LONG FORM
AUDIT REPORT OF
BANKS
Presented by:CA. Santanu Ghosh
ICAI 23.03.2013
BACKGROUND OF LONG
FORM AUDIT REPORT
(LFAR)
1. Informal management letters concerning deviations,
violations, laxity and apparent negligence in
following set principles and procedures including
management directives as also maximisation of
profit, used to be submitted by the auditors, to bring
procedural and other lacunae to the notice of the
top management. Therefore the contents had been
such which were more on procedural lapses rather
than statutory violations or reporting on the truth
and fairness of the financial statements.
2. It should therefore be clearly understood that
LFAR by no means is an extension of the
statutory audit report but is a supplementary
report to bring awareness to the management
and/or regulators.
3. Initially, for controlling and streamlining
procedural and other lapses, informally LFAR used
to be submitted to the management of the banks by
way of a Management Letter. It served a very useful
purpose and as such instead of continuing it as an
informal tool to the management, it was made
formal and thereafter it was converted as a formal
set of reporting requirement of Statutory Auditors,
who submitted LFAR to both the management and
the Regulators namely RBI. Regulators in turn
ensured compliance of the rules and procedure and
other important aspects on the strength of such
LFAR
4. It should be clearly understood that a Statutory
Audit Report(SAR) is an independent report and
LFAR is also another independent report.
However, the objective of SAR is quite different
from that of LFAR.
5. A SAR is a public document(of the bank) but
LFAR is only for the eye of the management and
the regulator(RBI) as it concerns procedural and
other lapses which may not have a bearing on the
true and fair view of the state of affairs.
6. It should therefore be clearly understood that any
point requiring qualification in the audit report
must be qualified there itself, with such details as
would be required and mere reference that the
particular point has been reported in the LFAR is
not enough.
7. LFAR questions are carefully drafted to take care
of procedural aspects and should be answered in
the right perspective.
8. Since the questionnaire is comprehensive, the
entire audit planning should be based on that,
which is expected to cover the entire gamut of
banking operations and is considered vital to
bank audit and is therefore a major aid in the
audit planning procedure.
9. The questions are prepared in such manner, that
it give an insight to the areas to be covered
under audit planning so that the auditor can
come to a conclusion about the internal control
lacunae and accordingly decide about the areas
which affects his actions for forming an opinion
on the financial statements of the branch and
those which are affecting the procedural aspects
but not affecting the truth and fairness of the
financial statements.
ASSETS
1. Cash
 System of monitoring of cash at branches;
and management of cash through currency
chest operations.
 Insurance cover (including insurance for cash
in transit).
 System and procedure for physical custody
of cash.
2. Balance with Reserve Bank of India and other
banks
 Whether balance confirmation certificates have
been obtained pertaining to accounts maintained
with other banks and reconciliation made thereof.
 Reasons for old unadjusted entries.
3. Call Money operations
 System related to Operation in inter- bank call
money market.
4. Asset Liability Management (ALM)
Existence of Policy on Asset – Liability
Management and monitoring thereof; compliance
with the RBI guidelines.
As per the RBI guidelines the ALM process rests
on three pillars :
 ALM Information system
 ALM Organization
 ALM Process
ALM
Information
System
ALM
Organization
ALM Process
• Management Information System
• Information availability, accuracy,
adequacy and expediency
• Structure and responsibilities
• Level of top management involvement
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Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance level
5. Advances (large advances of 5% of
aggregate advances or Rs.2 Crores
whichever is less)
 Credit Appraisal
Existence of a well-laid system of appraisal of
loans/credit proposals, including adequacy of
information for appraising the creditworthiness
of the applicant, and adherence thereto.
 Sanctioning /Disbursement
Delegation of powers/authority at various
levels; adherence to authorized limits; whether
limits are disbursed after complying with the
terms and conditions of sanction
 Documentation
 System of ensuring that documents are executed
as per the terms of sanction.
 Nature of documentation defects observed
during audit and suggestions to avoid such
defects.
 System of documentation in respect of joint /
consortium advances.
 Renewal of documents.
 Review/Monitoring and Supervision(Audit of all
borrowers with limit above Rs.10 lakhs)
 Periodic Balance confirmation/ acknowledgement of
debts.
 Receiving regular information, Stock/ Book Debt
Statements, Balance Sheet, etc.
 Receiving audited accounts in case of borrowers with
limits beyond Rs 10 lakhs.
 System of scrutiny of the above information and
follow -up by the bank.
 System of periodic physical verification or inspection
of stocks, equipment and machineries and other
securities.
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System and periodicity of stock audits.
Inspection reports and their follow- up.
Norms and awarding of Credit Rating.
Review/ renewal of advances including
enhancement of limits.
 Monitoring and follow- up of over dues arising out
of other businesses such as leasing, hire purchase,
credit cards, etc.
 Overall monitoring of advances through maturity/
ageing analyses; Industry- wise exposures and
adherence to the Loan Policy.
 System of monitoring of off-balance sheet
exposures including periodic reviews of :
(a) Claims against the bank not acknowledged as
debts.
(b) Letters of credit /Guarantee
Guarantees invoked and LCs devolved which have
been funded by the branch to be reported.
(c) Ready forward transactions
(d) Co-acceptances
(e) Swaps, etc.
6. Other Assets
 Whether there is adequate internal control over
issue and custody of term deposit receipts, drafts,
pay orders, cheques etc.
 System of recording of lost and missing items.
 Expeditious clearance of suspense accounts. Old
outstanding entries and delay in adjustments need
to be commented.
LIABILITIES
1. Deposits
 Whether guidelines have been followed with respect
to inoperative accounts. Cases of divergence should
be commented.
 Any unusual large movement in aggregate deposits
after the balance sheet date. Proper clarification
should be obtained from the management.
 Amount of overdue matured term deposits as on year
end should be indicated.
 Adherence of KYC norms as stipulated by RBI.
2. Suspense Accounts, Sundry Deposits, etc.
 System of clearance of items debited /credited to
these accounts
 Year wise break up of unadjusted amount
indicating number of entries outstanding.
PROFIT AND
LOSS
Profitability
 Analysis of variation in major items of income
and expenditure compared to previous year.
 Important ratios such as ROA, ROE etc.;
comparison and analysis in relation to previous
year
 Policy relating to general provisions /reserves
INTERNAL CONTROL
1. Written guidelines/ instructions / manual for
accounting aspects
2. Balancing of Books / Reconciliation of control
and subsidiary records.
 System of monitoring the position of balancing
of books / reconciliation of control and
subsidiary records
 Follow-up action
(A control check through Exception Report
generated from CBS System be carried out.)
3. Inter-branch Reconciliation
 Comments on the system/ procedure and records
maintained
 Test check for any unusual entries put through
inter- branch/ head office accounts
 Position of outstanding entries ; system for
locating long outstanding items of high value
 Steps taken or proposed to be taken for bringing
the reconciliation up-to -date.
 Compliance with the RBI guidelines with respect
to provisioning for old outstanding entries.
4. Branch Inspection
 System of branch inspections: frequency;
scope/coverage of inspection / internal audit,
concurrent audit or revenue audit; reporting.
 System of follow- up of these reports; position of
compliance.
5. Frauds/ Vigilance
 Observations on major frauds discovered
during the year under audit.
 System of follow-up of frauds/ vigilance cases
6. Automation and computerization
 Existence of Computerization and Automation
Policy; progress made during the year under review
 Critical areas of operations not covered by
automation.
 Number of branches covered by computerization
and the extent of computerization.
 Procedures for back- ups, off-site storage, contingency
and disaster recovery and adherence thereto.
 Existence of Systems/EDP audit; coverage of such
audit.
 Electronic Banking; existence of systems and
procedures; monitoring; regular updation of technology;
method of review and audit of procedures.
 Suggestions ,if any, with regard to computerization and
automation
7. System and controls
Existence of systems and procedures for
concurrent and internal audits, inspections, EDP
audit of computer systems / software, etc.;
monitoring and follow-up on such reports.
OTHER MATTERS
 Comments on accounting policies, if any,
including comments on changes in accounting
policies made during the period.
 Policies and systems for monitoring activities
such as underwritten, derivatives, etc.
 Adequacy of provisions made for statutory
liabilities such as Income Tax, Interest Tax,
Gratuity, Pension, Provident Fund, etc.
 Adequacy of provisions made for off-balance
sheet exposures and other claims against the
bank.
 Any major observations on branch returns and
process of their consolidation in final statement of
accounts.
 Balance with other banks – observations on
outstanding items in reconciliation statements.
 Procedure for revaluation of NOSTRO accounts
and outstanding forward exchange contracts.
 Observations on the working of subsidiary of the
bank :
a) reporting system to the holding bank and
b) major losses of the subsidiary, if any.
 Any other matter which the auditor considers
should be brought to the notice of the
management. Such as:
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Corporate Governance
Borrowings
Premises
Stationery Department
Jilani and Ghosh Committee Compliances
 Implementation of recommendation of Mitra
Committee
 Legal departments (details relating to suit
filed and decreed accounts)
 Merchant banking activity.
 Inter office adjustments.
 Planning department
 Raj Bhasha
 Voluntary retirement scheme.
CORPORATE
ACCOUNTS
GROUP
BRANCHES / INDUSTRIAL FINANCE
BRANCHES WITH ADVANCES OF RS.100
CRORE OR MORE
 To obtain full details of borrowers with more
than Rs.2 Crores exposure in a specified
format.
 Mention major shortcomings
appraisal and monitoring
in
credit
RECOVERY POLICY IN RESPECT OF
BAD /DOUBTFUL DEBTS/NPAS
 Existence of a recovery policy; regular updation
thereof; monitoring and adherence thereto;
compliance with the RBI guidelines.
 System of monitoring of recovery from credit card
dues in respect of credit cards issued.
 Effectiveness of the system for compiling data
relating to the bad and doubtful debts and the
provision in respect thereof.
 System for identification, qualification and adequacy
of provision (including that at foreign branches).
 System for suspension of charging of interest and
adherence thereto.
 Ascertaining the realizable value of securities
(including valuation of fixed assets) and the possible
realization from guarantors including DICGCI/ECGC.
 Assessment of the efficacy of rehabilitation
programmes.
 Method of appropriation of recoveries against
principal, interest, etc.
 System of compromise/ settlement. Review such
cases and cases of recovery of over Rs1.00 crore
and also the cases wherein limit of sacrifices laid
down in the Recovery Policy is exceeded.
Compliance with RBI guidelines.
 Provision/ write-offs under proper authority.
 Recovery procedures including those relating to suit
filed and decreed accounts.
 System of identifying and reporting of willful
defaulters
 As regards advances to sick units which are under
rehabilitation programmes, the auditor should
examine whether the bank has adhered to the board
parameters to grant of relief / concessions as per the
RBI guidelines.
LARGE ADVANCES
 Comments on adverse features considered significant
and which need management’s attention
 The details to be given in respect of each such
account should include the name of the borrower, the
amount outstanding and a brief history and statement
of facts. It would be desirable for the auditor to obtain
the relevant explanations from the management in
writing.
LIQUIDITY AND FUND MANAGEMENT
 Existence of investment policy and adherence thereto;
compliance with RBI guidelines.
 System of purchase and sale of investments;
delegation of powers; reporting system; segregation
of back office function etc.
 Controls over investments, including periodic
verification / reconciliation of investments with book
records.
 Valuation mode; changes in mode of valuation
compared to previous year; shortfall and provision
thereof.
 Investments held at foreign branches; valuation mode;
regulatory reserve requirements; liquidity.
 Composition of investment portfolio as per RBI
guidelines and the depreciation on investments, if any,
not provided for.
 System relating to unquoted investments in the
portfolio and the liquidity of such investments.
 System relating to SGL/BRs; control over SGL/BRs
outstanding at the year end and their subsequent
clearance.
 System and periodicity of concurrent and internal
audit / inspection of investment activities; follow-up
on such reports.
 System of recording and accounting of income from
investments.
 System of monitoring of income accrued and due but
not received.
 System of monitoring matured investments and their
timely encashment.
 Average yield on investments.
 System relating to Repos.
 In case of unquoted investments,
requirements of the auditor includes:
reporting
 Whether appropriate system is followed for
valuation of the unquoted investment in the
portfolio. The basis of valuation is different
depending on the type of investment.
 Whether the unquoted investments are liquid in
nature, i.e., they are easily saleable in the open
market. This depends on the trend of the sale price
net-worth of the enterprise, the market condition, etc.
SLR/CRR REQUIREMENTS - SYSTEM OF
ENSURING COMPLIANCE
 System of complying weekly DTL position from
branches.
 Records maintained for the above purpose.
CAPITAL ADEQUACY
 Enclose a copy of the capital adequacy certificate.
Thank you