AUDIT PLANNING,PROCEDURE

Bank Branch Audit

&
RBI Guideline
_______________

1 CA MANISH BAXI
 Banking Industry facebook

Dynamic Industry
Financial reporting and disclosure
Auditors Role
Expectations from RBI , Banks , ICAI .
Discharge of duties in time.
Bank Branch Audit is T20 Not Test
Match-
Be like a Sachin & Dhavan
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 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

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 Planning

We never fail !!!

We fail to Plan .

Planning has No Alternative!!!

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 Audit Planning

Knowledge Management
Time Management
Men-power Management
Compliance Management
Reporting Management

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 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
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 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)
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 Part I : Off Site Planning

Audit Planning

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 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

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 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)
10 Analytical Procedures (SA 520) CA MANISH BAXI
 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
1.07.2006==19.02.2007==01.07.2009=01.07.2010=
01.07.2011==02.07.2012
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

11 Exposure norms dated October 10 ,2006 CA MANISH BAXI

 Why ? -----Audit Planning.

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 SA 240- Auditors 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

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 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 clients business.
Plans should be further developed and
revised as necessary during the course of
a audit.
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 Audit Planning:

Plans should be made to cover, among other

things:
a) acquiring knowledge of clients accounting system,
policies and internal control procedures;
b) Determining the expected degree of reliance to be
placed on internal controls;
c) determining the nature, timing, and extent of the
audit procedures to be performed; and preparing
the audit plan accordingly.
d) Allocation and Coordination of the work to be
performed.
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 Part II : On Site Planning

Audit Planning

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 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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 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 )
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 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)

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 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
Branchs 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

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 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

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 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
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 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,
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 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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 Part III : Execution

Audit Planning

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 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
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 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

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 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

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 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

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 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
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 Documentation SA -230

Auditorshould 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
31 record, the facts of the case CA MANISH BAXI
 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
auditors report, branchs 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

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 Documentation

Proper minutes should be made of

important discussions held with the branch
management on critical issues and how it
was concluded. Obtain managements
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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 REPORTING Requirements

Audit Planning

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 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

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 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;

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 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.
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 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)

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 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 1.4.2012 are to be issued in the
revised format.

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 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
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under the head Other Matters .
CA MANISH BAXI
 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

41 representations from the branch may be obtained
CA MANISH BAXI
 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

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 Other Points

Audit Planning

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 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
44 No of days spent for the audit CA MANISH BAXI
 Other Points

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

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 Important Concept : Proactive
Approach

KITE RISES
AGAINST
AND NOT
WITH THE
WIND
BE A SELF
STARTER
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 Thank YOU

You can reach to

CA. MANISH BAXI

e-mail : manish@talatiandtalati.com
| Mob. : +91 98240 59005

47 CA MANISH BAXI
 Disclosure in balance sheets dated July 1, 2006

Circulars issued by RBI

Prudential norms on Income recognition,asset classification
and provisioning relating to advances dated
1.07.2006==19.02.2007==01.07.2009=01.07.2010= 01.07.2011
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

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 Prudential Norms

I Income Recognisation
II Asset Classification
III Provisioning

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 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.

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 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)

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 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)

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 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.

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 II - ASSET Classification
Categories of NPA
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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 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)

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 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)

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 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.

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 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.

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 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.

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 Provision on Doubtful assets (Para
5.3) .

Period for which the advance has Provision requirement (%) OF

remained in doubtful category SECURED PORTION

Up to one year 20

One to three years 30

More than three years 100

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 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.

61 CA MANISH BAXI
 Thank You

You can reach to

CA. MANISH BAXI

e-mail : manish@talatiandtalati.com | Mob. : +91 98240 59005

62 CA MANISH BAXI