IT services like KYC
Some of the softwares used by banks are Finacle
(Infosys), Bancs (TCS), and Flex cube (I Flex)

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Rajkumar S.Adukia

34

Possible Segments in
bank business as per ASBusiness segments
17
Treasury
2)
Other bank operations
3)
Residual operations
Geographic Segments
1)
Domestic
2)
International
1)

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Rajkumar S.Adukia

35

Possible Related party

in banks as per AS-18

Parent
Subsidiaries
Associates/ Joint ventures
Key management personnel
Relatives of key management personnel

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Rajkumar S.Adukia

36

Circulars issued by RBI

Disclosure in balance sheets dated July 1, 2006

Prudential norms on Income recognition,asset classification
and provisioning relating to advances dated 1 st July 6
Management of advances dated January 22, 2007
Loans and advances-statutory and other restrictions dated
1st July 2006
Guarantees and co-acceptances dated July 1,2006
Guidelines for securitisation of standard assets dated 1 st Feb
2006
Prudential Norms on Capital Adequacy dated July 1,2006
Para-banking Activities dated July 1,2006
Exposure norms dated October 10 ,2006
Cash Reserve ratio and Statutory Reserve ratio dated
October 11,2006
Provisioning Requirement for Standard Assets dated Feb 19, 2007
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Rajkumar S.Adukia

37

Definition of Non performing

assets as per Circular dated 0107-06
An asset, including a leased asset, becomes non-

performing when it ceases to generate income for the

bank (Para 2.1.1)
A non-performing asset (NPA) is a loan or an advance
where;
i.
interest and/ or instalment of principal remain overdue
for a period of more than 90 days in respect of a term
loan
ii.
the account remains out of order in respect of an
Overdraft/Cash Credit (OD/CC)

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Rajkumar S.Adukia

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Definition of Non performing

assets as per Circular dated 0107-06
the bill remains overdue for a period of more than 90
iii.

iv.

v.

days in the case of bills purchased and discounted

a loan granted for short duration crops will be treated
as NPA, if the instalment of principal or interest
thereon remains overdue for two crop seasons.
a loan granted for long duration crops will be treated
as NPA, if the instalment of principal or interest
thereon remains overdue for one crop season. (Para
2.1.2 )

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Rajkumar S.Adukia

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INCOME RECOGNITION on
NPA

Income from non-performing assets (NPA) is not

recognised on accrual basis but is booked as income
only when it is actually received (Para 3.1.1)
The Accounting Standard 9 (AS 9) on `Revenue
Recognition' issued by the Institute Of Chartered
Accountants of India (ICAI) requires that the revenue
that arises from the use by others of enterprise
resources yielding interest should be recognized only
when there is no significant uncertainty as to its
measurability or collect ability.

Bank Branch Audit

Rajkumar S.Adukia

40

INCOME RECOGNITION
on NPA

Interest on advances against term deposits, NSCs, IVPs,

KVPs and Life policies may be taken to income account
on the due date, provided adequate margin is available
in the accounts (Para 3.1.2)
Fees and commissions earned by the banks as a result
of re-negotiations or rescheduling of outstanding debts
should be recognised on an accrual basis over the
period of time covered by the re-negotiated or
rescheduled extension of credit (Para 3.1.3)

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Rajkumar S.Adukia

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Reversal of income

If any advance becomes NPA as at the close of any year,

interest accrued and credited to income account in the
corresponding previous year, should be reversed or
provided for if the same is not realised.(Para 3.2.1)
This will apply to Government guaranteed accounts
also.
Fees, commission and similar income that have accrued
should cease to accrue in the current period and should
be reversed or provided for with respect to past periods,
if uncollected. (Para 3.2.2)

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Categories of NPA

Classification is only for the purpose of

computing the amount of provision that should
be made with respect to bank advances and
certainly not for the purpose of presentation of
advances in the banks balance sheet

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Categories of NPA

Sub-standard Assets - which has remained NPA for a

period less than or equal to 12 months (Para 4.1.1)
Doubtful Assets - has remained in the sub-standard
category for a period of 12 months (Para 4.1.2)
Loss Assets - loss has been identified by the bank or
internal or external auditors or the RBI inspection but
the amount has not been written off wholly. (Para 4.1.3)

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Rajkumar S.Adukia

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Provisioning norms

The primary responsibility for making adequate

provisions for any diminution in the value of loan assets,
investment or other assets is that of the bank
managements and the statutory auditors. (Para 5.1.1)
The assessment made by the inspecting officer of the
RBI is furnished to the bank to assist the bank
management and the statutory auditors in taking a
decision in regard to making adequate and necessary
provisions in terms of prudential guidelines.(Para 5.1.1)

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45

Provision on standard
assets

The banks should make a general provision of a minimum of

0.40 percent on standard assets on global loan portfolio basis
Banks would continue to make provision at 0.25 per cent for
direct advances to agricultural and SME sectors in the
standard category (as per circular issued by RBI on 8 th of Nov
2005)
A small scale industrial unit is an undertaking in which
investment in plant and machinery does not exceed 1 crore
except in certain specified items under hosiery,hand tools,
drugs. Pharmaceuticals. Stationery items and sport goods
where investment limit has been extended to Rs. 5 crore
Units with investment in Plant and machinery in excess of SSI
limit and upto Rs 10 crore may be treated as medium
enterprise (circular dated 19/08/2005)
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Provision on sub standard

assets (Para 5.4)

A general provision of 10 percent on total outstanding

should be made
The unsecured exposures which are identified as
substandard would attract additional provision of 10
per cent.
The provisioning requirement for unsecured doubtful
assets is 100 per cent.
Unsecured exposure is defined as an exposure where
the realisable value of the security, as assessed by the
bank is not more than 10 percent

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Provision on Doubtful
assets
100 percent of the extent to which the advance is not
( covered
Paraby5.3)
the realisable value of the security

In regard to the secured portion, provision may be made

on, at the rates ranging from 20 percent to 100 percent
of the secured portion depending upon the period for
which the asset has remained doubtful

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Rajkumar S.Adukia

48

Provision on Doubtful
assets
Period for which the advance has
Provision requirement (%)
remained in doubtful category
( Para 5.3) Contd
Up to one year
20
One to three years

30

More than three years

(i) outstanding stock of NPAs as on 60 per cent with effect from March
March 31, 2004
31, 2005

75 per cent with effect from March

31, 2006

100 per cent with effect from

March 31, 2007
100 percent with effect from March
(ii) advances classified as
31, 2005
doubtful more than three years
on or after April 1, 2004
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Rajkumar S.Adukia

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Provision on Loss assets

(Para 5.2)

Loss assets should be written off. If loss assets are

permitted to remain in the books for any reason, 100
percent of the outstanding should be provided for

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Rajkumar S.Adukia

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Audit Planning

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51

Importance of Audit
Planning
1.
2.
3.

4.

Well planned is half done

One should know destination to plan well
Good planning leads to effective reporting. Audit
destination is report ( to express opinion on
financial statements)
Audit planning helps in controlling audit risks

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52

Considerations for
overall audit Plan
1.
2.
3.
4.
5.
6.

The terms of his engagement and any statutory

responsibilities
The nature and timing of reports or other
communication
The applicable legal or statutory requirements
The accounting policy adopted by bank and changes
in these polices
The identification of significant audit areas
The degree of reliance he expects to be placed on
accounting systems and internal control

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Considerations for
The nature and timing of audit evidence obtained
overall
audit Plan
The work of internal auditors and extent of their
7.
8.

9.
10.

11.

involvement
The involvement of expert
The allocation of work to be undertaken between joint
auditors and procedures for its control and review
Establishing and coordinating staffing requirements

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Audit
Programme
An audit program can contain following columns

Particulars
Closing Balance
Sample Size
Criteria for selection of data in sample
Date/ Months/ Period
Action to be taken
Person In charge

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Audit Procedures

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Audit Procedures
1.Inspection
2.Observation
3.Inquiry & confirmation
4.Computation
5. Analytical Procedures
Audit Documentation and Audit Evidence are outcome of
Audit procedures AAS 3 and AAS 5

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Inspection and
observations
Inspection consists of examining records, documents,
or tangible assets

The auditor inspects in order to:

1.
Be satisfied as to the physical existence of material
negotiable assets that the bank holds
2.
Obtain the necessary understanding of the terms and
conditions
of
agreements
(including
master
agreements) that are significant individually or in the
aggregate in order to:
- Consider their enforceability; and
- Assess the appropriateness of the accounting treatment
they have been given.

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Inquiry and Confirmation

The auditor inquires and confirms in order to:
Obtain evidence of the operation of internal controls;
Obtain evidence of the recognition by the banks
customers and counter parties of amounts, terms and
conditions of certain transactions;
Obtain information not directly available from the banks
accounting records.

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Key ratios for analysis

Non-performing loans to total loans

Cash and liquid securities (for example, those due
within 30 days) to total assets
Interest income as a percentage of average interest
bearing assets
Non-interest expense as a percentage of operating
income
Capital adequacy ratios
Return on average total assets

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Analytical procedures

Analytical procedures consist of the analysis of

significant ratios and trends including the resulting
investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate
from predicted amounts

By using analytical procedures, the auditor may detect

circumstances
that
call
into
question
the
appropriateness of the going concern assumption, such
as undue concentration of risk in particular industries or
geographic areas and potential exposure to interest
rate, currency and maturity mismatches.

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Verification of Advances
1)
2)
3)
4)
5)
6)
7)
8)

General
Verification of Advances against goods
Verification of advances against fixed deposits
Verification of advances vehicles
Verification of advances immovable property
Verification of advances against insurance policy
Verification of advances against shares
Verification of advances against bills purchased and
discounted

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1. Verification of loans and

advances (General)

Check the individual balance in each loan ledger with

the trial balance book
Verify the head office sanction /renewal for advances
sanction as per appropriate authorities
See that margins are maintained in respect of secured
advances
Examine that the operation of each advance is reviewed
at least once in a year

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Verification of loans and

advances (General)

Examine that advances represent amount due to the

bank
All the necessary documents (e.g., agreements, demand
promissory notes, letters of hypothecation, etc.) should
be executed by the parties before advances are made
Advances are classified in such a way that information
required in schedule 9 of Banking Regulation Act, 1949
can be gathered.

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2.Verification of advances
against goods

Examine the stock statements and ascertain that the loans

availed is with in the drawing power/limits sanctioned
Verify that letter of hypothecation has been executed in
favour of bank
Verify that charge is duly registered with ROC in case of
loan on hypothecation to limited company
Verify the fire insurance policy and ascertain that polices
are alive as at 31st March 2006
Banks should have a system in place to ensure that the
borrower does not avail the advantage double financing on
same stock, i.e., financing from bank for the portion of
stock not paid to the creditors

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65

3. Verification of advances
against fixed deposits

See that banks lien have been marked on deposit

receipts as in their respective ledger folio
See that no advance is granted against duplicate receipt
without proper verification
In case of advances against deposit receipts of other
branches ,to verify the intimation to that branch to mark
the lien and to see that the same has been
acknowledged by other branch
See that deposit receipts /pass books/ cash certificates
have been duly discharged in favor of bank at the time
of discharge

Bank Branch Audit

Rajkumar S.Adukia

66

4. Verification of advances
against vehicle

Verify the copies of registration certificate

See that vehicle has been comprehensively insured and
verify the bankers clause in insurance policy
Test check the original certificate and ascertain that
endorsement is made in favor of bank

Bank Branch Audit

Rajkumar S.Adukia

67

5.Verification of advances
against immovable
Go through the legal opinion of banks lawyer about title
property
of property to the borrower

Verify the latest tax receipts towards the payment of

property tax and verify the encumbrance certificate
Verify the valuation reports for the fixed assets charged
to bank
Verify whether building has been properly insured and
policy has been taken in the joint name of bank and the
mortgagor

Bank Branch Audit

Rajkumar S.Adukia

68

6.Verification of advances
against insurance policy

Scrutinise the insurance policy and ascertain the

surrender value
If surrender value is subject to payment of certain
premium the amount of such premium has been
deducted from the surrender value
Verify the latest premium receipts
Verify whether policies have been duly assigned by the
insured in favour of bank and assignment is noted by
insurance company

Bank Branch Audit

Rajkumar S.Adukia

69

7. Verification of advances
against shares

Loan against security of shares to individuals should not

exceed Rs 10 lakh per individual borrower in case securities
are in physical form and Rs 20 lakh if securities are held in
demat form (Para 3.4.3 of Master circular exposure norms)
A uniform margin of 50% shall be applied on all advances
against shares ( Para 3.4.6 )
Bankers lien should be noted in Demat account of the client
If the person in whose name the securities are registered is
other than the borrower, the bank satisfy itself that the
person has a good title to the security. The bank also
obtains a letter of renunciation from the person in whose
name the securities are registered.

Bank Branch Audit

Rajkumar S.Adukia

70

8.Verification of advances
against bills purchased and
All the outstanding bills have been taken in the balance
discounted
sheet

All the details, including the nature of the bills and

documents, are mentioned in the register and that the
bills have been correctly classified
The bills purchased or discounted from different parties
are in accordance with the agreements with them and
the total of outstanding bills of each party is not in
excess of the sanctioned limit
The bills are not overdue. If there are any overdue bills,
the auditors should ascertain the reasons for the delay
and the action taken by the bank

Bank Branch Audit

Rajkumar S.Adukia

71

Advances against working

capital

The assessment of working capital requirement of borrowers, other

than SSI units, requiring fund based working capital limits upto
Rs.1.00 crore and SSI units requiring fund based working capital
limits upto to Rs.5.00 crore from the banking system may be made
on the basis of their projected annual turn over (Para 2.1 of
Management of advances)
The working capital requirement is to be assessed at 25% of the
projected turnover(including excise duty) to be shared between the
borrower and the bank, viz. borrower contributing 5% of the
turnover as net working capital (NWC) and bank providing finance at
a minimum of 20% of the turnover.(Para 2.2)
For example, in case, annual turnover of a borrower is projected at
Rs. 60.00 lakh, the working capital requirement will be computed at
Rs. 15.00 lakh (i.e. 25%) of which Rs. 12 lakh (i.e. 20%) may be
provided by the banking system, while Rs. 3.00 lakh (i.e. 5 %)
should be borrower's contribution towards margin money. (Para 2.6)

Bank Branch Audit

Rajkumar S.Adukia

72

End use of Funds

In cases of project financing, banks ensure end use of

funds by, inter alia, obtaining certification from the
Chartered Accountants
In case any falsification of accounts on the part of the
borrowers is observed by banks, Banks can lodge a
formal complaint against the auditors of the borrowers,
with Institute of Chartered Accountant of India (ICAI) if it
is observed that the auditors were negligent or deficient
in conducting the audit to enable the ICAI to examine
and fix accountability of the auditors (Para 6.8 of
Management of advances )

Bank Branch Audit

Rajkumar S.Adukia

73

Diversion of Funds

Diversion of funds would be construed to include any one of the

under-noted occurrences
Utilisation of short-term working capital funds for long-term
purposes not in conformity with the terms of sanctions;
Deploying borrowed funds for purposes / activities or creation of
assets other than those for which the loan was sanctioned;
Transferring funds to the subsidiaries / group companies or other
corporates by whatever modalities
Routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender
Investment in other companies by way of acquiring equities / debt
instruments without approval of lenders
Short fall in deployment of funds vis--vis the amounts disbursed / drawn
and the difference not being accounted for.
(Para 6.3 of management of advances )

Bank Branch Audit

Rajkumar S.Adukia

74

Documentation

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 which 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 copy of the letter from Head Office regarding Sanction
limit of the Branch Manager;

Bank Branch Audit

Rajkumar S.Adukia

75

Documentation

List of cases where the Branch has not obtained

stock/book debts statements at the end of the year;
List of cases where insurance copies are yet to be
received at the end of the year
A copy of the Head office instructions for identification
of NPAs and classification of advances
List of major items pending for reconciliation under
Inter-Branch Accounts
List of all fraud cases reported to RBI as fraud upto
March 31st

Bank Branch Audit

Rajkumar S.Adukia

76

Documentation AAS 3
Following certificates should be obtained from
management

Cash Retention Limit duly certified by the Branch

Manager

A photo copy each of the confirmation certificates

for Balances with RBI, SBI and other banks

A copy of the reconciliation statement in respect of

differences in such balances with RBI, SBI and other
banks
List of overdue or matured investments at the end
of the year duly confirmed by the Branch Manager;

Bank Branch Audit

Rajkumar S.Adukia

77

Computer Assisted Audit

Techniques (CAAT)

1.

CAAT are computer programs and data that the

auditor uses as part of the audit procedures to process
data of audit significance, contained in an entitys
information systems
CAAT may be used in performing various auditing
procedures, including the following:
Tests of details of transactions and balances, for
example, the use of audit software for recalculating
interest or the extraction of invoices over a certain
value from computer records

Bank Branch Audit

Rajkumar S.Adukia

78

Computer Assisted Audit

Techniques (CAAT)
2.

3.

4.
5.

Analytical procedures, for example, identifying

inconsistencies or significant fluctuations
Tests of general controls, for example, testing the setup or configuration of the operating system or access
procedures to the program libraries or by using code
comparison software to check that the version of the
program in use is the version approved by
management ;
Sampling programs to extract data for audit testing
Reperforming calculations performed by the entitys
accounting systems.

Bank Branch Audit

Rajkumar S.Adukia

79

Audit Reports

Bank Branch Audit

Rajkumar S.Adukia

80

Various
Reports/Certificates
1.
2.
3.
4.
5.

6.
7.
8.

Tax Audit Report

Position of Advances above certain amount
PMRY Audit Certificate
DICGC Certificate
Verification on Friday Statements Certificate(Form X
sec 27)
Service Tax Certificate
Income on Insurance Business
Frauds

Bank Branch Audit

Rajkumar S.Adukia

81

Various
Reports/Certificates(Contd.
Ghosh Committee Recommendations
) Jilani Committee Recommendations
9.

10.
11.
12.
13.
14.
15.

LFAR
MOC-Classification
MOC-Income Recognition
Other reports
AUDIT REPORT- U/S 30 OF The Banking Regulation
Act,1949 r.w.s.228(3) of the Companies Act,1956

Bank Branch Audit

Rajkumar S.Adukia

82

Special purpose
certificates in banks

Certificate for advances to infrastructure project and

income generated thereon
Certificate of reconciliation of securities by the bank
Certificate of advances exceeding 10 crores
Certificate pertaining to credit/deposit ratio
Certificate of cash and bank balances

Bank Branch Audit

Rajkumar S.Adukia

83

Plan for each Report

separately

Effective planning requires separate plan for each report

Find out common data and interlinking in various
reports
(Jilani committee is on internal control
Ghosh committee is on Fraud, EDP controls, internal
Checks
LFAR has many issues on internal control it is like audit
programme and check list)

Bank Branch Audit

Rajkumar S.Adukia

84

LFAR

Reserve bank of India (RBI) advised the current format of LFAR

(LFAR) for the banks from their auditors vide circular number
DBS.CO.PP.BC.11/11.01.005/2001-2002 dated April 17, 2002
This report is not substitution of the statutory report, neither a part
of the said report. LFAR is actually a management Report.
Matters required to be reported by the auditor in LFAR are
illustrative not exhaustive
The Statutory Branch Auditors should address LFAR to Chairman of
Bank, Copy to Central Statutory Auditors (Para 1 of LFAR)
At times though audit qualifications are included in the LFAR, they
are not highlighted in the main Audit Report Every adverse
comment would not result in Qualification in main audit report.
Auditor has to use his professional judgment having regard to the
facts and circumstances of each case. (Para 3 of LFAR
Questionnaire)
Bank Branch Audit

Rajkumar S.Adukia

85

Major Clauses in LFAR

I

Assets
1. Cash
2. Balance with RBI ,SBI and other banks
3. Money at call and short notice
4. Investments
5. Advances
6. Other Assets

II Liabilities
1. Deposits
2. Other Liabilities
3. Contingent liabilities

III Profit and Loss account

Bank Branch Audit

Rajkumar S.Adukia

86

Major Clauses in LFAR

IV

General
1. Books and records
2. Reconciliation of Control and subsidiary records
3. Inter branch accounts
4. Audits/ Inspections
5. Frauds
6. Miscellaneous

Questionnaires Applicable to Specialized Branches

1.
For Branches dealing in Foreign Exchange Transactions
2.
For Branches dealing in very large advances in excess of Rs.
100 crores
3.
For Branches dealing in Non Performing Assets such as
Asset Recovery Management Branches.
4.
For Branches dealing in Clearing House Operations,
normally referred to as Service Branches
Bank Branch Audit

Rajkumar S.Adukia

87

Ghosh Committee

High level Committee on fraud and malpractice in banks under

chairmanship of Shri A. Ghosh ex deputy governor

To enquire into various aspects of frauds and malpractices in bank

To make recommendations to reduce such incidence.

Committee submitted report in June,1992

The report is divided into Groups A,B,C,D with A, B and D having 2

parts each, Group C having one part.

Out of 97 Recommendations 27 required to be reported exclusively

at Branch level, 43 exclusively at RO/ZO/HO level and 27 at both
levels
Bank Branch Audit

Rajkumar S.Adukia

88

Four groups under Ghosh

Committee

Group A -Recommendations which have to be implemented

by the banks immediately

Group B- Recommendations requiring RBI approval

Group C- Recommendations requiring approval of

Government of India

Group D Recommendations requiring further examination

in consultation with IBA

Bank Branch Audit

Rajkumar S.Adukia

89

Main objectives of Ghosh

Committee

Safety of assets

Compliance with laid down policies and procedures

Proper segregation of duties and responsibilities of staff

Timely prevention and detection of frauds and

malpractices

Bank Branch Audit

Rajkumar S.Adukia

90

Jilani Committee

Working group to review the internal control and

inspection and audit system in banks
under the
chairmanship of Mr. Rashid Jilani. The committee
submitted its report in July 1995

Objective was to review the efficacy and adequacy of

internal control and inspection and audit system in a
bank with a view to strengthening the supervisory
system and reliability of data

The Implementation form is divided into 25 points,10 of

them are applicable on a Bank branch.

Bank Branch Audit

Rajkumar S.Adukia

91

S No

Recom
no in
WG
report

Nature of recommendation

13

39

Follow up on major/serious irregularities

detected during Concurrent audit to be
immediately taken up with HO. Time bound
plan for rectification should be made.
Fraudulent transactions to be reported to
vigilance/ chief of inspection

14

41

Small and Medium sized Branches to

rectify irregularities pointed out during
inspection/audit within 4 months

Bank Branch Audit

Rajkumar S.Adukia

Imple
ment
ation
Statu
s at
Branc
h

Imple
ment
ation
Statu
s at
RO\Z
O

Imple
menta
tion
Status
at HO

92

S No

Reco Nature of recommendation

m
no
in
WG
repo
rt

15

44

Auditors and inspector to get the majority of

irregularities rectified during their stay at
branches concerned and guide them with it.

16

45

Immediate action to be taken to plug gaps in

serious irregularities\Revenue leakages which
have surfaced due to loopholes in existing
procedures

Bank Branch Audit

Rajkumar S.Adukia

Imple
ment
ation
Statu
s at
Branc
h

Imple
ment
ation
Statu
s at
RO\Z
O

Imple
menta
tion
Status
at HO

93

S No

Recom
no in
WG
report

Nature of recommendation

19

53

Appropriate Control Measures should be

devised and documented to prevent the
computer system from attack of
unscrupulous elements.

20

54

Various Tests to be carried out to ensure

that EDP applications have resulted in
consistent and reliable system for
inputting, processing and generation of
output of data

Bank Branch Audit

Rajkumar S.Adukia

Imple
ment
ation
Statu
s at
Branc
h

Imple
ment
ation
Statu
s at
RO\Z
O

Imple
menta
tion
Status
at HO

94

S No

Recom
no in
WG
report

Nature of recommendation

22

59

Entire domain of EDP activities be brought

under scrutiny of Inspection and Audit
department.

23

61

For bringing about uniformity of software, a

formal method of change be approved by
the management.

Bank Branch Audit

Rajkumar S.Adukia

Imple
ment
ation
Statu
s at
Branc
h

Imple
ment
ation
Statu
s at
RO\Z
O

Imple
menta
tion
Status
at HO

95

S
No

Recom
no in WG
report

Nature of recommendation

24

71

Completion of enquiries expeditiously and

bringing to book delinquent staff so as to deter
other from frauds. Internal vigilance machinery to
be strengthened and reviewed by board every 6
months

25

74

Regular checking by inspectors and auditors to

verify correctness of information regarding asset
classification, Income recognition and
provisioning.

Bank Branch Audit

Rajkumar S.Adukia

Imple
mentat
ion
Status
at
Branch

Imple
menta
tion
Status
at
RO\ZO

Implem
entatio
n
Status
at HO

96

Reporting under Banking

Regulation act,1949
As per section 30(3) of a banking regulation act ,1949 an
auditor is required to state in his report of a banking
company incorporated in India the following :-(a) whether or not the information and explanations
required by him have been found to be satisfactory;
(b) whether or not the transactions of the company which
have come to his notice have been within the powers of
the company;

Bank Branch Audit

Rajkumar S.Adukia

97

Reporting under banking

regulation act ,1949
(c)

whether or not the returns received from

branch officers of the company have been
found adequate for the purposes of his audit
(not applicable to bank branch)
(d) whether the profit and loss account shows a
true balance of profit or loss for the period
covered by such account;
(e) any other matter, which he considers should
be brought to the notice of the shareholders of
the company
Bank Branch Audit

Rajkumar S.Adukia

98

Non applicability of CARO,

2003
Statement of companies (Auditors Report ) order 2003
is not applicable to banking company as defined in
clause (c) of section 5 of Banking regulation act.1949
Banking company means any company, which transacts
the business of banking in India;
Any company which is engaged in the manufacture of
goods or carries on any trade and which accepts
deposits of money from the public merely for the
purpose of financing its business as such manufacturer
or trader shall not be deemed to transact the business
of banking
Bank Branch Audit

Rajkumar S.Adukia

99

PEER REVIEW
CONSIDERATIONS

Compliance with technical standards

Office system and procedure
Quality of reporting
Training of staff
Quality Review Board ( Proposed Section 28A to 28 D )
All services will be covered

Bank Branch Audit

Rajkumar S.Adukia

100

THANK YOU