1. AUDIT PLANNING,PROCEDURE1
AUDIT PLANNING,PROCEDURE
Bank Branch Audit
&
RBI Guideline
_______________
CA MANISH BAXI 1

2. Banking Industry – facebook
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

3. Planning
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

4. Planning We never fail !!! We fail to Plan . Planning has No Alternative!!!
CA MANISH BAXI

5. Audit Planning Knowledge Management Time Management
Men-power Management
Compliance Management
Reporting Management
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6. Objective of Audit Planning
To 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

7. Objective of Audit Planning
Simultaneous coverage of allied assignments including:
Ghosh & Jilani Committee Reports
Responses to the LFAR questionnaire
Tax Audit report under Section 44AB of the income- Tax 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

8. Part I : Off Site Planning
Audit Planning
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9. 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
CA MANISH BAXI

10. Pre Audit Planning- Off site
REFRESH Standards on Auditing like
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

11. Circulars issued by RBI- Off site
Disclosure in balance sheets dated July 1, 2006
Prudential norms on Income recognition,asset classification and provisioning relating to advances dated == == = = ==
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
Exposure norms dated October 10 ,2006
CA MANISH BAXI

12. Why ? -----Audit Planning….
CA MANISH BAXI

13. SA 240- “Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”
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

14. Audit Planning(SA-300) :
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

15. Audit Planning: 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

16. Part II : On Site Planning
Audit Planning
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17. 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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18. 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 ( As per Annexure )
CA MANISH BAXI

19. Preliminary Work – On Site
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

20. 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
CA MANISH BAXI

21. Evaluation of Internal Control-On site
Evaluate the knowledge of accounting software, policies and strength of internal control systems existing at the branch
Internal Control would include:
Accounting Controls
Administrative Controls
CA MANISH BAXI

22. 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
CA MANISH BAXI

23. Audit Planning- Program
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

24. Audit Planning- Program
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
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25. Part III : Execution
Audit Planning
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26. 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
CA MANISH BAXI

27. 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
CA MANISH BAXI

28. Inter Branch Reconciliation (IBR)
Understand the IBR system
Fraud Area –
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

29. IBR
Check and report:
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

30. Documentation –SA 230
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
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

31. Documentation SA -230
Auditor 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-co-operation of branch management, etc communicate and politely place on record, the facts of the case
CA MANISH BAXI

32. Documentation –SA 230
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

33. Documentation
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
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34. REPORTING Requirements
Audit Planning
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35. Different Reports:
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

36. 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;
CA MANISH BAXI

37. 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.
CA MANISH BAXI

38. Report & MOC
Main Report should be a self contained and no reference of any point made in the LFAR
Audit 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

39. Audit Report & MOC For suggesting any changes
Quantify 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 are to be issued in the revised format.
CA MANISH BAXI

40. Audit Report 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

41. Ghosh & Jilani Committee Report
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

42. Tax Audit Report
To be signed as per Section 44AB – both Form 3CA & 3CD
Importance may be given to –
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

43. Other Points
Audit Planning
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44. Other Points:
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
No of days spent for the audit
CA MANISH BAXI

45. Other Points RBI Master Circular on NPA
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

46. Important Concept : Proactive Approach
KITE RISES AGAINST AND NOT WITH THE WIND
BE A SELF STARTER
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48. Circulars issued by RBI
Disclosure in balance sheets dated July 1, 2006
Prudential norms on Income recognition,asset classification and provisioning relating to advances dated == == = =
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
CA MANISH BAXI

49. I Income Recognisation II Asset Classification III Provisioning
Prudential Norms
I Income Recognisation
II Asset Classification
III Provisioning
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50. I- INCOME RECOGNITION on NPA
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

51. I - INCOME RECOGNITION on NPA
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 re-negotiations 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

52. Reversal of income on NPA
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

53. Reversal of Income on NPA
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

54. II - ASSET Classification – 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
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55. Categories of NPA
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

56. III - Provisioning norms -NPA
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

57. Provision on standard assets ( Para 5.5)
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

58. Provision on sub standard assets (Para 5.4)
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

59. Provision on Doubtful assets (Para 5.3)
100 percent of the extent to which the advance is not covered by the realisable value of the security ( UNSECURED PORTION).
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

60. Provision on Doubtful assets (Para 5.3) .
Period for which the advance has remained in ‘doubtful’ category
Provision requirement (%) OF SECURED PORTION
Up to one year 20
One to three years 30
More than three years
100
CA MANISH BAXI

61. Provision on Loss assets (Para 5.2)
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.
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