SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES Audit

SEMINAR ON STATUTORY AUDIT OF BANK BRANCHES Audit Planning, Long Form Audit Report PRESENTATION BY CA ATUL C. BHEDA B. COM, FCA, LLB(GEN), DISA(ICA)

Importance of Audit Planning and reporting l l l l Well planned is half done One should know destination to plan well Good planning leads to effective reporting Audit destination is report ( to express opinion on financial statements) Audit planning and reporting are two important stages Audit planning is before beginning of field work and reporting is last stage in every audit Audit planning helps in controlling audit risks (inherent, control & detection) SA 300 – Planning an Audit CA Atul C. Bheda 6/17/2021

Stages in Bank Audit l Study of appointment letter l Preliminary work l Risk Assessment l Internal Control Evaluation l Conduct of audit l Submission of Audit Reports, Certificates and Returns 6/17/2021 CA Atul C. Bheda

Contents of Letter of Appointment l Appointment under the Banking Regulation Act, 1949 l Duties and responsibilities of the SBA. l Particulars of branch(s) to be audited and of the region/zone to which the branch reports. l Particulars of statutory central auditors (SCA) l Particulars of previous auditors. 6/17/2021 CA Atul C. Bheda

Contents of Letter of Appointment l Guidelines for conducting audit of Branches, completion of audit, eligible audit fees and reimbursement of expenses etc. l Procedural requirements to be complied with in accepting the assignment, e. g. , letter of acceptance, Declaration of indebtedness, declaration of fidelity and secrecy, other undertaking by the firm/SBA, specimen signatures, etc. 6/17/2021 CA Atul C. Bheda

Contents of Letter of Appointment l Scope of work - Besides the statutory audit under the provisions of the Banking Regulation Act, 1949, SBA is also required to verify certain other areas and issue various report and certificates like LFAR, Tax Audit Report, certificates for cash verification on odd dates, Ghosh&Jilani reports etc. 6/17/2021 CA Atul C. Bheda

Study of appointments letter l l l l Noting of relevant contents Assessment of disqualification of the auditor Letter to the previous auditor of NOC Preparation of Acceptance letter and declarations Engagement letter to the appointing authority Assessment of reporting requirements (Time and contents) Letter of requirement to the Branch. 6/17/2021 CA Atul C. Bheda

Preliminary work l Knowledge about the branch operations l Characteristics and Scope of the Audit l Acquiring the knowledge for effective conduct if Audit l Risk assessment and evaluation of internal control l Staff Training 6/17/2021 CA Atul C. Bheda

Preliminary work… l Consider the requirements of various Accounting Standards and Standards on Auditing, to the extent applicable l Ascertaining l Establish the reporting objectives Overall Audit Strategy 6/17/2021 CA Atul C. Bheda

Knowledge of Business l l l Acquire Information of the banking industry Information of past events and progress of the bank Study of Annual reports of the earlier years Banking Journals Laws & Regulations applicable 6/17/2021 CA Atul C. Bheda

Laws and Regulations applicable l The banking regulation Act, 1949 l Master Circulars and other circulars issued by the RBI l The Companies Act l Guidance Note on Audit of Banks issued by ICAI 6/17/2021 CA Atul C. Bheda

Risks in Bank Branch Audit Effect of the statutory and regulatory requirements • The scale of banking operations and the resultant significant exposures • Extensive dependence on IT to process transactions • Continuing development of new services and banking practices • Particular nature of risks associated with the transactions undertaken by banks • 6/17/2021 CA Atul C. Bheda

Risk Assessment and Evaluation of internal control l Branch Manager meeting l Meeting and discussion with the bank branch management and understanding the profile of the branch and its business l Initial review of system l Review of other Audit observations 6/17/2021 CA Atul C. Bheda

Branch Manager meeting l l l Review of the Organization chart Accounting policies Composition of Deposits & Advances Staff Strength & Average Shifts & Duty timings Positive and grey areas of the branch : Branch manager’s concerns 6/17/2021 CA Atul C. Bheda

Initial review of the system l Meeting with departmental heads l Division of work and area of operations l Logistic support expected l Tentative time schedule of closing work and audit l Computerization and software used l List of top ten borrowers l List of top ten NPA 6/17/2021 CA Atul C. Bheda

Review of other audit observations l l l l Concurrent Audit Reports Internal Audit Reports Revenue Audit Report IT System Audit Report RBI Inspection Reports Previous years LFAR 6/17/2021 CA Atul C. Bheda

Review of other Documents l l l Reporting process between the Head Office & Branches Review of RBI circulars Review of Circular issued by Head office Review of periodical returns from Branch Review of Closing Instructions and communication with Branch Auditors 6/17/2021 CA Atul C. Bheda

Understand the system in CBS at Branch l SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment” lays down that the use of Information Technology (IT) affects the way control activities are implemented. From the auditor’s perspective, controls over IT system are effective when they maintain the integrity of the information and the security of the data such systems process, and includes effective IT controls and application controls. In recent years, many banks have moved towards computerisation of their operations. The degree of computerisation, however, varies among different banks and also among various branches of the same bank. While some branches have been fully computerised, some others have been partly computerised while many others are noncomputerised. 6/17/2021 CA Atul C. Bheda

Understand the system in CBS at Branch l Verify controls l Start of day and end of day report l Verify exceptional report l Understand the editable & uneditable fields at Branch l Creation & entries in Masters l Various short-cut keys for checking the accounts 6/17/2021 CA Atul C. Bheda

Understand the system in CBS at Branch …. . l System of downgrading & upgrading of Accounts l Interest calculations l Generation of reports relating to advances classification and Capital Adequacy calculation, etc. 6/17/2021 CA Atul C. Bheda

Planning for conduct of audit l l l Audit Team Audit schedule Audit Program Appropriate documentation Physical aspects: Travel, boarding etc. Reporting requirements Audit facilities, computers, software, etc. l Formats l Timings for submission l Alternative plan for contingencies l 6/17/2021 CA Atul C. Bheda

The Audit can be conducted in either of the following ways • Inspection and Observation • Inquiry and Conformation • Computation • Analytical Procedures 6/17/2021 CA Atul C. Bheda

Staff Training l Familiarity with banking operations in different areas (deposits, loans, investments, NPA norms, etc. ) l Deliverables: Audit reports, certificates and returns l Audit techniques (enquiry, explanations, verifications, sample checks, objective evidence, etc. ) 6/17/2021 CA Atul C. Bheda

General l Audit Team should carry : -- l Copy of appointment letter l Authorization letter for the staff member l Stationery : pen, pencil, letterheads, worksheets, rubber stamps etc. l Copy of norms for reimbursement of expenses such as lodging, boarding, Traveling and local conveyance. 6/17/2021 CA Atul C. Bheda

Essential of good Planning l Knowledge of situation l Knowledge of resources l Knowledge of Audit expectations l Plan to deliver more than expected. 6/17/2021 CA Atul C. Bheda

Audit Report and certification l Branch Returns : correctness of branch returns l Audit Report : True and fair view l Memorandum of Changes (MOC) l LFAR l Tax Audit Report l Certificates 6/17/2021 CA Atul C. Bheda Mumbai 26

Branch Returns l l l All returns should be certified Correctness of returns should be ensured No changes are to be made in returns The changes are to be reported through MOC Corrections, overwriting, deletions etc. Care should be taken about correct preparation and correct reporting Even NIL return should be certified 6/17/2021 CA Atul C. Bheda Mumbai 27

Audit reports Exceptions should be noted specifically (e. g. Provision for taxation, bonus, NPA) l Auditor’s name and membership number should be mentioned l Date of Audit Report and place of execution should be mentioned l The report should be on the letterhead 6/17/2021 CA Atul C. Bheda Mumbai 28

Memorandum of changes(MOC) l Memorandum l Assets of changes for : and liabililities l Income and Expenditure l Changes in Asset classification l In case there is no change…MOC with NIL remark should be submitted l MOC is a part and parcel of the Audit report…Audit report without MOC is an incomplete report. 6/17/2021 CA Atul C. Bheda Mumbai 29

MOC ……. . contd. l Signature of the Branch Manager (BM) needs to be obtained on MOC as a token of acceptance l In a situation where BM does not accept the change suggested by the Auditor, l The auditor should issue the MOC, and l A suitable note should be attached describing the reasons as to why the auditor feels the change is necessary 6/17/2021 CA Atul C. Bheda Mumbai 30

Guidance Note on Audit of Banks (2019 Edition) Contents of accompanying Pen Drive/CD To download pdf file of Guidance Note and contents of accompanying Pen Drive/CD, please click on the link given at the website: l Section A -Statutory Central Audit l https: //resource. cdn. icai. org/53700 icai-aasb-ssgna. pdf l Section B -Foreign Exchange Transactions and Integrated Treasury l https: //resource. cdn. icai. org/53710 icai-aasb-ssgna-b. pdf l Section C -Bank Branch Audit other than Foreign Exchange Transactions l https: //resource. cdn. icai. org/53711 icai-aasb-ssgna-c. pdf l 6/17/2021 CA Atul C. Bheda

Contents of Accompanying CD l l Appendices II. . . . . . V. Illustrative Format of Engagement Letter to be sent to the Appointing Authority of the Nationalised Bank by Branch Auditor. . . . . 611 -615 vi. Illustrative Format of Written Representation Letter to be obtained from Branch Management. . . . . 616 -621 l l l Appendix V Illustrative Bank Branch Audit Programme for the year ended March 31, 219. . . . . . . 723 -742 6/17/2021 CA Atul C. Bheda

Important SAs for Branch Audit l l l l l l SA 210 “Agreeing the Terms of Audit Engagements” SA 220, “Quality Control for an Audit of Financial Statements” SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements” SA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance and Management”. SA 300 “Planning an Audit of Financial Statements” SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment” SA 320 “Materiality in Planning and Performing an Audit” SA 330, “The Auditor’s Responses to Assessed Risks” SA 402, “Audit Considerations relating to an Entity Using a Service Organisation”. SA 450, “Evaluation of Misstatements Identified during the Audit” SA 500 “Audit Evidence whilst testing IPE Information Produced by the Entity (‘IPE’)” SA 505 “External Confirmations” SA 510 “Initial Audit Engagements- Opening Balances” SA 570 “Going Concern” SA 580, “Written Representations” SA 600 “Using the Work of Another Auditor” SA 580, “Written Representations” SA 700 “Forming an Opinion and Reporting on Financial Statements”, SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report” CA Atul C. Bheda 6/17/2021 Engagement and Quality Control Standards

LFAR LONG FORM AUDIT REPORT 6/17/2021 CA Atul C. Bheda Mumbai 34

Basics v LFAR is an internal control evaluation questionnaire. v Comprehensive in scope and coverage. v Covers both Balance Sheet and Profit & Loss Account. v Serves as an important check list for audit planning. v Make LFAR part of the audit programme. 6/17/2021 CA Atul C. Bheda Mumbai 35

Must Do’s v Study the Questionnaire thoroughly. v Each answer should be precise v Data should be original and be supported with source document or MRL and just not picked up from concurrent audit report v Avoid vague or general comment. 6/17/2021 CA Atul C. Bheda Mumbai 36

Must Do’s Give specific instances of weakness/shortcomings. v Start preparing in month of march v Main Audit Report and LFAR are two separate reports. v Qualificatory remarks MUST be part of the main report. v 6/17/2021 CA Atul C. Bheda Mumbai 37

Must Do’s v Main Report is a self contained document and should not contain any references to LFAR. v Should be sufficiently detailed and quantified to enable expeditious consolidation. v Do not make current year’s LFAR a replica of previous year. 6/17/2021 CA Atul C. Bheda Mumbai 38

Must Do’s v LFAR is of utmost importance to the management as well as the Central Auditors. v Finalize Statutory Report and LFAR simultaneously. v Should be well drafted and not loosely worded 6/17/2021 CA Atul C. Bheda Mumbai 39

Must Do’s v Scope of work carried out should be clearly specified. v Extent of verification be stated v Should create an impact on the bank management about the quality of work carried out. 6/17/2021 CA Atul C. Bheda Mumbai 40

Coverage v Cash and Bank Balances. v Money at call and Short Notice. v Investments. v Advances v Other assets. v Deposits and other liabilities. v Profit and Loss Account. v General. v Specialized Branches. 6/17/2021 CA Atul C. Bheda Mumbai 41

Cash v Cash balance which vary significantly from the limit fixed by controlling authorities. v Excess balance reported to the controlling authorities. v Adequate Insurance Cover. v Joint custody. Refer Instructions, Key Movement Register. v Periodic checking of cash balance. Ascertain procedure and observe during audit General scrutiny of cash book. 6/17/2021 CA Atul C. Bheda Mumbai 42

Balance with RBI, SBI and other Banks v Balance confirmation. v Report differences. v Observation on differences. § Cash transactions remaining unresponded. § Revenue items requiring adjustment / write offs. (issue MOC / Qualify report) § Old outstanding balances remaining unexplained and age wise analysis. 6/17/2021 CA Atul C. Bheda Mumbai 43

Balance with RBI, SBI and other Banks (cont’d) v Item requiring special attention of management. § Reconciliation not done / procedure not followed. § Material amount unadjusted for a long time. v Items affecting financial statements may be reported in the Statutory Report. 6/17/2021 CA Atul C. Bheda Mumbai 44

Money at call and Short Notice v Report even if a single transaction v Confirm that the transaction is as per the instructions/guidelines. v Unauthorized deposits and excess of authorized deposits to be reported 6/17/2021 CA Atul C. Bheda Mumbai 45

Investments v Physical verification on behalf of H. O. v Ensure that income earned on such Investments is not accounted by Branch. v Matured or overdue investments not encashed v Guidelines of RBI for transaction and valuation followed 6/17/2021 CA Atul C. Bheda Mumbai 46

Advances v Examination of all large advances and a test check of other advances v Questionnaire in four Broad categories l Credit Appraisal l Sanctioning / Disbursement l Documentation l Review / Monitoring / Supervision 6/17/2021 CA Atul C. Bheda Mumbai 47

Other Assets v Stationery and Stamps. [Clause 6(a)] v Comment on existence and compliance with. Internal control system over valued stationery with regard to issue and custody. v Instances of missing or lost items of stationery to be given (new clause). 6/17/2021 CA Atul C. Bheda Mumbai 48

Other Assets (Cont’d) Suspense Accounts / Sundry Assets. v Critically Scrutinize these accounts. v Details and clarification in respect of old unadjusted entries be obtained. v Balances which in your opinion are not recoverable. eg: Advance against travelling. l Payment to merchant establishment. l Legal expenses l Dividend / Interest paid. 6/17/2021 CA Atul C. Bheda Mumbai 49

Other Assets (Cont’d) v Unusual reported items in these accounts be eg: Cash in transit l Difference in balancing. l Difference in cash. 6/17/2021 CA Atul C. Bheda Mumbai 50

Deposits v Compliance with guidelines in respect of inoperative accounts. v Instances if not complied with the guidelines. v Seek clarification for unusual movements after balance sheet date. v Quantification of Overdue / Matured term deposits at the year end. 6/17/2021 CA Atul C. Bheda Mumbai 51

Bills Payable / Sundry Deposits / Contingent Liabilities v Details of old items to be reported. v Unusual items and matured withdrawals or debits to be reported along with their nature and amounts. v List of major items of contingent liabilities other than Guarantees, LCs, Endorsements, Acceptances etc. , 6/17/2021 CA Atul C. Bheda Mumbai 52

Profit and Loss Accounts v Existence of system to compute discrepancies in interest / discount income as well as interest expenditure & timely adjustment thereof. v Discrepancies if material to be reported (MOC to be issued) Existence of system l Discrepancies to be checked by branch l Findings of Concurrent Audit/Revenue Audit. l 6/17/2021 CA Atul C. Bheda Mumbai 53

Profit and Loss Accounts (Cont’d) v Compliance with Income Recognition Norms v System of estimation and provision of Interest on overdue / matured term deposits. v Divergent trends in major items of P & L A/c if not satisfactorily explained. 6/17/2021 CA Atul C. Bheda Mumbai 54

General v Proper maintenance of manual Books of Accounts. v In respect of Computerized Branches number of new areas prescribed. v Inquire about l Banks policy l Compliance of the policy l Internal Control & Security measures. l Backups and Disaster Recovery Plans 6/17/2021 CA Atul C. Bheda Mumbai 55

General (Cont’d) - Suggestions for the improvement in the system v Reconciliation records. 6/17/2021 of control and subsidiary CA Atul C. Bheda Mumbai 56

General (Cont’d) v Inter Branch Accounts, (Very Important area) l Understand the system l Daily Communication to HO/Designated cell statement of debit / credit transaction. l Agreement between balance in HO Account Branch Accounts. l Old outstanding debits in the Head Office Account. 6/17/2021 CA Atul C. Bheda Mumbai 57

General (Cont’d) l Expeditious compliance to communication from HO / Designated cell (Report unresponded entries) l Items of Double response in HO Account. l Old / Large outstanding transaction at debits as at year end. v Audit 6/17/2021 and Inspection CA Atul C. Bheda Mumbai 58

General (Cont’d) v Particulars of frauds discovered during the year together with your suggestions to minimize the same. v Window dressing to be reported eg. Large deposit at year end. Under utilised facilities converted in Deposits. Unsecured loans shown as secured. 6/17/2021 CA Atul C. Bheda Mumbai 59

General (Cont’d) v Maintenance l Documents of Fixed Assets Records. of title in relation to branch v Non compliance with Ghosh and Jilani Committee recommendations. 6/17/2021 CA Atul C. Bheda Mumbai 60

Ghosh and Jilani committee recommendations v Ghosh committee : A high level committee was set up to enquire into the various aspects of fraud and malpractices in the bank and to make recommendations to reduce such instances v Jilani committee : A working group was formed to review the internal control and inspection/audit system in bank 6/17/2021 CA Atul C. Bheda Mumbai 61

GHOSH COMMITTEE RECOMMENDATIONS WERE FOR v Improvement in day to day administrative functions v For ensuring safety of assets v Compliance with the let down policies and procedures v Accuracy and completeness of accounting and other records v Proper segregations of duties and responsibilities of the staff v Timely prevention and detection of frauds and malpractices 6/17/2021 CA Atul C. Bheda Mumbai 62

Ghosh Committee Recommendations v Recommendations divided in to four groups • Group-A: Recommendations, which have to be implemented by the banks immediately • Group-B: Recommendations requiring Reserve Bank of India’s approval • 6/17/2021 CA Atul C. Bheda Mumbai 63

Recommendations Group-C: Recommendations requiring approval of Government of India • Group-D: Recommendations requiring further examination in consultation with IBA. • 6/17/2021 CA Atul C. Bheda Mumbai 64

Ghosh Committee v Out of 97 recommendations, v 27 required to be reported at the branch level v 43 at Regional Office (RO), Zonal Office (ZO), or at Head Office (HO) v 27 at both the levels i. e. Branch as well as RO/ZO/HO 6/17/2021 CA Atul C. Bheda Mumbai 65

JILANI COMMITTEE Working group to review the internal control and inspection and audit system in banks Contains 25 questions and to indicate the answer as either “Implemented “ or Not Implemented”. 6/17/2021 CA Atul C. Bheda Mumbai 66

JILANI COMMITTEE RECOMMENDATIONS Broadly divided into three categories • Dealing with the EDP environment in the banks • Dealing with the inspection/Internal audit system in the bank • Dealing with other miscellaneous aspects of functioning of a bank. 6/17/2021 CA Atul C. Bheda Mumbai 67

NEGATIVE ASSURANCE CERTIFICATE RECOMMENDTO BE ISSUED ON THE GHOSH AND JILANI COMMITTEE RECOMMENDATIONS l “We have in the course of audit of _____ branch of _____ Bank, and based on a test check procedures adopted in respect of the accounts for the year _______, broadly reviewed the internal control procedures of the Bank considered relevant for audit, as also airising out of the recommendations of the Ghosh and Jilani Committees, and have relied upon the information, explanations and management responses / assertions stated against each item in the statement / format prepared (*certificate nos. ____ and ____); and, except as otherwise stated in our main report and LFAR dated _____, we have not come across anything that causes us to believe that there any significant / material mis -statements / assertions made, as would have effect on our opinion on the financial statements under audit. ” 6/17/2021 CA Atul C. Bheda Mumbai 68

Once upon a time a tortoise and a hare had an argument about who was faster. l They decided to settle the argument with a race. They agreed on a route and started off the race. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The moral of the story is that slow and steady wins the race. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The hare was disappointed at losing the race and he did some Root Cause Analysis (RCA). He realised that he'd lost the race only because he had been overconfident, careless and lax. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The moral of the story : “ Fast and Consistent will always Beat the Slow and Steady “ 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

But the story doesn't end here. The tortoise did some thinking(RCA) this time, and realised that there's no way he can beat the hare in a race the way it was currently formatted. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The moral of the story ? “ First identify your core competency and then change the playing field to suit your core competency “ 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The moral of the story ? It's good to be Individually Brilliant and to have strong Core Competencies; but unless you're able to Work in a Team and Harness each other's Core Competencies, you'll always Perform below par because there will always be situations at which you'll do poorly and someone else does well. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

There are more lessons to be learnt from this story……… 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

Note that neither the hare nor the tortoise gave up after Failures. The hare decided to work Harder and put in More Effort after his Failure. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The tortoise changed his Strategy because he was already Working as Hard as he could. In life, when faced with Failure, sometimes it is appropriate to Work Harder and put in More Effort. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

Sometimes it is appropriate to Change Strategy and Try something different. And sometimes it is appropriate to do both. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

The hare and the tortoise also Learnt another vital Lesson : “ When we stop Competing against a rival and instead start Competing against the Situation, we Perform far Better “ 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI

To sum up, the story of the hare and tortoise teaches us many things; Chief among them are : - Fast and Consistent will always beat slow and steady. - Work to your Competencies. - Pooling resources and working as a team will always beat individual performers. - Never give up when faced with failure; and finally, - Compete against the situation NOT against a rival. 6/17/2021 BY CA ATUL BHEDA Mumbai FOR PATNA BRANCH OF CIRC OF ICAI