Audit Perbankan

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Western India Regional Council of The Institute of Chartered Accountants of India Compilation of Papers 2016
WESTERN INDIA REGIONAL COUNCIL OF
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
Opinions expressed in this book are those of the Contributors. Western India Regional Council
of The Institute of Chartered Accountants of India, does not necessarily concur with the same.
Published by
CA. Shruti Shah, Chairperson, Western India Regional Council of
The Institute of Chartered Accountants of India,
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Bank
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Compilation of Papers 2016 Western India Regional Council of The Institute of Chartered Accountants of India
Western India Regional Banking, Insurance &
Council 2016-17 Pension Committee 2016-17
Chairperson Chairman
CA. Shruti Shah CA. Balkishan Agarwal
Vice Chairman Convenor

CA. Hardik Shah CA. Shilpa Shinagare
Secretary Office Bearers

CA. Kamlesh Saboo CA. Kamlesh Saboo
CA. Shruti Shah
Treasurer Regional Council Members
CA. Shilpa Shinagare CA. Sarvesh Joshi
CA. Satyanarayan Mundada
Members
CA. Abhijit Kelkar CA. Sushrut Chitale
CA. Aniket Talati CA. Priyam Shah
CA. Balkishan Agarwal
CA. Drushti Desai Ex-Officio Member
CA. Lalit Bajaj CA. Anil Bhandari
CA. Manish Gadia
CA. Pradeep Agrawal
CA. Priti Savla
CA. Priyam Shah
CA. Purushottam Khandelwal
CA. Rakesh Alshi
CA. Sandeep Jain
CA. Sarvesh Joshi
CA. Satyanarayan Mundada
CA. Sushrut Chitale
CA. Umesh Sharma
CA. Vikrant Kulkarni
CA. Vishnu Agarwal
Ex-Officio Members
CA. Anil Bhandari
CA. Jay Chhaira
CA. Prafulla Chhajed
CA. Tarun Ghia
CA. Nihar Jambusaria
CA. N. C. Hegde
CA. Dhiraj Khandelwal
CA. Mangesh Kinare
CA. Dhinal Shah
CA. Shiwaji Zaware
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Foreword
The Indian banking industry is a very well-regulated industry. It undergoes
regeneration frequently due to robust growth, full automation, newer and complex
transactions and ever changing regulations.
To regulate business environment, the Reserve Bank of India, Banking Regulator,

has been issuing notifications and circulars on a regular basis. Many of these have
a direct bearing on the financial statements of the banks, which has significant
implications towards greater transparency in and credibility of the financial statements. Our fraternity is
expected to be abreast of all these notifications in performing the attest function.
In the above background, the role and responsibilities of Chartered Accountants doing the audit of banks
have grown manifold. Added to this, the limited time allowed for completion of audit is increasing the
stress on auditors in discharging their professional functions.
However, our Chartered Accountants with their strong fundamentals and updated knowledge are able
to carry out this critical task in a professional manner to the satisfaction of regulators, Government and
the stakeholders, while also completing the audit within the stringent time limits imposed by the banks.
This professional conduct by our Chartered Accountants exhibits their extraordinary abilities to face
challenges head-on when necessary.
This Bank Branch Audit Compilation would provide an opportunity to the Chartered Accountants to have
an overview of the best practices in the area of audit of Bank Branches. The papers presented here will
apprise bank auditors of various emerging and newly established concepts in the area of Bank Branch
Audit and thereby sustaining public confidence in & trustworthiness of financial statements and the
reputation of the accountancy profession.
I congratulate CA. Shriniwas Joshi, Past Chairman of WIRC and Past Central Council Member, for his
valuable guidance. I also congratulate CA. Balkishan Agarwal, Chairman of Banking, Insurance and
Pension Committee, WIRC for his untiring efforts in bringing out this publication in record time. I thank
the learned contributors for their time and insights resulting in this scholarly compilation.
CA. Shruti Shah

Chairperson, WIRC
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Preface
In an economy experiencing a growth rate of above 7%, having major of its population
below the age of 35, with lot of new startup ventures buzzing the financial street, it
is anticipated that banking sector would be buoyant. Yet the recent decline in banks
share prices has investors on the edge. The major has been attributed to the huge
level of bad loans and non-performing assets in the banks portfolio entrusting a larger
responsibility to our profession being auditors to these banks. It needs no reiteration
that banking institutions are the lifeline of any economy and in case anything going
wrong with such vital segment, the whole economy of the country would be jeopardized.
In an era of globalization, every bank, whether public or private, is trying to convert itself into a financial power
house and provide large number of para-banking services through their various subsidiaries or joint ventures
instead of being only a banking solution provider.
We as auditors play a vital role in maintaining market confidence in these institutions. In the case of the
banking industry, this role is particularly relevant to financial stability given banks financial intermediation
function within the economy as a whole. Core Principle 27 of the Basel Committees Core Principles for
Effective Banking Supervision (September 2012) states that the supervisor determines that banks and
banking groups maintain adequate and reliable records, prepare financial statements in accordance with
accounting policies and practices that are widely accepted internationally and annually publish information that
fairly reflects their financial condition and performance and bears an independent external auditors opinion.
Bank Branch Audit Series 2016 is a book, guide and ready reckoner for our members, students and all
persons involved in auditing of bank branches. Over a period it has been observed that the audit fraternity is
grappling with the fear of unknown events due to rapid changing gears of banking development, regulations
and audit aspects. In this book, an attempt is made to cover major practical aspects and problems involved
during audit of bank branches. This book integrates updates and amendments, which I hope will be useful
to the readers of this book.
I personally and on behalf of the Committee, would like to take an opportunity to express gratitude to our Past
WIRC Chairman CA. Sunil Patodia and current Chairperson CA. Shruti Shah, the Office bearers and Regional
Council Members for their immense confide by giving this responsibility. Words are powerless to show my
gratitude towards our eminent writers, as noted, who took efforts in making this book a more of worth for
its users. I would also like to thank CA. Shriniwas Joshi, Past Chairman, WIRC, CA. Kanhaiya Agarwal and
CA. Parul Saraf for devoting their valuable time and support in compilation of this edition.
Utmost care has been taken while compiling this edition to avoid any errors but I do believe to err is human,
therefore I will be grateful to those who will be kind enough to give me their feedback and point out error(s),
if any, that may have unknowingly crept in while authoring this series.
This book is a tribute to our CA Profession who has served in an Advisory Role and also as Auditors in
Banking Industry with extreme diligence and integrity.
CA. Balkishan Agarwal

Chairman, Banking, Insurance &
Pension committee of WIRC of ICAI
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Bank Branch Audit Compilation of Papers
Seminar Series 2016
INDEX
S. Subject Pg.
No. No.
1. Current Developments in Banking Industry.................................................................... 1

CA. Shriniwas Y. Joshi
2. Overview of Basel III and CRAR.................................................................................... 5

CA. Mrudul Gokhale
3. Bank Branch Audit Planning......................................................................................... 13

CA. Uday Sathaye
4. Verification Advances (other than Agricultural Advances)............................................ 23

CA. I. B. Sonawalla
5. Audit of Agricultural Advances ................................................................................... 31

CA. Saurabh S. Peshwe
6. Treatment of recoveries in NPA post Balance Sheet date.......................................... 37

CA. Sandeep Welling
7. Restructuring of Debt .................................................................................................. 41

CA. Gautam Shah
8. Income Recognition and Asset Classification (IRAC) Norms ..................................... 49

CA. Parag Hangekar
9. Long Form Audit Report............................................................................................... 55

CA. Ketan Saiya
10. Income and Expenditure Audit .................................................................................... 61

CA. Ramesh A. Shetty
11. Sensitive Accounts and Housekeeping Accounts........................................................ 65

CA. Nilesh Joshi
12. Bank Branch Audit in CBS Environment...................................................................... 69

CA. Dr. Mitil Chokshi & CA. Kalpen Chokshi
13. Audit Reports and Certificates ................................................................................... 73

CA. Abhay V. Kamat
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S. Subject Pg.
No. No.
14. Procedural Aspects of compliance verification of Ghosh-Jilani

Committee recommendation by Branch Auditor........................................................... 77
CA. Dhananjay Gokhale
15. Tax Audit of the Branch of the Bank ........................................................................... 87

CA. Abhay V. Kamat
16. Audit of Foreign Exchange Transactions

in Bank Branch Audit.................................................................................................... 99
CA. Rahul Joglekar
17. Frauds in Banking Sector........................................................................................... 113

CA. Nitant P. Trilokekar
18. Accounting Standards Applicable to Bank Branches................................................. 121

CA. Abhijeet Sanzgiri
19. Important Circulars for Branch Audit March 31, 2016............................................... 129
CA. Sandeep Welling
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Current Developments in Banking Industry
CURRENT DEVELOPMENTS IN
BANKING INDUSTRY
CA. Shriniwas Y. Joshi
I. INTRODUCTION provision on newly restructured advances

The Global Financial stability has witnessed resulted into Public Sector Banks posting
serious threats. Recoveries in Financial ` 12,000 crore losses only in the third quarter
Markets being connected to recovery in itself. And the frightening thing is that, the
Global Economies, there remains serious provision is allowed to be spread over several
challenges regarding pace, pattern and timing quarters, which means more pain is in store in
for wishful thinking on early relief. Advanced near future.
Economies as well as Emerging Economies are
Consequently, return on asset, an indicator
facing weakening prospects of growth, falling
of financial viability did not improve in 2014-
commodity prices and strengthening of Dollar.
15 and declined in 2015-16 and the quality
Indian economy has fared well when the world of asset of banks deteriorated substantially,
is facing serious financial crises. The credit for especially of the public sector banks, with
the same goes to strict vigilance by Reserve the rise in proportion of stressed assets. It is
Bank of India, control on inflation and robust feared that about one third of the corporate
capital inflows. sector borrowings from banks to be stressed,
totalling to 21% of bank credit, of which only
Indian banking sector, however, experienced a about half has been recognized currently as
slowdown in terms of demand for bank credit. impaired in the books. The serious difference
The reasons thereof being those who were in of opinion between bankers and potential
need of funds were not bankable and banks buyers (Asset Reconstruction Companies) on
refused to take additional risk considering asset valuation has been the main stumbling
their mounting bad loans and those who block in the banking system trying to reduce
were bankable were not in a mood to expand its bad loans and revive those assets whose
capacities and demand higher loans. Also, values are fast deteriorating.
another reason for lower bank credit was
exploration of the other avenues for raising A number of regulatory measures were taken
funds by the corporate. However, asset quality by RBI to help the banking sector to face the
in the retail segment continued to be healthy long term and short term challenges. The
and stable. effect of such measures is likely to be visible
in the year to come.
Profit of the banking sector in the year
2014-15 was more not because of growth in II. FRAMEWORK FOR REVITALISING
Income but due to decline in the growth of DISTRESSED ASSETS
operating expenses. In the year 2015-16, the
Reserve Bank of India announced measures
banks showed huge decline in profits or even
aimed at instituting a mechanism for rectification,
losses due to substantially higher provisioning
restructuring and recovery of stressed assets in
for bad loans. Severe downturn in global
January 2014. It required recommendation of
commodity prices, inability of the corporate to
corrective action plan by Joint Lenders Forum
sell non-core assets and stricter identification
(JLF) for distressed assets. It also required
of stressed assets as per new RBI norms
banks to consider periodic re-financing of
resulted in faster deterioration in asset quality
project loan subject to certain conditions, fixing
in the first nine months of the current fiscal.
of longer repayment schedules for long term
In fact, provisioning on old NPAs and failing projects, extension of date of commencement
CDRs and requirement of higher percentage of commercial operations for infrastructure
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loans. The guidelines providing for conversion of another ` 1,10,000 Crores from the market by
debt into equity (Strategic Debt Restructuring), that date. In spite of this , banks are expected
consideration of change of management, to remain under pressure on the capital front,
classification of wilful defaulters and non-co- due to additional requirements towards the
operative borrowers, conditions for sale of capital conservation buffer, the counter-cyclical
financial assets to securitization companies and capital buffer and supervisory capital, apart
credit risk management including sensitivity tests/ from supporting business growth.
scenario analysis, viability study etc., were also
put in place. The fourth recommendation was about
addressing the rising NPA levels of banks in
RBI allowed banks to raise funds via long term infrastructure and core sectors. The action
bonds for financing to infrastructure sector. plan included expeditious issue of pending
For these, they do not have to meet the Cash approvals/permits to steel, power and road
Reserve Ratio, Statutory Liquidity Ratio or sectors, making fuel & electricity available
Priority Sector Norms. This will help banks to such projects on long term basis and
to boot infrastructure and Housing Financing. adjustment of duties.
Banks are now also allowed to refinance core
sector projects every five years for four times, The fifth recommendation was regarding
as per 5/25 rule, helping the banks to address autonomy to banks in decision making with
their Asset liability mismatch. accountability for the actions.
The sixth recommendation was regarding new
III. INDRADHANUSH (A SEVENTH POINT frame-work of Key Performance Indicators
ACTION PLAN) (KPIs) for measuring the performance of Public
Department of Financial Services, Ministry of Sector Banks indicating efficiency in use of
Finance, announced plan for revamp of Public capital and diversification of business, NPA
Sector Banks on 14th August, 2015. Management, Financial inclusion and strategic
initiatives. The Government, for the first time,
This plan recommended separation of post
declared that it was considering ESOPs for top
of Chairman and Managing Director of
management of Public Sector Banks.
Public Sector Banks. It recommended that
Managing Director will be Executive Director The seventh recommendation was regarding
and Chairman will be non-executive Director. Governance reforms for Public Sector Banks.
The process of selection of non-official / Strengthening of Risk Management Practices,
Independent Director was revamped and was policy of no interference was envisaged.
made more transparent. This measure was
to improve efficiency in the decision making IV. MONETARY POLICY TRANSMISSION
process of the banks boards. Reserve Bank of India has changed the
The second recommendation was about guidelines for Base Rate Calculation and
formation of Bank Board Bureau replacing advised banks to use marginal cost of funds
Appointment Board for appointment of whole- instead of average cost of funds to calculate
time Directors as well as non-executive the Base Rate. This move is supposed to
Chairmen of Public Sector Banks. remove the stickiness of the Base Rate
System. Banks have been allowed to review
The third recommendation was regarding the base rate more frequently with the
fresh plan for adequate capitalization of Public approval of the Boards. The base rate will
Sector Banks for meeting Basel-III norms. be the minimum rate for all loans and banks
Government has decided to infuse additional are not permitted to lend below Base Rate
capital of ` 1,80,000 Crores by F.Y. 2019. applicable on the date of sanction. However,
The capital infusion would be based on their DRI advances, loan to employees and loan
quantitative and qualitative performance against bank deposits could be priced without
indicators. The banks are also required to raise reference to the base rate.
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Based on the recommendation of the expert providing stricter norms for provisioning and
committee to revise and strengthen the asset classification. Special category of Assets
monetary policy framework, the Reserve Bank as Special Mention Accounts (SMAs) was
adopted a flexible inflation targeting approach recommended and credit rating was made
in monetary policy formulation to make it more compulsory for deposit taking NBFCs.
transparent and predictable.
VIII. CONVERSION OF URBAN CO-OPERATIVE
V. ADOPTION OF STRINGENT CAPITAL AND BANKS
LIQUIDITY STANDARDS Issuance of fresh licences to New Urban Co-
On recommendation of Basel Committee on operative Banks was suspended. The weaker
Banking Supervision (BCBS), the Reserve banks were allowed to be taken over by strong
Bank of India made Liquidity Coverage Ratio ones, to protect the interest of the depositors
(LCR) operational as a part of Basel-III frame and to improve the Financial soundness of these
work w.e.f. 1st January, 2015. The investments banks, considering the important role these
under Statutory Liquidity Ratio (SLR) were banks are playing in extending financial inclusion.
made eligible to be classified as high quality
liquid assets. The liquidity monitoring tools and As per recommendation of High Powered
liquidity disclosures were also recommended. Committee of UCBs, a UCB with business
of ` 20,000 crores or more, was allowed
Reserve Bank of India stipulated higher Capital to convert itself to commercial bank. Other
to Risk-Weighted Assets Ratio (CRAR) than UCBs were recommended for voluntary
what was recommended by Basel Committee conversion to Small Finance Banks (SFBs).
on Banking Supervision (BCBS). The fresh licences for conversion into bank
was recommended for issue to financially
VI. TOO-BIG-TO-FAIL sound and well managed co-operative credit
Financial Stability Board (FSB) has issued the societies having minimum track record of
final Total Loss-Absorbing Capacity (TLAC) 5 years. The appropriate set of incentives was
Standard for Global Systemically Important to be recommended by RBI to existing bank to
Banks (G-SIBs) to deal with Too-Big-To-Fail open branches in unbanked areas. Accordingly,
for Banks. To avoid exposing public funds to RBI has made it compulsory to PSBs, to open
loss, these standards are design to ensure that at least 25% of the new branches every year
G-SIBs would have sufficient loss absorbing in unbanked areas of the country.
and recapitalization capacity.
IX. FINANCIAL INCLUSION
RBIs contagion analysis revealed that the To re-affirm, RBIs commitment to financial
Indian banking system could potentially lose inclusion, the licensing of two universal banks
close to 50% of its total Tier-1 capital under the was done in August 2014, one to infra financier
joint Solvency-Liquidity condition in the event of IDFC and another to micro lender Bandhan
a particular bank triggering a contagion. Financial Services. Ten differential licences for
The identification of Domestic-Systematically payments banks and eleven licences for small
Important Banks (D-SIBs) was done and finance banks were mooted. Priority sector
framework for their regulatory treatment has guidelines were revised with respect to small
been designed. Two largest banks, one from and marginal farmers and micro enterprises
Private Sector and one from Public Sector, and KYC guidelines were simplified for low
were identified in August 2015 to meet the risk customers. RBI has permitted the use
additional Tier-I capital requirement. of Business Correspondents (BCs) to further
increase financial inclusion.
VII. SHADOW BANKING SECTOR
X. WAY FORWARD
NBFCs are considered as shadow banking
sector. NBFCs Regulations were strengthen Small Banks will be promoted to connect to
small customers. Foreign Direct Investment
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(FDI) limit in private sector banks will be transparency and decentralization in decision
increased. Government holding in Public Sector making.
Banks would diminish.
Speedy risk redressal systems, passing
Risk mitigation strategies and effective of bankruptcy code, financial literacy of
monitoring systems would be placed in customers, trade receivable exchange to
banking industry. Upgradation of technology facilitate small enterprises to extend credit,
infrastructure and new ways of banking using land assets as collaterals, extension of
such as Mobile Banking, with appropriate benefits of PMs Jan Dhan Yojana by making
safeguards against frauds would be banking transaction easy and accessible to
encouraged. Unified payment interface will be financially weaker section of the society are
introduced to give greater flexibility in transfer some of the initiatives which are expected to
of funds. materialise in the near future.
Flexibility in fixing compensation for higher All this makes the reforms in Indian Banking
management of PSBs would be allowed for industry very interesting and far reaching
attracting right talent. Steps would be taken and makes RBI Governor Raghuram Rajans
by RBI to improve efficiency and governance promise of dramatic remaking of the countrys
in public sector banks and to introduce banking sector come true.
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Overview Of Basel Iii And Crar
OVERVIEW OF BASEL III AND CRAR

CA. Mrudul Gokhale
The risk regulatory landscape is constantly evolving Capital Buffers: Introduction of Capital
and undergoing numerous changes. Over the last Conservation Buffer 2.5% of common equity
few years, risk mitigation has remained a top priority in Tier 1 capital and counter cyclical buffer of
for all financial institutions and this trend is set to get 0%-2.5% of Risk Weighted Assets
stronger as regulators across geographies continue
Improvement in Risk Management Framework
to become more proactive in ensuring greater
stability in the banking system. Liquidity: Introduction of liquidity coverage
ratio with aim to hold more high-quality; short-
The Capital Adequacy Ratio is a thermometer of
term assets to guard against a run on a bank
Banks health. Capital Adequacy can indicate the during 30 days of acute market stress. This
capacity of the Banks ability to absorb the possible new rule may increase liquidity charges for a
losses. banks derivative trading products, which will
BCBS had issued a comprehensive reform package affect corporate treasurers managing global
entitled Basel III: A global regulatory framework businesses and foreign currency transactions.
for more resilient banks and banking systems in Leverage Ratio
December 2010, with the objective to improve the
banking sectors ability to absorb shocks arising from Net Stable Funding Ratio (NSFR): Beginning
financial and economic stress, whatever the source, in 2018, this ratio will encourage banks to fund
thus reducing the risk of spillover from the financial their activities with what is defined as high-
sector to the real economy. It seeks to eliminate quality liquid assets, such as cash, government
weaknesses in Basel II which were noticed during securities or marketable securities traded on
financial crisis of 2008. large, highly liquid markets, to ensure banks
will be able to withstand market shocks.
Basel III, akin to Basel II, has three mutually
reinforcing pillars as follows: An attempt has been made here to highlight main
initiatives under Basel III having major impact on
Pillar 1: Minimum Regulatory Capital Requirements banking industry.
based on Risk Weighted Assets (RWAs): Maintaining
Reserve Bank has issued Guidelines based on the
capital calculated through credit, market and
Basel III reforms on capital regulation on May 2, 2012,
operational risk areas.
to the extent applicable to banks operating in India.
Pillar 2: Supervisory Review Process: Regulating The Basel III capital regulation has been implemented
tools and frameworks for dealing with peripheral from April 1, 2013 in India in phases and it will be fully
risks that banks face. implemented as on March 31, 2019.
Pillar 3: Market Discipline: Increasing the Banks are required to maintain a minimum Pillar 1
disclosures that banks must provide to increase the Capital to Risk Weighted Assets Ratio (CRAR) of 9%
transparency of banks on an on-going basis (other than capital conservation
buffer and counter cyclical capital buffer etc.)
Key aspects of Basel III framework are:
Common Equity Tier 1 (CET1) capital must be at
Capital: Increase in common equity capital least 5.5% of Risk Weighted Assets (RWAs). Tier 1
requirements with increase in Tier 1 capital. capital must be at least 7% of RWAs on an ongoing
Tier 1 capital can no longer include hybrid basis. Thus, within the minimum Tier 1 capital,
capital instruments. Elimination of Tier 3 capital. additional Tier 1 capital can be admitted maximum
Improving the quality of regulatory capital at 1.5% of RWAs.
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In addition to the minimum Common Equity Tier 1 the portfolio and counterparty levels is one element
capital of 5.5% of RWAs, banks are also required of a robust limit monitoring system. Banks must
to maintain a capital conservation buffer (CCB) of take account of large or concentrated positions,
2.5% of RWAs in the form of Common Equity Tier including concentrations by groups of related counter
1 capital. parties, by industry, by market, customer investment
strategies, etc.
Under Pillar 1, the Basel III framework continues to
offer the three distinct options for computing capital Migration to advanced approaches for credit risk can
requirement for credit risk and three other options for be done only after approval from the Reserve Bank
computing capital requirement for operational risk, of India.
albe it with certain modifications / enhancements.
These options for credit and operational risks are Capital Charge for Market Risk
based on increasing risk sensitivity and allow banks Market risk is defined as the risk of losses in on-
to select an approach that is most appropriate to balance sheet and off-balance sheet positions
the stage of development of banks operations. The arising from movements in market prices. Banks are
options available for computing capital for credit required to manage the market risks in their books
risk are Standardised Approach, Foundation Internal on an ongoing basis and ensure that the capital
Rating Based Approach and Advanced Internal requirements for market risks are being maintained
Rating Based Approach. The options available for on a continuous basis, i.e., at the close of each
computing capital for operational risk are Basic business day.
Indicator Approach (BIA), The Standardised Approach The capital charge for specific risk is designed to
(TSA) and Advanced Measurement Approach (AMA). protect against an adverse movement in the price of
an individual security owing to factors related to the
Capital Charge for Credit Risk individual issuer. The capital requirements for general
Under the Standardised Approach, the rating market risk are designed to capture the risk of loss
assigned by the eligible external credit rating arising from changes in market interest rates.
agencies will largely support the measure of credit The Basel Committee has suggested two
risk. The Reserve Bank has identified the external broad methodologies for computation of capital
credit rating agencies that meet the eligibility criteria charge for market risks. One is the standardised
specified under the revised Framework. Banks may method and the other is the banks internal risk
rely upon the ratings assigned by the external credit management models method. As banks in India are
rating agencies chosen by the Reserve Bank for still in a nascent stage of developing internal risk
assigning risk weights for capital adequacy purposes management models, it has been decided by RBI
as per the mapping furnished in these guidelines. that, to start with, banks may adopt the standardised
method.
Detailed guidelines have been specified by RBI
for various types of exposures including CRE, Under the standardised method there are two
securitisation, off-balance sheet, credit default swap principal methods of measuring market risk, a
positions etc. Various measures adopted by banks maturity method and a duration method. As
for credit risk mitigation are being considered while duration method is a more accurate method of
evaluating Risk Weighted Assets. It is necessary measuring interest rate risk, it has been decided
for banks to have in place counterparty credit risk to adopt standardised duration method to arrive at
management policies, processes and systems. the capital charge. Accordingly, banks are required
The measurement of CCR must include monitoring to measure the general market risk charge by
daily and intra-day usage of credit lines. The bank calculating the price sensitivity (modified duration) of
must measure current exposure gross and net of each position separately.
collateral held where such measures are appropriate
and meaningful (e.g., OTC derivatives, margin Capital Charge for Operational Risk
lending, etc.) Measuring and monitoring peak Operational risk is defined as the risk of loss
exposure or potential future exposure (PFE), both resulting from inadequate or failed internal
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processes, people and systems or from external (global position) as well as at the consolidated level,
events. This definition includes legal risk, but the ICAAP should be prepared, on a solo basis, at
excludes strategic and reputational risk. Legal every tier for each banking entity within the banking
risk includes, but is not limited to, exposure to group, as also at the level of the consolidated bank
fines, penalties, or punitive damages resulting from (i.e., a group of entities where the licensed bank is
supervisory actions, as well as private settlements. the controlling entity). This requirement would also
apply to the foreign banks which have a branch
The Basel III Framework provides that internationally presence in India and their ICAAP should cover their
active banks and banks with significant operational Indian operations only. The ICAAP should from an
risk exposures are expected to use an approach integral part of the management and decision-making
that is more sophisticated than the Basic Indicator culture of a bank. The ICAAP should be forward
Approach and that is appropriate for the risk profile looking in nature. The management of a bank shall
of the institution. However, to begin with, banks in develop and maintain an appropriate strategy that
India shall compute the capital requirements for would ensure that the bank maintains adequate
operational risk under the Basic Indicator Approach. capital commensurate with the nature, scope, scale,
Reserve Bank will review the capital requirement complexity and risks inherent in the banks on-
produced by the Basic Indicator Approach for general balance-sheet and off-balance-sheet activities, and
credibility, especially in relation to a banks peers and should demonstrate as to how the strategy dovetails
in the event that credibility is lacking, appropriate with the macro-economic factors.
supervisory action under Pillar 2 will be considered
Pillar 2: Supervisory Review Process (SRP) Pillar 3: Market Discipline
envisages the establishment of suitable risk The aim is to encourage market discipline by
management systems in banks and their review developing a set of disclosure requirements which
by the supervisory authority. Pillar 2 also requires will allow market participants to assess key pieces
the supervisory authorities to subject all banks to of information on the scope of application, capital,
an evaluation process, hereafter called Supervisory risk exposures, risk assessment processes and
Review and Evaluation Process (SREP), and to hence, the capital adequacy of the institution.
initiate such supervisory measures on that basis, as Pillar 3 disclosures as introduced under Basel III
might be considered necessary. have become effective from July 1, 2013.
Banks should have a process for assessing their Market discipline can contribute to a safe and sound
overall capital adequacy in relation to their risk banking environment. Hence, non-compliance
profile and a strategy for maintaining their capital with the prescribed disclosure requirements would
levels. Supervisors should review and evaluate attract a penalty, including financial penalty. It is
banks internal capital adequacy assessments recognised that the Pillar 3 disclosure framework
and strategies, as well as their ability to monitor does not conflict with requirements under accounting
and ensure their compliance with the regulatory standards, which are broader in scope. The
capital ratios. Supervisors should take appropriate disclosures should be subjected to sufficient scrutiny
supervisory action if they are not satisfied with the (e.g., internal control assessments, etc.) to satisfy
result of this process. Supervisors should seek to the validation issue. Pillar 3 disclosures will not be
intervene at an early stage to prevent capital from required to be audited by an external auditor, unless
falling below the minimum levels required to support specified.
the risk characteristics of a particular bank and
should require rapid remedial action if capital is not A bank should decide which disclosures are
maintained or restored. relevant for it based on the materiality concept.
Information would be regarded as material, if
Every bank is required to have an ICAAP its omission or misstatement could change or
encompassing firm wide risk profile. Reckoning influence the assessment or decision of a user
that the Basel II framework is applicable to all relying on that information for the purpose of making
commercial banks (except the Local Area Banks and economic decisions. This definition is consistent
the Regional Rural Banks), both at the solo level with International Accounting Standards and with
Bank
Branch 7
Audit
the national accounting framework. The Reserve minimum, must be disclosed on banks website. If
Bank does not consider it necessary to set specific a bank finds it operationally inconvenient to make
thresholds for disclosure as the user test is a useful these disclosures along with published financial
benchmark for achieving sufficient disclosure. results / statements, the bank must provide in these
However, with a view to facilitate smooth transition financial results / statements, a direct link to where
to greater disclosures as well as to promote greater the Pillar 3 disclosures can be found on the banks
comparability among the banks Pillar 3 disclosures, website. The Pillar 3 disclosures should be made
the materiality thresholds have been prescribed for concurrent with publication of financial results /
certain limited disclosures. statements.
The Reserve Bank believes that the requirements In order to ensure comparability of the capital
set out under disclosure requirement strike adequacy of banks across jurisdictions, it is
an appropriate balance between the need for important to disclose details of items of regulatory
meaningful disclosure and the protection of capital and various regulatory adjustments to it.
proprietary and confidential information. Proprietary Further, to improve consistency and ease of use of
information encompasses information (for example disclosures relating to the composition of capital and
on products or systems), that if shared with to mitigate the risk of inconsistent reporting format
competitors would render a banks investment undermining the objective of enhanced disclosures,
in these products/systems less valuable, and banks across Basel member jurisdictions are
hence would undermine its competitive position. required to publish their capital positions according
Information about customers is often confidential, to common templates.
in that it is provided under the terms of a legal
agreement or counterparty relationship. This has Strengthening of loss absorption capacity of
an impact on what banks should reveal in terms capital by banks by introduction of Capital
of information about their customer base, as well Conservation Buffer, Leverage Ratio and Counter
as details on their internal arrangements, for Cyclical Capital Buffer.
instance methodologies used, parameter estimates,
data etc. Banks should have a formal disclosure Capital Conservation Buffer Framework
policy approved by the Board of directors that The capital conservation buffer (CCB) is designed
addresses the banks approach for determining to ensure that banks build up capital buffers during
what disclosures it will make and the internal normal times (i.e., outside periods of stress) which
controls over the disclosure process. In addition, can be drawn down as losses are incurred during
banks should implement a process for assessing a stressed period. When buffers have been drawn
the appropriateness of their disclosures, including down, one way banks should look to rebuild them
validation and frequency. is through reducing discretionary distributions of
earnings. This could include reducing dividend
Frequency of Disclosures: Banks are required to payments, share buybacks and staff bonus
make Pillar 3 disclosures at least on a half yearly payments. Banks may also choose to raise
basis, irrespective of whether financial statements new capital from the market as an alternative to
are audited, with the exception of following, where conserving internally generated capital.
quarterly disclosures are required:
The capital conservation buffer can be drawn down
(i) Table DF-2: Capital Adequacy; only when a bank faces a systemic or idiosyncratic
(ii) Table DF-3: Credit Risk: General Disclosures stress. A bank should not choose in normal times
for All Banks; and to operate in the buffer range simply to compete
with other banks and win market share. This aspect
(iii) Table DF-4: Credit Risk: Disclosures for would be specifically looked into by Reserve Bank of
Portfolios Subject to the Standardised India during the Supervisory Review and Evaluation
Approach. Process.
All disclosures must either be included in a banks Banks are required to maintain a capital conservation
published financial results / statements or, at a buffer of 2.5%, comprised of Common Equity Tier
Bank
8 Branch
Audit
1 capital, above the regulatory minimum capital Basel III, a simple, transparent, non-risk based
requirement of 9%. Capital distribution constraints leverage ratio has been introduced. The leverage
will be imposed on a bank when capital level falls ratio is calibrated to act as a credible supplementary
within this range. However, they will be able to measure to the risk based capital requirements and
conduct business as normal when their capital levels is intended to achieve the following objectives:
fall into the conservation range as they experience
losses. Therefore, the constraints imposed are (a) Constrain the build-up of leverage in the
related to the distributions only and are not related banking sector to avoid destabilising
to the operations of banks. deleveraging processes which can damage
Basel III minimum capital conservation standards the broader financial system and the economy;
apply with reference to the applicable minimum CET and
1 capital and applicable CCB. Therefore, during the
(b) Reinforce the risk-based requirements with a
Basel III transition period, banks are required to
simple, non-risk based backstop measure.
maintain CCB ratio as mentioned in the Table below,
at various levels of the Common Equity Tier 1 capital The Basel III leverage ratio is defined as the capital
ratios: measure (the numerator) divided by the exposure
measure (the denominator), with this ratio expressed
Minimum capital conservation standards for
individual bank as a percentage
Common Equity Tier 1 Ratio after including the Capital Measure
current periods retained earnings Leverage Ratio = ----------------------------
As on As on As on Minimum Exposure Measure
March 31, March 31, March 31, Capital
2016 2017 2018 Conservation The Basel Committee will use the revised framework
Ratios for testing a minimum Tier 1 leverage ratio of 3%
(expressed during the parallel run period up to January 1,
as % of 2017. The Basel Committee will continue to track
earnings) the impact of using either Common Equity Tier 1
5.5% - 5.5% - 5.5% - 100% (CET-1) or total regulatory capital as the capital
5.65625% 5.8125% 5.96875%
measure for the leverage ratio. The final calibration,
>5.65625% >5.8125% >5.96875% 80%
and any further adjustments to the definition, will be
- 5.8125% - 6.125% - 6.4375%
completed by 2017, with a view to migrating to a
>5.8125% >6.125% - >6.4375% 60%
Pillar 1 treatment on January 1, 2018.
- 5.96875% 6.4375% - 6.90625%
>5.96875% >6.4375% >6.90625% 40% Currently, Indian banking system is operating at a
- 6.125% - 6.75% - 7.375% leverage ratio of more than 4.5%.
>6.125% >6.75% >7.375% 0%
The capital measure for the leverage ratio is the
Leverage ratio framework Tier 1 capital of the risk-based capital framework,
An underlying cause of the global financial crisis was taking into account various regulatory adjustments /
the build-up of excessive on- and off-balance sheet deductions and the transitional arrangements.
leverage in the banking system. In many cases,
banks built up excessive leverage while apparently The exposure measure for the leverage ratio should
maintaining strong risk-based capital ratios. During generally follow the accounting value, subject to the
the most severe part of the crisis, the banking sector following:
was forced by the market to reduce its leverage in a
On-balance sheet, non-derivative exposures
manner that amplified downward pressure on asset
are included in the exposure measure
prices. This deleveraging process exacerbated the
feedback loop between losses, falling bank capital net of specific provisions or accounting
and contraction in credit availability. Therefore, under valuation adjustments (e.g. accounting credit
Bank
Branch 9
Audit
valuation adjustments, e.g. prudent valuation However, depending on the CCCB indicators, the
adjustments for AFS and HFT positions); banks may be advised to build up requisite buffer in
a shorter span of time.
netting of loans and deposits is not allowed
The credit-to-GDP gap shall be the main indicator
Unless specified differently, banks must not
in the CCCB framework in India. However, it shall
take account of physical or financial collateral,
not be the only reference point and shall be used
guarantees or other credit risk mitigation
in conjunction with GNPA growth. The Reserve
techniques to reduce the exposure measure.
Bank of India shall also look at other supplementary
In a nutshell, banks total exposure measure is the indicators for CCCB decision such as incremental
sum of the following exposures: C-D ratio for a moving period of three years (along
with its correlation with credit-to-GDP gap and GNPA
(a) On-balance sheet exposures;
growth), Industry Outlook (IO) assessment index
(b) Derivative exposures; (along with its correlation with GNPA growth) and
interest coverage ratio (along with its correlation with
(c) Securities financing transaction (SFT) credit-to-GDP gap). While taking the final decision
exposures; and
on CCCB, the Reserve Bank of India may use its
(d) Off-balance sheet (OBS) items on taking into discretion to use all or some of the indicators along
account CCF factor with the credit-to-GDP gap.
The Basel Committee is monitoring banks leverage The CCCB requirement shall increase linearly from
data on a semi-annual basis in order to assess the 0 to 20 basis points when credit-to-GDP gap moves
design and calibration of the leverage ratio over a from 3 to 7 percentage points. Similarly, for above
full credit cycle and for different types of business 7 and up to 11 percentage points range of credit-to-
models. The Committee will also closely monitor GDP gap, CCCB requirement shall increase linearly
accounting standards and practices to address any from above 20 to 90 basis points. Finally, for above
differences in national accounting frameworks that 11 and up to 15 percentage points range of credit-
are material to the definition and calculation of the to-GDP gap, the CCCB requirement shall increase
leverage ratio. The public disclosure requirements of linearly from above 90 to 250 basis points. However,
leverage ratio have begun from January 1, 2015 and
if the credit-to-GDP gap exceeds 15 percentage
the Basel Committee will monitor the impact of these
points, the buffer shall remain at 2.5 per cent of the
disclosure requirements.
RWA.
Countercyclical Capital Buffer Framework Discretion shall be with the Reserve Bank of India
The aim of the Countercyclical Capital Buffer (CCCB) for operating the release phase of CCCB. Further,
regime is twofold. Firstly, it requires banks to build the entire CCCB accumulated may be released at
up a buffer of capital in good times which may be a single point in time but the use of the same by
used to maintain flow of credit to the real sector banks will not be unfettered and will need to be
in difficult times. Secondly, it achieves the broader decided only after discussion with the Reserve Bank
macro-prudential goal of restricting the banking of India.
sector from indiscriminate lending in the periods of
excess credit growth that have often been associated For all banks operating in India, CCCB is required
with the building up of system-wide risk. to be maintained on a solo basis as well as on
consolidated basis. All banks operating in India (both
The CCCB has to be maintained in the form of foreign and domestic banks) should maintain capital
Common Equity Tier 1 (CET 1) capital only, and the for Indian operations under CCCB framework based
amount of the CCCB may vary from 0 to 2.5% of
on their exposures in India. Banks incorporated in
total risk weighted assets (RWA) of the banks.
India having international presence have to maintain
The CCCB decision would normally be pre- adequate capital under CCCB as prescribed by the
announced by RBI with a lead time of 4 quarters. host supervisors in respective jurisdictions.
Bank
10 Branch
Audit
Banks will be subject to restrictions on discretionary sheet clean-up exercise they are currently
distributions (may include dividend payments, share undertaking on RBIs directive.
buybacks and staff bonus payments) if they do not
IBA, in a statement, said: Banks are taking
meet the requirement on countercyclical capital
necessary measures to handle their stressed
buffer which is an extension of the requirement for
assets.the asset quality has essentially
capital conservation buffer (CCB).
deteriorated on account of the economic downturn
Banks must ensure that their CCCB requirements and the banking industry is addressing the issue
are calculated and publicly disclosed with at least related to each project to put it back on track.
the same frequency as their minimum capital Finance ministry has assured support to the
requirements as applicable in various jurisdictions. banks to meet the capital requirements under
Basel III.
Indian banks have incurred losses in the October-
December 2015 quarter as a result of the balance
Bank
Branch 11
Audit
Notes
Bank
12 Branch
Audit
BANK BRANCH AUDIT PLANNING

CA. Uday Sathaye
In present scenario of Audit of Branches of Banks 4) ICAI Guidance Note Our Institute comes
the most important aspect is proper planning. out with Guidance Note on Bank Branch Audit
Planning means advance thinking and that should every year to give appropriate guidance to the
be done based on knowledge of business. As members to carry out branch audit process
a Chartered Accountant we have knowledge of smoothly and effectively. Audit Report is the
business of bank but study of Composition of end result of the whole process. When the
Business of a particular branch which is under audit auditor gives his report, its a commitment in
is necessary. Because of variety of products, you writing and therefore carries responsibility.
cannot apply the same yardstick for the branches Every one of us does the audit considering
under audit. Today, the whole process of banking is risks. These risks need to be controlled and
computerized however; the Audit Report is required for that ICAI Guidance note is helpful. The
to be signed manually after physical checking of Guidance note contains reporting formats
records, documents and accounts maintained under including some Checklists and Disclaimers
CBS. This is a combination of men and machine which we should use appropriately wherever
where basic accounting data is in the soft form while required.
supportings are available physically for checking.
We as a Chartered Accountant and Auditor need to 5) We also need to have basic knowledge of
select the sample based on various things: Allied Laws to carry out effective audit.
1) Appointment Letter It is necessary to read For example, Indian Contract Act 1872, The Bombay
Appointment Letter carefully and consider Stamp Act 1958, Negotiable Instruments Act 1881
the terms and conditions mentioned therein, etc.
required to be followed during the process The impact of provisions under these laws on the
of audit. You cannot ignore or forget to cover working of the bank particularly in the area of loans
any area and more importantly the sample and advances need to be considered appropriately
selection must cover all areas which can be during the audit.
truly representative data.
After having basic knowledge of abovementioned
2) RBI Circulars Every year on 1st July, Circulars, Guidance Notes etc. you can plan the
RBI comes out with Master Circular which audit. In fact, the Knowledge and the information
gives guidelines for functioning of banking from the above should be an ongoing exercise as a
industry. Thereafter during the year whenever part of our professional practice. Then in that case, it
necessary circulars are issued to clarify or to will be easy for you to handle the branch audit more
give further guidance to the banking industry effectively with less risk.
which Auditors must know. To sum up, ongoing
knowledge and understanding of RBI Circulars Banking Industry is a backbone of Indian Economy.
is very much necessary. Today, this backbone is facing lots of problems and
the health of this backbone is not good because of
3) Banks Closing Circular With appointment NPAs of Banks. In recent times, almost every day,
letter, Closing Circular of the bank is sent to there is a reporting of bad loans, NPAs, Stressed
the Auditors. That Circular covers the policies Accounts etc. Fraud cases as well as cases of
of concerned bank which are framed within the misuse of bank funds are being reported regularly in
parameters set by RBI Circulars and also SEBI newspapers. All this is an indication of more risk in
Guidelines etc. Therefore, basic understanding audit. In fact, regular reading and analysis of such
of these circulars is necessary. news published in daily newspapers helps planning
more effectively in the branch audit. It is important to
Bank
Branch 13
Audit
note that this published information about a particular the branch particularly the Branch Head and the
bank gives you some direction to plan the audit of Credit Officer. This can be done by way of raising
branch of that particular bank if you happen to be some basic questions based on your experience and
the auditor. knowledge. The answers given by them will certainly
guide you about the areas of weaknesses where
Since planning is advance thinking, your you need to focus more. I am sharing this from
knowledge base will always help you in analyzing my experience as no Guidance Note or published
and controlling the risk early. It means you are material give such hints. When you ask anybody any
ready to tackle any situation during the audit as question and you get a reply instantly it is always a
academically you are ready with your plan. When truth as the same is not after thought. This helps in
your knowledge of banking in general is good and forming an opinion to prepare checklist.
based on Appointment Letter you prepare your plan
after considering business of that particular branch, To sum up, planning means thinking the whole
you are in a better position to prepare checklist to process from start to end and placing the same
be used by you and your staff to carry out the audit on paper. Then define each point, discuss with the
process within the time frame. In Bank Branch audit concerned staff to finally prepare the checklist. Such
it is most important that you meet timelines with plan certainly helps controlling the risk.
effective Audit Report.
An illustrative plan is given below
Creativity lies with every one of us. It is suggested
that when you receive Appointment Letter from the THINGS TO BE DONE BEFORE AUDIT
bank along with copy of Closing Circular, share the
same with your audit team. Let every member of the AT OWN OFFICE
team read both and frame up their mind to prepare 1. Read appointment letter and complete
common Checklist covering all areas of operation formalities of acceptance, NOC from previous
in the branch under audit. You then discuss the auditor etc.
checklist and carry out necessary changes if any.
2. Team Formation and preparation of basic
Normally a medium or large size firm is given 2/3
audit programme with standardized checklist.
branches for audit. Audit of all Branches is required
Conduct interactive meeting of the team to
to be carried out simultaneously. It is therefore
confirm understanding of audit programme.
necessary for auditor to do simultaneous working
and control the audit from one place. We all have 3. Collect and read all relevant material as stated
given Operation Research (OR) paper in CA Final under point Nos. 1 to 5 above.
Examination. These OR techniques, PERT, CPM,
Simultaneous Motion Chart (SIMO chart) can be 4. Accounting, Auditing and Assurance Standards,
used at branch level to cover the required areas of Guidance Notes and other relevant material
audit in given time span. issued by ICAI be studied.
Always maintain proper working papers of whatever 5. Basic provisions of Tax Audit u/s. 44AB of
work is done at branch during the audit. These Income-tax Act as applicable to Bank Branch
working papers are our wealth. Its an evidence of Audit should be noted.
our efforts. Its a good guide for future reference. It 6. Based on the above, prepare a final check-list
helps in compiling working papers for Peer Review covering all the areas in Bank Branch Audit
purposes. Therefore, planning for quality audit and have common understanding of contents
working paper management is necessary for various of checklist. Please remember that checklist is
reasons. very important to control Bank Branch Audit in
It is also necessary to plan the manpower with limited time and to cover all the areas under
proper thinking. For that you need to do SWOT audit.
analysis of your team members. When you visit the 7. If you have been provided with reporting CD by
branch before commencement of audit, try to judge the Bank with standard format of report, then
the depth of knowledge of the concerned staff at run that CD to test whether it is workable.
Bank
14 Branch
Audit
8. Please note the help line number now provided 11. Attend meeting with Central Statutory Auditors
by Regional Council of ICAI to sort out queries if scheduled, to understand their expectations
and problems during Bank Branch Audit and and management perspective about Bank
provide the same to your team members. Branch Audit.
9. Decide timelines of completion of each job till 12. Prepare a list of items to be checked before
signing final report. 31st March and after 1st April.
13. If possible prepare standardized formats of
AT THE BRANCH
queries to avoid confusion.
1. If the branch is located in the same city, visit
before 31st March and discuss broad Audit 14. Discuss audit of Loans and Advances with
Programme. If the same is located elsewhere, Credit Officer in detail and take judgment to
discuss basic Audit Plan at least on telephone decide sample percentage.
and ask for basic data on email to formulate
15. Verify review procedure to minimize the risk.
your plan. Also, the list of required documents
etc. for Audit be given to Branch Manager with 16. Prepare Final Audit programme keeping margin
request for Audit co-ordinator (Nodal Officer). to accommodate changes if required.
2. Check the category of the Branch like Industrial
THINGS TO BE DONE DURING AUDIT
Finance Branch or P Segment Branch etc. to
plan your audit. 1) Follow timelines and commitments as decided
earlier.
3. Discuss all Closing Circulars, Accounting
Policies and basic working of the branch with 2) Keep track on daily targets. In case of pending
branch manager. work as compared to the plan verify reasons
and take corrective action. Document the
4. Take judgment of records, culture, procedures, extent of check applied from time to time.
processes etc. to have feel of working of
branch. 3) Points raised by your staff during the audit
may be discussed and cleared on daily basis.
5. Understand Software used for branch business However, noting of all observations including
and CBS system. those cleared must be preserved as records
6. Verify effectiveness of controls and take list of for various purposes mentioned earlier
various reports generated by software. 4) In the beginning decide
7. Obtain list and drafts of all Reports Certificates a) Documents to be prepared or generated
required to be signed on completion of Audit. by bank staff and to be verified by your
Read all these documents to understand the staff.
meaning.
b) Documents to be prepared by your staff.
8. Obtain list of all returns and other submissions
by branch to HO, ZO, RBI etc. c) Who will do cross check to confirm
correctness of such documents.
9. Collect latest Trial Balance to understand the
financials of branch and select the sample d) A procedure to confirm the final data and
based on figures in Trial Balance. putting initials.
10. Obtain copies of all other Audit Reports i.e. e) Reports, Certificates and any other
Internal, Revenue, Concurrent, Stock Audit, documents that require certification
RBI Inspection, previous year Statutory should be prepared on ongoing basis
Auditor s Report, System Audit Report, and shall not be shifted to last day of
Discretionary Financial Powers Circular etc. to audit. For this purpose, draw a flow chart
understand reported irregularities if any. of happenings and put time lines to meet
target date.
Bank
Branch 15
Audit
f) Obtain xerox copies of documents of Companies Act and Income-tax Act as are
wherever necessary while verifying the applicable for reporting.
concerned area.
5. Complete other formalities like stamping,
g) Discuss and crystallize Audit Queries on signing and affixing date etc.
daily basis.
6. Your Attendance Sheet is to be confirmed by
h) Final audit working papers to be compiled Branch Manager and signed.
before leaving the branch on last day of
audit. 7. Hand over final sets as required by adhering to
the deadline given by bank authorities.
END OF AUDIT 8. Take all your working papers and final set
1. Peacefully review the whole Audit Process and without leaving any of your working papers at
confirm final Query Sheets and Reports. Branch.
Redraft the same if necessary. Involve all team 9. Ensure that you will not be required to modify
members. or change anything later which is certified by
you earlier.
2. Prepare Draft Audit Report and draft of other
documents to be certified by you. CONCLUSION
Discuss the same with Branch Manager. To carry out effective audit with minimum risk, the
Resolve difference of opinion, if any. Discuss first and foremost important thing is plan based
MOCs suggested by you. Do not forget to on knowledge of business. Once this is done the
quantify MOCs and its debit / credit effects. sample selection and execution of audit is your own
judgment. Thereafter, reporting with appropriate
3. Prepare Final Report. disclosures is necessary to safeguard your own
4. Quantify all points raised in report particularly interest. Since the time and resources are limited,
from the point of view of materiality. This will control the whole Audit Process to have effective
help in deciding whether a particular comment delegation. You may trust your assistants, staff etc.
or observation is necessary to be included in but verify the trust to deliver accurate complete and
the report. Do not forget to consider provisions timely Audit Report.
Bank
16 Branch
Audit
Bank Branch Audit Programme / Illustrative Checklist Time & Manpower planning
Sr. Name of the Designation & Qualifications Estimated time for Initials of the
No. person work person
Audit Programme
Sr. Area of Work Person responsible Done by Date
No. at the Branch for whom
that area
A General - Pre Audit Work
1 Review of latest available inspection reports
of Internal/Concurrent/RBI/Statutory Auditors /
Systems Audit report and compliance thereof
2 Review of Closing Circular issued by Head
Office
3 Study of Significant accounting policies of the
Bank & computer system
4 Study of Business mix of the Branch &
determination of the sample size and
percentage of checking in each area
5 Compliance of Mandatory Accounting
Standards/ Auditing Standards and RBI circulars
6 Intimation in writing whether given to the Branch ,
Manager regarding requirements for audit and
documents to be kept ready for audit
B Physical Verification
1 Physical verification of Cash (in branch and in
ATM), 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 gold packets taken
as security and its correlation with insurance
coverage
4 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 etc.
Bank
Branch 17
Audit

that area
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
a. Credit Appraisal
b. Sanctioning and Disbursement
c. Documentation - Pre-sanction & Post
Sanction
d. Monitoring/ Review/ Supervision by the
Branch
1. Submission of financial statements
2. Submission of I.T. Returns
3. Timely submission of stock statements
4. Calculation of Drawing Power
5. Inspection of Godowns
6. Operations in the account - overdue/ sticky
accounts / diversion of funds/ cheques
duly honoured / limit not exceeded
frequently
7. Renewal of documents due
8. Penal interest for default
9. Insurance coverage
10. Registration and Mortgage of property
11. Verification of data in CBS with special
reference to BASEL II requirements of LTV
ratio in case of housing loans etc.
2 Analysis of entries outstanding in suspense
Account, Sundry Debtors, Sundry Creditors
Bank
18 Branch
Audit

that area
3 1. Verification of assets classified as NPA.
2. Verification of Upgraded Accounts earlier
classified as NPA
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
8 Verify that Interest accrued but not due on loans
is not included in advances
9. Verification of priority sector classification at
Branch level.
10 Deposits
1. After 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
2. Verification of Staff Accounts
3. Check that guidelines issued by RBI for in-
operative & dormant accounts are strictly
followed
4. Verify that overdue, matured time deposits
are shown in demand deposits
5. Verify that interest accrued but not due is
not included in deposits but shown under
other liabilities
11 Analysis of entries outstanding in Bills Payable/
Sundry Deposits etc.
12 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,
sub-standard, doubtful & loss assets and
appropriate accounting treatment thereof
2 Checking of proper classification of revenue and
expenditure items
Bank
Branch 19
Audit

that area
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
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 Preparation of LFAR
4 Special emphasis on restructured accounts /
NPAs
H Tax Audit Report
1 Check the following in detail
1. Payments made to clubs
2. Details of revenue expenditure capitalised
3. Whether TDS has been remitted before
the due date
4. Particulars of Income and Expenditure of
earlier years debited / credited to Profit &
Loss Account which are of material nature
5. Verify whether any repayment of deposits
have been made in violation of section
269 T of the Income-tax Act 1961.
2 Checking of Tax Audit Schedules
3 Preparation of Tax Audit Report
Bank
20 Branch
Audit

that area
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
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 regarding possession of investment
documents on behalf of Head Office
6 Certificate for DICGC Claim
7 Movement of NPAs
8 Certificate of BASEL-II, if any
M Finalisation
1 Preparation of Draft of the following-
1. Audit Report
2. LFAR & Annexures
3. Tax Audit Report
4. Jilani Committee Recommendations
Bank
Branch 21
Audit

that area
5. Ghosh Committee Recommendations
6. Memorandum of Changes
2 Discussion of Draft Report with Branch Manager
3 Preparation of Final Report
4 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

Bank
22 Branch
Audit
Verification Advances (other than Agricultural Advances)
VERIFICATION ADVANCES
(OTHER THAN AGRICULTURAL ADVANCES)
CA. I. B. Sonawalla
Introduction Audit of Advances

While in the last decade, the traditional banking The major accounting policies and rules that the
has undergone a metamorphosis, yet its two major bank follows are given in the Annual Closing
activities still remain as acceptance of deposits and Guidelines issued by the bank and must be
granting of advances. Hence, during the course understood completely. If some of these guidelines
of audit, especially the statutory branch audit, are not in line with the Accounting Standards or
verification of advances forms a major component other statutory guidelines prescribed, the guidelines,
of the audit. as given by the bank, should be followed but the
fact about its deviation from the statutory guidelines
Banking laws, especially the circulars from Reserve should be given in the report.
Bank of India (RBI), the apex body governing
Majority of the bank branches are fully computerised
these banks, have been undergoing a continuous
and the auditor should take full advantage of the
modification. Hence, before commencing the audit,
same to generate various statements from the
the auditor and his staff should acquaint themselves system. Some of the statements that could be
with the contents of all relevant RBI circulars. More generated by the system as on 31st March are -
than 50 Master Circulars have been issued on
1st July, 2015 and are available on their site Facility wise / partywise list of accounts
www.rbi.org.in. A Master Circular is a one-point outstanding, alongwith the outstanding balance.
reference of instructions issued by the RBI on The aggregate total of these lists should first
a particular subject between July-June. This is be tallied with the figure of total advances in
generally issued on July 1 every year superseding the Trial Balance to ensure that none of such
the previous Master Circular on the same subject. statements have been missed out;
Sanctioning powers of the branch officials and
From January, 2016, the RBI has started issuing
the higher authorities;
Master Directions. About 18 such directions have
been issued mainly concerning foreign exchange. List of accounts where the regular facility or
These Master Directions replace the related Master the ad hoc facility is due for renewal, but has
Circulars. not been renewed, where stock / book debt
statements are in arrears, where no insurance
It is also necessary that the audit team is well or inadequate insurance has been taken,
versed with the various laws applicable to the where accounts are overdrawn beyond the
bank and its customers. While knowledge of The sanctioned / DP (drawing power) limit, where
Banking Regulation Act, 1949 and The Reserve stock audit is due, but has not been done,
Bank of India Act, 1934 is vital, the team must where inspection has not been carried out in
not lose sight of various other allied laws such as the last three or six months;
FEMA, taxation laws including service tax rules and
For CC (Cash Credit) / OD (Overdraft)
various commercial laws including the Stamp Act.
accounts, month wise details of debit and credit
For instance, it should be borne in mind that for the
transactions (turnover);
purpose of stamping of documents, the branch has
to follow the law of the place where the document NPA (Non-Performing Assets) statements, as
is executed and not where the registered office of prepared by the branch.
the bank is situated, implying that different branches
of the same bank have to follow different sets of Type of Facilities
rules for stamping, as applicable to the State where The type of facilities extended by the bank can be
document is executed. divided into the following broad categories
Bank
Branch 23
Audit
Based on Funds Funded where actual debts e.g. FD receipts, NSC receipts, shares,
money is given by the bank and Non-Funded LIC policies, etc. When such overdraft is
where only a guarantee or commitment or granted to the borrower to tide over temporary
co-acceptance is given that a certain amount financial crisis, it is called Temporary Overdraft
would be paid on the occurrence of a certain TOD. Unlike TOL, which is generally
unknown event, or an accepted bill would be secured, TOD is generally unsecured.
honoured on presentation (Letter of Credit);
Bills Purchased / Discounted when an
Based on Geography Inland and Export advance against a sale bill is granted to the
(Packing/Pre-shipment credit, Post-shipment seller with the condition that the same should
credit); be repaid before the physical possession of
the goods passes on to the buyer, it is called
Based on Security Secured and Unsecured Bills Purchased facility; when an advance is
Secured is one which is granted against some granted against a sale bill, wherein the buyer
security, while unsecured is one which is has received the goods and has agreed to pay
given against personal surety only. Secured the amount therein within a stipulated period,
can be further divided into hypothecation, such a facility is called Bills Discounted.
pledge, mortgage, assignment etc. The security
could be tangible (goods) or intangible (bank / Extent of Verification
government guarantees); The sample to be selected for test check would
depend on existence and efficacy of the internal
Based on Sector Priority sector and Non-
control procedures and the report given by various
Priority sector;
auditors in this regard, especially the concurrent
Priority sector is one in which persons with auditors. However, the auditor has to verify all large
small means are engaged or which needs to advances which are defined as one which constitute
be supported / encouraged by the Government. more than 5% of the aggregate outstanding advance
of that branch or ` 2 crores, whichever is lower.
Type of Advances Nevertheless, if NPAs are high or extensive
Banks extend credit facilities in various forms, the problem is identified, percentage of check should be
major ones being as follows: increased.
Demand / Term loan Such credit facility, Stages of Verification

though called demand loan is generally It is suggested that for verification of advances
repayable in pre-determined instalments. If especially the large ones, all the stages of
the repayment period exceeds 36 months, it is verification should be done by the same person to
called Term loan. enable him to get a birds eye view of the account.
Cash Credit (CC) This credit facility is The stages are detailed below:
generally granted against security of stocks/
book debts without any stipulation for i) Credit appraisal and sanction: Verification
repayment, but is required to be renewed every begins with review of documents. Typically the
year. When a borrower is allowed to draw documents relating to the borrower which need
beyond his sanctioned limit or drawing power to be reviewed would include: the borrowers
limit, the said amount is called Temporary financial statements, visit report by the branch,
Overlimit TOL. This TOL is secured by the valuation report or pro forma invoice for plant
existing securities against which the CC limit and machinery, vehicle, etc., credit appraisal
has been sanctioned. report of the bank, papers showing net worth
of the borrower and guarantors, confidential
Overdraft (OD) this credit facility is similar report from other banks, ratio analysis, etc.
to CC, except that either no security is taken Now-a-days, banks obtain the CIBIL [Credit
(termed as Unsecured Overdraft) or the Information Bureau (India) Ltd.] report of
security taken is other than stock and book the borrower and the guarantors to ensure
Bank
24 Branch
Audit
that they have not defaulted in the past. cash / cheque transactions, transfer from /
The auditor must review the sanction letter, transfer to other accounts, frequent return of
check its veracity and verify that all terms cheques, excessive withdrawals / deposits in
are complied with. Another important aspect cash, no / inadequate payments by cheque for
is to ensure that there is no violation of the purchases, no / inadequate deposits by cheque
prudential norms that are set by the RBI for for sale proceeds, turnover in the account
individual and group borrowers (Refer Master disproportionate to the sale / turnover of the
Circular on Exposure Norms dated July 1, business, payment to persons or for items
2015). Also, the auditor should verify if there which do not concern this business or transfer
have been any adverse comments on the of funds to personal accounts of the owner or
borrower in previous statutory audit, internal sister concerns (diversion of funds), etc.
inspection or concurrent audit.
The auditor should compare the movement of
ii) Disbursement: At the time of disbursement, stock / book debts from month-to-month with
the borrower and guarantors have generally the turnover in the account and the purchase
to execute the following documents demand and sale declared by the borrower in the stock
promissory note, necessary documents for statements; the stock and book debts declared
hypothecation / pledge / mortgage of the in the statement for March of the previous year
tangible security, letter of guarantee, etc; is to be compared with similar figures given in
similar documents have to be executed for the audited or unaudited financial statements
temporary overdrafts and ad hoc limits also; of the concern; many banks insist that the
for enhancement of limits, supplementary book debts statement should be certified
documents have to be obtained. Further, by a chartered accountant on a quarterly
most of the above documents have to be basis; for non-submission of these statements,
appropriately stamped. Depending on the penalty is charged. It is also very necessary to
type of advance, the borrower also has to verify whether the stock includes unpaid stock
provide various documents to the bank such (represented by Sundry Creditors), stock under
as complete title documents for immovable L/C, stock under Packing Credit, etc., since all
property, NOC from co-operative housing these stocks being unpaid stock have to be
society etc. All immovable and movable deducted from the total stock considered for
properties given as security to the bank have DP (drawing power) limit.
to be fully insured by the borrower and the
policy assigned in the banks favour. The Sometimes, for the purpose of convenience
Terms and Conditions of Sanction as or statutory requirements, the borrower is
indicated in the Sanction Letter need to be permitted by the bank to open current account
complied with, which the auditor must verify near the factory premises to pay certain legal
for e.g., in case of housing loan, disbursement dues or salary or such expenses of the factory.
is to be done directly to the builder and In all such cases, the auditor should insist
receipts have to be obtained, borrower with on verifying the statement of such accounts
previous loan needs to clear his old dues, to ensure that only permissible transactions
borrower may have to introduce promoters are routed through these accounts, since the
capital, branch has to inspect the borrowers possibility of use of such accounts to divert
unit, etc. funds from the business cannot be ruled out.
iii) Review of operations: This is the most In case of advance against exports, the bank
important stage in the verification of has to inform to The Export Credit Guarantee
an advance. RBI has stated that any Corporation (ECGC) to cover the said
transaction susceptible to fraudulent advance under its insurance scheme. Further,
transaction should be directly reported concessional rate of interest is charged to
to RBI by the auditors. In this stage, the the borrower, provided certain conditions are
auditor has to do an intelligent scrutiny of fulfilled and the advance is liquidated within a
the bank statement - debit / credit entries, specified time limit out of the export proceeds.
Bank
Branch 25
Audit
If the same does not happen, the benefit of etc., are usually in the custody of the bank
concessional rate of interest is withdrawn. The and can be physically verified by the auditor.
auditor should also note that it is compulsory In case of loan against shares, the bank has
for non-corporate entities, which have been to take out a periodical statement of valuation
sanctioned limits above ` 10 lakhs, or any of shares pledged to check whether margin is
higher limit fixed by the bank, to get their still maintained. In case of NPA accounts, it
accounts audited. is mandatory for the bank to obtain valuation
report for all immovable properties / machinery
Lastly, in the process of verification, the auditor mortgaged / hypothecated to the bank at least
has to ensure that the balance of advance once in 3 years.
appearing in the individual ledgers is tallied
with the general ledger balance unreconciled vi) Verification of charges due on the
balances outstanding for a long time are advances: - The auditor must at least test
indicators of probable frauds. check the recovery of following charges which
are recoverable on various advances at rates
iv) Renewal / Enhancement / Reschedulement / prescribed by the bank -
Balance confirmation: Generally, the advance
is renewed at the end of one year, unless it is Charges for processing of loan, stamping,
an adhoc advance or it is otherwise specified insurance etc.;
in the sanction letter; non-renewal can make
Interest / charges on the advance,
the account a NPA. If the limits are realigned
including charges for withdrawals against
or enhanced, necessary documents are
effects (WAE), temporary overlimit, etc.;
required to be executed to cover the realigned
/ enhanced limits sanctioned. Even if the limit Charges for late / non-submission of
is sanctioned for a temporary period, proper stock / QIS statements, non-renewal of
stamping and execution of the necessary limits, inspection, valuation, etc.
documents is mandatory. Where a project
gets delayed or temporary crisis arises in the Certain indicators which could lead to identify
business of the borrower, the loan repayment Irregular Accounts / Frauds
amount and its time is rescheduled. The While an auditor is a watchdog and not a blood
auditor has to ensure that all reschedulement hound, one needs to take extra care in the course
/ restructuring has been done in accordance of the audit to rule out any irregularities in the loan
with the norms prescribed by RBI. In order and advances portfolio. While verifying loans and
to avoid the documents from becoming time- advances, the auditor has to take cognisance of
barred, generally banks obtain a document certain indicators, which may lead to detection of
called Letter of acknowledgement of debt irregular accounts / frauds.
and securities (LAD or ADS) or Balance
confirmation certificate. By virtue of these The branch has 1 or 2 major borrowers
documents, the borrower and the guarantors constituting more than 50% to 75% of the
confirm their liability, which is then considered total advances of the branch, for whom the
as the date of incurring the liability for the branch goes out of its way to give continuous
purpose of Law of Limitation. overlimits or withdrawals against uncleared
effects or does not pursue recovery of overdue
v) Physical inspection of securities & bills or stock statements are not received in
valuation: The auditor must examine the stock time and yet drawing power limit is continued
audit report to see if there are any adverse or account is not renewed on due date or
comments and whether they have been adhoc limits are not cleared and yet facility is
rectified. Special attention needs to be paid continued, etc. etc.
to non-moving stock and obsolete machinery
included in the stock statements on the basis While verifying CC a/c, OD a/c and bills a/c,
of which the DP limit is being determined. the following observations are made
Demat papers, physical shares, TDR, NSC, Account remains continuously overdrawn;
Bank
26 Branch
Audit
A number of cheques are bounced due to While verifying monthly / quarterly stock
insufficient funds; statements submitted, the following
observations are made:
Cheques deposited are not honoured and
returned unpaid; Generally stock statements are not
submitted on time;
The account has been granted
continuous TOL by the branch for 20 The itemwise details of stock is not given
to 25 days every month; moreover, at and instead lump sum figures are shown
times, such TOLs have been granted by without quantitative details;
the Branch Manager without having the
If itemwise details are given, a
power to do so;
comparison of statements submitted over
The 12 months turnover in the account a period of time shows that the same
does not commensurate with the sale stock is repeated over and over again
and purchase shown in 12 monthly with the same quantity and value;
stock statements or the s statement of There is heavy sundry creditors
accounts submitted; indicating unpaid stock, but the said
The realisation of bills purchased / bills amount has not been deducted from the
discounted is not received on the due stock value, before determining the DP
date and subsequently the same is limit of the borrower;
cleared by debit to the borrowers CC / The stock statement includes certain
OD a/c; items which have actually been financed
As soon as the above bills are cleared, by the branch under LC limit or Packing
fresh bills are purchased / discounted; Credit limit or some other limits;
The facility has not been renewed on There is a huge difference in the closing
the due date and the reason given is stock shown in the stock statement of
that the borrower has not submitted the 31st March of previous year and the
audited / unaudited accounts submitted
necessary papers;
subsequently or better still, the borrower
All overdue CC limits, OD limits, does not submit the stock statement of
unrealised bills, unrealised interest are March or the same is untraceable in the
bundled together and the borrower is branch;
granted WCTL Working Capital Term
The stock statement reflects an unusually
Loan to avoid the account becoming
high amount of stock in transit every
NPA. Generally, such bullet loan is an
month, which does not commensurate
indicator that the account is having
with the monthly purchases or the
problems;
monthly turnover in the accounts;
For certain accounts, when papers are
Though mandated, the branch has not
asked for, the branch is unduly slow in obtained the stock audit report;
producing the same or makes a plea
that the same have been sent to some The stock audit report has adverse
authority and hence is unavailable at the comments, but the branch has not taken
branch or states that the same are not any corrective steps or the Branch
traceable; Manager states that subsequently he has
visited the unit and everything is rectified
In case of certain accounts, the Branch and regularised;
Manager pleads not to put any adverse
remark in the report and that he shall get The stock inspection done by the branch
it rectified after the audit is over. is superfluous and does not record the
Bank
Branch 27
Audit
details of the stock verified a few that the borrower has borrowed from
direct indepth questions to the branch other banks without the knowledge /
staff, who went for the concerned stock permission of the existing banker,
inspection, would reveal the quality of the old charges which were supposed
inspection done. to have been cleared have not been
done indicating that old loans are still
While verifying monthly / quarterly book outstanding;
debts statements submitted, the following
observations are made: There is correspondence on record,
which states that on the same immovable
Book debts due for more than 90 days property, the borrower has obtained loans
are not segregated, though the same is from more than one bank;
mandated in the sanction letter;
The branch has filed a suit against the
A comparison of last 10-12 months borrower to recover the amount;
statement reveals that there are a
number of book debts, which probably
Verification of Non-Funded Advances
are being shown for more than 8-10
months and may be bad debts or While the general verification of funded and non-
recovered, but not deducted from the funded advances is done simultaneously, there are
statement; certain components of non-funded advances, which
need to be looked into. RBI has issued a Master
A comprehensive 10-12 months analysis of Circular dated 1st July, 2015 under the heading
monthly sales, purchase and stock as shown Guarantees and Co-acceptances, which can act as
in the stock statements, the book debts, the a guiding parameter.
turnover in the accounts and the audited
financial statements may reveal that the stock Non-funded advances are called Off Balance Sheet
statements submitted every month are highly items, as their value is not reflected in the Balance
inflated. Sheet. They form the Contingent Liability items of
the bank. However, for the purpose of keeping a
Verification of other records at the branch control over these items, banks have a system of
passing contra entries in its books of account at the
Verification of stamping of the immovable
branch level and hence these items get reflected on
property documents under ultra violet
the liability as well as asset side of the Trial Balance.
rays can reveal whether the document is
However, while preparing the Balance Sheet of
genuine or a colour xerox copy;
the bank as a whole, the value of these items are
In immovable property loans, the branch reflected in the Notes to Accounts.
has not obtained search report of the
(i) Guarantees
property from the Registrars office, or
the adverse comments in such report a. Guarantees are of two types financial
have been ignored; guarantee, wherein the guarantor (the
bank) promises to pay the stated amount
The branch has not obtained NOC from
to the beneficiary, if the person for whom
the builder / society or such NOC has
the guarantee is given, fails to pay the
been personally brought by the borrower
same (also referred to as invoking the
to the branch instead of the same being
guarantee); performance guarantee,
directly obtained by the branch from the
wherein the guarantor promises to pay
builder / society;
the beneficiary a stated sum of amount,
In case of loans to limited companies, if the person for whom the guarantee is
details of previous charges have given, fails to perform, as expected, in a
not been obtained or if any adverse given period of time. Banks are generally
observations have been made, the same discouraged from issuing performance
are ignored for e.g. the report shows guarantees.
Bank
28 Branch
Audit
b. A guarantee transaction usually l. In the above mentioned circular, RBI has

comprises of two independent, but also given extensive guidelines on issue
related components one is the of guarantees on behalf of exporters and
guarantee issued by the banker (of the importers.
buyer) to the beneficiary (i.e., seller) and
(ii) Co-acceptance of bills
the other is a counter guarantee given by
the buyer to his banker, who has issued a. In this type of facility, the seller
the guarantee. despatches the goods and raises the
bill on the buyer. The buyer accepts
c. Generally, guarantees should not be
the bill and then it is co-accepted by
issued on behalf of customers, who do
buyers banker. The sellers banker then
not enjoy credit facilities with the bank.
discounts this bill.
d. Since guarantees invoked could get
b. This type of facility is often used by
converted into funded advance to a customers to float accommodation bills
borrower, banks should not encourage (i.e. bills which are not supported by
borrowers to over extend their genuine sale and purchase of goods) and
commitments solely on the basis of hence auditors should be careful while
guarantees. examining such bills.
e. Guarantees could be for specific c. RBI has mandated that co-acceptance
transaction (called specific guarantee) limit should be extended only to
or it could be for multiple transactions customers, who enjoy other credit
within a specific time frame (called facilities with the bank.
continuing guarantees). Guarantees
should generally be for short durations; (iii) Letter of Credit (LC)
in any case, it should not have a maturity
a. A Letter of Credit (LC) is a promise by
period of more than 10 years.
a banker to honour the payments to
f. Unsecured Guarantees to a particular be made by its customer (the buyer or
borrower should generally not exceed importer) to the seller or exporter. This
10% of the total exposure. type of payment facility is generally used
in international trade. In this type of
g. Banks should also not concentrate its facility, at the request of the buyer, his
unsecured Guarantees to a particular banker opens an LC, which is sent to
borrower or a group. the seller. Based on such LC, the seller
despatches the goods and then sends
h. Ghosh Committee has recommended
the bills and other documents through his
certain precautions to be taken by banks
banker to the buyers banker, which has
while issuing guarantees.
opened the LC, to make payment of the
i. Guarantees are generally issued by bill.
keeping margins, either in the form b. The buyer then makes the payment and
of cash / term deposit or some other routes it through his banker to the sellers
security. banker. In case the buyer fails to make
j. In case of guarantees issued on behalf the payment (also known as devolvement
of share and stock brokers, RBI has of LC), the buyers banker, which has
advised that banks should obtain a opened the LC, is liable to make the
minimum margin of 50% (with 25% being payment to the seller.
cash margin). c. RBI has mandated banks not to discount
k. RBI has laid restrictions on guarantees of bills drawn under LCs or otherwise for
inter-company deposits / loans and inter- beneficiaries, who are not their regular
institutional guarantees. clients.
Bank
Branch 29
Audit
Reporting of Verification & Rectification NPA (Non-Performing Assets) Norms

Statutory auditors have to report about discrepancies This is one of the most important aspects of
noted in the Advances in two separate reports one verification of advances, details of which have been
is the Statutory Audit Report for Major / Critical provided under a separate chapter.
Discrepancies and the other is a detailed report in
the Long Form Audit Report (LFAR) under para I-5 Conclusion
Advances. If any financial adjustment has to be Advances bring income to the bank, but
done (short/excess debit of interest, other charges, carelessness in sanction of the same may also lead
etc.), the same should be done through the MOC the bank to lose the money advanced. The auditor
Memorandum of Change. has therefore to ensure that advances are granted
after due diligence, are within the norms prescribed
Classification of Advances - Prudential Norms by RBI and others, are good of recovery and are
on Income Recognition & Asset Classification adequately provided for, if doubtful of recovery.
and Provisioning IRAC Norms or also called
Bank
30 Branch
Audit
AUDIT OF AGRICULTURAL ADVANCES

CA. Saurabh S. Peshwe
1. Introduction 7% by March, 2016

Even during the current trend of globalisation, 8% by March, 2017
domination of IT & other Services Industries
and Make in India, the Indian Economy is still, [Ref. RBI 2015-16/53 FIDD.CO.Plan.
to a larger extent, dependent on agriculture. BC.4/04.09.01/2015-16 dt. 01.07.2015 (as
Agricultural Finance thus constitutes a pivotal amended up to 15.12.2015)]
category under the ambit of priority sector
c. Different benchmark has been stipulated
credit. In fact, realising the importance of
for foreign banks to achieve these goals.
agricultural lending, most of the banks have
set up specialised agricultural credit centres d. In Agricultural finance the distinction
and branches. between direct & indirect agricultural is
dispensed with.
Agricultural Finance, as opposed to generic
lending, is subject matter of specialised skills, 3. Key Concepts of Agricultural Finance with
requiring the bankers as well as auditors to summary of RBI Guidelines
have understanding of specific procedures
developed by each bank as well as specific a. Farm Credit
RBI guidelines. In this paper, I have made Farm credit means and includes:
an attempt to summerise the RBI guidelines
relevant to on Agricultural Lending along on Loans to individual famers, self help
the Key concepts of Agricultural Finance, groups (SHGs), Joint Liability Group
which are relevant for the purpose of bank (provided banks maintain disaggregated
branch auditors. Auditors are advised to refer data) directly engaged in Agricultural
to relevant RBI guidelines as well as Banks Allied Activities viz. Dairy, Fishery, Animal
Internal Guidelines/policies and procedures husbandry, poultry, bee keeping and
to have an exhaustive understanding of the sericulture.
subject matter. o Crop loans to farmers which will
include traditional/non-traditional
plantations and horticulture and
2. Gist of RBI guidelines in respect Targets
loans for allied activities.
on Agricultural Lending
a. Within the overall target for Priority o Medium and long-term loans
Sector Advances, i.e. 40%, Minimum to farmers for agriculture &
18% of ANBC or Credit Equivalent allied activities i.e. Purchase
Amount of off balance sheet Exposure of agricultural implements &
whichever is higher should be extended machinery loans for irrigation &
to Agricultural finance. other development activities under
in the farm & developmental loans
b. Further within overall 18% share of for allied activities i.e. tractor /
Agricultural advances, 8% of ANBC or trailer / bullocks / bullock cart /
Credit Equivalent Amount of off balance power filler / pump set / well / drip
sheet whichever is higher is prescribed irrigation / poultry / dairy etc.
for small & marginal farmers to be
Loans to farmers for pre & post harvest
achieved in phased manner i.e.
activities such as spraying, weeding,
Bank
Branch 31
Audit
harvesting sorting grading and Loans for Food & Agro processing up to
transporting of their own farm produce. an aggregate sanctioned limit of ` 100
crore per borrower from the banking
Loans to farmers up to ` 50 lakhs against system.
pledge/hypothecation of agricultural
produce (including warehouse receipts) Loans to customer service units
for period not exceeding 12 months. managed by individuals, institutions
or organizations who maintain a fleet
Loans to distressed farmers indebted to of tractors, bulldozers, well boring
non institutional lenders. equipment, threshers etc. and undertake
Loans to farmers under Kisan Credit farm work for farmers on contract basis.
Card Scheme. Bank loans to Primary Agricultural
Loans to small & marginal farmers for Credit Societies (PACs), Farmer Service
purchase of land for agricultural purpose. Societies (FSS), and Large sized Adivasi
Multipurpose societies (LAMPS) for on
Loans to corporate farmers, farmers lending to agriculture.
producer organisation/companies of
individual farmers, partnership firms and Loans sanctioned by banks to MFIs for
Co-op. of farmers directly engaged in on lending to agriculture sector
Agricultural & Allied Activities i.e. dairy, Outstanding deposits under RIDF and
fishery, animal husbandry, poultry, bee other eligible funds with NABARD on
keeping & sericulture up to an aggregate account of priority sector shortfall.
limit of ` 2 Crores per borrower.
d. Crop Loans
b. Finance for Agricultural Infrastructure
Crop loans are normally referred as a
Finance for Agricultural Infrastructure, among short term finance, which caters to credit
other things, include requirements of a crop season.
Loans for construction of storage facilities Crop loans are also called as production
such as warehouse, market yards, loans or farm credit. Generally crop
godowns & silos including cold storage loans are divided into kind and cash
chains. components.
Soil conservation & watershed The kind component is based on the
development. cost of inputs such as fertilizers, seeds
Plant tissue culture & Agri-biotechnology and pesticides etc. which are essential
culture, seed production, production of for cultivation of crops. By and large, it
bio-pesticides, vermi-composting. is expected that such amount should be
disbursed directly to the supplier of inputs
(Note For above, an aggregate sanction limit to ensure end use of funds.
of ` 100 crores per borrower from the banking
system will apply.) Cash component mainly denotes to the
expenses towards payment of hired
labourers, hire charges, for tractors,
c. Finance for Ancillary Activities
machinery, electricity charges etc.
Loans up to ` 5 crores to Co-op.
Societies of farmers for disposing of the The disbursement of crop loans should
produce of members be in stages linked up with inspection
to ensure ultimate use of funds. It thus
Loans for setting up of Agri-lines and Agri follows that crop loans are granted
business Centres for meeting the current expenditure in
connection with raising of crops.
Bank
32 Branch
Audit
An essential feature of crop loan is that For each State, a State Level Bankers
a cultivators eligibility for a loan and Committee (SLBC) is constituted, which
size of the loan are determined not with reviews and decides the crop season
reference to the value of land or any and duration thereof for various crops
other tangible security but on the basis of cultivated in that state.
the size of the holding that he cultivates
and the cost of cultivation of crops which g. Kisan Credit Card (KCC)
the farmer proposes to grow. In terms of RBI Cir. No. RPCD:F.S.D.
The credit requirement for raising a BC No. 77/05/09/2011-12 dt. 11.05.2012
particular crop is also termed as revised scheme for issue of Kisan Credit
scale of finance. The scale of finance card was introduced by RBI which was
is determined by a Technical Group subsequently modified vide cir. No.
comprising members of DCCB, PACS, RBI/2012-13/162 ROCD:FSD.BC. No.
State Govt. Agri Department, Lead bank 23/05.05.09/2012-13 dt. 07.08.2012.
of the district etc. The scale of finance The scheme was simple and hassle free
thus determined is then approved by for both the farmers and bankers. The
District Consultative Committee. scheme was aimed at providing adequate
& timely credit support under single
e. Investment credit window to the farmers for their cultivation
Investment Credit Normally refers to and other needs as indicated below
medium and long-term agricultural
finance, which includes the following: o Short-term credit limits
To meet the short-term credit
o Development of farm land,
requirement for cultivation of
o Digging of well/ bore-well crops
o Acquisition of farm machinery Post harvest expenses
o Other Irrigation facilities Produce marketing loan

Consumption requirement of
f. Crop Season farmer household
Crop season refers to the time period Working capital for
from preparation cultivation of a crop till maintenance of farm assets &
its ultimate realisation. activities allied to agriculture
It is essential for auditors to understand like dairy, inland fishery etc.
concept of crop season, since the o Long-term Credit Limit: Investment
repayment of agricultural advances is credit requirement for agriculture
liked with the crop season of each crop. & allied activities like pump sets,
sprayers, dairy animals etc
Crop season can vary from crop to
crop. In fact, common crops like paddy It is important here to understand that,
or sugarcane etc. may have different unlike the general notion, KCC is not a
crop seasons, depending on the state of type of loan, but is a channel for granting
cultivation or manner of cultivation (i.e. a either short-term or long-term agricultural
single crop or multiple crops etc). finance.
A crop is classified as Short Duration
h. Interest application
Crop or Long Duration Crop, based on
the crop season. Unlike normal loans, the interest on
agricultural advances is not charged at
Bank
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Audit
monthly rests but is charged normally at securities should be obtained as per the
half yearly or annual rests. guidelines framed by the bank.
Compounding of Interest is generally not b. Auditors should verify that the agricultural
permitted in respect of an agricultural credit is extended only after obtaining No
advance, unless it turns out to be a non dues/ No objection certificates from the
performing advance. existing credit agencies in the area of
finance.
4. NPA Norms In respect of Agricultural
c. Disbursement of agricultural finance is
Advances
required to be carried out in various
A Short Term Crop Loan is classified as stages based on the requirements
Non Performing, if instalment of principal of farming activity. This needs to be
or interest thereon remains overdue ensured strictly. In some cases, the
for two crop seasons for short duration expenditure is incurred by farmer from
crops. his/her own sources or from non-
A Long Term Crop Loan is classified as institutional lenders and subsequently
Non-Performing, if instalment of principal banks are requested to reimburse the
or interest thereon remains overdue same. In such cases, auditors have
for two crop seasons for short duration to carefully verify the facts from the
crops. documents/evidences available on
record. Under all situations, auditors
For allied agricultural loans the general should verify that the bank holds
norms of 90 days delinquency is used. documents evidencing the utilisation of
loans for agricultural activities.
Thus, the NPA identification for agricultural
advances is different from other loans and d. For crop loans, primary security is
advances. It is important to note that the normally the standing crops under
repayment of direct agricultural loans (crop cultivation, as such pre and post sanction
loans as well as investment loans) is linked visits by the officers of bank, who are
to the realisation from sale of agricultural experts in Agri finance and adequate
produce as such due date of loans for documentation of visit report is a key
repayment will be coincided with the timing control.
of such realisation.
e. While verifying the security offered for
5. Audit of Agricultural Advances: Key Audit agricultural loans, it is to be confirmed
Steps that the security is legally enforceable.
Standing crops and agricultural
While auditing advances, auditors have to machinery and implements are secured
perform certain generic audit procedures by a hypothecation charge, while
applicable to all advances. Such audit the agricultural land is secured by a
procedures have been covered in detailed mortgage charge. Auditors have to
fashion elsewhere in this compilation. I have ensure that amongst others, the following
attempted to summerise a few key aspects in has been duly taken on record by the
the audit of Agricultural Advances. I would like banks:
to humbly submit that these procedures are
inclusive and not exhaustive. Copy of the land revenue extracts.
a. Sanctioned amount of Agri Loans should Land Tax Assessment and payment
be as per scale of finance applicable to receipt.
the land under cultivation and the crop
being cultivated. Further, necessary Copy of record with Sub-Registrar
(wherever applicable)
Bank
34 Branch
Audit
Original copies of the title deeds or reschedulement of loans, the existing

loans as well fresh term loans granted to
Search of title deeds and Legal the farmers are treated as current dues
opinion from the advocate on the and as such are not classified as NPAs.
Banks approved panel
i. NPA Classification of Agricultural Loans
Valuation of land from a valuer on
the Banks approved panel. The NPA classification of
agricultural loans is linked with the
f. Loans granted to farmers against the nature of crop, duration of crop and
security of NSC, KVP or Fixed Deposits the crop season for each crop. In
of Banks, which has been utilised for India, several crops are cultivated
agricultural purposes, is allowed to be having different crop season in
classified under the category of finance different states, as such, applying
to agriculture. However, auditors should a single form for NPA and setting
carefully verify the loan documents and up the system parameters becomes
other supporting documents to ensure difficult.
that non-agricultural loans are not
classified as Agricultural Finance. Auditors should carefully verify the
parameters set up in the system
g. Agricultural Advances are required to ensure that crops are not
to be serviced through realisation of categorised in an incorrect manner.
sale proceeds to crop. Auditors should Further, it is to be ensured that
be sceptical about the nature and system parameters are correctly
timing credits coming into service the configured to capture relevant
agricultural loans and ensure that they SLBC guidelines for crop seasons
are from genuine sources. and classification of crops.
h. Restructuring of agricultural loans, due If the system parameters are not
to natural calamities is governed by configured correctly, it will certainly
separate RBI guidelines, which readily lead to incorrect classification of
summarised in the RBI Master Circular loans.
on IRAC norms. In case of conversion
Bank
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Audit
Notes
Bank
36 Branch
Audit
Treatment of recoveries in NPA post Balance Sheet date
Treatment of recoveries in
NPA post Balance Sheet date
CA. Sandeep Welling
Treatment of recoveries in loan accounts subsequent regulatory directive is for the entities they govern and
to balance sheet date has been the most talked not the entities that audit these constituents. Hence
about and debated topic during our bank audits accounting as on balance sheet date is a matter of
(whether Branch or Central). There have been accounting principle and not regulatory directive. It is
various positions taken by every professional therefore not right to expect any guidelines from the
concerned. It is necessary to discuss this topic at regulator on to the accounting treatment as on the
length. balance sheet date relating to the directive issued
by it. It is ICAI who shall devise the same or the
It is observed that there are predominantly two members who audit will interpret the directives for
schools of thought. One that says as long as the their reporting.
recoveries have taken place prior to signing of
balance sheet, there is no reason why these should Para 2 of the prudential guidelines on IRAC spells
be not considered. These professional tend to accept out the definition of Non-performing Assets The
such recoveries after due scrutiny and classify such said definition is deliberately not reiterated here. It is
borrower as performing as on the balance sheet first necessary for us to identify whether a particular
date. The other school goes to the other extreme. account is NPA. After identifying an account to be
According to them RBI directive does not spell out NPA the Para 4 provide us a classification of these
such pre dated treatment. Further taking cognisance NPA into Substandard, Doubtful and Loss. Para 4.2
of the post balance sheet event cannot be restricted give us the guidelines on classification. It is this
to positive events alone. In support of their argument guideline that determines the classification for the
these professional also cite the basic principle of purpose of provisioning. Let us analyse the directive
conservatism wherein the negative events post (only limited portion is considered here to address
balance sheet need to be factored in and the the topic of the article)
positive to be ignored. While the bank management
is certainly not required to pre-date the downgrading 4.2.1 Broadly speaking, classification of assets
(as the directive does not expect that) the question into above categories should be done
remains whether the directive leaves any scope for taking into account the degree of well-
the management perspective in case of recoveries defined credit weaknesses and the extent
subsequent to the downgrading date. of dependence on collateral security for
realiaation of dues.
In the light of these two extreme opinions it is
necessary to bring about the detailed analysis Hence upon identification, classification
of the subject matter. While simple subsequent guidelines are subjective to the overall health
recovery does not justify upgrading; mere position of the credit exposure. Strictly speaking, it
as on balance sheet date is not the decisive factor. conveys that the classification downward is
Before we start discussing the subject, we need to subjective or open for the judgment. Judgment
understand the distinction between the accounting on basic downgrading to Substandard does not
principles and the regulatory directives. Regulatory seem to be the available option.
directives unlike accounting principles are not 4.2.4 Accounts with temporary deficiencies
confined to any boundary date but they are about
common playing field and parameters of the health The classification of an asset as NPA
of the organisations regulated by them. The trigger should be based on the record of recovery.
date for classification as per the directives and Bank should not classify an advance
the accounting period never coincides and hence account as NPA merely due to the existence
there remains a scope for the interpretation of of some deficiencies which are temporary
the treatment as on the balance sheet date. The in nature such as non-availability of
Bank
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Audit
adequate drawing power based on the us to take extra auditing steps to ascertain
latest available stock statement, balance whether the credits are temporary and only to
outstanding exceeding the limit temporarily, avoid classification. The application of principle
non-submission of stock statements and of conservatism in banking organisation
non-renewal of the limits on the due date, has its impact not just on auditee i.e. bank
etc. management but on the business entities as
well. Downgrading for the first time to SS has
This paragraph addresses the temporary long lasting impact on the business and hence
deficiencies. This means although the needs careful consideration. It is necessary
definitions and classifications are clearly to note that the purpose of audit is not to
specifies the trigger in this directive, the downgrade but to assess the health of the
credit weakness or economic health of the asset.
account is the governing factor. Many a times
there are administrative lapses or temporary Let us now look at the circumstances under
business up/down. However it is difficult to which the account can be upgraded:
bring all these situations into directive. Hence
although the basic definition is given, the bank 4.2.5 Upgradation of loan accounts classified as
management needs to examine the account NPAs
with the parameter of weakness Para 4.2.6 If arrears of interest and principal are
emphasises this fact. paid by the borrower in the case of
4.2.6 Accounts regularised near about the loan accounts classified as NPAs, the
balance sheet date account should no longer be treated as
non-performing and may be classified as
The asset classification of borrowal standard accounts.
accounts where a solitary or a few credits
are recorded before the balance sheet date The above guideline allows bank management
should be handled with care and without to upgrade if all the arrears of interest and
scope for subjectivity. Where the account principal are paid the question now remains
indicates inherent weakness on the basis whether the NPA account eligible to be
of the data available, the account should upgraded before signing of Balance Sheet can
be deemed as a NPA. In other genuine be construed to be the account with temporary
cases, the banks must furnish satisfactory deficiency or ailment? Whether it could be
evidence to the Statutory Auditors/ construed that the account is potentially not
Inspecting Officers about the manner of weak and hence administrative or business
regularisation of the account to eliminate situation delays should not jeopardise the long
doubts on their performing status. term interest of the business unit.
It gets further clear that the definitions, though In order to understand this more in details, let
given, only act as a measuring tool. The us examine following situations:
real test lies in the health perception. Hence 1. Business unit having multiple or
even though there are credits around the consortium arrangement. The account
balance sheet date, if the transaction does not with the bank is not operated as the
seem justifiable or genuine, it requires further place of business is somewhere else. The
investigation to know the performing status. business unit deposits a cheque on 29th
Generally auditor finds it safer to ask for of March and due to holidays or any other
downgradation. This may be because in the reason the credit takes place on April 2.
recent past it is observed that material amount
of the diversions as identified by the inspecting 2. The business is passing through tough
officer fall into this category (and not about competition and hence has to give longer
subsequent recoveries) where classification credits. Manages to get cheque on April
is judgmental, though it strictly does not fall 10. The previous three quarters were
into the definition. However it is necessary for satisfactory.
Bank
38 Branch
Audit
3. The business is passing through tough sheet date. However in case of Cash
competition and hence has to give longer Credit account care should be taken
credits. Manages to get cheque on April that the same amount is not taken for
10. This is happening for the entire year consecutive two quarters as a part of
during quarter end. recovery (this is more relevant during
quarterly reviews).
4. Business closes the account with all the
dues on April 20. This is happening for The question remains what is the
the entire year during quarter end. reasonable time for post balance sheet
recovery, if considered. There are
5. The amounts of all the overdues are banks that close within one month of
recovered on April 15 and the account is the balance sheet date and there are
eligible to be upgraded. banks that close much later as late as six
6. Cash credit is overdrawn is brought into months from the closing date.
limit on April 12 In order to address the aspect of
7. The proposal for enhancement in Cash reasonability of time we may look at Para
credit is pending with the management 4.2.2
since December for the want of some 4.2.2 Banks should establish appropriate
negotiation issues. The account internal systems (including technology
is running excellent. Turnover in the enabled processes) for proper and timely
account is multifold. However runs identification of NPAs, especially in respect
beyond limit since December on account of high value accounts. The banks may fix
of business needs. The limit is enhanced a minimum cut off point to decide what
on April 8. would constitute a high value account
Further consider a situation where depending upon their respective business
NPA trigger date is 12th March and levels. The cutoff point should be valid for
the part (not full) overdues are cleared the entire accounting year. Responsibility
before March end. The March end and validation levels for ensuring proper
balance shows little less than 3 month asset classification may be fixed by the
outstanding. The auditors invariably banks. The system should ensure that
accept the account to be standard. doubts in asset classification due to any
Hence we actually give credit to the reason are settled through specified internal
subsequent recoveries; it is a question channels within one month from the date
whether balance sheet date matters in on which the account would have been
following the directive. classified as NPA as per extant guidelines.
While the regulatory guidelines give It is not clear in what context the regulator
specific measure to identify NPA and is referring to the doubts in this paragraph.
expect us to test the situation from However it allows one month clarifying the
the point of view of weakness on the doubts on classification. Taking clue from this
balance sheet date it does not prohibit it may be reasonable expect that post balance
the management to use the judgment. sheet recoveries leading to upgradation of the
Hence in all the above situations, borrowal account to standard within one month
keeping the evidence of our test of the closure date may be acceptable.
is critical. The borrowal accounts, if Hence the author of this article is of the
insisted upon by the auditors to classify opinion that, if the account is not considered
as NPA it will have to be purely on the weak on the balance sheet date and during
merits and test of potential weakness. It a reasonable time after the Balance Sheet
cannot be a simplistic test that it fulfilled date (one month), if the account is eligible
the NPA definition as on the balance to be upgraded, the account need not be
Bank
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Audit
downgraded as on the balance sheet date. bank management also to come forward and
Hence the situation as on the Balance Sheet formulate a policy of provisioning and include
date could be construed to be temporary. these subsequent recoveries (in a perspective
This does not amount to backdating of the elaborated above in this article) for the purpose
recovery. However in case of banks that of classification of the asset as on balance
close books later than one month, if the said sheet date. It must be remembered that bank
accounts show weakness, no up gradation on management primarily requires adhering to
the balance sheet date could be justified. the guidelines, auditors merely report on its
compliance. In case the policy (or at least
Finally the auditor is expected to report on disclosure) is facilitated; auditor will ensure
the truth and the fairness of the financial consistency of the said policy. As discussed,
statement. Financial statements are drawn on such policy may not contravene with the
the basis of Accounting Standards, accounting directives.
policies and the basic accounting principles.
Any policy pursued consistently will give fair (Please note this article attempts to address
presentation of the balances. In absence of the classification to SS for the first time. The
an accounting policy, own interpretations by considerations to upgrade the accounts below
every concerned professional of the directive SS on account of subsequent recoveries could
may lead to arbitrary depiction. In order to put be little different)
this subject to rest it may be necessary for the
Bank
40 Branch
Audit
Restructuring of Debt
RESTRUCTURING OF DEBT
CA. Gautam Shah
Restructuring of Advances 1. Special Regulatory Treatment for Asset

Restructuring essentially refers to redefining and/or Classification
rescheduling the terms of borrowings including the Instructions on Special Regulatory Treatment
installments, moratorium period, rates of interest and for Asset Classification as contained in
terms of repayment etc. in the light of developments Part B of Master Circular DBR.No.BP.
taking place after the terms under which original BC.2/21.04.048/2015-16 dated July 1, 2015
advances were sanctioned and disbursed. on Prudential norms on Income Recognition,
Asset Classification and Provisioning pertaining
The basic objective of restructuring is to preserve to Advances (Master circular) stand withdrawn.
economic value of units, not ever-greening of Accordingly, as per para 20.2.3 of the master
problem accounts. This can be achieved by banks circular, all restructurings effective from April
and the borrowers only by careful assessment of the 1, 2015 The accounts classified as 'standard
viability, quick detection of weaknesses in accounts assets' would be immediately classified as
and a time-bound implementation of restructuring 'sub-standard assets' upon restructuring.
packages. Banks may restructure the accounts
classified under standard, sub-standard and Henceforth, the following General Conditions
doubtful categories but restructure not permitted to would be applicable in all cases of restructuring
be carried out with retrospective effect. in addition to General Conditions already
mentioned in paragraph 21 (Miscellaneous) of
Key statistics of advances restructured under the Master Circular ibid:
Corporate Debt restructuring (CDR) is as follows:
i. All restructuring packages will be
(` in crore) required to be implemented in a time
Particulars No. of Amount bound manner. All restructuring packages
Cases under CDR/JLF/ Consortium/MBA
arrangement should be implemented
Received 655 4,74,002
within 90 days from the date of approval.
Rejected 125 70,998 Other restructuring packages should be
Net 530 4,03,004 implemented within 120 days from the
Failure 202 83,552 date of receipt of application by the bank.
Success 86 62,217 ii. Promoters must bring additional funds
Live Cases 242 2,57,235 in all cases of restructuring. Additional
funds brought by promoters should be
Source: CDR website a minimum of 20 per cent of banks
sacrifice or 2 per cent of the restructured
The above table only highlights cases restructured
debt, whichever is higher. The promoters
under CDR. In addition to above, the Banks have
contribution should invariably be brought
done internal restructuring as well.
upfront while extending the restructuring
In 2008, Reserve Bank of India (RBI) came up with benefits to the borrowers. Promoters
comprehensive master circular on restructuring contribution need not necessarily be
of advances and recently there were certain key brought in cash and can be brought in
amendments to those guidelines as highlighted the form of conversion of unsecured loan
below: from the promoters into equity;
Bank
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Audit
iii. Banks should determine a reasonable ii. On a review, and with a view to
time period during which the account is preserve the economic value of viable
likely to become viable, based on the accounts, it has been decided that in
cash flow and the Techno Economic cases of fraud/malfeasance where the
Viability (TEV) study; existing promoters are replaced by new
promoters and the borrower company
iv. Banks should be satisfied that the is totally delinked from such erstwhile
post restructuring repayment period is promoters/management, banks and JLF
reasonable, and commensurate with the may take a view on restructuring of
estimated cash flows and required DSCR such accounts based on their viability,
in the account as per their own Board without prejudice to the continuance
approved policy. of criminal action against the erstwhile
v. Each bank should clearly document its promoters/management. Further, such
own due diligence done in assessing the accounts may also be eligible for asset
TEV and the viability of the assumptions classification benefits available on
underlying the restructured repayment refinancing after change in ownership, if
terms. such change in ownership is carried out
under guidelines contained in circular
vi. All other instructions under Part DBR.BP.BC.No.41/21.04.048/2015-16
B of Master Circular DBR.No.BP. dated September 24, 2015 on Prudential
BC.2/21.04.048/2015-16 dated July 1, Norms on Change in Ownership of
2015 on Prudential norms on Income Borrowing Entities (Outside Strategic
Recognition, Asset Classification and Debt Restructuring Scheme). Each
Provisioning pertaining to Advances shall bank may formulate its policy and
remain unchanged. requirements as approved by the Board,
on restructuring of such assets.
2. Restructuring Fraud and Malfeasance cases
i. While the borrowers indulging in frauds 3. Strategic Debt Restructuring (SDR) Scheme
and malfeasance will continue to remain The Reserve Bank of India (RBI), through its
ineligible for restructuring, banks may notification DBR.BP.BC.No.82/21.04.132/2015-
review the reasons for classification of the 16 dated 25th February 2016, issued certain
borrowers as wilful defaulters, specially in revisions and clarifications to its prudential
old cases where the manner of classification guidelines on Strategic Debt Restructuring
of a borrower as a wilful defaulter was (SDR). It reiterates the requirement for banks
not transparent, and satisfy itself that the to stringently adhere to previously-issued
borrower is in a position to rectify the wilful guidelines including those relating to:
default. The restructuring of such cases may
be done with Board's approval, while for triggers for invoking SDR
such accounts the restructuring under the effecting a change in the management of
CDR Mechanism may be carried out with borrower companies
the approval of the Core Group only. Banks
may review the reasons for classification invoking personal guarantees obtained
of the borrowers as wilful defaulters, from existing promoters and
specially in old cases where the manner
of classification of a borrower as a wilful conversion of debt into equity shares
defaulter was not transparent, and satisfy of the borrower within the specified
itself that the borrower is in a position to timeframe.
rectify the wilful default. In addition, the notification prospectively
modifies some of the previously-issued
guidelines on SDR as described below.
Bank
42 Branch
Audit
i. Minimum equity divestment to obtain asset over a maximum of four calendar quarters
classification benefit from the date of conversion of debt into equity
This notification states that the minimum i.e. the provisioning held for such depreciation
quantum of equity to be divested by banks should not be less than 25 per cent of the
within 18 months to new promoters, in order to depreciation during the first quarter, 50 per
retain the benefit relating to the classification cent of the depreciation as per the current
of the asset as standard, has been revised valuation during the second quarter, and so
to 26 per cent from 51 per cent previously. on. If banks desire a longer period for making
Lending banks will have the option of exiting provisions (e.g. six quarters), they can start
their remaining holdings gradually, with an doing so from the reference date itself.
upside as the company turns around. However,
In addition, banks are required to ensure that
lending banks will be required to grant a Right
they hold a provision of at least 15 per cent
of First Refusal to the new promoters for the
of the residual loan by the end of 18 months
subsequent divestment of their remaining
from the reference date. This is to avoid a
stake.
sharp deterioration in the asset classification
if the banks are unable to divest a minimum
ii. Timelines for conversion of debt into equity equity stake to new promoters within the
While the Joint Lenders Forums (JLFs) are stipulated 18-month period. This provision is
required to adhere to the prescribed timelines also to be made in equal installments over four
during the SDR process, the notification quarters and can be reversed only when all the
permits flexibility in the completion of individual outstanding facilities in the account perform
activities up to the conversion of debt into satisfactorily after the transfer of ownership and
equity in favour of the lenders. However, it management control to the new promoters.
requires such conversions to be completed
within a period of 210 days from the date a Key indicative audit points for Restructured
decision to invoke SDR is made (based on a Advances:
review of the achievement of milestones/critical
conditions by the borrower). If this timeline is New Restructured Advances
not met with, the benefit of a standstill in the To review of banks process for identification &
asset classification which was available from monitoring of restructured advances. System
the date the SDR was invoked (the reference report can be generated to identify advances
date) ceases to exist. The loans will then account with any change or modification
be classified in accordance with the existing in original terms. Need to compare same
Income Recognition, Asset Classification with list maintained by the Bank to ensure
(IRAC) and Provisioning Norms prescribed in completeness of restructured advances.
the RBIs Master Circular dated 1st July, 2015.
To review process for tagging of restructured
iii. Additional provisioning requirements advances in Core Banking System
Previously-issued guidelines on the SDR To review classification all restructuring after
scheme, as defined in the RBI Circular dated 1st April 2015, needs to be downgraded
8th June, 2015, exempted banks from the
requirement of a periodic mark-to-market of To review compliance with all timelines given
the equity shares of the borrower received in extant master circular vis-a-vis creation of
on the conversion of debt, for the 18 month Joint Lending Forum (JLF), Formation and
period until divestment to the new promoters. Implementation of Corrective Action Plan
The notification now requires banks to (CAP), Timelines for admission to CDR/
periodically value and provide for depreciation application of internal restructuring, timelines
on these equity shares as per IRAC norms for for CDR approval and implementation of CDR.
investments. However, banks have the option
To review minutes of all JLF meetings, CDR
of distributing the depreciation in value, if any,
meetings and bank's board meetings
Bank
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Audit
To review compliance with all pre-restructuring Guidelines on Restructuring of Advances by

conditions mentioned in restructuring package Bank
To check provisioning for advances as per Eligibility criteria for restructuring of advances
extant guidelines. Full provision for Funded i. Banks may restructure the accounts classified
Interest Term Loan (FITL) under 'standard', 'sub- standard' and 'doubtful'
categories.
To check all disclosure for restructured
advances as per extant guidelines ii. Banks cannot reschedule / restructure/
renegotiate borrowal accounts with
To check computation for provision for retrospective effect. While a restructuring
diminution in fair value of restructured
proposal is under consideration, the usual
advances
asset classification norms would continue
To check impact of restructured advances on to apply. The process of re-classification of
Capital Adequacy and Risk Weighted Assets an asset should not stop merely because
restructuring proposal is under consideration.
To review classification and provision for The asset classification status as on the date
advances converted to investments as per of approval of the restructured package by
extant guidelines the competent authority would be relevant to
decide the asset classification status of the
Existing Restructured Advances account after restructuring / rescheduling /
renegotiation. In case there is undue delay in
To obtain complete list of existing restructured
sanctioning a restructuring package and in the
advances from bank and need to re-check
meantime the asset classification status of the
from system report to ensure completeness of
account undergoes deterioration, it would be a
reporting
matter of supervisory concern.
To review compliance status of all post
iii. Normally, restructuring cannot take place
restructuring conditions
unless alteration / changes in the original loan
To review financial performance of the borrower agreement are made with the formal consent /
as per TEV study, to ensure no inherent application of the debtor. However, the process
weakness or failure of restructuring of restructuring can be initiated by the bank in
deserving cases subject to customer agreeing
To review classification of advances as per to the terms and conditions.
extant guidelines
iv. No account will be taken up for restructuring
To ensure provision @ 5% on standard by the banks unless the financial viability
Restructured advances. Full provision for is established and there is a reasonable
Funded Interest Term Loan (FITL) certainty of repayment from the borrower,
as per the terms of restructuring package.
In case of failure of restructuring, needs to Any restructuring done without looking into
assess classification of advances vis-a-vis cash flows of the borrower and assessing
original payment schedule the viability of the projects / activity financed
by banks would be treated as an attempt at
To check computation for provision for
ever greening a weak credit facility and would
diminution in fair value of restructured
invite supervisory concerns / action. Banks
advances
should accelerate the recovery measures in
To review all disclosure for restructured respect of such accounts. The viability should
advances as per extant guidelines be determined by the banks based on the
acceptable viability benchmarks determined by
To check impact of restructured advances on them, which may be applied on a case-by-case
Capital Adequacy and Risk Weighted Assets basis, depending on merits of each case.
Bank
44 Branch
Audit
v. Illustratively, the parameters may include ii. Asset classification

a. The Return on Capital Employed Restructured on or after 01.04.2015 Standard
b. Debt Service Coverage Ratio Assets
Immediately re-classified as sub-
c. Gap between the Internal Rate of Return standard assets upon restructuring..
d. Cost of Funds and Restructured before 01.04.2015 Standard
Assets
e. the amount of provision required in lieu
of the diminution in the fair value of the Standard Advances compliances with
restructured advance. special regulatory treatment for asset
classification norms will continue as
vi. The viability should be determined by the Standard assets and all other advances
banks based on the acceptable viability should be immediately re-classified as
parameters and benchmarks for each sub-standard assets
parameter determined by them. The
benchmarks for the viability parameters iii. The non-performing assets, upon
adopted by the CDR Mechanism are given in restructuring, would continue to have
the Appendix to Part-B of this Master Circular the same asset classification as prior
and individual banks may suitably adopt them to restructuring and slip into further
with appropriate adjustments, if any, for specific lower asset classification categories as
sectors while restructuring of accounts in non- per extant asset classification norms
CDR cases. with reference to the pre-restructuring
repayment schedule.
vii. BIFR cases are not eligible for restructuring
without their express approval. CDR Core 5. Upgradation of Accounts
Group in the case of advances restructured
i. Standard accounts classified as NPA
under CDR Mechanism, the lead bank in the
and NPA accounts retained in the same
case of SME Debt Restructuring Mechanism
category on restructuring by the bank
and the individual banks in other cases, may
should be upgraded only when all the
consider the proposals for restructuring in such
outstanding loan/facilities in the account
cases, after ensuring that all the formalities in
perform satisfactorily during the specified
seeking the approval from BIFR are completed
period, i.e., a period of one year from
before implementing the package.
the commencement of the first payment
of interest or principal, whichever is
4. Asset classification norms later, on the credit facility with longest
i. Restructuring of advances could take period of moratorium under the terms
place in the following stages: of restructuring package, principal and
interest on all facilities in the account are
before commencement of
serviced as per terms of payment during
commercial production / operation;
that period.
after commencement of commercial
ii. In case, however, satisfactory
production / operation but before
performance after the specified period
the asset has been classified as
is not evidenced, the asset classification
'sub-standard';
of the restructured account would be
after commencement of commercial governed as per the applicable prudential
production / operation and the norms with reference to the pre-
asset has been classified as 'sub- restructuring payment schedule.
standard' or 'doubtful'.
iii. Any additional finance may be treated
as standard asset, during the specified
Bank
Branch 45
Audit
period under the approved restructuring b. With a view to reflecting a higher

package. However, in the case of accounts element of inherent risk which may
where the pre-restructuring facilities were be latent in entities whose obligations
classified as sub-standard and doubtful, have been subjected to restructuring/
interest income on the additional finance rescheduling either by banks on their
should be recognized on cash basis only. own or along with other bankers/
If the restructured asset does not qualify creditors, the unrated standard /
for upgradation at the end of the above performing claims on corporates should
specified period, the additional finance shall be assigned a higher risk weight of
be placed in the same asset classification 125% until satisfactory performance
category as the restructured debt. under the revised payment schedule has
been established for one year from the
6. Income recognition norms date when the first payment of interest/
i. Interest income in respect of restructured principal falls due under the revised
accounts classified as 'standard assets' schedule.
will be recognized on accrual basis and c. For details on risk weights, Master
that in respect of the accounts classified Circular RBI/2015-16/58DBR.No.BP.
as 'non-performing assets' will be BC.1/21.06.201/2015-16 dated July 1,
recognized on cash basis. 2015 on Basel III Capital Regulations
may be referred.
7. Provision on restructured advances
Prudential Norms for Conversion of Principal
Normal provisions into Debt / Equity
Banks will hold provision against the
restructured advances as per the extant 9. Asset classification norms
provisioning norms. A part of the outstanding, principal amount can
Restructured accounts classified as be converted into debt or equity instruments
standard advances will attract a higher as part of restructuring. The debt / equity
provision (as prescribed from time to instruments so created will be classified in the
time) in the first two years from the date same asset classification category in which
of restructuring. In cases of moratorium the restructured advance has been classified.
on payment of interest/principal after Further movement in the asset classification of
restructuring, such advances will attract these instruments would also be determined
the prescribed higher provision for the based on the subsequent asset classification
period covering moratorium and two of the restructured advance.
years thereafter.
Income recognition norms
Restructured accounts classified as non- 10. Standard Accounts
performing advances, when upgraded to In the case of restructured accounts classified
standard category will attract a 5.00 per cent as 'standard', the income, if any, generated
5.00 per cent with effect from March by these instruments may be recognised on
31, 2016 (spread over the four quarters accrual basis.
of 2015-16)
11. Non-Performing Accounts
8. Risk-weights In the case of restructured accounts classified
The RBI circular also provides that: as non-performing assets, the income, if
any, generated by these instruments may be
a. Restructured housing loans should be recognised only on cash basis.
risk weighted with an additional risk
weight of 25 percentage points.
Bank
46 Branch
Audit
12. Valuation and provisioning norms quoted, interest income can be

These instruments should be held under AFS recognized after the account is upgraded
and valued as per usual valuation norms. to standard category at market value of
Equity classified as standard asset should equity, on the date of such upgradation,
be valued either at market value, if quoted, not exceeding the amount of interest
or at break-up value, if not quoted (without converted into equity.
considering the revaluation reserve, if any) Only on repayment in case of FITL
which is to be ascertained from the company's or sale / redemption proceeds of the
latest balance sheet. In case the latest balance debt/ equity instruments, the amount
sheet is not available, the shares are to be received will be recognized in the P&L
valued at ` 1. Equity instrument classified Account, while simultaneously reducing
as NPA should be valued at market value, the balance in the "Sundry Liabilities
if quoted, and in case where equity is not Account (Interest Capitalisation)".
quoted, it should be valued at ` 1. Depreciation
on these instruments should not be offset
15. Restructuring under JLF
against the appreciation in any other securities
held under the AFS category. If the JLF decide to restructure as CAP, it
can be referred to CDR cell or restructure
Prudential Norms for Conversion of Unpaid the same independent of CDR mechanism.
Interest into 'Funded Interest Term Loan' For restructuring process refer Master
(FITL), Debt or Equity Instruments Circular no. RBI/2015-16/101DBR.No.BP.
BC.2/21.04.048/2015-16 dated July 1, 2015
13. Asset classification norms along with clarification issued by Reserve
The FITL / debt or equity instrument created bank of India circular no. DBOD.BP.BC.
by conversion of unpaid interest will be No.45/21.04.132/2014-15 dated October 21,
classified in the same asset classification 2014
category in which the restructured advance
has been classified. Further movement in the 16. Restructuring of doubtful accounts under
asset classification of FITL / debt or equity JLF
instruments would also be determined based i. In terms of paragraph 4.3.6 of the circular
on the subsequent asset classification of the DBOD.BP.BC.No.97/21.04.132/2013-14
restructured advance. dated February 26, 2014, while generally
no account classified as doubtful
14. Income recognition norms should be considered by the JLF for
The income, if any, generated by these restructuring, in cases where a small
instruments may be recognised on portion of debt is doubtful i.e. the account
accrual basis, if these instruments are is standard/sub-standard in the books of
classified as 'standard', and on cash at least 90% of creditors (by value), the
basis in the cases where these have account may then be considered under
been classified as a non-performing JLF for restructuring.
asset. ii. In partial modification of the above, it has
The unrealised income represented been decided that a JLF may decide on
by FITL / Debt or equity instrument restructuring of an account classified as
should have a corresponding credit in doubtful in the books of one or more
an account styled as "Sundry Liabilities lenders similar to that of SMA2 and sub-
Account (Interest Capitalization)". standard assets, if the account has been
assessed as viable under the TEV and
In the case of conversion of unrealised the JLF-EG concurs with the assessment
interest income into equity, which is and approves the proposal.
Bank
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Audit
17. Asset Classification Norms circular. The information would be required for
i. While a restructuring proposal is under advances restructured under CDR Mechanism,
consideration by the JLF/CDR, the usual SME Debt Restructuring Mechanism and other
asset classification norm would continue categories separately. Banks must disclose the
to apply. The process of re-classification total amount outstanding in all the accounts /
of an asset should not stop merely facilities of borrowers whose accounts have
because restructuring proposal is under been restructured along with the restructured
consideration by the JLF/CDR. part or facility. This means even if only one of
the facilities / accounts of a borrower has been
18. Incentive for quick implementation of a restructured, the bank should also disclose the
restructuring package, the special asset entire outstanding amount pertaining to all the
classification benefit on restructuring of facilities / accounts of that particular borrower.
accounts as per extant instructions would The disclosure format prescribed in Annex-6
be available for accounts undertaken for of the Master Circular, inter alia, includes the
restructuring under these guidelines, subject to following:
adherence to the overall timeframe for approval
of restructuring package detailed in paragraphs details of accounts restructured on a
23.3 and 23.4 of Master Circular no. RBI/2015- cumulative basis excluding the standard
16/101DBR.No.BP.BC.2/21.04.048/2015- restructured accounts which cease to
16 dated July 1,2015 to be read along with attract higher provision and risk weight (if
Reserve Bank of India circular no. DBOD. applicable);
BP.BC.No.45/21.04.132/2014-15 dated October provisions made on restructured accounts
21, 2014 and implementation of the approved under various categories; and
package within 90 days from the date of
approval. The asset classification status as details of movement of restructured
on the date of formation of JLF would be the accounts.
relevant date to decide the asset classification
ii. This implies that once the higher provisions
status of the account after implementation of
and risk weights (if applicable) on restructured
the final restructuring package. As mentioned
advances (classified as standard either ab initio
in paragraph 15.2.3 in Part B of this Master
or on upgradation from NPA category) revert
Circular, the special asset classification
to the normal level on account of satisfactory
benefit as above will however be withdrawn
performance during the prescribed period, such
for all restructurings with effect from April 1,
advances should no longer be required to be
2015 with the exception of provisions related
disclosed by banks as restructured accounts
to changes in Date of Commencement of
in the Notes on Accounts in their Annual
Commercial Operations (DCCO) in respect of
Balance Sheets. However, the provision for
infrastructure and non-infrastructure project
diminution in the fair value of restructured
loans.
accounts on such restructured accounts should
continue to be maintained by banks as per the
Disclosures
existing instructions.
i. With effect from the financial year 2012-
13, banks are required to disclose in their It has been reiterated that the basic objective of
published annual Balance Sheets, under restructuring is to preserve economic value of units,
Notes on Accounts; information relating to not ever greening of problem accounts. This can
number of accounts and amount of advances be achieved by banks and the borrowers only by
restructured, and the amount of diminution in careful assessment of the viability, quick detection
the fair value of the restructured advances as of weaknesses in accounts and a time-bound
per the format given in Annex 6 to the RBI implementation of restructuring packages.
Bank
48 Branch
Audit
Income Recognition and Asset Classification (IRAC) norms
INCOME RECOGNITION AND ASSET

CLASSIFICATION (IRAC) NORMS
CA. Parag Hangekar
In its report submitted by the Narsimham Committee Moreover it is observed that the Banks take serious
in 1992, it had recommended that the policy view on any manual intervention by its staff in the
of income recognition should be objective and classification of the advances in the CBS.
based on recovery rather than on any subjective
considerations. Likewise it was also suggested by In spite of this it is astonishing that at the year-
the Committee that the classification of the assets end the auditors come across instances of issuing
should be done on the basis of objective criteria, several MOCs towards the classification of advances
which would ensure a uniform and consistent as NPA, making provisioning and reversing the
application of the norms. income on the same.
One of the most important areas in a bank audit is Verification of advances is one of the important
the classification of the advances and the relevant aspects of bank audit. While conducting verification
provisioning on it. Along with classification the of advances, impact of irregularities needs to be
auditor also has to ensure that the income on the seen from point of view of its asset classification.
advances is recognized based on the appropriate Originally RBI had health code system, which was
classification of the advance. This activity consumes replaced by IRAC norms in 1992-93.
the major time of the auditor in the entire audit and Any irregularities having bearing on NPA (Non-
thus assumes lot of significance. Performing Asset) status of the advances need to be
Nowadays all the Banks are on CBS platform examined carefully. In other words while examining
and the system are robust enough to classify the any advances; we need to check what impact does
advances based on the parameters fed by the the irregularity have on the advance on its NPA status.
Banks in the system as per the RBI norms. The As per RBI circular, when asset ceases to generate
systems are capable to flag the advances as NPA income, it becomes NPA. Auditors are advised to go
and also to account the income on them as per the through all the RBI circulars issued during the financial
RBI guidelines. The provisioning on the advances year, which are available at www.rbi.org.in. Also the
are mainly done by a different software package, auditors should refer the latest guidance note issued by
which is integrated with the main CBS system. This ICAI. Reserve Bank of India issues every year Master
software package pulls the data from the CBS and circular. The latest Master Circular No. RBI/2015-
based on the identification of the advances done by 16/101DBR.No.BP.BC.2/21.04.048/2015-16 was issued
the CBS suggests the relevant provisioning on them. on July 1, 2015 on Prudential Norms on Income
Even the provisioning is done by the packages again Recognition, Asset Classification and Provisioning
based on the parameters fed by the Bank as per the Pertaining to Advances. The salient points of the
relevant RBI guidelines. guidelines as presently in force are discussed below:
Type of facility To be Classified as NPA

Term Loan If Interest and/or installment remains overdue for more than 90 days.
Working Capital Finance If accounts remain out of order for more than 90 days. Account is treated as
(Over draft and Cash Credit) Out of order when:
the outstanding balance remains continuously in excess of the sanctioned
limit/ drawing power. In cases where the outstanding balance in the principal
operating account is less than the sanctioned limit/ drawing power, but there
are no credits continuously for 90 days as on the date of Balance Sheet or
credits are not enough to cover the interest debited during the same period,
these accounts should be treated as out of order
Bank
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Audit
Type of facility To be Classified as NPA

Further any amount due to the Bank under any credit facility is Overdue, if
it is not paid on the due date fixed by the Bank.
Bills purchased and The bill remains overdue and remains unpaid for a period of more than 90
discounted days.
Agricultural Advances Short duration crops
The installment of principal or interest thereon remains overdue for two crop
seasons.
Long duration crops
The installment of principal or interest thereon remains overdue for one crop
season.
Natural calamities
Where natural calamities impair the repaying capacity of agricultural
borrowers, banks may decide on their own as a relief measure conversion
of the short-term production loan into a term loan or re-schedulement of
the repayment period; and the sanctioning of fresh short-term loan, subject
to guidelines contained in RBI circulars. The RBI authorizes the State level
bankers committee to identify the areas of calamities and the crops to be
covered for the relief to be provided by the Banks.
Liquidity Facilities The amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitization transaction undertaken in terms of guidelines on
securitization dated February 1, 2006
Derivative Transactions The overdue receivables representing positive mark-to-market value of a
derivative contract, if these remain unpaid for a period of 90 days from the
specified due date for payment.
Diminution of Fair Value Provisions for diminution of fair value of restructured advances, both in
respect of Standard Assets as well as NPAs, made on account of reduction
in rate of interest and / or reschedulement of principal amount are permitted
to be netted from the relative asset.
Banks should, classify an account as NPA only if the interest due and charged during any quarter is not
serviced fully within 90 days from the end of the quarter.
Further advances need to be classified into categories as Standard, Sub-standard, Doubtful and loss Asset.
Following are criteria for classification of NPA
NPA Category Criteria for classification

Sub-Standard Asset Which has remained NPA for a period less than or equal to 12 months.
In such cases, the current net worth of the borrower/guarantor or the current
market value of the security charged is not enough to ensure recovery of
the dues to the banks in full. In other words, such an asset will have well
defined credit weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain some loss,
if deficiencies are not corrected.
Doubtful Asset An asset would be classified as doubtful if it has remained in the sub-
standard category for a period of 12 months.
Bank
50 Branch
Audit
NPA Category Criteria for classification

A loan classified as doubtful has all the weaknesses inherent in assets
that were classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
known facts, conditions and values highly questionable and improbable.
For provisioning, Doubtful Assets are further classified as per age in doubtful
category, in sub-categories generally called as D-1, D-2 and D-3.
Loss Asset A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written
off wholly.
In other words, such an asset is considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted although
there may be some salvage or recovery value.
Accounts where there is In respect of accounts where there are potential threats for recovery on
erosion in the value of account of erosion in the value of security or non- availability of security and
security/frauds committed by existence of other factors such as frauds committed by borrowers it will not
borrowers be prudent that such accounts should go through various stages of
asset classification.
In cases of such serious credit impairment the asset should be
straightaway classified as doubtful or loss asset as appropriate:
Value Classification to be done
Less than 50% Doubtful Asset
Less than 10% Loss Asset Full Provision
Other issues in classifications of advances as NPA

Accounts with temporary Banks should ensure that drawings in the working capital accounts are
deficiencies covered by the adequacy of current assets.
Drawing power is required to be arrived at based on the stock
statement, which is current. However, considering the difficulties
of large borrowers, stock statements relied upon by the banks for
determining drawing power should not be older than three months.
Regular and ad hoc credit limits Regular and ad hoc credit limits need to be reviewed/regularized not
later than three months from the due date/date of ad hoc sanction.
In case of constraints such as non-availability of financial statements
and other data from the borrowers, the branch should furnish evidence
to show that renewal/review of credit limits is already under process
and would be completed soon. In any case, delay beyond six
months is not considered desirable as a general discipline. Hence,
an account where the regular/ad hoc credit limits have not been
reviewed/ renewed within 180 days from the due date/ date of ad
hoc sanction will be treated as NPA.
Accounts regularized near about The asset classification of borrowal accounts where a solitary or a few
the balance sheet date credits are recorded before the balance sheet date should be handled
with care and without scope for subjectivity.
Bank
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Audit
Where the account indicates inherent weakness on the basis of

the data available, the account should be deemed as a NPA.
In other genuine cases, the banks must furnish satisfactory evidence
to the Statutory Auditors/Inspecting Officers about the manner of
regularization of the account to eliminate doubts on their performing
status.
Loans with moratorium for i. In the case of bank finance given for industrial projects or for
payment of interest agricultural plantations etc. where moratorium is available for payment
of interest, payment of interest becomes due only after the moratorium
or gestation period is over. Therefore, such amounts of interest do not
become overdue and hence do not become NPA, with reference to
the date of debit of interest. They become overdue after due date for
payment of interest, if uncollected.
ii. In the case of housing loan or similar advances granted to staff
members where interest is payable after recovery of principal,
interest need not be considered as overdue from the first quarter
onwards. Such loans/advances should be classified as NPA only when
there is a default in repayment of installment of principal or payment of
interest on the respective due dates.
Government Guaranteed Advances Central Government Guaranteed Advances
The credit facilities backed by guarantee of the Central Government
though overdue may be treated as NPA only when the Government
repudiates its guarantee when invoked. This exemption from
classification of Government guaranteed advances as NPA is not for
the purpose of recognition of income.
State Government guaranteed Advances
State Government guaranteed advances and investments in State
Government guaranteed securities would attract asset classification and
provisioning norms if interest and/or principal or any other amount due
to the bank remains overdue for more than 90 days.
Other points to be considered in classification of an Advances against Term Deposits, NSCs, KVP/
advances as NPA: IVP, etc.
Asset Classification needs to be done Advances against term deposits, NSCs eligible
borrower-wise and not facility-wise. The auditor for surrender, IVPs, KVPs and life policies
should check properly that only a single unique need not be treated as NPAs, provided
code is given to each borrower in the CBS adequate margin is available in the accounts.
since the NPA classification will be based
on this code and if there are multiple codes PROVISIONING NORMS
given to the same borrower then there are Advances against gold ornaments, government
possibilities that some of the facilities of the securities and all other securities are not
borrower are not classified as NPA. covered by the NPA classification exemption.
Consortium Advances: Asset classification of Valuation of Security for provisioning purposes
accounts under consortium should be based on
the record of recovery of the individual member With a view to bringing down divergence
banks and other aspects having a bearing on arising out of difference in assessment of
the recoverability of the advances. the value of security, in cases of NPAs with
Bank
52 Branch
Audit
balance of ` 5 crore and above stock audit at annual intervals by external agencies, collaterals such
as immovable properties charged in favour of the bank should be got valued once in three years by
valuers appointed as per the guidelines approved by the Board of Directors.
Standard Assets (a) Direct advances to agricultural and SME sectors at 0.25 per cent.
(b) Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent.
(c) Advances to Commercial Real Estate Residential Housing Sector (CRE-
RH) at 0.75 per cent
(d) All other loans and advances not included in (a) and (b) above at 0.40
per cent
Housing loan at teaser rate it will be @ 2%
On newly restructured advances after 1-6-2013 @ 3.5% for March 2014,
4.25% for March 2015 and @ 5% for March 2016. On old restructured
advances @ 2.75%
Sub-standard Assets Secured exposure: 15% on total outstanding should be made without making
any allowance for DICGC/ECGC cover and securities available
Unsecured exposures for escrow accounts available in respect of
infrastructure lending, infrastructure loan accounts: 20% on outstanding
balance
Other unsecured exposures: 25% on outstanding balance
Doubtful Assets Unsecured Portion : 100%
Secured Portion :
Period for which the advance has Provision requirement
remained in doubtful category (%)
Up to one year - D1 25
One to three years - D2 40
More than three years - D3 100
Loss Assets 100 %
INCOME RECOGNITION debts should be recognized on an accrual basis

The policy of income recognition has to be objective over the period of time covered by the re-negotiated
and based on the record of recovery. Internationally or rescheduled extension of credit. If Government
income from non-performing assets (NPA) is not guaranteed advances become NPA, the interest
recognized on accrual basis but is booked as income on such advances should not be taken to income
only when it is actually received. Therefore, the account unless the interest has been realized.
banks should not charge and take to income account
interest on any NPA. Reversal of income
If any advance, including bills purchased and
However, interest on advances against term deposits,
discounted, becomes NPA, the entire interest
NSCs, IVPs, KVPs and Life policies may be taken to
accrued and credited to income account in the
income account on the due date, provided adequate
past periods, should be reversed if the same is
margin is available in the accounts.
not realized. This is commonly referred as UIPY
Fees and commissions earned by the banks as a Unrealized Interest of Previous Year. This will apply
result of re-negotiations or rescheduling of outstanding to Government guaranteed accounts also.
Bank
Branch 53
Audit
In respect of NPAs, fees, commission and similar Certain Practical Points

income that have accrued should cease to accrue In case of NPA, the auditor should carefully
in the current period and should be reversed with examine security as it will change the amount
respect to past periods, if uncollected. of provisioning if advances are found to be
unsecured.
Leased Assets
The date of advance becoming NPA is
The finance charge component of finance income [as
important and needs to be examined whether
defined in AS 19 Leases issued by the Council
the same is correctly determined as age of
of the Institute of Chartered Accountants of India
NPA determines its provisioning amounts.
(ICAI)] on the leased asset which has accrued and
was credited to income account before the asset The restructuring of advances should not be
became non-performing, and remaining unrealized, repeated restructuring.
should be reversed or provided for in the current
accounting period. There are various evergreening techniques
which are being resorted for not classifying
Appropriation of recovery in NPAs advance as NPA, we have to see the
advances are being paid off from genuine
Interest realized on NPAs may be taken to income
sources and not by granting fresh advances in
account provided the credits in the accounts
any way.
towards interest are not out of fresh/additional
credit facilities sanctioned to the borrower
Conclusion
concerned.
As classification, provisioning and income recognition
In the absence of a clear agreement between is governed by RBI norms, we have to carry out audit
the bank and the borrower for the purpose of of advances based on latest RBI norms and directives.
appropriation of recoveries in NPAs (i.e., towards The NPA norms have improved overall quality of
principal or interest due), banks should adopt advances. The controls in the CBS for identification of
an accounting principle and exercise the right NPA and the software packages used for provisioning
of appropriation of recoveries in a uniform and should be properly checked by the auditors. Looking at
consistent manner. frauds reported, we need to be very vigilant in verifying
correct application of NPA norms.
Bank
54 Branch
Audit
Long Form Audit Report
LONG FORM AUDIT REPORT

CA. Ketan Saiya
Introduction same, if done so we will need to study newer

Reserve Bank of India (RBI) being Central LFAR.
Bank of India, makes various policies for As per circular of RBI dated 4th June 2015,
functioning of all Banks in India. RBI Controls, In respect of branches below the cut-off
Directs, Supervises and Monitors Banking point, which are subject to concurrent audit
Industry in India. RBI issues / cancels by chartered accountants, after above date,
Licenses of Banks and Non Banking Financial LFARs and other certifications done earlier
Companies (NBFC) in India. RBI issues by SBAs will be submitted by the concurrent
various notification / circular directing about auditors and such branches may not generally
policies / procedure to be followed by banks. be subject to statutory audit.
One must keep on eye on RBI website www.
rbi.org.in to keep oneself updated with latest
Content of LFAR
pronouncements made by RBI.
The Reserve Bank of India has prescribed
Increased level of NPA and Frauds are concern two formats for LFAR viz. LFAR for Bank as
for auditors in this year in carrying out Branch a whole and LFAR for branches of the bank.
Statutory Audit. Further availability limited The branch auditors are expected to submit the
time adds fuel to fire. Auditors are under LFAR in the format prescribed for the branches
pressure to carry out quality audit in limited of the bank. The Central Statutory Auditors is
time available. expected to review the LFARs submitted by
the branch auditors and consolidate his LFAR
Audit assumes an important role in assisting
for bank as whole in the format prescribed
the RBI to supervise and monitor Banking
for the bank as a whole by RBI. This LFAR
Industry in India. There are various types of
are submitted to RBI also. It is necessary for
audits carried out in banks viz. Statutory Audit,
the branch auditors to prepare the LFAR very
Concurrent Audit, Internal Audits, Revenue
carefully.
Audit, etc. Amongst these, Statutory Audit of
the bank is a yearly function. The format of LFAR is in a question reply
format. These questions are to be answered
The Statutory auditor of the bank is required
with proper details along with appropriate
to submit Statutory Audit Report as per the
examples. Auditor should not reply the
requirements of the Banking Regulation Act,
questions mealy by stating Yes No Not
1949. This report is not detailed report for
Applicable but he should write detailed replies
various requirements on which RBI wants input
to each question based on his examination
of independent auditors. Keeping that in mind,
of books and other records. Many a time it
RBI has introduced Long Form Audit Report
is seen LFAR is prepared completely based
(LFAR) from the auditor since 1985.
on previous year LFAR or from concurrent
The format of LFAR was revised in the year audit / internal audit reports instead of own
2003 and the present format is effective from independent examination of facts and figures
31st March, 2003. In past 13 years, Banking which should be avoided. Verification of
industry has undergone many changes, compiled data should be done along with audit
dynamics of doing business have completely simultaneously. Writing replies to the LFAR at
changed hence this LFAR which was redrafted the end of audit is not advisable.
in 2003 needs further revision. New LFAR
LFAR is neither substitute for Branch Statutory
format is under preparation, RBI will notify the
Audit Report nor it is part of Statutory Audit
Bank
Branch 55
Audit
Report. Thus the Statutory Report is a 3. Contingent liabilities

independent document and the auditor should
not make any cross reference in both reports. C. Profit and Loss Account
The matters may be repeated in both the D. General
reports.
1. Books and Records
Any adverse comment made by auditor in
LFAR, he should consider whether qualification 2. Reconciliation of Control and Subsidiary
in the main report is required. It is not records
necessary that every adverse comment in 3. Inter-branch Accounts
LFAR will result in a qualification in main
report. Therefore the auditor should use his 4. Audits/ Inspections
judgment in the facts and circumstances in
each case. Matters are material can come in 5. Frauds
Main Report. 6. Miscellaneous
Auditors should discuss the LFAR with the In addition to these questions it also gives
branch management and get their feedback questionnaires applicable to specialised branches
before issuing the final report. The motto is to
ensure correctness facts and figures given in Dealing in Foreign Exchange Transactions.
report are error free.. Dealing in very large advances in excess of
Apply your original thoughts in LFAR, based ` 100 crores.
examination carried out by audit team. Do not Dealing in NPAs such as Asset Recovery
make it replica of previous year LFAR. Management Branches.
The evidences viz., copies of bills and other Dealing in clearing house operations, normally
documents, to support the deficiencies / referred to as service branches.
adverse remarks, mentioned in the LFAR
should be obtained and preserved as audit Additionally, there is a format for Annexure for large/
working paper. irregular/critical advances. Normally this annexure
is to be filled up by the Bank branch management
Points Covered in LFAR and the auditor should verify the details mentioned
The format of LFAR as applicable to the bank branch in the Annexure. The details will be pertaining to the
audit consists of the questions on following major advance in excess of ` 100 crores.
areas, such as: Some of the matters mentioned in the LFAR needs
A. Assets compilation of information at the branch. It is the
responsibility of the concerned branch to compile
1. Cash the information and hand it over to the auditor for
verification. The auditor should verify the correctness
2. Balances with RBI, SBI and other banks
of information and include the same in his LFAR.
3. Money at call and short notice In case auditor faces any problem in getting such
information or has a doubt about the correctness of
4. Investments information, he should report the same in his LFAR.
5. Advances
Individual Questions
6. Other assets
Cash
B. Liabilities
The branch is expected to maintain the cash balance
1. Deposits within the limit prescribed by the controlling authority.
In case the branch holds cash in excess of the
2. Other liabilities retention limit set, the auditor needs to give details
Bank
56 Branch
Audit
of the same. The reasons for such excess cash Money at call and short notice
balance should be inquired into. Normally this head is NIL at branches. Money at
Normally the global insurance policy for cash-in- call and short notice are handled at, head office.
custody or cash-in-transit is taken at the head office However, in case such transactions are located at
level. The head office normally sends confirmation to the branch, the auditor should examine the balances
that effect to the branches. Auditor should examine held at the branch with reference to the general
that communication from head office and comment or specific authority and instructions/guidelines
whether insurance cover is adequate or not from the controlling authority / RBI. The cases of
non compliance of relevant instructions should be
The branch should hold cash in joint custody of reported including unauthorised deposits or deposits
the cashier and the branch manager. The branch in excess of authorised limit.
manager is also expected to verify the cash
periodically and put his signature to that effect. The Investments
auditor should report whether these directions are
followed properly or not. Investments are normally NIL at branches.
The auditor should comment on identification and Investments in India and Outside India is reported
disposal of soiled notes, counterfeit notes, stapling separately. Questions are separate for the branches
of notes, use of ultra violet lamps, note counting in India and for branches outside India. However the
machines etc. questions to both are almost same.
Further auditors should examine cash at ATM, The auditor should obtain a certificate from branch
Extension counters (if any). regarding investments held by the branch on behalf
of the head office. The auditor should verify them
If there any last day unresponded cash entries are physically. In case the security is not available
there auditors should see the same is responded in physically, the holding certificate/ confirmation to that
reasonable time frame. effect should be obtained. The income on investment
Balances with RBI, SBI and other banks. should be reported to head office. The auditor should
see that accounting of such income is done properly.
Normally bank branch maintains the account with The matured investments should be encashed. The
RBI / SBI or any other bank. The branch auditor RBI guidelines for valuation and income recognition
should check whether the balances are tallied at should be examined.
year end or there a reconciliation statement for the
year end balances is prepared or not. He should In case of any deviation the auditor should report
critically review the reconciliation statement and find the same. For valuation of investment, the auditor
out the long outstanding entries in the statement. should refer to the circular on Prudential norms got
An explanation from the branch management for Classification, Valuation and Operation of Investment
the pending entries should be obtained. If there is portfolio by banks issued by RBI.
any revenue item/old outstanding debit entry is lying
in Reconciliation statement, the same should be Advances
reported in LFAR and if material Memorandum of The reporting under advances is to be done under
Changes (MOC) can be issued for the same. four broad categories viz.
The auditor should give the details of entries Credit Appraisal,
outstanding in the reconciliation statement which
are outstanding for more than six months and with Sanctioning and Disbursement,
specific details of outstanding entries for more than
one year. The auditor may ask the bank to compile Documentation,
such information and verify the same before giving Review/ Monitoring and Supervision.
it in LFAR. The continuous failure of the branch to
obtain and/or preparing reconciliation statements This topic is dealt in detail in this books. Hence
should also be reported in LFAR. these aspects are not dealt in detail here.
Bank
Branch 57
Audit
Other assets Other Liabilities Bills payable, sundry

The balance sheet of the bank contains residual deposits, etc.
items about the assets which are not specified The auditors should obtain age wise details of
above, such as stationery and stamp, sundries, pending entries in bills payable, sundry deposits
suspense A/c, etc. In case of stationery and stamps accounts from the branch management. The
the auditor should do physical verification of stock on details obtained should be scrutinised to find out
hand, he should also check the control on custody whether there exists any unusual items or material
and issue of stationery items, stamps, blank cheque withdrawal/ debits. Also old entries needs to be
books and other security documents etc. The auditor reported in specified format given
should review the process of receipt and issue for
the same. Stationery items will include term deposit Contingent liabilities
receipts drafts, pay orders, cheque books, traveller The auditor should see that there exists a system
cheques, gift cheques etc. The instances of lost or which gives a reasonable assurance that all
missing stationery should also be mentioned in the contingent liabilities are identified and properly
report. disclosed. The auditor should mention the list of
major items of contingent liabilities (other than
In case of sundries and suspense accounts, the
constituents liabilities such as guarantees, letters of
auditor should obtain the details of age wise analysis
credit, acceptances, endorsements, etc.) addition,
of outstanding entries in the account. Inquire about
the auditor should obtain representation from branch
reason for entry being pending for unreasonable
management that all contingent liabilities have been
period. Assess the position of recoverability of the
disclosed and contingent liabilities do not include any
amount. The auditor should exercise his judgment
contingencies which are likely to result in a loss and
about proposing provision against such amounts. In
which therefore require consequent adjustments of
case any unusual items are noticed while perusing
assets and liabilities.
the account, the auditor should report the same.
Profit and Loss Account
Liabilities Deposits
The auditor should review the system at the branch
A deposit accepted from the public is a liability for
to compute the discrepancy in interest, discounts
the bank. Overdue deposits needs to be transferred
or commission and for timely adjustment therefore
to Specified fund as prescribed by RBI at the end of
The auditor should see the guidelines of head
10 years since the same is overdue/unclaimed.
office in this regard. The interest and commission
Unclaimed/Inoperative accounts needs to be seen should be checked on test check basis to find out
critically as it is one of the fraud prone areas. whether there exists proper system to compute
Guidelines for operations in inoperative accounts them correctly. The income recognition norms of RBI
needs to be seen whether the same is being should be followed at the branch. The auditor should
followed properly or not?. if the guidelines are not report any deviation in that regard.
followed, the same should be suitably reported.
The auditor should carry out the analytical procedure
Auditors should check if there any unusual large to find out whether there are any divergent trends
movements (whether increase or decrease) in in major items of income or expenditure. A suitable
the aggregate deposits held at the year end. In explanation should be asked for any divergent trend
such situation the explanation from the branch from the branch management. In case the auditor is
management should be obtained. The movements not satisfied with the explanation, he should mention
without proper explanation should be reported in the same in his report with proper details for the said
LFAR under this clause of under the clause of divergent trend.
window dressing if so felt. The auditor can apply various analytical procedure
The auditor should obtain a list of overdue/ matured ssuch as comparison with previous year, verification
deposits at the end of the year and same should be of interest income/expenses vis-a-vis average
reported in LFAR. advances/deposits respectively.
Bank
58 Branch
Audit
Books and records Audits/Inspections

In most of the situation, nowadays, the books are The auditor should review reports for concurrent
maintained in a computerised environment. If the audit, RBI inspection special audit, internal audit,
books are maintained manually the auditor should etc. and find out whether they are complied properly.
peruse them to find out whether they are maintained While finalising the reports, the auditor should
properly. The balancing is done and it is properly consider the major adverse comments arising out of
inked out. The books are to be authenticated by these reports. This review of report should be done
proper signatory at the branch. while starting the audit hence areas in which there
are adverse comments auditors can more focus such
In respect of computerised environment the hard areas.
copies of certain accounts should be printed
regularly. The auditor should also mention the Frauds
extent of computerisation and adequacy of the The auditor should check the fraud register and
access and data security measures and other report particulars of frauds discovered during the
internal controls. The auditor may review the process year under audit at the branch. Auditor should find
of creation of new logins, change of password of out about whether the fraud detected has been
administrative control to access different files or reported to Reserve Bank of India or not? if any
reports through computerised system. There should fraud is not reported by bank, auditor is duty bound
be maker checker system. Updatation of the master to report the same to RBI. Auditor should check
data should be under supervisory control. The whether adequate provision has been done in books
modification in the master data should be registered or not? The auditor can also give suggestions to
to branch manager only. The auditor should also curb the possibilities of frauds.
review the contingency and disaster recovery plan
for the computer system. Timely backups, offsite Miscellaneous/Fixed Asset/Window Dressing:
backups, etc. should be reviewed to understand the The auditor should mention about the adequacy of
backup procedure. The auditor should also mention control and maintenance of records in relation to the
any suggestion for efficient operation of the computer fixed assets at the branch. The fixed assets register
system. should be updated. Auditor should check whether
branch management has physically verified the
Reconciliation of control and subsidiary records Fixed Asset or not? also auditor should check asset
The auditor should see whether the subsidiary transfer to and from branch are properly accounted
records are tallied with the control accounts. In case in books.
there are differences the same should be reported. The calculation of depreciation should be checked
He should also mention the date up to which the properly and any deviation should be reported.
control and subsidiary records are balanced. Now-a-
days due to computerisation this point has become The auditor should report whether examination
superfluous. Auditors should check if any such of accounts indicate possible window dressing.
manual records are maintained same are matching The auditor should review the transactions near
with main books of accounts. to the balance sheet to look into the possibility of
window dressing in the account. There have been
Inter branch accounts transactions of transfer of current account balances
to overdraft/cc accounts there by increasing deposits
In view of Core Banking Solutions Environment and advances of the branch hence auditors should
across banking sector, reconciliations have become be careful if year end advances and deposits have
much easier. The auditors should check enquiry increased.
memos received from head office are being
responded by the branches and there are no un- The auditor can also mention any other matter
reconciled entries. Old unreconciled entries needs to which he would like to bring to the notice of the
be reported. If there are old Debit balances, auditors management and Central Statutory Auditors. Under
should call for provisioning of the same. this clause auditor can share his suggestions on
Bank
Branch 59
Audit
all matters which he feels for betterment of overall of accounts he should reply to all those questions
working of the bank. applicable to such branches.
Questionnaire applicable to specialised branch Conclusion

We have not covered in this article, LFAR applicable LFAR is very important tool for bank branch audit.
to specialised branches. LFAR has special points If examination of all questions mentioned in LFAR
focused for specialised braches. These questions is covered in detailed automatically it takes care of
are for branches specialized in Foreign Exchange all the areas to be covered in a bank branch audit.
Transactions, Service Branches, Asset Recovery Auditor should distribute the areas within the team
Branches. Auditor should get himself updated with and person doing specific area should keep in mind
rules and regulations applicable to such specialised questions to be replied in LFAR so no area/ question
branches and based on his examination of books is missed while carrying out the audit of bank branch.
Bank
60 Branch
Audit
INCOME AND EXPENDITURE AUDIT

CA. Ramesh A. Shetty
The statutory auditors should certify the financial of average monthly advances outstanding in each
statements prepared at the branch of the Bank. category of advances and average rate of interest
earned thereon. Calculate the same for the current
He has to express the true and fair view on the year as well as previous year. This analysis is useful
financial statements prepared at the branch. for ascertaining average interest yield on advances
Therefore, the auditors should take care of various and to avoid any gross error in calculation of interest.
items of the Income and Expenditure and Balance Even computer software bugs such as debiting/
Sheet. crediting interest twice erroneously or omitting
Due to paucity of time, auditors should adequately, interest booking (revenue leakage) can be easily
plan their audit in order to complete the audit in caught by these analyses.
time. The auditor needs to decide the test check Changes in interest rates are communicated to
criteria and selection of sample. Begin the audit with branches through circulars from banks head office.
comparative analysis and Ratio Analysis of current Such circulars should be obtained and changed
period figures with previous corresponding periods. rates should be verified with effect from the
Previous years report and internal audit reports applicable dates.
such as RBI Report, Income Audit, Revenue Audit, For new advances granted during the year, examine
Concurrent Audit and Internal Audit also provides charging of processing fees. On the advances not
useful information for selecting samples under each utilised by the borrower during the year, branch is
head, based on which the auditor may be able to required to recover commitment charges from the
identify problematic/critical areas, where more thrust borrower.
needs to be given.
In case of certain advances schemes discontinued
Before commencing the audit of Profit and Loss by the bank, interest rates are to be updated
Account, the auditor must appraise himself with manually, which should be verified on test check
the accounting policies of the bank with regards to basis. Errors may occur in calculation of interest
recognition of income, expenses, overdue interest or feeding of interest rate or value date or on
on term deposits, booking of depreciation, gain/loss updation of interest rates. Accounts where interest
on assets sold, Broken period interest/commission is calculated manually should be focused more for
on bills, booking of investment, income, provision of verification.
bad and doubtful debt, employee related provisions
such as bonus, gratuity, pension etc. Appropriate Penal interest charged can be verified on selective
disclosure needs to be given for non-provision of basis with respect to different types of default
some expense which are accounted at head office and non-compliance for delay in submission,
and not at branch level. non-submission of periodical data such as late
submission of financial statement and other period
INCOME data stock/ book debt statement etc.
Major part of income of the bank accrues from
interest on advances. Ascertain the type of advances Not providing information for renewal of facility
granted by the branch and average prevailing also attracts penal interest. In case of cash
interest rate charged on such advances. credit accounts, penal interest is to be charged if
outstanding balance in the account exceeds drawing
Verify significant portion of the interest charged in power.
respect of Major Advances Accounts of the branch
and selectively in case of the balance accounts. Method of charging renewal fees and its actual
Verify overall interest income earned on the basis debits needs to be examined. For verification of
Bank
Branch 61
Audit
other income like Commission on DO, etc. applicable RBI and other inter-bank funds, needs to be accrued
rate needs to be applied, which should be verified on in books.
test check basis. In certain cases DO issued to staff,
valued customers etc., commission is not recovered Verify income of extension counter of the branch (if
or recovered at concessional rates, authorization for any) and also balance reconciliation with extension
which should be verified. counter.
In respect of accounting of commission on Verify amount received from court due to settlement
guarantees or Letter of Credit, it is observed that of cases.
banks follow different practices for accounting Verify profit booked on sale of land, buildings and
commission as income. Some banks account as other fixed assets.
and when income is collected, whereas some banks
account income over the period of guarantee, thus EXPENDITURE
commission for unexpired period of guarantee is
For expenses, it is not enough to have appropriate
treated as received as advance and is shown
account debited but the amount debited should
as liability. Thus, auditor should ensure that the
also be proper. For all expenses, the auditor should
accounting policy adopted by the bank in this regard
see the sanction by appropriate authority, proper
is consistently followed by the branch.
documentation and correctness in accounting. The
The auditor should ensure that the branch has not auditor may also have a proprietary angle which
considered unrealised interest on any NPA (including he may use judiciously. The auditor needs to verify
Government guaranteed advances), irrespective of Interest expenses on various types of deposits like
the fact whether the NPA has been subjected to any savings, fixed-term, recurring etc. Interest has to be
restructuring, rescheduling or renegotiation of terms. charged at the prevailing rates as per banks circular.
Examine whether interest has been changed in the
Interest on NPA can be booked only upon realization. system from time-to-time as per head office circulars
However, the same should not be out of fresh/
additional credits and the realization has to be Verify banks policy with regard to booking of
genuine. expenses.
Interest on exempted advances against Fixed All Establishment expenses need to be verified
Deposits, NSCs, KVPs and Life Insurance Policies on test check basis. Ensure that all expenses are
(LlC) can be booked as income, provided adequate booked based on the accounting policy followed
margin is available in accounts. by the bank. Some banks have wrong notion of
booking expenses of twelve months i.e., from March
The auditor should verify whether any fees or of previous year to February of current year, which
commission earned by the banks as a result of needs to be corrected.
re-negotiations or rescheduling of loans is in line with
the extant RBI Circular. Expenses like salary needs to be verified on test
check basis. For all other expenses, the auditor
In case of lockers, recovery of rental by debiting to needs to verify whether the expenses incurred by the
respective savings account of locker-holders needs branch are within the overall authority of the branch
to be verified. Statement of outstanding locker rent manager. In case of higher expenses, verify whether
needs to be obtained. head office approval has been obtained.
Commission on Government business needs to be Carry out physical verification of stationery and if
checked with head office RBI confirmation. required provide for old obsolete stationery items.
Income on Forex transaction needs to be verified Many branch premises are on rentals. The auditor
based on type of branch and type of income. needs to verify agreement of lease and debit of
Income on other activities such as investments rent as per the prevailing lease agreement. In many
activities like PMS, Mutual Fund, Insurance cases agreements have expired and dispute exists
marketing, interest on investments, balances with between the branch and landlord, which is mainly
for increase in rent or for any other term. In such
Bank
62 Branch
Audit
cases appropriate provision needs to be made in OTHERS

the accounts based on the status of the dispute. Obtain Management Representation letter
The requirements of AS-29, Provisions, Contingent representing that the branch has booked all known
Liabilities and Contingent Assets should be referred liabilities and expenses and all other issues relating
to in such case. to audit of Profit & Loss account.
Based on accounting policies, provision of all known Examine correct entries have been passed for last
expenses and losses needs to be examined. In years Memorandum of Changes suggested by
case of frauds, based on the status of the case, un- previous years branch auditors.
recovered amount needs to be provided fully.
Obtain engagement letter for conducting audit of the
Verify head office interest received/paid by the branch.
branch based on internal policy of the bank. Verify
various Tax audit requirements, especially TDS on Check the depreciation policy of the bank and
interest payments and on applicable expenses. accordingly design the audit plan of the branch.
Normally it is observed that branches make defaults
Examine applicability of other applicable accounting
in timely deduction and payment of TDS.
standards and accordingly plan the audit and
Verify currency chest expenses (if any) in the reporting requirements.
branch.
Verify foreign exchange valuation gain or loss
Verify expenses of extension counter (if any) of the booked.
branch.
Finally the presentation in the Profit and Loss
Verify legal fees paid to advocate is in respect of account is also very important. The balances
which legal cases? Such expenses may give details in particular account should be mentioned at
of potential liabilities of the branch. appropriate column or row in the final Profit and
Loss account.
While verifying repairs & maintenance, auditors
should verify whether capital expenses are debited In general, the auditor should be aware of the
to Profit & Loss account, and whether expenses of situation in which he is auditing. He should
revenue nature are capitalized as assets. have sound knowledge of statutory or regulatory
requirements.
Bank
Branch 63
Audit
Notes
Bank
64 Branch
Audit
SENSITIVE ACCOUNTS AND HOUSEKEEPING ACCOUNTS
SENSITIVE ACCOUNTS AND

HOUSEKEEPING ACCOUNTS
CA. Nilesh Joshi
Normally in case of Branch Audit, focus is always on 2. Understand nature of sensitive accounts.
advances, as advances is the critical risk area and
highest revenue generating area for a Bank. Another 3. Obtain agewise analysis of sensitive accounts
high risk area from financial risk perspectives submitted by Branch to controlling office as
are expenses, interest on deposits & advances, monthly report.
suspense accounts, levying of charges, etc. As part 4. Generate GL of office accounts and analyse
of normal audit processes areas like expenses, the same to identify long outstanding or
interest on deposits & advances, collection of unusual entry.
charges are covered during regular audit, however
suspense accounts and sundry accounts may not 5. Information Technology controls in respect
get adequate focus though it is a high risk area. of sensitive accounts e.g. Debit to sundry/
These accounts are considered as fraud prone suspense account require authorization from
accounts due to small account balances in these Branch Head/Manager.
accounts. These are also known as office accounts, Some of the sundry debtors, suspense, sundry
sundry debtors account, sundry creditors account, creditor accounts used by banks and purpose of the
suspense accounts, etc. same are as under:
The verification of these accounts are not only
restricted to monitoring long outstanding entries but 1. SUNDRY DEPOSITS TERM DEPOSITS A/C
also identifying an unusual entry considering nature The account is used to credit the initial deposit
of account. For example an entry for reversal of of new term deposit.
processing charges shall be as under;
2. TD-LIQUIDATION A/C
Processing Charges a/c Dr.
To Current Account / Cash Credit a/c The account is used to credit the maturity
proceeds of term deposit.
if the above entry is passed as under;
Processing Charges a/c Dr. 3. SA-ADV PAID TO EMPLOYEES
To RTGS Suspense a/c
As per practice, the account is used for
Then the reason of passing such entry should be accounting any advance amount paid to staff
enquired, because RTGS suspense account is used during the course of business other than
to send funds through RTGS. amount granted as loan to staff. (Such as Adv
payment for expenses towards business tour/
The most important aspect of a sensitive account training etc.)
is nature and purpose of account. In case of CBS
platforms like Finacle, some office accounts are 4. SA-CLEARING CHEQUES RETURNED
called as pointing accounts, which are accounts
used for specific purpose and should be nullified Cheques received in inward clearing that have
within specified time period. The auditor should to be returned (on account of insufficient funds,
understand the purpose of the account and plan the out of date instrument etc.) are debited to this
verification process. account.
Steps may be followed while verifying sensitive 5. SA-STAMP DUTY FRANKING

accounts INTERMEDIARY
1. Identify sensitive accounts by analyzing trial This is an intermediary account used where
balance customers do not have account with the
Bank
Branch 65
Audit
Bank and submits a demand draft/pay order issue register, Document Movement Register
favouring ______ A/c Stamp Duty. Initially, etc. These registers should be properly and
the requisite franking is done by debiting this regularly updated. If these registers are not up
intermediary account. Subsequently, from the to date or not updated regularly then it shows
realization proceeds of demand draft submitted Branch is exposed to risk. For example if the
by the customer the above debit in SA Stamp signature of customer on locker access register
Duty Franking Intermediary A/c is reversed. is not counter signed by Branch official, then it
does not give evidence that Branch official has
6. SA-OTHERS verified signature. This reflects lack of internal
This account is temporary parking account controls in the Branch, which may be common
and to be used in the circumstances where across whole branch.
appropriate account / GL Head cannot be 2. Reconciliations: The important aspect of
debited at that point of time. This account is Housekeeping is reconciliations of accounts
more prone to fraud as this a residual office with other banks including Nostro accounts
account. and with clearing house. Reconciliation should
be drawn on monthly basis and there should
7. SL-FUNDS IN TRANSIT be no long pending unreconciled entries in the
SLFIT account is an office account maintained reconciliation. On sample basis, auditor should
at every branch to park the funds received also verify how unreconciled entries have been
from other branches for final payment to the reconciled. If there is any unreconciled entry
beneficiary. Although it is an office account, it for the month of August is cleared in the month
has been observed in the recent past that a of March, then auditor should specifically check
lot of cash payments are being routed through the same.
this account. High value transactions are
often parked by the branches in this account 3. Safeguarding and maintenance of Assets
for cash payment by a remote branch to The branch should have updated fixed asset
a representative of the customer of the register. If the same is maintained centrally
base branch. The base branch debits the in a computer application, then reconciliation
customers account and credits the remote with physical verification should be available.
branch SLFIT Account with an instruction to Branch should have entered in annual
pay the amount to the representative of the maintenance contracts (AMC) for assets like
base branch customer; it also specifies the Air Conditioners, Computers, etc., which also
nature of documentary evidence of identity to include regular maintenance of the assets.
be produced by the representative at the time Auditor should check whether Branch has
of withdrawing the cash. practice of assessing performance of AMC
vendors. Auditor should check whether
adequate insurance for physical assets have
Housekeeping
been obtained as per guidelines from Head
Traditionally this term was mainly used for balancing office. If insurance is obtained centrally then
of books in manual book-keeping environment. Branch should have practice of informing Head
Housekeeping mainly includes following areas which office for any addition or deletion in assets.
require attention of auditor to understand internal
control environment of the Branch. 4. MIS and control returns: The Branch needs
to submit returns to controlling authority on
1. Manual Register: Traditionally this term was periodic basis within specified time. Auditor on
mainly used for balancing of books in manual sample basis should verify the correctness and
book-keeping environment. However in CBS timeliness of these returns submitted. If the
environment, though most of transactions returns are based on reports generated from
are computerized still some registers are the system then Branch should not carry out
maintained manually. For example Locker any manual modifications in the return without
Access Register, Key movement Register, DD disclosing the same to Controlling office. A
Bank
66 Branch
Audit
comparative analysis of returns for different Branches are as per guidelines of Head
periods should be made in order to get proper office. Cash movement to or from branch
insight of the operations at the branch. shall be made in presence of security
guards. Also, the gun licence of the
5. Security Procedures: These deals with Guard is valid.
environmental controls related procedures,
which include following areas 3. Fire and Burglary alarms are in working
condition.
1. Fire Extinguisher: Auditor should verify
that the number of fire extinguishers at 4. Business Continuity and Disaster
Branches are as per guidelines of Head Recovery Plan BCP/DR: BCP/DR plans
office. Also, auditor should verify that all should be in place and branch officials
fire extinguishers are within validity date. are aware about the same. Fire drill
should be ideally conducted at least once
2. Security Guard: Auditor should verify a year.
that the number of security guards at
Bank
Branch 67
Audit
Notes
Bank
68 Branch
Audit
Bank Branch Audit in CBS Environment
BANK BRANCH AUDIT IN

CBS ENVIRONMENT
CA. Dr. Mitil Chokshi & CA. Kalpen Chokshi
In India, all public sector banks are working on Core This requires auditors to change the approach
Banking Application, which facilitates anywhere of audit from manual to systems based. Auditor
banking. With the evolution in technology like internet should carry out a mix of auditing through the
banking, mobile banking, cash acceptance machine, computer and auditing around the computer. To
etc. banking is not restricted to banking hours and carry out the same, we need to understand the
branch banking. Almost, all banking related work can CBS structure and how the financial statements
be conducted without visiting Bank Branch. We are are generated. Following is an example of typical
moving to virtual banking where all instructions for CBS structure.
banking transactions can be given electronically.
SB,CA, CC/OD, TL,

TF ETC.
TREASURY
APPLICATION
VENDOR
PAYMENT
MODULE IRAC (NPA
IDENTIFICATION AND
PROVISIONING)
PAYROLL
CBS
FIXED ASSETS APPLICATION FOR

REGISTER PREPARATION
MOCs
OF FINANCIAL
STATEMENTS
ATM, CASH
ACCEPTANCE
MACHINE
INTERNET
BANKING
Bank
Branch 69
Audit
In a typical public sector bank branch audit, the returns Processing controls
at Branch level are consolidated at Zonal / Regional Processing controls ensure that incoming data is
Level and Returns of Zonal/Regional level are in turn processed through application as per pre-defined
consolidated at head office level. Hence, it is important rules.
that Branch Level returns are correctly prepared and
audited in detail. This casts a big responsibility on It refers to data validation which identifies data
Branch Auditor. The correctness of returns depends errors, incomplete or missing data, inconsistencies
on the correctness of transactions executed by the among related data items and keep bad data out of
Branch, which requires system and manual controls to the database.
be in place. Hence the Branch auditor should have good
For example the auditor may independently verify
understanding of risks and controls regarding processes
interest on deposit accounts calculated by the
at the Branch. Since all processes involve CBS, the
system.
Branch auditor should carry out audit by using CBS.
The audit in CBS environment should be carried Output controls
out at two levels, first level assessing the Controls Output controls ensure that the information is
in CBS and second level auditing through various distributed to the appropriate recipient, duration
reports generated from CBS. of retention of sensitive reports, whether sensitive
reports are stored in a protective environment.
Let us see verification at first level in detail i.e.
control assessment. In a CBS structure effectiveness Auditor can document this verification by preparing
of following controls should be verified. Risk Control Matrix, refer Exhibit-I for sample risk
control matrix. If as a result of assessment of
Access controls controls, auditor considers controls to be ineffective
Access controls refers to the practice of restricting in any specific area then the auditor should verify
entrance to a property, a building, or a room to returns related to that area more intensively. For
authorised persons. In a computer environment, example in case of Bank Guarantee, margin should
access control is a security technique that can be be entered in the system, which is an important
used to regulate who or what can access or view or aspect from the perspective of Capital adequacy. If
use or change data, systems or programmes. during verification of controls, the auditor observes
that controls related to linking margin for BG is
For example based on their profile, staff members weak, then auditor should intensify verification
have access to different menu in CBS application. of Capital Adequacy return related to Contingent
Liability.
Input controls
Input controls refer to the techniques that ensure the Now let us see verification at second level i.e.
data has been properly authorized to be input into auditing by using various reports generated through
the system. Some of the input control techniques are CBS. CBS has capability of generating reports which
reconciliation of data, error correction procedures, helps in conduct of audit effectively. Some of the
batch integrity in database systems, maker-checker reports and their utilities are as under;
controls for transaction processing, etc.
Sr. Report Useful for Relevant Clauses of

No. LFAR
1. General Ledger reports Provides list of accounts with branch Clause IV(1)(b)
2. Manual debit to income Provides details of debit transactions processed Clause I(2)(b)
accounts in branch income accounts
3. Negative balance Provides list of accounts with negative balances Clause IV(1)(b)
reports
4. Temporary / Excess Provides details of TOD facility granted during Clause V (d) (vi)
Overdraft reports the period
Bank
70 Branch
Audit
Sr. Report Useful for Relevant Clauses of

No. LFAR
5. List of non-zero Intermediate suspense accounts pending to be Clause I(6)(b)
intermediate suspense reconciled
accounts. (Ageing &
Balances)
6. Cash Reconciliation Reconciliation of cash in the branch at EoD Clause I(1)(d)
Report (includes cash with teller, cash in BNA / recycler
machine in the branch, cash in ATM machine in
the branch & cash in vault)
7. Conversion of Provides details of transactions carried out in Clause II(1)
Inoperative account inoperative accounts during the period
into Operative account.
8. Inter Sol Reports Provides details of transactions processed in Clause IV(3)(a)
accounts based in other branch
9. I n t e r e s t / C h a r g e s Provided details of accounts in which Clause I (2)(b)
Parameter changes parameters for charging interest / other charges
report were changed during the period
10. Term Loan Overdue for Provides details of term loan accounts where Clause I (5)(d)
every month end repayments / installment due during the period,
was not paid by the borrower
11. Limit Expiry Report Provides details of advance accounts whose Clause I (5)(d)
sanctioned limit is expired during the period and
pending for renewal
12. Security Register Provides details of advance accounts where Clause I (5)(d)
updation securities were not obtained / obtained but not
updated in the system
13. Insurance Policy details Provides details of accounts where insurance Clause I (5)(d)
policy of the security is expired or insurance
policy not obtained
14. Asset Classification Provides details of advance accounts with Clause I (5)(d)
Report classification into standard, sub-standard,
doubtful & loss asset categories
15. Statutory Payment Provides details of statutory payments made by 3CD clause 34(A)
Report the branch during the period
16. Fixed Asset Report Provides details of Fixed Assets held by the Clause IV(6)(b)
branch as on date
Bank
Branch 71
Audit
Exhibit I Risk Control Matrix
Sr. Description Testing Operating Automated IPE Planned Findings and

No. of Controls Strategy Frequency / Manual (Information Nature, Observations
for Control Control Produced by Timing, and (None Noted,
Effectiveness the Entity) Extent of Change
used in Procedures to Plan,
Testing or to Evaluate Deficiency,
Performing Operating Identified or
a Relevant Effectiveness Suspected
Control? (OE) of Fraud,
Controls Management
Letter
Comment,
Material
Weakness,
Significant
Deficiency)
Bank
72 Branch
Audit
AUDIT REPORTS AND CERTIFICATES

CA. Abhay V. Kamat
With the intentions of financial inclusions, the banks In this article we are going to deal with the audit
have started spreading their wings of operations report and the certificates as the other topics are
geographically. Presently the audit of bank in India dealt by the other articles in the background material
is governed by pyramid approach. The branches for the bank branch audit
are at the base, the zonal offices, regional offices in
the middle and the Head office at the top. Therefore Bank Branch Audit report
the process of audit is also designed in the similar The Branch statutory audit report is also sometimes
fashion. The consolidation of accounts gets started referred to as the One-page audit report. The revised
from the branch account and ends with the bank SA-700 issued by ICAI is to be borne in mind while
as a whole accounts at the Head Office. Even the issuing the Branch Audit report. Certain important
process of statutory audit also starts from the bank aspects to be borne in mind while drafting the audit
branch audit and ends at the Central Statutory report are as follows:
Auditors (CSA) signing the consolidated Financial
Statements at the Central Office. 1. Usually the audit report is addressed to
the members of an entity or the appointing
We all are aware that the deliverable product of authority if not the members. At a branch the
the auditor is AUDIT REPORT. The preparation of audit report may be generically worded without
the financial statements is the responsibility of the addressing it to any specific person that is
management of the bank. The auditors of the bank to say, Independent auditors report ABC
should express its opinion. Therefore at the end of Branch of XYZ Bank Ltd..
the audit the auditor issues the report. In case of
the bank branch auditor he issues the report on the 2. Branch audit report is an independent report
accounts and operations at the branch. and all the critical issues arising during the
audit need to be addressed in this report.
The financial statements consist of certain disclosure This is a standalone report and hence matters
to be given. These disclosures could be as reported here should not give a reference to
prescribed by the Reserve Bank of India through some other report or other document. The audit
its master circular on disclosure and disclosures as report should stand out on itself.
required by the Accounting Standards issued by The
Institute of Chartered Accountants of India (ICAI) or 3. The Banks usually provide a standard format
by the prescribed authorities. In order to give these of the branch audit report. However, in order
disclosures the bank compiles the data from the to include all observations and qualifications of
branch operations. Hence the branch auditors have the auditor, the auditor should independently
to issue certain certificates which in turn facilitate the draft the report instead of directly signing on
CSA to issue the certificate for the bank as a whole. the pre-printed format.
The final deliverables from the branch auditors 4. The auditor should bear in mind the
include the following amendments made by ICAI dated 3rd
January 2014 in the Auditors Responsibility
1. The audit report as prescribed by the Banking Paragraph included in the Independent
Regulation Act Auditor s Report under SA-700. These
2. Long Form Audit Report (LFAR) amendments are available at http://220.2
27.161.86/32150aasb22246-3.pdf. Certain
3. Certificates as prescribed by the appointment clarifications have also been issued by ICAI
letter. on 22nd August, 2013 contemplating situations
where in statutory provisions require different/
4. Memorandum of Changes (MOC), if any,
Bank
Branch 73
Audit
additional reporting in the audit reports 8. Practically in every Bank, certain provisions /
and how the auditors should incorporate effects are provided for only on a consolidated
such matters in the audit report. Recent level at the HO viz. Provisions for NPAs,
changes in the reporting, if any, required by Gratuity, Pension, Provision for tax etc. To
the Companies Act, 2013 also need to be that extent, the Branch financial results are
considered. The format of report is also given understated and may not show a true and
in the Guidance Note issued by the Institute of fair view of the Branch financial statements.
Chartered Accountants of India (ICAI). To cover such scenarios, the Auditor
should incorporate suitable comment in the
5. For the ready reference of members carrying "Modification of Opinion" Paragraph. It is also
out audit of banks/bank branches, the auditing possible that certain accounting standards
and assurance standards board of the ICAI are not complied with at the branches viz.
has developed relevant audit report formats cash flow statement may not be prepared, the
specifically for Bank Branch audit reports in effects of exchange fluctuations especially on
line with the requirements of the revised SA- derivative transactions may not be provided for
700. These are available on the ICAI website under AS-11, segment reporting may not be
as well as in the latest edition of the Guidance drawn up etc. the auditor should suitable clarify
Note on audit of Banks released in February these facts in the audit report while reporting
2016. about compliance with Accounting Standards.
6. As regards the MOCs issued by auditors, the
RBI has advised ICAI that the total number Certification by Branch Statutory Auditors
and amount of debits/credits arising pursuant In addition to the audit report, there are various
to the Memorandum of Changes submitted certificates to be issued by the Branch Statutory
by them, should be given under the heading Auditor. A few of those important certificates and
Other Matters Paragraph on the face of the the aspects to be considered while issuing them are
bank branch audit report issued by them. given herewith:
Auditors should keep this communication in
mind while reporting the effect of MOCs in the 1. Certificate on DICGC claims - This aspect may
audit reports. include three types of certificates to be issued
whether appropriate claims have been lodged
7. In certain cases, it may so happen that certain with DICGC, whether the claims received are
documents / returns etc. pertaining to a branch appropriated to the respective accounts and
are not available at the branch. In such cases, whether in recovered account, proportionate
the auditor should highlight this fact in the audit claims have been refunded to DICGC. Over
report under the section modification of opinion the years in most of the Banks, this aspect has
or disclaimer of opinion as the case may be if been discontinued and generally no amounts
in his judgment; his opinion is expected to be are claimed or received. In such case, the
vitiated due to non-availability of the documents. auditor should give a NIL certificate. In some
In extreme cases, where the auditor has not Banks, consolidated claims may be lodged
been able to carry out the audit satisfactorily or from the HO in which case also the Branch
not or inadequate records have been produced auditors would provide a NIL certificate. In
to him or there are major inconsistencies in the case there are claims lodged or amounts
records, etc. making it difficult for the Auditor to received, the auditor should call for all the
give an unqualified report, the auditor should individual accounts in which the claims have
issue a qualified report regarding the true and been lodged. Actual claim letters in the relevant
fair view of the accounts under audit. However, format and the dates of submission should be
in such an event, it is imperative on the Auditor verified from the forms at the Branch. Where
to substantiate the facts and reasons for giving amounts have been received from DICGC, the
a qualified report under the section modification auditor should check the statements of claims
of opinion or disclaimer of opinion as the case settled received from DICGC and further check
may be. if the amount is appropriated to the respective
Bank
74 Branch
Audit
savings/current accounts. Year wise break up branch auditors should be well versed with the
of outstanding claims can be asked from the relevant RBI circulars on CRAR. At the Branch
management for determining the recoverability level, the certificate usually includes pre-printed
of the same. In respect of recoveries in claim risk weights against the relevant GL items and
received accounts, the auditor should call for the GL amounts are reported against each
representation from the management about of the items. Auditors should take precaution
such items and check whether the claims that not only the GL amounts reported are
received are proportionately refunded by a correct, but the risk weights printed are also
debit to the customers account and fund in accordance with the latest RBI circular. If
transfer to DICGC. not, the auditor should include the correct risk
weights in the certificate. Additional precaution
2. Certificate on claim of PMRY subsidy - In this is required while certifying the risk weighted
regard, the verification of related items would assets for off-balance items as to their nature.
be similar to the procedure under DICGC With the phased introduction of BASEL III
claims. The auditor should go through the norms, some Banks may also require the
circular on PMRY and certify that the subsidy branch auditors to give limited certificates
claimed is correct. related to these aspects.
3. Certificate pertaining to Cash and Bank 6. Certificate of NPAs at the Branch - The auditor
Balances This certificate is required to be should be conversant with the RBI circular
furnished in order to arrive at the CRR / SLR on NPA classification. In case the auditor has
position of the entire Bank and its compliance identified additional NPAs than those reported
with the same. Usually the Bank / Central by the Branch, he should adequately bring
Statutory Auditors would call for these details out that fact in the certificate issued. Suitable
from the Branch auditors, especially for 26 non- MOCs should also be passed to classify such
reporting Fridays in the whole year. Nowadays, advances as NPA.
after core banking has been introduced, Banks
where all branches are on CBS, this certification Lastly, one must bear in mind seemingly petty
may not be required. Wherever it is to be given, matters, but of upmost importance while issuing
auditors should be careful while certifying the any audit report or any certificate. The audit report
amounts of Cash and Bank balance. Cash or certificate should be printed on the letterhead
balance also includes connected ATM balance of the auditor firm. It should not be dated earlier
if any. Bank balances where reconciliation than the date on which the financial statements
items have not been accounted for should be or certificates are signed by the Branch Manager.
considered in the Bank balance and suitable The audit report or certificate should be signed in
MOCs should be passed. the personal name of the partner and on behalf of
4. Certificate of investments held - This certificate the firm. Firm registration number of ICAI should be
may be required in case any investments are invariably mentioned in the audit report along with
held by the Branches on behalf of HO. The the firm's seal.
auditor should cross-check the relevant GL The audit report should be correct and clear on
head in which such investments are reflected facts and the opinion of the auditor should be
and verify the amount and details included in expressed in the said audit report. Such reports do
the certificate are correct. The auditor should help the CSA to take the point of branch auditor
also physically verify the investments held, further and in issuing his report for the bank as a
either in certificate form or in Demat mode. whole. Therefore while issuing the audit reports
Valuation, provisioning on such investments, the branch auditors should remember five Cs viz.
should also be verified and reported if required. Compliance, Correctness, Clarity, Conciseness and
5. Certificate on risk weighted assets for BASEL- Completeness. Such audit reports will be helpful
II CRAR This certificate is issued by the for the CSA to compile his final audit report and it
Branch auditors to enable the Central Statutory will serve the desired purpose of the branch audit
Auditors to certify the whole bank CRAR. The reports or certificates.

Bank
Branch 75
Audit
Notes
Bank
76 Branch
Audit
Procedural Aspects of compliance verification of Ghosh-Jilani Committee . . .
PROCEDURAL ASPECTS OF COMPLIANCE

VERIFICATION OF GHOSH-JILANI COMMITTEE
RECOMMENDATION BY BRANCH AUDITOR
CA. Dhananjay Gokhale
BACKGROUND and then the statutory branch auditors are required

Ghosh Committee was set-up in 1992 by RBI under to check the compliances. Generally, the Branch
chairmanship of Shri A. Ghosh. This committee Statutory Auditors at large consider it as the last
came up with 97 recommendations, which were item on audit agenda to be done after completion of
classified in 4 categories:- the audit. In fact, checking of implementation of G/J
recommendations is a part of regular audit and both
1) Applicable to Branches should be done simultaneously. RBI has expressed
2) Applicable to Regional/Zonal Office a concern that Ghosh-Jilani Report is not given a
serious attention by the Branch Auditors. So, in this
3) Applicable to Head Office write-up we would focus on procedures of verifying
correctness of response given by the Branch.
4) Applicable to Treasury Operations
Few key Ghosh Committee recommendations
Main objectives of these recommendations was
applicable at branch level and the Audit Procedure
timely detection and prevention of frauds and
are discussed below:
malpractices.
Jilani Committee was set-up in 1995 by RBI under GROUP A PART I
chairmanship of Mr. Rashid Jilani. This committee
3.3 Joint custody and dual responsibility of
came up with 25 recommendations, which were
cash and other valuables
categorised under 3 heads:-
Maker-Checker is the basic principle of
1) Dealing with EDP environment in Banks transactional system in banking. As cash
is a high value and sensitive asset, an
2) Dealing with Inspection/Internal Audits in Bank
officer of rank higher than cashier should be
3) Dealing with misc. aspects of functioning of co-custodian of cash. Auditor should obtain
Bank User Rights related reports as supporting
documents in the report. Verify that cash and
Main objective of these recommendations were other valuables are stored in safes that can be
to review internal controls and strengthening of opened by two separate keys and the keys are
supervisory system. with two different persons.
Ghosh-Jilani recommendations were accepted by
RBI and its implementations were made applicable 3.4 Transactions in the currency chest to be
in late 90s. In the beginning of computerisation reported to RBI on the same day
in banks main data was generated and stored at This is applicable to only those branches
branch level and this had put vast onus of checking which manage Currency Chests. In CBS
compliance on the branch auditors. But in todays environment, every branch freezes activity
era of networking and computerization RBI has of current day through EOD (End of Day)
pushed Banking industry for mandatory CBS, procedures. Currency chest transactions
and many audit checks have now shifted from reports submission (on daily basis), should be
branch level to HO/Data Centre level. Ghosh- verified.
Jilani committee recommendation is more of a
questionnaire nature. At branch level, Branches 3.5 Adhering to the prescribed norms and
have to fill up their replies against each question safeguards issued by RBI on issue and
Bank
Branch 77
Audit
payment of high value drafts, depositing the transactions in such accounts to see if
large amounts in new accounts without any undue favour is passed on to the account
verifying antecedents, opening of benami holder.
accounts, etc., to prevent misuse of
banking channel 8.14 Monthly certificate on inspection of
Exception reports are generated by the system associated units on stocks pledged /
listing unusual transactions. Auditor should hypothecated to Bank
check the exceptional reports on test check Branches are required to maintain records/
basis and confirm whether the branch has registers of unit inspections. Auditor should
taken sufficient steps to resolve or report verify for Unit-inspection reports of Cash Credit
the exceptional/suspicious transactions to Accounts. There would be correspondence
appropriate authorities. Concurrent Audit with the borrower w.r.t. queries raised on unit
reports may also indicate deficiencies on inspections and replies from the borrowers.
this aspect. As a good practice, auditor can This is a conclusive proof of Unit inspection
generate and keep in audit file, transaction having been done. Another check will be
summary of accounts opened in last 30 inspection charges debited for unit inspection.
days. KYC pending status accounts, where
deviations are observed with regard to 11.4 Rotation of staff / duties and transfer
Depositor s Name, can be an avenue for covering all categories of staff, including
benami accounts. So auditor need to keep dealing room/securities
eye on these accounts, howsoever old these Job rotation is done to prevent frauds being
accounts may be. committed by an employee if he is allowed to
handle sensitive portfolio for longer time. The
8.10. a) System of exclusive scrutiny of credit branches are required to maintain register/
portfolio with focus on larger advances records for job allocation/job rotation. Auditor
and group exposures should verify job rotation records on test check
The auditor should obtain a list of large basis and also verify some corroborating
advances and group advances. Ensure that evidence like signature of the employee on
the credits sanctioned is within the individual / vouchers, reports of the department to confirm
group exposure limits set by the management. that job rotation was done.
Ensure that any deviations are reported to
appropriate authorities. Auditor should verify 11.9 Desk cards for staff to be prepared, banks
inter-group transactions on test check basis to designate one of the senior officers as
to check transactions on the nature of money a Compliance Officer
laundering, accommodation, suppression of In CBS, this process is carried out via real-time
NPA. monitoring system of each employee login.
As per RBI guidelines, it is to be ensured
b) Special scrutiny of high value that Compliance Officer is experienced and
accounts shifted to the bank along with of senior position. Compliance Reports by
executives and account transferred from concerned officer needs to be checked. The
other branches along with officials. The auditor should ensure that login passwords are
observations of RBI Inspections should be changed by the employees frequently.
promptly and effectively followed up by
banks 11.10 Financial and administrative powers of
Obtain a list of accounts shifted to the officials should be laid down
branch from other branches and also obtain Although designation duties and power are
a list of the executives who were transferred framed by HO, branch auditor should verify
from other branches of the bank. If these for the additional duties on specific position
accounts have been shifted to the branch in branch, with regards to the scale/size of
along with transferred executive then watch branch.
Bank
78 Branch
Audit
GROUP A PART II reconciliation and balance confirmations and

also for follow up of unresponded entries in
1.1 Precautions in handling cash and valuables these accounts. Cash insurance is generally
- restriction of entry to cash cabin, dual taken by HO for the bank as a whole and this
custody of cash / valuables, surprise aspect is generally not applicable at branch
verification at irregular intervals, etc. level.
Generally, the cashiers sit in a cabin that
has facility of locking from inside and 1.6 Banks should evolve proper systems of
outside by keys or smart cards to restrict adequate security and custody of cash in
unauthorised entry. Smart cards distributed dacoit / terrorist attack-prone areas
to bank employees generally unlocks every
Auditor should inquire whether the branch
cabin doors, but cashier cabin should be able
is located at sensitive area and if yes then
to unlock only via cashier/custodian smart
additional safety/ security measures taken by
card. Internal Audit policy should prescribe for
the bank.
surprise cash checking by Branch Manager or
designated officer in each month at irregular
1.7 Precaution against misusing banking
intervals. The auditor should ensure that these
channels for tax evasion. POs/TCs in
controls are in place and are working properly.
excess of ` 50,000/- should be by way of
debit to constituents account and not by
1.2 Precautions against theft of cash staff
cash. Doubtful cases should be reported
should not indulge in conversations/
to higher authorities
answering queries, but direct such persons
to Enquiry Counter only Auditor should test check cash book/ PO/TC
issue register to see if PO/TCs for amount in
This can be verified by the Branch Auditor by
excess of ` 50,000 were issued by accepting
observation and from the Concurrent Auditors
cash from customers instead of debiting
Reports.
their account as this may be resorted for tax
evasion.
1.4 Precautions against misappropriation of
cash by member of staff in the guise
1.10 Exercise of caution at the time of opening
of customer service. Only authorised
of new deposit accounts of all types
personnel should accept cash / issue
counterfoils in cash departments. Cashier Auditor should test check account opening
should not be allowed to made entries in documents of some accounts opened
pass book during the year to see whether proper KYC
documents were obtained whereby ultimate
Check whether banks policy provides
beneficiary individuals of the account are
for customer service expenses at branch
properly identified. In case of companies a
level. If yes, obtain a list of persons who
chain of holding companies may exist where
are authorised to incur such expenses with
the ultimate holding company is incorporated
maximum cap. Test check some of such
at places like Caymans Island, Hawana, British
expenses vouchers to see proper approval
Virgin Island where laws allow lot of secrecy
process and booking under proper head of
and it is difficult to track down the ultimate
account.
beneficiary individuals.
1.5 Proper systems should be evolved in
1.11 Customers to be educated about
respect of cash balances, insurance and
implications of introducing an account
prompt reporting of inter-branch and inter-
without knowing the party
bank remittances of cash
The Auditor should discuss this issue with
Auditor should study the system of reporting
the branch management and verify whether
and excess cash balances and inter-branch
adequate material explaining implications of
and inter-bank cash transactions and its timely
introducing an account without knowing the
Bank
Branch 79
Audit
party is displayed within the branch premises 1.17 Inoperative accounts to be kept in separate
easily visible to the customers ledger, specimen signature to be in custody
of Manager and other precautions.
1.13 Close watch on the operations in the new
In manual ledger system all inoperative
accounts should be kept
accounts were required to be closed in the
The auditor should obtain a list of deposit regular ledger and shifted to Inoperative
accounts opened during the year and on test Accounts Ledger. Under computerized
basis examine operations in some accounts to environment, the auditor should ensure that the
see whether they contain unusual transactions system automatically flags inoperative accounts
like immediate heavy deposits, or heavy and rights to allow operations in such accounts
deposits followed by immediate withdrawals, lies only with the authorized officer. He should
heavy cash deposits. If he finds such obtain a list of inoperative accounts and test
transactions then whether such transactions check whether the restrictions applied to them
are reported in exception reports and whether really work.
the branch has done inquiry with the depositors
and obtained satisfactory explanations. 1.18 Safe custody of / access to vouchers
through written orders of Manager -
1.14 Issue of fresh cheque book should be records to be maintained of those who
only against requisition slip from previous have accessed to such records
check books and other precautions to be
Obtain a list of persons who are authorized to
taken in respect of cheque books
have access to record room and whether there
The Auditor should check the cheque book is a system in place so that the authorized
issue register and test check that cheque persons only handle vouchers.
books are issued only against Requsition Slip
or an application. Now-a-days cheque book 1.26 Way in which telegraphic / telex messages
requisitions are accepted at the branch but for telegraphic remittances should be sent
cheque books are issued to customers directly - use of codes and accessibility to top
from centralized department. In such cases, most officers of branch, etc.
the Auditor should check the record maintained
by the branch for receipt of Requisition Slips/ The Auditor should enquire whether the codes
Applications. for sending Telegraphic Transfers, Transfers
through e-mails are accessible only to the
In case where cheque books are issued authorized officers.
by centralized department on the basis on
online application from the customers, enquire 1.28 Precautions against frauds perpetrated
whether there exists a system of online up by employee - effective supervision,
dating in the customers accounts. timely receipt of control returns and
scrutiny thereof, rotation/transfer of staff
1.15 Precautions in payment of cheques etc. Strict watch on clearing operations,
verification of signature, custody of housekeeping, and reconciliation of inter-
specimen signatures, custody and control bank / branch accounts
of bank cheque books, etc. The Auditor should obtain a calendar of
Under CBS environment, specimen signature periodic returns to be sent by the branch to the
cards will not be available with the branch control office and ensure on test check basis
as specimen signatures are stored in central that the returns are checked by branch officials
server. The Auditor should test check that the and are sent as per schedule. Also, verify inter
authorized executives are only having access branch/ inter-bank reconciliation statements to
to specimen signatures and cheque passing satisfy that unreconciled entries are followed
module. up vigorously and settled within reasonable
time.
Bank
80 Branch
Audit
1.30 Safe transit of cheques and instruments Enquiry system followed by the branch to avoid
between the branches / clearing house. such lapses and test check adherence to this
With the introduction CTS system, this issue is system. Obtain statement of accounts that
not of relevance. have turned NPA due to staff side lapses.
1.31 Precautions to be taken to prevent fraud 2.7 Observance of laid down rules/guidelines/
through entries in suspense account safeguards by bank officials - credit
periodical balancing and checking, signing appraisal, pre sanction visit to borrowers
of debit voucher by Manager Officer premises/godown, proper monitoring of
authorised by him, sending periodical end use of funds by allowing payment to
statement specifying reasons for non- parties connected with borrowers line of
adjustment of large & long outstanding business and not allowing transfer of large
entries etc. amount to sister concerns etc.
Suspense and Sundry Accounts are often The Auditor should study system of credit
used by unscrupulous employees for parking appraisal and pre-sanction visit and monitoring.
fraudulent entries. Enquire system followed Banks often ask the borrowers to write purpose
for operation of these accounts and check on of withdrawals of large amount to ensure that
test basis that debits and adjustment entries in only business related transactions are done
these accounts are done only after approved from loan account. Check credit appraisal
by authorized officers. reports and pre-sanction reports to and some
payment vouchers of large amount on test
1.32 Mechanisation of operations relating to check basis to ensure adherence to the laid
inter-branch reconciliation. All branches to down procedures.
clear outstanding entries above ` 2 lakhs He should also test check some transfers
and not allow them to remain outstanding entries of large amount in sister concerns
for more than a month, etc. accounts to check that non business related
Enquire what system is followed for follow up transactions are not allowed in these accounts.
of inter-branch entries. There should be robust
follow up of all entries in excess of ` 2 lakh 2.8 Check list of guidelines to avoid misuse of
each. Verify on test check that such entries are hypothecation/pledge facilities - verification
followed up and adjusted within a period of one of borrowers title top pledged, safety of
month. godowns, obtaining stock statement, etc.
Hypothecation/ Mortgage/ Pledge of assets of
2.3 Post-disbursement safeguards to be the borrower will be effective only if the borrower
followed critical assessment of all has a clear & marketable title to these assets.
advances periodically, review of sticky Title verification is done through advocates listed
advances and look into staff side of case on panel of advocates maintained by the bank.
when there is shift in health code status of These assets only if charged in favour of the
account. bank can stand as security. This is essential so
Enquire about system followed by the branch that the borrower is not able to offer same asset
for supervision of borrower account like study as security to multiple lenders. Sanction Order
of key financial figures like turnover, stock and would specify the assets to be taken as security.
their reflection in the account. Comparison of Verify on test check basis that title verification
turnover declared in monthly stock/debtors and charge creation is done before disbursement
statements with VAT/ Service Tax returns. of advance.
Staff side cases include non-follow up of stock/
2.13 Safeguards against frauds through Kite
debtors statements, Review and Renewals.
Flying operations in cheques limits
Accounts may become NPA if the branch fails
against clearing cheques only for prime
to obtain these, though this is avoidable issue.
Bank
Branch 81
Audit
customers, limited drawings, spare use of reputed customers. Obtain a list of LC/ BG
discretionary powers, etc. devolved to confirm that these are allowed only
Kitting is commonly defined as intentionally to reputed customers.
writing a cheque for a value greater than the Ensure on test check that LC/ BG are allowed
account balance from an account in one bank, only against sanctioned limits.
then writing a cheque from another account
in another bank also with non-sufficient fund
4.4 Precaution relating to deals in items like
with the second cheque serving to cover the
furniture and fixtures, stationery, - proper
non-existing funds from the first account. This
system of receiving quotations, delegation
is done to get cheques passed against ledger
of authority, proper inventory management
balance and not clear balance. Enquire about
and periodical checking etc.
policy of allowing limits against ledger balances
and ensure on test check basis that such Study banks policy for purchase of furniture
facility is allowed only to prime customers and and fixture, stationery and other assets items.
there is no bouncing of cheques paid against Verify monetary limits allowed to branches.
ledger balances. Verify on test check that quotations are
obtained from reputed dealers, comparative
2.15 Precaution against frauds in bill portfolios statements are prepared. Purchase Committee
to ensure bills represent genuine trade should carefully study the quotations and
transactions, insistence on submission of Terms and Conditions and recommend proper
all related documents, ascertaining credit vendor for purchase.
worthiness of borrowers and drawees, lorry Few key Jilani Committee recommendation
receipts of approved transporters, etc. applicable at branch level and the Audit Procedure
Bill Discounting facility is allowed to facilitate are discussed below:
genuine trade transactions, but often people
use this facility for accommodation purpose i.e. 39. Follow-up on major/serious irregularities
for financing by raising bogus/inflated invoices detected during concurrent audit to be
that are not supported by proper documents immediately taken up with the HO. A time
like Transporter Receipt/Railway Receipts, bound action programme for rectification
Invoice/Excise Invoice, Gate pass etc. The to be drawn up and closely monitored.
Auditor should study the system and procedure Fraudulent transactions to be reported to
followed by the bank for bill discounting and Vigilance/Chief of Inspection/Audit etc
ensure on test basis that bill discounting is Concurrent Auditor can suo motu take up
done only against all related documents only. matters with HO wherein quantum of amount
or risk is high. He need not wait to disclose the
3.4 Precautions for averting frauds in the areas observations of the above nature, in report, but
of letter of credit, issue of guarantees and can immediately report HO about irregularities
co-acceptance facilities. having serious implications. Statutory Auditor
LC and BG constitute a major area of fraud. should carefully go through Monthly Concurrent
This a popular way of cheating a bank Reports to verify whether major/serious
by allowing the LC/BG to get devolved. irregularities observed by the Concurrent
To safeguard against this loss, the banks Auditor were rectified in time bound schedule.
generally sanction LC/BG facility to a customer
against 100% deposit. However, out of 41. Smaller/medium sized branches to rectify
experience, the bank allows LC/ BG against irregularities pointed out during inspection/
deposit of lower amount to a customer with audit within 4 months
excellent track record. The Auditor should Reporting of irregularity would not relinquish
carefully study the policy of allowing LC/ auditor of his responsibility, but ensuring
BG facility to customers. Ensure that LC/ compliance is also of utmost importance.
BG against lower deposit are allowed only to Auditor cannot compel branch to comply it as
Bank
82 Branch
Audit
he is not the authority, but he should monitor it, 53. Appropriate control measure should
and pile up all past reports non-compliances, in be devised and documented to prevent
the current report. Compliance checking ambit the computer system from attacks
has no restriction of appointment date. He is of unscrupulous elements. All aspects
supposed to verify pending compliance, even if of security, reliability and accessibility
it pertains to period earlier of his appointment. are ensured before introduction of EDP
application in place of manual system by
44. Inspectors/auditors to get majority of having pilot parallel runs.
irregularities rectified during their stay at
Former part of this point is related to
the branches concerned and guide them as
Information System Audit (which is of Annual
well
Nature) is done by system auditor.
Chartered Accountancy profession carries
respect not for finding problems, but for In CBS environment, although EDP system
providing/advising solutions to it. Audit exists on Server in Data Centre, still branch
assignment should be value-addition activity. can experience attacks on its internal network
Guiding branch officials about methods to system. Branch users computer are treated as
tackle the irregularities is also importance. trusted computer by CBS Server. So they are
Although this does not form part of report, still direct avenue for launching attacks on CBS
it can be communicated verbally. Server.
Now next question arises that how to verify
45. Immediate action to be taken to plug
if branchs network system is vulnerable
gaps in serious irregularities/revenue
to attacks from unscrupulous elements.
leakages which have surfaced due to
Auditor can resort to below practice to check
loopholes in existing procedures, abnormal
vulnerability.
deviations from laid down procedures/
norms in consultation with the departments Any organization is relatively more vulnerable
concerned by issue of fresh guidelines to attacks from insiders (i.e. existing staff),
Income leakage, is one of prime matter than externals. First and relatively easy point
of concern for Banks. Due to aggressive of entering in any organisations network is
marketing and selling pressure, officials often Wireless router. User name of Wi-fi is already
resort to offer discounts/waiver in charges. visible. Just google default password for that
Charges are of mandatory nature with model of router. If we are able to connect to
exception of discretion. This thin boundary the system, then report should be qualified
of discretion may function as loophole, and immediately for existence of vulnerability.
can be a slow poison, if seen on long-term Then auditor should proceed forward to next
scenario. Auditor need to verify the steps step where-in this vulnerability needs to be
taken by branch for compliance of abnormal exploited, to open doors for attacks. Branch
irregularities/deviations, pointed out (i.e. which do not have Wi-fi routers, can jump to
recoveries in the case of Income Leakage), this step by plugging LAN cable to enter into
with regards to fresh guidelines framed by network. (Wi-fi users can continue without
concerned department. CBS enabled Banks LAN cables as they have successfully entered
provides reports where in some important flag network in previous step). Now access Router
is overridden from default value (especially for administration page through browser by
Concessional interest/Charges rate applied entering any of the mentioned IP address
by Branch user, or Preferred Customer flags). http://192.168.0.1 or http://192.168.1.1 or
Statutory Auditor should obtain a report of http://192.168.2.1. After this page opens,
deviations and verify on test check that such enter username as admin and try any of the
deviations were authorized by appropriate following password admin or admin123 or
authority. 123 or blank password (i.e. no password). If
login is successful, auditor should finally qualify
Bank
Branch 83
Audit
report, as system is now finally prone to attack, in EDP system is given in writing to software
as this was the last door to be unlocked. All developers. So, a logic generally handles
the above-mentioned steps would not in any normal situation correctly. Errors may occur
way damage any functional system of branch. at the boundary line of two slabs in logic.
Attacks can be launched after these two doors For e.g, PAN checking by system for cash
are unlocked (using professional tools by IT transaction of Rs 50,000 or above (>=50,000)
professional). At this point, privilege of any may be implemented erroneously as above
computer can be modified, or password of Wi- 50,000 (>50,000). After implementation of EDP
fi can be changed using this unlocked routers applications it is mandatory on bank to get
network administration page. audit of implementation done from IS Auditor.
Statutory Auditor should ensure that such audit
In order to prevent this type of hacking, branch has been done and all the shortcoming pointed
should ensure that routers factory default out by the IS Auditor have been rectified and a
password are changed. Branch Manager certificate to that effect has been obtained by
should be custodian of these passwords. the bank. He may also perform some tests.
IT Department of the bank can monitor these
issues at Centralised Location. However, at 59. Entire domain of EDP activities be brought
branches these issues can be checked by the under scrutiny of inspection and audit
Concurrent Auditor. including the underlying financial aspects
The EDP activities undergo changes on routine
Auditor should ensure that USB ports from all
basis as per increased requirement of banks,
standard users computer are removed (not
customers. Changes in programming take
disabled).
place on regular basis. In order to ensure
When a branch is shifted from manual working that all these changes are done correctly, the
to EDP system a migration audit is carried banks needs to have a separate department
out by the bank through IT experts. Their consisting of IT experts to keep a watch on
report will be available with the branch. Also, the EDP activities. Statutory Auditors should
parallel runs are continued for some period enquire about existence and functioning of
and the results of manual and EDP systems this department and go through their periodic
are compared to ensure that the EDP system reports. However, under CBS environment,
has stabilized. The Statutory Auditor should go EDP Department will be functioning from
through the migration audit report and satisfy Central Office and the branches will not have
himself that all the shortcomings reported by reports on EDP activities. In such case, the
the Migration Auditor were rectified by the Branch Auditor should obtain confirmation from
bank and a final certificate is obtained from the the management or put a disclaimer in his
Migration Auditor. He can also verify the results report.
of parallel runs to ensure correctness of EDP
system. The Statutory Auditor should find out 61. In order to bring about uniformity of
from Concurrent Audit Reports whether he has software used by various branches /
verified these issues and if not then he should offices, there should be a formal method
put suitable remarks in his report. of incorporating change in standard
software and it should be approved by
54. Various tests to be carried out to ensure senior management. Such changes to be
that EDP applications have resulted in inspected and monitored continuously.
consistent and reliable system for Auditor should insist Bank to publish the list
inputting, processing and generation of of softwares that can be installed on any
output of data standard user computer (i.e. excluding IS staff
Auditors can conduct only black box testing or Network Administrator). He should verify
of any EDP system (as logic is embedded in that no software other than those mentioned
software). Operational logic to be implemented in the prescribed list exists on any standard
Bank
84 Branch
Audit
users computer. User should document the system of checking of these aspects through
reason for installing software not specified in Internal Inspectors or Concurrent Auditors. The
that list. However, after switching over to CBS, statutory auditor should go through Inspection/
this issue will be out of control of the branch Concurrent Audit reports to find out any gaps
management. in identification of NPA or Provisioning and
ensure that these were plugged by the bank.
74. Regular checking by inspectors/auditors He should perform test check of classification
to verify correctness of information of advance, income recognition and
compiled/furnished by branches regarding provisioning to satisfy himself about reliability
income recognition, asset classification, of the system.
provisioning and NPA quantification in
conformity with prescribed norms. CONCLUSION
Discrepancy to be immediately brought Thus, it can be seen that verification of compliance
to the notice of Branch Managers for of Ghosh- Jilani Committee report is not a separate
rectification on the spot. task for the statutory auditor, but the compliance
Under EDP environment, Assets Classification, verification is outcome of a regular audit. In fact, it
Income Recognition, and Provisioning is provides a guide line to the Statutory Auditor to plan
done by the system. However, there manual and perform his audit in a better manner. Statutory
interventions are also required at certain Auditors should maintain robust working papers to
stages. The banks should have a regular establish an audit trail of verification of each item.
Bank
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Audit
Notes
Bank
86 Branch
Audit
Tax Audit of The Branch of The Bank
TAX AUDIT OF THE BRANCH

OF THE BANK
CA. Abhay V. Kamat
1. As per section 44AB of the Income-tax Act, should apply his mind for every clause and
1961, every person carrying on business verify the answer given in the form
whose total sales, turnover or gross receipts,
as the case may be, in the business exceed or 5. The prescribe format of Form 3CD does not
exceeds ` 1 crore in the previous year should have a place for the signature of the assessee.
get his accounts of such previous year audited It provides the place for the signature of the
by an accountant before the specified date and Chartered Accountant. However it is advisable
furnish by that date the report of such audit in to take the signature of the Branch Manager
the prescribed form, duly signed and verified on Form 3CD. It is presumed that the answers
by such accountant. The audit under section to the clauses in the form are compiled by the
44AB of the Income-tax Act, 1961 is commonly Branch Management and the auditor should
known as Tax Audit. verify them by applying suitable test checks as
he may think appropriate.
2. As far as the bank is concerned, it is operating
through its branches. However, for Income Tax 6. Normally the bank prepares a format of Form
purpose the bank as a whole is an assessee. 3CD. There are certain items for which the
Hence the monetary limit of the turnover of details are available at the Head Office of the
` 1 crore is considered in respect of the bank bank. The branch may not have the details.
as a whole. Thus the bank is subject to tax Such items are specifically mentioned in the
audit. The operations of the bank are carried format given herein. For some of the clauses,
out through its branch network. Therefore the there will be standard answers which are also
bank appoints its branch auditor as the tax stated in the said format. In some cases the
auditor who is supposed to carry out the tax details are to be given in a specific manner. In
audit of the branch and report to the Head such cases the bank prepares the formats of
Office. At Head Office the branch tax audit the annexure to be attached to the Form 3CD
reports are considered and a consolidated tax and the same are attached along with the said
audit report is prepared. Thus the tax audit format.
report of the branch plays supplementary role 7. The auditor should verify the correctness and
in the entire process of the tax audit of the completeness of the details given in Form
bank. 3CD. In case the auditor is of the opinion that
3. The audit could be carried out by the the details given by the branch are not correct
accountant as defined in the explanation below or complete, he should bring this fact to the
sub-section (2) of section 288 of the Income- notice of the branch management and get it
tax Act, 1961. According to this explanation a corrected. In case the branch management is
chartered accountant within the meaning of the not in agreement with the views of the auditor,
Chartered Accountants Act, 1949 can sign the the fact should be suitably disclosed and the
Tax Audit Report. reasoning should also be given.
4. The details are required to be submitted in the 8. The auditor should give the report in Form
prescribed form viz. Form 3CD. I have given 3CA, as the audit of the branch is conducted
the said Form 3CD by way of annexure to this under Banking Companies (Acquisition and
article. I have also given the possible answers Transfer of Undertaking) Act, 1980
against every clause in the Form 3CD. These 9. While signing the audit report as well as
answers are the indicative answers and not Form 3CD, the auditor should mention his
necessarily the complete answers. The auditor
Bank
Branch 87
Audit
firm name, firm registration number, name of tax subsequently, it should be mentioned
the member signing the report along with his/ here as tax deducted late.
her membership number. The date and the
place of execution of the report should also be d. Tax deducted but not paid to the credit
mentioned. of the Central Government The bank
deducts the tax and the accounting entry
10. While carrying out the tax audit, the tax auditor is passed. The said amount remains
should also refer to the tax audit report of the as liability till the time it is paid to the
earlier year. This will help him in understanding Government treasury. In case such tax
the expenses of the prior period, disallowances which is deducted but not remitted to the
under section 43B, written down value of Government treasury, the auditor should
the assets as per Income-tax Act, TDS enquire whether the amount is paid till
disallowances or allowances, etc, the time of conclusion of the tax audit.
However, in case, the amount is not
11. Clause 347 of Form 3CD requires stating the remitted till the time of conclusion of the
details about tax deduction and its remittance tax audit, it should be mentioned against
to the government treasury. It is necessary this sub-clause.
to see the compliance of the provisions of
Chapter XVII-B of the Income-tax Act, 1961. In e. The details of interest paid u/s. 201
case of violation of the provisions the matter should also be mentioned. The auditor
should be reported. Additionally, it is necessary should also ask the branch management
to pay attention to the following for aspects about the pending demands from the
income tax site and if need be it should
a. Tax deductible and not deducted at all be mentioned in the contingent liabilities
Where it is necessary to deduct the tax apart from considering it during the
at source as per chapter XVII-B and the course of tax
branch had not deducted the tax from
such payments should be given. The While ascertaining the correctness of the
auditor should verify the expenses while details given under this clause one should
scrutinizing the profit and loss account remember that the non-compliance of the
and ascertain whether proper tax has provisions of Chapter XVII-B has an impact
been deducted or not. Where the tax on the allowability of the expenditure under
is not deducted the amounts should be section 40(a)(ia) of the Income-tax Act,1961
mentioned.
12. The auditor should obtain proper
b. Shortfall on account of lesser deduction documentation from the branch to complete the
than required to be deducted The rates working paper file. Wherever required, proper
of tax to be deducted are specified in the representation, in respect of certain points,
Act. The auditor should verify whether may be obtained.
the tax is deducted at appropriate rate or
not. In case the tax deducted is less than 13. Tax audit is a specific appointment in the
the amount works out at the prescribed process of annual bank branch audit. Therefore
rate, the instances with the amount the auditor should plan for the tax audit
of short fall should be mentioned. In and design appropriate audit programme
case the tax deducted is more than the to complete the tax audit effectively. In fact
prescribed amount, the instances need the auditor can enquire about the availability
not be mentioned. of well prepared Form 3CD along with its
annexure. The checking of these details
c. Tax deducted late The tax should be required for the tax audit can be done
deducted at the prescribed time. Usually simultaneously while carrying out the scrutiny
the tax is to be deducted at the time of of the books of account. Where the accounts
credit or on payment whichever is earlier. are maintained on computer, the auditor should
However, in case the bank deducts the enquire about the availability of the reports
Bank
88 Branch
Audit
supporting the data required for the tax audit the audit, auditing techniques, Standards
and use such reports as additional support to on Auditing, etc. but also be thorough with
ascertain the correctness and completeness of the provisions of the Income-tax Act, 1961.
the details given. Understanding the provisions of Income-tax Act
and using the audit techniques efficiently will
14. In order to complete tax audit effectively make the tax audit more effective.
the auditor should not only be thorough with
FORM NO. 3CD
[See rule 6G(2)]
Statement of particulars required to be furnished under section 44AB of the Income-tax Act, 1961
PART A
1 Name of the assessee : Name of the branch/office with C.O. Code Number
2 Address : Address of the branch
3 Permanent Account Number (PAN) : Specify the PAN of the bank
4 Whether the assessee is liable to pay : Specify the relevant registration number of the bank
indirect tax like excise duty, service tax,
sales tax, customs duty, etc. if yes, please
furnish the registration number or any other
identification number allotted for the same
5 Status : Domestic Company
6 Previous year : 01-Apr-2015 to 31-Mar-2016
7 Assessment year : 2016-17
8 Indicate the relevant clause of section 44AB : 44AB(a)
under which the audit has been conducted
PART B
9 (a) If firm or Association of Persons, indicate names of partners/ Not Applicable

members and their profit sharing ratios
(b) If there is any change in the partners or members or in their Not Applicable
profit sharing ratio since the last date of the preceding year, the
particulars of such change
10 (a) Nature of business or profession (if more than one business or Banking as per Section 6 of
profession is carried on during the previous year, nature of every the Banking Regulation Act,
business or profession) 1949.
(b) If there is any change in the nature of business or profession, the There is no change in the
particulars of such change nature of business.
11 (a) Whether books of account are prescribed under section 44AA, if No.
yes, list of books so prescribed
(b) List of books of account maintained and the address at which the As of 31.03.2016
books of account are kept the branch/ office is
(In case books of account are maintained in a computer system, computerized having Core
mention the books of account generated by such computer Banking Solution Platform
system. If the books of accounts are not kept at one location, and the books of accounts
please furnish the addresses of locations along with the details of are generated by computer
books of accounts maintained at each location.) system.
Bank
Branch 89
Audit
(c) List of books of account and nature of relevant documents As above

examined
12 Whether the profit and loss account includes any profits and gains No
assessable on presumptive basis, if yes, indicate the amount and the
relevant sections (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB,
Chapter XII-G, First Schedule or any other relevant section.)
13 (a) Method of accounting employed in the previous year. Mercantile system
(b) Whether there had been any change in the method of accounting Dealt at Head Office.
employed vis-a-vis the method employed in the immediately
preceding previous year
(c) If answer to (b) above is in the affirmative, give details of such Dealt at Head Office.
change, and the effect thereof on the profit or loss.
Serial number Particulars Increase in profit Decrease in
(`) profit (`)
(d) Details of deviation, if any, in the method of accounting employed Dealt at Head Office.
in the previous year from Accounting Standards prescribed under
section 145 and the effect thereof on the profit or loss
14 (a) Method of valuation of closing stock employed in the previous Not Applicable
year.
(b) In case of deviation from the method of valuation prescribed under Not Applicable
section 145A, and the effect thereof on the profit or loss, please
furnish:
Serial number Particulars Increase in profit Decrease in
(`) profit (`)
15 Give the following particulars of the capital asset converted into stock- Not Applicable
in-trade:
(a) Description of capital asset
(b) Date of acquisition
(c) Cost of acquisition
(d) Amount at which the asset is converted into stock-in-trade
16 Amounts not credited to the profit and loss account, being,
(a) the items falling within the scope of section 28 Details to be given, if any
(b) the pro forma credits, drawbacks, refund of duty of customs or Details to be given, if any
excise or service tax, or refund of sales tax or Value Added Tax,
where such credits, drawbacks or refunds are admitted as due by
the authorities concerned
(c) escalation claims accepted during the previous year Details to be given, if any
(d) any other item of income Details to be given, if any
(e) capital receipt, if any. Details to be given, if any
Bank
90 Branch
Audit
17 Where any land or building or both is transferred during the previous NIL
year for a consideration less than value adopted or assessed or
assessable by any authority of a State Government referred to in
section 43CA or 50C, please furnish
Details of property Consideration Value adopted or
received or accrued assessed or assessable
18 Particulars of depreciation allowable as per the Income-tax Act, 1961 Dealt at Head Office
in respect of each asset or block of assets, as the case may be, in the
following form :
(a) Description of asset/block of assets.
(b) Rate of depreciation
(c) Actual cost or written down value, as the case may be
(d) Additions/deductions during the year with dates; in the case of
any addition of an asset, date put to use; including adjustments
on account of
(i) Central Value Added Tax credits claimed and allowed under
the Central Excise Rules,1944, in respect of assets acquired
on or after 1st March, 1994,
(ii) Change in rate of exchange of currency, and
(iii) Subsidy or grant or reimbursement, by whatever name called
(e) Depreciation allowable.
(f) Written down value at the end of the year.
19 Amounts admissible under sections-
(a) 32AC, (b) 33AB, (c) 33ABA, (d) 35(1)(i), (e) 35(1)(ii), (f) 35(1)(iia), NIL
(g) 35(1)(iii), (h) 35(1)(iv), (i) 35(2AA), (j) 35(2AB), (k) 35ABB, (l) 35AC,
(m) 35AD, (n) 35CCA, (o) 35CCB, (p) 35CCC, (q) 35CCD, (r) 35D, (s)
35DD, (t) 35DDA, (u)35E:
Amount debited to profit and loss account
Amounts admissible as per the provisions of the Income-tax Act,
1961 and also fulfils the conditions, if any specified under the relevant
provisions of Income-tax Act, 1961 or Income Tax Rules,1962 or any
other guidelines, circular, etc., issued in this behalf.
20 (a) Any sum paid to an employee as bonus or commission for NIL
services rendered, where such sum was otherwise payable to him
as profits or dividend. [Section 36(1)(ii)]
(b) Details of contributions received from employees for various funds NIL
as referred to in section 36(1)(va):
Serial Nature Sum Due The The actual date
number of fund received date for actual of payment to
from payment Amount the concerned
employees paid authorities
Bank
Branch 91
Audit
21 (a) Please furnish the details of amounts debited to the profit and loss
account, being in the nature of
Capital expenditure Details to be given, if any
Personal expenditure
Advertisement expenditure in any souvenir, brochure, tract,
pamphlet or the like, published by a political party
Expenditure incurred at clubs being entrance fees and
subscriptions
Expenditure incurred at clubs being cost for club services and
facilities used
Expenditure by way of penalty or fine for violation of any law for
the time being in force
Expenditure by way of any other penalty or fine not covered above
Expenditure incurred for any purpose which is an offence or which
is prohibited by law
(b) Amounts inadmissible under section 40(a): Details to be given, if any
(i) as payment to non-resident referred to in sub-clause (i)
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(B) Details of payment on which tax has been deducted but has Details to be given, if any
not been paid during the previous year or in the subsequent
year before the expiry of time prescribed under section
200(1)
(I) date of payment
(V) amount of tax deducted
(ii) as payment referred to in sub-clause (ia) Details to be given, if any
(A) Details of payment on which tax is not deducted:
(I) date of payment
Bank
92 Branch
Audit
(B) Details of payment on which tax has been deducted but has Details to be given, if any
not been paid on or before the due date specified in sub-
section (1) of section 139
(I) date of payment
(IV) name and address of the payer
(V) amount of tax deducted
(VI) amount out of (V) deposited, if any
(iii) under sub-clause (ic) [Wherever applicable] NIL
(iv) under sub-clause (iia) NIL
(v) under sub-clause (iib) NIL
(vi) under sub-clause (iii) NIL
(A) date of payment
(B) amount of payment
(C) name and address of the payee
(vii) under sub-clause (iv) NIL
(viii) under sub-clause (v) NIL
(c) Amounts debited to profit and loss account being, interest, salary, Not Applicable
bonus, commission or remuneration inadmissible under section
40(b)/40(ba) and computation thereof
(d) Disallowance/deemed income under section 40A(3):
(A) On the basis of the examination of books of account and Details to be given, if any
other relevant documents/evidence, whether the expenditure
covered under section 40A(3) read with rule 6DD were made
by account payee cheque drawn on a bank or account
payee bank draft. If not, please furnish the details:
Serial Date of Nature of Amount Name and Permanent
number payment payment Account Number of the
payee, if available
(B) On the basis of the examination of books of account and Details to be given, if any
other relevant documents/evidence, whether the payment
referred to in section 40A(3A) read with rule 6DD were
made by account payee cheque drawn on a bank or account
payee bank draft. If not, please furnish the details of amount
deemed to be the profits and gains of business or profession
under section 40A(3A);
Serial Date of Nature of Amount Name and Permanent
number payment payment Account Number of the
payee, if available
Bank
Branch 93
Audit
(e) provision for payment of gratuity not allowable under section NIL
40A(7);
(f) any sum paid by the assessee as an employer not allowable NIL
under section 40A(9);
(g) particulars of any liability of a contingent nature; NIL
(h) amount of deduction inadmissible in terms of section 14A in NIL
respect of the expenditure incurred in relation to income which
does not form part of the total income;
(i) amount inadmissible under the proviso to section 36(1)(iii) NIL
22 Amount of interest inadmissible under section 23 of the Micro, Small Details to be given, if any
and Medium Enterprises Development Act, 2006.
23 Particulars of payments made to persons specified under section NIL
40A (2)(b).
24 Amounts deemed to be profits and gains under section 32AC or 33AB NIL
or 33ABA or 33AC.
25 Any amount of profit chargeable to tax under section 41 and NIL
computation thereof.
26 In respect of any sum referred to in clauses (a), (b), (c), (d), (e) or (f) Details to be given, if any
of section 43B, the liability for which:
(A) pre-existed on the first day of the previous year but was not
allowed in the assessment of any preceding previous year and
was
(a) paid during the previous year;
(b) not paid during the previous year.
(B) Was incurred in the previous year and was
(a) paid on or before the due date for furnishing the return of
income of the previous year under section 139(1);
(b) not paid on or before the aforesaid date
(State whether sales tax, customs duty, excise duty or any other Yes
indirect tax, levy, cess, impost, etc., is passed through the profit and
loss account.)
27 (a) Amount of Central Value Added Tax credits availed of or utilised Relevant details to be
during the previous year and its treatment in the profit and loss reported
account and treatment of outstanding Central Value Added Tax
credits in the accounts
(b) Particulars of income or expenditure of prior period credited or NIL
debited to the profit and loss account
28 Whether during the previous year the assessee has received any No
property, being share of a company not being a company in which
the public are substantially interested, without consideration or for
inadequate consideration as referred to in section 56(2)(viia), if yes,
please furnish the details of the same
Bank
94 Branch
Audit
29 Whether during the previous year the assessee received any No

consideration for issue of shares which exceeds the fair market value
of the shares as referred to in section 56(2)(viib), if yes, please furnish
the details of the same.
30 Details of any amount borrowed on hundi or any amount due thereon NIL
(including interest on the amount borrowed) repaid, otherwise than
through an account payee cheque [Section 69D].
31* (a) Particulars of each loan or deposit in an amount exceeding the Not Applicable
limit specified in section 269SS taken or accepted during the
previous year
(i) name, address and permanent account number (if available
with the assessee) of the lender or depositor
(ii) amount of loan or deposit taken or accepted
(iii) whether the loan or deposit was squared up during the
previous year
(iv) maximum amount outstanding in the account at any time
during the previous year
(v) whether the loan or deposit was taken or accepted otherwise
than by an account payee cheque or an account payee
bank draft
*(These particulars needs not be given in the case of a Government
company, a banking company or a corporation established by a Central,
State or Provincial Act.)
(b) Particulars of each repayment of loan or deposit in an amount Details to be given, if any
exceeding the limit specified in section 269T made during the
previous year :
(i) name, address and permanent account number (if available with
the assessee) of the payee
(ii) amount of the repayment
(iii) maximum amount outstanding in the account at any time during
the previous year
(iv) whether the repayment was made otherwise than by account
payee cheque or account payee bank draft
(c) Whether the taking or accepting loan or deposit, or repayment of Details to be given, if any
the same were made by account payee cheque drawn on a bank
or account payee bank draft based on the examination of books
of account and other relevant documents
(The particulars (i) to (iv) at (b) and comment at (c) above need not
be given in the case of a repayment of any loan or deposit taken or
accepted from Government, Government company, banking company or
a corporation established by a Central, State or Provincial Act)
Bank
Branch 95
Audit
32 (a) Details of brought forward loss or depreciation allowance, in the NIL

following manner, to the extent available:
Serial Assessment Nature Amount Amount as Remarks
Number Year of loss/ as assessed (give
allowance returned reference to
(in rupees) (in relevant order)
rupees)
(b) Whether a change in shareholding of the company has taken No
place in the previous year due to which the losses incurred prior
to the previous year cannot be allowed to be carried forward in
terms of section 79
(c) Whether the assessee has incurred any speculation loss referred NIL
to in section 73 during the previous year, If yes, please furnish the
details of the same.
(d) Whether the assessee has incurred any loss referred to in section NIL
73A in respect of any specified business during the previous year,
if yes, please furnish details of the same.
(e) In case of a company, please state that whether the company NA
is deemed to be carrying on a speculation business as referred
in explanation to section 73, if yes, please furnish the details of
speculation loss if any incurred during the previous year.
33 Section-wise details of deductions, if any, admissible under Chapter VIA Details to be provided, if
or Chapter III (Section 10A, Section 10AA). any
Section Amounts admissible as per the provision of the
under which Income-tax Act, 1961 and fulfils the conditions, if any,
deduction is specified under the relevant provisions of Income
claimed Tax Act, 1961 or Income-tax Rules,1962 or any other
guidelines, circular, etc, issued in this behalf.
34 (a) Whether the assessee is required to deduct or collect tax as per Details to be provided
the provisions of Chapter XVII-B or Chapter XVII-BB, if yes please
furnish:
1 Tax deduction and collection Account Number (TAN)
2 Section
3 Nature of payment
4 Total amount of payment or receipt of the nature specified in
column (3)
5 Total amount on which tax was required to be deducted or
collected out of (4)
6 Total amount on which tax was deducted or collected at
specified rate out of (5)
7 Amount of tax deducted or collected out of (6)
8 Total amount on which tax was deducted or collected at less
than specified rate out of (5)
Bank
96 Branch
Audit
9 Amount of tax deducted or collected on (8)

10 Amount of tax deducted or collected not deposited to the
credit of the Central Government out of (6) and (8)
(b) Whether the assessee has furnished the statement of tax Details to be provided
deducted or tax collected within the prescribed time. If not, please
furnish the details:
Tax Type Due Date of Whether the statement of
deduction of date for furnishing, tax deducted or collected
and Form furnishing if contains information about
collection furnished all transactions which are
Account required to be reported
Number
(TAN)
(c) Whether the assessee is liable to pay interest under section Details to be provided
201(1A) or section 206C(7). If yes, please furnish:
Tax deduction and Amount of interest under Amount paid out of
collection Account sections 201(1A)/206C(7) column (2) along with
Number (TAN) is payable date of payment
35 (a) In the case of a trading concern, give quantitative details of Not Applicable
principal items of goods traded:
(i) opening Stock
(ii) purchases during the previous year
(iii) sales during the previous year
(iv) closing Stock
(v) shortage/excess, if any
(b) In the case of manufacturing concern, give quantitative details Not Applicable
of the principal items of raw materials, finished products and by-
products:
A Raw materials :
(i) opening stock
(ii) Purchases during the previous year
(iii) consumption during the previous year
(iv) sales during the previous year
(v) closing stock
(vi) yield of finished products
(vii) percentage of yield
(viii) shortage/excess, if any
Bank
Branch 97
Audit
B Finished products/By-products : Not Applicable

(i) opening stock
(ii) purchases during the previous year
(iii) quantity manufactured during the previous year
(iv) sales during the previous year
(v) closing stock
(vi) shortage/excess, if any
36 In the case of a domestic company, details of tax on distributed profits Not applicable
under section 115-O in the following form: -
(a) total amount of distributed profits;
(b) amount of reduction as referred to in section 115-O(1A)(i);
(c) amount of reduction as referred to in section 115-O(1A)(ii);
(d) total tax paid thereon;
(e) dates of payment with amounts.
37 Whether any cost audit was carried out, if yes, give the details, if any, Not Applicable
of disqualification or disagreement on any matter/item/value/quantity as
may be reported/identified by the cost auditor
38 Whether any audit was conducted under the Central Excise Act, 1944, Not Applicable
if yes, give the details, if any, of disqualification or disagreement on any
matter/item/value/quantity as may be reported/identified by the auditor
39 Whether any audit was conducted under section 72A of the Finance No
Act,1994 in relation to valuation of taxable services, Finance Act,1994
in relation to valuation of taxable services, if yes, give the details, if any,
of disqualification or disagreement on any matter/item/value/quantity as
may be reported/identified by the auditor
40 Details regarding turnover, gross profit, etc., for the previous year and
preceding previous year:
1. Total turnover of the assessee Not Applicable
2. Gross profit/turnover
3. Net profit/turnover
4. Stock-in-trade/turnover
5. Material Consumed/finished goods produced
(The details required to be furnished for principal items of goods traded
or manufactured or services rendered)
41 Please furnish the details of demand raised or refund issued during the At Head Office
previous year under any tax laws other than Income-tax Act, 1961 and
Wealth Tax Act, 1957 along with details of relevant proceedings.

Bank
98 Branch
Audit
AUDIT OF FOREIGN EXCHANGE TRANSACTIONS IN BANK BRANCH AUDIT
AUDIT OF FOREIGN EXCHANGE

TRANSACTIONS IN BANK BRANCH AUDIT
CA. Rahul Joglekar
Banks are the backbone of any economy and the implementation of modern technology, particularly in
facilitators of trade between different entities and the field of data capturing, recording and processing.
also between nations. In the Indian scenario, offtake Most of the Banks are now on CBS to manage the
of Bank finance has been the subject matter of much numerous transactions their Branches undertake.
debate and discussions. Of late the Government of
India has launched ambitious campaigns like Make This discussion paper is focused on the audit
in India and it is expected that the same will see aspects of Forex Transactions in a Bank Branch
huge foreign investment in India. Indian businesses audit under both manual and CBS environment.
also need to gear themselves up for the challenges Before highlighting the audit aspects of Forex
of the future. Transactions in a Bank branch, it is necessary to
One of the major aspects of Bank finance is trade understand the categories of Bank Branches as per
finance and funding of foreign trade transactions. RBI.
Apart from substantial rise in the volume of business Category-A: Offices and Branches maintaining
in foreign exchange, almost all the major banks independent foreign currency accounts in their
dealing in it are discovering it as a profit centre, own names
making substantial contribution to their bottom line.
Category-B: Offices and Branches not
With increasing focus on foreign trade business of maintaining independent foreign currency
Banks, audit thereof is an important consideration accounts but having powers of operating on
in the Statutory Bank Branch audit. In addition to it, the accounts maintained abroad by their Head/
of late there has been massive growth in banking Principal Office or any other office
services, covering more and more geographical area
and large number of population and also a geometric Category-C: All other offices and branches
increase in risks faced by Banks on account of handling foreign exchange business through
such large scale expansion. This has necessitated other offices or branches in category A or B.
Pictorial representation of major Foreign Exchange Transactions dealt by Banks

Pictorial representation of major Foreign Exchange Transactions dealt by Banks
IMPORTS EXPORTS
- Import Letter of Credit & Bills - Export Bills for Collection
- Direct Import Bills - Export Bills Discounted
- Import Bills for Collection - Export against Advance Remittance
- Advance remittances
FX Treasury
Operations
- Forward Contract
- Exchange Positions
and cover Position
- Nostro/Vostro A/c
Credit Facility in - Dealing Room Remittances
Forex Transactions Transactions Issue of DD, TT,
Trade Credits Issue of TC
ECB Non Resident A/cs
EPC and PCFC
Bank
IMPORT TRANSACTIONS Branch 99
1. LETTER OF CREDIT (LC)
Audit
In order to mitigate the risks of non-realisation of proceeds in case of international transactions,
usually the overseas exporters insist on an LC opened in its favour by the importer in India.
Similarly, the buyer in India is apprehensive about the shipments being of the correct quality and
quantity. Therefore in international trade transactions, usually, documentary credits are insisted
IMPORT TRANSACTIONS genuineness of the credit. It is normally

situated in the county of the beneficiary. For
1. LETTER OF CREDIT (LC) advising the credit issued by another bank,
In order to mitigate the risks of non- there should be an agency arrangement
realisation of proceeds in case of international between two banks.
transactions, usually the overseas exporters
insist on an LC opened in its favour by the Audit of LC issue transactions:
importer in India. Similarly, the buyer in India In respect of LCs issued by the Bank, the auditor
is apprehensive about the shipments being should verify the following aspects:
of the correct quality and quantity. Therefore
in international trade transactions, usually, i. Obtain a list of LCs issued during the audit
documentary credits are insisted upon. A letter period and draw a suitable sample therefrom
of credit may be either revocable or irrevocable for verification. LCs issued during the period
one. If nothing is specified the LC will deemed can be tracked from CBS as well as manual
to be irrevocable one. Hence, such type of registers if any maintained by the Bank.
credit cannot be cancelled before its expiry.
ii. Check application for LC issue by the importer
Various parties to and LC and whether the same is supported by
confirmed purchase orders from the buyer
1. Applicant [Buyer] to the seller. LCs are usually opened by the
Banks only for their customers and not on
The applicant is normally the buyer of the
an ad hoc basis. RBI has allowed Bank vide
goods (in India), who has to make payment
Circular No.DBR.Dir.BC.No.70/ 13.03.00/2015-
to the seller i.e., beneficiary. The LC is issued
16 dated 7th January 2016 to issue non-fund
at his request and on the basis of firm orders/
based facilities to non-constituent borrowers
contracts exchanged between the buyer and
of the Bank provided various conditions
the seller.
are fulfilled by the Bank. In case of ad hoc
LCs issued, auditors should also confirm if
2. Beneficiary [Seller]
adequate safeguards for KYC, security and
The beneficiary is normally the seller of the other aspects have been taken by the Bank.
goods (party outside India), who has to receive
the payment for having supplied the goods. iii. Check whether various documents required
A credit issued in his favour enables him, to to be collected as per the sanction letter have
obtain the payment from the Issuing bank been collected before issuance of LC. More
or Advising Bank on surrender of stipulated specifically, check whether the following are
documents duly comply the terms and collected:
conditions of the credit.
i. Copy of Import-Export Licence of the
importer.
3. Issuing Bank
The issuing bank is the one which issues the ii. Form A-1 duly filled in all respects and
LC at the request of the applicant in favor signed by the authorized signatory.
of the beneficiary. The issuing Bank is the iii. Proforma Invoice, Indent indicating the
one which creates a Letter of Credit and amount, description of goods, payment
undertakes to make the payment on receipt of terms under LC at DP/DA, INCO terms
the complied documents from the beneficiary i.e. CIF, C&F, C & I, FOB etc.
or through their banker.
iv. OGL Declaration/licence and undertaking
4. Advising Bank to submit the Bill of entry within
stipulated time.
The advising bank is one who advises the
credit to the beneficiary at the request of iv. Check a swift copy of the actual LC issued
the issuing bank thereby assuming the and verify if the same is in line with the terms
Bank
100 Branch
Audit
of the trade between the parties and adequate i.e., Buyer about the receipt of the documents.
INCO terms have been incorporated therein. In case of discrepancies, the issuing bank
will insist upon the buyer to accept the
v. Check appropriate entries in CBS have been
discrepancies and undertake to bear the
made in accordance with the LC issued. In
discrepancy charges.
case of sub-limits with CC, check if the CC
limits have been appropriately reduced to the Issuing bank as per the LC terms delivers
extent of open LCs. the documents to Buyer either after receiving
vi. In case FD has been stipulated as margin, payment or acceptance of bill.
verify if the same have been obtained in Audit of bills under LC
original and lien marked in the system. In case
of variation in exchange rates, the borrower a. Generate reports from the CBS for bills under
agrees to bear the exchange fluctuations and LC during the period. In case of bills for
therefore margin FDs may have to be topped which payment has already been received,
up at regular intervals. Check if the same have the auditor should check if the same has
been called for by the Bank. been received on time and whether suitable
vii. Check if Contra Transactions have been penal interest has been collected in case
reflected appropriately which will update the of overdues. Out of the bills yet to be paid
Contingent Liability / Assets accounts for Off- for, carry out verification of all outstanding
Balance Sheet items reporting. In case of a bills appearing under Bill Balancing Reports.
devolvement of Bills under LC, the transaction Special attention should be given to
will be recorded as Advance to customer outstanding bills under Lodgement status for
transaction and thus will be brought into the availability of Transport Documents.
Balance Sheet. From the date the LC becomes
b. Check the payments made against the bills in
funded, IRAC Guidelines issued by RBI will be
terms of the LC, whether at sight or usance. In
applicable in determining Asset Classification.
case of sight bills, the customer will retire the
viii. Check if appropriate bank charges and bills by making immediate payment subject to
commission have been collected from the presentment period. In case of usance bill, the
borrower for LC issued. The commission so customer will accept the documents for making
collected will be for the entire duration of payment on the due date.
LC. Check accounting policy of the Bank for
deferral of income collected in advance. Check c. Check entries in CBS and Bills register under
compliance with service tax laws. LC Ref. No. for various bills received and
lodged. In case of CBS operations the payment
2. IMPORT BILLS UNDER LC of Bill made through LC / Bill module in CBS
Once an LC has been issued, the foreign seller which will update the outstanding Bill Liability
exports the goods to the named port at Buyers and outstanding LC Liability.
country. Transport and other documents d. However, in case of Non-payment / non
pertaining to the export will be routed through availability of sufficient balance on the due
Advising Bank. Advising Bank in turn will send date of LC in Borrowers Account, the Bank
the documents to the LC issuing Bank. The set has to make the payment to the Beneficiary.
of documents is referred to as Bill in banking
It is known as devolvement of bill. In such a
parlance.
scenario, the bill amount will be crystallized
When the bills are received by the LC issuing and will be accounted for as a funded facility
Bank the documents will be scrutinized for its and the same is treated as overdue right from
correctness as per the terms of the LC. If the the first day. RBI states that If the debits
documents are in accordance with the LC, the arising out of devolvement of letters of credit or
bill will be registered as non discrepant bills. invoked guarantees are parked in a separate
The Issuing Bank will inform the Customer account, the balance outstanding in that
Bank
Branch 101
Audit
account also should be treated as a part of under forward contract etc., should be
the borrowers principal operating account for mentioned and verified.
the purpose of application of prudential norms
b. Proforma invoice against which payment
on income recognition, asset classification and
is required should be kept on record.
provisioning. In case of such overdues beyond
This should specifically indicate the
90 days, the facility has to be classified as
requirement of Advance Payment.
NPA.
c. Check whether various documents
e. Check if activity of collection of charges required to be collected as per the
is system driven or manual. Check the sanction letter have been collected
collection of various charges in case of bills before effecting outward remittance. More
and commission for handling bills under specifically, check whether the following
LC including that pertaining to Lodgement, are collected:
Liquidation / Realization, Devolvement (if any).
In case of discrepant documents the charges i. Form A-1 duly filled in all respects
in respect of discrepancies are also to be and signed by the authorized
collected from the account of the borrower. signatory.
ii. Proforma Invoice, Indent indicating
3. IMPORT BILLS UNDER COLLECTION BASIS the amount, description of goods,
Import Bills can be received on collection basis. payment terms under LC at DP/
In other words, the exporter in the foreign country DA, INCO terms i.e. CIF, C&F,
will send the import documents to its banker. C & I, FOB etc.
The banker will in turn send the documents to
iii. OGL Declaration/license and
the Banker of Importer with certain terms and
undertaking to submit the Bill of
conditions. The Importers Bank will follow the
entry within stipulated time.
instructions mentioned in the bill schedule and
deliver the documents to the buyer. iv. Copy of self-attested IEC certificate
of the borrower is obtained on
In this type of transaction Importers Banker is record.
dealing only as an intermediary. i.e., in case
the Importer does not pay the bill amount v. FEMA Undertaking
the Importers bank will notify the Exporters vi. Standard declaration in terms of
Bank and will act as per Exporters Bank compliance with Sec.195 of Income
instructions. There is no exposure in this case tax Act and certificates like 15CA
on the Importers Bank. The audit of bills and 15CB.
received under LC on collection basis is similar
to that of bills received under LC for funding. d. Check whether various charges as
applicable for outward remittance have
4. ADVANCE REMITTANCES been collected.
Where the importer is required to make
5. TRADE CREDITS
advance payment for the imports expected
to be made, Banks can arrange for advance Trade Credit is defined by RBI in Master
remittance. The process is similar to outward Circular on External Commercial Borrowings
remittances, but being specifically for imports, and Trade Credit (RBI/2015-16/33 Master
the auditor needs to verify the following: Circular No. 12/2015-16 dated July 1, 2015) as
- Trade Credits (TC) refer to credits extended
a. Request letter from the customer for imports, permissible under the extant
specifically mentioning purpose of Foreign Trade Policy, directly by the overseas
remittance, details of beneficiary, whether supplier, bank and financial institution for
maturity up to five years.
Bank
102 Branch
Audit
Depending on the source of finance, such has given an undertaking of payment by it on

trade credits include suppliers credit or buyers the due date.
credit. Suppliers credit relates to credit for
imports into India extended by the overseas Trade credits are also capable of being rolled
supplier, while buyers credit refers to loans over (subject to maximum tenure of 5 years
for payment of imports into India arranged by as stipulated). At the time of roll-over all the
the importer from a bank or financial institution documents submitted at the time of original
outside India. availment need to be refurnished.
Trade credit for non-capital goods up to Audit of trade credit transactions

one year from the date of shipment or up to a. Auditor should check if the applicant has a
the operating cycle whichever is lower. It is sanctioned limit for Trade Credit under LC /
therefore very important for the Banks to judge Buyers Credit Collection Bills with specific fund
a customers operating cycle with reasonable based limits in the form of Cash Credit or Term
accuracy. Auditors should carefully verify Loan.
compliance with such calculations submitted by
the borrower. Trade credit period for import of b. Auditor should verify if Applicant must have
capital goods can be upto five years from the a definite cash generation to honour the
date of shipment with ab initio contract period obligations under the Trade Credit for payment
of 6 months. at scheduled maturity date for payment of
Trade Credit.
It is very important to be well versed with
the regulations governing trade credits as c. Auditor should understand the mechanics of
stipulated in the RBI master circular as trade credit. Underlying transaction for Trade
aforesaid. Credit is always an Import Transaction. Hence,
it is necessary for the auditors to verify the
Example of how Trade Credit (Buyers credit) evidence of import having been completed.
comes into picture - Further, as per FEMA, TC for Merchanting
Say, RPJ Co. Ltd., India wants to import goods Trade Transactions is not permitted. For
worth Euro 0.25 million from PQR GMBH of that purpose the Exchange Control copy
Germany. It has approached KLM Bank to of Bill of Entry for Home consumption is
open an LC in favour of PQR GMBH. KLM the document that must be verified. There
Bank (LC Issuing Bank) has opened an LC are certain restrictions on availing TC for
in favour of the seller and Deutsche Bank is select commodities. Prescribed tenure in
the paying Bank. The import transaction was Master Circular issued by RBI for the said TC
concluded on 25th May 2015. The due date transaction must be adhered to.
of payment of Import Bill is 20th August 2015. d. Check if various forms at the time of entering
RPJ Co. has also applied for buyers credit Trade Credit transaction like submission of
to the same Bank, KLM Bank which request FEMA declaration, A1 form, OGL declaration
KLM Bank has accepted and has issued a or Import License copy and undertaking for
Letter of Undertaking (LoU) to the exporters submission of Bill of Entry within stipulated
Bank in Germany. On the LC due date i.e. time as per FEMA have been submitted or not.
on 20th August 2015, RPJ Co. Ltd. has to
retire the Import Bill. KLM Bank will ask for e. Check if Form A2 (for payment of Buyers
Nostro details of Deutsche Bank in Germany credit plus interest), Forms 15CA and 15CB
and request its overseas Branch to extend the towards TDS deduction and payment to
funding so that the payment of Import Bills can Income-tax Dept. have also been submitted.
be made on due date. This will complete the f. Auditor should check Offer Letter issued
import transaction and a new transaction will by overseas lender for ROI and if it is in
also come into existence that is Trade Credit conformity of TC transaction with FEMA
extended by Foreign Lender in favour of Indian guidelines. Interest Rate and other costs for
Importer where the Indian Bank (KLM Bank)
Bank
Branch 103
Audit
TC transaction must be within the prescribed rate. It helps Indian Exporter to procure raw material
All-in-Cost ceiling. and can produce the goods to be exported. Export
Financing can be in Indian Rupees [EPC] and in
g. Bank issuing LoU / LoC for Buyers credit
Foreign Currency [PCFC].
Transaction earns commission / charges as
that of Letter of Credit and the auditor should Banks provide finance for purchase, processing,
check if the same have been duly recovered manufacturing or packing of goods prior to shipment
as per the schedule of charges or the sanction / working capital expenses towards rendering of
letter. services. It is also known as Pre-Shipment Credit
h. The Trade credit facility is considered as a Facility. In addition to it, Banks provide finance
non-funded facility and appears as Contra on to exporters by way of loan or advance post to
the Banks Balance Sheet. It is necessary for Shipment stage by way of Export Bill Discounting,
the auditor to verify the process of accounting Export Bill Purchase, and Advances against Export
for the TC transactions in CBS and verify collection bills which is generally referred to as Post
its compliance accordingly. At the time of Shipment Credit in Foreign Currency (PSCFC). RBI
extending TC, liability under bill collection or Master Circular DBR No.DIR.BC.14/04.02.002/2015-
LC bill would extinguish and a new liability 16 dated 1st July 2015 deals with the Rupee /
under Buyers credit would be brought into the Foreign Currency Export Credit and Customer
books of account of the bank. Service To Exporters which the auditors need to be
abreast of.
i. Since TC can be rolled over during its entire
eligibility period for various reasons (like
Pre-Shipment Credit to Exporters
funding availability or quote available as per
international funding style of overseas bank) RBI defines Pre-Shipment Credit as:
the TC may require amendment / extension Pre-shipment / Packing Credit means any loan
and similar entries would require to be passed
or advance granted or any other credit provided by
in the system.
a bank to an exporter for financing the purchase,
j. At the time of final maturity date, the financing processing, manufacturing or packing of goods prior
bank needs to be paid for TC amount and to shipment / working capital expenses towards
interest and outward remittance transaction rendering of services on the basis of letter of credit
would be undertaken. At this stage, customers opened in his favour or in favour of some other
/ applicants default account (current or Loan person, by an overseas buyer or a confirmed and
a/c) would be debited and NOSTRO a/c irrevocable order for the export of goods / services
would be credited. This transaction would be from India or any other evidence of an order for
undertaken at Ready Rate or Forward Booking export from India having been placed on the exporter
rate (as applicable). At this stage the liability or some other person, unless lodgement of export
under Buyers credit has to be reversed. orders or letter of credit with the bank has been
k. In case FD has been stipulated as margin for waived.
TC, verify if the same have been obtained in Important Points to remember -
original and lien marked in the system. In case
of variation in exchange rates, the borrower i. Export packing credit can be in Indian Rupees
agrees to bear the exchange fluctuations and and in Foreign Currency.
therefore margin FDs may have to be topped
ii. Maximum period for packing credit is 360 days.
up at regular intervals till the tenure of the TC.
Check if the same have been called for by the iii. EPC is available at concessional rate of
Bank. Interest.
EXPORT TRANSACTIONS iv. EPC is disbursed against specific orders, in

To boost up the Exports of the country, the RBI has one lump sum or against the requirement for
directed banks to grant credit at a concessional executing export orders.
Bank
104 Branch
Audit
v. EPC can be disbursed as per Running Account e. If the liquidation of Export Credit is by other
Facility where availability of Letter of Credit / than the way of Export of Goods / Services
Confirmed orders before disbursement are not within the maximum period of 360 days, the
insisted. advance will cease to qualify for prescribed
rate of interest for export credit ab initio. It
vi. Liquidation of EPC / PCFC will be by way means that the bank will have to collect the
of exports proceeds only. Liquidation by any difference in concessional rate of interest and
other means than by way of exports will attract normal rate of interest. Auditor should verify the
higher rate of interest as applicable to domestic sources from which the EPC liability has been
borrowers. funded.
Audit of packing credit transactions f. Interest application should be checked with
respect to the period of funding and the date
a. Auditor should call for a list of all EPC
on which the EPC was liquidated.
disbursed during the audit period and select
a suitable sample for verification. Ordinarily, g. Auditor should carefully verify whether separate
each packing credit sanctioned should be stock statements have been given by the
maintained as separate account for the borrower in respect of stock procured under
purpose of monitoring the period of sanction EPC and not clubbed with normal CC limits.
and end-use of funds. The same should not be Such stock should be separately identified as
directly disbursed as a part of the CC account procured for exports and ultimate utilization for
of the borrower. the export goods should be ensured.
b. Confirm if the request for EPC is supported by Post-Shipment Credit to Exporters (Export Bills
a genuine trade transaction. For that purpose a Discounted/Purchased)
confirmed purchase order or similar document
As per RBI guidelines, Post-shipment Credit means
executed by the overseas buyer should be
any loan or advance granted or any other credit
verified. Banks can fund the export orders only provided by a bank to an exporter of goods/services
after maintaining a suitable margin over the from India from the date of extending credit after
amount of purchase orders in hand. Auditors shipment of goods / rendering of services to the
should also verify if the financing is made only date of realisation of export proceeds, and includes
in respect of permissible industries and not any loan or advance granted to an exporter, in
from those in the prohibited list of RBI. consideration of, or on the security of any duty
c. Banks should keep a close watch on the drawback allowed by the Government from time to
end-use of the funds and ensure that credit time.
at lower rates of interest is used for genuine Banks extend credits to Exporters by way of
requirements of exports. Banks should also purchasing/discounting export bills. Banks also
monitor the progress made by the exporters provide facility of advance against Exports on
in timely fulfilment of export orders. Auditor collection basis. The facility of discounting / purchase
should check if shipments have been made of bill is available in both Indian Rupee and in
within time and duly supported by relevant Foreign Currency.
shipping documents.
Audit of post-shipment credit transactions
d. At the time of liquidation of EPC, the borrower
may fund the same out of export realisation a. Generate a report on Export Bills purchased
or may request for converting the amount of during the audit period and select a suitable
Pre-Shipment credit into Post-Shipment credit sample for verification. Ordinarily, each
by discounting / purchasing the export bills. In post shipment credit sanctioned should be
case of EPC in foreign currency the borrower maintained as separate account for the
should undertake to bear the forex fluctuations, purpose of monitoring the period of sanction
if any. and due date of the bills. The same should
Bank
Branch 105
Audit
not be directly disbursed as a part of the CC for export bill lodgement and claims courier
account of the borrower. and other charges for submission of Export
Documents. Auditor should check if appropriate
b. Auditor should verify whether adequate interest is recovered on export.
documentary evidence is submitted by the
borrower viz: final invoice, packing list, LC e. In case of overdue bills, IRAC Norms for
if applicable, bill of lading/airway bill etc. and overdue bills will be applicable and the
confirm whether it complies with the terms of advance will be subject to Asset Classification.
the sanction. Auditor should also confirm if the
export is to permitted countries only. f. Generally in case of post-shipment credit,
interest on such disbursements is collected
c. Auditor should verify whether the period of upfront till the due date. Therefore auditor
sanction is within the period prescribed by RBI should verify whether the interest is bifurcated
i.e. 360 days. between different accounting periods as
the case may be. Similarly in case of early
d. Interest on Bill Discounting/Purchase is liquidation, proportionate interest needs to be
revenue for the bank. Bank also charges fees refunded.
VARIOUS DEPOSIT ACCOUNTS DESIGNATED IN FOREIGN CURRENCY AND LOANS AGAINST THEM
In addition to loans, foreign currency transactions at a Bank may also include deposits held in foreign currency
or Indian Rupees by NRIs. The below mentioned table highlights the features of various Deposit Schemes
available for Non-Resident Indians (NRIs). The said tabulation is readily available on RBI website in the
form of FAQs at the following link: https://www.rbi.org.in/scripts/FAQView.aspx?Id=69. Auditors should draw a
suitable sample from the various types of deposits in the Branch and perform the checks to verify compliance
with the conditions listed in this table.
Particulars Foreign Currency (Non- Non-Resident (External) Non-Resident Ordinary

Resident) Account (Banks) Rupee Account Scheme Rupee Account Scheme
Scheme [FCNR (B) [NRE Account] [NRO Account]
Account]
(1) (2) (3) (4)
Who can NRIs (individuals / entities NRIs (individuals / entities Any person resident outside
open an of Bangladesh / Pakistan of Bangladesh / Pakistan India (other than a person
account nationality / ownership nationality/ownership resident in Nepal and Bhutan).
require prior approval of RBI) require prior approval of Individuals / entities of
RBI) Pakistan nationality/ ownership,
entities of Bangladesh
ownership and erstwhile
Overseas Corporate Bodies
require prior approval of the
Reserve Bank.
Bank
106 Branch
Audit

Account]
(1) (2) (3) (4)
Joint In the names of two or more In the names of two May be held jointly with
account non-resident individuals or more non-resident residents
provided all the account individuals provided all
holders are persons of Indian the account holders are
nationality or origin; persons of Indian nationality
or origin;
Resident close relative
(relative as defined in Resident close relative
Section 6 of the Companies (relative as defined
Act, 1956) on former or in Section 6 of the
survivor basis. The resident Companies Act, 1956)
close relative shall be eligible on former or survivor
to operate the account as basis. The resident close
a Power of Attorney holder relative shall be eligible to
in accordance with extant operate the account as a
instructions during the life Power of Attorney holder
time of the NRI/ PIO account in accordance with extant
holder. instructions during the
life time of the NRI/ PIO
account holder.
Nomination Permitted Permitted Permitted
Currency Any permitted currency i.e. Indian Rupees Indian Rupees
in which a foreign currency which is
account is freely convertible
denominated
Repatriablity Repatriable Repatriable Not repatriable except for the
following:
i) All current income and ii)
up to USD 1 (one) million per
financial year (April-March), by
A NRI/ PIO
Type of Term Deposit only Savings, Current, Recurring, Savings, Current, Recurring,
Account Fixed Deposit Fixed Deposit
Period For terms not less than 1 From one to three years, As applicable to resident
for fixed year and not more than 5 However, banks are allowed accounts
deposits years. to accept NRE deposits
above three years from
their Asset-Liability point of
view
Bank
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Audit

Account]
(1) (2) (3) (4)
Rate of With effect from March 1, With effect from March 1, Banks are free to determine
Interest 2014 (i) deposits of 1 year 2014, interest rates offered their interest rates on savings
to less than 3 year maturity, by banks on NRE deposits deposits under Ordinary Non-
interest shall be paid within cannot be higher than Resident (NRO) Accounts.
the ceiling rate of LIBOR/ those offered by them on However, interest rates offered
SWAP rates plus 200 basis comparable domestic rupee by banks on NRO deposits
points; (ii) deposits of 3-5 deposits cannot be higher than those
years maturity, interest shall offered by them on comparable
be paid within the ceiling rate domestic rupee deposits
of LIBOR/ SWAP rates plus
300 basis points
On floating rate deposits,
interest shall be paid within
the ceiling of SWAP rates
for the respective currency /
maturity plus 200 bps/ 300
bps as the case may be. For
floating rate deposits, the
interest reset period shall be
six months
Operations Operations in the account in Operations in the account in Operations in the account in
by Power of terms of Power of Attorney terms of Power of Attorney terms of Power of Attorney is
Attorney in are restricted to withdrawals are restricted to withdrawals restricted to withdrawals for
favour of a for permissible local for permissible local permissible local payments in
resident by payments or remittance to payments or remittance to rupees, remittance of current
the non- the account holder himself the account holder himself income to the account holder
resident through normal banking through normal banking outside India or remittance
account channels channels to the account holder himself
holder through normal banking
channels.
Remittance to the NRI/PIO
account holder is subject to the
ceiling of USD 1 (one) million
per financial year
Loans
a. In India
i) to the Permitted without any ceiling Permitted without any Permitted subject to the extant
Account subject to usual margin ceiling subject to usual rules
holder requirements margin requirements
Bank
108 Branch
Audit

Account]
(1) (2) (3) (4)
ii) to Third Permitted without any ceiling Permitted without any Permitted, subject to conditions
Parties subject to usual margin ceiling subject to usual
requirements margin requirements
b. Abroad
i) to the Permitted without any ceiling Permitted without any Not Permitted
Account subject to usual margin ceiling subject to usual
requirement margin requirement
holder
ii) to Third Permitted without any ceiling Permitted without any Not Permitted
Parties subject to usual margin ceiling subject to usual
requirements margin requirements
c. Foreign
Currency
Loans in
India
i) to the Permitted without any ceiling Permitted without any Not Permitted
Account subject to usual margin ceiling subject to usual
holder requirements margin requirements
ii) to Third Permitted without any ceiling Permitted without any Not Permitted
subject to usual margin ceiling subject to usual
Parties requirements margin requirements
Purpose of
Loan
a. In India
i) to the i) Personal purposes or i) Personal purposes or Personal requirement and/or
Account for carrying on business for carrying on business business purpose.
holder activities activities.
ii) Direct investment in India ii) Direct investment in India
on non-repatriation basis on non-repatriation basis
by way of contribution to by way of contribution to
the capital of Indian firms / the capital of Indian firms /
companies companies.
iii) Acquisition of flat/ iii) Acquisition of flat /
house in India for his own house in India for his own
residential use. (Please refer residential use. (Please
to para 9 of Schedule 2 to refer to para 6(a) of
FEMA 5) Schedule 1 to FEMA 5)
Bank
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Audit

Account]
(1) (2) (3) (4)
ii) to Third Fund based and / or non- Fund based and / or Personal requirement and / or
Parties fund based facilities for non-fund based facilities business purpose
personal purposes or for personal purposes or
for carrying on business for carrying on business
activities. (Please refer to activities. (Please refer to
para 9 of Schedule 2 to para 6(b) of Schedule 1 to
FEMA 5) FEMA 5)
b. Abroad Fund based and / or non- Fund based and / or non- Not Permitted.
fund based facilities for bona fund based facilities for
To the fide purposes. bona fide purposes
account
holder and
Third Parties
The loans cannot be utilised for the purpose of on-lending or for carrying on agriculture or plantation
activities or for investment in real estate business.
[Source: FAQs by RBI on Features of various Deposit Schemes available to Non-Resident Indians (NRIs) as
updated up to February 2, 2015]
* Also refer notes below the FAQs as per RBI website.
GENERAL REMITTANCES AND APPROVAL are prohibited items under the said scheme
ACTIVITIES for which remittances cannot be permitted.
In addition to the transactions discussed above, Auditors should acquaint themselves with the
Banks undertake various other transactions as well. nuances of the said scheme. The scheme
Since, the said transactions are of procedural nature, is readily available on RBI website at the
detailed discussion is not included hereinabove. link: https://www.rbi.org.in/Scripts/FAQView.
However, auditor must acquaint himself with Master aspx?Id=66
Circulars issued by RBI on the following transactions
for compliance and other important guidelines. 2. Inward Remittances
Certain types of transactions and broad points to be a. AML check of the remitter should be
checked by the auditor are listed herewith performed by the Bank.
1. Outward Remittances (Liberalised b. In case of FDI remittance, AML check
Remittance Scheme for residents) and KYC report of the remitter to be
obtained from the overseas Bank.
Under the Liberalised Remittance Scheme
(LRS), all resident individuals, including c. Remittance details should be received
minors, are allowed to freely remit up to USD through SWIFT, MT 103
2,50,000 per financial year (April-March) for
any permissible current or capital account d. FEMA undertaking from the beneficiary
transaction or a combination of both. There should be obtained indicating the purpose
are specified permitted purposes for which of remittance. Appropriate documentary
only the LRS can be used. Similarly there evidence of the remittance should be
obtained before crediting the funds.
Bank
110 Branch
Audit
e. FIRC should be issued to the beneficiary FOREIGN EXCHANGE TREASURY

and appropriate charges for the FIRC TRANSACTIONS
should be recovered. Generally such transactions are carried out at
f. Appropriate request from the beneficiary Category A Branches / Specialized branches. Audit in
if he intends to hold funds in EEFC respect of the same is being carried out by Statutory
account. Central Auditors and the same are not discussed in
this paper.
3. Approval Activity with respect to
While it is difficult to cover the entire gamut of
External Commercial Borrowing forex transactions in a Bank in a small write-up,
Transaction critical important points have been discussed
Foreign Currency Convertible Bonds above. However, while performing an audit of these
transactions, the auditor needs to be fully aware
Investment in Joint Ventures(JV), Wholly of the detailed guidelines on the subject matter
Owned Subsidiaries (WoS) abroad issued by RBI and also the Banks internal policies.
Last but not the least, the auditor must be well
Investment in India
versed with the subject matter and keep his eyes
Branch Office Remittances and ears open while performing an audit of forex
transactions.
Bank
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Audit
Notes
Bank
112 Branch
Audit
Frauds in Banking Sector
FRAUDS IN BANKING SECTOR

CA. Nitant P. Trilokekar
Bank Audit in India is a risk-revenue mixed becomes widespread, the frauds are also computer
assignment. Bank Branch allotment is widespread based in response to the environment.
and with decent fees. Yet it is fraught with risk.
The Banking frauds can be classified from the angle
Work of about 30 staff in a Bank branch done over
of the perpetrator as:
the full year has to be signed in three to four days.
Then the auditor holds his breath for a year hoping 1. Insider
no fraud surfaces. This is downright embarrassing
for him as well as the whole profession. Perhaps 2. Outsider
increased discussion on Frauds in Banking sector When the employees of the Bank commit the fraud,
will increase alertness of all Bank Auditors raising they are the Insider category. Many laypersons have
the quality bar of Bank branch audits. This article is this strong view that frauds in Banking sector are
one such attempt. impossible without involvement of insider. However
this is not always the case.
Frauds in the economy involve Banks directly
or indirectly. Some of those which shake up the Fraud by outsider is without the involvement of any
confidence of people are: insider is also possible. The intention is just to exploit
weakness of the Banking system for self-gain.
Money Laundering
From the angle of technology classification they can
Debit/Credit card fraud be classified as:
Fake Demat accounts 1. Manual frauds converted to computer based
Frauds emanating from bribery for loans 2. New category of frauds back door of
technology exploited.
Know Your Customer (KYC) Violations (Benami
Accounts)
Approach to fraud detection
All of the above cannot be covered in the limited When the appointment is that of statutory audit, it
space of this booklet but we can start off on some would be unjustified to recommend an approach that
topics diverts you from your primary objective of statutory
audit. The tactic is to notice frauds during your
Money is the trading commodity of any Bank. planned work for statutory audit or at least notice
With so much cash floating in the Bank, like cash the RED FLAGS and walk the extra mile. When you
balances in Bank safes as well as in near cash like notice something out of the ordinary, it is a red flag.
drafts and payorders, staff, or customers or persons Red flag does not always mean fraud. It is just an
walking in branches may sometimes feel tempted alert to you for further investigation. For example,
to pick up what is not theirs. Computers have if the Credit Manager was on long leave, who did
added complexity to the detection and tracing of the authorisations and was it under direction of
perpetrator of the crime since handwriting is minimal the Regional/Head office? An acronym has been
in computerised environment. As computerisation developed for fraud detection.
Bank
Branch 113
Audit
F Find the RED flags When you notice anything out of the ordinary like
heavy cheque purchase and even return of cheques
of same person it is a red flag.
R Review RED flagged transactions Review of red flagged transactions is to confirm it is
not a one time and legitimate one. It can be one time
yet non legitimate.
A Analyse them for abnormality The study should specifically answer what is abnormal
about them from point of security, risk, violation of
statute or management policy and procedure. (please
include Accounting Standards)
U Understanding may be shared with It will be in good stead to discuss with the Branch
Management Manager to ensure there is no misunderstanding on
your part. If you feel he is likely to stall you then this
step may be skipped.
D Document your findings Try to keep with you all evidence possible. Screen
shots, relevant copies of policy or statute which is
violated, even photocopies/scans etc. of instruments
to support your argument.
S Statutorily report them Reporting such Frauds needs to be in writing and not
at an informal level. Resist the argument to present it
under a separate letter with a single copy only to one
person. In a statutory audit it should find a way in the
official report only.
Although the suggested approach may initially seem targeted in a publication dedicated for auditors, it will
formidable, over time it will be second nature and be value added to also discuss specific approaches
auditors will not even be aware that they are doing to detect each case in the limited time of audit.
this unconsciously. Some cases discussed here Each case is independent from the other. Audit tips
will demonstrate how the above approach can be are given in each case to minimise the detection
implemented. time. CBS (Core Banking Software) environment
is assumed which is a reality as well as a little
Cases of fraud discussed here are based on real bit of computer usage by the auditor restricted to
cases. Some have had huge publicity while some spreadsheet though audit tools are also available but
may be reported much earlier. As this article is normally not permitted.
Bank
114 Branch
Audit
Case 1 also have confirmed the price as well as the viability

of the building construction (project). A borrower who
Fraud title New Scheme exploitation
is to move into a house of ` 10 crore (a price of that
Perpetrator Outsider time of cases) will rarely move from a very small
Category house unless the increase in source of income is
Technology Non CBS transparent and shared with the Bank.
complexity
Objective Self-gain Case 2
Any new scheme announced by either the Fraud title Dormant Account Fraud
Government or any Bank defines opportunity for the Perpetrator Insider
exploiter. He bases the opportunity on the hastiness Category
of the scheme launch. It is announced by the
Technology CBS (relative low
Minister or Prime Minister or Bank Chairman in a
complexity complexity)
public meeting and all scurry to define features and
perhaps documentation. Let us take the example of Objective Self-gain
housing loan. This is a case of old wine in new bottle. This fraud
In India, Housing loan was for decades given only was prevalent in the pre-computerisation period
by the Institution Housing Finance Development leave alone CBS stage. In this fraud, accounts which
Corporation (HDFC). When the Banks started giving are classified as dormant and have sizable balance
finance for housing, amongst various features they in them are defrauded. Accounts normally go through
specified the margin. Each Bank vied with each two stages of non-operation. The first stage is non
other for loans by specifying lower margin. One such operative accounts where no operation other than
Bank announced what others announced i.e. 20%. In system related vouchers such as interest or charges
other words the Bank would finance 80% of value of are passed in the account for a period of six months.
the house. Knowing this, one prospect walked in with Five to seven years after that depending on the
a proposal for a house of ` 10 crore. It was for a Banks policy and RBI direction, such accounts
new house purchase under construction. He proved are classified as dormant. Although the majority
to the Banks for his source of margin of 2 crore as do not have balance other than nominal, some
well as ability to repay installments. have sizable balance in them. These accounts
though rare, exist. The account holder may have
Warning signs ignored: A person rolling in crores moved to new premises, or got transferred or
would reflect his wealth in his personality. He would plumb forgot the existence of the account. Banks
travel in large cars and if housing finance was and most software systems are sensitive to these
needed, he would apply to his own Banker and not accounts. Once they are classified as non-operative
walk into a Bank as a new customer. or dormant, operations in the account other than
system generated entries are not permitted. Entries
What transpired after payment of just one installment are permitted under authorisation of the Branch
was that the Builders agreement was false although Manager only. This is also to ensure interview of
the stamps paid as fees were genuine. The copy of account holder by the accountant to understand the
return of Income was also false. Also false was the reasons for low action of the account. The fraud is
document of his source of ` 2 crore. done by either transfer of funds to own account or
Audit tips: New customer formality was missing. dummy account or straight withdrawal.
When the customer is new or walk in, more care The difficult situation was just mentioned that the
should be taken. No-one comes without any previous account needs to be converted from non-operative
Banker from whom a credit opinion should be asked to operative and this is to be done only under
in confidence usually. Additionally, a visit by the authorisation of Branch Manager. Does that mean
banker to the borrower premises either home or that without active involvement of the Branch
office would be sufficient to confirm the financial Manager? This is not always imply so. So, how does
status of the borrower. Auditor can peruse the the staff get the password of the Manager? He need
inspection report in the file. Visit to the builder would not get so. By design or by accident the power of
Bank
Branch 115
Audit
his own password may be erroneously given to the lower provisions are needed. Internally, the Region
level of a manager due to which the account may to which the Branch belongs will thus have lower
be made live. statistics. With this larger objective in mind such
dubious tactics are employed. If not detected, the
Another bypass of control is when any person has auditor is placed later in a precarious position of
authority to the database. Information Technology such window dressing is detected.
maintenance persons have access to the database
or a poor security control will permit easy access. The modus operandi used is to manipulate status
When the application controls are by passed, it is of the NPA accounts to performing status whether
easy to transfer the balances to another account or not specialised software application is used to
without leaving an audit trail. The perpetuator determine NPA status. Just before the year end,
will also have his personal account in one of the you will notice the loan account closed and another
branches which is a natural feature. Such frauds loan given to the same party for amount equivalent
are difficult to discover until complaint from the real to the outstanding of the old account. Since the old
account holder is received. Prevention is better account is closed, even if the status of NPA was
than cure. Restricted access to database is a better accorded to it anytime during the year this account
alternative. is of no consequence either to the NPA software or
anyone as this account ceases to exist at the end
Audit tips: The study of audit trail would be helpful of the year. Analysis of such an account is thus
to check those accounts made live from dormant. easily skipped under the misunderstanding of 100%
However the reality of presentation of audit trail hits recovery when in reality, it is not.
us when we inspect one. It is lengthy and all small
events are shown with old value to new value. This
Audit tips
source is no longer reliable to point out red flag
transactions. One suggested short cut is isolate The auditor has various alternatives to seek and
all accounts made live this year. You can do this verify such account in a minimum period of time.
by accessing list of accounts which were dormant The audit action here is, Select target accounts
last year as well as end of this year. Insert this examine them conclude on window dressing.
data in spreadsheet, use look up to identify those Initially we shall see the section of selection.
whose status was dormant last year but are not
in the dormant list this year. These are red flag 1. Selection of target accounts
transactions. Examine these accounts especially Ask for list of loan accounts closed between
the voucher just after conversion of status of the February and March. If such a list is
accounts from non-operative/dormant to live. This not forthcoming then alternative action is
will feed you to a trail in case there is a fraud of this mentioned below. If such a report is obtained
type. If the software application has a report of date from the system it is comfortable to get list of
of conversion to live status then the spreadsheet broad target accounts. Examine the closure
alternative need not be taken. entry and if it is equal to the last / average
installment then this is not in your select list at
Case 3 this stage. Accounts closed either by transfer
Fraud title Window dressing to any other account (smart manipulators do
Perpetrator Bank Officials not use this option) or by payment of amounts
Category sizably more than one instalment usually
Technology CBS (Low) nearing three instalments or above are in your
complexity select target.
Objective Suppress true NPA (non- a. In case the ready report of list of
performing account) status accounts closed in specified period
Unlike other frauds, this one does not have the is unavailable you can still obtain it
direct nexus to personal gratification. It is done using the CBS and without involving
for the collective gain of the Branch. The aim is programmers at the Data Centre of the
to suppress NPA status of few accounts so that Bank (which is next to impossible). A
Bank
116 Branch
Audit
jotting list is sine qua non of any Indian exercise can be repeated for August-
Banking system since the manual days. September.
This lists the balance of a particular
department say Loans or Savings on 2. Analyse the accounts & Conclude on
a particular day. In manual days this window dressing
was done every Friday to tally with the How the account is closed and the amount of
manually maintained General Ledger. closure are red flags.
Such Jotting can be printed at any
frequency today. Assuming you have a. Accounts are rarely blatantly transferred
numerous loan accounts such a list of to new loan accounts. Yet this has to
mere account number, name and amount be ruled out. Such accounts need to
will run into dozens of pages. For just be analysed if a new loan is given and
two months analysis you need to print earlier loan account merged as per the
jotting for end of February and March sanctioning authority and it should sound
end. Then you need to compare old logical to the auditor.
closed accounts and new loan accounts. b. Cash/Cheques used for settlement are
b. New accounts are easy to identify since to show legitimate closure of account. If
account numbers higher than the last one this is a case of window dressing then
of February are the new accounts. the borrower seeks a temporary source
for a few days about a week to fifteen
c. Closed account identification however is days after which a new loan account
time consuming for a higher load if done is granted. This is definitely window
manually. Again, you can insert this data dressing.
in excel and identify accounts existing
c. Names of new accounts sometimes
in February but not in March. These
may not be the same as the old one.
are target accounts. As amounts are
This is to throw the auditor off track.
also mentioned, you can take the ABC
You are aware that a person can have
analysis route to identify those which
many proprietorship accounts. If a new
have been closed with more than one
loan is taken in another proprietorship
installment. In addition, newly opened
account it will not show up as a red
accounts in March with same name are
flag. Banks need to identify the name
also to be selected.
of the proprietor in the Loan account
d. A note of caution that mere closure since the proprietary firm does not have
of old account and opening of new independent legal status. If the name of
immediately need not mean window the proprietor is not mentioned then the
dressing. It has to be examined case to PAN number of the borrower will be the
case. For example two housing loans same and the documents of the new loan
are sometimes not permitted based on will show who the proprietor is.
income assessment. For this, one is d. If the names are changed to that of
closed and a new one is opened. family member then also the surnames
e. Two months are suggested here because would be the same in areas where
the banks normally struggle to get the surnames are prevalent.
account in order around January even e. In case the borrower manipulates through
though the NPA date is the date on private limited companies then here
which the account has dropped to NPA too, the hard work of finding common
status. If the auditor feels the Bank directors can be resorted to.
ensures this half early then same
Bank
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Audit
Case 4 When Income Tax PAN Number is available, the

Bank can verify online through say CIBIL where all
Fraud title Money Laundering/Benami/ other details can also be corroborated.
KYC
Perpetrator Outsider Case 5
Category
Fraud title Accommodation Bills
Technology High-fake documents
complexity Perpetrator Outsider
Category
Objective Suppress identity and evade
tax Technology High-fake documents
complexity
Tax evasion in India is a sore feature. While the Objective Use cheap Banking
Government has taken steps and enactments, the finance for non-sanctioned
translation into action at ground zero remains to be transactions
patrolled by many of us. KYC being a non-financial
nature it is not given due attention by the Bank Banking finance encourages contribution to the
auditor. A fake KYC has potential to germinate into countrys Gross Domestic Product. Bank finance is
large frauds without recourse to the perpetrator. encouraged to be given at low rates to contributors
Digital technology has eased the copy and to the economy. Borrowers get encouraged wrongly
manipulation of documents. Editing software permits to use cheaper finance for other non-official
manipulation of names and addresses to create an activities. We normally see this for vendor bill
edifice of falsehood. Education certificates, address purchase. Whenever goods are purchased either
proofs, income-tax returns, proof of residence and for manufacture or trade, the borrower needs more
other documents can easily be manipulated. Unless credit period than that offered by the vendor for
there is some third party or an objective/direct reasons of cash flow or manufacturing/sale cycle.
source of confirmation the web of lies will expose the The bank steps in by providing finance specifically
Bank to astronomical levels. These levels are either for the documented transaction. The borrower has
borrowings from the same Bank or transactions done to prove all aspects of the transaction. Proofs are
through the Bank for the economic benefits of the provided by documents. The bank should be able to
perpetuator like Demat Accounts (Benami). conclude that order is placed on the vendor, goods
are dispatched, goods are received, insured in transit
Audit tips: Whenever wholesale account opening is etc. Thus, purchase order, sale invoice, lorry receipt
encountered by any Bank, it needs to be supported (LR) or bill of lading, goods received note, insurance
by sufficient staff and Standard Operating Procedure policy etc. proves that this transaction existed. At
(SOP) for KYC Compliance. KYC of depositors the time of sanction the bank must have approved
and Borrowers need not be accorded differential a list of vendors approved for bills discounted. In
priority as yesterdays depositor may be tomorrows genuine cases such documents are normal and easy
borrower. Yet the golden rule is that KYC of non- to produce.
depositors needs to be more strictly done. System
of KYC needs to be examined and also whether it If the transactions do not exist yet bills are
is being followed. Under the garb of convenience, discounted then such bills are termed as
some Banks send their representatives to the house Accommodation Bills. But the documents need
or place of business of potential clients. Their visit to be submitted as a formality. As mentioned
also confirms the address of the account holder and before, technology of today offers easy way out for
as photograph it taken by the Bank official there is reproduction of documents.
no question of fake photo submission. Even if there Audit tips: Some stark signs are as follows:
is no personal visit, accounts need to be opened by
the personal visit by the account holders including 1. Bills are of round amounts. The net amount of
Directors of companies at least once. This is a actual transactions rarely are in round figures.
guaranteed implemented procedure if the Bank is If all the bills are in round figures then it is a
shooting the photographs on their camera only and red flag. You need to be cautious to realise
not accepting submitted photos. that all red flags are not fraud.
Bank
118 Branch
Audit
2. Supporting documents are neat and clean. Lending against this is done with a margin of 20%.
Take the example of Invoice. If it is not folded Also, the rate of interest charged is 2% over the
to fit into an envelope does it mean that a fixed deposit. In case the borrower does not pay,
10 X 12 inch envelope was used? This may when the fixed deposit matures, the money is
be so in overseas trade though even there it is appropriated against the outstanding. Furthermore,
rare. Then the Lorry (Truck/surface transport) such advances against the Banks own FDR are
receipt. It may be clean in case of vendor bill outside the purview of Non-performing Asset (NPA)
purchased. But in case Debtor bill purchased classification. This makes scrutiny of such account
where the borrower claims to have delivered easy to miss.
goods to his customer, he has to submit
accepted lorry receipt (LR). This lorry receipt Normally the FDRs are of the borrower i.e. name
has travelled with the truck from the factory to on the FDR is the same as that of the borrower.
the customer taking days and lot of handling. In few genuine cases it is not the same. When the
This soils the paper to a large extent. So if this partners submit their personal FDR for the funds to
LR is clean, your red flag should be fluttering! be borrowed by the firm or when parents submit the
Even here we have noted the office staff to FDRs in their name as security to finance business
rub the receipt on used carbon paper to show of their children to enforce discipline. When the
grease and dust with the aim to avoid such FDR does not bear the same name as that of the
notice by the auditor or the Banker where borrower it is termed as 3rd party receipt.
accommodation is taken without his knowledge. In such a fraud, the Bank assumes security of the
3. Single vendor: Unless the Bank has sanctioned FDR exists when it does not. FDRs are genuine
Bill Purchase/ discount of only one approved but the aspect of their submission as security is
vendor you will agree that few concerns have not. In such cases bulk deposits are brought in
a single vendor. Such a vendor is likely to be through middlemen. The word bulk refers to amounts
an accommodating friend. So if all the bills exceeding ` 100 crore. Middlemen drive a barter
are drawn by one party only, your red flag bargain with the Bank Managers-deposit for lending.
starts fluttering. If you note the sanction of Once the deposits are transferred, the receipts are
facility is to more than one vendor then you handed over to the middleman who convinces the
are heading for an investigation. Normally, Bank that he takes it as agent. Deposits are usually
the Banker himself would question only one of large corporations especially public authorities
vendor unless it is a monopoly item or some or Public Limited companies. The Bank also does
other technical reason. To avoid pre-sanction not have much say in the KYC as the middleman
objections and hard questions he would add a encourages secrecy otherwise the deposits will move
list just to divert attention but after sanction use to other Banks. Now after the transfer is made and
his accommodating friend only. deposit receipts are handed to the middleman he
expectedly comes with the letter to permit the Bank
Case 6 to give overdraft against a third party not related
to the depositor (not an associate company or
Fraud title Fraudulent Overdraft subsidiary). Since this was part of the barter with the
against Fixed Deposits Bank by the middleman, the overdraft is given. Only
Receipts (FDR) when either no servicing is done or the depositor
Perpetrator Outsider company complains non-receipt of deposit receipts,
Category the fraud is understood.
Technology High-fake documents
complexity Audit tips
Objective Siphoning money 1. Sudden spike in any ratio of the Bank needs
to be investigated. (Use the term study as the
Giving money against fixed deposit is the safest form
term investigation has more sinister annotation
of Bank Lending. This is oft quoted by Bankers. The
in Banking industry) Even spike in profit which
logic is simple. The money offered as security is
others may applaud should be studied critically
already with the Bank in the form of fixed deposit.
by the auditor. Ratio analysis is an easy
Bank
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Audit
pointer to problem areas but undervalued by Conclusion

many. In the present case, the annual figure Discovery of frauds is often misunderstood as
compared to earlier would have shown jump in labour intensive or time consuming process. Society
profit, deposits and advances. The bulk deposit looks to the industry of auditors to unearth frauds
and bulk advance would be easily traced and in their regular work. As the clients have benefited
the story revealed before circumstances and from computers it is logical that the auditors too
newspapers revealed the story. benefit from them. Computer Aided Audit Tools
2. Unrelated third party deposits need to be (CAAT) are useful. One day, auditors will be
supported by special document and not merely permitted to use them. Until then a via media has
by a letter from the company. to be reckoned with. Generating reports through
the system and dovetailing them into spreadsheet
3. The document needs to be supported by for future analysis like Ratio analysis saves the
certified resolution copy. auditor lots of time yet points to the stark red flags.
The given examples though few, are based on
4. If all the documents are in place then a
real frauds that have occurred in Indian Banking
balance certification from the depositor and
history. This should spur you in your next Bank
lender should be demanded to be sent directly
audit assignment.
to the auditor. This will be the ultimate proof of
authenticity of the transaction.
Bank
120 Branch
Audit
ACCOUNTING STANDARDS APPLICABLE TO BANK BRANCHES
ACCOUNTING STANDARDS
APPLICABLE TO BANK BRANCHES
CA. Abhijeet Sanzgiri
The Indian Banking industry is regulated by policies Every year the RBI comes out with master circular
and regulations of the Reserve Bank of India on Disclosure in the notes to accounts by Banks
(RBI). These guidelines offer limited flexibility in which includes the relevant disclosures under the
terms of policy decision to Scheduled Commercial aforementioned accounting standards.
Banks pertaining to a specific subject. Scheduled
Ind AS: These are the converged Indian Accounting
Commercial Banks are Companies as per the
Standards (Ind AS) hosted by MCA on its website.
Companies Act, and follow the relevant provisions
The date on which these will come into force is yet
of the Companies Act wherever these are not
to be notified.
consistent with the provisions of the Banking
Regulation Act. However, Insurance, Banking and Non-Banking
Financial Companies are not required to apply Ind
One of the most important aspects of preparation of
AS either voluntarily or mandatorily.
accounts and financial statements of a Bank is the
compliance with accounting standards (AS). Since However, it appears (though not clarified), that
the time AS issued by ICAI are in force, Banks are if these entities are subsidiaries, joint venture
mandatorily required to comply with these standards. or associates of a parent company who are to
However, owing to the peculiar nature of a Banks comply with Ind AS, they will have to report Ind AS
business, compliance with certain standards was a adjusted numbers for the parent company to prepare
difficult proposition. consolidated Ind AS accounts.
RBI had constituted a Working Group Committee AS-5 Net Profit or Loss for the period, Prior
under the Chairmanship of Shri N. D. Gupta, former Period Items and Changes in Accounting
President of ICAI to recommend steps to eliminate/ Policies
reduce gaps in compliance by banks with AS issued
Standard AS-5 prescribes classification
by ICAI. The Working Group observed that out
and disclosure of items in the Profit and loss
of AS, already in force then i.e., in 2003 viz. AS
account to be prepared and presented on a
1-22, Banks in India were generally complying with
uniform basis. AS-5 requires classification and
most AS except for AS 5, AS 9, AS 11, AS 15, AS
disclosure of extraordinary and prior period
17, AS 18, AS 21, AS 22, leading to qualification
items, and disclosure of certain items within
in the financial statements. It also gave certain
profit or loss separately from ordinary activities.
recommendations w.r.t compliance with AS for
Banks. Banks do not disclose the details of such items
separately in the relevant years profit & loss
RBI Circular DBOD.No.BP.BC 89 /21.04.018/2002-
account since the profit & loss account format
03 dated 29th March, 2003 stated that the for banks is prescribed under Form B of the
requirements of this circular w.r.t. compliance with Third Schedule to the Banking Regulation Act,
specific AS as pointed out earlier be complied from 1949 which does not provide any matching
the year ended 31st March, 2003. This circular was item head for such disclosure.
further supplemented by Circular No.DBOD No.BP.
BC.82/21.04.018/2003-04 dated 30th April, 2005 RBI has clarified vide Circular DBOD.
dealing with AS24, AS26 and AS28. No.BP. BC. 89/21.04.018/2002-03, that such
disclosures, wherever warranted, be made in
It is important to note that all the other AS the Notes on Accounts to the balance sheet of
prescribed by ICAI would be applicable as such banks.
in their entirety; only the ones highlighted in
these circulars would be applicable in the manner AS-5 specifies the accounting treatment
prescribed therein. for changes in accounting estimates and
Bank
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Audit
disclosures to be made in the financial e) Premium paid on leasehold land is

statements regarding changes in accounting amortised over the period of lease.
policies. These disclosures are in addition
to any other disclosures required by other AS-9 Revenue Recognition
Accounting Standards. a) Income/Expenditure should be recognised
AS-5 would generally not apply at a branch on accrual basis, unless otherwise
level and would be applicable at the Head stated. In respect of foreign offices,
office level as a matter to be taken care of by income/expenditure should be recognised
as per local laws of host country.
the Statutory Central Auditor.
b) Interest income should be recognised on
Branch applicability In case there are
time proportion basis except
Prior Period items, the Branch Statutory
auditor should ensure that they are separately i. Interest on Non-Performing Assets
disclosed. If any Accounting Policy / Accounting recognised on realisation, in terms
estimate is changed at the Branch level in the of the RBI guidelines.
current year as compared to last year, then
either the same should be stated specifically c) Commission on issue of Bank Guarantee
in the Audit report and also the Notes to the (BG) and Letter of Credit (LC) is accrued
Accounts. Alternatively, MOC (Memorandum of over the tenure of BG/LC.
Change) could be passed rectifying the change d) All other Commission and Exchange,
and giving effect to the entry as per the policy/ Brokerage, Fees and other charges are
estimate adopted last year recognised as income on realisation.
AS-6 Depreciation Accounting e) Income (other than interest) on

investments in Held to Maturity category
a) Depreciation on assets is to be charged
acquired at a discount to the face value,
on the Written Down Value at a rate that shall be recognised as follows:
would depreciate 95% of its historical
cost over the useful life of the asset 1. On Interest bearing securities, it
(i.e., the book value at the end of the is recognised at the time of sale/
useful life of the asset shall not be more redemption.
than 5% of its historical cost), except
2. On zero-coupon securities, it is
in respect of computers where it is
accounted over the balance tenor
calculated on the Straight Line Method,
of the security on a constant yield
at the rates prescribed by RBI.
basis.
b) In respect of additions, depreciation shall
f) Profit or loss on sale of investments
be provided for the full year, irrespective
is recognised in the Profit and Loss
of the date on which the assets were
account. In case of profit on sale of
put to use whereas, depreciation is not investments under Held to Maturity
provided in the year of sale/disposal of category, an equivalent amount, net
an asset. of taxes and amount is transferred to
c) Depreciation on the revalued portion of Statutory Reserves and appropriated to
assets should be adjusted against the Capital Reserve Account.
Revaluation Reserve. g) Dividend is recognised when the right to
d) Where the cost of land and building receive the dividend is established.
cannot be separately ascertained, h) Interest on Income-tax refund is
depreciation should be provided on the recognised in the year of passing of
composite cost, at the rate applicable to assessment order.
buildings.
Bank
122 Branch
Audit
i) Recoveries made from NPA accounts c. Foreign currency non-monetary

are appropriated first towards unrealised items, which are carried at
interest/income debited to borrowers historical cost, are reported using
accounts, expenditure/out of pocket the exchange rates at the date of
expenses incurred, then principal dues the transaction.
and lastly towards uncharged interest. d. Contingent liabilities denominated
in foreign currency are reported at
AS-10 Accounting for Fixed Assets FEDAI closing spot rates.
a) Fixed assets are to be stated at historic
e. Outstanding foreign exchange
cost, except in the case of revalued spot and forward contracts held
assets which are stated at revalued for trading are revalued at the
amounts. The appreciation on revaluation exchange rates notified by FEDAI
is credited to Revaluation Reserve. for specified maturities, and the
resulting profit or loss is recognised
b) Cost shall include cost of purchase and
in the Profit and Loss account.
all expenditure such as site preparation,
installation costs, professional fees etc. f. Outstanding Foreign exchange
incurred on the asset before it is put to forward contracts not intended for
use. Subsequent expenditure incurred on trading are valued at the closing
assets put to use is capitalised only if it spot rate as advised by FEDAI.
increases the future benefits from such The premium or discount arising
assets or their functioning capability. at the inception of such a forward
exchange contract is amortised as
c) Cost of premises shall include cost of expense or income over the life of
land, both freehold and leasehold. the contract.
g. Exchange differences arising on
AS-11 The Effects of Changes in Foreign
the settlement of monetary items
Exchange Rates (revised 2003) at rates different from those at
A. Translation in respect of Integral which they are initially recorded
Foreign operations: are recognised as income or as
expense in the period in which they
Foreign currency transactions of Indian arise.
branches are classified as integral
foreign operations and foreign currency h. Gains/Losses on account of
transactions of such operations are changes in exchange rates of open
translated as under: position in currency futures trades
are settled with the exchange
a. Foreign currency transactions clearing house on daily basis and
are initially recorded on initial such gains/losses are recognised
recognition in the reporting in the Profit and Loss account.
currency by applying to the foreign
i.
currency amount the exchange rate
between the reporting currency and B. Translation in respect of Non-Integral
the foreign currency on the daily Foreign operations
closing rate as displayed on the
Transactions and balances of foreign
Reuters page.
branches are classified as non-integral
b. Foreign currency monetary items foreign operations and their financial
are reported using the Foreign statements are translated as follows:
Exchange Dealers Association of i) Assets and Liabilities (monetary
India (FEDAI) closing spot rates. and non-monetary as well as
Bank
Branch 123
Audit
contingent liabilities) are translated the Bank intends to hold

at the closing rates notified by till maturity. Investments in
FEDAI. subsidiaries, joint ventures
and associates are also to
ii) Income and expenses are be categorised under Held to
translated at the quarterly average Maturity.
closing rates notified by FEDAI.
2. Held for Trading: These
iii) All resulting exchange differences comprise investments
are accumulated in a separate acquired with the intention
account Foreign Currency to trade by taking advantage
Translation Reserve till the disposal of short term price/interest
of the net investments by the bank rate movements. These are
in the respective foreign branches. intended to be traded within
90 days from the date of
iv) Assets and Liabilities of foreign
purchase.
offices in foreign currency (other
than local currency of the foreign 3. Available for Sale: These
offices) are translated into comprise investments which
local currency using spot rates do not fall under Held to
applicable to that country. Maturity or Held for Trading
classification.
AS-13 Accounting for Investments b) Acquisition Cost of Investment
a) Transactions in Government Securities
are recognised on Settlement date and 1. Brokerage, commission, securities
all other investments are recognised on transaction tax etc., paid on
Trade date. acquisition of equity investments
are included in cost.
b) Investments are categorised under
Held to Maturity, Held for Trading 2. Brokerage, commission, broken
and Available for Sale categories as period interest paid/received on
per RBI guidelines. For the purpose of debt investments is treated as
income/expense and is excluded
disclosure of investments in India, these
from cost/sale consideration.
are to be classified, in accordance with
RBI guidelines & Banking Regulation 3. Brokerage and Commission
Act 1949, under six classification viz., received on subscription of
Government Securities, Other Approved investments is credited to Profit
Securities, Shares, Debentures and and Loss Account.
Bonds, Investment in Subsidiaries and
Associates and Others. In respect of 4. Cost of investments is determined
investments outside India, these are at weighted average cost method.
classified, in accordance with RBI c) Transfer of Securities between categories
guidelines, under three categories viz.
Government Securities (including local Transfer of securities between categories
authorities), Subsidiaries/Joint Ventures is carried out at the least of acquisition
abroad and Other Investments. cost / book value / market value on the
date of transfer. The depreciation, if any,
a) Basis of categorisation on such transfer is fully provided for.
Categorisation of an investment is d) Non-performing Investments (NPIs) and
done at the time of its acquisition. valuation thereof
1. Held to Maturity: These 1. Investments are classified as
comprise investments that performing and non-performing,
Bank
124 Branch
Audit
based on the guidelines issued by termination of employment,

the RBI in case of domestic offices for an amount equivalent
and respective regulators in case of to 15 days basic salary
foreign offices. payable for each completed
year of service, subject to
2. In respect of non-performing a maximum prescribed as
investments, income is not per The Payment of Gratuity
recognised and provision is made Act, 1972 or BOI (Employee)
for depreciation in value of such Gratuity Regulation whichever
securities as per RBI guidelines. is higher. Vesting occurs upon
e) Repo/Reverse Repo completion of five years of
service. The Bank makes
The securities sold and purchased under periodic contributions to a
Repo/Reverse repo are accounted as fund administered by trustees
Collateralised lending and borrowing based on an independent
transactions. Securities are transferred as external actuarial valuation
in case of normal outright sale/purchase carried out annually.
transactions and such movement of
securities is reflected using the Repo/ b) Pension: The Bank provides
Reverse Repo Accounts and Contra pension to all eligible
entries. The above entries are reversed employees. The benefit is in
on the date of maturity. Costs and the form of monthly payments
revenues are accounted as interest as per rules and payments
expenditure/income, as the case may to vested employees on
be. Balance in Repo Account is classified retirement, on death while
as Borrowings and balance in Reverse in employment, or on
Repo account is classified as Balance termination of employment.
with Banks and Money at Call & Short Vesting occurs at different
Notice. stages as per rules. The
Bank generally makes
AS-15 Employee Benefits (revised 2005) monthly contribution to
the pension fund at 10%of
i. Short Term Employee Benefit: The
pay. The pension liability
undiscounted amount of short-term
is reckoned based on
employee benefits, such as medical
an independent actuarial
benefits etc. expected to be paid in
valuation carried out
exchange for the services rendered by
annually and Bank makes
employees are to be recognised during
such additional contributions
the period when the employee renders
periodically to the Fund as
the service.
may be required to secure
ii. Post-Employment Benefit: payment of the benefits under
the pension regulations.
A. Defined Benefit Plan:
B. Defined Contribution Plan:
a) Gratuity: The Bank
provides gratuity to all a) Provident Fund: The
eligible employees. The Bank operates a Provident
benefit is in the form of Fund scheme. All eligible
lump sum payments to employees are entitled
vested employees on to receive benefit sunder
retirement, on death while the Banks Provident
in employment, or on Fund scheme. The Bank
Bank
Branch 125
Audit
contributes monthly at a (c) lease agreements to use lands.

determined rate. These
This Standard applies to agreements that transfer
contributions are remitted
the right to use assets even though substantial
toatrust established for this
services by the lessor may be called for in
purpose and are charged
connection with the operation or maintenance of
to Profit and Loss Account. such assets. On the other hand, this Standard
The bank shall recognise does not apply to agreements that are contracts for
suchannual contributions as services that do not transfer the right to use assets
an expense in the year to from one contracting party to the other.
which it relates.
b) Pension: The bank also AS-22 Accounting for Taxes on Income
contributes monthly at a a) Income-tax comprises the current tax
predetermined rate to the provision and net change in deferred
said pension scheme. Bank tax assets or liabilities during the year.
recognises its contribution to Deferred tax adjustments shall comprise
such scheme as expenses of changes in the deferred tax assets or
in the yearto which it relates. liabilities during the period.
The contributions are b) Deferred-tax is to be recognised subject
remitted to National Pension to consideration of prudence in respect
System Trust. The obligation of items of income and expenses
of bank is limited to such those arise at one point of time and
predetermined contribution. are capable of reversal in one or more
subsequent years.
iii. Other Long Term Employee Benefit:
c) Deferred tax assets and liabilities are
a) Leave encashment benefit, which measured using the tax rates and
is a defined benefit obligation, is tax laws that have been enacted or
provided for on the basis of an substantively enacted by the balance
actuarial valuation. sheet date.
b) Other employee benefits such as d) Deferred tax assets are recognised
Leave Fare Concession, Milestone and reassessed at each reporting date,
award, resettlement benefits based upon managements judgment
etc. which are defined benefit as to whether realisation is considered
obligations are provided for on the reasonably certain. Deferred tax assets
basis of an actuarial valuation. are recognised on carry forward of
unabsorbed depreciation and tax losses,
AS-19 Accounting for Leases only if there is virtual certainty that such
This Standard is applied in accounting for all deferred tax assets can be realised
leases other than: against future profits.
(a) lease agreements to explore for or use AS-28 Impairment of Assets

natural resources, such as oil, gas, This standard prescribes the procedure that
timber, metals and other mineral rights; the enterprise (Branch) should apply to ensure
and that its assets are carried at not more that their
recoverable amount. An asset is treated as
(b) licensing agreements for items such as
carried at more than its recoverable amount,
motion picture films, video recordings,
if its carrying amount exceeds the amount to
plays, manuscripts, patents and be recovered through use or sale of the asset.
copyrights; and If this is the case, the asset is described as
Bank
126 Branch
Audit
impaired and the enterprise has to recognise Controls are effective and used continuously.
an impairment loss. An enterprise should Auditor also has to document whether the
assess at each balance sheet date whether Internal Control System is sufficient enough
there is any indication that an asset may be due to which the auditor has decided to go for
impaired. The impairment loss, if recognised, Test Checking.
shall be debited in the profit and loss account
provided no revaluation reserve exists at that SA 315 Identifying and Assessing Risk of
date in relation to the asset, and if it exits, Material Misstatement Through Understanding
the loss should first be debited to revaluation the Entity and Its Environment
reserve. After debiting the revaluation reserve, This Standard on Auditing (SA) deals with
if still there is impairment loss then the same the auditors responsibility to identify and
should be debited to the profit and loss assess the risks of material misstatement in
account. the financial statements through understanding
the entity and its environment, including the
AS-29 Provisions, Contingent Liabilities and entitys internal control.
Contingent Assets
The Branch shall recognise provisions only The objective of the auditor is to identify and
when it has a present obligation as a result of assess the risks of material misstatement,
a past event and it is probable that an outflow whether due to fraud or error, at the financial
of resources embodying economic benefits statement and assertion levels, through
will be required to settle the obligation and understanding the entity and its environment,
when a reliable estimate of the amount of the including the entitys internal control,
obligation can be made. thereby providing a basis for designing and
implementing responses to the assessed
Contingent liability is to be disclosed unless risks of material misstatement. This will help
the possibility of an outflow of resources the auditor to reduce the risk of material
embodying economic benefit is remote. misstatement to an acceptably low level.
Contingent Assets are not recognised in the Risk assessment procedures by themselves,
financial statements since this may result in however, do not provide sufficient appropriate
the recognition of income that may never be audit evidence on which to base the audit
realised. opinion.
Branch Applicability The branch auditor
Standards on Auditing
has to gain an understanding of the functions
SA 230 Audit Documentation of the branch and base his audit procedures
This Standard deals with the auditor s accordingly. Generally, the Internal Control
responsibility to prepare audit documentation System and Accounting System of the bank
for an audit of financial statements. It is secure enough and hence the chances of
is to be adapted as necessary in the material misstatement is low.
circumstances when applied to audits of
other historical financial information. The SA 530 Audit Sampling
specific documentation requirements of other This Standard on Auditing (SA) applies when
SAs do not limit the application of this SA. the auditor uses audit sampling in performing
Laws or regulations may establish additional audit procedures. It deals with the auditors
documentation requirements. use of statistical and non-statistical sampling
when designing and selecting the audit sample,
Branch Applicability -- Branch auditor has performing tests of controls and tests of details,
to document things that are being checked by and evaluating the results from the sample.
him, the manner of checking and the outcome. The objective of the auditor when using audit
E.g., If the auditor goes for test checking, he sampling is to provide a reasonable basis
has to document that whether the Internal for the auditor to draw conclusions about
Bank
Branch 127
Audit
the population from which the sample is The purpose of this Standard on Auditing (SA) is
selected. to establish standards to be applied in situations
where a principal auditor, reporting on the financial
This SA complements SA 500, which deals information of an entity, uses the work of other
with the auditors responsibility to design and auditor with respect to the financial information of
perform audit procedures to obtain sufficient one or more components included in the financial
and appropriate audit evidence to be able to information of the entity. This Standard also
draw reasonable conclusions on which to base discusses the principal auditors responsibility in
the audit opinion. SA 500 provides guidance on relation to his use of the work of the other auditor.
the means available to the auditor for selecting
items for testing, of which audit sampling is Branch Applicability : The branch auditor
one means. might discuss with the previous auditor the audit
procedures applied or review a written summary of
Branch applicability- The branch auditor shall the auditors procedures and findings which may be
see the nature and cause of any misstatement in the form of a completed questionnaire or check-
identified and their possible effect on the list. The branch auditor may also wish to meet the
purpose of audit procedure and other areas of previous auditor. The nature, timing and extent of
audit. procedures will depend on the circumstances of the
The auditor shall evaluate the result of engagement and the branch auditors knowledge of
the samples and whether the use of audit the professional competence of the previous auditor.
sampling has provided a reasonable basis for This knowledge may have been enhanced from the
conclusions. review of the previous audit work of the previous
auditor.
SA 600 using the work of another auditor
List of Standards Not Applicable to Banks
When the auditor delegates work to assistants
or uses work performed by other auditors and AS 2 Valuation of Inventories
experts, he will continue to be responsible for AS 7 Construction Contracts (revised 2002)
forming and expressing his opinion on the financial
information. However, he will be entitled to rely on
Sources
work performed by others, provided he exercises
adequate skill and care and is not aware of any 1. Annual Reports of various Banks
reason to believe that he should not have so relied. 2. Bare Text of Accounting Standards as issued
In the case of any independent statutory appointment by ICAI
to perform the work on which the auditor has to
relying forming his opinion, such as in the case of 3. Guidance Note on Audit of Banks (2016
the work of branch auditors appointed under the Edition) by ICAI
Companies Act, 1956 the auditors report should
expressly state the fact of such reliance.
Bank
128 Branch
Audit
Important Circulars for Branch Audit March 31, 2016
Important Circulars for

Branch Audit March 31, 2016
CA. Sandeep Welling
I am sure, all the auditors are aware of the Master extent laws and regulations, to
circulars issued by the Reserve Bank of India every enable lenders to exercise the right
year on July 1. These master circulars compile all
the circulars issued by RBI prior to that date. This iii. Such decision should be approved
facilitates easy reference as one need not refer to by majority JLF members (minimum
any earlier circular. However, all the master circulars 75% by value of creditors and 60%
are not relevant for the audit. For the purpose of creditors by number)
audit for the current year, the relevant circulars are iv. Post collection JLF members should
listed at the end of their article. These will have collectively hold at least 51% or
to be downloaded and referred to by everyone more of the equity shares
undertaking the branch audit.
v. Henceforth all Banks to include
This article, in addition to the listing of master necessary covenants in all load
circulars enumerates certain other relevant circulars agreement to include SDR.
issued after July 1 giving a brief on the content Invoking of SDR will not be treated
thereof. as restructuring
1. Strategic Debt Restructure: This is important vi. Asset classification to continue
circular for the current year audit. RBI issued for 18 months based on the
a circular on SDR on June 8, 2015 on the classification at the time of
subject. Certain clarifications were issued on conversion
September 4. The brief on this circular and the
clarification thereof is as under: vii. The bank should consider
appointing the suitable professional
a. SDR involves initiating of measures such management to run the affairs of
as change of ownership in accounts the company
which failed to achieve the projected
viability milestones viii. The lenders should divest their
holdings to new promoter as soon
b. SDR involves measure of converting loan as possible
dues into equity shares of the borrower
account d. Upon divesting to investor the account
may be upgraded to standard, though the
c. SDR includes following features amount of provision will not be allowed to
i. Initial restructure, JLF must be reversed.
incorporate as part of restructuring e. The above benefit shall be available
conditions to convert entire loan provided
(including unpaid interest), or part
thereof, into shares in the company i. The new promoter does not belong
subject to non-fulfilment of critical to or is associate of the original
conditions promoter group
ii. These conditions must be ii. He owns at least 51% (incase

supported by necessary approvals the company falls under foreign
and resolutions from the borrower investment restrictions and the new
company as required and to the promoter is a foreign investor lesser
% as approved)
Bank
Branch 129
Audit
f. Conversion to take place at fair value b. Master Circular - Prudential norms on

based on restriction under section 53 of Income Recognition, Asset Classification
Companies Act 2013 and Provisioning pertaining to Advances
g. The conversion though will result c. Master Circular - Disclosure in Financial
into bank holding more than 20% the Statements - Notes to Accounts
accounting standards applicable for such
holdings will not be applied d. Notification as Amended upto June 30,
2015 - Change in or Take Over of the
2. Withdrawal of Bank notes prior to 2005: Management of the Business of the
On Feb 11, 2016 RBI issued a circular to Borrower by Securitisation Companies
designate the branches to accept Currency and Reconstruction Companies (Reserve
notes prior to 2005. All the branches are not Bank) Guidelines, 2010
allowed to exchange
e. Master Circular on Establishment of
3. Concurrent Audit of Branch: RBI has issued Liaison / Branch / Project Offices in India
a circular on changes in the concept of by Foreign Entities
concurrent audit concept on July 16 2015. The
circular is important from the members practise f. Master Circular Basel III Capital
perspective Regulations
4. Reporting under Foreign Account Tax g. Master Circular Housing Finance

Compliance Act (FATCA): August 28 2015 the h. Master Circular- Income Recognition,
circular is issued on reporting under FATCA. Asset Classification, Provisioning and
It is necessary to conduct the necessary Other Related Matters - UCBs
due diligence of the account holders and
identify them under the reporting requirements. i. Master Circular Know Your Customer
Branch auditors may ensure the process of (KYC) norms / Anti-Money Laundering
identification and reporting thereof. (AML) standards/Combating Financing of
Terrorism (CFT)/Obligation of banks and
5. List of relevant Master circulars: financial institutions under PMLA, 2002
a. Master Circular - Capital Adequacy j. Master Circular on Direct Investment by
Standards and Risk Management Residents in Joint Venture (JV) / Wholly
Guidelines for Standalone Primary Owned Subsidiary (WOS) Abroad
Dealers
k. Master Circular on Frauds - Classification
and Reporting
Bank
130 Branch
Audit
Notes
Bank
Branch 131
Audit
Notes
Bank
132 Branch
Audit

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Bank

Vice Chairman Convenor

Secretary Office Bearers

To regulate business environment, the Reserve Bank of India, Banking Regulator,

CA. Shruti Shah

CA. Balkishan Agarwal

1. Current Developments in Banking Industry.................................................................... 1

2. Overview of Basel III and CRAR.................................................................................... 5

3. Bank Branch Audit Planning......................................................................................... 13

4. Verification Advances (other than Agricultural Advances)............................................ 23

5. Audit of Agricultural Advances ................................................................................... 31

6. Treatment of recoveries in NPA post Balance Sheet date.......................................... 37

7. Restructuring of Debt .................................................................................................. 41

8. Income Recognition and Asset Classification (IRAC) Norms ..................................... 49

9. Long Form Audit Report............................................................................................... 55

10. Income and Expenditure Audit .................................................................................... 61

11. Sensitive Accounts and Housekeeping Accounts........................................................ 65

12. Bank Branch Audit in CBS Environment...................................................................... 69

13. Audit Reports and Certificates ................................................................................... 73

14. Procedural Aspects of compliance verification of Ghosh-Jilani

15. Tax Audit of the Branch of the Bank ........................................................................... 87

16. Audit of Foreign Exchange Transactions

17. Frauds in Banking Sector........................................................................................... 113

18. Accounting Standards Applicable to Bank Branches................................................. 121

I. INTRODUCTION provision on newly restructured advances

OVERVIEW OF BASEL III AND CRAR

BANK BRANCH AUDIT PLANNING

Sr. Area of Work Person responsible Done by Date

Sr. Area of Work Person responsible Done by Date

Sr. Area of Work Person responsible Done by Date

Sr. Area of Work Person responsible Done by Date

Sr. Area of Work Person responsible Done by Date

Introduction Audit of Advances

Demand / Term loan Such credit facility, Stages of Verification

b. A guarantee transaction usually l. In the above mentioned circular, RBI has

Reporting of Verification & Rectification NPA (Non-Performing Assets) Norms

AUDIT OF AGRICULTURAL ADVANCES

1. Introduction 7% by March, 2016

o Acquisition of farm machinery Post harvest expenses

o Other Irrigation facilities Produce marketing loan

Original copies of the title deeds or reschedulement of loans, the existing

Restructuring of Advances 1. Special Regulatory Treatment for Asset

To review compliance with all pre-restructuring Guidelines on Restructuring of Advances by

v. Illustratively, the parameters may include ii. Asset classification

period under the approved restructuring b. With a view to reflecting a higher

12. Valuation and provisioning norms quoted, interest income can be

INCOME RECOGNITION AND ASSET

Type of facility To be Classified as NPA

Type of facility To be Classified as NPA

NPA Category Criteria for classification

NPA Category Criteria for classification

Other issues in classifications of advances as NPA

Where the account indicates inherent weakness on the basis of

INCOME RECOGNITION debts should be recognized on an accrual basis

In respect of NPAs, fees, commission and similar Certain Practical Points

LONG FORM AUDIT REPORT

Introduction same, if done so we will need to study newer

Report. Thus the Statutory Report is a 3. Contingent liabilities

Other assets Other Liabilities Bills payable, sundry

Books and records Audits/Inspections

Questionnaire applicable to specialised branch Conclusion

INCOME AND EXPENDITURE AUDIT

cases appropriate provision needs to be made in OTHERS

SENSITIVE ACCOUNTS AND