1026

Bank Audit

Planning of Bank Branch Audit

As the financial year draws
to a close, the appointment
of branch statutory
auditors by various Public
and Private Banks starts CA. Rahul Joglekar
gaining momentum. In the The author is a member of the Institute. He
emerging scenario the role can be reached at [email protected]
of the bank branch auditors
and the need and output
of the said audit cannot be
undermined. Presently, the
Indian banking sector is
under tremendous stress in
terms of rising NPAs, lack
of credit offtake, crunching
of the net interest margin,
rising frauds, compromise
of various IT systems, etc. In
such a scenario, the role of
the auditors is often called in
question and serious doubts
are raised about the quality
of the audit. In addition to
this, the Reserve Bank of It is with this purpose that planning 2. Particulars of branches allotted
India (RBI) is often found to for a Bank branch audit assumes to the firm and of the region/
be critical of the role of the greater importance. The auditors zone to which the branch
need to be aware of the entire reports.
auditors and being the sole gamut of Bank branch audit. SA 300
banking regulator, it has the deals with the Planning an Audit of 3. Names and communication
details of statutory central
powers to recommend penal Financial Statements. Appropriate
auditors.
action against the auditors planning is also essential since in
terms of SA 600, using the Work 4. Names and communication
in case of negligence or of another Auditor, the Statutory details of previous auditors.
professional misconduct. The Central Auditor is entitled to rely
members in the profession on the work done by the branch 5. Guidelines for conducting
auditor. The auditor should also be audit of Branches, completion
need to exercise utmost of audit, eligible audit fees and
abreast with the latest version of the
professional skepticism Guidance Note on Audit of Banks reimbursement of expenses, etc.
and be proactively involved issued by the Institute (ICAI). The
in their audits, especially various stages of the Bank branch 6. Procedural requirements to
audits are explained in the following be complied with in accepting
those of the bank branches. the assignment, e.g., letter
In majority of the cases, the section.
of acceptance, declaration
auditors do perform their A. Appointment and Related of indebtedness, declaration
Formalities of fidelity and secrecy, other
duties with adequate skills
The letter of appointment sent by undertaking by the firm/SBA,
and caution, yet are found specimen signatures, etc.
caught in the mess, primarily banks to branch auditors typically
contains the following:
due to lack of audit planning 7. Requirements of SA 220, SA 210
1. Appointment under the w.r.t acceptance/ continuance
and documentation of the Banking Regulation Act, 1949, of the client relationship,
work done. Read on… and the underlying duties and compliance with ethical
responsibilities of the auditors. requirement, etc.

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Bank Audit
8. Scope of work - Besides the
statutory audit under the
The auditors should actual commencement of the audit is
necessary. This includes knowledge
provisions of the Banking also ensure that their of RBI circulars, closing circular of
Regulation Act, 1949, the branch
auditors are also required audit report complies the Bank, proficiency with features
of the CBS. Specific emphasis should
to verify certain other areas
and issue various report and
with the requirements be provided to the susceptibility of
the bank’s financial statements to
certificates like the Long Form of SA 700 (Revised), SA material misstatement due to fraud,
Audit Report (LFAR), Tax Audit
Report, and various certificates.
705(Revised), and SA 706 that enables the engagement team to
consider an appropriate response to
In present times, the time available (Revised). fraud risks, including those related to
engagement risk, pervasive risks, and
for completion of branch audit is
of a company, in so far as they are specific risks.
extremely limited.
not inconsistent with the Banking
Co-ordination between the auditor D. Basic Understanding of
Regulation Act, 1949, also apply to
and the branch management is following Reference Material:
the financial statements, as the case
essential for an effective audit, timely
may be, of a banking company. It may 1. RBI Circulars – RBI issues
completion with the highest audit
be noted that this provision does not various circulars during the
quality. NoC from the previous
apply to Nationalised Banks, State year to be complied by the
auditor should be obtained and
Bank of India, its Subsidiaries and Banks. Auditors of banks are
kept on record. On receipt of NoC
Regional Rural Banks (RRBs). expected to have knowledge
and accepting the appointment,
the auditor should send a formal The provisions regarding audit of of these circulars. Till the year
communication to the branch Nationalised Banks are governed by 2015, RBI had a practice of
management/HO accepting his the Banking Regulation Act, 1949 and issuing Master Circulars every
appointment and other declarations the RBI Guidelines. The provisions year on 1st July. Since January
and undertakings so required. An regarding audit of Banking Companies 2016, RBI has started issuing
engagement letter should also be are governed by the Banking Master Directions. Such Master
sent to the appointing authority of Regulation Act, 1949, RBI Guidelines Directions are issued regularly.
the Bank by the Auditor. For the and the provisions of the Companies
2. Closing Circular of the Bank -
sake of clarity, the auditor should Act, 2013.
With the appointment letter, the
also specify the books, records, and
The auditors should also ensure that Closing Circular of the bank is
other information that he would
their audit report complies with the also sent to the Auditors. The
require in the course of his audit.
requirements of SA 700 (Revised), SA said circular covers the policies
Such a communication would
705(Revised), and SA 706 (Revised). of concerned bank which are
enable the branch management
The audit plan needs to be based framed within the parameters set
to keep the requisite documents,
on the business mix of that branch. by RBI Circulars and also SEBI
information, etc., ready in a timely
Sample selection is also dependent Guidelines etc. Dates of expected
manner. Additionally, a visit to the
on the business mix of the branch. compliance from the branches
branches would be helpful prior
Chartered Accountant must are also included in the Circular.
to actually commencing the audit.
discuss the sample size with branch Accounting treatment of various
It will enable the auditor to get an
manager based on business mix and items is also spelt out in the
overall idea about the business,
percentage of checking mentioned in closing circular.
nature and competences of the staff
and understanding of the flow of the appointment letter, if any. 3. ICAI Guidance Note - The
information and authority. Guidance Note on Audit of
C. Composition of the Audit Team
B. Knowledge of the Banking and Engagement Team Discussions Banks is issued by the Auditing
Business, Branch Composition and and Assurance Standards Board
Since branch audit is essentially (AASB) of ICAI every year with
Expected Deliverables.
a time bound program, the audit the objective to provide detailed
The functioning of banking industry team must be chosen appropriately. and updated guidance to the
in India is regulated by the RBI. The Preferably, staff having prior members on various aspects of
auditors need to understand the role knowledge of bank audits should be bank audits. The Guidance Note
of RBI and the nuances of the banking included in the audit team. Persons is an important resource for the
sector. The provisions regarding the having good interpretation and members carrying out audits
financial statements of banks are analytical skills, report drafting of banks and bank branches.
governed by the Banking Regulation abilities and intuitive capabilities The Guidance Note is updated
Act, 1949. Further, in case of banking should be given priority. The team every year to incorporate
companies, the requirements of the should also comprise of suitable the impact of developments
Companies Act, 2013, relating to Chartered Accountants for guidance that have taken place in the
the balance sheet, profit and loss and coordination. It is essential that banking sector which require
account and cash flow statement basic training to the branch prior to attention of statutory auditors,

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Bank Audit
such as, master directions/ software, operations spread over Snapshot of Activities to be
circulars of RBI, other relevant vast geographical areas, etc. SA 315 exercised during Branch Audit
circulars issued by RBI, requires the auditor to put specific At CA’s Office, Prior to
relevant pronouncements of emphasis on the risks arising out Commencement:
ICAI having bearing on bank of the fraud, changes in regulatory
1. Refer appointment letter
audits, amendments/changes in environment, complex transactions,
and complete formalities of
applicable laws or regulations. related party transactions, and
acceptance, NoC from previous
abnormal business transactions.
Persons having good Since the past few years,
auditor, etc.

interpretation and cybersecurity has gained much

importance. The auditor should
2. Identification of audit team
and preparation of basic audit
analytical skills, report familiarise himself with the programme with standardised
checklist. Conduct interactive
drafting abilities and cybersecurity framework in place
at the branch. The audit procedures meeting of the team to confirm
intuitive capabilities will need to be enhanced/altered understanding of audit
programme.
should be given priority. if the auditor concludes that the
cybersecurity framework is not 3. Collect and read all relevant
The team should also effective. background material as stated
above.
comprise of suitable F. Audit Planning Document
4. Accounting, Auditing and
Chartered Accountants
The engagement partner should Assurance Standards, Guidance
summarise audit plan by preparing Notes and other relevant
for guidance and an audit document also known as the
planning memorandum. The planning
material issued by ICAI be
coordination. memorandum should contain the
5.
studied.
Based on the above, prepare a
following minimum aspects:
4. Accounting and Auditing final check list covering all the
Standards- Auditors need to be 1. Results of the risk assessment areas in Bank Branch Audit and
aware of and ensure compliance procedures performed by the have common understanding
with relevant and applicable auditor and the extent of sample of contents of checklist. Please
Engagement and Quality Control selection as well as decisions of remember that checklist is
Standards issued by the ICAI reliance on controls. very important to control Bank
(SAs and SQCs). 2. The expected scope and extent Branch Audit in limited time and
of the audit procedures to be to cover all the areas under audit.
5. Allied Laws - Auditors should
performed.
also have basic knowledge 6. Decide timelines of completion of
of Allied Laws in order to 3. Any significant changes made each job till signing of final report.
carry out effective audit. For during the audit to the overall
audit strategy or the audit 7. Draft Management
example, Indian Contract Act, Representation Letter to be
1872, The Bombay Stamp Act, plan, and the reasons for such
changes. obtained from branch manager.
1958, Negotiable Instruments
Act 1881, etc. The impact of The planning memorandum should 8. Before going for audit, carry
provisions under these laws on also be prepared in a manner that it with you- all stamps, letterheads,
the documents especially in the will act as an aid in the Peer Review pen drive, soft copies of report
area of Loans and Advances need process of the Audit Firm. formats, reference material, etc.
to be considered appropriately,
wherever required.
G. Regular Supervision and
Monitoring
The Guidance Note on
E. Risk Assessment and Internal Since branch audit is a time sensitive Audit of Banks is issued
Control Assessment
Prior to commencing actual
and time bound activity, regular by the Auditing and
Assurance Standards
interaction of the engagement partner
verification of files and documents with the audit team is imperative.
it is essential for the audit team to
conduct risk assessment in terms of
The partner should devote adequate
time and attention to critical audit
Board (AASB) of ICAI
SA 315, Identifying and Assessing areas like NPA verification, fraud every year with the
the Risks of Material Misstatement
through Understanding the Entity
reporting, CRAR certification, etc.
Suitable checklists may be devised objective to provide
and Its Environment. Banks have
certain typical risks viz: handling
by the firm to track progress of the detailed and updated
guidance to the members
work. Requirement and work trackers
large volumes of cash on behalf of may also be developed which could
customers, significant involvement
of outsourced services, extensive
be updated on a real-time basis on
shared network accessible to all the
on various aspects of
dependence on IT systems and members of the audit team. bank audits.

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Bank Audit
At the Branch, Prior to (MOCs), list of large borrowers of LFAR to avoid any area to be
Commencement: to understand reported missed out.
irregularities, if any. Activities to be exercised at the End
1. If possible, visit the branch
before 31st March and discuss 8. Attend meeting with Central of Audit
broad Audit Programme. Send Statutory Auditors, if scheduled,
1. Carefully review the Audit
basic data requirements on to understand their expectations
Process and confirm final Query
e-mail to enable the branch to and management perspective
Sheets and Reports. Re-draft
compile the same. Request for about Bank Branch Audit.
the same if necessary. Involve all
one person to be identified in the 9. Prepare a list of items to be team members.
Branch as audit coordinator. checked before 31st March and
2. Prepare Draft Audit Report and
2. Discuss all Closing Circulars, after 1st April.
draft of other documents to be
Accounting Policies and basic 10. If possible prepare standardised certified by you. Discuss the
working of the branch with formats of queries to avoid same with Branch. Quantify and
branch manager. confusion. discuss MoCs suggested by you.
3. Take judgement of records, work 11. Discuss audit of Loans and 3. Prepare Final Report.
culture, procedures, processes, Advances with Credit Officer
etc. to have an idea of working of 4. Quantify all points raised in
in detail and use judgement to
the branch. report particularly from the
decide sample percentage.
point of view of materiality. This
4. Understand the software used Activities to be exercised During will help in deciding whether
for branch business and CBS Audit a particular comment or
system. observation is necessary to be
1. Follow timelines and
5. Verify effectiveness of controls commitments as decided earlier. included in the report.
and take list of various exception 5. Generate UDIN, separately
reports generated by CBS 2. Keep track of daily targets.
For pendency, verify reasons for the statutory audit report,
software. certificates and the tax audit
and take corrective actions.
6. Obtain list of all returns and Document the extent of report. Refer FAQs on UDIN
other submissions to be made by verification. released by ICAI. These can be
branch to HO, ZO, RBI, etc. accessed at https://udin.icai.org/
3. Issues identified by audit faqs
7. Obtain copies of all other staff during the audit may be
Audit Reports, i.e., Internal, discussed and cleared on daily 6. Complete other formalities like
Revenue, Concurrent, Stock basis. However, noting of all stamping, signing and affixing
Audit, RBI Inspection, previous observations including those date, etc.
year Statutory Auditor’s cleared must be preserved as 7. Handover final sets as required
Report, System Audit Report, records. by adhering to the deadline given
Discretionary Financial Powers by bank authorities.
Circular, etc. Also check new 4. Comparative analysis of Balance
advances sanctioned during the Sheet and Profit & Loss items 8. Take all your working papers and
year, restructured accounts, new with previous year’s figures and final set without leaving any of
NPAs declared/NPAs upgraded call for explanations in case of your working papers at Branch.
during the year, previous year material variances. Delete working folders created
Memorandum of Changes 5. Plan to check and report aspects on branch computer systems
before leaving the branch.
Sample Bank Branch Audit Programme / Illustrative Checklist

S. No. Name of the person Designation & Qualifications Estimated time for work Initials of the person

Audit Programme
Person
S. Done by
Area of Work responsible at Date
No. whom
the Branch
A. General - Pre Audit Work
1. Appointment letter, NOC of previous auditor, acceptance letter and
related formalities
2. Preliminary visit to branch for understanding of business, IT
systems etc.

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Bank Audit
Person
S. Done by
Area of Work responsible at Date
No. whom
the Branch
3. Review of Closing Circular issued by Head Office

4. Review of Latest available inspection reports of Internal/

Concurrent/Stock Audit/Revenue Audit / RBI / Statutory Auditors/
System Audit and compliance thereof
5. Study of Significant accounting policies of the Bank & computer
system
6. Study of Business mix of the Branch & determination of the sample
size and percentage of checking in each area

7. Compliance of Mandatory Accounting Standards / Auditing

Standards and RBI circulars / directions
8. Intimation in writing whether given to the Branch Manager
regarding requirements for audit and documents to be kept ready
for audit including for LFAR, Tax Audit Report and Certification
B. Physical Verification
1. Physical verification of Cash (in branch and in ATM), Tokens,
Adhesive stamp documents and postage and cross verification of
the same with GL balances.
2. Physical verification of Investments. (if lodged at Branch)
3. Physical verification of valuable stationery like cheque books,
Demand Drafts, Pay-Orders etc.
C. Verification of Returns and Reconciliation
1. Verification of returns submitted to RBI/HO/ZO (Monthly/
Quarterly / Half Yearly / Yearly)
2. Verification of Annual Closing Returns
3. Verification of HO / Branches / Other Banks Reconciliation, Branch
Adjustment Account, Suspense account, Sundry Accounts etc.
4. Verification of Statement of Fraud
5. Verification of NOSTRO reconciliation
D. Verification of Balances
1. Checking of opening balances in GL with previous year audited
Balance Sheet and Profit & Loss Account
2. Cross Verification of Trial Balance, Profit & Loss Account and
Balance Sheet figures as on 31st March with GL figures
E. Balance Sheet
1. Advances
100 % coverage of advances in respect of which outstanding
amount is in excess of 5% of the aggregate advances of the branch
or ` 2 crores whichever is less. List number of cases and names
of parties including limits for all cases above specified limits and
sample selected below the limit.
a) Credit Appraisal

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Bank Audit
Person
S. Done by
Area of Work responsible at Date
No. whom
the Branch
b) Sanctioning and Disbursement
c) Documentation - Pre-sanction & Post Sanction including
Registration and Mortgage of property and Registration of
Charges with ROC/ CERSAI
d) Monitoring/ Review/ Supervision by the Branch
i. Submission of financial statements
ii. Submission of I.T. Returns
iii. Timely submission of stock statements
iv. 4.Calculation of Drawing Power
v. Inspection of Godowns / other units of the borrowers
vi. Operations in the account - overdue/ sticky accounts /
diversion of funds/ cheques duly honoured / limit not
exceeded frequently
vii. Renewal of documents due / Review of Term Loans
viii. Penal interest for default – whether system driven or
manual
ix. Insurance coverage
x. Verification of data in CBS with special reference to
BASEL II requirements of LTV ratio in case of housing
loans etc. / BASEL III Norms
2. Analysis of entries outstanding in Sundries and Suspense Account,
Sundry Debtors, Sundry Creditors
3. i. Verification of assets classified as NPA.
ii. Verification of Upgraded Accounts earlier classified as NPA –
Registration of uncharged interest
iii. Identification of new NPAs
4. Review of suit filed accounts / Decreed accounts & their follow – up
5. Checking of additions, deductions, transfer of fixed assets with
relevant supporting
6. Verify that all balances are shown under proper heads
7. Verify that credit balances in OD, CC, inoperative current accounts
are not netted off with advances and are shown separately under
demand deposits
Verify that Interest accrued but not due on loans is not included in
advances
8. Deposits
i. Near the Balance Sheet date & till the date of audit whether
there have been any unusual large movements in the aggregate
deposits held at the year end
ii. Verification of Staff Accounts
iii. Check that guidelines issued by RBI for inoperative & dormant
accounts are strictly followed with KYC guidelines.
iv. Verify that overdue, matured time deposits are shown in
demand deposits
v. Verify that interest accrued but not due is not included in
deposits but shown under other liabilities
vi. Verify that Dormant Accounts more than 10 years are
transferred to Depositors Education and Awareness Fund
9. Analysis of entries outstanding in Bills Payable/ Sundry Deposits,
etc.

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Bank Audit
Person
S. Done by
Area of Work responsible at Date
No. whom
the Branch
10. Obtain list of contingent liabilities not acknowledged as debts by
the branch. Check for correct reporting.
F. Profit & Loss Account
1. Verification of provision of interest on standard, substandard,
doubtful & loss assets and appropriate accounting treatment
thereof and reversal of interest and charges not recovered on new
NPAs
2. Checking of proper classification of revenue and expenditure items
3. Ratio Analysis and comparison with previous year figures
4. Verify whether there is any divergent trend in major items of
income & expenditure and analysis of reasons thereof
5. Test checking of interest on deposits and advances
6. Test checking of commission and discount on bills, etc.
7. Verification of accounts of major heads of income & expenditure
8. Verification of provisions for prepaid and outstanding income &
expenditure
9. Verification of locker rent received and due and provision thereof
10. Verification of provision for depreciation on fixed assets
11. Checking of prior period expenses and income and provisioning
thereof. Separate prior period expenses and provisioning- give
separate numbers
12. Checking of provisions for ECGC/ DICGC claims
G. LFAR
1. Checking of items as per LFAR checklist
2 Preparation of annexures to LFAR
3. Annexures to LFAR
4. NPAs
H. Tax Audit Report
1. Check the followings in detail-
2. Payments made to clubs
3. Details of revenue expenditure capitalised
4. Whether TDS has been deducted and remitted before the due date
5. Particulars of Income and Expenditure of earlier years debited /
credited to Profit & Loss Account which are of material nature
6. Checking of Tax Audit Schedules
7. Preparation of Tax Audit Report
I. Verification of Checklist of Jilani Committee Recommendations
J. Verification of Checklist of Ghosh Committee Recommendations
K. Collection of following certificates and statements from Branch
1. Physical verification of cash

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Bank Audit
Person
S. Done by
Area of Work responsible at Date
No. whom
the Branch
2. Physical verification of Adhesive Stamp Documents, Postage,
Security, etc.
3. Physical verification of Investments
4. Physical verification of Fixed Assets carried out by Branch
5. NPA Statement, Profit & Loss Account, Balance Sheet, Trial Balance
certified by Branch Manager
6. Management Representation Letter
7. Certificate from Branch Manager for attendance of Audit
L. Issue of Certificates
1. Certificate for Review of Loan Portfolio
2. Certificate relating to recoveries in claim paid accounts under small
loan Guarantee Scheme 1971 and Small Loan (SSI) Guarantee
Scheme, 1981
3. Certificate in respect of subsidy utilised under the scheme Prime
Minister’s Rojgar Yojana (PMRY) and correctness of claim made
4. Certificate regarding the implementation of Jilani & Ghosh
Committee recommendations
5. Certificate in respect of Interest Subvention if any at the Branch.
6. Certificate regarding possession of investment documents on behalf
of Head Office
7. Certificate for DICGC Claim
8. Movement of NPAs
9. Certificate of BASEL – III
10. Cash Balance on Twelve Days (Certificate for CRR)
M. Finalisation
1. Preparation of Draft of the following-
2. Audit Report under SA 700 format
3. LFAR & Annexures
4. Tax Audit Report
5. Jilani Committee Recommendations
6. Ghosh Committee Recommendations
7. Memorandum of Changes
8. Discussion of Draft Report with Branch Manager
9. Preparation of Final Report
10. Generation of UDIN as required by ICAI – separate for Statutory
Audit report, tax audit report and certificates
11.
Submission of Final Report along with Copies of Signed Balance
Sheet, Profit & Loss Account and certificates
N. Review of work done by Audit Team
1. Senior
2. Junior
3. Articled Clerks
4. Employee

46 THE CHARTERED ACCOUNTANT FEBRUARY 2020 www.icai.org