AHMEDABAD BRANCH OF WIRC OF ICAI
All Gujarat Conclaves of
Cooperative Societies
August 21, 2015
Issues in Audit of
Co-operative Societies / Banks
Dhananjay J. Gokhale
Partner
M /s. Dhanan jay J. Gokhale & Co.
Chartered Accoun tant s
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These are my personal views and can not be construed to be the views of
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants.
WIRC & ICAI have no responsibility for its contents.
These views do not and should not be considered as a professional
advice.
This presentation should not be reproduced in part or in whole, in any
manner or form, without our written permission.
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
2
All Gujrat Conclave on Co-operative Societies
August 21, 2015
1
Agenda
Objective
 Brief about important sections and SAs
 Issues in Audit of Co-operative Banks
Coverage
 Applicability of Acts and provisions
 Audit Planning and documentation
 Balance Sheet Audit
 Coverage of Audit
 Head Office Departments
 Issues in Audit of Co-operative Bank
 CRAR / CRR / SLR / Treasury Function of UCBs
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
3
Applicability of Acts / Provisions / Circulars w.r.t. Audit of
co-operative Banks

Respective State Co-operative Act

The Multi-State Co-operative Societies Act, 2002

Bye Laws

Banking Regulation Act (to the extent applicable)

Circulars issued by UBD Department of Reserve Bank of India
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
2
Audit of Co-operative Societies
Important Sections …..
Section Particulars
Remarks
24
Open Membership
i) No right to refuse without sufficient cause
ii) Deemed membership within 3 months
from the date of application
25
Nominal / Associate
Member
Within 10% of regular members
27
No right of membership till Defaulter for more than one year
due payments are made
28
Voting Rights of members
One member One vote
28A
Attendance of meeting by
members
At least two meetings of general body within
a consecutive period of 5 years
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
Audit of Co-operative Societies
Important Sections …..
Section Particulars
Remarks
45
Restriction on making
loans
i) Loan can be given only to members
ii) Financing for own shares prohibited
iii) Borrower as well as Guarantors to be
members of the society
47
Charge and set-off in
respect of shares /
interest of member
Society can have charge on share / interest on
member against any debts due
50
Deduction from salary to
meet society’s claims
Salary deduction on the basis of agreement
executed by member in favor of society
66
Appropriation of Profits
i)
To deduct accrued interest overdue for
more than 6 months to arrive at Net Profit
ii) Approval of AGM mandatory
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
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Audit of Co-operative Societies
Important Sections …..
Section Particulars
Remarks
67
Reserve Funds
i)
67A
Bad Debt Reserve Funds i)
At least 25% to be carried to Reserve
Funds
ii) If Reserves exceed Authorized share
capital, it can be restricted to 10% of Net
Profits
At least 15% of Net Profit to be
appropriated
ii) Procedure for write-off to be followed …
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
7
All Gujrat Conclave on Co-operative Societies
August 21, 2015
Audit of Co-operative Societies / Banks
Write – off ….
Step – 1: Debts which are irrecoverable and certified as such by auditor
Step – 2: First write off against Bad Debt Reserve Fund
Step – 3: If any balance remains, may be w/off against reserve fund u/sec. 67 to the
extent of 15% of the Reserve Fund
Step – 4: Approval of AGM is required by two third of members of society present and
voting
Step – 5: Approval of State Government is required
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
4
Audit of Co-operative Societies
Important Sections …..
Section Particulars
Remarks
70
Contribution to Public
Purpose
(Applicable only to other
than co-operative credit
structure)
i) Maximum ceiling of 20% of Net Profit
ii) Approval of Gujarat State Co-operative
Union or District Co-operative Board
required
iii) End use can be for
a) Any prescribed co-operative purpose
b) Any charitable purpose
c) Any other public purpose
70A
Members Welfare Fund
To set aside sum from Net Profit as prescribed
by State Government for purpose of welfare
activities of its members
85
Rectification of defects in
the Accounts
Time period reduced from 3 months to 2
months
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
9
Applicability of Acts / Provisions / Circulars w.r.t. Audit of
co-operative Banks
Section 84 of Gujarat Co-operative Societies Act, 1961
(Read along with Notification dated April 10, 2015)

Accounts would be audited once in each year by / through Registrar

Audit of District Central Co-operative Bank / State Apex Co-operative
Bank shall be conducted only by Chartered Accountants from the
panel approved by National Bank (NABARD)
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
5
Audit of Co-operative Societies
Provisions under The Gujarat Co-operative Societies Act, 1961
Section 84(4) – Rights of Auditors
1.
Access to books of accounts, documents, papers, cash and
securities and other properties of the society;
2.
Can summon any person in possession of or responsible for the
custody of books, cash, securities, etc. to produce the same at the
HO or any branch of the Society.
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
11
Audit of Co-operative Societies / Banks
Audit Planning and Documentation
 Receipt of Appointment letter
 Acceptance letter
 Intimation to the Previous Auditor for no objection
 Obtaining Basic Information from Appointment Letter
 Rules & Regulations applicable to the Co-operative Bank
 Various Products – Advances and deposits offered by the bank
 Complexities involved
 FEDAI Guidelines
 Availability of reports through system & correlating it with Report
 Understanding the Banking Software (CBS System)
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
12
All Gujrat Conclave on Co-operative Societies
August 21, 2015
6
Audit of Co-operative Societies
Standards on Auditing (SA)
SA
Particulars
210
Agreeing the terms of Audit Engagements
230
Audit Documentation
240
Auditor’s responsibility relating to frauds in an Audit of
Financial Statements
250
Consideration of Laws and Regulations in an Audit of
Financial Statements
260
Communication with those charged with Governance
265
Communicating Deficiencies in Internal Control to
those charged with Governance and Management
299
Responsibility of Joint Auditors
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
13
Audit of Co-operative Societies
Standards on Auditing (SA)
SA
Particulars
300
Planning an Audit of Financial statements
320
Materiality in Planning and Performing an Audit
500
Audit Evidence
505
External Confirmations
520
Analytical Procedures
530
Audit Sampling
550
Related Entities
560
Subsequent Events
580
Written Representations
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
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Audit of Co-operative Societies
Standards on Auditing (SA)
SA
Particulars
700
Forming an opinion and Reporting on Financial
Statements
706
Emphasis Matter Paragraphs and Other Matter
Paragraphs in Independent Auditor’s Report
720
Auditors Responsibility in Relation to Other
Information in Documents containing Audited Financial
Statements
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
Audit of Co-operative Banks
First hand feel of the bank by going through …..
 Earlier Statutory Audit reports
 Internal / Concurrent Audit Reports
 Inspection Reports
 Stock Audit Reports
 Revenue Audit Reports
 RBI Inspection Report
 Compliance Reports
 Loan and Deposit Policy of the Bank
 Internal Circulars issued by Bank
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
8
Audit of Co-operative Banks
Coverage in Audit of Banks

Cash and ATM Cash

Internet Banking

Advances – Credit Appraisals

Advances – Operations

Advances – Bill Discounting

Advances – Cheque Purchase

Advances – Against own deposits

Advances – Forex / Export related

CERSAI (Central Registry of Securitisation of Asset Reconstruction and Security Interest of India)

Potential NPA Accounts – IRCA norms

Insurance of primary and collateral security

Observations in Unit Inspection / Stock Audit / Credit Audit Reports
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
17
All Gujrat Conclave on Co-operative Societies
August 21, 2015
Audit of Co-operative Banks
Coverage in Audit of Banks

Share Linkage (Rule 5(2)(ee) minimum 2.50%)

Release of Advances – End-use verification and compliance with Terms & Conditions

Valuation of securities in case of NPA Accounts and provisioning of NPA Accounts
including accounting or IR / OIR (UCI)

Non-fund based business – BG / LC / LoC (Partial utilisation, impact on CRAR)

RoI on Advances

RoI on Deposits

Premature withdrawals of FDRs / Premature withdrawal and renewal of FDR
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
9
Audit of Co-operative Banks
Coverage in Audit of Banks

Inter-Office Reconciliation (incl. age-wise analysis)

Bank Reconciliation (incl. age-wise analysis)

GL / SL Inconsistencies in balancing

PO / DD outstanding for more than three months – Revalidation / payment

Deposits – KYC Compliance

Deposits – Multi-city cheque books and ABB Transactions

Deposits – Staff Accounts

Deposits – MFD / Inoperative Accounts
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
19
Audit of Co-operative Banks
Coverage in Audit of Banks

Income – Commission / Other business like insurance, etc.

Expenditure

Sundry Deposits / ML / MA Accounts

Fixed Assets

Verification of cash, stamps on hand, sensitive stationery, Investments

Contingent Liabilities

Applicability of Accounting Standards of ICAI

System related controls – User-ids, Passwords, Backups, Access to Server room

System related discrepancies – CBS Environment

System related discrepancies – General

Points pending for compliance of earlier report and other reports

Minutes Books
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
20
All Gujrat Conclave on Co-operative Societies
August 21, 2015
10
Audit of Co-operative Banks
Audit of Treasury / HO Departments
Treasury
(Domestic) Department
Treasury
(Foreign) Department
Premises
/ Estate Department
HR
Department
Audit
& Inspection Department
Central
Accounts Department
Finance
Credit
and Taxation
Department
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
21
Audit of Co-operative Banks
Additional points for drafting of Report and other general
areas related to Audit
 Document the extent of checking for each aspect of coverage of audit
 Set materiality levels standards for each area
 Lay down over all time schedule
 Training to Audit staff and special skill if required
 Weak areas identified during the Audit be given extra focus
 Need-based unit inspections may be carried out
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
22
All Gujrat Conclave on Co-operative Societies
August 21, 2015
11
Audit of Co-operative Banks
Execution and Closure of Audit

Time & Manpower Planning

Checklist / Audit Program
Cover all areas of Liabilities, Assets, Income, Expenditure and Off Balance Sheet items

Review of audit

Discussion with branch / department in-charge

Audit Report to clearly spell out adverse qualifications, if any, along with reasons and
quantification thereof
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
23
Audit of Co-operative Banks - Issues

Compliance with Accounting Standard 15

Compliance with Accounting Standard 22

Special Reserves under section 36(1)(viii) and recent circular by Reserve Bank of
India w.r.t. creation of DTL as per Accounting Standard 22

Creation of DTA w.r.t. b/fd losses

DEAF (Depositors Education and Awareness Fund) – Monthly commencing from Jun’14

Compliance with Branch Licensing – Conducting of similar business from two different
premises of Bank

KYC and AML Compliance by Co-operative Banks

IRAC Norms : Few debated critical issues

Regularization of account by way of granting of fresh advances / Ever-greening

Regularization of accounts subsequent to balance sheet date

Applicability of TDS on Interest on FDRs / RDs

Compliance with NDTL Calculation and CRR / SLR compliances
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
24
All Gujrat Conclave on Co-operative Societies
August 21, 2015
12
Audit of Co-operative Banks – Capital Adequacy Norms

Compliance with Capital Adequacy Norms and calculation thereof

Minimum Required CRAR (Capital to Risk weighted Assets Ratio) – 9%

Share linkage to be minimum @ 2.50% for Secured and 5% for unsecured Loans

Share linkage should be least of 5% of share capital of UCB or share linkage norms
whichever is lower

Share linkage norms relaxed w.e.f. November 15, 2010 for banks with CRAR above 12%

Tier I and Tier II Capital Component ….
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
25
Audit of Co-operative Banks – Capital Adequacy Norms
Tier I Capital
Tier II Capital
Paid up capital
Undisclosed Free Reserves
Contribution / non-refundable admission
fees received Nominal capital which are
non-refundable and held under
Reserves
General provisions against future but
presently unidentified losses (Provision
on Standard Assets, Floating Provision
of BDDR)
Perpetual Non-cumulative Preference
(PNCP) Shares
Revaluation Reserves after reducing
discount of 55%
Innovative Perpetual Debt Instruments
Invest Fluctuation Reserve
Special Reserves subject to creation of
DTL
Hybrid Debt Capital Instruments (other
than PNCP shares)
Realised Capital Reserves
Subordinate Debts(Long Term
Subordinated Deposits)
Free Reserves
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
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Audit of Co-operative Banks – Capital Adequacy Norms
Feat ur e s of Sub- or d i na t e Debt

Should have original maturity tenure of at least five years

Limited to 50% of Tier I Capital

Not eligible for DICGC cover

Not to be counted for capital adequacy if remaining maturity period is less than one year

Progressive discount for capital adequacy purpose @ 20% each starting from 4 – 5 years
residual maturity period

Classified as “Borrowings” for disclosure Purpose

To be considered as part of Liabilities while calculation of NDTL and thus, CRR / SLR is
required to be maintained

Not eligible as security for grant of advance against the same

UCBs cannot subscribe to LTDs of other UCBs
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
27
Audit of Co-operative Banks – Capital Adequacy Norms

Calculation of Net NPAs

Floating Provision …. It is provision which is in excess of provisions required as per IRAC
norms and is not marked against any specific loan

Floating provision can be either used for reduction of Net NPAs or for Tier II Capital

Sacrifice for restructured advances cannot be used for Tier II Capital but can be used to
reduce net NPAs

Excess provision on sale of NPAs can be continued as provision instead of reversing to
PL and can be used for Tier II subject to 1.25% of RWAs
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
14
Audit of Co-operative Banks – Capital Adequacy Norms – Risk Weight ages
Asset Description
Risk Weight
Cash on Hand
0
Balances with Reserve Bank of India
0
Balance with UCB, Other Banks
20
Investment in Government Securities
2.50
Investments in Bonds of All India Public Financial Institutions
102.50
Intangible assets / losses deducted from Tier I Capital
0
Central / State Government guaranteed advance
0
State Government guaranteed NPA advance
100
Consumer Credit including Personal Loan
125
Loan against shares / debentures
127.50
Warranties / Standby LCs related to particular transaction
50
Guarantees issued by banks against counter guarantee of other banks
20
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
29
Audit of Co-operative Banks – Treasury Function

Structure of Treasury Department of a Bank

Restriction on Short Sale of Securities

Exposure Norms for Co-operative Banks


Restriction to take exposure to Equity

Restriction on holding shares of other Co-operatives

Restriction on Inter-Bank Exposure

Call Borrowings – Daily 2% of the aggregate deposits as of last March-end

Non-SLR – 10% of overall deposits as at last March-end

CPs / Debentures / Bonds to have at least ‘A’ rating

Secondary Market Transactions w.r.t. Non-SLR securities can be only with
Commercial Banks or Primary Dealers
Eligible Counter-parties (Scheduled Commercial Banks / UCBs / FIs / Insurance
Company / Mutual Funds / Primary Dealers / PF)
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
30
All Gujrat Conclave on Co-operative Societies
August 21, 2015
15
Audit of Co-operative Banks – Treasury Function

Trading on NDS OM platform / SGL Account / Concept of Gilt Account

Classification of Securities into HTM / AFS / HFT

Shifting of Securities from one classification to another

Investment Fluctuation Reserves (min @ 5% / max @ 10%) (below the line creation)

Accounting on Settlement Date concept and not on transaction date

Interest calculation on 30/360 days

Valuation of Securities

NPI Norms

CRR / SLR / Non-SLR Securities

Daily maintenance of CRR is @ 95% w.e.f. fortnight beginning September 21, 2013

Statutory Auditors required to certify correctness of computation of DTL / NDTL and
compliance with CRR / SLR (at present @ 4% and 21.50% respectively)

Netting off concept is not applicable in NDTL which is applicable for CRAR
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
31
Audit of Co-operative Banks – Treasury Function
Eligible CRR Securities
Eligible SLR Securities
(Unencumbered)
Cash on Hand
Cash
Balance with Reserve Bank of India
Gold (at price not exceeding MV)
Approved
securities
(Government
Securities, Treasury Bills, SLR Bonds)
Term Deposits with Public Sector Banks,
State / District Central Co-op. Banks
(upto Mar’15)
Reserve Fund securities eligible too
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
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Questions???
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
All Gujrat Conclave on Co-operative Societies
August 21, 2015
33
!!! Thank You !!!
Dhananjay J. Gokhale,
FCA, DISA
Partner
M/s. Dhananjay J. Gokhale & Co.
Chartered Accountants
Mumbai
Email: dhan_gokhale@hotmail.com
Cell: 9820047669
M/s. Dhananjay J. Gokhale & Co., Chartered Accountants
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All Gujrat Conclave on Co-operative Societies
August 21, 2015
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