Influencing policy (training slides from Fast Track Impact)
Bank's Branch Audit Process
1. Assignment Report on-
“Bank’s Branch Audit Process”
With reference to ICICI Bank
Submitted To:
Prof. Prasad Joshi Sir
By:
Somnath Pagar
MBA II
(2013-2015)
2. Introduction:
Banking Industry in India is developing and expanding day by day. The
basic work culture in banks in India is fairly different as compared to banks in
other countries. The customers (Deposit holders or borrowers) of the banks are
being serviced now through Internet, Core Banking Solutions(CBS) etc resulting
very less personal interaction with bankers. Because of this changing face of
banking industry it is very much necessary to properly plan Bank Branch Audit.
Banking Industry is a facebook of Economy of the Country. It speaks about
economic growth, its stability and soundness. Fortunately, due to regulations and
controls, Indian Banking Industry could sustain when banks in others countries are
facing problems due to threats like frauds etc.
Meaning and Definition of Statutory Audit:
In the India, the term "statutory auditor" refers to an external auditor whose
appointment is mandated by law. A "statutory audit" is a legally required review of
the accuracy of a company's or government's financial records. The purpose of a
statutory audit is the same as the purpose of any other audit - to determine whether
an organization is providing a fair and accurate representation of its financial
position by examining information such as bank balances, bookkeeping records
and financial transactions.
Some of the Laws applicable to the Banks:
The Banking Regulation Act, 1949
State Bank of India Act, 1955
State Bank of India (Subsidiary Banks) Act, 1959
The Companies Act, 1956 (registration of charges, resolutions, borrowing
powers etc.)
The Reserve Bank of India Act, 1934
Prevention of Money Laundering Act, 2002
3. Securitisation & Reconstruction of Financial Assets & Enforcement of
Security Interest Act, 2002
The Foreign Exchange Management Act
The Income Tax Act, 1961 (Tax Audit)
Service Tax Rules
The Stamp Act of the States/ The Indian Stamp Act
Negotiable Instrument Act
Law of Limitation
Bank Branch Audit Process:
1. Pre-commencement Work
The following points have to be considered before commencing the audit
o Receipt of appointment letter
o Compliance u/s. 226(3) of Companies Act, 1956 with regard to
qualifications and disqualifications of auditors
Pre-commencement Work
Understanding the business of bank branch
Overall audit plan / Audit Programme
Audit Procedures:
Substantive Testing & Analytical Procedure
Report
4. None of the following persons shall be qualified for appointment as auditor of a
company-
A body corporate;
An officer or employee of the company;
A person who is a partner, or who is in the employment, of an officer or
employee of the company;
A person who is indebted to the company for an amount exceeding one
thousand rupees, or who has given any guarantee or provided any security
in connection with the indebtedness of any third person to the company for
an amount exceeding one thousand rupees;
A person holding any security of that company after a period of one year
from the date of the companies (Amendment) Act, 2000
o Internal Auditor cannot be statutory auditor for the same financial
year
o The nature of audit work has to be ascertained as to whether it is
Concurrent Audit, Stock Audit, Revenue Audit, Credit Risk Auditor
or any other Assignments of any branch of that bank
o Decision for Acceptance or Rejection of Assignment has to be
communicated to the concerned authority
o It should be ensured that minimum fees are set as per RBI circular
o The Objective and Scope of Work has to be considered with specific
considerations to time available for conducting audit AAS-2 deals
with Objective and Scope of the audit of financial statements
o Before accepting the audit assignment, the availability /outsourcing of
staff for conducting bank audit has to be considered. In doing so the
auditor should follow the guidance given in AAS 10 which deals with
using the work of another auditor.
5. o The Previous Auditor must be communicated (Clause 8 of First
Schedule of Chartered Accountants Act, 1949)
o Engagement Letter under AAS 26 has to be issued
o There must be a Communication with joint auditor as per AAS 12
o A list of accounting standard applicable to the branch must be
prepared
o Copy of all circulars of RBI applicable to branch have to be
obtained and kept ready for reference
o Attending branch audit seminars could enhance the auditors
knowledge on bank audits
o Banking terminology and schemes should be well understood
o A reading of Guidance Note on audit of banks by ICAI would provide
valuable guidance.
2. Understanding the business of bank branch
The next step is in understanding the business of the branch with specific
reference to
A. Type of constitution
B. Applicable Laws
2. Banking Regulation Act, 1949
3. Reserve Bank of India, 1934
4. Multi State Co-operative Act, 2002
5. Relevant State Co-operative Act
6. Companies Act, 1956
7. Circulars/Guidelines issued by RBI
8. Circulars/Guidelines issued by Head Office of bank
9. Service Tax Provisions
6. 10.TDS Provisions under Income tax Act
11.Prevention of Money Laundering Act, 2002
C. Type/Nature of transactions
Quantum of Transactions under various heads as detailed below:
Sr. No. Particulars Nos. Total Value
A P & L Income
A1 Interest earned
A2 Other income
B P & L expenditure
B1 Interest expended
B2 Operating expenses
C Balance Sheet Assets
C1 Cash and balance with RBI
C2 Money at call and short notice
C3 Investments
C4 Advances
C5 Fixed assets
C6 Other assets
D. Balance sheet liabilities
D1 Deposits
D2 Borrowings
D3 Other liabilities and provisions
E. Other items
E1 Contingent liabilities
E2 Bill for collection
D. Computerization System / software used by the branch
7. E. Security aspect of software, output of software, interlinking between
various reports
F. Internal Control / Risk Assessment
G. Risk Management / Back up system
12.Overall Audit Plan - Audit Programme
While drafting the audit programme, the type of reports to be
submitted have to be considered. There are four types of reports.
1. Unqualified Report
2. Qualified Report
3. Disclaimer of Opinion
4. Adverse Report
Auditor should plan his work based on the client’s business to enable him to
conduct an effective audit in an efficient and timely manner as per AAS-
8(Audit Planning).
The auditor should design and select an audit sample, perform audit
procedures thereon, and evaluate sample results so as to provide sufficient
appropriate audit evidence as per AAS-15 (Audit sampling)
13.Testing & Analytical Procedure Major Parameters
Sr. Item Important Audit Checks
1.
Deposits
i. Term
ii. Saving
iii. Current
iv. FCNR/NRE/NRNR
Verify transactions during the year relating to:
New Accounts opened;
Accounts closed;
Dormant Accounts;
Interest calculations;
Test check account statements for unusual/ large/overdraft
8. transactions;
Overdue Term deposits & banks policy for its renewal;
Accrual of interest;
RBI Norms for Non-resident deposits & its operations - with due
importance to opening and operation of accounts like NRE, NRNR,
FCNR, RFC,etc.;
Interest on various types of deposits; Tax Deducted at Source.
Large deposits placed at the end of the year (probable window
dressing).
Examine unusual trend in account opening or account closing,
dormant accounts that have suddenly been reactivated by heavy
cash withdrawals or deposits, overdrawing, etc.
Examine interest trends as compared to average annual deposits
(monthly average figures).
2. Advances
Review monitoring reports (irregularity reports) sent by the branch
to the controlling authorities in respect of irregular advances.
Review appraisal system, Files of large as well as critical
borrowers, sanctions, disbursement, renewals, documentation,
systems, securities, etc.
Review on test check basis operations in the Advances Accounts.
Compliance of sanction terms and conditions in the case of new
advances.
Whether the borrower is regular in submission of stock statements,
book debt statements, insurance policies, balance sheets, half yearly
results, etc. and whether penal interest is charged in case of default/
delay in submission of such data.
Charge of interest and recovery for each quarter or as applicable to
be verified.
Review the monitoring system, i.e. monitoring end use of funds,
analytical system prevalent for the advances, cash flow monitoring,
branch follow-up, consortium meetings, inspection reports, stock
audit reports, market intelligence (industry analysis), securities
updation, etc.
Check classification of advances, income recognition and
provisioning as per RBI Norms/ Circulars.
Check whether Non-Fund based (Letter of Credits/ Bank
Guarantees) exposure of the borrowers is within the sanctioned
limits.
3. Profit & Loss A/c Income/ Expenditure Verify:
Short debit of interest/ commission on advances;
Excess credit of interest on deposits;
In case the discrepancies are existing in large number of cases, the
auditor should consider the impact of the same on the accounts;
Determine whether the discrepancies noticed are intentional or by
error;
9. Check whether the recurrence of such discrepancies are general or
in respect of some specific clients;
Divergent Trends:
Divergent trends in income/ expenditure of the current year may be
analysed with the figures of the previous year.
Wherever a divergent trend is observed, obtain an explanation
along with supporting evidences like monthly average figures,
composition of the income/ expenditure, etc.
4. Balance Sheet Cash & Bank Balances:
Physically verify the Cash Balance as on March 31….. (Year end)
or reconcile the cash balance from the date of verification.
Confirm and reconcile the Balances with banks.
Investments:
Physically verify the Investments held by the branch on behalf of
Head Office and issue certificate of physical verification of
investments to bank’s Investments Department.
Check receipt of interest and its subsequent credit to be given to
Head Office.
Advances Provisioning:
As per RBI norms, unrealised interest on NPA accounts should be
reversed and not charged to “Advance Accounts”. Reversal of
unrealised interest of previous years in case of NPA accounts is
required to be checked.
Partial Recovery in respect of NPA accounts should be generally
appropriated against principal amount in respect of doubtful assets.
Fixed Assets:
Check Inter-branch transfer memos relating to Fixed Assets and
whether they have been correctly classified in the accounts and
depreciation accounting thereof.
Inter Branch Reconciliation (IBR):
Understand the IBR system and accordingly prepare an audit plan
to review the IBR transactions. The large volume of Inter Branch
Transactions and the large number of unreconciled entries in the
banking system makes the area fraud-prone.
Check-up head office inward communication to branch to ascertain
date up to which statements relating to inter branch reconciliation
have been sent.
Suspense Accounts, Sundry Deposits, etc.:
Ask for and analyse their year-wise break-up.
Check the nature of entries parked in such Accounts.
Check any movement in such old balances and whether the same is
genuine and has been properly authorized by the competent
authority.
Check for any revenue items lying in such accounts and whether
proper treatment has been given for the same.
10. 14.Report
Sample Audit Report (ICICI Bank)
Auditor's Report (ICICI Bank)
1. We have audited the attached Balance Sheet of ICICI Bank Limited
(the ''Bank'') as at 31 March 2014 and also the Profit and Loss Account
and Cash Flow Statement for the year then ended, and a summary of
significant accounting policies and other explanatory information.
Incorporated in the said financial statements are the returns of the
Singapore, Bahrain, Hong Kong, Dubai, Qatar, Sri Lanka and New York-USA
branches of the Bank, audited by other auditors.
MANAGEMENT''S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
2. Management is responsible for the preparation of these financial
statements that give a true and fair view of the financial position,
financial performance and cash flows of the Bank in accordance with
accounting principles generally accepted in India, including the
Accounting Standards notified under the Companies Act, 1956 (''the
Act''), read with General Circular 8/2014 dated 4 April 2014 issued by
the Ministry of Corporate Affairs and with guidelines issued by the
Reserve Bank of India (''RBI'') insofar as they are applicable to the
Bank and in conformity with Form A and B (revised) of the Third
Schedule to the Banking Regulation Act, 1949 as applicable. This
responsibility includes the design, implementation and maintenance of
internal control relevant to the preparation and presentation of the
financial statements that give a true and fair view and are free from
material misstatement, whether due to fraud or error.
AUDITOR''S RESPONSIBILITY
3. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance
with the Standards on Auditing issued by the Institute of Chartered
Accountants of India. Those Standards require that we comply with
ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
from material misstatement.
4. An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor''s judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
Bank''s preparation and fair presentation of the financial statements in
order to design audit procedures that are appropriate in the
circumstances. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of the accounting
estimates made by management, as well as evaluating the overall
presentation of the financial statements.
5. We believe that the audit evidence we have obtained is sufficient
11. and appropriate to provide a basis for our audit opinion.
OPINION
6. In our opinion and to the best of our information and according to
the explanations given to us, the financial statements give the
information required by the Banking Regulation Act, 1949 and the Act in
the manner so required for banking companies, and give a true and fair
view in conformity with the accounting principles generally accepted in
India:
a) in the case of the Balance Sheet, of the state of affairs of the
Bank as at 31 March 2014;
b) in the case of the Profit and Loss Account, of the profit for the
year ended on that date; and
c) in the case of the Cash Flow Statement, of the cash flows for the
year ended on that date.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
7. The Balance Sheet and the Profit and Loss Account have been drawn
up in accordance with the provision of section 29 of the Banking
Regulation Act, 1949 read with section 211 of the Act.
8. We report that:
(a) We have obtained all the information and explanations which to the
best of our knowledge and belief were necessary for the purpose of our
audit and have found them to be satisfactory;
(b) In our opinion, the transactions of the Bank which have come to our
notice have been within its powers;
(c) The financial accounting systems of the Bank are centralised and
therefore, accounting returns for the purpose of preparing financial
statements are not required to be submitted by the branches; we have
visited 110 branches for the purpose of our audit;
9. In our opinion, the Balance Sheet, Profit and Loss Account and Cash
Flow Statement comply with the Accounting Standards referred to in
sub-section (3C) of section 211 of the Act, to the extent they are not
inconsistent with the guidelines issued by RBI.
10. We further report that:
(a) In our opinion, proper books of account as required by law have
been kept by the Bank so far as appears from our examination of those
books;
(b) The Balance Sheet, Profit and Loss Account, and Cash Flow Statement
dealt with by this Report are in agreement with the books of account;
(c) On the basis of written representations received from the directors
as on 31 March 2014, and taken on record by the Board of Directors,
none of the directors is disqualified as on 31 March 2014, from being
appointed as a director in terms of clause (g) of sub-section (1) of
section 274 of the Companies Act, 1956.
12. OTHER MATTER
11. We did not audit the financial statements of Singapore, Bahrain,
Hong Kong, Dubai, Qatar, Sri Lanka and New York-USA branches, whose
financial statements reflect total assets of Rs. 1,630,498 million as at
31 March 2014, the total revenue of Rs. 69,223 million for the year ended
31 March 2014 and net cash flows amounting to Rs. 209,916 million for the
year ended 31 March 2014. These financial statements have been audited
by other auditors, duly qualified to act as auditors in the country of
incorporation of the said branches, whose reports have been furnished
to us, and our opinion is based solely on the report of other auditors.
For S.R. Batliboi & Co. LLP
Chartered Accountants
ICAI Firm registration number: 301003E
per Shrawan Jalan
Partner
Membership No.: 102102
Place: Mumbai
Date: 25 April 2014
Source: MoneyControl.com
****