1. LFAR and Other Important Aspects of Bank Audit Mayur Swadia Chartered Accountant

2. Contents  Shifting role of the Auditor.  Audit Programme.  Profit and Loss Account.  Basics of LFAR  Posers  LFAR Para-wise  Ghosh and Gilani Committee Reports 10/15/2015CA Mayur Swadia2

3. Bank Branch Audit is like an IPL – a very short game in which we have to bat like ‘Yusuf Pathan’ and WIN High quality output in a short period of time

4. 10/15/2015CA Mayur Swadia4 Shifting role of the Auditor  Challenge to do quality audit in a limited time frame.  Proper audit planning critical.  Quality of audit and value addition – key issues.  All of us must strive to do our best in the larger interest of our profession.

5. Audit Programme  No planning, is planning to fail.  Go through last year’s Profit and Loss Account and Balance Sheet.  Carry out comparative analysis.  Find out major variations.  Probe for major reasons.

6. Audit Programme  Go through last inspection, internal audit, concurrent audit, revenue reports and compliance by the branch.  Identify key risk areas for special focus.  Prepare work schedule on the basis of the overall analysis with special focus on identified key areas.

7. 10/15/2015CA Mayur Swadia7 Profit and Loss Accounts  Existence of system to compute discrepancies in interest / discount income as well as interest expenditure & timely adjustment thereof.  Discrepancies if material to be reported (MOC to be issued)  Existence of system  Discrepancies to be checked by branch  Findings of Concurrent Audit/Revenue Audit.

8. Audit of Profit and Loss Account  Test Check interest calculations.  Verify rates of interest and changes therein.  Check interest charge on NPA accounts  Analysis of yield on advances.  Test check commission income etc. – whether as per revenue recognition norms.

9. Audit of Profit and Loss Account  Check provisions for expenses.  Check depreciation charged correctly.  General ledger scrutiny and reconciliation with subsidiary ledgers.  Compare expenses with previous year.  Test check major/exceptional expenses.  Check the powers of the branch to incur expenses.

10. 10/15/2015CA Mayur Swadia10 Profit and Loss Accounts (Cont’d)  Compliance with Income Recognition Norms.  System of estimation and provision of Interest on overdue / matured term deposits.  Divergent trends in major items of P & L A/c if not satisfactorily explained.

11. 10/15/2015CA Mayur Swadia11 Basics of LFAR  Why ‘LFAR’? Should it be ‘BCAR’?  LFAR is an internal control evaluation questionnaire.  Comprehensive in scope and coverage. Where as MAOCARO is not so comprehensive  Covers both Balance Sheet and Profit & Loss Account.  Serves as an important check list for audit planning. Make LFAR part of the audit programme.

12. 10/15/2015CA Mayur Swadia12 Must Do’s  Study the Questionnaire thoroughly.  Each answer should be precise.  Avoid vague or general comment.  Give specific instances of weakness/shortcomings.  Main Audit Report and LFAR are two separate reports.  Qualificatory remarks MUST be part of the main report.

13. 10/15/2015CA Mayur Swadia13 Must Do’s  Main Report is a self contained document and should not contain any references to LFAR.  Should be sufficiently detailed and quantified to enable expeditious consolidation.  Do not make current year’s LFAR a replica of previous year.

14. 10/15/2015CA Mayur Swadia14  LFAR is of utmost importance to the management as well as the Central Auditors.  Finalize Statutory Report and LFAR simultaneously.  Should be well drafted.  Scope of work carried out should be clearly specified.  Should create an impact on the bank management about the quality of work carried out. Must Do’s

15. 10/15/2015CA Mayur Swadia15  Mr. CA has taken a housing loan from Bank of NAMO.  Monthly installment (principle + Interest) due on 31 st December, 2013 not paid by 31 st March, 2014. Whether the account is NPA?  Would it make any difference if the said installment was due on 30/12/2013 or 1/1/2014? Refreshers…….

16. 10/15/2015CA Mayur Swadia16 Term Loans (Posers???)  Mr. FCA has taken a term loan from bank of Italy.  Installment for the October-December quarter debited on 30th December, 2013 Rs. 1 lac (Incl. int. of Rs. 25,000/-  Amount paid by 31 st March, 2014 against the same Rs. 95,000/-. Branch Manager has classified the account as a Performing Asset. Your audit assistant has approved the same. Do you have any counter view?

17. 10/15/2015CA Mayur Swadia17 Term Loans  Mr. Article has taken a housing loan from a bank. Equated Installments (principal + interest) are payable on a monthly basis. Mr. Article is generally regular in repayment. However, installments for the months of October and November, 2013 could not be paid by 31/3/2014? All the other installments are paid for the year ended 31/3/2014.  Is he OUT??? or NOT OUT???

18. 10/15/2015CA Mayur Swadia18 Term Loans  Any loan account where the monthly/quarterly/half yearly/annual installment (principle + Interest) falls due on or before 30 th December, 2013 and if the same is not FULLY paid by 31 st March, 2014, the account would have to be classified as an NPA for the financial year ending 31 st March, 2014.

19. 10/15/2015CA Mayur Swadia19 Posers???  A Ltd. Has availed Cash Credit facilities. Interest for the quarter October-December, 2013 is Rs. 2,50,000/-. Credit during the quarter Rs. 2,45,000/-.  Interest for the quarter January-March, 2014 is Rs. 2,80,000/-.  Credits during the period January-March, 2014 are Rs. 2,79,000/-.  The Branch Manager requests for your valued opinion?

20. 10/15/2015CA Mayur Swadia20 Cash Credit  Y Ltd has taken Cash Credit from a bank. Interest debited during the quarter January-March, 2014 is Rs. 50,000/-. No credits in the account for last quarter except one credit entry for reversal for excess charge of commission in the past for Rs. 51,000/-.  HOWZZZTHAT?????

21. 10/15/2015CA Mayur Swadia21 Posers???  B Ltd. has a Cash Credit facility (based on hypothecation of inventory and debtors). The sanctioned limit is Rs. 10 lacs. Drawing power is Rs. 7.5 lacs. Outstanding balance in the account is around Rs. 7 lacs for January- March, 2007. Your assistant has noticed that inventory statement includes dead stock of Rs. 3 lacs and statement of debtors includes non-realizable debtors of Rs. 2 lacs. Hence the actual DP is only Rs. 4.5 lacs. How would you classify the account?

22. 10/15/2015CA Mayur Swadia22 Posers???  C Ltd. has CC facilities. The account is healthy and there are no outstanding overdue as at 31/3/2014. On verifying DP calculation, you notice that DP is worked out based on last available stock statement of August, 2013. The account is classified as a Performing Asset. Is it OK?

23. 10/15/2015CA Mayur Swadia23 Posers??  D Ltd. again has CC facilities. It is a blue-chip company with strong Balance Sheet. The account is healthy with no overdue outstandings. The limit was due for review on October 1, 2013. However, the same could not be reviewed by 31/3/2014? The account is classified as a PA. How say you?

24. 10/15/2015CA Mayur Swadia24 Posers???  Y Ltd. Is a chemical manufacturing concern. The unit is not in operation for 6 months. Inventory of Rs. 20 lacs is carried forward for last six months. Outstanding dues in CC account are Rs. 10 lacs. Account is fully serviced as at the Balance Sheet date. You have noticed that inventory of Rs. 15 lacs had expiry period of 120 days. How would you classify the account?

25. 10/15/2015CA Mayur Swadia25 Posers???  H Ltd. Has CC facility of Rs. 100 lacs. The account is healthy. There is overdrawing in the account in the month of January by Rs. 10 lacs for 10 days. In the month of March the account is overdrawn by Rs. 15 lacs for the period 25 th March, 2013 to 3 rd April, 2014. How would you classify the account?

26. 10/15/2015CA Mayur Swadia26 Posers???  Ram Ltd. and Laxman Ltd. are sister(brother??) concerns. The account of Ram Ltd. has become NPA. The other account is Standard. Laxman Ltd. was sanctioned additional facilities as at the year end. Laxman Ltd. gave a loan to Ram Ltd. Out of the same, Ram Ltd. cleared its outstanding dues of the bank at the year end. Ram Ltd. is classified as Performing asset at the year end. Is it correct?

27. 10/15/2015CA Mayur Swadia27 Posers???  M Ltd. is a healthy manufacturing unit with no overdue outstanding in either CC/TL/BPBD account. Fire takes place on 31/3/2024 and all the assets are destroyed. There is no insurance cover. Bank has classified the account as a Standard asset based on the norms. As an auditor, what is your call?

28. 10/15/2015CA Mayur Swadia28 Posers??  In the case referred to in the previous slide, assume that the fire takes place on April 1, 2014. Would there be any change in your opinion with respect to classification of the said account as at 31 st March, 2014?  What is the date on which the account would become NPA?

29. 10/15/2015CA Mayur Swadia29 Bills Purchased/Discounted  X Ltd. Has facilities from Metro Bank Ltd. Cash Credit and Term loans are serviced regularly. Bills account is also regular except for one bill due on 29 th December, 2013, which is overdue. How would you classify the various facilities of X Ltd?

30. 10/15/2015CA Mayur Swadia30 Posers???  Bank of Vadodara is a listed bank. You are the branch auditor of the bank.  Borrower X has obtained loan against pledge of shares.  The list of shares pledged includes shares of Bank of Vadodara.  Is there any audit objection?

31. 10/15/2015CA Mayur Swadia31 Posers???  Robert Ltd. Has availed loan from PQR bank. You are the auditor of the bank.  On scrutiny of the account of Robert Ltd., you notice that wife of the director of the bank has 26% stake in the company. However, she is neither director or employee of the company.  Is there any irregularity on the part of the bank?

32. 10/15/2015CA Mayur Swadia32 Posers???  Loan granted against 10% Government of India security. Interest and installments of last two quarters not paid.  Manager has classified the account as NPA.  Interest has been accounted on cash basis.

33. 10/15/2015CA Mayur Swadia33 Posers???  X has taken loan against his term deposits?/NSC’s/IVP’s/KVP’s and life insurance policies. Interest has remained overdue for 120 days as 31/3/2014. The branch has recognized the interest income on accrual basis. Is it correct? What would be the asset classification?

34. 10/15/2015CA Mayur Swadia34 Posers???  Z Ltd. Is an NPA account (outs principle Rs. 50 lacs + Outs interest Rs. 25 lacs) It has paid Rs. 5 lacs during the year against its overdue loan. Bank has accounted the same as income for the year. Z Ltd. Had requested to settle the same against outstanding principle amount. What is your call?

35. 10/15/2015CA Mayur Swadia35 Posers??  A Ltd. Has a CC facility with bank against inventory. Facility is for Rs. 50 lacs. Inventory is Rs. 100 lacs. Sundry creditors against goods are Rs. 50 lacs. Margin specified is 25%. What would be the DP?

36. 10/15/2015CA Mayur Swadia36 Coverage  Cash and Bank Balances.  Money at call and Short Notice.  Investments.  Advances  Other assets.  Deposits and other liabilities.  Profit and Loss Account.  General.  Specialized Branches.

37. 10/15/2015CA Mayur Swadia37  Cash balance which vary significantly from the limit fixed by controlling authorities.  Excess balance reported to the controlling authorities.  Adequate Insurance Cover.  Joint custody.  Refer Instructions, Key Movement Register.  Periodic checking of cash balance.  Ascertain procedure and observe during audit  General scrutiny of cash book. Cash

38. 10/15/2015CA Mayur Swadia38  Balance confirmation.  Report differences.  Observations on differences. Cash transactions remaining unresponded (very serious observation). Revenue items requiring adjustment / write offs. (issue MOC / Qualify report) Old outstanding balances remaining unexplained and age wise analysis. Balance with RBI, SBI and other Banks

39. 10/15/2015CA Mayur Swadia39  Item requiring special attention of management.  Reconciliation not done / procedure not followed.  Material amount unadjusted for a long time.  Items affecting financial statements may be reported in the Statutory Report. Balance with RBI, SBI and other Banks (cont’d)

40. 10/15/2015CA Mayur Swadia40 Money at call and Short Notice  Report even if a single transaction.  Confirm that the transaction is as per the instructions/guidelines.  Unauthorized deposits and excess of authorized deposits to be reported.  Normally not applicable to branches.

41. 10/15/2015CA Mayur Swadia41 Investments  Physical verification on behalf of H.O.  Ensure that income earned on such Investments is not accounted by Branch.  Matured or overdue investments not encashed.  Guidelines of RBI for transaction and valuation followed.  Examine evidence of securities not in possession of the branch.  Generally not maintained at branch level.

42. 10/15/2015CA Mayur Swadia42 Advances  Examination of all large advances and a test check of other advances  Questionnaire in four Broad categories  Credit Appraisal  Sanctioning / Disbursement  Documentation  Review / Monitoring / Supervision  Higher of advances exceeding Rs. 2 crores or 5% of the advances of the branch needs to be individually audited.

43. 10/15/2015CA Mayur Swadia43 Credit Appraisal  Opinion is sought on compliance of Procedure / Instruction of controlling authorities  Whether loan application in prescribed format.  Whether intelligent appraisal done by competent person.  Adequate appraisal documentation.  As per the old format required to report on major shortcomings in credit appraisal.

44. 10/15/2015CA Mayur Swadia44 Sanctioning / Disbursement  Credit facilities beyond the delegated authorities.  Are such cases promptly reported to higher authorities?  Verify control returns.  Advances disbursed without compliance of terms of sanction (give details)  eg: Necessary funds not brought in by the borrower.

45. 10/15/2015CA Mayur Swadia45 Sanctioning / Disbursement (Cont’d)  Net worth of the guarantor not furnished.  Unit not inspected.  End use of the funds not verified.  Borrower continuing to have operations with other Banks.

46. 10/15/2015CA Mayur Swadia46 Documentation  Instances of credit facilities released without execution of all the necessary documents?  Verify legal status.  Government recognized status.  Type of Loan.  Securities.  Instances of deficiencies in documentation, non registration of charge etc., (give details)

47. 10/15/2015CA Mayur Swadia47 Documentation (Cont’d)  Some instances of deficiencies  Documents left blank.  Overwriting in documents, change in hand writing, incomplete documents.  Joint documentation in case of consortium advance.  Documents inadequately stamped.  Documents time bared.  Additional reporting requirement on advances against lien of deposits.

48. 10/15/2015CA Mayur Swadia48 Review / Monitoring / Supervision  Periodic review of advances including balance confirmation / acknowledgement of debts etc.  Analysis of such accounts overdue for review.  System of receipt of Stock / Book Debt and other statement and scrutiny thereof.  System of obtaining Stock Audit Report.  Audited accounts as per RBI guidelines from non corporate entities with limit beyond Rs.10.00 lacs.

49. 10/15/2015CA Mayur Swadia49 Review / Monitoring / Supervision (Cont’d)  Physical verification of securities as per procedure laid down?  Deficiencies in value of securities, frequent / unauthorized drawings, inadequate insurance etc.  New clauses relating to lease finance activities and credit card dues.  Clauses relating to Prudential Norms.  Clause relating to DICGC. (modified formats)

50. 10/15/2015CA Mayur Swadia50 Review / Monitoring / Supervision (Cont’d)  Compliance by Branch with Recovery Policy / in respect of Compromise / Settlements / Write off.  Details of such cases where waiver / write off >50 lacs.  Major deficiencies in credit review / monitoring / supervision.  New Clause relating to guarantee and letter of credit (clause 5 (e).

51. 10/15/2015CA Mayur Swadia51 Other Assets  Stationery and Stamps. [Clause 6(a)]  Comment on existence and compliance with Internal control system over valued stationery with regard to issue and custody.  Instances of missing or lost items of stationery to be given (new clause).

52. 10/15/2015CA Mayur Swadia52 Other Assets (Cont’d) Suspense Accounts / Sundry Assets.  Critically Scrutinize these accounts.  Details and clarification in respect of old unadjusted entries be obtained.  Balances which in your opinion are not recoverable.  eg: Advance against travelling.  Payment to merchant establishment.  Legal expenses  Dividend / Interest paid.

53. 10/15/2015CA Mayur Swadia53 Other Assets (Cont’d)  Unusual items in these accounts be reported eg: Cash in transit Difference in balancing. Difference in cash.

54. 10/15/2015CA Mayur Swadia54 Deposits  Compliance with guidelines in respect of inoperative accounts.  Instances if not complied with the guidelines.  Seek clarification for unusual movements after balance sheet date.  Quantification of Overdue / Matured term deposits at the year end.

55. 10/15/2015CA Mayur Swadia55 Bills Payable / Sundry Deposits / Contingent Liabilities  Details of old items to be reported.  Unusual items and matured withdrawals or debits to be reported along with their nature and amounts.  List of major items of contingent liabilities other than Guarantees, LCs, Endorsements, Acceptances etc.,

56. 10/15/2015CA Mayur Swadia56 General  Proper maintenance of manual Books of Accounts.  In respect of Computerized Branches number of new areas prescribed.  Inquire about  Banks policy  Compliance of the policy  Internal Control & Security measures.  Backups and Disaster Recovery Plans

57. 10/15/2015CA Mayur Swadia57 General (Cont’d)  Suggestions for the improvement in the system  Reconciliation of control and subsidiary records.

58. 10/15/2015CA Mayur Swadia58 General (Cont’d)  Inter Branch Accounts, (Very Important area)  Understand the system.  Daily Communication to HO/Designated cell statement of debit / credit transaction.  Agreement between balance in HO Account Branch Accounts.  Old outstanding debits in the Head Office Account.

59. 10/15/2015CA Mayur Swadia59 General (Cont’d)  Expeditious compliance to communication from HO / Designated cell (Report unresponded entries).  Old / Large outstanding transaction at debits as at year end.  Audit and Inspection.

60. 10/15/2015CA Mayur Swadia60 General (Cont’d)  Particulars of frauds discovered during the year together with your suggestions to minimize the same.  Window dressing to be reported  eg. Large deposit at year end.  Under utilised facilities converted in Deposits. Unsecured loans shown as secured.

61. 10/15/2015CA Mayur Swadia61 General (Cont’d)  Maintenance of Fixed Assets Records.  Documents of title in relation to branch  Non compliance with Ghosh and Jilani Committee recommendations.

62. 10/15/2015CA Mayur Swadia62 GHOSH COMMITTEE RECOMMENDATIONS WERE FOR  Improvement in day to day administrative functions.  For ensuring safety of assets.  Compliance with the let down policies and procedures.  Accuracy and completeness of accounting and other records.  Proper segregations of duties and responsibilities of the staff.  Timely prevention and detection of frauds and malpractices.

63. 10/15/2015CA Mayur Swadia63 Ghosh Committee Recommendations  Recommendations divided in to four groups  Group-A: Recommendations, which have to be implemented by the banks immediately.  Group-B: Recommendations requiring Reserve Bank of India’s approval.

64. 10/15/2015CA Mayur Swadia64 Recommendations  Group-C: Recommendations requiring approval of Government of India.  Group-D: Recommendations requiring further examination in consultation with IBA.

65. 10/15/2015CA Mayur Swadia65 JILANI COMMITTEE  Working group to review the internal control and inspection and audit system in banks.  Contains 25 questions and to indicate the answer as either “Implemented “ or Not Implemented”.

66. 10/15/2015CA Mayur Swadia66 GILANI COMMITTEE RECOMMENDATIONS Broadly divided into three categories  Dealing with the EDP environment in the banks.  Dealing with the inspection/Internal audit system in the bank.  Dealing with other miscellaneous aspects of functioning of a bank.

67. Thank you