BANK BRANCH AUDITS
A C2C INITIATIVE
CONCEPT TO COMPLETION
CA P R SURESH
CA SRIPRIYA KUMAR
Presentation Path
Auditors
Report &
on Financial
statements
Long Form
Audit
Report
Tax Audit
reports
Standard
and Special
Certificates
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Overview -Objective and Scope of Audit
Understanding Perspective
Bank Audit Unique Dynamics
Understanding P&L, B/S and certificates
Engagement formalities
Understanding CBS environment
Master Circular on IRAC norms
Case Studies on advances
MS Excel in bank audits
Audit Planning and sampling
Audit Program & documentation –
A Check list driven approach
Reporting and closure
Precautions
Bank Branch Audits – An overview – Scope and objective
•
The basic objective of Bank Branch audits is to provide an opinion on True and Fair
status of the financial statements as at the Balance Sheet date
•
The key reports issued are :
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•
•
•
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Branch Auditors Report
Certified Copies of the Balance Sheet and Profit and Loss Account
Long Form Audit report
Tax Audit report under Section 44AB of the Income Tax Act
Special reports and certificates
A Unique feature in a bank audit is that unlike in corporates, we are also required to
confirm if the transactions of the branch which have come to our notice have been
within the powers of the bank.
Bank Branch Audits – The Auditors Perspective
Assurance on
Internal
Controls
Revenue and
Expense
Assurance
and
Recognition
True
and Fair
Assets
Impairment
RBI / HO / CO
Norms
Compliance
•
Audit as you would if you OWNED
the branch, then it is very simple !
•
All bank audit documents that are
certified are mostly directed only
at the these four perspectives at
the Core of True and Fair
•
In a limited sense, LFAR, Ghosh
and Jilani are like CARO in a
Corporate audit
Bank Branch Audits – Unique Dynamics
Assets and
Liabilities are
properly
stated
Income and
Expenses are
completely
and accurately
accounted
Internal
Controls over
Banking
operations
RBI norms and
circulars are
properly
complied
•
The Branch Auditors Report is an
objective certification of the True
and Fair position of the P&L and the
Branch Balance Sheet
•
Additionally, we are required to
provide assurance on status of
regulatory compliances and internal
controls in the following sign offs
namely the :
• LFAR
• Ghosh Committee recos
• Jilani Committee recos
Bank Branch Audits – Unique Dynamics
Inspection
Reports
Concurrent
Audit reports
RBIA reports
•
Most of us have no familiarity with
the branch and we somehow need to
hit the ground running
•
We can however derive strong
comfort
from
the
following
documents which would be available
at the branch
•
•
•
Concurrent Audit reports
Inspection Reports
Risk based internal audit
reports where the branches
are objectively rated
The Landscape
Bank Branch Audits
True and Fair Asset quality /
Income
Assurance
Internal
controls and
fraud risks
Specific
Certifications
LFAR
Fin.
statements
Certificates
Engage and
Planning
Master
Circular on
IRAC norms
Concurrent
Audits , RB
audits,
Inspections
Compliance
Tests and
Substantive
Tests
Audit
working
papers
Reports
Bank Branch Audits – The delicate balance
Against us
For Us
Understanding Financial statements
• Balance Sheet of a Bank as finally presented
Schedule –1
Schedule –2
Schedule –3
Schedule –4
Schedule –5
Schedule –6
Schedule –7
Schedule –8
Schedule –9
Schedule –10
Schedule –11
Schedule –12
Capital
Reserve and surplus
Deposits
Borrowings
Other Liabilities and provisions
Cash and bank balance with RBI
Balance with bank and money at call and short notice
Investments
Advances
Fixed Assets
Other Assets
Contingent Liability
Engagement formalities
1.
2.
3.
4.
5.
Receipt of appointment letter
Address qualifications and disqualifications of auditors - (Concurrent ,Internal,
Revenue, Stock, System, Credit Risk or other Special Audits conducted in same
previous year)
The following category of persons ( Section 226(3) of Companies Act 1956)
•
Body Corporate
•
An officer or employee of the Bank
•
A person who is a partner, or who is in the employment, of an officer or
employee of the Bank
•
A person who is indebted to the Bank for an amount exceeding one
thousand rupees, or who has given any guarantee or provided any security
in connection with the indebtedness of any third person to the bank for an
amount exceeding one thousand rupees
•
person holding any security of that bank, Security means an instrument
which carries voting rights.
•
Member associated with bank in the capacity as concurrent auditor, stock
auditor, revenue auditor etc., except systems auditor.
Communication with Previous Auditor by Registered AD (clause 8 of First
Schedule to the Chartered Accountants Act, 1949
Expected date of submission of reports
What we certify - an indicative checklist
Make your own
checklist of what
is expected as
the end state
deliverable in
order to ensure
that we
understand what
we are to do and
to ensure that
there are no
omissions
What we certify - an indicative checklist
Make your own
checklist of what
is expected as
the end state
deliverable in
order to ensure
that we
understand what
we are to do and
to ensure that
there are no
omissions
Understanding CBS environment
• Core Banking solutions are integrated farmeworks that automates all aspects of
core banking operations across entities, languages and currencies.
• Master data , transaction data , access restrictions and business process logic is all
in built in the CBS platform minimising and mostly eliminating need for manual
intervention beyond input stages
• Core banking solutions helps banks with:
• Entire range of banking products including savings, checking, overdraft and
deposit accounts
• Entire range of lending products
• Complement of transactional services including remittance, foreign exchange,
cards and trade finance
• Accessibility through multiple channels, including mobile banking and web
• Full integration of front-, middle-, and back-office processes
• Accurate, timely and actionable information about customer relations
• Single view between bank and customer
• “Anytime anywhere” banking
Understanding CBS environment
• CBS does not obviate the need for bank branch audits because
• NPA classifications are system driven, however cannot replace human
intelligence
• Work flow integration for documentation aspects is not complete across all
banks. Hence documentation and security cover lapses may still impair asset
quality
•
No scale and complexity of automation can substitute human intuition
• Window dressing and borderline cases – analytical reviews
• CBS is a good audit enabler as it permits simple views of large transactions , by
excel manipulation of text files and helps us to profile and stratify data for sample
selection
Master Circular on IRAC norms
• The classification of assets of banks has to be done on the basis of objective
criteria, which would ensure a uniform and consistent application of the norms.
• The provisioning should be made on the basis of the classification of assets based
on the period for which the asset has remained non-performing and the availability
of security and the realisable value thereof.
• Master Circular dated 1st July 2012 on IRAC Norms.
• Other Circulars : Master Circular on Capital Adequacy norms
• Master Circular on Priority sector lending
• Master Circular on SLR / CRR
• Master Circular on Fraud
• Definition of Infrastructure lending.
Asset Type
• STANDARD ASSET / PERFORMING ASSET
The account is not non-performing and does not carry more than the normal risk
attached to the business.
• NON-PERFORMING ASSET (NPA)
 The asset ceases to generate income for the bank.
 Higher risk than normal risk attached to business.
 Non performing as per criteria for various types of loans.
Identification of Account as NPA
Loans or Advance
 Interest and/or installment remains overdue for a period of
more than 90 days in respect of a term loan.
 As per para 2.1.3, an account is classified as NPA only if
interest due and charged during any quarter is not serviced
fully within 90 days from the end of the quarter.
Exceptions

Loans with moratorium for payment of interest .

Housing Loan or similar advance to staff.

Loan against banks own deposits, against surrender value of
LIC policies, government securities such as NSC, NSS etc.,
Identification of Account as NPA ...
Bills Purchased and
discounted
Bill remains overdue for a Discounted period of more than 90
days.
Agricultural Advances
Interest or installment remains overdue for two crop seasons
for short duration crop, one crop season for long duration crop.
Derivative Transaction
Overdue receivables representing positive mark to market value
of a derivative contract remaining unpaid for a period of 90
days from specified due date.
Liquidity facility
Remains outstanding for more than 90 days in respect of
Securitisation transaction.
Identification of Account as NPA ...

Cash Credit / Overdrafts

Account remains
‘out of order’
The account is treated as ‘out of order’ if :
 Outstanding Balance remains continuously in excess of sanctioned
limit/drawing power for 90 days or
 No credit continuously for 90 days as on the date of Balance Sheet or
 Credits in the account are not sufficient to cover interest debited during the
same period.
Exceptions / Clarifications
• Temporary Deficiencies:
• TOD : Outstanding Balance in account based on the drawing power calculated from stock
statements older than 3 months would be deemed as irregular & if such irregular drawing are
permitted for a period of 90 days, account needs to be classified as NPA.
• Non-renewal/ Non-regularisation of regular/ adhoc limit within 180 days from the due date
would also qualify for NPA
• Advances against term deposits, NSCs, IVPs, KVPs and Life Insurance Policies need not be
treated as NPAs, till security cover is sufficient to cover outstanding balance.
• Income to be recognised subject to availability of margin.
• Advance against gold ornaments / Government securities not exempt.
Exceptions / Clarifications …
• Central Government guaranteed advance to be classified as NPA only if Government
repudiates the guarantee when invoked.
•
Classification Qua Borrower - All facilities granted to a borrower shall be treated as
NPA & not only that facility which has become irregular. Exception: Credit facility to
Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on
lending arrangement.
•
Consortium Advance - Member banks shall classify the accounts according to their own
• record of recovery. Bank needs to arrange to get their share of recovery or obtain an
express consent from the Lead Bank
Exceptions / Clarifications …
Straightaway Classification
 Where realisable value of security is less than 50% of the value assessed, account
to be straightaway classified as Doubtful Asset.
 Where
realisable value of security is less than 10% of outstanding balance,
account to be straightaway classified as Loss Asset.
Valuation of Securities
 In respect of NPAs
with the balance of Rs. 5.00 crores & above, bank needs to
formulate policy for annual stock audit by external agencies & in respect of
immovable properties, valuation to be carried out once in 3 years by approved
valuer.
Exceptions / Clarifications …
Solitary Credit Entry
 Care should be taken that a solitary or few credits in the account made at/near the
balance sheet date extinguishing the overdue interest/principal is not the only
criteria for classifying the asset as standard.
Regularisation of Account
 Account need not be classified as NPA if account has been regularised by the date of
Balance sheet by payment of overdue through genuine sources & not by sanction of
additional facility or transfer of funds between accounts.
Income Recognition
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For NPA accounts income should be recognised on realisation basis.
When an account becomes non-performing, unrealised interest of the previous periods
should be reversed or provided.
Interest income on additional finance in NPA account should be recognised on cash
basis.
In project loan, funding of interest in respect of NPA if recognised as income, should be
fully provided.
If interest due is converted into equity or any other instrument, income recognised
should be fully provided.
Income Recognition…
Adjustment of Recoveries - Priority
Unrealised Expenses
Unrealised Interest
Amount of Principal Outstanding
Clarification vide Master Circular - in the absence of clear agreement between the Bank
and the Borrower, an appropriate policy to be followed in uniform and consistent
manner.
Classification Norms

Standard Asset
The account is not non-performing.

Sub-Standard Asset
A sub standard Asset is one which has remained NPA for a period of less than or equal
to 12 months.

Loss Assets
These are accounts, identified by the bank or internal or external auditors or by RBI
Inspectors as wholly irrecoverable but the amount for which has not been written off.
Classification Norms…

Doubtful Asset - Three Categories
Category
Period
Doubtful - I
up to One Year
Doubtful – II
One to Three Years
Doubtful - III More than Three Years
Provisioning Norms
Standard Asset






Agricultural and SMEs Sectors
Housing Loan with teaser rates of interest
Restructured Advances
Commercial Real Estate (CRE) Section
Others
Restructured Advances upgraded as Standard advance
Sub-standard Asset
 Secured exposure
 Unsecured Expsoure – Infrastructure
 Unsecured – other than Infrastructure
unsecured
0.25%
2.00%
2.00%
1.00%
0.40%
2.00%
- 15% of total outstanding
– 20% of total outstanding
- 25% of total outstanding
Provisioning Norms…
Doubtful Assets:
Period Provision
Up to 1 year
1to 3 years
More than 3 years
(Secured + Unsecured)
25%
+ 100%
40%
+ 100%
100%
+ 100%
Loss Asset:
100% should be provided for
Provisioning Norms
Provision Under Special Circumstances
 Advance under rehabilitation programme approved by BIFR / Institutions, Provision
should be continued to be made on existing facilities.

Additional facilities no provision for a period of one year.

In case of advances guaranteed by CGTSI/ECGC, Provision should be made only for
balance in excess of the amount guaranteed by these corporations.
Guidelines on Restructuring of Advances

Restructuring divided in following four categories;
i.
ii.
iii.
iv.
Industrial Units.
Industrial Units under CDR Mechanism
SMEs
All other advances.
Infrastructure lending
Special Regulatory Treatment ( Para 14 of Master Circular)
Guidelines on Restructuring of Advances…

Eligibility
 Any account classified as standard, sub standard or doubtful.
 Restructuring cannot be done retrospectively and usual asset classification norms
would continue to apply.
 Restructuring should be subject to customer agreeing to terms and conditions.
 Financial viability should be established.
 Borrowers indulging in frauds and malfeasance or in eligible.
 BIFR cases eligible for restructuring subject to approval from BIFR.
Guidelines on Restructuring of Advances…

Asset Classification Norms
 Restructuring of accounts could take place in following stages:
 Before commencement of commercial production
 After commencement of commercial production / operation but before the
asset has been classified as ‘Sub Standard’.
 After the commencement of commercial production / operation but after the
asset has been classified as ‘Sub Standard’ or doubtful.
Guidelines on Restructuring of Advances…

Asset Classification Norms (Cont’d)
 Standard Asset would get reclassified as sub standard and account which is
already NPA would continue to have the same classification.
 Additional finance would be treated as standard upto a period of one year.
 All restructured accounts, classified as NPA upon restructuring would be eligible
for upgradation after observation of satisfactory performance for the period of
one year.
Guidelines on Restructuring of Advances…

Provisioning Norms
 Total provision required would be normal provision plus provision in lieu of
diminution in fair value of advances.
 Diminution in fair value would be required to be recomputed on each balance
sheet date.
 Banks have option of notionally computing the diminution in fair value and
providing at 5% in case of all restructured accounts where the total dues to bank
is less than one crore.
Guidelines on Restructuring of Advances…

Special Regulatory Treatment for asset classification.
 Not available to following categories of advances:
 Consumer and personnel advances
 Advances is classified as capital market exposure
 Advances classified as commercial real estate exposure.
I.
Incentive for quick implementation of package
The asset classification status may be restored if the approved package is
implemented :
 Within in 120 days from the date of approval under CDR
 Within 90 days from the date of receipt of application by Bank in
other cases.
Guidelines on Restructuring of Advances…
II. Asset classification benefits
a. Standard advance will not be reclassified as sub standard upon restructuring if
following conditions are satisfied.
i.
Dues of the bank are fully secured by tangible security (except SSI borrower
with outstanding upto Rs.25 lacs & infrastructure projects)
ii.
Unit becomes viable in 10 years, if it is engaged in infrastructure activities and
in 7 years in case of other units.
Guidelines on Restructuring of Advances…
iii.
iv.
v.
vi.
Repayment period including moratorium does not exceed 15 and 10 years for
infrastructure and other projects respectively ( 10 years ceiling won’t apply to
restructured hosing loan accounts)
Promoters sacrifice and additional funds brought by them should be a
minimum of 15% of bank’s sacrifice (Ref RBI Circular dated 7th October 2010)
Personal guarantee is offered by promoters.
The restructuring is not ‘repeated restructuring’
.
During the specified period the asset classification of sub standard / doubtful accounts
will not deteriorate, if satisfactory performance is demonstrated during the
specified period.
Data Volume
Sample Selection
It is possible
• Enables a good look and feel of the transactions that
are audited
• Identification of samples for audit
• CBS outputs are there as text files that can be
converted to excel
Integration
• Seamless integration of work done and working
papers for the audit
Analytical
Procedures
• Easy to recheck interest calculations, NPA
movements etc
And to top it all a Very complex regulatory
framework
Need for MS Excel in bank audits
USING MS EXCEL
Obtain Text File
Save to excel work
book
Block area of data to
be converted (
Select)
Use function Data text to columns
Select Fixed Width
option
Ensure that numbers
are not truncated
Index all transactions
by nature of advance
/ deposit type
Eliminate blank
rows
Classify by year using
year() function
Select data for
audit , document
in standard Work
template
Check for texts in
number fields
Check the balances
of the file with the
Balance Comparison
report
Complete the
template
Finish the Action by
clicking finish
Sort by Loan type by
amount
Report exceptions in
LFAR / provision for
NPA
Practical Issues in audit of advances
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Drawing Power
Classification Date of NPA
Realisable Security Value
Inter Company transactions
Ever greening/ Restructured Advances
Temporary Deficiencies - renewal
Temporary Deficiencies – Stock Statements
Term Loans
EMI Concepts
Circular Credits
SARFAESI notice
Financial Statement Analysis - threat of recovery
Sale of Assets – Threat of recovery
Practical Issues in audit of advances
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Diversion of Funds.
Devolved Letters of Credit / Bank Guarantees invoked
Borrower Wise Classification
Knowledge of business
Physical Stock Verification
Government Guaranteed Advances
Agricultural Advances
Continuous Overdrawing – Discretionary power
Staff Advances against Shares
Window dressing
Premises Loans
PMRY Loans
Case Studies on Advances – Drawing Power
A & Co, a Partnership firm enjoys a Cash Credit Limit of Sanction letter, terms
Rs.1,00,000/-, the account is operated within the sanctioned limit.
of sanction, margin
The borrowers Statements Contains the following details stock
stipulated to be
Rs.1,50,000/- Debtors Rs.50,000/- and creditors Rs.60,000/verified for
determining DP
C & Associates, has reported a stock of Rs.10,00,000/- in their Access
to
other
monthly stock statements, the Cash Credit limit enjoyed by them is
information
Rs.5,00,000/-. The inspection report of the Concurrent auditors
available at branch
states that the stock figures reported includes dead and slow
in determining DP
moving stocks to the tune of Rs.1,75,000/-, creditors is Rs.300000
Darshini, a small hotel, enjoys a Cash Credit Limit of Rs.100000/- Knowledge of business
against hypothecation of stocks in rural area, their annual turnover
is Rs.1080000/-. Operation in the account is satisfactory and within
the limit.
Case Studies on Advances – Classification Date of
NPA
Elango Engineering was reported as an NPA Since 30.9.2012.
Certificate
versus
Statement of True
and fair.
Francis Furniture's was reported as NPA since 3.4.2012
Audit perspective
Case Studies on Advances – Realisable Security
Value
Gopi Aqua Ltd., an NPA account had 100 acres of coastal land on Realisable Value of
which aqua culture was carried on. The land was pledged as
Security - Land
security against its loan outstanding of Rs.2 crores. The unit was
infested with a disease and hence the account turned sick on
30.9.2009.
During the boom period for aqua culture the price of these lands Validity of valuation
was Rs.3 lacs an acre, the valuation report dated 31.3.2010
report
showed the value of land to be Rs.0.5 lac per acre.
Harsha P Ltd., engaged in leather garments, had an outstanding Common
sense
of Rs.50 laksh the account was classified as a NPA by the branch
approach to audit
auditor since August 2012, the unit is not functioning since July
2012, As per stock statement of January 2013 it has a stock of
Rs.100 lacs consisting of raw hides / leather of Rs.20 lakhs, Semi
finished goods of 70 lakhs and Finished goods of Rs.10 lacs
(manufactured to a particular specification)
Case Studies on Advances – Realisable Security
Value (Cont…)
Imaging links, Who had availed of a Term Loan for Purchase of Application
of
Machinery worth Rs.10 lacs during 2010 has defaulted to repay
generally accepted
the loan, the guestimated machinery value as per the branch
principles
management as at 29th January 2013 is Rs.10lacs.
Jessi & co, owes a bank Rs. 25 lakhs, the owner has given his Impossibility
property in his remote native village, the single largest land of
performance
1000 acres values at Rs.25 lakhs.
of
Case Studies on Advances – Inter Company Transaction
Khan Bros, is a group concern, enjoying loan facilities along with Caution in cases of
ghan bros in the same branch, each with Rs.5 lakhs limit. There
circular credits
are periodic inter transfer of funds between these two firms. But
there is no business transactions between the same.
Best Shoes is a shoe exporter enjoying Rs.5 crores Packing Credit Exclusion of credit
Limit, Best Leathers is also in the business of exporting of shoe
summations
of
uppers, shoe intermediaries etc., enjoying Rs.2 crores Packing
circular and non
Credit Limit.
genuine credits
Best Shoes did job works for best leathers to the tune of Rs. 50 Accomodation
lakhs during financial year ending 2012. The Turnover of Best
diversion
Shoes for the year ended 31.3.2012 was Rs.25 crores and that of
Best Leathers was Rs.10 Crores, During the year Best Shoes
received an advance of Rs. 1.50crores from Best leathers
and
Both the companies Fund based Limits are fully utilized Audit
processes
throughout the year and periodically beyond the limits, however
enable
not for 90 days continuously.
determination
Case Studies on Advances – Ever Greening / Restructured
Accounts
Ever Green P Ltd., Engaged in horticulture, obtained a Term Loan Provisions
of
of Rs.100 lacs on 1.6.2011, repayable in 50 Monthly Installments
Restructuring of
of Rs.2,00,000/- with a moratorium of 15 months. Repayment to
Advances,
commence from 1.09.2012.
Specifications,
special regulatory
However due to delay in commissioning of the project by 18
treatment,
para
months, the loan was rescheduled with the following terms:
11.1 and Para 14
Repayment to commence from 1.12.2012
of RBI Master
Circular on IRAC
Though the Company has been functioning, the capacity
norms.
utilization was less than 50% and the cash flow position of Ever
green P Ltd., was not comfortable and hence sought the
rescheduling of the Term Loan Repayments from 1.12.2012 vide
their letter dated 30.08.2012, which has been sanctioned by the
bank on 3.2.2013.
Case Studies on Advances – Temporary Deficiency Renewal of Cash Credit, Overdraft and Demand Loans.
Lawrance & co, enjoying a Cash Credit limit of Rs.5 lakhs Temporary
sanctioned on 1st October 2011 has been a very good account
deficiencies – non
operating within the sanctioned limit, however due to the branch
renewal
not having adequate officers his C/C limits has not been renewed
since 1.10.2012.
Mohan, a Machinery Manufacture obtained a Temporary Exceptions to asset
Overdraft for 6 months against LIC Policies of Rs.25000/- on 1st
classification
July 2012.
Nath, a trader was sanctioned an adhoc limit of Rs.1 lac on Provisions on Adhoc
15.4.2012 for 6 months and the same was further extended for 4
months on 18.10.2012.
Jewel Loans Obtained by Jugraj on 30th December 2010 for a Security not a cover
period of 2 years is still not redeemed
for
asset
classification
Case Studies on Advances – Temporary Deficiency Renewal of Cash Credit, Overdraft and Demand Loans.
Varadaraj a spare part dealer does not submit his stock 90 days after the
statements for 3 months.
delay
/
non
submission.
The branch auditor during the course of verification of the stock Consideration of facts
statement of X finds that out of the total stocks reported 25
and info in audit.
percent is reported as non moving and 15 damaged, the
drawings power is less that the limit sanctioned. The borrower
has been operating within the Sanctioned Limit.
Case Studies on Advances – Term Loans
O' Coffee, has defaulted in repaying their Instalments and are Determination
classified as a Sub Standard Asset, they have not paid 3 monthly
date
of
instalments as on 31.3.2013, a scrutiny of the ledger reveals that
obligation
the instalments not paid pertains to the period 1.4.2011 to
auditors
30.6.2011.
of
NPA
on
Prince Pens have paid their Term Loan dues of 6 months on Window dressing –
3.2.2013 by issuing a cheque of Rs.60000/- from their Cash Credit
analytical
Account. Upon transfer the balance Loan outstanding in the Cash
procedure enable
Credit Account was Rs.135000/- as against a sanctioned limit of
proper
Rs.100000/-. The manager has reported the excess drawing to
classification
–
the controlling authority.
human intelligence
Case Studies on Advances – EMI Concepts
Prince was sanctioned a Housing Loan of Rs.72 lakhs on Sample
selection,
10.4.2010 repayable in 180 instalments the EMI fixed was
parabolic
effect
Rs.45000/-. The Borrower has been regularly repaying the EMI of
and
compliance
Rs.45000/-. The balance outstanding as at 31st March 2013 is
with terms of
Rs.76.5 lakhs.
sanction
Case Studies on Advances – Circular Credits
Rajesh was sanctioned a Demand Loan of Rs.20000/-, on the Careful
schemes,
same day he deposited the money into his firm's account, which
unintelligible
to
was used for paying a creditor S, which S, in turn paid towards his
systems deduction
Term Loan account with the same branch.
Thomas & Unni are related entities both enjoying Cash Credit Circular credits
Limits of Rs.50000/- each. During the year the Credit summation
of Thomas was Rs.200000/- and unni was Rs.250000/-, the Cross
transfer of funds from Thomas to Unni was Rs.150000/- and from
unni to Thomas Was Rs.225000/-.
Case Studies on Advances – SARAFEASI Cases
Zaheer Ltd, Could not repay their Term Loan instalment of Rs.5 Events occuring after
lacs for the months of January, February & March 2013 due on
balance sheet date
10th of every month, During April the borrower was served with
notice u/s 13 for possession of the securities.
Case Studies on Advances – Financial Statement Sheet
Analysis – Threat of recovery
AAA Hosiery, a proprietary firm, was sanctioned a Cash Credit Tendencies
of
Limit of Rs.10 lakhs during 2011, the operation in the account is
sickness warrant
satisfactory, all the interest is paid up and credit summations has
closer scrutiny and
been good. The Net Profit for the year 31.3.2012 was
reporting in LFAR
Rs.1,75,000/- against a turnover of Rs.1.75 crores. The Balance
sheet of the firm reflects that debtors beyond 2 years is Rs.15
lakhs. Creditors remain unpaid for more than 6 months.
Vikram Ltd whose networth has eroded by 50% was declared sick Threat of recovery
by the management in the Audited Financial Statements for the
y.e. 31.03.2012, the Term Loan repayments are irregular as on
31st March 2013, two intalments are pending. The unit has
stopped functioning since February 2013.
Case Studies on Advances – Sale of Asset – Threat of
recovery
Zen who had obtained a Term Loan for buying a car had an Loss
of
primary
outstanding of Rs.150000/- in his account, he has not paid 2
security – threat of
months installment, however it came to the notice of the branch
recovery – loss
that he has sold the car on 28th March 2013, there are no other
asset
securities/ assets with Zen.
Case Studies on Advances – Diversion of funds
Rohan bought a Hyundai Accent Car, his balance sheet reflected Absence of drawing
capital including Current Account of Rs.5 lakhs, fixed assets
power – diversion
including the car Rs.15 lakhs. He enjoys Rs.10 lakhs Cash Credit
of funds
Limit and there are no other loans.
Case Studies on Advances – Letters of Credit Devolved /
Bank Guarantees Invoked
On 30th March 2013 Vikrams Letters of Credit and Bank Accounting treatment
Guarantees were devolved and invoked by the respective
and grouping
persons, the branch paid the same on 1st April 2013, by keeping
them under other assets.
Case Studies on Advances – Borrower Wise Asset
Classification
Raghuram has three accounts with the branch, a Term Loan Borrower
wise
which was a standard Asset, A Cash Credit account which was
classification
also a standard asset however a Bill Purchased for Rs.10,000/- on
18th December 2012 had not been realized as on 31st March
2013 by oversight.
Restructured Accounts – fresh limits.
Exceptions
to
borrower
wise
classification
Case Studies on Advances – Knowledge of business
The Total Turnover of Yash for the current year is Rs.6,00,000/- Knowledge
which is 10% higher than their previous year turnover, the stocks
business
held by them are Rs.3,00,000/- as against a Cash Credit Limit of
reality
Rs.2,00,000/-. Yash is engaged in Bakery business.
of
reflect
Francis, a retailer of FMCG goods very frequently draws cash Business
other than for salaries and other expenses.
considerations
Case Studies on Advances – Physical Stock Verification
Rao, the branch statutory Auditor, during his visit to one of the Inclusion of stock
borrowers premises observed the following:
verification
of
single largest client
a. Stock books are not properly maintained.
of the branch to
b. The stocks reflected in the stock statement and physical
form part of the
verification showed significant variance
audit program
c. There was slow moving / seconds stocks
d. There was damaged goods.
Case Studies on Advances – Government Guaranteed
Advances
KBG a power project of a state government was outstanding to Accouting
versus
the tune of Rs.10. lakhs, the original amount sanctioned was
asset classification
Rs.75 crores. The last date for repayment was 31.3.2012. Ledger
Account shows that the amount outstanding is disputed interest
on account of excess charged by the branch over and above the
refinance rate.
Loan Sanctioned to a unit with Central Government Guarantee Distinction between
has become overdue, the guarantee is invoked.
asset classification
and
interest
Will the answer be different if the guarantor is State
recognition
of
Government.
government
guaranteed
advances
Case Studies on Advances – Agricultural Advances
Muniyappa had taken a crop loan on 25.3.2012 of Rs.25000/- on Repayment of one
25.3.2013 he took a mortgage loan of Rs. 25000/- which was
loan with another
directly paid to repay his crop loan.
not permitted
Ramappa had also done the same thing as above towards his Drought hit – SLBC sugarcane crop which was affected by drought during the year
norms
2012 -13.
Case Studies on Advances – Continuous Overdrawing –
Discretionary power
Mahesh Associates ledger account in the branch reflected that Discretionary power
they had continuously been using Rs.110000/-as against the
not a substitute to
sanctioned limit of Rs.100000/- for four months, the branch
sanctioned limit
manager has stated that he has used his discretionary power (up
to 20% of sanctioned limit) and hence the account is a
performing asset.
Case Studies on Advances – Staff Advances against Shares
Prabhu a staff of a bank apart from availing other loans has also Staff loan does it fall
availed loans against shares, the market value of such shares has
outside the scope
reduced by 50% for the last 1year due to huge volatility in the
for
asset
stock market.
classification
Case Studies on Advances – Window Dressing
There is a solitary credit of Rs.15000/-on 31st March into the Window dressing
account of Venkat in his Cash Credit account of Rs.112000/-, by
discounting of a cheque.
Case Studies on Advances – Premises Loan
A Term Loan was given to Raja the landlord by the branch, the Terms of sanction –
terms of repayment was the entire rent to be adjusted towards
non compliance –
the Term Loan, The EMI was Rs.8,000/- per month, rent was
asset downgrade
Rs.7,000/- per month. The land lord has not been paying the
additional Rs.1000 from his pocket since the repayment
commenced during January 2010, the accountwas not classified
as a non performing asset since the branch has the possession
and security of the premises.
The Landlord has also been asking for an increase in the rent of Moc for increased
the extent of Rs.10,000/- being the market rent, however as per
rent or increase in
the agreement rent is to be enhanced one in two years of 10%
Contingent liability
the matter is pending settlement.
provision as the
case may be.
Case Studies on Advances – PMRY Loans
As per PMRY Loan scheme a moratorium of a maximum of 18 Scope
beyond
months can be offered, however the branch manager has not
authority.
given any moratorium to Ramesh an unemployed youth to set up
his Xerox shop, Ramesh has not paid last 6 months installment.
The branch manager states that the account will remain a
standard asset considering the moratorium that is permissible.
AUDIT PLANNING
Phase
Actions
One
• Call the Branch manager to confirm the size of the branch and the unique
advances of the branch, restructuring, audit level ( covered under concurrent
etc)
• Document the key data on total advances, total deposits ( value and volume )
to form an idea on the time to be taken and the resources to be deployed
• The audit can be commenced and completed even for a date prior to March
31, 2013 and the final movements can be analysed after the Balance Sheet
date
• Understand the CBS reports that are being pushed on a daily basis ( 200+ )
including Specially Marked Accounts, Irregular loans, NPA reports
• Obtain opening balance files for NPA as at April 1, 2012 and reconcile to
previous Balance Sheet
AUDIT SAMPLING
Phase Actions
Two
• The Balance Sheet totals ( general ledger ) are reflected in the loan
balances , CC OD and deposits file
• Take samples of high value transactions on
• transactions initiated during the year
• transactions initiated during previous years
• The focus will be on documentation for current year disbursements and
asset backing for previous year cases as documentation would be more or
less verified by the previous auditors
• Large advances need to covered completely anyway
• Pareto is a good, tested, safe and acceptable sampling protocol ( 20 % of
transactions will account for 80% by value ) . The certification is under
GAAP
AUDIT PROCEDURES
Phase Actions
Three
• Audit procedures are the same for bank audits like in the case of other
audits and include the following
Inspection
Observation
Inquiry & confirmation
Computation
Analytical Procedures
• The auditor should apply commensureaudit procedures to obtain
sufficient and appropriate Audit evidence to confirm his opinion on the
component / branch being audited
AUDIT DOCUMENTATION
Phase
Actions
Four
• Audit Documentation should cover
•
•
•
•
What was checked – particular account / group
Why it was checked – rationale for sample selection
When it was checked – date of review / visit
How it was checked – base documents / visit / system review /
calculation verification etc
• Who checked – audit staff who performed the work
• A checklist driven approach will ensure speed and confidence in the
performance of work especially when assistants are engaged
• Illustrative checklists are attached
DEPOSIT – CHECKLIST ILLUSTRATION
The key risks associated with audit of Deposits are KYC, AML compliance,
deposit related documentation, interest rate application , TDS compliance
and Lien on deposits
SB / CURRENT ACCOUNTS – CHECKLIST
The key risks associated with audit of Deposits are KYC, AML compliance,
related documentation, authorization to operate, identity of entity, interest
rate application. The checklist should cover all entity types to be filled up
after audit as Yes, No or Not applicable
CHECKLIST – LOAN AGST DEPOSITS
Key risks : Loan without deposit,
duplication of loan against same
deposit and escaped security due
to lien not marked
CHECKLIST – LOAN AGST FINANCIAL ASSETS
Key risks : Loan without asset,
duplication of loans for same asset
, decline in value of security, not
lien to bank
CHECKLIST – VEHICLE LOAN
Key risks : Loan without original
RC, non availability of security
CHECKLIST – HOUSING LOAN
Key risks : Loan without housing
documents, title issues, unapproved
constructions, non registration of mortage
in favour of the bank,
Delayed constructions ( land and building )
and possession not complete within 24
months cannot be “housing loans”
CHECKLIST – EDUCATION LOAN
CHECKLIST – CC / OD
CHECKLIST – TERM LOAN
REPORTING
Bank Branch audit reports will be covered by SA700 and stands revised for the present year and
audit reports in respect of audits of financial statements for periods beginning on or after 1st
April 2012 are to be issued in this revised format. T
he text of the revised auditor’s report format appears in the Appendix to the Revised SA 700 and
can be downloaded from website of the Institute of Chartered Accountants of India at URL:
http://220.227.161.86/17874sa700annx1.pdf .
For the ready reference of members carrying out audit of banks/ bank branches, the Auditing
and Assurance Standards Board of ICAI has developed relevant audit report formats in line
with the requirements of the revised SA 700 which are once again attached for your perusal.
Further, members undertaking bank branch audits are also requested that, pursuant to a recent
communication by the Reserve Bank of India to ICAI in this regard, the total number and amount
of debits/ credits arising pursuant to the Memorandum of Changes submitted by them, be given
under the heading “Other Matters Paragraph” on the face of the bank branch audit report/s
issued by them.
Necessary guidance in this regard is being provided in the 2013 Guidance Note on Audit of
Banks which would be issued soon.
PRECAUTIONS
Questions ?