BANK BRANCH
AUDIT
CA Mukesh Singh Kushwah
B.Com, LLB, LLM, ACMA, FCA
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INTRODUCTION
 Highly
CA Mukesh Singh Kushwah
controlled environment
 Challenges
a. Keeping Cost of Operations Low
b. Keep NPA in Limit
c. New Banking
d. Competition
e. Social Responsibility
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UNDERSTANDING
IMPORTANCE OF AUDIT OF
ADVANCES
CA Mukesh Singh Kushwah
Highly risky Audit
Highly time consuming
Can substantially change the
financial results of the bank
Basis for fee
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PREPARATION PRIOR TO
ACCEPTANCE OF BANK BRANCH
AUDIT
Eligibility
 Communication
 Understanding Terms of
Appointments

Location of the Branch

Date of submission of Report

Documents to be certified
CA Mukesh Singh Kushwah

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PECULIARITIES OF THE
BRANCH UNDER AUDIT
Type of Advances

Specialized Branches

CA Mukesh Singh Kushwah

Advances increasing at much faster
rate.

Increasing NPA percentage

Frauds detected during the year
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ANALYSIS OF FINAL
ACCOUNTS






Divergent Trends in Income or Expenses
Volume, Value and Categories of outstanding
loans
Percentage verification
Efforts and time required for certification
Work Allocation
Parking Accounts
Understanding Accounting Package
CA Mukesh Singh Kushwah

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PREPARATIONS PRIOR TO
STARTING THE WORK
CA Mukesh Singh Kushwah
Reading Reports
Visit to RBI web-site
Reading Internal Circulars
Guidance Note on Audit of Banks 2014 by ICAI
Delegation of Authority
Internal Manuals
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CURRENT CIRCULARS BY RBI
CA Mukesh Singh Kushwah
1st July 2013 Master Circulars
Levy of Charges for cheque returns
(7th May 2013)
KYC Procedure for opening of Bank
Accounts of Foreign Students (2nd
September 2013)
Innovative Housing Loan Products
(3rd September 2013)
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CURRENT CIRCULARS BY RBI
(CONTD…)
against Gold Jewellery (20
January 2014)
 Review of Prudential Guidelines on
Restructuring of Advances (30 May
2013)
 Frame Work for Revitalizing
Distressed Assets in Economy (26
February 2014)
CA Mukesh Singh Kushwah
 Lending
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COMPUTARISED
ENVIOURNMENT
Banking Solution
 Reading the Report of System
Auditor for Data validity
 Exception Reports
 Signing of Reports through System
CA Mukesh Singh Kushwah
 Core
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CA Mukesh Singh Kushwah
VERIFICATION OF
ADVANCES
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UNDERSTANDING ADVANCES
CA Mukesh Singh Kushwah
Funded / Non Funded
Type of Security
Type of Lien
Sector Classification
Stages of Advances
Result of Monitoring and
Supervision
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SECURITY
CA Mukesh Singh Kushwah
Whether legally enforceable
Whether is in effective control of the
bank
Whether it is recently inspected
Whether valuation realistic and
current
Whether covers value of advance
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DOCUMENTS TO BE EXAMINED
Obtained by Bank
Prepared by Bank
CA Mukesh Singh Kushwah
Submitted by Borrower
Third Party Data
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OBSERVATIONS ON ADVANCE
PORTFOLIO
defects
 Terms of Sanction not complied
 Frequent Overdrawing
 Stock Statements incorrect
 Drawing Power
 Diversion of Funds
 Inadequacy of Insurance
CA Mukesh Singh Kushwah
 Documentation
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UNDERSTANDING
OVERDRAFTS
Overdrafts
CA Mukesh Singh Kushwah
Fixed Deposits
National Savings Certificates
Loan against shares/units
Life Insurance Policy
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OTHER ADVANCES
CA Mukesh Singh Kushwah
Bills Purchased / Discounted
Cheques Purchased
Bank Guarantees
 Financial Guarantees

Performance Guarantees

Continuing Guarantees

Unsecured Guarantees
Letter of Credit
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CA Mukesh Singh Kushwah
NORMS FOR INCOME
RECOGNITION, ASSET
CLASSIFICATION AND
PROVISIONING (NPA)
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NPA
Definition
 Accounts with temporary
deficiencies
 NPA Identification borrower wise
not facility wise
 Loans with moratorium for payment
of interest and/or principal
 Ever greening
 Repeated Restructuring

CA Mukesh Singh Kushwah
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NPA…
Adhoc limit
 Accounts regularized near balance
sheet date
 Government Guaranteed Advances
 Advance against Term Deposits,
NSCs, KVP, IVP etc.
 Advances against Gold Ornaments,
Government Securities

CA Mukesh Singh Kushwah
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INCOME RECOGNITION
recognition Policy
 Reversal of Income
 Appropriation of Recovery in NPAs
 Interest Application
 Computation of NPA Levels
CA Mukesh Singh Kushwah
 Income
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ASSET CLASSIFICATION
of NPA
 Upgradation of Loan Accounts
Classified as NPAs
 Accounts where there is erosion in
the value of Security
CA Mukesh Singh Kushwah
 Categories
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PROVISIONING NORMS
Assets
 Sub-Standard Assets
 Loss Assets
 Valuation of Security for
provisioning purposes
CA Mukesh Singh Kushwah
 Standard
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PROCESS OF CLASSIFICATION OF NPA
Advance / Loan
Std. Asset
Sub – Std. Asset
Sub-Std. Contd.
More 1 year - Doubtful 1
More 2 years - Doubtful 2
After 3 years - Doubtful 3
Loss Asset
Erosion in value
of security < 10%
By Bank
By RBI
By
Auditors
CA Mukesh Singh Kushwah
Erosion in value of
security < 50%
90 Days overdue,
NPA upto 12
months
Fraud
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Debit
Credit
Balance
YEAR-2013-14
Loan Granted
10,00,000
10,00,000
September 30
Interest Debited
10,000
10,10,000
October 1
Installment received
October 31
Interest Debited
November 1
Installment received
November 30
Interest Debited
9,534
9,62,902
December 31
Interest Debited
9,629
9,72,531
January 31
Interest Debited
9,725
9,82,256
February 28
Interest Debited
9,822
9,92,078
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March 31
Interest Debited
9,921
33,200
9,768
9,76,800
9,86,568
33,200
9,53,368
10,01,999
CA Mukesh Singh Kushwah
September 1
Instalment
date
November’13
01-12-2013
December’13
01-01-2014
90
January’14
01-02-2014
59
February’14
01-03-2014
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Date of NPA
installment.
for
November
Due No.
of
days
overdue as of 31st
march’14
121
13
1st March 14
CA Mukesh Singh Kushwah
Month
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Case II Case III
Case IV
Sanction limit
50 lakh
50 lakh 50 lakh
50 lakh
Drawing power
40 lakh
40 lakh 40 lakh
40 lakh
Minimum outstanding balance
30 lakh
38 lakh 42 lakh
38 lakh
4 lakh
4 lakh
4 lakh
4 lakh
1 lakh
Nil
5 lakh
5 lakh
01.12.12-31.03.13
Interest debited during 01.12.12-
CA Mukesh Singh Kushwah
Case I
31.3.13
Amount received during 01.12.1231.3.13
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NPA DATES FOR DIFFERENT CROPS AFTER
ADOPTING THE RBI GUIDELINES
Particulars
Short Duration Crop
Kharif Season
Rabi Season
01.06.2011
June-July 2011
01.10.2011
Oct – Nov 2011
Oct-Nov 2011
31.12.2011
March-April 2012
30.06.2012
Dec’2011 to Jan’2012
30.06.2012
Season Starts
Harvesting Time
Repayment due
date
NPA Date
June- July 2012
Oct – Nov 2012
31.12.2012
Oct – Nov 2012
March – Apr 2013
30.06.2013
31.03.2013
30.09.2013
30.09.2012
CA Mukesh Singh Kushwah
Date of Finance
Season Starts
First crop Season.
Harvesting Time
Repayment Due
Date
Second Crop
Season After Due
Date
Long Duration Crop
Perennial Crop
Sugarcane
01.07.2010
July 2010
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ADVANCES COVERED BY
ECGC/DICGC -
Rs. 4 Lakh
ECGC Cover
50 Percent
Period for which the advance More than 2 years remained
has remained doubtful
doubtful
(Say as on March 31,2012)
Value of Security Held
Rs. 1.50 Lakh
CA Mukesh Singh Kushwah
Outstanding Balance
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PROVISION REQUIRED TO BE MADE
Rs. 4.00 Lakh
Less : Value of Security held
Rs. 1.50 Lakh
Unrealised Balance
Rs. 2.50 Lakh
Less : ECGC Cover
(50% of unrealisable balance)
Rs. 1.25 Lakh
Net Unsecured balance
Rs. 1.25 Lakh
Provision for unsecured portion
of advance
Rs. 1.25 Lakh (@100% of unsecured
portion)
Provision for secured portion of
advance
(as on March 31,2012)
Rs 0.60 Lakh (@ 40% of the secured
portion i.e.Rs.1.50 lacs)
Total Provision to be made
Rs. 1.85 Lakhs (As on March 31,2012)
CA Mukesh Singh Kushwah
Outstanding Balance
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REPORTS TO BE GIVEN
CA Mukesh Singh Kushwah
Statutory Report
 Tax Audit Report
 Memorandum of changes

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LONG FORM AUDIT REPORT (LFAR)
 Objective
CA Mukesh Singh Kushwah
- Reporting on Internal Controls,
Process and Systems of the Bank
 Audit Approach
o List shortcomings/weaknesses
o Discuss contents
oObtain Management Representation
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LFAR …

CA Mukesh Singh Kushwah
Reporting
o Should be sufficiently detailed and
quantified
o Major qualifications to be repeated in
Audit Report and not cross referenced
o Sensitive Accounts like Suspense,
DD/Pay-slip payable, Clearing
adjustment Account to be verified for
unusual entries, old entries
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CERTIFICATES TO BE ISSUED
on capital adequacy –
Basel II / Basel III
 Non Performing Assets
 Statement of Liquidity on select days
 Classification of Advances
CA Mukesh Singh Kushwah
 Statement
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CERTIFICATES TO BE ISSUED
Minister Rojgar Yojana
 Interest Subvention
 Claim under CGC/DICGC
 Ghosh Report
 Jilani Report
CA Mukesh Singh Kushwah
 Prime
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CONCLUSION
an easy task
 Enormous preparation and training
required
 Ability to work in computarised
environment
 Dealing with huge cash and public
money
 High risk High reward Job
CA Mukesh Singh Kushwah
 Not
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CA Mukesh Singh Kushwah
THANK YOU …
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