Knowledge sharing session On Bank Audit

Knowledge Sharing Session on Bank Audit

The Bank Company Act 1991 (as amended upto 2013) Audit Report issue

The following additional reporting requirements have been inserted through amendment in 2013, where an auditor is also suppose to report on: Adequacy of internal audit, internal control and risk

management related process; Any fraud/forgery, irregularities or administrative error

or anything harmful for the Bank committed by the officer-staff of the bank or its associated entity came to the attention of the auditor; and

If applicable, whether subsidiary company has been audited and properly consolidated.


Paragraph 4 of section 39 also requires an auditor of a Bank to report on the following matters immediately to Bangladesh Bank:

Any serious violation of the Bank Company Act 1991; Due to loss, capital of entity came down below 50%; Any other serious non compliance occurred, including doubt

on repayment of due to creditors; and There is doubt whether assets are adequate to meet demand

of creditors.


Comment on adequacy of internal audit, internal control and risk management arrangements of the bank as per Bank Companies Act 1991 (amended upto 2013).

Credit Risk;

Foreign Exchange Risk;

Asset Liability Management Risk;

Money Laundering Risk; and

Internal Control and Compliance Risk; and

Information & Communication Technology Security Risk.

Loans and advances Audit procedure Concentration on CRG Purpose of the loan Loan write off (written off within 1.5 years?) Rescheduled loan on cash basis interest income (in the

loan statement down payment word to be written) Trend analysis (11 month differs with one year) Writ petition Valuation circular of BSEC

Movement of Interest Suspense Accounts: [BRPD 14 (25 June 2003)]

Particulars TakaBalance at the beginning of the year Amount transferred to "Interest Suspense" Account during the year * (+) Amount recovered in "Interest Suspense" Account during the year ** (-) Amount written off during the year (-) Amount waived by Bank (-) Balance at the end of the year

Investigate the following (for loans) Loans are properly approved and whether sanctions are within delegation

limit and necessary formalities have been duly complied with before disbursement of the loans;

The outstanding balance of each account shown in the statement agrees with that in ledger;

Examine that all terms and conditions stated in the loan sanction/renewal/reschedule letter have been followed;

CIB report has been taken from Bangladesh Bank before sanction any fresh loans;

Ensure that sufficient/adequate security against the loan amount has been obtained by the branch. List the securities taken by bank along with their value and also check professional valuer’s certificate (if applicable) to confirm the value (Forced sale value) of the security;

Investigate the following (for loans) Ensure that in the case of security in pledge are in the custody of the bank;

Ensure that for hypothecated security as stock, goods etc., the branch obtains regular stock list and makes inspection on regular basis;

Ensure whether adequate insurance policies have been taken for the security;

Whether prior approval of Bangladesh Bank has been taken for declassification/re-lending of loan classified by Bangladesh Bank;

Examine that necessary excise duty has been deducted from appropriate loan balance;

In case of rescheduling of loan, check whether appropriate amount of down payment has been deposited before application for rescheduling and the reschedule has been properly approved by the Board of Directors;

Obtain the list of loan declassified during the year and ensure that necessary approval of Bangladesh Bank has been taken;

Check whether interest on SMA and classified advances has been duly transferred to interest suspense. For this, compare CL statement with interest suspense ledger.

Commonly made mistakes by Bank

Loans and advances amount differs with departments

Differences in quarterly CL Differences in BB report and Financial statements Key Management benefit and loans and advances Large loan statements Director’s loan (inside and outside)

Commonly made mistakes in reporting in FSLarge loan (differs with BB report)Key Management loan (not staff loan)Other asset (most problematic) Other liabilities (most problematic)Directors feeUnadjusted/Unreconciled entries ICC disclosureSteps taken regarding bad loan recovery

The following disclosures are mandatory (v) The lending policy to related parties shall be disclosed

and in respect of related party transactions, the amount should include: (a) each of loans and advances, deposits and guarantees

and commitments; disclosures may include the aggregate amounts outstanding at the beginning and end of the period, as well as changes during the period;

(b) each of the principal items of deposit, expense and commission;

(c) the amount of the provision against loans and advances;

(d) irrevocable commitments and contingencies and commitment arising from other off-balance sheet items;

The following disclosures are mandatory (vi) Full disclosure of balances at the balance sheet date resulting

from transactions with directors and their related concerns shall be made together with an analysis as to the classified and unclassified advances, provision, if any, for possible losses on classified loans and advances, value of the securities held etc., and the amount of the loans, adversely classified, of the concerns of persons who were bank directors at the time the loans were extended. If such loans were written off or waived that should also be mentioned;

(vii) Detailed information of any business (like receiving/extending services, purchase/sale of properties, renting etc.) other than the banking business with any related concerns of the directors as per section 18(2) of the Bank Companies Act should be provided;

Detailed information of the amount invested along with a list, in the securities (both dealing and investment) of the directors and their related concerns.

The following disclosures are mandatory Names of the members of the audit committee formed

by the board of directors of the bank and their qualifications should be disclosed. Confirmation as to the number of meetings of the audit committee held with the bank's senior management to consider and review the bank's financial statements, the nature and scope of audit reviews and the effectiveness of the system of internal control and compliance thereof should be made.

Detailed information should be given regarding financing and management of the fund raised for staff pension considering it as a separate entity.

The following disclosures are mandatory

(i) Names of the Directors together with a list of entities in which they have interests;

(ii) All contracts of significance to which the bank, its subsidiary or any fellow subsidiary company was a party and wherein a director has interests subsisted at any time during the year or at the end of the year;

(iii) Share options given to directors and executives to acquire shares at 'nil' consideration or restricted share plan exercisable at a discount.

(iv) The nature of the related party relationship, the types of transactions and the elements of transactions;

Critical matters of the Bank Company Act



BB reporting by Bank

Name of Reports Duration Match with

Statement of Classified Loans & Advances (CL )

Quarterly Overall checking of loan and advances

Statement of Top 20 Defaulter and Large Loan (Approved only)

Quarterly and monthly resp

Disclosure regarding large borrowers

Liquidity Coverage Ratio (LCR) under Basel – III and Capital Adequacy Basel - III (Solo)

Monthly and quarterly resp

Calculation of capital adequacy

Statement on Customer Complain and Statement of Money Suits Filed With Artho Rin & Dewlia Adalat (BR-4)

Monthly and Half-yearly resp

List of cases against and for the bank

BB reporting by BankEmployees' Provident Fund & Gratuity Fund

Half-yearly Note of employees’ benefits

Statement of Write-off Quarterly Measurements, disclosures for write-off loans

Cash Reserve Requirement(CRR) & Statutory Liquidity Reserve(SLR)

Weekly, Bi-weekly and Monthly resp

Notes of CRR & SLR

Fraud related reporting to BB

Consolidation IssuesBanks and Financial Institutions have to comply with the requirements of the Bank Companies Act 1991 as amended in 2013, Bangladesh Bank circulars and guidelines, BSEC notifications and BFRSs in preparing the financial statements of the Company.

The major rules & regulations that have to be complied in preparing the financial statements are :

o The Bank Companies Act 1991 (As amended in 2013);o BRPD Circular No . 14 dated 25 June 2003 (For Conventional

Banking);o BRPD Circular No. 15 dated 09 November 2009 (For Islamic

Banking);o Bangladesh Financial Reporting Standards (BFRSs)

Investment in SubsidiariesAs per BRPD 14 dated 25 June 2003, “Investment in subsidiaries” will have to be presented under the head “Other Assets” and are recognised at cost.

However in some circumstances the NAV (Net Asset Value) per share of the subsidiary falls below the Face Value of the subsidiary. In such circumstances, an impairment on the “Investment in subsidiaries” have to be recognized in the financial statements.

Investment in Subsidiaries (Contd..)The journal entries to record the fall in the value of investment:

o Impairment loss on Investment in Subsidiary (Dr.)

Investment in shares of subsidiary Company (Cr.)

Subsequently, the increase in the NAV per share will result in reversal of the aforementioned journal.

Related guideline issued by BB Prudential banking guideline BASEL II guideline Credit Risk guideline; Foreign Exchange Risk guideline; Asset Liability Management Risk guideline; Money Laundering Risk guideline; and Internal Control and Compliance Risk guideline; and Information & Communication Technology Security

Risk guideline.

Thank You

Education

Knowledge sharing session On Bank Audit