Planning for an effective bank branch Statutory Audit

, Last updated: 18 March 2024
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Introduction

A bank branch audit involves a systematic examination of the financial records, operations, internal controls, and compliance procedures of a specific branch of a bank. The primary objective is to assess whether the branch is functioning effectively, adhering to regulatory guidelines, and mitigating risks appropriately. Bank branch audit play a significant role in ensuring the integrity, efficiency, and regulatory compliance of financial institution. These audits are essential for maintaining trust among stakeholders and safeguarding the interests of customers and shareholders. In this article, we will discuss in depth about audit of branch of bank.

Steps to be followed on receipt of Branch Allotment letter

On receipt of branch allotment letter following steps are required to perform by the auditor-:

Talk to the Branch Manager and discuss with him about the branch working, total business of the branch, amount of advances, nature of advances, nature of branch (rural, industrial etc.),risk rating of branch.
Ask Branch manager to send the Jotting report (Account wise Advances Details) as on date on email. Generally nature of advance are MSME, large corporate loan, loan against FD/NSC/KVP etc., Agriculture, Infrastructure, LC/ other Non-fund based advances.
Send him a mail and letter showing the documents required for bank audit.
Send him an Audit Engagement letter.
Intimate to the previous Auditor about your appointment.

Planning for an effective bank branch Statutory Audit

Various types of reports to be finalized

Independent Audit Report
MOC (Memorandum of Changes)
LFAR (Long Form Audit Report)
Ghosh Jhilani Audit Report
Various Certificate's
Tax Audit

Preparation for Audit

Finalise the team member - Atleast 3-4 members.
Have a formal training of the team members:

Give them knowledge of the banking business, various terminologies used in the banking and divide them according to work to be done
Most Important decide who will be responsible for verification of all the documents on completion of branch

Analysis of Jotting report received from branch
Study of Master Circular, IRAC Norms, Closing Circular of the bank, various other documents.
Take knowledge of various software (Finacle Core) and commands used in bank audit to draw various reports from system.
Have a detailed Audit Plan in Hand
Minimum time required for completion of One Branch - 3-4 days.
Study the previous year bank audit reports, Balance Sheet, certificates and other documents.

Things to kept with before going to bank audit

All the Rubber Stamps
Digital Signature
Letter Head
Bill Performa
Pan Drive and 2 LAPTOP Minimum, Scanner, Printer
Soft copy of Master Circulars
Books and material on Bank Audit
Material on various software commands for bank audit

Carry out Bank Audit in the Branch

Basic points

Reach in the Branch at time
Have Confidence that you know how to conduct the bank audit- First Impression is Last Impression
Introduce your team to the Branch Manager and inform him about what job will be carried by which team member.
Main team member need to study previous year audit report, Reports of various audit completed during your period - i.e. concurrent audit, RBIA, other inspection/ Audit, IT Audit and Risk Rating of Branch, Scale of Branch manager, Sanction Authority of Branch Manager.
Physical verification of the Fixed Assets
Physical verification of Cash and other security papers
Note all the details and documents asked by you but not shown by branch manager or asked to be shown later.
Have atleast more than half day for signing of all the documents and reports.

Some important points in Audit of Advances

Have complete command on IRAC Norms - Master Circular of RBI issued every year
All Large Advances (having outstanding more than 10% of the total advances (Fund+Non Fund) OR Rs.10 Crore whichever is lower) to be checked thoroughly and reported account wise. It is the requirement of LFAR.
Other Advances may be audited on selected basis.
Verify the charge registration on Immovable Property on CERSAI website in case of Advances against Immovable Property.
While checking the Balance Sheet, Tax Audit Report Form 3CD of the borrower- must be downloaded from the Income Tax Website and not just issued by CA.
To check in Working Capital Advances, that the limit has been duly renewed and if not renewed within 6 (3+3) months from the due date of renewal, then the account will become NPA.
Stock statements should not be older than 3 Months for calculation of Drawing power (DP)
Accounts regularized near Balance Sheet date.
In all advances check the security documents properly.
Obtain Potential NPA report, SMA Report, Red Flag Account as on 31st Jan and 28th Feb and compare it with as on 31st March.
Check the End use of Advances Given, No case of diversion of funds should be in the account. No heavy cash withdrawal should be.
Check in the selected accounts, whether DP is properly calculated.
To check whether there are proper transaction in the account in comparison to sales of the borrower.
In case of NPA, Check whether any amount of devolvement of LC or Guarantees invoked has been debited in a separate account, because this account will also be treated as NPA
In case of Loan against FD/NSC/KVP etc. - No NPA if adequate Margin
Loan Guaranteed by Central Govt. - NO NPA but the income recognition on realization basis. And in case of loan guaranteed by State Govt. - May be NPA (Para 4.2.14)
In case any account has been converted NPA, then check other accounts of the same borrower from CustID.
Check in NPA account master, the correct value of security and correct date of NPA for the purpose of provisioning.
Check whether any NPA account has been upgraded during the year. Whether upgadation is genuine. i.e. Fresh funds have been credited in the accounts.
Check that in NPA account there should be no debit transaction. Only credit transaction is allowed.
Check the classification of the NPA. i.e. the account which was declared NPA last year should be transferred to Doubtful asset this year. And so on.
In case of NPA accounts, Property Valuation report is must once in 3 years and in case valuation report is older than 3 years then entire loan is unsecured and provision accordingly and reporting in LFAR.
Annual stock audit is must in case of NPA with balance more than 5 Crores.

Some Important points in Audit of P&L

To cross check on sample wise that the rate of interest has been properly entered in the master data.
To check whether processing fees, Penal charges, renewal charges have been properly booked by the branch.
To check the Processing fees debited at every time review / renewal.
Check whether Interest has been properly debited on Deposits taken by the branch.
Whether there is any renovation of the Branch and if yes, then applicability of TDS and GST to be checked properly.

Overview of GST on bank

Interest income is considered to be taxable supply however it is exempted under Notification 12/2017 dated 28.06.2017 excluded interest involved in credit services.
Commission, Brokerage income, agency income, account maintenance charges, credit/debit charges are taxable and GST shall be levied on those above charges.
Digital payment facilities is exempted only if single transaction is upto Rs 2000
Other incomes like minimum balance charges, cheque bouncing charges, DD issue charges are taxable.

Exemptions under GST

Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) or sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.
Services by an acquiring bank, to any person in relation to settlement of an amount upto two thousand rupees in a single transaction transacted through credit card, debit card, charge card or other payment card service.
Services by way of collection of contribution under the Atal Pension Yojana
Services by way of collection of contribution under any pension scheme of the State Governments
Services by the following persons in respective capacities — (a) business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch; (b) any person as an intermediary to a business facilitator or a business correspondent with respect to services mentioned in entry (a)

Audit perspective

List of exempted services - whether has been correctly claimed?
Whether GST has been charged on amounts recovered in addition to interest (such as locker rent, folio charges, loan processing fee, late payment fee, lease management fee, rent, management fee etc.) as well as on other supplies like sale of repossessed assets. Prepare reconciliation with GSTR / MIS data
Whether GST is levied on interest and late fee charges collected from credit card holders?
Whether requirements u/s 9(3) w.r.t reverse charges have been complied with?
Whether claim of ITC is consistent with applicable rules?

Some important Points in LFAR

LFAR is an important report on the Functioning of the Branch
Each Question of the LFAR should be answered with suitable reasons and should avoid Just Yes/ NO/ NA
If any answer is in negative, then give complete detail of the account in which that is negative reporting.
Point No-5 (Advances) of LFAR is important as it gives complete questionnaire about the advances.
Before start of audit, we must have complete command on the questions asked in LFAR as during audit various points can be filled in LFAR simultaneously.
If Auditor has any observation, for which there is no specific question asked, then these observation can be given in the last Point- Miscellaneous.

Some important areas for MOC

Change in Classification of Advances- From Standard to Sub Standard- Doubtful - Loss Assets
Account already NPA- but no reversal of Income
Account already NPA and shown secured- but no security value available.
Performing Account shown as secured - but no security available
In case of Fresh NPA found out- then pass MOC for change of classification and reversal of unrealised income both.
Account is NPA but only that account is treated as NPA while all the loans accounts of same borrower will become NPA.
Wrong rate of Interest charged
Some Provision of Expense remain unentered
Some income remain unaccounted

Discussion with manager

Discuss your reporting points with branch manager alteast one day before your last day in Branch.
Show to the BM, the relevant circular / notification on the basis of which you want to report the irregularity or want to declare MOC.
It is the efforts of BM to obtain clean report from Auditor
It is the duty of the auditor to report on what is true and fair.

Report finalization and signature

The Crux of all audit Exercise is the Audit Report with all disclosure.
Do not rely on the prefilled report format given by the Branch. Use your Laptop and soft copies of all reports already available with you.
Prepare the report very carefully as if the points found out by you are not reported properly then it is of no use.
Preparation of MOC- Have knowledge of the format of MOC used by your bank.
Preparation of MOC- Crux of MOC is to disclose what wrong has been disclosed in FS and what should be the correct disclosure.
H.O. Account appearing in Balance Sheet- Other Matter Paragraph
Key Audit Matters
Issuance of UDIN
Make sure that all the sets has been duly prepared and properly signed by the BM and the Auditor.

Points to be checked on completion on audit

Obtain MRL duly signed by the Branch Manager.
Obtain Signed copy of Audit Engagement letter
Obtain one set of all the documents signed
Cross check all the documents from the list provided by HO for documents to be submitted after audit.
Branch Diary duly signed by Branch Manager (2 Copies)
Issuance of Bills
All the supporting documents, Audit Evidences.

Some reports necessary for audit

Study and obtain a copy of all the following reports-:

Circular on Closing of Accounts
Concurrent Audit Report, if any
Statutory Audit Report, LFAR, Tax Audit Report of Last Year Audit
Any RBI Inspection
Any Internal Audit / RBIA (Risk based internal audit)
Any System Audit
List of New Advances sanctioned during the year
List of Restructured account during the year.
List of NPA accounts upgraded during the year
List of New NPA account declared during the year. (called NPA Slippage Summary)
HO Circular on Credit Appraisal and Sanctioning power
List of Advances covered under CGTSME Scheme
List of LC devolved and BG invoked during the year.
List of inoperative accounts made operative during the year
MOC if any passed in previous year and in any quarter of current year under audit (Whether proper effect has been taken in accounts or not)
Copy of Lease Deed of the Branch Premises
Copy of the Service Agreements with the various Service Providers to the Branch.