Procedure and Key Points of Statutory Bank Branch Audit.

LET’S UNDERSTAND STATUTORY AUDIT.

A statutory audit is a legally required review of the accuracy of a company's (or government's) financial statements and records. It is a process of examining all the financial reports and the statements to determine the financial position of a Company.

A practicing chartered accountant or a Chartered accountant firm or LLP can be appointed as a statutory auditor of a bank.

Statutory Audit of banks is mandatory. RBI appoints statutory Auditors in association with the ICAI. Every year after the end of the previous financial year, in every branch of the banks, a very rigorous audit is conducted.

The process to Conduct a Statutory Audit

The Statutory Auditors should ensure that the audit report issued by them complies with the requirements of

SA 210 (REVISED) Agreeing The Terms of Audit Engagement

SA 700 (REVISED) Forming an Opinion and Reporting on Financial Statements

SA 705 (REVISED) Modifications to the Opinion in the Independent Auditor’s Report

SA 706 (REVISED) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Audit Procedure in case of Bank Branch Statutory Audit.

Preparation of Audit Plan
Work Allocation
Reading of Closing Circular, Bank policy, Delegation of Authority
Have a look at LFAR points, List of Certificates which require to sign, Various system generated reports – Exception report, Exceeding report, SMA II report, etc.
Reading and noting the points from Concurrent Audit Report, Inspection Report, RBIA report, System Audit Report, Last year’s financial statements.
Verification of GLA with FormA and FormB.
Selection of Advances according to Portfolio of Branch (Needs to ask for facility-wise jotting). It should be sample basis with coverage of all the products – While checking the advances go through the detail current file of communication, Latest Annual financials, Stock Audit Report, Credit Audit Report, Credit rating, CIBIL report, a Valuation report of Collateral, Search Report, Mortgage papers, etc. The filling of the Checklist is preferable according to the facility.
Verification of KYC norms for the accounts opened during the audit period.
Stationery Verification – DD, Cheque books, FD, Lockers, Stamps, etc.
Cash and ATM cash (if any) verification.
FormA - FormB head wise analysis with last year comparison and if the variation is more than 5%-10% then the reason for the same.
FormB – On a Test basis, vouchers-supporting of the expenses needs to verify.
Interest Verification – Cash Credit, Overdraft, Term Loan, Recurring Deposit, etc.
Commission Verification of Demand Draft, Bank Guarantees, Letter of Credit, etc.
If Authorised Dealer Branch then foreign exchange related transactions needs to verify with proper supporting – Preferably checklist of the same needs to fill.
Based on the above audit needs to fill up the LFAR and verify the Certificates.
Verify the Provisioning on advances as per the RBI guidelines or not?
Verify the classification of advances – Priority, Others, Staff, etc.
Verify the Basel II – III report, Verify the Risk Weightage, and cross tally the same with total advances.
Verify the transactions on test basis through black-box testing.
Form A Verification – Long outstanding entries, age-wise breakups, subsequent clearance of parking entries (if any), grouping of advances, etc.

The most important elements to check in the statutory audit of banks are:

A. Cash Verification Procedure

B. Tax-Related Items

C. Verification of Loan Accounts

A. Cash Verification Procedure

The auditors have to verify the cash balance at the branch at the end of 31st March. An auditor should follow the below-mentioned checklist for cash verification:

i. Whether branch is getting opened at the time as per the guidelines and the branch manager is present at the time of the opening of the branch

ii. Whether the cash vault/cash safe are being opened by the Joint Custodians

iii. Whether any unrecorded security items or documents are kept in the cash vault/cash safe

iv. The Branch should maintain the records for the acceptance of currency from the public. This also includes the records of the mutilated notes

v. Whether all the other doors are locked at the time of the opening of the cash room

B. Tax-Related Items

An auditor will also have to check all the tax-related items and compliances that are applicable to the bank like TDS, 15H & 15H etc. The important elements to check an compliance are mentioned below:

i. The tax should be deducted at an appropriate rate on the monthly/quarterly/yearly payments made by the bank towards interest on deposits, rent, payment to contractors/professionals etc

ii. TDS Certificate should be issued on time and Form 15G/15H are collected and sent on time

iii. Check if any RBI has been audited in the past. If yes, then whether the same is closed and comment on the quality of compliance is to be seen

iv. All the tax returns are filed on time

C. Verification of Loan Accounts

Loan accounts form a major part of the assets for banks. A statutory auditor should check the loan accounts very cautiously.

The verification of Loan Accounts is divided into three parts:

A. Preliminary Check

B. Disbursement

C. Post Disbursement Inspection

A. Preliminary Check

The banks should do a preliminary check of all the accounts before considering the project for evaluation. An auditor should look at the following documents for checking the bank preliminary process:

i. Loan Application

ii. Prescribed Application form

iii. KYC Compliance

iv. Project Report, Projected P&L, Balance Sheet & Cash Flow Statement

v. Latest Audited Financial Statements

vi. Board Resolution for Availing the Credit Facilities

vii. All Government Departments Registration

viii. Technical Review

B. Disbursement

An auditor should check that the disbursement should happen only if all the terms and conditions of the sanction letter have been fulfilled and an acceptance letter for the same has been acquired.

C. Post Disbursement Inspection

The bank should have a proper check on the active accounts. The important elements that a statutory auditor can check are as follows:

i. There should be an acceptance letter duly acknowledged by the borrowers for all the loan accounts

ii. Execution of the loan documents should be as per the terms and conditions of the sanction letter

iii. All the original documents are held in safe custody in fire resistance safe

iv. Confidential Report and NOC from the existing bankers

v. CIBIL Report and score. The bank should check for any adverse comments

vi. Valuation of Securities

vii. External & Internal Credit Rating

viii. Due Diligence Certificate

ix. Verify the drawing power of the accounts is calculated properly and a margin is maintained as per the sanction letter

x. Verify any adverse comment on the stock audit report or the audited balance sheet

xi. Verify the payment schedule as per the sanction letter is implemented. If any, check the approval document for the same

Let's Quickly Summarized the above information: (Scroll Down)

One line Summary of every individual procedure.

Pre-Branch Visit:

Annual report of the Bank
Accounting Policies
Audit Manual
Communication with the previous auditors
Portal Visit of the bank
ERP environment studies (Basic knowledge about bank ERP System)
Guidance Note study

Walk-In Process

Branch Audit Report and Accounts
Long Form Audit Report
Internal Inspection Report
Concurrent Audit Report
Credit Audit Report
RBI Inspection Report, if such inspection took place
Income and Expenditure Control Audit/Revenue Audit Report
Quarterly review report
Snap and Systems Audit Report
IS/ IT/Computer/EDP Systems Audit
Any special inspection/investigation report

Review of Registers/returns/records:

Loan Application
Sanction/Disbursement
Documents/Charge
Pre & Post Inspection
Insurance
Stock
Irregularity
Limitation/LAD/BC
Renewal/Review
Recalled Assets
RC issued
Securitizations
Recovery
Bank Guarantee
Suit Filed
Compromise/Settlement
Bills purchased
Letter of Credit
Locker Rent
Salary/TDS/15G/H
Fixed Assets if any controlled by Branch.

"Jai Shree Krishna"

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Committed to Solution

Yogesh Suthar