SR.NO.

SUBJECT
1 NPA GENERAL
2 NPA AGRICULTURAL ADVANCES
3 LFAR
4 CBS
5 GHOSH JILANI
6 DEPRECIATION
7 GUARANTEES
8 MOC
9 TAX AUDIT
10 STOCK AUDIT
11 GENERAL
i. TAXES COLLECTED
ii. GENERAL - D.P. CALCULATION
iii. INTEREST SUB-VENTION CLAIMS
iv. AUDIT PROGRAMME & DOCUMENTATION
v. EXTENSION OF TIME FOR AUDIT DUE TO HIGH VOLUME
vi. RRB'S
vii. MORTGAGE & ELIGIBILITY FOR LOAN
viii. D.P. CALCULATION
ix. DISCLOSOURE ACCOUNTING POLICY
x. NEGATIVE LIEN
INDEX
FAQ'S ON STATUTORY AUDIT OF BANK BRANCHES
1 There is an instruction from the H.O. to branches to reverse
the liability entries in the case of guarantees whose validity
date has expired as on 31
st
March 2008 . This is being done
irrespective of the fact that the discharged original
guarantees have not been received by the branch. The
branch has written a letter to the beneficiary informing that
as the guarantee is expired and is not renewed, they are
canceling the guarantees. But if one goes by the wording of
the guarantees issued, it appears that the liability of the
bank will continue till it receives back the discharged
guarantee from the beneficiary and the validity period
restricts only the usability of the guarantee after the expiry
period. Of course bank may do it keeping in view the
requirements of Basel II norms. What should be the
approach of the branch auditors in this case ?
As per bank policy, the bank is correct if it reverses bank
guarantee as of 31
st
March because technically there is no liability
after that date. However one key point is to be remembered that
the liability lapses as on 31
st
March only at the closing hours of
the day and it would be more prudent if the liability is reversed on
1
st
April. The point of receiving the original guarantee is
procedural and in no way affects the liability. However if there is a
claim on the guarantee before 31
st
March and it would at least
take a few days for the bank to know whether the guarantee has
been invoked or not. Thus once againit would be more prudent to
wait for sometime and in this case a months time is very
reasonable. However since there is the bank policy to reverse of
the contingent liability immediately he may have to follow that.
However we ought to state that the same is not prudent and at
least the months wait is necessary. This matter may be bought to
the notice of Central Statutory Auditors.
1
Depreciation
SLM
Method
Plant and Machinery 13.91% 4.75% 15% 50% of normal
rate
40.00% 16.21% 60% 50% of normal
rate
For Less than
180 days use
Data Processing Machines including
computers
The bank has charged depreciation on Computers @ 33.33% following SLM
method. The asset was purchased at the fag end of the year, i.e., in
December, 2007.
Computers under RBI instructions, SLM method are followed. Therefore
depreciation @ 33.33% should be charged even if used for less than 180
days in a year. Computer software not forming integral part of hardware.
Where the aggregate cost of individual items of plant and machinery costing
Rs.5,000 or less constitutes more than 10% of total actual cost of plant and
machinery rate of depreciation applicable to such items shall be the rates as
specified in item II of the schedule.
As per Income Tax Act, "computer software" means any computer program
recorded on any disc, tape, perorated media or other information storage
devise.
No rates of depreciation on fixed assets have been prescribed by the Banking
Regulations Act, 1949. The provisions of the Companies Act, 1956 should
therefore be kept in mind in this respect especially in so far as the banking
companies are concerned. RBI has directed that in respect of computers and
data processing equipments, depreciation be provided over three years
period. The Banking Regulations Act, 1949 requires, in the case of other
bank, the auditor should examine whether the rates of depreciation are
appropriate in the context of the expected lives of the respective assets.
Rate of depreciation as per companies Act and Income Tax Act.
Description of the Asset WDV
Method
I Tax Act
2
3
Bank branch is charging depreciation on the itemsusedathomebeing
provided to its staff. The depreciation is allowed fully on this items.
As per the provisions of Companies Act, 1956 "Where during any financial
year, any addition has been made to any asset or where an asset has been
sold, discarded, demolished or destroyed, the depreciation on such asset
shall be calculated on a pro-rata basis from the date of such addition or, as
the case may be, up to the date on which such asset has been sold,
discarded, demolished or destroyed.
There is no specification as to the computer software that is not forming
integral part of the hardware.
Kindly advise if the bank's policy to write off the entire cost of software and
33.33% of computers purchased in December, 2007 and not put to use for
the entire year.
If during the audit of FY 07-08, we found that one of the asset has wrongly
been taken in 10% block instead of 15% block since FY 03-04 and it was
overlooked by management and previous auditors. Then how present
statutory auditor should dealt with this issue.
The bank can claim depreciation for the full year
regardless of the date of purchase. Do not let the
depreciation policy under other statutes confuse you.
Since you have mentioned that the audit booklet
also contains similar instruction, you can keep that
as backing for your action.
You need to calculate the depreciation from
F.Y.2003-04 at 15%. Difference in depreciation till
last year need to be provided for by the
management. You could give MOC to this effect and
also give a note in your LFAR /main audit report
If the amount involved is material, suggest
memorandum of change and report that as prior
period item.
The auditor is not clear about the fact whether
depreciation in question is allowable under which
act. Whether Income Tax Act or any other Act.
So far as the depreciation on Items used at home
being provided by the bank and they are as per the
approved policy of the bank, the depreciation shall
be charged at appropriate applicable rates
prescribed by the bank.
The depreciation shall be charged to the profit and
loss account.
Regarding disallowance under the Income Tax Act,
the same shall be dealt with by the bank at the time
of filing of Income Tax Return at the Head Office.
Auditor can mention the amount of depreciation on
such items whether used for personal purposes and
mention the same in form No. 3 CD which will be
consolidated at the Regional / Zonal Office level.
Also the auditor can refer this point along with
amounts of depreciation in Long Form Audit Report.
RRB'S
1 Kindly update me with the special points to be considered in
central statutory audit of RRB.
2 EXTENSION OF TIME FOR AUDIT DUE TO HIGH VOLUME
We are planning for the audit from 3
rd
April to 8th April, 2008
which is the deadline given by the Bank for completion of audit
and submission of report.This time span is very little and it is
very difficult to cover all areas in the bank branches. So i
request for some planning to cover important areas without
leaving any area while conducting the branch audit. Kindly
advice me, how to complete the audit within time frame or can
I extend time some more days.
We have been appointed to carry out branch audit of 15
branches of XYZ Bank and the said letter has been given
today, i.e., 31
st
March, 2008 and just after that they started
pressurizing to immediately start and we want to have report of
all the branches latest by 6
th
as Board meeting has been fixed
for 11
th
April, 2008.
How it is possible to do it and justify the work.
3 AUDIT PROGRAMME & DOCUMENTATION
My query is "what important documents we possess for the
documentation purpose or can you provide audit programme
so that we can do accordingly.
INTEREST SUB-VENTION CLAIMS
RBI passes on 2% interest subvention to banks on crop loans
where banks are required to charge interest @ 7% P.A. for
crop loans disbursed up to Rs.3 lacs.
We have noticed that one of our branches hasbeen charging
higher rate of interest say 11 to 12% till September-October
and thereafter it has started charging interest at 7%.
As u know that we have to give certificate for interest
subvention for claiming the same from RBI. Moreover this
subvention amount is worked at zonal office and they provide
us list for certificate. We only test check because of bulk
volume.
In this particular case, we have asked manager to pass on
interest subvention amount of 2% for kharif, i.e., April to
September in stead of directly crediting to interest income and
for rabi i.e., October to March to be credited to interest income
account.
On account of large no of accounts, it is not possible for us to
verify higher interest charged by bank in each and every case.
Hence, we have worked out this short cut.
Whether this is right and what level of responsibility comes in
providing certificate to RBI for claiming interest subvention in
such case.
MORTGAGE & ELIGIBILITY FOR LOAN
What is the difference between Mortgage, Pledge and Lien
Who can avail facility of Overdraft and Cash Credit (CC a/c).
D.P. CALCULATION
1. The bank which we are auditing has got the practice of not
to deduct the sundry creditors while calculating the drawing
power in the Cash Credit Account. According to the circulars
issued by the Head Office only the creditors which are above
the estimated level of creditors are to be excluded (which
information is never available with the branch at the time of
allowing monthly drawing power). Our opinion of allowing
Drawing Poweronly against the paid stock as prescribed by
the Reserve Bank of India is not acceptable to the bank.
TAXES COLLECTED
The bank has included the amount of BCTT collected under
"Miscellaneous Income" in the P & L account of the branches.
It is specifically mentioned in "Others" of Miscellaneous
Income column of the banks pre-printed P & L format. I feel
that BCTT is a liability and can not be classified under income
under any circumstances. What stand should I take in this
regard. The amount involved is material.
The Branch has accounted for all service charges received
gross (inclusive of Service Tax). No provision for Service tax is
made at the branches because it is done at the HO level. But
this has resulted in the overstatement of the branch income
and under statement of liabilities to the extent of the amount of
service tax. What stand should be taken in this regard?
As per my information, the Institute has not issued any
separate guidelines for Statutory Audit of RRBs. In my view
there are no special points, as such and our normal
procedure for bank audit should be followed.
You may refer to Guidance Note issued by the Institute on
Audit of Banks. (including para 1.11 of Chapter 1 on RRBs
of 2008 edition of the Guidance Note)
At the end of the audit, the auditor has to give the reports
and certificates. The report is a reasonable assurance and
has two parts (mainly), the statement of facts and the
expression of opinion. The auditor has to plan his audit in
such a fashion that he is comfortable in expressing his
opinion. If the auditor gives the certificate without carrying
out proper audit checks, it may lead to professional
negligence. Thus the auditor may put in additional
manpower to complete the audit properly. The need be he
may talk to the bank about extension of time.
Please give written representation to Bank. Please keep
details of the work done so as to enable you to justify the
work done and the time required. At the same time please
have a suitable team to assist you. Finally you must keep in
mind that inadequate time is no justification for dilution of
quality.
There is no standard audit program. One may refer to the
Guidance Note on Audit of the Banks issued by the ICAI.
The ICAI has come out with the CD on bank audit which has
certain check points in the bank audit. Moreover one may
use LFAR as the guideline for carrying out the checking
activities.
On documentation one may refer to the Auditing Standards
on Documentation to build up the working paper file.
Whether accounting of Interest Subvention claim should be
made at the branch or at Zonal Office of the Bank, will
depend upon the policy of the Bank under audit. In my
opinion, passing of entries of subvention claim will depend
upon this policy.
2. As per the RBI circular dated 10
th
May 2007 on extension
of subvention scheme for the year 2007-08, subvention shall
be available to the public sector bank, on the condition that
short term credit is made available to the farmers @ 7% p.a.
If this condition is not followed by any branch of a bank,
subvention shall not be available. In the cases cited by you,
since interest is charged at the rates higher than the
stipulated rate of 7%, such accounts shall not be eligible for
subvention. In my opinion, these accounts should be
excluded from subvention claim.
3. The test check to be applied for verification of no. of
accounts shall be a matter of judgment & decision of the
individual auditor. An auditor may enquire whether data of
rates of interest charged on all such accounts can be made
available in electronic form. In such a case he can use
Microsoft Excel tools to find out all such cases of incorrect
rate of interest charged. He may decide to suitably qualify
the certificate to be issued, based on the circumstances.
A mortgage is a conveyance or contract that pledges real or
personal property as security for the performance of an
obligation, usually the payment of a debt. The term comes
from the Old French "dead pledge," apparently meaning that
the pledge ends (dies) either when the obligation is fulfilled
or the property is taken through foreclosure.
In most jurisdictions mortgages are strongly associated with
loans secured on real estate rather than other property
(such as ships) and in some cases only land may be
mortgaged. Arranging a mortgage is seen as the standard
method by which individuals and businesses can purchase
residential and commercial real estate without the need to
pay the full value immediately. See mortgage loan for
residential mortgage lending, and commercial mortgage for
lending against commercial property.
In many countries, it is normal for home purchases to be
funded by a mortgage. In countries where the demand for
home ownership is highest, strong domestic markets have
developed, notably in Spain, the United Kingdom, and the
United States.
In law, a lien is a form of security interest granted over an
item of property to secure the payment of a debt or
performance of some other obligation. The owner of the
property, who grants the lien, is referred to as the lienor and
the person who has the benefit of the lien is referred to as
the lienee .
In the United States, the term lien generally refers to a wide
range of encumbrances and would include other forms of
mortgage or charge. In the U.S., a lien characteristically
refers to non-possessory security interests (see generally:
Security interest - categories).
In other common law countries, the term lien refers to a very
specific type of security interest, being a passive right to
retain (but not sell) property until the debt or other obligation
is discharged. In contrast to the usage of the term in the
U.S., in other countgries it refers to a purely possessory
form of security interest; indeed, when possession of the
property is lost, the lien is released, However, common law
countries also recognise a slightly anomalous form of
security interest called an "equitable lien" which arises in
certain rare instances.
In the U.S. and Canada the word is usually pronounced
lien, whereas in other countries (the UK) is more normally
enunciated as lien.
Despite their differences in terminology and application,
there are a number of similarities between liens in the U.S.
and elsewhere in the common law world.
Cash credit Account
This account is the primary method in which Banks lend
money against the security of commodities and debt. It runs
like a current account except that the money that can be
withdrawn from this account is not restricted to the amount
deposited in the account. Instead, the account holder is
permitted to withdraw a certain sum called "limit" or "credit
facility" in excess of the amount deposited in the account.
Cash Credits are, in theory, payable on demand. These are,
therefore, counter part of demand deposits of the Bank.
Overdraft The word overdraft means the act of overdrawing
from a Bank account. In other words, the account holder
withdraws more money from a bank account than has been
deposited in it.
How does this account then differ from a Cash Credit
Account? The difference is very subtle and relates to the
operation of the account. In the case of Cash Credit, a
proper limit is sanctioned which normally is a certain
percentage of the value of the commodities/debts pledged
by the account holder with the Bank. Overdraft, on the other
hand, is allowed against a host of other securities including
financial instruments like shares, units of mutual funds,
surrender value of LIC policy and debentures etc. Some
overdrafts are even granted against the perceived "worth" of
an individual. Such overdrafts are called clean overdrafts.
There are many ways in which finance can be raised Cash
Credit is one of the many ways of raising finance (i.e. it is a
type of loan account).
Meaning : Cash credit is an arrangement under which a
customer of a bank or financial institution is allowed an
advance up to certain limit against credit granted by bank.
That means a loan may be granted say for Rs. 1 Lakh
however the customer/borrower of the loan may take the
amount of loan to the extent required by him but not
exceeding the limit of Rs. 1 Lakhs.
Purpose : The purpose for which loan is required is essential
to ascertain, as for different purposes different types of loan
can be taken. E.g., In case the loan is required to purchase
fixed assets like plant and machinery, term loan must be
taken as plant and machinery are long term assets it will
take time in repayment of the loan and repayment can be
done in EMIs (Equated Monthly Installments). Where as a
loan required for working capital needs a long term loan is
not required as repayment does not require long period,
hence cash credit may be availed. Explanation of Cash
Credit loan facility : If for e.g., a person is having a
business. To carry on this business he needs to purchase
raw material, and sell the goods. For this he needs working
capital to run his daily business. Working capital means
current assets minus current liabilities. Where current assets
comprise of investment in stock, sundry debtors, cash, etc.,
current liabilities comprise of sundry creditors, suppliers of
stock (incase of sto are short to address the repayment of
the term loan over the sanctioned
tenure?









This working capital that is required to run the business can
be either funded by the businessman himself or if he does
not have the money he can take a loan i.e. Cash credit. In
Cash Credit facility an amount of loan is given to the
borrower/businessman for his working capital needs. The
entire amount of working capital required is not funded by
the bank, some small amount will have to be funded by the
businessman and the balance amount will be funded by a
bank as a loan. This is as per RBI rules. The amount of loan
to be given is decided on the basis of different types of
methods like MPBF (Maximum Permissible Bank Finance)
suggested by Tandoon Committee or other methods. These
methods use formulas which take into consideration actual
working capital required.
The amount so worked out is given as loan and is called as
limit this is because under this kind of loan the borrower
may not take up the entire amount of loan as working capital
requirement every day is not the same.
Any entity which is in a position to offer the sound security
and undertakes to maintain financial discipline can avail of
the overdraft/cash credit facility.
If the drawing power calculated from paid stocks is
significantly lesser than the outstanding on a continuous
basis, the account can be classified as an NPA. The same
can be done taking the fall in drawing power as not
temporary. Further, the shortfall in draw power due to
reduction in creditors could imply fund divergence, which
should be brought out. However most of the banks do not
deduct creditors to arrive at paid stocks and thus calculate
drawing power ignoring creditors. This issue has also not
been qualified by RBI till date. Many Chartered Accountants
have also ignored this fact and classified the same as
Standard. However in my opinion, you can classify the same
as an NPA & if the branch head is not agreeing to sign the
MOC, leave it to the Central Statutory Auditor to decide
giving the MOC & bringing out all facts clearly.
Check the closing guidelines of the bank. If it states (or any
other circular issued at the time of commencement of BCTT)
that BCTT has to be accounted as "Income", then you need
to report in the statutory audit report about the same and
quantify it.
This is the usual method of accounting by many of the
banks. Yes, you should report it in the statutory audit report
about overstatement of income to that extent.
ISSUE
NPA AGRICULTURAL ADVANCES:-
1) As regards Agricultural advances, they become NPA
when the principal and interest remains overdue for two crop
seasons. For the area covered by the branch they are
contending that Paddy cultivated comes under one cropping
Pattern(One cultivation & Harvesting for each year). The
normal period of cultivation and harvesting for paddy is six
months. In the above situation the branch is of the opinion
that the two crop seasons refers to two years (not one year
as assumed by us) and the accounts become NPA if the
principal & interest remains overdue for two & half years. Is
the contention put forth by the bank is in accordance with
RBI guidelines? If it is correct, What is the sort of evidence I
should obtain to conform that the above crop comes under
one cropping pattern? Please elucidate.
2) Agricultural Tractor advances are given under Annual
Installments and for lands under paddy cultivation (Single
Cropping). In the above situation the branch is of the
opinion that the two crop seasons refers to two years (not
one year as assumed by us) and the accounts become NPA
if the principal & interest remains overdue for three years. Is
the contention putforth by the bank is in accordance with RBI
guidelines?
2 In respect of Agriculture Advances, the bank management
says that fresh NPAs identified during the audit are covered
by Waiver scheme announced bythe Honourable Finance
Minister in the budget speech. Kindly advise whether to go
without classifying them as NPA in the absence of any
circular from RBI.
1
3 I want to know about NPA classification of discounted export
bills guaranteed by ECGC. Bill discounted by bank is of 120
days maturity and generally paid after long overdue period.
The bank management has not classified them NPA
because they are covered by guarantee of ECGC, i.e.,
CentralGovernment. I have gone through the RBI master
circular but failed to get reply in clear terms. Please guide.
Sub: Statutory audit of banks 07-08
Agricultural advances are usually re-scheduled in certain
districts in the month of March as drought affected area and
not classified as NPA. Since there is a proposal in the
budget for debt relief to farmers, the banks cannot re-
schedule such accounts as the applicants fear that they may
be out of the relief programme because of such re-
schedulement. The Branch Managers are in a difficult
situation as they cannot re-schedule such accounts at their
own risk without obtaining application as the proposed
scheme may exclude such accounts. Whether all agricultural
advances not re-scheduled in time are to be classified as
NPA?
Please guide me regarding treatment of loan waiver recently
announced by the government. What will be treatment of
NPA agricultural loans waived?
6 As per declaration in budget, Agricultural loans are to be
waived upto a certain limit. Now on 31
st
March, 2008, banks
can not waive the same and even can not re-schedule. So
whether same should be considered as NPA as on 31
st
March 2008 or not. Please clarify
4
5
7 The branch is granting, besides crop loans, Term loans to
agriculturists for purchase of Tractors, Housing and Cash
Credit for Business under Agro Mortgage Scheme. The
interest is charged at monthly rests but the instalment
collected is at the end of the year. The guidelines clearly say
that the interest not serviced for more than 90 days is to be
classified as NPA. The guidelines are as follows:
Page 1.132 Para 6.166-167-170-172:
In line with the international best practices and to ensure
greater transparency, the Reserve bank of India has directed
the banks to adopt the "90 days overdue" norm for
identification of NPAs from the year ending March 31, 2004.
Banks have been charging interest at monthly rests, from
April 1, 2002. However the banks were advised that the date
of classification of an advance as NPA would not be
changed on account of charging interest at monthly rests.
Banks should, therefore, continue to classify an account as
NPA only if the interest charged during any quarter is not
serviced fully within 90 days from the end of the quarter.
A loan granted for short duration crops will be treated as
NPA, if the instalment of principal or interest thereon remains
overdue for two crop season and a loan granted for long
duration crops will be treated as NPA, if the instalment of
principal and interest thereon remains overdue for one crop
season.
As per guidelines, "long duration" crops would be crops with
crop season longer than one year crop, which are not "long
duration" crops would be treated as short duration" crops.
The crop season for each crop, which means the period up
to harvesting of the crops raised, would be as determined by
the State Level Bankers' Committee in each State.
Depending upon the duration of crops raised by an
agriculturist, the above NPA norms would also be made
applicable to agricultural term loans availed by him.
The above norms should be made applicable to all direct
agricultural advances as listed in the Master Circular on
Lending to Priority Sectors (RPCD.No.Plan. BC.
84/04/09.01/2006-2007 dated 30
th
April 2007.) In respect of
all other agricultural loans, identification of NPAs would be
done on the same basis as non-agricultural advances,
which, at present is the 90 days delinquency norm.
I am suggesting to classify all the loans (except those
sanctioned against crops) granted for business or purchase
of assets and housing etc., as NPAs for which the bank is
resisting. Kindly advise as to the classification of such loans
whose interest is not serviced in 90 days.
REPLY
Both your queries are in respect of agricultural advances
and issue in both the queries is common .i.e. nature of crop -
whether it is long duration or short duration. As I understand
from your query, in your view the crop in question is short
duration crop but in view of the Bank, the crop is long
duration crop. In such situation what is the recourse
available to you as auditor? I invite your attention to
para 4.2.12 of Master Circular dated 2nd July 2007 issued
by Reserve Bank of India. In sub para (i) of this para it is
very clearly mentioned as under. The
crop season for each crop, which means the period up to
harvesting of the crops raised, would be as determined by
the State Level Bankers' Committee in each State.
Depending upon the duration of crops raised by an
agriculturist, the above NPA norms would also be made
applicable to agricultural term loans availed of by him."
In my opinion, if you have any different view on duration of
crop as stated by the Bank management, then you can
definitely insist for the State Level Bankers' Committee
reportfor determination of crop season for the crop in
question and accordingly classify the advance as NPA or
otherwise.
The agriculture loans scheme is a budget proposal
submitted by the Hon. Finance Minister in House
(Parliament). The proposal is yet to be approved and
become effective. RBI has also not issued any
communication amending the existing instructions regarding
NPA(Agricultural Advances). As such, all the agricultural
advances, including those which are likely to be covered by
the budget proposal, will have to be classified and provided
for as per the existing guidelines of RBI.
Classification of NPA is based on record of recovery. The
same is not dependent on availability of security. In the
above case, the advance is an NPA, if it is overdue for more
than 90 days after the due date of payment. Availability of
ECGC cover will only affect the security status for
provisioning if it is to be classified as doubtful.
Till today, no circular in this regard has been issued by RBI
and hence there is no modification in the Master Circular on
IRAC issued by RBI on 2
nd
July, 2007.
2. If any internal circular / guideline has been issued by the
respective bank, the auditor should take cognizance of the
same.
3. If no such circular / guidelineis issued, the branch
auditor should make a reference of the same in his statutory
audit report with a request tothe Statutory Auditors to deal
with it appropriately at the central level.
Income Recognition and Asset Classification norms in
respect of advancesgiven by Banks as per Reserve Bank
of India Master circular dated 2
nd
July, 2007 are required to
be applied to agricultural advances also. Therefore an
agricultural advance will have to be classified as NPA, if by
virtue of the above referred norms it has become NPA.
If any advance is not rescheduled as per the scheme, the
same shall be required to be classified as NPA, if it fulfills all
other conditions of a NPA under IRAC norms prescribed by
RBI.
I agree with your view regarding the term loans to the
agriculturists for purchsase of equipments and other
mortgage loans, etc.
However, if these loans are granted to agriculturists and if
the repayment of these loans are dependant upon the
cropping pattern of the area and accordingly the repayment
schedule has been prepared as per loan document and if
the terms of repayment have been finalized accordingly,
then the accounts shall continue to remain standard , if the
repayment is as per scheduled terms.
It shall depend upon the contract terms , which would
depend upon the cropping pattern and cash flows of the
agriculturists.
ISSUE
1 To conduct stock audit the borrower should enjoy limit of
Rs. 5 cores. This limit is only OD limit or consolidated limit
enjoyed by the borrower in a bank?
REPLY
The limit will mean the OD limit. The limit referred by RBI
are all working capital limits.
LFAR
Q5. LFAR certification requires lot of time to be spent for
verifying the correctness of the controls and procedures.
However due to deadline of completing 3 branch audits by
7th of April, how to tackle the situation.
1. Should we need to check and verify all the account
opening forms for accounts opened during the year under
audit to comment on KYC norms, more particularly when
the branch is not covered by concurrent audit and no
internal inspection took place at the branch during the
period under audit?
2. The branch (not a branch dealing in large advances /
assets recovery branch) has one account with exposure
(FB & NFB together) in excess of 300 lacs, should we
obtain the Annexure to the LFAR prepared by the branch
in such a case?
DOCUMENTATION
When documents, like,D.P Note, Agreement for
Hypothecation of Stock/Book debt and Acknowledgement
of Debt, etc.,are time barred, i.e,, they are more than 3
years old. Whether it is compulsory to get each and every
such documents to be renewed or there is any other
single document that can increase the validity of all such
documents.
SENSITIVE STATIONERY
Register showing receipt, issue and balance stock of
stationery comprising of security items (Term Deposit
Receipts, Drafts, Pay Orders, cheque books, Travelers
Cheques, Gift Cheques, etc.) is not maintained. Only
partial details about issue of such stock are available.
Shall I qualify main audit report or LFAR only?
FRAUD
During the course of a Branch audit, we noticed the
occurrence of a fraud during the year.
This was identified by the branch and reported to the
immediate higher authorities.
However, a criminal case is filed against the bank officials
also along with other accused persons by the aggrieved
person and an FIR is filed for the same.
We need to report it under LFAR.
We need clarification whether the same should be
reported by us to RBI, since our appointment order
requires us to report any occurrence of frauds below Rs.
100.00 Lakhs to RBI, Regional Office. Whether report to
RBI is only for a fraud discovered under audit or all frauds
already identified and reported to Vigilance department of
the respective bank?
We are not informed about status of information submitted
to RBI by the bank.
Please clarify whether reporting under LFAR will suffice or
we should also report it to RBI also?
Please ensure that you have adequate number of
assistants to conduct the audit. Having accepted the audit,
it is the duty of the auditor to ensure that the audit is
completed within the agreed time period. But lack of time is
not a justification for dilution in the quality of the audit. Full
compliance needs to be made with all the applicable SAs.
Read the Guidance Note on Bank Audit.
There is no specific circular/ instructions either from RBI or
the Head Office of the Banks requiring 100% checking of
account opening forms by the statutory auditor. The
concurrent audit scope definitely requires checking of 100%
accounts opened during the year. The statutory auditor can
do it on test check basis, however, the sample size is
dependent on number of factors, such as, volume of new
accounts opened, internal control in the branch etc.
Accordingly, the sample size can be increased. Further, as
the Branch is not under concurrent audit and internal
inspection, the size of the branch might be small, therefore,
the auditor can take decision of sample size.
Annexure to the LFAR viz., questionnaire applicable to
specialised branches is required in respect of branch
dealing in very large advances, such as, corporate banking
branches and Industrial finance branches with advances in
excess of Rs.100 crore or Asset Recovery branch.
Every individual docs. Need to be renewed.
From the query, it appears that this is a routine shortcoming
in the branch. There is noindication in the query that the
auditor feels that there is some sort of shortage of stock,
whichcould lead to some fraud. In that case, it would
only be reporting in the LFAR. However, if there
appears to be a theft in the security items, indicating an
intention to defraud the bank, then this would need to be
highlighted in the main report.
Any fraud detected during the audit should be brought in to
the notice of the CMD, CSA and RBI. Earlier frauds
reported must have been already brought in to the notice of
competent authorities.
Whether beside writing No / Yes in Ghosh / Jilani
Committee reports, we can attach our detailed
observed to these reports?
Yes, you can certainly attach your detailed
observation and in the questionnaire at the end you
could mention subject to your observation in a
separate annexure or read with separate annexure.
it is advisable to prepare a detailed report
giving negative assurance on the lines of
limited review and also stating scope and
limitation. Just saying yes or no is not in the
interest of the auditor.
OUR DOUBT REGARDING CLASIFYING THE NPA.
ACCOUNT DETAILS :
NAME : XYZ LTD.
LIMITS : OCC : 200 LACS PRESENT O/S.280 LACS LC : 100 LACS
O/S. NIL
EXCESS OVER LIMIT SINCE OCT.,2008 LCs devolved and paid by the
bank by debiting OCC during sept07 to mar08. Interest is also not serviced
during last 6 months.
Security : II charge over factory building and machinery along with XYZ
bank (I charge) fire accident occurred in the company premises on
28/03/2007 and part of the unit damaged and effect the major part of the
production.
Bank referred this account to CDR for restructuring along with bank. CDR
Committee accepted this account for consideration but not yet given the
restructuring details.
Branch not classified this as NPA. There version is when the case is
pending with CDR, status required to be maintained i.e. required to be
continued as standard.
Please give your opinion regarding this account.
Please explain about the treatment to be given to the following type of
account :-
"A C/C account of trading firm where monthly credits in the account are just
equivalent to the monthly interest debited to it." The balance is within the
DP.
1
2
Facts of the case:
Term Loan Sanctioned in April 2005- 8.90 lacs; Moratorium- 6 months;
Tenure - 84 months; EMI - Rs. 16646/- Rate of Interest BPLR +12.5%
(presently 14%p.a.)
Borrower has requested the bank for re-schedulement of EMI (in November
2005) to Gradually (increasing) monthly installments such that initially the
EMIs would match the monthly interest and gradually increase over the third
year to seventh year, such that the term loan could be repaid in full. Bank
has accepted the request and accordingly allowed re-schedulement.
Borrower has till date repaid the committed EMIs as per re-schedulement.
During April 2007, bank migrated from old software to core banking. While
doing so, the re-schedulement sanctioned earlier has not migrated
effectively. EMIs of 2
nd
year alone are reflected in the system during the
year under audit.
Meanwhile, the concerned officers, re-calculated the repayment profile upto
2012 (covering 84 months) and have reported that the rescheduled EMIs
would not be adequate to square off the term loan in 2012. Hence,
computed the desired outstanding balance as at 31-03-2008 (from the
repayment profile) and compared the same with the balance shown by the
system and reported in October 2007 that the term loan would slip in to NPA
category if the difference is not made good by the borrower.
3
Meanwhile, the borrower has deposited aggregate amount during the 12
months which is more than the re-scheduled EMIs and also cover the
interest debited during the year. The bank has not given any written
intimation to the borrower about the shortfall as at 31
st
March 2008. The
borrower has deposited the amounts rather not as per schedule but has
taken care to deposit more than the given EMIs. The bank has marked the
account as NPA in December 2007. Now, the borrower has been called for
and has been asked to deposit an amount equal to the difference between
the system balance and the desired balance. The borrower has argued that
if he has paid an amount equal to 12 EMIs (rather more than 12 EMIs taken
together) during the year, how could be his account be classified as NPA?
Query: Kindly advice as to how do we look at the account. Whether it would
fall into NPA? And whether the action taken by the bank is justified? Is it not
the banks' responsibility to communicate with the borrower that the
rescheduled EMIs are short to address the repayment of the term loan over
the sanctioned tenure?
4
My query is about classification of NPA. A Term loan account is sanctioned
with the stipulation that interest and principal to be serviced annually.
According to aRBI Circular, I heard, banks should provide interest only on
monthly basis. Accordingly, if the interest is paid once in a year, does the
account become NPA?
5
The bank has got a Loan Scheme by the name of Traders Easy loans.
Under this category of loan, Cash Credit limit is allowed to the party against
the Property mortgaged. No condition of arriving at the periodic drawing
power through monthly stock and book debt statement is being prescribed.
Even the parties with negative working capital keep enjoying working capital
facility as the same is being allowed against the property mortgaged and not
against the Working Capital Requirement.
6
The Bank ishaving another loan scheme of Channel Financing, where limit
is sanctioned to a dealer of a reputed manufacturer at his recommendation(
without any guarantee or comfort). The limit is allowed by making direct
payment to the manufacturer to the extent of the limit withouthaving any
condition of maintaining the net working capital justifying such limit. Even
the dealer having negative working capital is enjoying working capital limit.
3
7
Facts of the case: Particulars of advance made by a bank branch. 1.
Nature of Industry Sugar Manufacture 2.
Nature of Advance : Working Capital Term Loan
3. Nature of Security:
Primary security: Book Debts
Collateral Security: Immovable Properties
4. Account Performance : Current. Well serviced (although it is apparent
that the party is doing kite-flying viz., borrowing from one financier to fulfil
current loan commitments.) 5.
Book debt statements not submitted for a long time more than a year.
6. Collateral adequately covers the loan exposure.
Query: Does non-submission of book debt statement merit the account to
be classified as NPA.
If it was a CC/OD account it is clear that non-submission of stock / book-
debt statements for more than 3 months would necessitate the account to
be treated as out of order. Would like to know the position if it was an
exposure in the nature of a WORKING CAPITAL DEMAND LOAN
since DP is not drawn based on latest stock/book-debt statements in
this case.
8
1. In a trading account, deficits were observed in the OCC account for a
period of two months and subsequently the bank sanctioned Working
capital demand loan (WCDL)and the deficit portion was culled out from
OCC and absorbed in the WCDL. After that the OCC accounted was
operated within the drawing power availability and the repayment in the
WCDLwas regular. My question is whether the bank can sanction one
credit facility to regularise the irregularity and to avoid the account becoming
irregular. (Sanctioning of a loan is a management decision, but the thing is
to regularise the accountthe new credit facility can be utilised) Can I
classify the account as NPA in view of making the account evergreen.
9
2. After the implementation of the nursing programme, the unit responded
well and the account was upgraded as performing after watching one year
satisfactory performance of the unit. As a part of the nursing programme,
interest sacrifice made by the bank till the date of implementation of the
nursing programme, was kept in the mirror account and instructions were
given to recover the mirror balance every month at a specified quantum
and the recovery was credited to P & L account every month. Now my
question is, as the account has become performing, whether entire interest
portion in the mirror accountcan be recognised by transfer to P & L A/C
credit and debiting the Loan A/C in the year of upgradation of the account
as performing.
1. If one account is become NPA during F.Y.07-08 and it has unrecovered
interest of Rs.10000/- in FY 07-08 and beside this, there is unrecovered
interest of Rs.3000/- in FY 06-07. Then reversal of interest during the
year would of Rs.10000/- or 13000/-
2. If one the account should have been NPA in the FY 05-06 but it was not
done by the management as well as auditors of FY 05-06 and 06-07. Then
in FY 07-08 how statutory auditor should dealt with such account.
The loan was sanctioned in 1998 for doing medicine in Russia and as per
the original scheme the loan repaymentwas to commence from 2004 June
onwards. since the Russia degree was not recognised, the student was to
take one more course in India and the repayment did not commence in
2004. The branch deferred the recovery of loan to 2008, I. e., till the
completion of the new course.
Now the issue is, as per the original scheme, the loan is to be repaid within
one year from the end of the first course or within 6 months from the date of
employment and in this case the loan was for the first course and any other
degree subsequent to the first degree amounts totaking up other degree
and in my opinion the loan repayment is to commence as per the earlier
schedule. But the bank differs with our views and did not has not classified
the account as NPA on the ground that the course is not completed.
It is very encouraging for the members that the Institute has started the
facility for online reply to the queries relating to bank audits. There are some
confusions which I request be cleared. Please clarify the role and the
course of action in the following situations :-
1. A CC account in which Rs 31000 is the interest debited for Q4 2007-08.
There is only one solitary credit entry of Rs 26000 cash deposit on
31.3.2008. The branch manager is adamant for not classifying it as NPA
since only half months interest is in arrears. Please clarify.
2. It has been mentioned in the Guidance Note to be careful about those
loans in which there is only a single credit entry about the year end.
Suppose there is a credit in the CC account around the end of the year by a
contra debit in another CC account with the assertion that the latter is a
relative of the former and has verbally consented for the transfer of money
in the formers account. What is the remedy if after the completion of the
audit the amount is reversed back.
3. What is the NPA status of a CC account in which there is no credit during
the last quarter of 2008 and on 1.4.2008 there is a cash deposit of double
the amount of interest debited during the fourth quarter . The Manager is
adamant to transfer it to NPA.
4. A borrower is enjoying various credit facilities in the branch. One of his
accounts is CC against mortgage of building & is a small account. Ignorantly
there is no credit in the account for the last 180 days. The managers
assertion is that if you classify this account as NPA, all other accounts many
of which form a substantial part of the banks advances will turn NPA. Please
clarify.
5. A CC account where the balance is in excess of the sanctioned limit
during the entire year except 31
st
March, 2008 when it is brought within
sanctioned limit
An housing advance was classified as NPA on 31.03.07 , details of the
same are as follows:
Date of sanction: 10.05.2005
Moratorium Period: 6 months
First installment date/Due Date: 10.12.2005
Amount Sanctioned: Rs. 6.50 Lacs
O/s as on 31.03.2007: 6.47 Lacs
During year 2007-08 (till 23.02.08) there were credits of Rs. 49,000/-(which
as per branch/system) were enough to convert the account from NPA to
Performing Asset. After the same the system charged the due interest from
01.04.2007 till February 2008, which debited the account by Rs. 61900/-(out
of which 51,273 pertain to period 1.4.07 to 31.12.07 which was levied on
10.03.08). Against interest levied till 31.12.2007 only Rs. 6,000/- have been
received on 27.03.2008.Now as on 31.03.2008 the outstanding amount is
Rs. 6.55 Lacs.
Now my questions are:-
1. Was the system/branch correct in converting the account from NPA to
Performing Asset?
2. What should be classification of advance as on date?
The borrower is running Poultry business whose loan was sanctioned in
2005 enjoying Term loan and CC limits of Rs 1 Crore. The repayments are
not satisfactory. The Branch has the practice of re-scheduling the loan when
it is on the verge of becoming an NPA. Two re-schedulements have already
taken place and a third has been done on 27.03.08 wherein the limit has
been reduced to Rs 20 lacs and the balance has been asked to be repaid
out of sale proceeds of few securities released for sale. The time permitted
for sale is June 2008.
The Branch argues that in view of the re-schdulement the account is
standard. The Master Circular on classification released by RBI is silent on
re-schedulement of loans other than project loans. Does it mean that the 90
days norm has to be adopted for the original sanction terms?
If the argument of the branch is to be accepted then it can be ensured by
the bank that no account becomes an NPA by merely re-scheduling all
loans when they are about to become NPAs.
I request you to please clarify how an advance (C/C) should be classified
when it has become NPA as on 31-3-2008 and again on 05-04-08 (before
audit completion), the Assets has become performing. Will it be correct to
classify the asset as Standard in view of the fact that the same has become
a performing asset within the audit period.
As per RBI Master Circular dated 2/7/2007, even if an account is approved for
restructuring, classification as Standard or NPA will be done as per the status of the
account when it goes/is approved for restructuring. In this case even if account is
approved for CDR, if at the time of submission of the proposal for restructuring the
account was Sub Standard, then it has to be classified as NPA.
You need to examine in detail sequence of event on these lines and also the status of
account when it was sent for restructuring.
If at the time of submission of proposal, if an account was NPA then it has to be
classified as NPA. Thus if at the time of submission of proposal if an account was out
of order for more than 90 days then it has to be classified as NPA.
As per the RBI Master Circular, there are certain timelines specified for the whole
CDR process, it is not clear from the query as to at which stage the whole process is
and moreover the statement that CDR Committee accepted this account for
consideration but not yet given the restructuring details does not convey the stage or
progress.
Please refer paragraph (iv) on Stand Still clauses on page 18 which states that,
during pendency of the case with the CDR system, the usual asset classification
norms would continue to apply. The process of re-classification of an asset should not
stop merely because the case is referred to the CDR cell.
Please refer to Master Circular - Prudential Norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances dated July 2, 2007 issued by
RBI (can be viewed on RBI site - www.rbi.org.in)
1. Please refer to para 2.2 for the definition of 'out of order'. Under this definition, the
account is technically not 'out of order'
2. Please refer to para 4.2.5. The account should now be examined in light of this
para, which says that 'a account with few credits only needs to be handled with care' .
Since this is a trading concern and if this is the only account being operated by the
borrower, then absence of debit and credit entries for purchase and sale of goods
prima facie denotes that the business is not operative. The auditor should examine
other available documentary evidence like stock statements, inspection reports, stock
audit reports, etc. as well as enquiry with the bank officials as to the reason why there
is no operation in the account, to come to the conclusion that the account has
'inherent weakness', on the basis of which the account can be classified as NPA.
3. Knowing the reason for non-operation is very necessary since the borrower may be
having two accounts - one for stock and other for book debts or may be having an
actual operating account in some other branch of the same bank or at times may be
routing his transactions through the current account of the firm and not the cash
credit account. In all such cases, the non-operating account cannot be considered as
NPA.
At one place it is stated that the bank has accepted the request and has allowed re-
schedulement, whereas at other place it is stated that the re-schedule EMI would not
be sufficient to square off the loan by 2012.
There seems to be some technical error on the part of the bank. Assuming that the re-
schedulement has been accepted in writing by the bank, the borrower cannot be
penalized for shortfall, if any, detected later on. The shortfall can be explained to the
borrower and can be recovered separately. In my opinion, pending that, if the
borrower has paid EMI as per the rescheduled terms till December 2007, the account
cannot be treated as NPA as on 31 March 2008.
The definition of due date is defined in paragraph 2.4 of the RBI Master Circular. It
defines due date as date fixed by the bank. In the given case, it is appears that the
bank has fixed annual date for servicing interest and accordingly it has to be
considered for NPA classification.
Many banks especially private/foreign have the concept of overdraft against property
which is also financed as aworking capital product without obtaining Stock/Book debt
statements. The bank is in order of doing the same. The account can be classified as
NPA only based on record of recovery. Stock statement non receipt or negative
working capital is a non issue in this case.
NPA Classification is based on record of recovery. In this case, even though it is a
faulty appraisal, the same can be brought out in the LFAR. However classification as
NPA can only be done only if thereare overdues for more than 90 days.
From the facts given, it appears that there are apparent credit weaknesses such as
absence of primary security, dependence on collateral security for the purpose of
recovery in case of default in servicing the loan as also obvious kite flying operations
such as borrowing from other financiers for the purpose of servicing the present loan.
All the factors indicate that the borrower is in difficulties and may not be able to
service the loan for long. In such a scenario, you may take a call on the situation and
ask the branch management to classify the advance as NPA.
At the same time, if the quantum of advance is substantial, it would be better to
confirm your decision by making a visit to the borrowers' factory toverify the present
position of the production, sales, etc.as also whether his factory is really in operation.
You may also verifywhether he is operating any account with some other bank and
diverting his business to that bank. Since mere non-submission of bookdebt
statement may not be enough to classify the account as NPA particularly when he is
otherwise servicing the loan properly, it need to corroborate thedecision you arrive at
by evaluating the risk to the advance from other evidence.
My replies to your queries are as under: 1) In the instant case account was irregular
and WCDL was given before the account really became NPA. Your observation is
correct that the account is regularised by sanction of WDCL. In your case after
sanction of WCDL not only that the OCC is account is within the limit but also that the
WDCL account is also serviced. In my opinion it appears to be a case of genuine
need of the borrower andtherefore in my opinion the account can be classified as
Standard. However you need to satisfy
yourself by verifying the appraisal documents and satisfy yourself about the
genuineness of the additional loan.
In this case even the account is doing well after nursing, in my opinion, it would be
prudent not to recognise the entire income in mirror account, but account the same as
income as and when realised.
Reversal of interest during the year would be Rs.13,000/- As
per paragraph 3.2.2 on page 5 of the RBI Master circular the words used are fee,
commission and other similar income and it does not specifically say interest or
discount for the purpose of reversal for the preceding previous year. Logically it
should also include interest and discount. In any case the matter should be referred to
the HO and Central Auditors for necessary clarification as the treatment could differ
from bank to bank.
As Statutory Auditor ,you have to examine the account independently for the
F.Y.2007-08. If in your view account is NPA ,it has to be classified as NPA.Moreover
you have to reverse unrealised interest for the year 2007-08 as well as for the
previous year depending on the classification. If is was
due to error or omission in the earlier year it must be corrected retrospectively this
year but it was a conscious decision of the branch and the branch auditors and there
is enough documentation to prove that, it may not be treated as error or omission.
It is not clear from your query, whether the borrower has completed first degree in
Russia or not; however from language , we presume thathe has completed the same
& loan is utilised for said course.
In such circumstances, the first installment is due on original date & determination of
NPA date starts from that date only depending on repayment. Inour opinion, course
is recognised or not is irrelevant & pursuing another course is also irrelevant. Hence
you may determine NPA accordingly & if bank disagrees, you have a option of MOC.
1 In case the interest for 90 days is not recovered by the credits in the account, the
account becomes NPA. In the present case the partial interest is not recovered
therefore it is not NPA
2 RBI suggests to scrutinize the solitary entry at the year end to find out the
genuinely of the transaction. Thus the auditor has to scrutinize the source of the
credit entry and take appropriate view.
3.Technically the position as on 31
st
March should be considered.
4 The IRAC Norms are objective norms and there is very little scope for the
sentiments.
5. Technically the position as on 31
st
March should be considered.
An account in the nature of term loan once classified as NPA will be a standard asset
only if all arrears are cleared. In this case, it appears that arrears are not cleared
since interest from 1.4.2007 to Feb 2008 is only charged afterwards. Thus branch is
not correct in classifying the account as standard in Feb. 2008 and account is an NPA
on 31.3.2008 with date of NPA as 31.3.2007. Account status will be doubtful as on
31.3.2008.
Apparently the loan appears to be a case of evergreening, i.e., frequent re-
schedulement. RBI, in Master Circular has clarified that frequent re-schedulement is
not permissible, You could argue with the bank management on these lines and
classify the account as NPA. One thing is not quite clear from your query as to how
tha repayable amount is only Rs.20 lacs instead of Rs. 1 cr which was the original
loan amount.
The position of non performing asset is as on 31
st
March. Hence technically the
position as on that date is valid. However on practical side some people take a view
on the basis of the subsequent recovery. The auditor should take a overall view of the
operations in the account to determine whether the concession can be given.
Request you to please clarify on the following :
Previous year MOCs
The previous auditor has classified certain standard assets
as sub- standard and has suggested provisions & interest
reversal. However the branch has not made those changes
in their records as they feel they are still standard assets.
While drafting MOCs for current year, I am going to show
these as Sub-standard. My queries in relation to above are
as follows:
Q1. Whether the prudential norms are to be strictly
adhered to in framing our MOCs. For example, in term loans
which were classified by previous auditor as Sub-standard
and not re-classified by branch, there have been some
substantial collections during the current year
howeverinterest and or principal are still overdue for more
than 90 days. Branch argument is that the account is still
operating as substantial amounts have been collected and
should not be classified as NPA. In relation to this, whether
we have to go strictlyby the prudential norms (90 days
concept) or we can be little liberal to accept their argument.
Q2. If I show these accounts in MOCs and classify as Sub-
standard, whether apart from current year interest reversal,
should I also insist on interest reversal for previous year
interestsuggested in previous year MOCs the accounts of
which have already been signed.
Q3. Whether security can be a criteria for not showing an
advance as NPA say in case of housing loans backed by
security of house property, if the defaults fall in NPA
category should I show it as NPA or not show because it is
backed by security of house property whose current market
value can be more than the outstanding amount.
Q4. Once MOC is created last year and for the same
accounts if MOC is created in current year as the same has
not been re-classified by branch, will it not lead to double
provision at HO level for the same account in two different
years.
The Prudential Norms are to be strictly adhered to.
The date of the NPA will not change. After 12 months
from the date of the NPA, the account will have to be
classified as Doubtful. The interest credited to the
account but not realized has to be reversed.
As mentioned above, if the account is NPA for more
than 12 months, it should be classified as Doubtful.
The date of the NPA will be the original date as
ascertained by the previous auditor, assuming that
the classification carried out by the previous auditor is
correct as per the RBI Circular.
Once a credit facility is classified as NPA, the interest
accrued and credited to the income account in the
corresponding previous year which has not been
realized should be reversed or provided for.
Accordingly the unrealized interest of 2005-06 and
2006-07 will have to be reversed or provided for in
2007-08. This will now be classified as prior period
interest and accordingly reflected in the financial
statements or shown so by way of MOC.
Attention is also invited to para 11 of SA 710.
Reference be made to the Appendix II to this SA for
the method of reporting, if you find the same to be
applicable.
The security is not a criterion while classifying an
advance as a NPA.
As a branch auditor ensure that suitable disclosures
are made in the audit report. The Central Statutory
Auditor and the Head Office will ensure regarding the
double provision.
As per section 145 of Income Tax Act that hybrid
accounting method is not acceptable but I found that
many bank have followinghybrid accounting system.
Example :
1) All revenues are accounted for on accrual basis
except the following items, which are accounted for
on cash basis :-
- Income from merchant banking operations,
- overdue locker rent,
- interest for overdue period on bills purchased
2) All cost are accounted for on accrual basis except
the following items:
- interest payable on overdue deposits is recognised
at the time of renewal / payment thereof.
Should I qualify my report, is it material deviation?
1
The bank audit is guided by Banking Regulation Act
and Reserve Bank of India Act. There is no question
of qualifying your report on branch audit as the Bank
is free to have their policy subject to consistency and
disclosure as per AS 1.
ISSUE
1 I would like to know the meaning of, 'Check
whether negative lien is created in case
immovable assets are not registered with co-
operative societies.'
REPLY
"Letter / Undertaking forNegative Lien" is an undertaking given by
the borrower to the bank stating that at present he has not created
any lien / charge on the concerned assets and that in future, he will
not create any lien / charge on theseassets without the permission
of the bank.
ThisUndertaking is on a stamp paper, but not registered anywhere.
1 A form 3CD is provided by bank to me for branch statutory
audit wherein Annexures including annexure for FBT is not
provided. Shall a branch auditor has to certify the annexures
forming part of Tax Audit Report?
In case the Bank has not provided for the Annexure
II, Value of Fringe Benefits in terms of Section
115WC read with section 115WB, the auditor need
not on his own furnish it. However it will be advisable
that in Form No 3CA in Para no 2 and 3, suitable
disclosure is made that the said Annexure II is not
being filed.
1
Please give us the procedure to convert the data of test
format (note pad) to excel. Branch has given the loan
particulars in test format. We need to convert it into excel
to analyse the data.
2
What is Core Banking System & how it working?
3
How I have to operate the same system?
4
Which report I have to ask from bank in Core Banking
System?
5
HowI can generate the various report from CBS? There
is no such information give in our institute reference book
also.
6
I have been alloteda branch which has converted into a
CBS branch in the 3rd week of March 08. The migration
audit has not been carried out for this branch.
I would like to know what kind of qualification I should
make in my audit report.
This is a matter of Information Technology Possibly, the
system administrator will be of some help to you. It
is advisable to take permission of the branch
management to covert the data in such fashion.
In core Banking, there is a centralised server. All the
Branches are connected to this node. Effectively, the
Banking modules are from a single server for all
branches. Data also is stored in one place. As auditor you
have the advantage that critical functions of back-up and
even installation of latest rates of interest are from a
central place. However, many issues like concession and
'adjustment of rates' are at branch level. You will find
details of this in the current and previous year's issue of
background material of the WIRC. Other Regionsmay
have this but I am not aware.
The Bank will give you a user ID and password. If not,
insist on it. This gives you access to reports and 'view'
screens only and no transactions can be passed. As
auditor you need this and only system tolerance in terns
of software audit is not permitted to you. Thus you can
take our reports you want to compare with the schedules
needed to be signed by you.
This is your perogative. From the trial balance to Balance
sheet and even installments in arrears are the normally
asked reports by auditors. Depth is your right to exercise.
Go to the reports menu and select the report and press
print or screen display. Each Bank and software has
different methods of negotiation in the software.
There is no such information give in our Institute
reference book also. What you are seeking is 'hands on'
experience for which there is no book. The institute's
book has sufficient details built if you are seeking audit
checklist, etc., you need to look at private publications.
U may add ".....subject to any adjustment arising out of
reconciliation of figures after migration to CBS..." in your
audit report. However in any case, the central statutory
auditors will take care of this.