Key Points to remember during Bank Audit.

!! Key Points to remember during Bank Audit !!
Hello Friends as this is the time of Bank Audit for year ended 31/03/2013, i am releasing my new post which may help to conduct your bank audit more efficiently. After going through a 955 Pages of "GUIDANCE NOTES ON BANK AUDIT" issued by the ICAI, i came to following 69 points which should be kept in mind during the BANK AUDIT.Some of this points contains the some page no.'s also for this kindly refer that Page no. in the guidance notes available at: 

http://taxguru.in/chartered-accountant/icai-releases-guidance-note-audit-banks-fy-201213.html .

Note: Kindly note that in below post you will highlighted field in yellow colour that represent the important words of that key point.

KEY POINTS BEGINS HERE:

1.       Page 281-282

2.       The general ledger contains control accounts of all personal ledgers, the profit and loss account and different asset and liability accounts. There are certain additional accounts also (known as contra accounts) which are kept with a view to keeping control over transactions which have no direct effect on the assets and liabilities of the bank, it should be ZERO at end of year.

3.       Opening of Letters of Credit

The procedure for opening of letters of credit in either case is generally on the following lines:

(a) The applicant submits an application in the prescribed format to the

branch wherein he mentions the name of the beneficiary, documents

required from the beneficiary, and the expiry date of the validity of the

letter of credit (LC) for the purpose of shipment as well as negotiation of

documents by a bank.

(b) In case the bank agrees and issues the LC, it makes contra entries in its

books. Necessary vouchers are prepared by the LC section. Normally, a

composite voucher is used for these entries.

(c) The transaction is recorded in the LC Issued Register. In the case of

customers who have been sanctioned regular LC limits (like a cash credit

limit), to ensure that the outstanding LCs do not exceed the sanctioned

limit, all issues of LCs are debited to the account (all payments or

cancellations of LC are credited).

(d) LC opening charges are recovered from the customer, either by debit to

his account or in cash.

(e) Banks generally maintain margin for each LC. It may be retained in any

form – in current account, term deposit, lien on drawing power, etc.

(f) LC is prepared by the bank on pre-printed formats of the bank. Each LC

has a distinctive number. The original (which is a negotiable copy) and

one or two non-negotiable copies of the LC are sent to a bank (known as

‘advising bank’) for transmitting it to the beneficiary. Copies of the LC are

given to the applicant also and at least one copy is retained on the branch

records.

(g) The number of officials who have to sign the LC may differ from bank to

bank.

4. bank guarantees are issued on non-judicial stamp papers whereas LCs are issued in bank’s pre-printed formats

     5.       PAGE 110(211)

OTHER TASKS TO BE CARRIED OUT

6. Cash verification of ATM’s also.
7. Checking Rates of Interest in all accounts.
8. Page 272-273
9. Charge on Security to be checked.
10. Documents to be checked during Sanction- Page 305-313
11. cross-check the figures declared in the stock statements with the books maintained by the borrower
12. The auditor should count the balance of cash on hand. As far as possible, the auditor should visit the branch at the close of business on the last working day of the year or before the commencement of business on the next day for carrying out the physical verification of cash
13. Page 342-
14. While Verifying FDR, auditor has to check following Things:
    @ Wether System is deducting TDS on date of Credit or not? If late deducted than interest is paid on that TDS to Govt. or not?
    @ In case of Deposit having Interest more than Rs.10000 than TDS must be deducted however in case of Indvidual/HUF exemption from deductibility of TDS is provided for Indviduals/HUF's who provides the Form 15G(for normal person)/ 15H(for senior citizen).

NPA Norms

14. RBI has directed the banks to adopt the ‘90 days’ overdue’ norm for identification of NPAs from the year ending March 31, 2004
15. Banks have been charging interest at monthly rests, from April 1, 2002. However, the banks were advised that the date of classification of an advance as NPA would not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.
16. An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'

The following criteria are to be applied for determining the status of various types of credit facilities:

(a) Term Loans: A term loan is treated as a non-performing asset (NPA) if interest and/or instalment of principal remain overdue for a period of more than 90 days.

(b) Cash Credits and Overdrafts: A cash credit or overdraft account is treated as NPA if it remains out of order as indicated above.

(c) Bills Purchased and Discounted: Bills purchased and discounted are treated as NPA if they remain overdue and unpaid for a period of more than 90 days.

(d) Securitisation: The asset is to be treated as NPA if the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

(e) Agricultural Advances: A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons and, a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season.

17. Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

18. The outstanding in the account based on drawing power calculated from stock statements older than three months is deemed as irregular. A working capital borrowing account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory

19. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA
    
    
20. The credit facilities backed by guarantees of central government though overdue may be treated as NPA only when the government repudiates its guarantee when invoked. This exemption from classification of Central Government guaranteed advances as NPA is not for the purpose of recognition of income.
21. In case of State Government guaranteed loans, this exemption will not be available and such account will be NPA if interest / principal / other dues remain overdue for more than 90 days.

NPA NORMS FOR Advances Under Consortium

22. Consortium advances should be based on the record of recovery of the respective individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account should be treated as not serviced in the books of the other member banks and therefore, an NPA.
23. The banks participating in the consortium, therefore, need to arrange to get their share of recovery transferred from the lead bank or to get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.
24. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates.
    
    

IRAC NORMS ON NPA

25. When a credit facility is classified as non-performing for the first time, interest accrued and credited to the income account in the corresponding previous year which has not been realized should be reversed or provided for
    
    
26. On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a Memorandum account in their books. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account
    
    
27. In the case of advances guaranteed by ECGC, provision should be made only for the balance in excess of the amount of such guarantee. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision should be made.
    
    Write-off of NPAs
28. The banks should either make full provision as per the guidelines or writeoff the advances or claim the tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. Banks may write-off advances at Head Office level, even though the advances are still outstanding in the branch books. At the branch level, provision requirement as per classification norms shall be made and in respect of loss assets 100% provision shall be made. There can be partial write off relating to the borrower's account in head office.

Interest Suspense Account

29. many banks adopted the practice of recording interest on non-performing advances to a separate account which is usually styled as ‘Interest Suspense Account’. The balance in this account represents interest on non-performing advances debited to the respective borrowers’ accounts in accordance with the terms of the agreement but not recognised as income. For purposes of balance sheet presentation, the gross advances portfolio is arrived at after deducting the credit balance in Interest Suspense Account from the total advances as per the ledgers. When the advances are identified as NPAs and banks  hooses not to further debit the borrower in the manner aforesaid, the interest on contractual basis is to be computed and recorded as unapplied interest in the memoranda records. The amounts held in Interest Suspense Account should not be reckoned as part of provisions for the purpose of computing the provision for NPAs. Amounts lying in the Interest Suspense Account should be deducted from the advances concerned and provisions should be made on the balances remaining after such deduction.
30. Page 401-403s

THINGS TO BE KEPT IN MIND WHILE CHECKING ADVANCES:-

31. The extent of sample checking would also depend on the auditor’s assessment of efficacy of internal controls. What constitutes a ‘large advance’ would need to be determined in the context of volume of operations of the branch. As a general rule, however, an advance may be considered to be a large advance if the year-end balance is in excess of Rs.2 crore or 5% of the aggregate year-end advances of the branch, whichever is less.
    
    
32. The auditor can obtain sufficient appropriate audit evidence about advances by study and evaluation of internal controls relating to advances, and by:
    examining the validity of the recorded amounts;
    examining loan documentation;
    reviewing the operation of the accounts;
    examining the existence, enforceability and valuation of the security;
    checking compliance with RBI norms including appropriate classification and provisioning; and
    carrying out appropriate analytical procedures.
    Amounts due to the bank are appropriately supported by Loan documents and other documents as applicable to the nature of advances.
     There are no unrecorded advances
     The stated basis of valuation of advances is appropriate and properly applied
     The advances are disclosed, classified and described in accordance with recognised accounting policies and practices and relevant statutory and regulatory requirements
    Appropriate provisions towards advances have been made as per the RBI
    
    
33. Advances which are sanctioned during the year or which are adversely commented by RBI inspection team, concurrent auditors, bank’s internal inspection, etc. should generally be included in the auditor’s review.
    
    
34. While checking review & Renewel compare figures of projected sales and actual sales at the time of sanction and review.
35. RC & Insurance in case of vehicle loans/
36. All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation, etc.) should be executed by the parties before advances are made.
    
    All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation, etc.) should be executed by the parties before advances are made.
    
    The compliance with the terms of sanction and end use of funds should be ensured.
    
    Sufficient margin as specified in the sanction letter should be kept against securities
    
    
37. for computing the Drawing Power, the value of declared stocks is to be considered only net of the stipulated margin; and that the declared stocks shall not cover the borrower’s liability outstanding by way of unpaid for stocks (whether in the form of sundry creditors for purchases or covered by LCs/ guarantees/ co-acceptances). The Bank should also insist on such information from borrowers.
38. The auditor should ascertain the status of balancing of subsidiary ledgers relating to advances. The total of balances in the subsidiary ledgers should agree with the control accounts in the General Ledger. The auditor should also tally the total of the statement of advances with the balances as per general ledger/ subsidiary ledgers
39. where the borrower is a company, loan documents would include certificate of incorporation, memorandum and articles of association, certificate of commencement of business (in the case of public limited companies), resolution of board of directors, and resolution of shareholders [in cases covered by section 293(1)(d) of the Companies Act, 1956], etc. Where the borrower is a partnership firm, loan documents would include copy of partnership deed. Where the security is in the form of mortgage, apart from mortgage deed (in the case of English Mortgage) or letter of intent to create mortgage (in the case of Equitable Mortgage), the evidence of registration of the charge with the Registrar of Companies would also form part of loan documentation if the borrower is a company. auditor should evaluate the adequacy of the loan documents.
40. Page-406-408
41. (b) Latest financial statements of borrowers.
42. (c) Reports on inspection of security.
43. (d) Auditors’ reports in the case of borrowers enjoying aggregate credit limits of Rs. 10 lakh or above for working capital from the banking system.
44. The auditor should review the operation of the advance accounts. In doing so, an intelligent scrutiny of the operation of the account should be carried out to see that the limit is not generally exceeded; that the account is not becoming stagnant; that the customer is not drawing against deposits which are not free from lien; that the account is not window-dressed by running down overdrafts at the year end and again drawing further advances in the new year, etc.
    
    
45. The auditor should satisfy himself that interest is being charged on all performing accounts regularly. He should compare the rate of interest with the agreement and the sanction and with the credit rating reports where the rate of interest is linked to credit rating. In case the interest rate is to be revised based on the changes in PLR / BPLR/Base Rate of the bank, it needs to be ensured that the rate of interest to be charged form the borrower is suitably revised as and when there are changes in PLR/BPLR/Base Rate. Calculation of interest should be test-checked
    
    
46. The penal interest in case of delayed submission of stock statements, non-creation of security overdrawn accounts etc., needs to be charged as per sanctioned terms and norms of the bank. The compliance of the same should be checked in detail by the auditors.
    
    
47. The auditor should also check nature of goods hypothecated/pledged. If the goods are of perishable nature, it will not have market value
    
    
48. In case the borrower is a company, the auditor should examine the certificate of registration of charge on the goods hypothecated with the Registrar of Companies. It may be mentioned that in case of pledge of goods, registration of charge is not necessary
    
    
49. The auditor should inspect such certificates and examine whether they have been properly discharged and whether the lien of the bank is noted on the face of the certificates as well as in the relevant register of the bank and also in CBS
50. Page 412-415
51. If any variation is made in the terms of the contract between the principal debtor and the creditor without the surety’s consent, it discharges the surety as to transactions subsequent to the variation. The guarantee forms used by banks normally seek to ensure the continuing obligation of the guarantor in spite of these contingencies If such clause is absent then Auditor has to see that acknowledge to debt from the borrower as well as guarantor is obtained by the Bank.
    
    
52. Bills purchased and discounted by the bank are generally drawn on outstation parties and are, therefore, sent by the bank to its branches or agents for collection immediately after their receipt. They are generally not in the possession of the bank on the closing date. The auditor therefore has to rely upon the Register of Bills Purchased and Discounted and the party-wise Register of Bills maintained by the bank. The auditor should examine these registers and satisfy himself that:
    (a) all the outstanding bills have been taken in the balance sheet;
    (b) all the details, including the nature of the bills and documents, are mentioned in the register and that the bills have been correctly classified;
    (c) the bills purchased or discounted from different parties are in accordance with the agreements with them and the total of outstanding bills of each party is not in excess of the sanctioned limit; and
    (d) the bills are not overdue. If there are any overdue bills, the auditors shouldascertain the reasons for the delay and the action taken by the bank.
    
    
53. Sometimes, a customer is sanctioned a cash credit limit at one branch but is authorised to utilise such overall limit at a number of other branches also, for each of which a sub-limit is fixed. In such a case, the determination of status of the account as NPA or otherwise should be determined at the limit-sanctioning branch with reference to the overall sanctioned limit/drawing power, and not by each of the other branches where a sub-limit has been fixed.
    
    
54. Adverse features in a borrower’s account are required to be reported in LFAR
    1. Name of the Borrower.
    2. Constitution.
    3. Sanctioned limits as on Balance Sheet date.

4. Any change in limit during the year.

5. Terms of sanction.

6. Details of fulfilment of terms of sanction.

7. Details of Loan documents and observations on the same.

8. Balance outstanding as at balance sheet date.

9. Classification as per bank.

10. Whether classification requires a change.

11. If so the reasons for the differing view and the impact of the same.

12. Whether necessary changes made in Memorandum of Changes.

13. Observations on the conduct of the account.

14. Deficiencies noted in the account.

15. Availability of security.
16. Timely submission of stock statement and other statements

55. The stock audit should be carried out by the bank for all accounts having funded exposure of more than Rs.5 crores.
    
    

In order to strengthen the information sharing system among banks in respect of the borrowers enjoying credit facilities from multiple banks, the banks are required to obtain regular certification by a professional, preferably a Company Secretary, Chartered Accountants or Cost Accountants regarding compliance of various statutory prescriptions that are in vogue, as per specimen given in Annexure III (Part I and II), to the RBI Circular No. DBOD.No. BP.BC.110/08.12.001/2008-09 dated February 10, 2009. (DUE DELIGIENCE REPORT in CONSORTIIUM)
PART I- Due diligence report (Page429)
PARTII- Certification Details as on (Page 431-433)

REPORTING REQUIREMENTS

56.   Announcement issued by the Institute of Chartered Accountants of India, the bank branch auditors need to mention the total number of debits/ credits and amounts in the Memorandum of Changes submitted by them, under the Other Matters Paragraph in the their audit report.

57.   It may be noted that the information in respect of Memorandum of Changes under the "Other Matters Paragraph" would include both such MoCs which have been accepted as well as those not accepted by the bank branch management, though this distinction need not per se be brought out in the audit report

58.   ‘NIL’ MOC Certificate should be issued even if there is no MOC

59. The LFAR should include non compliance of the RBI Circular, indicating the cases in which the reports have not been obtained for review by the auditors
    
    
60. In case the title deeds are held at the head office or some other location, the branch auditor should obtain a written representation to this effect from the branch management and should bring this fact to the notice of the Statutory Central Auditor through a suitable mention in his report. This fact should also be brought in the Long Form Audit Report (LFAR).
61. Page 605-606 (TYPES OF LETTER OF CREDIT)
    
    

AUDIT OF P& L ITEMS

62. In carrying out an audit of income, the auditor is primarily concerned with obtaining reasonable assurance that the recorded income arose from transactions, which took place during the relevant period and pertain to the bank, that there is no unrecorded income, and that income is recorded in proper amounts and is allocated to the proper period.
    
    
63. Dividends received should be checked with reference to counterfoils of dividend warrants
    
    
64. Discount on bills outstanding on the date of the balance sheet has been properly apportioned
    
    
65. interest on overdue/ matured term deposits should be estimated and provided for.
    
    
66. The auditor should check the calculation of salaries and allowances, etc. on a test check basis with reference to relevant agreements/ awards. He may also assess the reasonableness of expenditure on salaries, allowances, etc. by working out their ratio to total operating expenses and comparing it with the corresponding figures for previous years.
    
    
67. Provisions in respect of NPA and NPI should be verified with the regulatory requirements to ensure full provisioning.
68. SHOW NPA PROVISIONING NORMS IN EXCEL
69. any overdue & Matured R.D.'s?