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BANK AUDIT

MANUAL

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2011-2012

CA. Sanjay K Agarwal

B.Sc., FCS, FCA, CPA(USA)

83/85, N S Road, Suite: 417

Kolkata -700 001

Cell: +91 9331023275

+91-33-3291 3756, 2243 1088, 2231 0073
Fax: +91-33-2243 1088
E-mail: [email protected]

--- BE HAPPY MAKE HAPPY ---

Bank Audit Manual by CA. Sanjay K Agarwal Page No.1

 Index of Pages:

Particulars Page Nos

Key Points 3

Important Audit Checks 4-7

Income Recognition & Asset Classification Norms

- at a Glance 8-10

Asset Classification – at a Glance 11

Asset Classification & Provisioning – a ready

12
reckoner

Draft Management Representation Letter 13-15

Format of Letter to Branch 16-19

Checklist for Audit of Advances accounts 20-22

Checklist for Audit of LFAR 23-28

Remuneration to Auditors 29-31

Audit Programme for Branch Audit of a Bank 32-33

Bank Audit Manual by CA. Sanjay K Agarwal Page No.2

 KEY POINTS

 Break Even Date for NPA is 01.01.2012 for the year 2011-2012

 Once an account has been classified as NPA, all the facilities granted to the borrower will be
treated as NPA except in respect of Primary Agricultural Credit Societies (PACS)/Farmers
Service Societies (FSS).

 Overdue period starts immediately on expiry of due date, concept of ‘past due’ has already been
dispensed with in past years.

 Stock statements older than 3 months should not be considered

 Interest on advances (accrued and outstanding) should be calculated as on 31 st March (few banks
charges interest on advances few days prior to 31st March which should not be considered)

 Long outstanding entries (unexplainable and where there is no movement at all) in suspense
account should be suggested for provisioning.

 ‘NIL’ MOC Certificate should be issued even if there is no MOC

 MOC should also be countersigned by Branch Manager (views of the BM if any has to be
attached on a separate sheet duly signed by him)

 Submit all the REPORTS including TAX AUDIT REPORTS & LFAR immediately on
completion of Audit and before leaving the branch

 Make a columnar list of documents to be submitted to branch/regional/zonal/other office before

commencement of Audit. (it is advisable to get all documents in your custody duly signed by the
Branch Manger at the beginning of Audit)

 Must get CERTIFICATE OF ATTENDENCE signed by Branch Manager in duplicate before

leaving the branch

 Availability of security or net worth of borrower/guarantor should not be considered for the
purpose of NPA recognition – it should always be based on recovery

 100% provision is required for assets which has become doubtful for more than 3 years i.e. NPA
date on or before 31.03.2008.

 To specifically report simultaneously to the CEO of the bank and regional office of the Dept of
Banking Supervision RBI where the HO of the bank is situated, any matter susceptible to be
fraud or fraudulent activity or any foul play in any transactions. Any deliberate failure on part
of the Auditors should render himself liable for action. If amount of fraud involve Rs 1 Crore or
more – central office of the Dept of Banking Supervision, RBI, Mumbai to be reported
immediately.

S. Item Important Audit Checks

No.
1. Deposit  Verify transactions during the year relating to: New
Accounts opened; Accounts closed; Dormant Accounts;
Bank Audit Manual by CA. Sanjay K Agarwal Page No.3
 Interest calculations; Scrutiny of account statements for
i. Term unusual/large/overdraft transactions; Overdue Term
ii. Saving deposits & its policies and practices of renewal; Accrual of
iii. Current interest; RBI Norms for Non-resident deposits & its
iv. FCNR/NRE/NRNR operations - giving due importance to opening and
operation of accounts like NRE, NRNR, FCNR, RFC, etc.;
interest on various types of deposits; Tax Deducted at
Source.
 Large deposits placed at the end of the year (probable
window dressing).
 Examine unusual trend in account opening or account
closing, dormant accounts that have suddenly been
reactivated by heavy cash withdrawals or deposits,
overdrawings, etc.
 Examine interest trends as compared to average annual
deposits (monthly average figures).

2. Advances  Review monitoring reports (irregularity reports) sent by

the branch to the controlling authorities in respect of
irregular advances.
 Review appraisal system, Files of large as well as critical
borrowers, sanctions, disbursement, renewals,
documentation, systems, securities, etc.
 Review on test check basis operations in the Advances
Accounts.
 Compliance of sanction terms and conditions in the case of
new advances.
 Whether the borrower is regular in submission of stock
statements, book debt statements, insurance policies,
balance sheets, half yearly results, etc. and whether penal
interest is charged in case of default/delay in submission of
such data.
 Charge of interest and recovery for each quarter or as
applicable to be verified.
 Review the monitoring system, i.e. monitoring end use of
funds, analytical system prevalent for the advances, cash
flow monitoring, branch follow-up, consortium meetings,
inspection reports, stock audit reports, market intelligence
(industry analysis), securities updation, etc.
 Check classification of advances, income recognition and
provisioning as per RBI Norms/Circulars.
 Examine interest trends as compared to average annual
advances (monthly average figures).
 Scrutinize the final advances statements with regard to
assets classification, security value, documentation,
drawing power, outstandings, provisions, etc.
 Check whether Non-Fund based (Letter of Credits/Bank
Guarantees) exposure of the borrowers is within the
sanctioned limits.
 Compare projected financial figures given at the time of
project appraisal with actual figures from audited financial
statements for relevant period and ascertain reasons for large
variance.

3. Profit & Loss Account  Income/Expenditure: Verify:

 Short debit of interest/commission on advances;
 Excess credit of interest on deposits;
Bank Audit Manual by CA. Sanjay K Agarwal Page No.4
  In case the discrepancies are existing in large
number of cases, the auditor should consider the
impact of the same on the accounts;
 Determine whether the discrepancies noticed are
intentional or by error;
 Check whether the recurrence of such discrepancies
are general or in respect of some specific clients;
 Proper authority in sanction and disbursement of expenses
as also the correctness of the accounting treatment given
as to revenue/capital/deferred expenses.
 Check accrual of income/expenditure especially for the last
month of the financial year.
 Divergent Trends:
 Divergent trends in income/expenditure of the
current year may be analysed with the figures of
the previous year.
 Wherever a divergent trend is observed, obtain an
explanation along with supporting evidences like
monthly average figures, composition of the
income/expenditure, etc.

4. Balance Sheet Cash & bank balances

 Physically verify the cash balance/ATM cash balance as on

March 31, 2012 or reconcile the cash balance from the
date of verification to March 31, 2012.
 Confirm and reconcile the balances with banks as on March
31, 2012.

Investments

 Physically verify the investments held by the branch on

behalf of Head Office and issue certificate of physical
verification of investments to bank’s Investments
Department.
 Check receipt of interest and its subsequent credit to be
given to Head Office.

Advances provisioning

 As per RBI norms, unrealised interest on NPA accounts

should be reversed and not charged to “Advance
Accounts”. Reversal of unrealised interest of previous years
in case of NPA accounts is required to be checked.
 Partial recovery in respect of NPA accounts should be
generally appropriated against principal amount in respect
of doubtful assets.

Fixed assets

Check inter-branch transfer memos relating to fixed assets and

whether they have been correctly classified in the accounts and
depreciation accounting thereof.

Inter Branch Reconciliation (IBR)

 Understand the IBR system and accordingly prepare an

audit plan to review the IBR transactions. The large
volume of Inter Branch Transactions and the large number
of unreconciled entries in the banking system makes the
Bank Audit Manual by CA. Sanjay K Agarwal Page No.5
 area fraud-prone.
 Check up head office inward communication to branch to
ascertain date up to which statements relating to inter-
branch reconciliation have been sent.

Check and report

 Reversal of any large/old/unexplained entries, which had

remained outstanding in IBR.
 Items of revenue nature, cash-in-transit (for example,
cash meant for deposit into currency chest) which remains
pending for more than a reasonable period.
 Double responses to the entries in the accounts.
 Test check accuracy and correctness of “Daily statements”
which are prepared by the branch and sent to IOR
department.

The auditor should duly consider the extent of non-reconciliation

in forming his opinion on the financial statements. Where the
amounts involved are material, the auditor should suitably qualify
his audit report. Attention is drawn on the paper on “Certain
Significant Aspect of Statutory Audit of banks” issued by the
Council of ICAI in March 1994, published in the C. A. journal.

Further, vide its circular No. BP.BC.22/21.04.018/99 dated March

24, 1999, the Reserve Bank of India (RBI) advised the banks to
maintain category-wise (head-wise) accounts for various types of
transactions put through inter-branch accounts so that the netting
can be done category-wise. Further, RBI advised banks to make
100 percent provision (category-wise) for net debit position in
their inter-branch accounts arising out of the unreconciled entries,
both debit and credit, outstanding for more than two years.

Suspense accounts, sundry deposits, etc.

Suspense accounts are adjustment accounts in which certain debit

transactions are temporarily posted whose authorisation is
pending for approval.

Sundry Deposit accounts are adjustment accounts in which certain

credit transactions are temporarily posted whose authorisation is
pending for approval.

As and when the transactions are duly authorised by the

concerned officials they are posted to the respective accounts and
the Suspense account/Sundry Deposit account is credited/debited
respectively.

 Ask for and analyse their year-wise break-up.

 Check the nature of entries parked in such Accounts.
 Check any movement in such old balances and whether the
same is genuine and has been properly authorised by the
competent authority.
 Check for any revenue items lying in such accounts and
whether proper treatment has been given for the same.

5. Auditors Report &  The Auditors Report should be a self contained document
Memorandum of Changes and should contain no reference of any point made in any
other report including the LFAR;
Bank Audit Manual by CA. Sanjay K Agarwal Page No.6
  Include Audit Qualifications in the Auditors Report and not
in the LFAR;
 Quantify the Audit Qualifications for a better appreciation
of the point made to the reader;
 For suggesting any changes in the financial statements of
the branch, quantify the same in the Memorandum of
Changes (MOC) and make it a subject matter of
qualification and annexe it to the Auditors Report.

6. Long Form Audit Report  Study the LFAR Questionnaire thoroughly;

(LFAR)  Plan the LFAR work along with the statutory audit right
from day one;
 The LFAR questionnaire is a useful tool for planning the
statutory audit of a bank’s branch;
 Complete and submit the Auditors Audit Report as well as
the LFAR simultaneously;
 Be specific while replying the LFAR;
 Give instances of shortcomings/weaknesses existing in the
respective areas of the branch functioning in the LFAR;
 Advances check-list for giving list of accounts with adverse
features;
 The LFAR should be sufficiently detailed and quantified so
that they can be expeditiously consolidated by the bank.

7. Computerised Branches  Review off-site back and daily back-up procedure of Bank
 Exception reports viz. password errors, limit verification,
irregular advances
 Custodian of pass word and unauthorized access of
password, computer room
 Periodical report to controlling authority on functioning of
computerised system and compliance of controlling
authority instructions in this respect

8. General  Send a letter of your requirements to the branch before

commencing the audit.
 Obtain the latest status of cases involving fraud, vigilance
and matters under investigation having effect on the
accounts and its reporting requirement.
 Obtain a Management Representation Letter (MRL).

Bank Audit Manual by CA. Sanjay K Agarwal Page No.7

INCOME RECOGNITION AND ASSET CLASSIFICATION NORMS - AT A GLANCE

Credit Facility Basis for treating a Credit Facility as Remarks

NPA
Term loans Interest or instalment remains overdue for Overdue: An amount due to the bank
a period of more than 90 days. under any credit facility is ‘Overdue’ if it
is not paid on the due date fixed by the
Agricultural Advances: bank.

Position upto 29th Sept 2004: In respect

of advances granted for agricultural
purposes where interest and/or instalment
of principal remains overdue for a period of
more than two harvest seasons but for a
period not exceeding two half years, the
advance should be treated as NPA.

Position wef 30th Sept 2004: A loan

granted for short duration crops will be
treated as NPA, if the instalment of principle
or interest remain overdue for two crop
season and a loan granted for long
duration crops will be treated as NPA, if
the instalment of principle or interest
remain overdue for one crop season

Long duration crops means crops with crop season longer

than one year

Short duration crops are those other than long duration crops

Cash Credits The account remains continuously “out of Banks may not classify an account
and order” for a period of more than 90 days; merely due to existence of some
Overdrafts i.e., outstanding balance remains deficiencies, which are of temporary
continuously in excess of the sanctioned nature such as non-availability of
limit/drawing power adequate drawing power, balance
outstanding exceeding the limit, non-
or submission of stock statements and non-
renewal of the limits on the due date,
there are no credits continuously for a etc.
period of 90 days as on the date of Balance
Sheet However, generally stock statements
older than three months would be
or deemed irregular and the working capital
borrowal account will become NPA if
credits are not enough to cover the interest such irregular drawings are permitted in
debited during the same period. the account for a continuous period of 90
days even though the unit may be
working or the borrower’s financial
position is satisfactory.

Further, an account where the

regular/ad-hoc credit limits have not
been reviewed/renewed within 180 days
from the due date/date of ad hoc
sanction respectively will be treated as
NPA.

Bank Audit Manual by CA. Sanjay K Agarwal Page No.8

Bills The bills purchased/discounted remains Overdue interest should not be charged
Purchased overdue for a period of more than 90 days. and taken to income account in respect
and of overdue bills unless it is realised.
Discounted
Other Any amount to be received in respect of  
Accounts that facility remains overdue for a period of
more than 90 days.
Government As on 31.03.2012, State government The credit facilities backed by guarantee
guaranteed guaranteed advances and investment in of Central government though overdue
advances State government guaranteed Securities may be treated as NPA only when the
would attract asset classification and government repudiates its guarantee
provisioning norms if interest and/or when invoked. However, income shall
principle or any other amount due to the not be recognised if the interest or
bank remain overdue for more than 90 instalment has remained overdue or the
days. account has remained continuously out
of order or the bills or any other facility
has remained overdue for a period of
more than 90 days.

Important Points

Key Words
Exclusion 1. Undernoted categories of advances should be excluded, as NPA norms are
not normally applicable to them:

 Advances granted on or after 02.01.2012;

 All staff loans sanctioned under various staff loan schemes including housing
loans;

 Project Finance (within Moratorium), Education Loan, Agriculture Loan etc.

wherein moratorium period is not completed and interest/installment have not
fallen due;

 Advances against Banks deposits, NSC, IVP, KVP and LIP etc provided
adequate margin is available to cover the unrealized interest;

 Relief granted to the Agricultural borrowers affected by natural calamities in

the form of conversion of short term loan or re-schedulement of term loan;

 Credit facilities backed by Central Govt Guaranteed (if not repudiated) ;

 Restructured accounts under Standard category;

 Credit facilities backed by State Govt. Guarantees where the default does not
exceed 90 days as on 31.03.2012;

Bank Audit Manual by CA. Sanjay K Agarwal Page No.9

  All Standard and Regular Advances.

All 2. Once an account has been classified as NPA, all the facilities granted to the borrower
Facilities will be treated as NPA except in respect of Primary Agricultural Credit Societies
(PACS)/Farmers Service Societies (FSS). Also, in respect of additional facilities
sanctioned as per package finalised by BIFR and/or term lending institutions,
provision may be made after a period of one year from the date of disbursement in
respect of additional facilities sanctioned under the rehabilitation package. The
original facilities granted would however continue to be classified as sub-
standard/doubtful, as the case may be
Adequate 3. Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may
Margin be taken to income account on the due date, provided adequate margin is available
in the accounts
Reversal of 4. Till the time the account is identified as NPA, income is recognised irrespective of
Interest whether realised or not. Where an account is identified as NPA during the year,
unrealised income should not be recognised for the year. Also, interest accrued and
credited to income account in the previous year should be reversed or provided for
if the same is not realised.
Regularise 5. If the accounts of the borrowers have been regularised before the balance sheet
d before date by repayment of overdue amounts, the same should be handled with care and
balance without scope for subjectivity. Where the account indicates inherent weakness on
sheet date the basis of the data available, the account should be deemed as a NPA. In other
genuine cases, the banks must furnish satisfactory evidence to the Statutory
Auditors/Inspecting Officers about the manner of regularisation of the account to
eliminate doubts on their performing status.

Fees and 6. Fees and commissions earned by the banks as a result of re-negotiations or
commissions rescheduling of outstanding debts should be recognized on an accrual basis over the
(re-
period of time covered by the re-negotiated or rescheduled extension of credit.
negotiations)
LOC or 7. If the debits arising out of devolvement of letters of credit or invoked guarantees
guarantees are parked in a separate account, the balance outstanding in that account also
should be treated as a part of the borrower’s principal operating account for the
purpose of application of prudential norms on income recognition, asset
classification and provisioning.
Income 8. Income on NPA accounts to be recognized on realisation basis (conservative
recognition approach)

Bank Audit Manual by CA. Sanjay K Agarwal Page No.10

ASSET CLASSIFICATION — AT A GLANCE

Category Conditions to be satisfied Provision amount Remarks

Standard Does not disclose any General provision of a Such an asset is not a NPA.
Assets problem and which does not minimum of 0.25% of total
carry any more than normal standard assets.
risks attached to business

Sub-  Classified as NPA for  A general provision of In respect of accounts where

Standard a period not 10% of total sub- there are potential threats of
Assets exceeding Twelve standard assets. recovery on account of
months.  Additional provision of erosion in the value of
 Classification of an 10% on unsecured security or non-availability of
asset should not be exposure. security and existence of
upgraded merely as a other factors such as frauds
result of committed by borrowers, it
rescheduling, unless will not be prudent for banks
there is satisfactory Unsecured Exposure means to first classify them as sub-
compliance of the exposure where realizable value standard and then as doubtful
required conditions at of security is not more than 10%, after expiry of twelve months
least for one year. ab-initio, of the outstanding from the date the account has
exposure.
become sub-standard. Such
accounts should be
straightaway classified as
doubtful asset or loss asset,
as appropriate, irrespective of
the period for which it has
remained as NPA.
Doubtful Remained Substandard for  100% to the extent to It has all the weaknesses
Assets a period of Twelve months. which the advances inherent in that of a sub-
are not covered by the standard asset with the added
realisable value of the characteristic that the
security to which the weaknesses make the
bank has a valid collection/liquidation in full,
recourse. · Over and highly questionable and
above the aforesaid, improbable, on the basis of
depending upon the current known facts,
period for which the conditions and values.
asset has remained
doubtful, provision on
the secured portion to
be made on the
following basis:
 Up to 1 year 20%
 1 to 3 years 30%
 Over 3 years: 100%

Loss Loss asset is one where loss  100% of the Such an asset is considered
Assets has been identified by the outstanding should be uncollectible and of such little
bank, external or internal provided for/written value that its continuance as
auditors or the RBI off. a bankable asset is not
inspectors, but the amount warranted although there
has not been written off may be some salvage or
(wholly or partly). recoverable value.

Bank Audit Manual by CA. Sanjay K Agarwal Page No.11

 Asset Classification & provisioning as on 31.03.2012 – A ready reckoner

Quarter of NPA ASSET CLASSIFICATION Provision for 2011-2012

March March March March March
Year Quarter
2008 2009 2010 2011 2012
100 % of outstanding for all NPAs
Mar SST D1 D2 D2 D3 on or before 31.03.2008,
irrespective of securities available
2
0 Jun SST D1 D2 D2
0
8 Sep SST D1 D2 D2

Dec SST D1 D2 D2
30 % of Secured portion of
Mar SST D1 D2 D2 outstanding and 100% of
Unsecured portion of outstanding
2
Jun SST D1 D2 for NPAs from 01.04.2008 to
0
31.03.2010
0
Sep SST D1 D2
9
Dec SST D1 D2

Mar SST D1 D2
2
Jun SST D1
0
20 % of Secured portion of
1
Sep SST D1 outstanding and 100% of
0
Unsecured portion of outstanding
Dec SST D1 for NPAs from 01.04.2010 to
31.03.2011
Mar SST D1
2
Jun SST
0
1 General – 10% of outstanding (20%
Sep SST
1 of outstanding if ab-initio
unsecured) for NPAs on or after
Dec SST
01.04.2011
2012 Mar SST

Bank Audit Manual by CA. Sanjay K Agarwal Page No.12

 Draft of Management Representation Letter to be obtained from the Branch Management

Date: ____________

M/s. XYZ & Co.

Chartered Accountants
Mumbai

Dear Sirs,

Sub.: Audit for the period ended 31-3-2012

This representation letter is provided in connection with your audit of the financial statements of
_____________ branch of _______________ BANK for the period ended 31-3-2012 for the purpose of
expressing an opinion as to whether the financial statements give a true and fair view of the financial
position of ___________ branch of _______________ BANK as of 31-3-2012 and of the results of
operations for the period then ended. We acknowledge our responsibility for preparation of financial
statements in accordance with the requirements of the Reserve Bank of India and recognised
accounting policies and practices, including the Accounting and Auditing Standards issued by the
Institute of Chartered Accountants of India.

We confirm, to the best of our knowledge and belief, the following representations:

ACCOUNTING POLICIES

1. The accounting policies, which are material or critical in determining the results of operations
for the period or financial position are set out in the financial statements and are consistent with
those adopted in the financial statements for the previous period. The financial statements are
prepared on accrual basis except as stated otherwise in the financial statements.

ASSETS

2. The branch has a satisfactory title to all assets and there are no liens or encumbrances on the
company's assets.

FIXED ASSETS

3. The net book values at which fixed assets are stated in the balance sheet are arrived at:

a. after taking into account all capital expenditure on additions thereto, but no expenditure
properly chargeable to revenue;

b. after eliminating the cost and accumulated depreciation relating to items sold, discarded,
demolished or destroyed;

c. after providing adequate depreciation on fixed assets during the period.

CAPITAL COMMITMENTS

4. At the balance sheet date, there were no outstanding commitments for capital expenditure
excepting those disclosed in Note No. ___ to the financial statements.

INVESTMENTS

5. The current investments as appearing in the balance sheet consist of only such investments as
are by their nature readily realisable and intended to be held for not more than one year from
the respective dates on which they were made. All other investments have been shown in the
balance sheet as `long-term investments'.

Bank Audit Manual by CA. Sanjay K Agarwal Page No.13

6. Current investments have been valued at the lower of cost or fair value. Long-term investments
have been valued at cost, except that any permanent diminution in their value has been
provided for in ascertaining their carrying amount.

7. In respect of offers of right issues received during the year, the rights have been either been
subscribed to, or renunciated, or allowed to lapse. In no case have they been renunciated in
favour of third parties without consideration which has been properly accounted for in the books
of account.

8. All the investments produced to you for physical verification belong to the entity and they do
not include any investments held on behalf of any other person.

9. The entity has clear title to all its investments including such investments which are in the
process of being registered in the name of the entity or which are not held in the name of the
entity. There are no charges against the investments of the entity except those appearing in the
records of the entity.

LOANS AND ADVANCES

10. The following items appearing in the books as at 31st March, 2012 are considered good and
fully recoverable with the exception of those specifically shown as "doubtful" in the Balance
Sheet:
Loans and Advances Rs.

OTHER CURRENT ASSETS

11. In the opinion of the Board of Directors, other current assets have a value on realization in the
ordinary course of the company's business, which is atleast equal to the amount at which they
are stated in the balance sheet.

CASH & BANK BALANCES

12. The cash balance as on 31st March, 2012 is Rs.______.

The bank balances as on ________________ is as under:
__________________ Bank Rs.______________
__________________ Bank Rs.______________
__________________ Bank Rs.______________

LIABILITIES

13. We have recorded all known liabilities in the financial statements.

14. We have disclosed in notes to the financial statements all guarantees that we have given to
third parties and all other contingent liabilities.

15. Contingent liabilities disclosed in the notes to the financial statements do not include any
contingencies, which are likely to result in a loss and which, therefore, require adjustment of
assets or liabilities.

PROVISIONS FOR CLAIMS AND LOSSES

16. Provision has been made in the accounts for all known losses and claims of material amounts.

17. There have been no events subsequent to the balance sheet date, which require adjustment of,
or disclosure in, the financial statements or notes thereto.

PROFIT AND LOSS ACCOUNT

Bank Audit Manual by CA. Sanjay K Agarwal Page No.14

 18. Except as disclosed in the financial statements, the results for the period were not materially
affected by:

a. Transactions of a nature not usually undertaken by the bank;

b. Circumstances of an exceptional or non-recurring nature;

c. Charges or credits relating to prior years;

d. Changes in accounting policies.

GENERAL

19. The following have been properly recorded and, when appropriate, adequately disclosed in the
financial statements:

a. Losses arising from sale and purchase commitments.

b. Agreements and options to buy back assets previously sold.

c. Assets pledged as collateral.

20. There have been no irregularities involving management or employees who have a significant
role in the system of internal control that could have a material effect on the financial
statements.

21. The financial statements are free of material misstatements, including omissions.

22. The company has complied with all aspects of contractual agreements that could have a
material effect on the financial statements in the event of non-compliance. There has been no
non-compliance with requirements of regularity authorities that could have a material effect on
the financial statements in the event of non-compliance.

23. We have no plans or intentions that may materially affect the carrying value or classification of
assets and liabilities reflected in the financial statements.

24. The branch has not received any notice, show cause, inspection advice, etc. from Government
of India, Reserve Bank of India or any other monitoring authority of India that could have a
material effect on the financial statements.

For & on behalf of

___________ branch of _______________ Bank

Authorised Signatory

Bank Audit Manual by CA. Sanjay K Agarwal Page No.15

 Draft Letter of Requirements to be sent to the Branch

April 1, 2012

The Branch Manager

_____________ Bank

_____________ Branch

Mumbai

Dear Sir:

Sub.: Statutory Audit of your branch for the year 2011-2012

As you are aware, we have been appointed as the Statutory Auditor to report on the accounts of your
Branch for the year 2011-2012.

In order to enable us to finalise the audit programme and furnish our report on the audit of the
accounts for the year 2011-2012 of your branch, may we request you to keep ready the
information/clarification as stated below and make the same available to our audit team at the earliest.

1. Latest Reports

 The following latest reports on the accounts of your bank, and compliance by the bank
on the observations contained therein may be kept ready for our perusal:

 Latest RBI Inspection Report;

 Internal/Concurrent Audit Reports;

 Head Office Inspection Reports;

 Internal Inspection Reports;

 Revenue Audit Report (if any);

 Income and Expenditure Control Report (if any);

 Report on any other Inspection/Audit that may have been conducted during the course
of the year relevant to the financial year 2011-2012.
 

2. Circulars in connection with accounts

Please let us have a copy of the Head Office circulars/instructions in connection with the closing
of your accounts for the year, to the extent not communicated to us or incorporated in our
letter of appointment.
 

3. Accounting policies

Kindly confirm whether, as compared to the earlier year, there are any changes in the
accounting policies during the year under audit.

Bank Audit Manual by CA. Sanjay K Agarwal Page No.16

 If so, please let us have a list and a copy of the accounting policy/ies amended by the bank
during the year covered by the current audit and compute the financial effect thereof to enable
us to verify the same.
 

4. Balancing of books

Kindly confirm the present status of balancing of the subsidiary records with the relevant control
accounts. In case of differences between balances in the control and subsidiary records, please
give the details thereof and let us know the efforts being made to reconcile/balance the same.
This information may be given head-wise for the relevant control accounts, indicating the date
when the balances were last tallied.
 

5. Deposits

 Please let us have the interest rate structure, applicable for the current year, for all the
types of deposits accepted by the branch.

 Kindly confirm having transferred Overdue/Matured Term Deposits to Current Account

Deposit. If not, details/particulars of credit balances comprising Overdue/Matured Term
Deposits as at the year-end which continue to be shown as Term Deposit, particularly
where the branch does not have any instructions/communication for renewal of such
deposits from the account holder and amount of provision of interest made on such
overdue/matured term deposits, should be separately marked out and be kept ready for
our reference.
 

b. Advances

 Kindly confirm whether in respect of the advances against tangible securities, the branch
holds evidence of existence and latest market value of the relevant securities as at the
year-end.

 Kindly inform the year-end status of the accounts, particularly those which have been
adversely commented upon in the latest reports of RBI/Internal Auditors/Concurrent
Auditors/Statutory Auditors, etc. on the branch as also accounts in respect of which
provisions have been made/recommended as at the previous year-end.

Information in relation to such advances accounts where provision

computed/recommended may please be prepared indicating:

a. Name of the borrower

b. Type of facility

c. * Total amount outstanding as at the year-end (both for principal and interest)
specifying the date up to which interest has been levied and recovered.

d. Particulars of securities and value on the basis of latest report/statement.

e. Nature of default and action taken.

f. Brief history and present status of the advance.

g. * Provision already made/recommended.

h. NPA since when (please specify the date)

Bank Audit Manual by CA. Sanjay K Agarwal Page No.17

 * Corresponding figures for the previous year-end may please be given.

 Kindly confirm whether the borrowers’ account have been categorised according to the
norms applicable for the year into Standard, Sub-standard, Doubtful or Loss assets, with
special emphasis on Non-Performing Assets (NPA) and whether such classification has
also been made applicable by the branch to advances with balances of less than Rs.
25,000 each.
Kindly confirm whether you have examined the accounts and applied the norms
borrower-wise and not account-wise for categorising the accounts. Please let us have the
particulars of provisions computed/recommended in respect of the above during the
financial year under audit.

 A list of all advances accounts which have been identified as bad/doubtful accounts and
where pending formal sanction of the higher authorities, the relevant amount have not
been re-classified/re-categorised in the book of the branch for provision/write off. This
covers all account identified by the branch or internal/external auditor or by RBI
inspectors but the amount has not been written-off wholly or partly.
In case the bank has recommended action against the borrowers or for initiating legal or
other coercive action for recovery of dues, a list of such borrowers’ accounts may be
furnished to us.

 Please let us have a list of borrowers’ accounts where classification made as at the end
of the previous year has been changed to a better classification, stating reasons for the
same.

 Kindly also confirm whether any income has been adjusted/recorded to revenue,
contrary to the norms of income recognition notified by the Reserve Bank of India and/or
Head Office circulars issued in this regards; and particularly where the chances of
recovery/realisability of the income are remote.

Kindly also confirm whether any income has been recorded on Non-Performing Accounts
other than on actual realisation.
 

c. Outstanding in Suspense/Sundry Account

Kindly let us have a year-wise/entry-wise break up of amounts outstanding in Suspense/Sundry

accounts as on 31-3-2012. Kindly explain the nature of the amounts in brief. Supporting
evidences relating to the existence of such amounts in the aforesaid accounts may be kept
ready at the branch for verification. Reasons for non-adjustment of items included in these may
be made known.
 

d. Inter-branch/Office Accounts/Head Office Account

 Please let us have a statement of entries (head-wise) which originated prior to the year-
end at other branches, but were responded during the period after 31-3-2012 at the
branch.

 Date-wise details of debits in various sub-heads relating to Inter-Branch transactions

and reasons for outstanding amounts particularly those, which are over 30 days as at
the Balance Sheet date.
 

e. Contingent liabilities

 Kindly confirm whether other than for advances, there are any matters involving the
bank in any claims in litigation, arbitration or other disputes in which there may be some
financial implications, including for staff claim, municipal taxes, local levies etc. If so,

Bank Audit Manual by CA. Sanjay K Agarwal Page No.18

 these may be listed for our verification, and you may confirm whether you have included
these as contingent liabilities.

 Kindly confirm whether guarantees are being disclosed net of margins, or otherwise as at
the year-end, and whether the expired guarantee where the claim year has also expired,
continue to be disclosed in the branch return. Please confirm specifically.
 

f. Interest provision

 Kindly confirm whether interest provision has been made on deposits etc. in accordance
with the latest instruction of the RBI/interest rate structure of the bank. A copy of such
instructions/rate structure may be made available for our scrutiny.

 Kindly confirm whether any amount recorded as income up to the year-end, which
remains unrecovered or not realisable, has been reversed from any of the income heads
or has been debited to any expenditure head during the financial year. If so, please let
us have details to enable us to verify the same.

 Kindly confirm the accounting treatment as regards reversal, if any of interest/other

income recorded up to the previous year-end; and the amount reversed during the year
under audit; i.e., income of earlier years derecognised during the year.
 

g. Foreign currency outstanding transactions

 Kindly confirm whether amount outstanding as at the year-end have been converted as
at the year-end rates prescribed by FEDAI. An authenticated copy of the FEDAI rates
applied may be given for our records.

 Kindly confirm the amount of inward value of foreign currency parcels, if any, which
originated prior to the year-end from other banks, but could not be recorded as these
were in transit and for which entries were made after the year end.
 

h. Investment/Stationery

For Investment held by the branch:

 These may be produced for physical verification and/or evidence of holding the same be
made available.

 Stock of unused security paper stationery/numbered forms like B/Rs, SGL forms, etc.
may please be produced for physical verification.

 It may be confirmed whether income accrued/collected has been accounted as per the
laid down procedure.

 It may be confirmed whether Investment Valuation has been done as per the extant RBI
guidelines.
 

i. Long Form Audit Report - Branch response to the Questionnaire

In connection with the Long Form Audit Report, please let us have complete information as
regards each item in the questionnaire, to enable us to verify the same for the purpose of our
audit.
 

Bank Audit Manual by CA. Sanjay K Agarwal Page No.19

 j. Tax Audit in terms of section 44AB of the Income-tax Act, 1961

Please let us have the information required for the tax audit under section 44AB of the Income-
tax Act, 1961 to enable us to verify the same for the purpose of our report thereon.
 

k. Other certification

Please furnish us the duly authenticated information as regards other matters, which as per the
letter of appointment require certification.
 

l. Bank reconciliation and confirmations

Please let us have the duly reconciled statements for all Nostro as well as Local bank accounts.
A copy of the year-end balance confirmation statements should also be called for and kept
ready for our review.
 

m. Books of account and records

Kindly keep ready all the books of accounts and other records like vouchers, documents, fixed
assets register, etc. for our verification.

We shall appreciate your kind co-operation in the matter.

Thanking you,

Yours truly,

Chartered Accountants

Bank Audit Manual by CA. Sanjay K Agarwal Page No.20

 Check-list for Audit of Advance Accounts
1. Name of the borrower  
2. Address  
3. Constitution  
4. Nature of business/activity  
5. Other units in the same group  
6. Total exposure of the branch to the Group - Fund based (Rs. in lakhs) - Non-fund  
based (Rs. in lakhs)
7. Name of Proprietor/Partners/Directors  
8. Name of the Chief Executive, if any  
9. Asset classification by the branch  

a. during the current year

b. during the previous year

10. Asset classification by the Branch Auditor  

a. during the current year

b. during the previous year Are there any adverse features pointed out in
relation to asset classification by the Reserve Bank of India Inspection or
any other audit.

11. Date on which the asset was first classified as NPA (where applicable)  
12. Facilities sanctioned:  
  Date of Nature of Limit Margin% Balance outstanding Prime Collateral
Sanction facilities (Rs. in at the year-end security security
Lakhs)
Current Previous
           
Year Year
               
Provision made: Rs.________ lakhs
13. Whether the advance is a consortium advance or an advance made on multiple-  
bank basis
14. If Consortium,  

a. names of participating banks with their respective shares

b. name of the Lead Bank in Consortium

15. If on multiple banking basis, names of other banks and evidence thereof  
16. Has the Branch classified the advance under the Credit Rating norms in accordance  
with the guidelines of the controlling authorities of the Bank
17. a. Details of verification of primary security and evidence thereof;
b. Details of valuation and evidence thereof

Date verified Nature of security Value Valued by

       
       
Insured for Rs. _______ lakhs (expiring on ________)

Bank Audit Manual by CA. Sanjay K Agarwal Page No.21

18. a. Details of verification of collateral security and evidence thereof
b. Details of valuation and evidence thereof

Date verified Nature of security Value Valued by

       
       
Insured for Rs. _______ lakhs (expiring on ________)
19. Give details of the guarantee in respect of the advance  

a. Central Government guarantee;

b. State Government guarantee;
c. Bank guarantee or financial institution guarantee;
d. Other guarantee

Provide the date and value of the guarantee in respect of the above.
20. Compliance with the terms and conditions of the sanction  
Terms and Conditions
Compliance
i. Primary Security
a. Charge on primary security
b. Mortgage of fixed assets
c. Registration of charges with Registrar of Companies
d. Insurance with date of validity of policy
ii. Collateral Security
a. Charge on collateral security
b. Mortgage of fixed assets
c. Registration of charges with Registrar of Companies
d. Insurance with date of validity of policy
iii. Guarantees - Existence and execution of valid guarantees
iv. Asset coverage to the branch based upon the arrangement (i.e., consortium
or multiple-bank basis)
v. Others:
a. Submission of Stock Statements/Quarterly Information Statements
and other Information Statements
b. Last inspection of the unit by the Branch officials: Give the date and
details of errors/omissions noticed
c. In case of consortium advances, whether copies of documents
executed by the company favouring the consortium are available

21. Key financial indicators for the last two years and projections for the current year (Rs. in lakhs)
Indicators Audited year Audited year Estimates for
ended 31st ended 31st year ended 31st
March___ March___ March ___
Turnover      
Increase in turnover % over previous      
year
Profit before depreciation, interest and      
tax
Less: Interest      
Net Cash Profit before tax      
Less: Depreciation      
Less: Tax/Net Profit after      
Depreciation and Tax      
Net Profit to Turnover Ratio      
Capital (Paid-up)      
Reserves      
Bank Audit Manual by CA. Sanjay K Agarwal Page No.22
 Net Worth      
Turnover to Capital Employed Ratio (The      
term capital employed means the sum of
Net Worth and Long Term Liabilities)
Current Ratio      
Stock Turnover Ratio      
Total Outstanding Liabilities/total Net      
Worth Ratio
In case of listed companies, Market Value      
of Shares

a. High;
b. Low; and
c. Closing

Earnings Per Share      

Whether the accounts were audited? If      
yes, up to what date; and are there any
audit qualifications
22. Observations on the operations in the account:
  Excess over Excess over
drawing power limit
1. No of occasions on which the Balance exceeded the drawing    
power/sanctioned limit (give details)
Reasons for excess drawings, if any    
Whether excess drawings were reported to the Controlling    
Authority and approved
  Debit summation Credit summation
(Rs. in lakhs) (Rs. in lakhs)
2. Total summation in the account during the year    
Less: Interest    
Balance    
23. Adverse observations in other audit reports/Inspection Reports/Concurrent  
Auditor’s Report/Internal Audit Report/Stock Audit Report/Special Audit Report or
Reserve Bank of India Inspection with regard to:

i. Documentation;
ii. Operations;
iii. Security/Guarantee; and
iv. Others

24. Branch Manager’s overview of the account and its operation.  

25. a. In case the borrower has been identified/classified as Non-performing Asset  
during the year, whether any unrealised income including income accrued in
the previous year has been accounted as income, contrary to the Income
Recognition Norms.
b. Whether any action has been initiated to recover accounts
identified/classified as Non-performing Assets.

  Date: Signature and Seal

of Branch-in-
Charge

Bank Audit Manual by CA. Sanjay K Agarwal Page No.23

 Advances checklist for LFAR

1. In respect of common irregularities, the Auditors can give their comments borrower-wise in the
format given hereunder:

Name of Name Region IRAC Sanctioning Facility Limit Amount Irregularity

borrower of status authority o/s. as at No.
branch the year
end
1 2 3 4 5 6 7 8 9
                 

2. In respect of Column 9 above, “Irregularity No.”, the number as given in the “Glossary to
Irregularities” in Point 5, under the head “Item” below should be given for the irregularity
applicable to respective borrower.

In case the auditors feel that in spite of the list of irregularities given below, there are some
other irregularities, which the auditor would like to bring to notice, the auditor may separately
disclose under the given head by giving “appropriate number”.

For the aforesaid purpose, “appropriate number” would mean, for example, if the auditors feels
that in case of “Review/Monitoring/Supervision”, which has the number “4”, any additional
irregularity has to be incorporated, he may give a number after the last number appearing in
the list such as “4.52”, and onwards. Similarly in case of “Credit Appraisal” which has the
number “1”, any additional irregularity may be given “1.14”, and so on.

3. The borrower-wise details may be given in descending order based on the Amount
outstanding.

4. In addition to the above, auditors wanting to give notes in respect of Critical Advances (large or
small) with gross irregularities should give the same as per the format given in “Point 6” below.

5. GLOSSARY TO IRREGULARITIES

Item REMARK
1 Credit Appraisal
1.1 Loan application not on record at branch.
1.2 The appraisal form was not filled up correctly and thereby the appraisal and assessment
was not done properly.
1.3 Loan application is not in the form prescribed by Head Office.
1.4 The bank did not receive certain necessary documents and Annexures required with the
application form.
1.5 Basic documents such as Memorandum & Articles of Association, Partnership deed, etc.,
which are a pre-requisite to determine the status of the borrower, not obtained.
1.6 Certain adverse features of the borrower not incorporated in the appraisal note forwarded
to the management.
1.7 Industry/group exposure and past experience of the bank is not dealt in the appraisal
note sent to the management for sanction.
1.8 The level for inventory/book-debts/creditors for finding out the working capital is not
properly assessed.
1.9 Techno-economic feasibility report, which is required to know the technical aspects of the
borrower’s business, is not obtained from Technical Cell.
1.10 Credit report on principal borrowers and confidential report from their banks are not
insisted from the borrowers.
1.11 The opinion reports of the associate and/or sister concerns of the borrower are not

Bank Audit Manual by CA. Sanjay K Agarwal Page No.24

 scrutinised.
1.12 The opinion reports of the associate and/or sister concerns of the borrower are not called
for.
1.13 The opinion reports of the associate and/or sister concerns of the borrower are not
updated.
1.14 The opinion reports of the associate and/or sister concerns of the borrower are not
satisfactory.
1.15 The opinion reports of the associate and/or sister concerns of the borrower are not
scrutinised/called for/not updated/not satisfactory.
1.16 The procedure/instructions of head office regarding preparation of proposals for grant not
followed.
1.17 The procedure/instructions of head office regarding preparation of proposals for renewal
of advances not followed.
1.18 The procedure/instructions of head office regarding preparation of proposals for
enhancement of limits, etc. not followed.
1.19 No exposure limits are fixed for forward contract for foreign exchange sales/purchase
transactions.
2 Sanctioning and disbursement
2.1 Credit facility sanctioned beyond the delegated authority or limit of the branch
2.2 Certain proposals were sanctioned pending approval of higher authorities wherever
required.
2.3 Ad hoc limits were granted for which sanctions were pending since long.
2.4 Facilities were disbursed before completion of documentation.
2.5 Facilities were disbursed without following sanction terms.
2.6 Facilities were disbursed without any sanction.
2.7 Sanction letter was missing in the branch.
2.8 Guarantor as required in the sanction letter was not obtained.
2.9 Required promoters stake not invested before disbursement of loan.
2.10 Sanctions were made without proper appraisal.
2.11 Security charge not created before disbursement as required by sanction letter/renewed
letter.
2.12 Full disbursement of the facility not made.
2.13 Sanction terms were not complied with or were not recorded.
2.14 Disbursement made without proper sanction.
2.15 Term loan was disbursed by creating the cash credit or savings account of the borrower.
3 Documentation
3.1 The security against which the advance was sanction was not available/was not on record.
3.2 Mortgage for the property given as security is not created.
3.3 Mortgage for the property given as security created, was inadequate, as compared to
terms of sanction.
3.4 Second charge as required, on assets is not created in favour of the bank.
3.5 Documents of second charge on assets is not on the record.
3.6 Documents pertaining to registration of charges with ROC or any other concerned
authority requiring charging of assets is not obtained.
3.7 Copies evidencing lodgment of the original conveyance/sale deeds with the Sub-Registrars
for registration not on record.
3.8 Authority letter/Power of Attorney to the bank to collect the original documents from the
Sub-Registrar not on record.
3.9 Documents pertaining to consortium advances not yet executed/not available with bank.
3.10 Documents signed by persons not duly authorised to sign or who have signed in other
capacity accepted by the bank.
3.11 Signatures of the executants were not found on all the pages of the documents

Bank Audit Manual by CA. Sanjay K Agarwal Page No.25

3.12 Some of the documents on record were blank, without signatures of Branch Manager,
witnesses, or guarantors, etc.
3.13 Revival letters in respect of documents to be reviewed from the borrowers not received.
3.14 Guarantors have expired.
3.15 Guarantors not on record.
3.16 Guarantors not renewed.
3.17 Guarantors not assigned.
3.18 Worth of the guarantors not available.
3.19 Stamping not as per the amended Stamps Act.
3.20 Documents have become mutilated, soiled, time barred or not obtained.
3.21 Opinion report by the field officer for the borrowers not found on record.
3.23 “Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No Lien Letters” not
obtained for the mortgage/s.
3.24 Advances for vehicle loans, Registration certificate, transfer certificate, etc. not obtained.
3.25 Work completion certificate, sale deeds, share certificates in societies, etc. not on record
for housing loans.
3.26 Documents are not duly attested/signed by concerned officials/not renewed.
3.27 The agreements for hypothecation do not contain details regarding goods hypothecated.
3.28 Copy of Bills/receipts, on the basis of which the amount was disbursed not found on
record. For example Vehicle Loans, Plant and Machinery.
3.29 Charge on main &/or collateral securities not created in terms of sanction letter.
3.30 Original security papers/sale deed/lease deed/title deed/agreement of sale not available
on record.
3.31 TDR are not discharged or renewed.
3.32 Control returns not sent to the H.O.
3.33 The branch has not taken any action for not compliance with terms of agreement
3.34 No documents executed for enhancement of limit/document not on record.
3.35 ECGC post shipment policy not obtained.
3.36 Credit facility released without execution of all necessary documents.
3.37 Common Seal not affixed on Letter of Comfort.
3.38 Confirm orders for export credit not found on record for facilities released.
4 Review/Monitoring/Supervision
4.1 The account is frequently overdrawn.
4.2 The account is continuously overdrawn.
4.3 The account is overdrawn and the branches have not taken sufficient steps to regularise
the accounts promptly.
4.4 The balance outstanding have exceeded the drawing power.
4.5 Balance confirmation and acknowledgment of debt not obtained.
4.6 The stock, book-debts statements not received regularly/promptly.
4.7 The FFI/financial statements/audited statements/FFR 1 & 2/other operational data, etc.,
not received regularly/promptly.
4.8 The stock, book-debts statements, etc., not scrutinised and no suitable action is taken.
4.9 The FFI/financial statements/audited statements/FFR 1 & 2/other operational data, etc.,
not received regularly/promptly/not scrutinised and no suitable action is taken.
4.10 Non-moving stock is not deducted to arrive at the drawing power.
4.11 The age-wise break-up of debtors is not found on record. The borrowers are allowed to
draw money on entire outstanding debt, which must rather be for the recent debts as
prescribed for particular industries and as per margin prescribed in the sanction letter.
4.12 Wide discrepancies observed in the stock statements and stock figures in the annual
audited financial statements.
4.13 No penal interest has been charged for delay in submission of various statements as per
the terms of agreement depending upon the type of loan/credit availed by the borrower.
Bank Audit Manual by CA. Sanjay K Agarwal Page No.26
4.14 Many branches have not adhered to the prescribed frequency of physical verification of
securities given against loans and advances.
4.15 Drawing power limits are not revised as per market value of shares for advances against
security of shares.
4.16 End-use of funds not ensured/not known funds utilised for purpose other than for which
granted.
4.17 The projections submitted by the borrower stay far beyond the actual performance.
Further, no explanation for the same is taken from the borrower.
4.18 Major sale proceeds of the borrower not routed through the bank.
4.19 Audited statements of non-corporate borrowers having limit beyond Rs. 10 lakhs not
received.
4.20 Renewal proposals of advances not received on time and in many cases the limits are not
renewed.
4.21 Application of wrong rate of interest, processing charges, commission, other charges, etc.
resulting in income leakage/excess booking of interest of the Bank.
4.22 Insurance cover for stock/property is inadequate/not on record/not renewed/not endorsed
in favour of the Bank.
4.23 Inspection/physical verification of security charged, not been carried out.
4.24 Expired bills/foreign currency sight bills which are outstanding, have not been crystallised.
4.25 EBW statements on write-off of overdue export bills of ECM not found on record.
4.26 Confirmation as to genuineness of export transactions not obtained from Bank’s foreign
offices/correspondents/customs department.
4.27 Import credit, bill of entry evidencing import of goods not found.
4.28 Documents are not obtained for bills discounted under Letter of Credit.
4.29 Advances, which are eligible for whole turnover packing credit guarantee cover of ECGC,
are not brought under its cover.
4.30 Though government guaranteed accounts are irregular since long, the issue of invocation
of guarantee does not seem to have been considered.
4.31 Prescribed margins not maintained as per sanctions.
4.32 Allocated limits, full terms of sanctions, stock statements, inspection reports, margin, etc.
not available at monitoring branches.
4.33 For allocated limits, inordinate delays were noticed in responding to transfer by the
allocator branch.
4.34 Regular meetings not held with other consortium members to review the performance of
borrowers and to assess the current state of affairs/not been held as per norms.
4.35 Individual members of the consortium are not advised about the quarterly operating
limits/D. P. allocated to each one of them.
4.36 Minutes of the consortium meetings not found on record/not been held as per norms.
4.37 Inspection report from the consortium members not obtained.
4.38 The capital of the borrower has eroded/networth is negative/decreasing. Close monitoring
needs to be done.
4.39 The drawing power is calculated wrongly and/or hence the borrower is allowed to enjoy
excess credit than actually eligible.
4.40 Signboard of SBI is not displayed in godown, where the pledged/hypothecated stock is
stored.
4.41 Limit not fully utilised by the borrower/No commitment charge is levied for the limit not
fully utilised by the borrower.
4.42 Loan against TDR/STDR, which is matured, is neither renewed nor credited to loan
account.
4.43 The Stock and Debtors Audit Report not found on record. No audit has been done for
accounts of the borrower.
4.44 The valuation report in respect of tangible security from government approved valuer
have not been obtained.
4.45 Guarantees, Opinion Reports Financial statements, IT assessment orders and etc. of the
Bank Audit Manual by CA. Sanjay K Agarwal Page No.27
 guarantor are not found on record.
4.46 Opinion report on guarantor is not obtained.
4.47 For small Government sponsored loan accounts, security cover could not be ascertained
since neither any record was available at branch nor physical verification conducted by the
branch.
4.48 Pre-sanctions and/or post-sanctions inspection reports were not on record.
4.49 The account was overdue for repayment and/or no credit was received from the borrower
for a long time.
4.50 The borrower is absconding or deceased and legal formalities are incomplete and there is
wilful default from the borrower. Either establishment was closed or security was disposed
of or no action taken by the branch.
4.51 Subsidy claim process was incomplete or subsidy was yet to be received or needs follow-
up.
4.52 Security disposed of/entity closed by borrower and no action taken by the branch.
4.53 Irregularity not advised to controllers.
4.54 Letter of subordination of deposits not taken.
4.55 Secured and unsecured portion not segregated properly in advance return of the branch.
4.56 Renewal of limits was done before the receipt of financial statements.
4.57 Heavy cash withdrawal for which consent of corporate Guarantor is not taken.
4.58 Proper valuation of stock not done/needs critical scrutiny.
4.59 Security obtained is inadequate/lower as compared to amount of outstanding/no collateral
security.
4.60 The party was dealing with other bank also tough it was not permitted.
4.61 Sticky accounts require close follow-up by the management.
5 Bad and doubtful advances
5.1 The IRAC norms for classification of advances were not followed and the same is
implemented through Memorandum of Changes by auditors during audit.
5.2 Instalments were not received from the borrowers.
5.3 Interest was not received from the borrowers.
5.4 Legal action for recovery of advances was not taken although authorised by the
Board/Controlling Authority.
5.5 Discontinuance of application of interest not followed although authorised by the
Board/Controlling Authority.
5.6 Government guarantees have expired and fresh guarantees not obtained/not renewed.
5.7 Terms of the BIFR scheme not complied.
5.8 Payment from government not received although guarantees were unconditional,
irrevocable and payable on demand.
5.9 Delays in the settlement/repayment in respect of sanctioned proposals.
5.10 The repayment accepted in case of compromise cases inadequate vis-à-vis value of
security.
5.11 Compromise proposals pending at various levels where local government/outside agencies
are involved as guarantors.
5.12 Copy of Search Report not on record.
5.13 Decree awarded but no further steps taken for recovery.
5.14 DI&CGC claims submitted/rejected/pending data not available.
5.15 Irregular/sticky advance not reported to the controlling authority promptly.
5.16 Compromise/OTS proposal is recommended and is under negotiation since long but not
finalised. Suit is filed in the court/DRT and pending to be finalised.
5.17 ECGC claim not submitted/lodged for recovery.

6. Format for reporting Large/Irregular Advances

Name of the Branch & Region :

Bank Audit Manual by CA. Sanjay K Agarwal Page No.28

 Name of the Borrower :
Asset Classification (IRAC Status) :

(Rupees in lakhs)
Facility Sanctioned Limit Drawing Power Outstanding as on 31.3.2012
Fund based:      
       
       
       
       
Non-Fund based:      
       
       
       

7. Security :

o Primary :

o Collateral :

Financial performance :

Operational comments :

Other comments (if any) :

Bank Audit Manual by CA. Sanjay K Agarwal Page No.29

( Remuneration payable to the Statutory Central and Branch Auditors from the year 2006-07 as per
RBI circular No. DBS.ARS.No.BC.08/08.92.001/2006-07 dated 6th June 2007 & DBS.ARS.BC.No.
3/08.92.001/2007-08 dated 25th July 2007

1. Remuneration for Branch Audit work of the Bank

The schedule of audit fees admissible to the Auditors for the audit work of the Branches, depending upon
the quantum of advances (as on the date with reference to which the audit is conducted) will be as under:-

Category of Branches according Rates

to the quantum of Advances of Audit Fees
-------------------------------------- -----------------------------
(Rs.)
a) Upto Rs. 75 lacs … 12,500.00
b) Over Rs. 75 lacs and upto Rs.150 lacs … 15,000.00
c) Over Rs.150 lacs and upto Rs.300 lacs … 22,500.00
d) Over Rs. 3 crores and upto Rs. 5 crores … 30,000.00
e) Over Rs. 5 Crores and upto Rs. 10 crores … 35,000.00
f) Over Rs. 10 crores and upto Rs. 20 crores … 50,000.00
g) Over Rs. 20 crores and upto Rs. 30 crores … 69,000.00
h) Over Rs. 30 crores and upto Rs. 50 crores … 1,05,000.00
i) Over Rs. 50 crores and upto Rs. 75 crores … 1,20,000.00
j) Over Rs. 75 crores and upto Rs.125 crores … 1,59,000.00
k) Over Rs.125 crores and upto Rs.175 crores … 1,99,000.00
l) Over Rs.175 crores and upto Rs.300 crores … 2,50,000.00
m) Over Rs.300 crores and upto Rs.500.00 crores … 2,82,000.00
n) Over Rs.500 crores … 3,13,000.00
As at present, the main operating office of the Bank (irrespective of the fact whether it is attached to Central
Office of the Bank or functions as separate unit) may be treated as any other branch and the fees admissible
for the audit work thereof will be on the basis of quantum of advances outstanding at their office and
prescribed schedule of audit fees will be applicable.
Audit fees, for Branches where there are no advances portfolio, such as Service Branches, Specialised
Branches etc. will be as below:
i) Forex-cum-Treasury Management Branch, Mumbai Rs. 2,50,000.00
ii) Four Service Branches situated at Metropolitan Areas
Viz. Kolkata, New Delhi, Mumbai & Chennai Rs. 15,000.00
iii) Fifteen Service Branches at various centres other than
Metropolitan areas and three QCS Branches Rs. 12,500.00
2. Fees for LFAR and Tax Audit for Branches :
i) For LFAR 10% of basic audit fees payable for audit of respective
branch.
ii) For Tax Audit 15% of basic audit fees payable for audit of respective
branch.

3. Reimbursement of Travelling and Halting

Allowances and Daily Conveyance Charges :
Travelling Allowances :
For Proprietors/Partners For Assistants
Travelling allowance in respect of The audit assistants are to be allowed to travel by First
partners/proprietor is to be considered by Class/Air conditioned II tier class by rail or to be reimbursed
allowing travel by air conditioned First the actual cost of conveyance by other modes of
Class by rail or by Air in economy class or transportation where the routes are not served by rail. Airfare
actual cost of conveyance by other modes in economy class can be considered in respect of the audit

Bank Audit Manual by CA. Sanjay K Agarwal Page No.30

 of transportation where the routes are not assistants as a special case, whenever considered necessary.
served by air/rail. (Prior permission is required from Zonal /Head Office in
case of travel by Air (Economy class) in emergent
circumstances).
Halting Allowance:
The rate of Halting Allowance subject to production of bills/vouchers should be as under
Lodging Charges:
The Lodging Charges payable to partners/proprietors of the audit firm may be paid, subject
to the production of bills, linking the same to IBA approved rates for the Bank officials as
under:
Proprietors/Partners of Firms:Scale-VII/General Manager
Qualified Assistant; Scale-III/Senior Manager
Unqualified Assistant: Scale-I/Officer.
The details of Lodging Charges applicable to our Bank’s Executive/Officers are given hereunder:
Reimbursement of actual hotel expenses restricting to Major A Area- I Other places
single room accommodation at Hotels subject to the Class cities
ceiling below:
Top Executive 6000 2500 1750
Grade- VII
Scale-III 2250 1250 800
Scale-I 1500 950 500
Major ‘A’ class cities for the purpose are Mumbai, Kolkata, Delhi, Chennai, Ahmedabad, Bangalore and
Hyderabad.
Area I centres are Pune, Nagpur, Kanpur, Surat, Jaipur and Lucknow, Vishakapatnam, Patna, Vadodara,
Kochi, Indore, Bhopal, Ludhiana, Coimbatore, Madurai, Agra and Varanasi.

Reserve Bank of India has advised in its recent communication that wherever Banks have Guest House or
visiting Officers’ flats, the same may be utilised to cater to the needs of the auditors.

Boarding Charges:
Major A Class Area I Other Places
Cities
----------------- -------- ---------------
(Rs.) (Rs.) (Rs.)
Proprietors/Partners of the
audit firm 500.00 400.00 325.00
Qualified Assistant 450.00 350.00 313.00
Unqualified Assistant 350.00 313.00 275.00
Boarding Charges as above shall be subject to production of Bills and when no bills are produced, boarding
charges @ 60% of the rates prescribed above to cover the boarding and other incidental expenses will be
paid.
Daily Conveyance Charges :
i) The actual local conveyance charges incurred by Auditors while working away from their
headquarters for conducting the Bank’s audit, not exceeding Rs.188/- per day for
proprietors/partners, Rs.94/- and Rs.75/- per day for qualified assistants and unqualified assistants
respectively may be reimbursed on the basis of self-declaration.
ii) In the case of local Auditors, if the distance between Auditors’ Office and Bank’s Office/Branch is
beyond 8 kms., actual expenditure not exceeding Rs.188/- per day for proprietors/partners, Rs.94/-
and Rs.75/- per day for qualified assistants and unqualified assistants respectively may be reimbursed
on a self-declaration.
iii) However, the reimbursement of such expenses shall not exceed 10% of the audit fees payable to the
respective auditors.

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 Boarding Charges as above shall be subject to production of Bills and when no bills are produced,
boarding charges @ 60% of the rates prescribed above to cover the boarding and other incidental
expenses will be paid.
4. With regard to the reimbursement of travelling, halting allowance and daily conveyance charges,
following observations are made :
i) It is observed that there are cases where expenses under TA/HA Bills are far in excess of the total
audit fees paid for which instruction of the Reserve Bank of India is to reduce the expenditure on
lodging.
Further, some of the audit firms are found to have managed obtaining bills for lodging charges far in
excess of the tariff charges levied by the concerned hotels and submitted bills for higher claims to the
bank. In such cases, the Bank is advised to bring the same to the notice of the Reserve Bank of India.
ii) The Bank will call for details of TA/HA from Auditors if considered necessary for verification of
bills in this regard and the Statutory Central Auditors as well as Branch Auditors should furnish such
details for verification of the actual expenses.
iii) Where the Statutory Central Auditors or Branch Auditors have an office at the place where the
branches/offices of the bank to be audited are situated, they will not be reimbursed TA/HA expenses.
iv) The TA/HA should be kept to the minimum.
v) In case of journey by Train, Ticket No./PNR No., Train No., date of journey must be mentioned for
claiming Ist Class fare/AC-II Tier fare. In absence of details, 2nd Class fare will be reimbursed. While
journey is undertaken by other mode of conveyance, viz., Air, Bus, Car etc., tickets/receipts must be
produced.
vi) In case, the journey is undertaken by Taxi or by own Car, reimbursement towards such conveyance
will be limited to Rs. 5.50/- per k.m. For journey by Taxi, proper stamped receipt indicating date of
journey, Taxi Number, name of the places travelled with distance covered, fare charged etc. should
be produced for claiming reimbursement. If the branch is not connected by train/bus route from the
station of the Auditors and they undertake journey by own car/taxi, a certificate in this regard should
be received from the concerned branch Manager mentioning the car/taxi number and the same will
be submitted along with the bill for claiming reimbursement.
vii) For claiming actual local conveyance charges on self-declaration basis, the distance of the branch
and mode of conveyance will have to be mentioned.
viii) In case of dispute between the Auditors and the Bank regarding settlement of their bills, the
Chairman & Managing Director of the Bank shall be the final authority to decide the claims. The
Chairman has to satisfy himself that the actual expenses have been incurred by a particular auditor
and the claims are settled keeping in view the RBI guidelines.
5. Payment of Service Tax :
Over and above the remuneration fixed towards the Professional Services, Service Tax at the rate
prescribed by the Finance Act, will be paid to the Statutory Auditors of the Bank for audit for the
year 2011-2012 in terms of directives of the Reserve Bank of India. The Auditors are advised to
claim Service Tax along with their professional fees for conducting audit for 2011-2012.

Bank Audit Manual by CA. Sanjay K Agarwal Page No.32

 Overall Audit Plan - Audit Programme
A. While drafting the audit programme, the type of reports  to be submitted  have to be
considered. There are four types of reports.

1. Unqualified Report
2. Qualified Report
3. Disclaimer of Opinion
4. Adverse Report
B.  Various types of reports include:
a. Jilani Committee Report
b. Ghosh Committee Report
c. Special Reports as applicable (Prime Minister Rojgar Yojana Scheme Report etc.)
d. Long Form Audit Report
e. Tax Audit Report
f. Main Report (Sec. 30(3) of Banking Regulation Act, 1949)
C. Accounting standards not applicable to bank
Of the effective twenty eight standards, the following standards are not applicable to banks to the
extent specified.
a) AS 13, Accounting for Investments, does not apply to investments of banks.
b) AS 11, “The Effects of Changes in Foreign Exchange Rates”, does not apply to accounting of
exchange difference arising on a forward exchange contract entered into to hedge the foreign
currency risk of a firm commitment or a highly probable forecast transaction.
D. Considerations for overall audit Plan
• 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
• The nature and timing of audit evidence obtained
• The work of internal auditors and extent of their 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

E. Documentation
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;
 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 Audit Manual by CA. Sanjay K Agarwal Page No.33

  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

F. Auditor should plan his work based on the client?s business to enable him to conduct an effective
audit in an efficient and timely manner as per AAS 8

G. Non applicability of CARO, 2003

Statement of companies (Auditor’s 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

 
Specimen Audit Program
 

Bank & Branch : XYZ

Audit Period: From ……………….. to……………………. Chartered Accountants
Date of Reporting
AUDIT PROGRAMME
ACCOUNTING YEAR :: 2011-2012    
Person in charge       Memb. No. Signature: Experience
Team Members Name   Qualifications  Experience
1.      
      2.                    
Sl
No Job By Initials
       
1    
     
2    
     
3    
     
4    
     
5    
     
6    
     
7    
     

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