Seminar on

“Bank Branch Audit”

organised by :
BANGALORE Branch of SIRC of ICAI

Presented by:
CA P.Manohara Gupta
Partner
DAGLIYA & CO.,
Chartered Accountants
BANGALORE
Page 1
How is Bank Branch Audit
different ?

 Complex & voluminous transactions

Availability of limited time
 Audit in computerised environment
 Risk of frauds & errors
 Numerous Reporting & Certifications

By CA P.Manohara Gupta Page 2

 PLANNING
&
DOCUMENTATION

Page 3
Preliminary work on receipt of Appointment:
• Complete the acceptance formalities
• Communicate with previous Auditor
• Study HO Annual closing instructions to Branches or
guidelines on Branch Audit
• List out the Returns and Certificates required to be
verified and certified by the Branch Auditors.
• Issue letter of Engagement to the branch; include
obligations and responsibilities for issuing all
certifications, LFAR and other reports.

Contd…
By CA P.Manohara Gupta Page 4
Preliminary work on receipt of Appointment:
• Letter to the Branch in-charge prior to the
commencement of the audit.
• Important information to be sought in the letter:
 Particulars of nature and size of the branch
 Latest list of advances with asset classification
 Previous audits conducted and status of compliance
with the observations in those reports
 List of SMA accounts generated in last three months
 List of fresh advances sanctioned/ disbursed and
relevant files
 List of accounts restructured or under resolution plan

By CA P.Manohara Gupta Page 5

Audit Tools
• Maintain record of : -
 Appointment Letter and acceptance
 Letter of introduction
 Key contact details
• Key circulars and instructions received from the bank regarding
branch audit – „accounts closing instructions‟
• Keep soft copies of Formats of audit reports / Certificates
• GN on Bank audit (ICAI) & recent RBI circulars (especially
master circulars on prudential norms on advances and capital
adequacy)
• Ready reckoner for NPA identification
• Interact with the branch to get confirmation of availability of duly
verified and authenticated copies of key statements, returns,
reports, etc. By CA P.Manohara Gupta
Page 6
Scope & Materiality:

• Study size of the branch and nature of its activities

Comply with SA 310 - Knowledge of Business
• Define scope identifying key areas
• Set materiality levels- SA 320
• Decide sample size keeping in mind minimum
requirements like 5 % of the advances or Rs 2 Crores
whichever is less-SA-530

By CA P.Manohara Gupta Page 7

Standards on Auditing
• Documentation (SA- 230)
• Auditors Responsibility for Fraud and error (SA- 240)
• Audit evidence (SA- 500)
• Audit Planning (SA- 300)
• Risk Assessment-(SA-315)
• Auditors Response to assessed Risk-(SA-330)
• Audit materiality (SA - 320)
• Analytical procedures (SA - 520)
• Audit sampling (SA - 530)
• Representation by management (SA - 580)
• Using the work of another Auditor (SA- 600)

By CA P.Manohara Gupta Page 8

Documentation:

• It is fundamental that any audit needs to be carried

out in accordance with Standards on Audit (SA).

• An Auditor needs to comply with SA 230 in

documenting the audit procedures adopted by him in
conducting the audit and the results obtained by him
in order to form his opinion.

• Bank Audit is no exception.

By CA P.Manohara Gupta Page 9

Documentation
Pre Audit Documentation :

•Prepare Audit plan & Programme to ensure

completion of the audit with in the time schedule- SA
300
•Prepare Checklist of Various Reports and
Certifications and work allocation among the staff.
•Compile important and latest RBI Master Circulars
bearing on Branch Audit.

By CA P.Manohara Gupta Page 10

 Documentation
During Audit Documentation :

•Document the features of CBS adopted by the Bank

and control tests carried out.
• Obtain list of Exception Reports generated by the
system and out come on review of such Reports.
• Maintain an „Advance noting sheet‟
• Retain the work sheets of documents verified by the
audit staff, duly initialed and dated; marking the same
in the checklist along with the name of team member(s)
•Ensure that relevant back up papers are taken for the
MOCs issued, Remarks/ Comments made
By CA P.Manohara Gupta Page 11
Documentation
• Obtain and file various other supporting documents
taken from the System and/or the Branch
Management.
• Carryout analytical reviews and obtain explanations
from Branch Management for significant variations and
comply with SA-520.
• Compile a list of points discussed with the Branch
Management before the closure of audit and finalization
of audit report.
• Obtain Letter of Representation from the Branch
Manager in terms of SA 580
Contd…
Page 12
By CA P.Manohara Gupta
Documentation
• Checklist/guideline for the conduct of the audit.
• Takes care of the LFAR requirements also.

• Important checks suggested (analytical reviews):

 Comparison of each of the NPA account as at the end of
the previous year with the current year‟s NPA statement.
 Comparison of the NPA‟s with the previous years MOC
and the RBI inspection report u/s 35.
 Major Advances to be noted - this takes care of the
requirements for the LFAR.
 LFAR Questionnaire check list.
 Back up papers for each of the certificate issued.

By CA P.Manohara Gupta Page 13

 Management Representation
SA 580
• Major confirmations to be obtained in the letter:
Observations of all the audit reports rectified
Compliance with Accounting Policies of the Bank
Compliance with all RBI circulars issued
Impairment of assets
Confirmation as to provision against all known
losses
Confirmations with respect to
Frauds/misappropriations during the year.
All claims against the branch and other
contingent liabilities are duly disclosed
Penalties paid during the year.
Page 14
 VERIFICATION
of Returns & Certifications

Page 15
 Verification of other Returns
• Various Returns from branches are required to be
compiled for disclosures in the Balance Sheet.
• Returns for compiling the data to be furnished in the
Balance sheet in compliance with:
 RBI Disclosure requirements
Accounting Standards
Returns & Certificates required by the Bank‟s
Management
Certificates required by the Bank for submitting to
Government Authorities.

By CA P.Manohara Gupta Page 16

Verification of Certificates

• Verify the records and data relating to various

certificates required to be given.
• Ensure to keep proper working document for each
certificate data verified.
• Ensure to issue ‘NIL’ certificates where there are no
such events/ transactions.

• Contd…..

By CA P.Manohara Gupta Page 17

Verification of Certificates

• While verifying the Returns & Certificates SBA‟s

should ensure to comply with „GN on Reports and
Certificates for Special Purpose’ issued by ICAI.

• List of certificates required by the Bank would be

given in the Annual Closing Manual issued by the
Bank or in the appointment letters.

By CA P.Manohara Gupta Page 18

Returns for disclosure in
compliance with AS
• Segment Reporting –Retail & Corporate banking
• Return on lease commitments
• Return relating to Related Party Transactions (RPT)

By CA P.Manohara Gupta Page 19

Returns & Certificates as per RBI
disclosure requirements:
• ALM reporting
• Movement of NPAs
• Provision for Un-hedged foreign currency exposure
• Sector wise lending
• Certificate relating to credit/ deposit ratio.
• Statement of accounts Re-structured/ Re-scheduled/
Re-negotiated relating to stressed accounts.
• Projects under implementation.
Contd….
By CA P.Manohara Gupta
Page 20
 Returns & Certificates as per RBI
disclosure requirements:
• Certificate on Unhedged Foreign Currency Exposure in case
of Borrowal having exposure of Rs.1 crore or more.
• Certificate on exposure to sensitive sectors .i.e. exposure to
Capital Market, Infrastructure & Real Estate Sector.
• Certificate on Capital Adequacy
• Reporting on compliance with SLR requirements (12 odd
dates)
• Report about serious irregularities requiring immediate
action

By CA P.Manohara Gupta Page 21

Certificates for submitting to
Government Authorities
• Certification of technology up gradation fund scheme (TUFS) – non SSI
textile centre.
• Certificate relating to recoveries in claim paid accounts under Small
Loans Guarantee Scheme 1971/Small Loans (SSI) Guarantee Scheme,
1981.
• Certificate Central sector interest subsidy scheme.
• Certificate for agricultural interest subvention claim @2% for residual
period of repayment of the loans disbursed during FY.
• Certificate for agricultural interest subvention claim @2% for
disbursements made during FY.
• Certificate for additional interest subvention (Incentive @3%) for prompt
repayment for short term production

Page 22
By CA P.Manohara Gupta
Returns & Certificates required
by Bank’s Management
• Certificate of cash and bank balances.
• Certificate relating to MOC entries of the previous years being
accounted for.
• Certification for advances to infrastructure project and income
generated thereon.
• Certificate of advances exceeding Rs.10 Crores.
• Certificate for Gold Stocks held for Sale of Gold/Metal Gold
Loans.
• Certificate for Gold Coins Held.
• Certificate for Gold Deposit Scheme.

By CA P.Manohara Gupta Page 23

Verification of Basel III
• Capital Adequacy is calculated based on:
1. Fund Based exposures
2. Non Fund Based Exposures &
3. Un-availed limits both under FB & NFB
• Classification of borrowers is vital aspect.
• Different Risk weights are assigned based on LTV
Ratio. Hence security value is important.
• Jotting Sheets generated by the system needs to be
reviewed by the Branch Auditors.
• Issue MOCs for any discrepancy noticed.
By CA P.Manohara Gupta Page 24
ICAI Regulations-Adherence to
Accounting Standards
• Any items where accrual system of accounting not
followed (AS-9)
• Prior period and extra-ordinary items (AS-4)
• Contingencies and events occurring after balance
sheet date (AS-5)
• Provision for retirement benefits (AS-15)
• Segment-wise reporting(AS-17)
• Lease accounting(AS-19)
• Related party disclosure(AS-18)
• Impairment of Assets(AS-28)

By CA P.Manohara Gupta Page 25

REPORTING
(Incl. LFAR)

Page 26
 Audit Report

• Audit Report Format (as prescribed under

the Banking Regulation Act, 1949).
• Generally, the specimen format of the
Audit Report provided by the Bank.
• All Standards on Auditing (SA) for the
conduct of the Audit and Issue of Audit
Report equally applicable to Bank Audit.

Page 27
Auditors Report
• Reporting format pursuant to revised SA 700
• Discuss all audit findings with the Branch Manager
• Comply with SA - 260 wherever audit report is
qualified- Communications with those charged with
governance.
• To bring out clearly impact of qualifications on
revenue, assets and liabilities, item-wise and
cumulative impact
• Non-adherence to Accounting Standards

By CA P.Manohara Gupta Page 28

Reporting & MOC

• Study and understand the MOC format designed by

the Bank
• List out number of MOCs and amount involved in the
Audit Report.
• Ensure that matters reported in LFAR having impact
on asset classification or on financial statements are
duly covered by MOCs
• Ensure to give proper explanatory note is given for
each entry appearing in MOC

By CA P.Manohara Gupta Page 29

 LFAR & MOC
• Discuss all audit findings with the Branch Manager
• Ensure that matters reported in LFAR having impact
on asset classification or on financial statements are
duly covered by MOCs
• Some Banks have introduced a system of changing
asset classification in the Credit Information Reports
itself instead of issuing separate MOC.

By CA P.Manohara Gupta Page 30

Objective of LFAR
• Important inputs about the health of the bank to the
Regulator
• To ensure uniformity in audit of all banks.
• Structured approach with focus on all critical areas of
banking operations
• Focus on systems, controls, practices, procedures,
risk management practices in the banks.
• Highlights critical areas and issues:
To the Management; and
To the Regulators.
By CA P.Manohara Gupta Page 31
Status of LFAR
• LFAR is an independent report to highlight any
weaknesses to the Management.
• It is neither an Annexure to the Audit Report nor it is a
substitute.
• Should not make any reference in the Audit Report to
the comments made in LFAR
• Any adverse comment made in LFAR need not
necessarily result in qualification in the Audit Report.
• Branch Auditor should use his professional expertise
and judgement in deciding the audit qualifications.
• It is preferable to draft both LFAR and Audit Report
simultaneously. Page 32
By CA P.Manohara Gupta
Features of LFAR

• Different formats for Branch LFAR and Whole Bank

LFAR.
• Branch LFAR is in a Questionnaire form
• Branch LFAR is designed to cover entire branch
operations.
• SCA‟s would review branch LFAR‟s during
consolidation process and for drafting Whole Bank
LFAR.

By CA P.Manohara Gupta Page 33

LFAR Points to be considered

• Where any of the comments made by the auditors in

their LFAR is adverse, they should consider whether
a qualification in their main report is necessary.
• A comment in LFAR in lieu of issuing MOC should
be strictly avoided.

By CA P.Manohara Gupta Page 34

LFAR Check Points
 Cost of deposits and yield on advances needs to be
analysed while answering clauses in Part III of LFAR.
 Inter Branch reconciliations
 Any Frauds particulars discovered during the year
 Any possible window dressing of borrower accounts
 Adequacy of data security , storage , back up , disaster
recovery plans & other internal control measures

By CA P.Manohara Gupta Page 35

 LFAR CHECK POINTS
CASH
• Whether Cash Balance is within the limits prescribed
by Controlling Authorities.
• Regular reporting of Excess Cash Balance
• Insurance for Cash-in-custody and Cash-in-Insurance
cover available in respect of cash
• System for Disposal of Soiled Notes, Missing Tokens,
Stapling of Notes etc
• Verification of cash balance in ATMs & Extension
counters , if any

By CA P.Manohara Gupta Page 36

 Balances with RBI, SBI and
Other Banks:
• - Verify Balance Confirmation Certificates and
Reconciliation Statements, in case of difference.
• - Analyze Pending/ Outstanding entries in Reconciliation
and Explanation to be obtained from the Branch.
• - If there are any revenue entries pending in
reconciliation which require Write Off – the same should
be reported in LFAR.
• - If there are pending entries in Reconciliation Statement
outstanding for a period of more than 6 months, specific
details of such pending entries should be given in LFAR.
By CA P.Manohara Gupta
Page 37
LFAR CHECK POINTS contd…

INVESTMENTS
Physical verification of Investments ,if any held by
branches on behalf of Head Office
Note: Branches are not permitted to make any kind of
investments. All investment portfolio of the bank as a whole is
carried out by Treasury department at Central Office. Branches
may hold securities on behalf of Treasury Department. In such
case physical verification has to be carried out and certificate
should be sent to Central Office/ concerned Statutory Central
Auditor.

By CA P.Manohara Gupta Page 38

 LFAR CHECK POINTS

ADVANCES
Credit Appraisal
Sanctioning / Disbursement
Documentation
Review/Monitoring/Supervision
Guarantees & Letter of Credit
Restructuring & Rescheduling of borrowers A/c

By CA P.Manohara Gupta Page 39

LFAR CHECK POINTS

OTHER ASSETS
Stationary & Stamps
Suspense Accounts / Sundry Assets
 LIABILITES
Deposits
Other Liabilities like bills payable, sundry deposits
etc.,
Contingent Liabilities

By CA P.Manohara Gupta Page 40

 LFAR CHECK POINTS

PROFIT & LOSS ACCOUNT

Verification of Charges-ensure all outstanding
exp are duly provided for.
Income recognition norms prescribed by RBI
Depreciation
Any divergent trends in major areas of income &
expenditure (Variance Analysis)

By CA P.Manohara Gupta Page 41

LFAR on Computerised environment

“ Detailed audit checklist/procedures for audit

in a computerised bank branch are listed on
folios 133 to 142 of the Comprehensive
Guide on Information Systems Audit issued
by the ICAI”

1. Whether hard copies of accounts are printed

regularly?
2. Indicate the extent of computerisation and the
areas of operations covered.

Contd…
By CA P.Manohara Gupta Page 42
LFAR on Computerised environment
“Are the access and the data security
measures and other internal controls
adequate?” (Environmental ,Physical
access and logical access controls)

• Major checks:
 Transferred, retired or resigned users need to be deleted
 Check that more than 3 unsuccessful attempts results in
unauthorised access.
 Time for password duration should be restricted to branch
hours
 Root passwords of the server need to be enclosed in a
sealed envelope.
Contd… .
Page 43
By CA P.Manohara Gupta
LFAR on Computerised environment
 Whether regular back-ups of accounts and
off-site storage are maintained as per the
guidelines of the controlling authorities of
the bank?
 Whether adequate contingency and disaster
recovery plans are in place for
loss/encryption of data?

• Major checks:
 Designated system administrator responsible for
daily backups.
 Onsite and offsite backups.
 Backups to be in a fireproof cabinet.
By CA P.Manohara Gupta Page 44
Comments in LFAR

Following types of general comments in the LFAR

should be avoided:
• Loan against Bank deposit sanctioned beyond
discretionary power of The Manager (Banking
Operations)/Branch Manager.
• Installments are not recovered in 17 Housing loan
accounts for long time.
• Stock statements are not obtained in several cash credit
accounts through out the year.
• 24 limits have expired and not renewed.
By CA P.Manohara Gupta Page 45
 Case Study
Following comment is made in LFAR:

“X Ltd was sanctioned a CC limit of Rs 60 lakhs, which has

expired on 5.3.2018. But the outstanding in the account is
Rs.137.00 lacs as on 31.3.2018 on account of permitting
excess drawings by way of adhoc limits through out the year.
The limit has been increased to Rs.1.00 crore by the
Sanctioning authority on 19.3.2018. Documents for the revised
limits are not obtained as on 31.3.2018 till the date of audit.”

This is a clear case for issuing MOC instead of making a

comment in LFAR.

By CA P.Manohara Gupta Page 46

OTHER MATTERS…

Page 47
Additional areas applicable to
specialised Branches
• Branches dealing with Foreign Exchange transactions
• Branches dealing with large advances. Total advances
exceeding Rs 100 Crores
• Branches dealing in NPAs ie., Asset Recovery
Management Branches.
• Service branches- dealing in clearing house
operations

By CA P.Manohara Gupta Page 48

Annexure for Large Branches

• Branch Auditor needs to attach data in structured

format relating to advances of Rs 2 Crores and above

• This data should be prepared by the Branch Manager

• Branch Auditor is not required to sign these data

formats but is expected to review to ensure that the
information furnished is proper and does not
contradict with his findings

By CA P.Manohara Gupta Page 49

Compliance of Ghosh & Jilani
Committee recommendations
• Ghosh Committee has made recommendations with
regard to action taken by the branch to prevent frauds
and malpractices.
• Jilani committee has made recommendations with
regard to action taken by the branch on internal
control issues, inspections and audit compliances.
• Implementation status of above recommendations
needs to be verified by the branch auditor and report.

By CA P.Manohara Gupta Page 50

Mitra Committee recommendations
• Statutory, Internal and Concurrent Auditors of
the banks are now required to:

“to specifically report, simultaneously , to the Chief

Executive of the bank and Central Office of the Department
of Banking Supervision, RBI, Mumbai, any matter
susceptible to be fraud or fraudulent activity or any foul
play in any transactions.

Any deliberate failure on the part of the auditor should

render himself liable for action.”

By CA P.Manohara Gupta Page 51

Expectations

• Comments in LFAR having bearing on asset

classification should be covered in MOC.
• Explanatory note to entries in MOC with reasons
would help the Bank and Central Auditors.
• LFAR observations and MOC entries should be
discussed with the Branch Manager.
• Ensure that all Returns/ certificates prescribed are
prepared including NIL Returns and signed.

By CA P.Manohara Gupta Page 52

Risk

Relationship between Risk and Awareness:

Taking risk is not in itself a problem but

the ignorance of the potential consequences is
an entirely different matter.

By CA P.Manohara Gupta Page 53

How do we deal with Risk?
• By Risk Mitigation

Risk due to accident was not

Risk mitigation:
mitigated by wearing a head
Risk due to accident mitigated by gear (helmet) – lead to fatal
wearing a head gear (helmet) injury

By CA P.Manohara Gupta Page 54

Future challenges

• Broad based Quality Review Board and /or NFRA

would monitor audit profession.
• CAs would be under deep scanner
• Branch Audit System may go away unless we give
value addition to the Management
• We should raise to the occasion and meet the
challenges, if you have strength! or Magic Stick

By CA P.Manohara Gupta Page 55

Parting thought

“To err is human but when the eraser

wears out before the pencil you are
overdoing it”

By CA P.Manohara Gupta Page 56

THANK YOU

By CA P.Manohara Gupta Page 57