LONG FORM AUDIT REPORT OF BANKS Presented by:- CA. Santanu Ghosh ICAI 23.03.2013

LONG FORM AUDIT REPORT OF

BANKS

Presented by:- CA. Santanu Ghosh

ICAI 23.03.2013

BACKGROUND OF LONG FORM AUDIT REPORT

(LFAR)

1. Informal management letters concerning deviations, violations, laxity and apparent negligence in following set principles and procedures including management directives as also maximisation of profit, used to be submitted by the auditors, to bring procedural and other lacunae to the notice of the top management. Therefore the contents had been such which were more on procedural lapses rather than statutory violations or reporting on the truth and fairness of the financial statements.

2. It should therefore be clearly understood that LFAR by no means is an extension of the statutory audit report but is a supplementary report to bring awareness to the management and/or regulators.

3. Initially, for controlling and streamlining procedural and other lapses, informally LFAR used to be submitted to the management of the banks by way of a Management Letter. It served a very useful purpose and as such instead of continuing it as an informal tool to the management, it was made formal and thereafter it was converted as a formal set of reporting requirement of Statutory Auditors, who submitted LFAR to both the management and the Regulators namely RBI. Regulators in turn ensured compliance of the rules and procedure and other important aspects on the strength of such LFAR

4. It should be clearly understood that a Statutory Audit Report(SAR) is an independent report and LFAR is also another independent report. However, the objective of SAR is quite different from that of LFAR.

5. A SAR is a public document(of the bank) but LFAR is only for the eye of the management and the regulator(RBI) as it concerns procedural and other lapses which may not have a bearing on the true and fair view of the state of affairs.

6. It should therefore be clearly understood that any point requiring qualification in the audit report must be qualified there itself, with such details as would be required and mere reference that the particular point has been reported in the LFAR is not enough.

7. LFAR questions are carefully drafted to take care of procedural aspects and should be answered in the right perspective.

8. Since the questionnaire is comprehensive, the entire audit planning should be based on that, which is expected to cover the entire gamut of banking operations and is considered vital to bank audit and is therefore a major aid in the audit planning procedure.

9. The questions are prepared in such manner, that it give an insight to the areas to be covered under audit planning so that the auditor can come to a conclusion about the internal control lacunae and accordingly decide about the areas which affects his actions for forming an opinion on the financial statements of the branch and those which are affecting the procedural aspects but not affecting the truth and fairness of the financial statements.

ASSETS

1. Cash

System of monitoring of cash at branches; and management of cash through currency chest operations.

Insurance cover (including insurance for cash in transit).

System and procedure for physical custody of cash.

2. Balance with Reserve Bank of India and other banks

Whether balance confirmation certificates have been obtained pertaining to accounts maintained with other banks and reconciliation made thereof.

Reasons for old unadjusted entries.

3. Call Money operations

System related to Operation in inter- bank call money market.

4. Asset Liability Management (ALM)

Existence of Policy on Asset – Liability Management and monitoring thereof; compliance with the RBI guidelines.

As per the RBI guidelines the ALM process rests on three pillars :

ALM Information system ALM Organization ALM Process

ALM Information System

•Management Information System •Information availability, accuracy, adequacy and expediency

ALM Organization •Structure and responsibilities •Level of top management involvement

ALM Process

• Risk parameters • Risk identification • Risk measurement • Risk management • Risk policies and tolerance level

5. Advances (large advances of 5% of aggregate advances or Rs.2 Crores whichever is less)

Credit Appraisal

Existence of a well-laid system of appraisal of loans/credit proposals, including adequacy of information for appraising the creditworthiness of the applicant, and adherence thereto.

Sanctioning /Disbursement

Delegation of powers/authority at various levels; adherence to authorized limits; whether limits are disbursed after complying with the terms and conditions of sanction

Documentation

System of ensuring that documents are executed as per the terms of sanction.

Nature of documentation defects observed during audit and suggestions to avoid such defects.

System of documentation in respect of joint / consortium advances.

Renewal of documents.

Review/Monitoring and Supervision(Audit of all borrowers with limit above Rs.10 lakhs)

Periodic Balance confirmation/ acknowledgement of debts.

Receiving regular information, Stock/ Book Debt Statements, Balance Sheet, etc.

Receiving audited accounts in case of borrowers with limits beyond Rs 10 lakhs.

System of scrutiny of the above information and follow -up by the bank.

System of periodic physical verification or inspection of stocks, equipment and machineries and other securities.

System and periodicity of stock audits. Inspection reports and their follow- up. Norms and awarding of Credit Rating. Review/ renewal of advances including

enhancement of limits. Monitoring and follow- up of over dues arising out

of other businesses such as leasing, hire purchase, credit cards, etc.

Overall monitoring of advances through maturity/ ageing analyses; Industry- wise exposures and adherence to the Loan Policy.

System of monitoring of off-balance sheet exposures including periodic reviews of :

(a) Claims against the bank not acknowledged as debts.

(b) Letters of credit /Guarantee Guarantees invoked and LCs devolved which have been

funded by the branch to be reported.(c) Ready forward transactions (d) Co-acceptances (e) Swaps, etc.

6. Other Assets

Whether there is adequate internal control over issue and custody of term deposit receipts, drafts, pay orders, cheques etc.

System of recording of lost and missing items.

Expeditious clearance of suspense accounts. Old outstanding entries and delay in adjustments need to be commented.

LIABILITIES

1. Deposits

Whether guidelines have been followed with respect to inoperative accounts. Cases of divergence should be commented.

Any unusual large movement in aggregate deposits after the balance sheet date. Proper clarification should be obtained from the management.

Amount of overdue matured term deposits as on year end should be indicated.

Adherence of KYC norms as stipulated by RBI.

2. Suspense Accounts, Sundry Deposits, etc.

System of clearance of items debited /credited to these accounts

Year wise break up of unadjusted amount indicating number of entries outstanding.

PROFIT AND LOSS

Profitability

Analysis of variation in major items of income and expenditure compared to previous year.

Important ratios such as ROA, ROE etc.; comparison and analysis in relation to previous year

Policy relating to general provisions /reserves

INTERNAL CONTROL

1. Written guidelines/ instructions / manual for accounting aspects

2. Balancing of Books / Reconciliation of control and subsidiary records.

System of monitoring the position of balancing of books / reconciliation of control and subsidiary records

Follow-up action (A control check through Exception Report generated from CBS System be carried out.)

3. Inter-branch Reconciliation Comments on the system/ procedure and records

maintained Test check for any unusual entries put through

inter- branch/ head office accounts Position of outstanding entries ; system for

locating long outstanding items of high value Steps taken or proposed to be taken for bringing

the reconciliation up-to -date. Compliance with the RBI guidelines with respect

to provisioning for old outstanding entries.

4. Branch Inspection

System of branch inspections: frequency; scope/coverage of inspection / internal audit, concurrent audit or revenue audit; reporting.

System of follow- up of these reports; position of compliance.

5. Frauds/ Vigilance

Observations on major frauds discovered during the year under audit.

System of follow-up of frauds/ vigilance cases

6. Automation and computerization

Existence of Computerization and Automation Policy; progress made during the year under review

Critical areas of operations not covered by automation.

Number of branches covered by computerization and the extent of computerization.

Procedures for back- ups, off-site storage, contingency and disaster recovery and adherence thereto.

Existence of Systems/EDP audit; coverage of such audit.

Electronic Banking; existence of systems and procedures; monitoring; regular updation of technology; method of review and audit of procedures.

Suggestions ,if any, with regard to computerization and automation

7. System and controls

Existence of systems and procedures for concurrent and internal audits, inspections, EDP audit of computer systems / software, etc.; monitoring and follow-up on such reports.

OTHER MATTERS

Comments on accounting policies, if any, including comments on changes in accounting policies made during the period.

Policies and systems for monitoring activities such as underwritten, derivatives, etc.

Adequacy of provisions made for statutory liabilities such as Income Tax, Interest Tax, Gratuity, Pension, Provident Fund, etc.

Adequacy of provisions made for off-balance sheet exposures and other claims against the bank.

Any major observations on branch returns and process of their consolidation in final statement of accounts.

Balance with other banks – observations on outstanding items in reconciliation statements.

Procedure for revaluation of NOSTRO accounts and outstanding forward exchange contracts.

Observations on the working of subsidiary of the bank :

a) reporting system to the holding bank and b) major losses of the subsidiary, if any.

Any other matter which the auditor considers should be brought to the notice of the management. Such as:

Corporate Governance Borrowings Premises Stationery Department Jilani and Ghosh Committee Compliances

Implementation of recommendation of Mitra Committee

Legal departments (details relating to suit filed and decreed accounts)

Merchant banking activity. Inter office adjustments. Planning department Raj Bhasha Voluntary retirement scheme.

CORPORATE ACCOUNTS GROUP BRANCHES / INDUSTRIAL FINANCE BRANCHES WITH ADVANCES OF RS.100 CRORE OR MORE

To obtain full details of borrowers with more than Rs.2 Crores exposure in a specified format.

Mention major shortcomings in credit

appraisal and monitoring

RECOVERY POLICY IN RESPECT OF BAD /DOUBTFUL DEBTS/NPAS

Existence of a recovery policy; regular updation thereof; monitoring and adherence thereto; compliance with the RBI guidelines.

System of monitoring of recovery from credit card dues in respect of credit cards issued.

Effectiveness of the system for compiling data relating to the bad and doubtful debts and the provision in respect thereof.

System for identification, qualification and adequacy of provision (including that at foreign branches).

System for suspension of charging of interest and adherence thereto.

Ascertaining the realizable value of securities (including valuation of fixed assets) and the possible realization from guarantors including DICGCI/ECGC.

Assessment of the efficacy of rehabilitation

programmes.

Method of appropriation of recoveries against principal, interest, etc.

System of compromise/ settlement. Review such cases and cases of recovery of over Rs1.00 crore and also the cases wherein limit of sacrifices laid down in the Recovery Policy is exceeded. Compliance with RBI guidelines.

Provision/ write-offs under proper authority.

Recovery procedures including those relating to suit filed and decreed accounts.

System of identifying and reporting of willful defaulters

As regards advances to sick units which are under rehabilitation programmes, the auditor should examine whether the bank has adhered to the board parameters to grant of relief / concessions as per the RBI guidelines.

LARGE ADVANCES

Comments on adverse features considered significant and which need management’s attention

The details to be given in respect of each such account should include the name of the borrower, the amount outstanding and a brief history and statement of facts. It would be desirable for the auditor to obtain the relevant explanations from the management in writing.

LIQUIDITY AND FUND MANAGEMENT

Existence of investment policy and adherence thereto; compliance with RBI guidelines.

System of purchase and sale of investments; delegation of powers; reporting system; segregation of back office function etc.

Controls over investments, including periodic verification / reconciliation of investments with book records.

Valuation mode; changes in mode of valuation compared to previous year; shortfall and provision thereof.

Investments held at foreign branches; valuation mode; regulatory reserve requirements; liquidity.

Composition of investment portfolio as per RBI guidelines and the depreciation on investments, if any, not provided for.

System relating to unquoted investments in the portfolio and the liquidity of such investments.

System relating to SGL/BRs; control over SGL/BRs outstanding at the year end and their subsequent clearance.

System and periodicity of concurrent and internal audit / inspection of investment activities; follow-up on such reports.

System of recording and accounting of income from investments.

System of monitoring of income accrued and due but not received.

System of monitoring matured investments and their timely encashment.

Average yield on investments.

System relating to Repos.

In case of unquoted investments, reporting requirements of the auditor includes:

Whether appropriate system is followed for valuation of the unquoted investment in the portfolio. The basis of valuation is different depending on the type of investment.

Whether the unquoted investments are liquid in nature, i.e., they are easily saleable in the open market. This depends on the trend of the sale price net-worth of the enterprise, the market condition, etc.

SLR/CRR REQUIREMENTS - SYSTEM OF ENSURING COMPLIANCE

System of complying weekly DTL position from branches.

Records maintained for the above purpose.

CAPITAL ADEQUACY

Enclose a copy of the capital adequacy certificate.

Thank you