AUDIT PLANNING,PROCEDURE
Bank Branch Audit
&
RBI Guideline
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CA MANISH BAXI
Banking Industry – facebook
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Dynamic Industry
Financial reporting and disclosure
Auditor’s Role
Expectations from RBI , Banks , ICAI .
Discharge of duties in time.
Bank Branch Audit is T20 – Not Test
Match-
Be like a Sachin & Dhavan
CA MANISH BAXI
Planning
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Planning is Vital in any part of
management and AUDITING assignment,
Bank Audit is not an exception
Plan to WIN------Win
Plan to Perform
Plan to do Quality Job in time.
Plan to avoid disciplinary action by ICAI
CA MANISH BAXI
Planning
We never fail !!!
We fail to Plan .
Planning has No Alternative!!!
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CA MANISH BAXI
Audit Planning
 Knowledge
Management
 Time Management
 Men-power Management
 Compliance Management
 Reporting Management
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CA MANISH BAXI
Objective of Audit Planning
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Ensure
Compliance with RBI / ICAI Guidelines
Compliance of Auditing and Assurance Standards
Effective Job & Reporting
Timely Completion of the assignment
Certifying Balance Sheet & Profit & Loss account and
other certificates
Annexure to Balance Sheet & P & L account
Compliance with Terms of Appointment
CA MANISH BAXI
Objective of Audit Planning
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Simultaneous coverage of allied assignments including:
 Ghosh & Jilani Committee Reports
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Responses to the LFAR questionnaire
Tax Audit report under Section 44AB of the incomeTax Act , 1961
Other certification work indicated in the letter of
appointment like –
 DICGC Claims, etc
 PMRY Scheme, Provident Fund Scheme
Statutory Requirements ( ICAI, Peer Review,
Statutory Authorities)
CA MANISH BAXI
Part I : Off Site Planning
Audit Planning
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CA MANISH BAXI
Pre-Audit Planning- Off Site Planning
Pre audit plan – Program
 Old Audit reports – Working papers,
certifications, etc.–
 Refresh yourself KNOWLEDGE
 Identify the staff – Experienced, train the
staff
 Visiting the branches
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CA MANISH BAXI
Pre Audit Planning- Off site
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REFRESH Standards on Auditing like
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Knowledge of Business (SA 310)
Terms of Audit Engagement( SA 210)
Audit Planning( SA 300)
Audit Sampling (SA 530)
Audit Documentation (SA 230)
Using the work of another auditor (SA 600)
Audit Evidence (SA 500)
Audit Materiality (SA 320)
Written Representations( SA 580)
Analytical Procedures (SA 520)
CA MANISH BAXI
Circulars issued by RBI- Off site
Disclosure in balance sheets dated July 1, 2006
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Prudential norms on Income recognition,asset
classification and provisioning relating to advances
dated
1.07.2006==19.02.2007==01.07.2009=01.07.2010=
01.07.2011==02.07.2012
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Management of advances dated January 22, 2007
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Loans and advances-statutory and other restrictions
dated 1st July 2006
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Guarantees and co-acceptances dated July 1,2006
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Guidelines for securitisation of standard assets
dated 1st Feb 2006
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Exposure norms dated October 10 ,2006
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CA MANISH BAXI
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Why ? -----Audit Planning….
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CA MANISH BAXI
SA 240- “Auditor’s Responsibilities
Relating to Fraud in an Audit of
Financial Statements”
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Audit Plan be effective not only to detect
errors but also material mis-statement.
Auditor is required to report to RBI any thing
susceptible to fraud, fraudulent activities,
any act of excess power , any foul play in any
transaction
Ref. : Para 08
CA MANISH BAXI
Audit Planning(SA-300) :
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The auditor should plan his work to
enable him to conduct an effective audit
in an efficient and timely manner.
Plans should be based on -knowledge of
the client’s business.
Plans should be further developed and
revised as necessary during the course of
a audit.
CA MANISH BAXI
Audit Planning:
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c)
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Plans should be made to cover, among other
things:
acquiring knowledge of client’s accounting system,
policies and internal control procedures;
Determining the expected degree of reliance to be
placed on internal controls;
determining the nature, timing, and extent of the
audit procedures to be performed; and preparing
the audit plan accordingly.
Allocation and Coordination of the work to be
performed.
CA MANISH BAXI
Part II : On Site Planning
Audit Planning
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CA MANISH BAXI
Audit Acceptance –
On Site Planning
Appointment letter
 Acceptance, Engagement letter ,
Declarations
 NOC from previous auditors
 Requirement letter to Branch
 Management representation letter
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CA MANISH BAXI
Audit Acceptance- On Site
Communicate with the branch
 Visit the branch – before year end & meet
the staff
 Discuss with the Concurrent Auditors
 Liaison with Branch staff for access and
other arrangements
 Detailed Check list on audit - To Review
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( As per Annexure )
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CA MANISH BAXI
Preliminary Work – On Site
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Obtaining knowledge of business of
bank/branch - Advances, Deposits, Large
borrowers, NPA A/cs, CBS, etc.
Document the discussions
Briefing Audit Team and Training
Review of reports, viz:
 Closing Guidelines issued by the bank
 Circulars (interest & Service charges)
CA MANISH BAXI
Preliminary Work- On site
 To
review Credit Policy
 Delegation of Authority & Financial powers
 Branch Audit Report/ LFAR of previous year
 Latest Internal Inspection/ Concurrent Audit
report/s
 Branch’s RBI Inspection Report, if any
 Revenue Audit Report, Special Audit Report (on
accounts or any segment )
 Status and level of compliance by the branch, on
adverse features pointed out in reports
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CA MANISH BAXI
Evaluation of Internal Control-On site
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Evaluate the knowledge of accounting
software, policies and strength of internal
control systems existing at the branch
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Internal Control would include:
 Accounting Controls
 Administrative Controls
CA MANISH BAXI
Evaluation of Internal Control
Determine the effectiveness of control
systems – segregation of duties,
exception reports, financial powers,
roles & responsibilities of staff,
awareness of circulars and systems.
 Emphasize on Risk prone areas
 Control Weakness – Fraud areas
 Test Check or substantive checking
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CA MANISH BAXI
Audit Planning- Program
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Ascertain the thrust of operations and nature of
banking activities at the branch
(deposits/advances)
Audit Program to cover all heads like Liabilities,
Asset, Income, Expenditure, Off Balance Sheet
items, with special emphasis on verification of
advances, deposits
Allocate the work (Deposits, Advances, Misc.
items, etc.).
Who does what?, how many days, time
constraints, outstation audits, other arrangements,
etc.
CA MANISH BAXI
Audit Planning- Program
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Simultaneous compilation of data as per
checklist for Reporting
Any issues in getting the information or
non-cooperation may be referred to
Controlling Authorities
Statutory Central Auditors- Communication
CA MANISH BAXI
Part III : Execution
Audit Planning
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CA MANISH BAXI
Execution of Work
Modify the audit plan in certain areas
depending on the inherent weaknesses
existing in those areas
 Obtaining Audit Evidence and
Management Representations
 Audit working papers
 Timely discussion and rectification of
queries
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CA MANISH BAXI
Execution of Work
Staff to be adequately trained to carry out
the assignment satisfactorily
 Execution must be done as per the audit
program
 Checks should be extended in areas of
weaknesses, including those identified
during the course of audit
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CA MANISH BAXI
Inter Branch Reconciliation (IBR)
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Understand the IBR system
Fraud Area –
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Look for large volume of Inter Branch Transactions
Large number of un-reconciled entries
Check up head office inward communication
to branch to ascertain date up to which
statements relating to inter-branch
reconciliation have been sent
CA MANISH BAXI
IBR
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Check and report:
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Reversal of any large/old/unexplained entries,
which had remained outstanding in IBR
Items of revenue nature, cash-in-transit (for
example, cash meant for deposit into currency
chest) which remains pending since long
Double responses to the entries in the Accounts
Test Check accuracy and correctness of “Daily
statements” sent to IBR department
CA MANISH BAXI
Documentation –SA 230
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Auditors should document matters which
are important in providing evidence that the
audit was carried out in accordance with
the basic principles governing an audit
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Address communication after accepting
appointment for inquiring the readiness of
financial statements & other statements
and records requiring authentication as
well as for carrying out certain year- end
procedures
CA MANISH BAXI
Documentation SA -230
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should address letters
seeking information on matters where
he desires to strengthen his
procedures and substantiate his
work.
 In case of non- readiness / partial
readiness of branch records, non-cooperation of branch management, etc
communicate and politely place on
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record, the facts of the case CA MANISH BAXI
Documentation –SA 230
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Document ‘Evaluation of Internal Control
Systems’ and its effectiveness
Obtain copies of documents which have been
relied upon, like internal/ concurrent/ revenue
auditor’s report, branch’s RBI inspection
report, etc.
Document the Extent of check applied in all
the areas and the names of persons who
covered these areas of audit
CA MANISH BAXI
Documentation
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Proper minutes should be made of
important discussions held with the branch
management on critical issues and how it
was concluded. Obtain management’s
representation on critical areas of branch
operations
Well- documented queries and responses
should be also placed on record
Obtain a Management Representation
Letter
CA MANISH BAXI
REPORTING Requirements
Audit Planning
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CA MANISH BAXI
Different Reports:
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Main Audit Report as per (sec.30(3) of)
Banking Regulation Act, 1949.
Long Form Audit Report
Tax Audit Report
Jilani Committee Report
Ghosh Committee Report
Special Certificates/ Reports as applicable
CA MANISH BAXI
Reporting under Banking
Regulation Act,1949:
As per section 30(3) of a Banking Regulation Act,1949;
an auditor of a banking company is required to state in
his report :-(a) whether or not the information and explanations
required by him have been found to be satisfactory;
(b) whether or not the transactions of the company which
have come to his notice have been within the powers of
the company;
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CA MANISH BAXI
Reporting under Banking
Regulation Act,1949:
(c) whether or not the returns received from branch
offices of the company have been found adequate for
the purposes of his audit (not applicable to bank
branch)
(d) whether the profit and loss account shows a true
balance of profit or loss for the period covered by such
account;
(e) any other matter, which he considers should be
brought to the notice of the shareholders of the
company.
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CA MANISH BAXI
Report & MOC
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Main Report should be a self contained and
no reference of any point made in the LFAR
 Audit
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Qualifications in the Main Report only
and not in LFAR
Report needs to be made out in the form and
manner prescribed, subject to the
qualifications being incorporated in the
report and duly quantified in the
Memorandum of Changes (MOC)
CA MANISH BAXI
Audit Report & MOC
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For suggesting any changes
in MOC (qualification)- MOC –
Auditors prerogative and need not take
confirmations from the branch manager
The Audit Reports in respect of audits of
financial statements for period beginning
on or after 1.4.2012 are to be issued in the
revised format.
 Quantify
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CA MANISH BAXI
Audit Report
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SA 700 ( revised ) has the full text
of the said format
To be reviewed by the Bank
Branch Auditors.
Any debits/ credits arising
pursuant to the MOC needs to
be reported in the main report
under the head” Other Matters “.
CA MANISH BAXI
Ghosh & Jilani Committee Report
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Ghosh Committee – Fraud & Malpractices in banks
at Branch level
Jilani Committee – Internal Control and
Audit/Inspection system in banks
Internal Control and reporting at the branch level
Compliances
Questionnaire – To say Yes/No
Beginning of the audit
Discussion certification and written
representations from the branch may be obtained
CA MANISH BAXI
Tax Audit Report
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To be signed as per Section 44AB – both Form 3CA
& 3CD
Importance may be given to –
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TDS – correct rates, no deduction, late deduction, paid
on time to the authorities
Rule 6DD
Section 43B
Prior period items
Letter heads
CA MANISH BAXI
Other Points
Audit Planning
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CA MANISH BAXI
Other Points:
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Obtain the latest status of cases involving fraud,
vigilance and matters under investigation having
effect on the accounts and its reporting
requirement
Disclaimers:
 Use of Audit sampling – Testing or substantive
as the case may be
 Checking
 Written representations and observations
 Reliance on the audit reports of others
 Reliance on the information systems in place
CA MANISH BAXI
 No of days spent for the audit
Other Points
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In CBS environment –balancing of
subsidiary ledgers
Impersonal Accounts like Suspense ,
Sundry Credits, Special debits , Clearing
adjustment
In appropriate grouping of impersonal
accounts into GL
RBI Master Circular on NPA
CA MANISH BAXI
Important Concept : Proactive
Approach
 KITE
RISES
AGAINST
AND NOT
WITH THE
WIND
 BE A SELF
STARTER
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CA MANISH BAXI
Thank YOU
You can reach to
CA. MANISH BAXI
e-mail : [email protected]
| Mob. : +91 98240 59005
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CA MANISH BAXI
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Disclosure in balance sheets dated July 1, 2006
Prudential norms on Income recognition,asset classification
and provisioning relating to advances dated
1.07.2006==19.02.2007==01.07.2009=01.07.2010= 01.07.2011
Management of advances dated January 22, 2007
Loans and advances-statutory and other restrictions dated 1st
July 2006
Guarantees and co-acceptances dated July 1,2006
Guidelines for securitisation of standard assets dated 1st Feb
2006
Prudential Norms on Capital Adequacy dated July 1,2006
Exposure norms dated October 10 ,2006
Circulars issued by RBI
CA MANISH BAXI
Prudential Norms
I Income Recognisation
II Asset Classification
III Provisioning
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CA MANISH BAXI
I- INCOME RECOGNITION on NPA
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Income from non-performing assets (NPA) is not
recognised on accrual basis but is booked as income only
when it is actually received (Para 3.1.1)
The Accounting Standard 9 (AS 9) on `Revenue
Recognition' issued by the Institute Of Chartered
Accountants of India (ICAI) requires that the revenue that
arises from the use by others of enterprise resources
yielding interest should be recognized only when there is
no significant uncertainty as to its measurability or collect
ability.
CA MANISH BAXI
I - INCOME RECOGNITION on NPA
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Interest on advances against term deposits, NSCs, IVPs, KVPs
and Life policies may be taken to income account on the due
date, provided adequate margin is available in the accounts
(Para 3.1.2)
Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be
recognised on an accrual basis over the period of time covered
by the re-negotiated or rescheduled extension of credit (Para
3.1.3)
If Government guaranteed advances become NPA, the interest
on such advances should not be taken to income account
unless the interest has been realised ( Para 3.1.4)
CA MANISH BAXI
Reversal of income on NPA
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If any advance becomes NPA as at the close of any year,
interest accrued and credited to income account in the
corresponding previous year, should be reversed or
provided for if the same is not realised.(Para 3.2.1)
This will apply to Government guaranteed accounts also.
Fees, commission and similar income that have accrued
should cease to accrue in the current period and should be
reversed or provided for with respect to past periods, if
uncollected. (Para 3.2.2)
CA MANISH BAXI
Reversal of Income on NPA
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Leased Assets
The finance charge component of finance income [as
defined in ‘AS 19 Leases’ issued by the Council of the
Institute of Chartered Accountants of India (ICAI)] on the
leased asset which has accrued and was credited to
income account before the asset became nonperforming,
and remaining unrealised, should be reversed or provided
for in the current accounting period.
CA MANISH BAXI
II - ASSET Classification –
Categories of NPA
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Categories of NPA
Banks are required to classify nonperforming assets further into
the following three categories based on the period for which the
asset has remained nonperforming and the realisability of the
dues:
– i. Substandard Assets ii. Doubtful Assets
– iii. Loss Assets
This Classification is only for the purpose of computing the
amount of provision that should be made with respect to bank
advances and certainly not for the purpose of presentation of
advances in the banks balance sheet.
Schedule 9 of the Balance Sheet
CA MANISH BAXI
Categories of NPA
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Sub-standard Assets - which has remained NPA for a
period less than or equal to 12 months (Para 4.1.1)
Doubtful Assets - has remained in the sub-standard
category for a period of 12 months (Para 4.1.2)
Loss Assets - 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. (Para 4.1.3)
CA MANISH BAXI
III - Provisioning norms -NPA
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The primary responsibility for making adequate provisions
for any diminution in the value of loan assets, investment
or other assets is that of the bank managements and the
statutory auditors. (Para 5.1.1)
The assessment made by the inspecting officer of the RBI
is furnished to the bank to assist the bank management
and the statutory auditors in taking a decision in regard to
making adequate and necessary provisions in terms of
prudential guidelines.(Para 5.1.1)
CA MANISH BAXI
Provision on standard assets
Para 5.5)
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The banks should make a general provision of a minimum
of 0.40 percent on standard assets on global loan portfolio.
Banks would continue to make provision at 0.25 per cent
for direct advances to agricultural and SME sectors in the
standard category (as per circular issued by RBI on 8th of
Nov 2005).
Advances to Commercial Real estate ( CRE) sector at 1.00
percent.
CA MANISH BAXI
Provision on sub standard assets
(Para 5.4)
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A general provision of 10 percent on total outstanding
should be made without making any allowance for ECGC
guarantee cover and securities available.
The ‘unsecured exposures’ which are identified as
‘substandard’ would attract additional provision of 10 per
cent.
The provisioning requirement for unsecured ‘doubtful’
assets is 100 per cent.
Unsecured exposure is defined as an exposure where the
realisable value of the security, as assessed by the bank is
not more than 10 percent.
CA MANISH BAXI
Provision on Doubtful assets (Para
5.3)
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100 percent of the extent to which the advance is not
covered by the realisable value of the security
(
UNSECURED PORTION).
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In regard to the secured portion, provision may be made
on, at the rates ranging from 20 percent to 100 percent of
the secured portion depending upon the period for which
the asset has remained doubtful.
CA MANISH BAXI
Provision on Doubtful assets (Para
5.3) .
Period for which the advance has Provision requirement (%) OF
remained in ‘doubtful’ category
SECURED PORTION
60
Up to one year
20
One to three years
30
More than three years
100
CA MANISH BAXI
Provision on Loss assets
5.2)
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(Para
Loss assets should be written off.
If loss assets are permitted to remain in the books for any
reason.
100 percent of the outstanding should be provided for.
CA MANISH BAXI
Thank You
You can reach to
CA. MANISH BAXI
e-mail : [email protected]
62
| Mob. : +91 98240 59005
CA MANISH BAXI