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Audit Program for Statutory Audit of BANK Branches

General Issues:

1) Check the Restructuring as per RBI Norms.

2) If any Consortium Financing then check Treatment and which is the Lead bank.
3) Find out the Revenue losses (Processing Fee, Documentation Charges, CIBIL charges, etc)
4) Stock Statements in Case of CC Limit.
5) Surprised Physical Cash Verification & check Cash Retention limit.
6) Analysis the valuation Report of Secondary Assets in case of Cash Credit (CC)
7) TDS Returns (Timely Filed or Not, though now deal at Central Level)
8) Audited Balance Sheet (F.Y. 2022-23) of CC limit holder where S/Limit > 20 lakhs.
9) Compare the audited BS with Projected BS given by limit holder.
10) Analysis the Different Report of Audit conducted during 2022-23.
11) Check Letter of Credit (LCs) in case of Foreign Exchange Transactions.
12) Verification of Additions in Fixed Assets from Purchase Bills and calculation of
Depreciation as per Closing Manual along with GST impact thereof.
13) Verify MOC effect on Previous Year.
14) Checking of Penal Interest.
15) Obtained Previous Audit Reports (Revenue, Statutory, Inspection, Concurrent)
16) Whether the Branch has been subjected to System Audit during the year.
17) Insurance Policy w.r.t. Cash in transit, etc.
18) Valuation of Security
19) Verify Charge creation on corporate customers. (Certificate of ROC)
20) Check details of Advances, NPAs (Ladder in PNB, CCDP in SBI, Escrom in BOB, Jotting
sheets in Bank of India, Audit Return in Corporation Bank, etc)
21) Check Central Repository of Info. on Large Credits (CRILC) for Advances > 5 crores
CRILC = maintains Borrower’s History w.r.t. moving into / out of Default.
22) Check Central Fraud Registry (CFR) for Advances < 5 crores.
CFR = holds all the data regarding Frauds reported by the Banks.
23) RBI has made mandatorily reporting on Internal Financial Controls over Financial
Reporting (IFCoFR) by SCA from F.Y. 2020-21 but if some controls test done at Branch
level then in consultation with Bank Management, SBA has to give Report on IFCoFR.
24) Verify recovery of Locker rent.
25) ITC under GST shall be eligible @ 50% u/r 38(c) of CGST Rules, 2017.
* CIBIL = Credit Information Bureau (India) Ltd. & CIR = Credit Information Reports
(Records of Individual’s payments w.r.t. Loans & Credit Cards)

26) Red Flagged A/c (RFA) → where a suspicion of fraudulent ac vity is thrown up by the
presence of ≥ 1 Early Warning Signals (EWS). The list of EWS is given in RBI Master
Directions RBI/DBS/2016-17/28 DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 on Frauds –
Classification & Reporting by commercial banks & select FIs.

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AREAS OF BANK AUDIT:

a) Audit of Advances
b) Audit of all other items in Financial Statements (FS)
c) Ensuring various Compliances
d) Reporting aspects
Let us discuss in details –

a.) Audit of Advances:

 Obtain Large Advances A/c’s (Lesser of → O/s 10% of Agg. Adv./ 10 crores) with details
(where Aggregate Advances of the branch means total of Fund based + Non Fund based)
For Branches dealing in LARGE ADVANCES, SBA has to obtain List and details as mentioned at
Page No. 452 of Guidance Note on Audit of Banks (Revised 2024).
 Obtain list of Stresses A/c’s (A/c that generally has overdue > 60 days or likely to slip to
NPA at the Quarter end – SMA (Refer Page No. 8.)
 Obtain list of Restructured A/c’s (to verify restructuring is as per RBI directives)
 Obtain list of Unsecured exposures > 1 crore
 Early/Quick Mortality cases (Any advance slippage to NPA within 12 months of its
introduction)
 Other Routine checks - Checking of Documentation, Security value for Provisioning.

b.) Audit of all other items in Financial Statements (F.S.):

 Suspense A/c
 Inter branch reconciliation
 Any other reconciliation item pending in F.S.
 Provisions other than relating to advances

c.) Ensuring various Compliances:

 Last year Statutory Audit Report & Tax Audit Report
 Compliance to Annual Financial Information Report - AFI (Inspection by RBI – if any)
 Compliance to Internal Audit Report/ Internal Inspection Report.
 Compliance to Concurrent Audit Report for February & March
 Stock Audit Report (A/c having exposure of ≥ 5 crores)
 Application of Interest in CBS (Input of interest rates requires test check though
calculate through Software)
d.) Reporting:
 Statutory Audit Report & Tax Audit (3CA & 3CD).
 Long Form Audit Report (LFAR)
 Various Certificates
 Memorandum of Change (MOC)

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CONTROL WEAKNESSES in the CBS are as :

A.) General Weaknesses:

 DP calculated on the basis of MANUAL Returns is entered in CBS.

 Lack of Independent application systems to assess the Quality of STOCK STATEMENTS &
Periodical Returns.
 Validation controls are weak w.r.t. DP Limits.
 Controls over validation of Borrower’s FST are weak.

B.) Audit Risk w.r.t. Wrong IRAC Classifications:

 Periodic validation of IRAC Classification w.r.t. Doubtful/Loss Assets (Many times it is

observed that the same is not System Driven but updated Manually.

 In case of MULTIPLE Loans sanctioned against a COMMON SECURITY (Possibility of

updation of Common Security at multiple loan A/c that results in OVER Statement of
Security Amt & LOWER Amt of Provisioning.

Illustrative List of :

 SPECIAL PURPOSE / EXCEPTION REPORTS in CBS:

Kindly refer Annexure B at Page No. 366 of Guidance Note on Audit of Banks (Revised
2024)

 Basis of SELECTION OF ADVANCE A/c’s:

Kindly refer Annexure at Page No. 536 of Guidance Note on Audit of Banks (Revised
2024)

 Features of GOLD MONETIZATION Scheme:

Kindly refer Annexure at Page No. 580 of Guidance Note on Audit of Banks (Revised
2024)

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PRUDENTIAL NORMS OF NPA

Income Recognition & Asset Classification (IRAC) Norms
NPA in respect of

Agriculture Advances** O/D & C/C Others

Out of Order for 90 days Overdue for > 90 days

(i.e. 1.1.24 - 31.03.24) i.e. payable ≤ 30.12.23
Short dura.crops Long dura.crops
(Crop season ≤ 1 yr) (Crop sesaon> 1 yr) i) O/s Bal. > Draw.Power (Term Loan*/Bills Purchases
OR / Other Credit Facility)
ii) Credits < Debits (*Refer Note 10)
Overdue for 2 Overdue for 1 OR
Crop Season Crop Season iii) No Credits

**For KCC if Overdue ≥ 2 years (as per practical approach) NPA if No credits from
October 2020 (approx.)

Income Recognition:
1. NPA : on Cash basis
2. Advance against NSC/KVP/LIP/TDs(i.e. FDs) : on Accrual provided Adequate
margin is available (i.e. Security > O/s amount of Loan)
3. Ist time Advance becomes NPA: Interest accrued that had been recognized
earlier should be reversed or make provision.

Account with Temporary Deficiencies

For Advance against STOCK Regular/Ad.hoc sanction

Stock statement > 3 months Old Credit limit not reviewed/

renewed within 180 days
from due date of revision/
A/c treated to be irregular ad hoc sanction.

& if Irregular for 90 days continuously NPA

NPA (irrespective of the fact that Borrower

is paying dues) Note: Such type of sanctions needs
to be reviewed ≤ 3 months
Ex.: If stock statement is not submitted after 30.09.2023
then the A/c is to be treated as NPA.
Some other examples of Temporary Deficiencies:
 Non availability of adequate DP based on latest Stock Statement.
 O/s Balance > the limit
 Non-renewal of the limits on the due date.
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NOTES:

1.) If amount are paid regularly in respect of NPA – upgraded as Standard Asset.
2.) Normal Rule of NPA is Borrower wise & not Facility wise but Exception is loans
as per on Lending arrangement to PACS/FSS.
3.) Asset Classification of Advances under Consortium arrangements is based on
records of recovery of individual member banks.
[Where Consortium arrangements means when a group of Banks lends Loan to
a Single borrower & for this, such group makes a lead bank]
4.) If realizable value of Security < 50% of value assessed → treat as Doubtful.
5.) If realizable value of Security < 10% of O/s balance → treat as Loss Asset.
6.) Advances against TD/NSC/KVP/LIP/IVP not necessarily be treated as NPA.
7.) If Moratorium for payment of Interest is given, NPA only if defaults in payment
(After Moratorium is over) and not from the date of Debit of Interest.
[Where Moratorium means granting of Extended time period]
8.) State Level Bankers Committee (SLBC) determines the crop season as Long
duration or short duration.
9.) Due date for RABI Season is 30th June and for KHARIF Season is 31st March.
10.) If T/L granted for Non-Infrastructure Projects NPA if Implementation is
delayed by 1 year & for Infrastructure Projects NPA if Implementation is
delayed by 2 years.
11.) It is better to take Return from the concerned Branch of IRREGULAR Advances
as on 31st December.
Example for Point No.2 :

→ Normal Rule-NPA is Borrower wise:

ABC Ltd. (Customer of Bank)

Term Loan Cash Credit (CC) O/D

If it becomes NPA then C/C & O/D A/c also becomes NPA.

→ Exception to Normal Rule i.e. NPA is Facility wise :

Where Loan is as per on Lending arrangement to PACS/FSS then if Term Loan
becomes NPA then other facility (i.e. C/C & O/D A/c) cannot be NPA.
Further, if Bank provides loan to PACS/FSS only then –

Agriculture Term Loan C/C O/D

Advance

If this becomes NPA If any of the above 3 becomes NPA then

then No other facility ALL 4 shall also be treated as NPA.
will be affected.
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Asset Classification :
S. No. Asset Meaning
1. Standard Not NPA (regular in paying interest/installments - EMI)
2. Sub Standard if loan(asset) NPA remains ≤ 12 months
3. Doubtful if loan(asset) NPA > 12 months. Further classification is Age wise:
≤ 1 year if NPA upto 24 months
1–3 years if NPA > 24 months but ≤ 48 months.
> 3 years if NPA > 48 months.
4. Loss if certified by Bank/Auditor/RBI as Bad but the Amount not written off
wholly.

Provisioning Requirements: (Refer Page No. 478 of Revised 2024 Guidance Note)
S. No. Asset Minimum Percentage
1. Standard 0.40% (0.25% for Agriculture & SMEs)
2. Sub Standard 25% on Unsecured portion + 15% on Secured
(In case of Infrastructure Loan, rate is 20% instead of 25%)
3. Doubtful 100% for Unsecured portion & for Secured portion –
≤ 1 year 25% of realizable value.
1–3 years 40% of realizable value
> 3 years 100%
4. Loss 100%
 ILLUSTRATION ON NPA (TERM LOAN – T/L):

T/L is to be repaid in 36 EMI. Interest is debited to the a/c at the end of every month (i.e. 30 Nov., 31
Dec., 31 Jan, 28 Feb. and 31 March) and is to be paid in addition to EMI. An EMI for the month from 30
Nov. to 28 Feb. remains unpaid till 31 March i.e. overdue more than 90 days.

The A/c becomes NPA as on 31 March.

 ILLUSTRATION ON NPA (CASH CREDIT - CC):

Case No. I II III IV

Sanctioned Limit 50 lakhs 50 lakhs 50 lakhs 50 lakhs
D.P. 40 lakhs 40 lakhs 40 lakhs 40 lakhs
Min. O/s Bal. (01.12.23 – 31.03.24) 30 lakhs 38 lakhs 42 lakhs 38 lakhs
Intt. debited during 01.12.23 – 31.03.24 4 lakhs 4 lakhs 4 lakhs 4 lakhs
Amt. recd. during 01.12.23 – 31.03.24 1 lakh Nil 5 lakhs 5 lakhs

Case No. Conclusion (Analysis)

I a) O/s Bal. has not remained continuously in excess of D.P./sanctioned limit during
01.12.23 – 31.03.24.
b) There have been Credits to the a/c during 01.12.23 – 31.03.24.
c) The Credits during 01.12.23 – 31.03.24 are less than Debits (Intt. debited).
The a/c is NPA as on 31 March on a/c of c.) above.
II a) O/s Bal. has not remained continuously in excess of D.P./sanctioned limit during
01.12.23 – 31.03.24.
b) There have been No Credits to the a/c during 01.12.23 – 31.03.24.
The a/c is NPA as on 31 March on a/c of b.) above.

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III a) O/s Bal. has remained continuously in excess of D.P./sanctioned limit during
01.12.23 – 31.03.24.
b) There have been Credits to the a/c during 01.12.23 – 31.03.24.
c) The Credits during 01.12.23 – 31.03.24 are more than Debits (Intt. debited).
The a/c is NPA as on 31 March on a/c of a.) above.
IV a) O/s Bal. has not remained continuously in excess of D.P./sanctioned limit during
01.12.23 – 31.03.24.
b) There have been Credits to the a/c during 01.12.23 – 31.03.24.
c) The Credits during 01.12.23 – 31.03.24 are more than Debits (Intt. debited).
The a/c is Standard Asset (Regular) as on 31 March.

Concept of Drawing Power (DP):

DP = [(Closing Stock – S/Creditors) – Margin*] + S/Debtors – Margin*

*Margin = Generally, 40% of Net Debtors + 25% of Stock (See, Sanction letter for exact % of Margin)

Note: If Sanction limit < DP, then customer cannot utilize more than Sanction Limit.
Thus, in that case Sanction Limit = DP. Therefore, DP cannot exceed Sanction Limit.

Calculation of Drawing Power (DP):

It is calculated by considering total value of paid stock (Paid stock = Stock Less Creditors) plus book debts
(not more than 90 days old) and deducting margin from the same. In most of the cases, debtors up to 90
days are considered for calculating DP. But, if the business has longer credit cycle, more than 90 days
debtors might be considered for DP calculation. This is to be done, if it is clearly mentioned as part of
sanction terms.

Example:

Closing Stock 50 lacs Particulars . (in lacs) . (in lacs)

S/Creditors 12 lacs Stock Insured 44
S/Debtors 70 lacs Less: Creditors 12
Debtors ˃ 90 days 10 lacs Paid Stock 32
Stock covered under Insurance 44 lacs Less: Margin 8 24
Margin on Stock 0.25 S/Debtors 70
Margin on Debtors 0.40 Less: Debtors ˃ 90 days 10
Sanctioned Limit for Working Capital 70 lacs Debtors allowed for DP 60
Less: Margin 24 36
 CCDP = Centralised Credit Data Processing. D.P. 60
 KCC = Kisan Credit Card

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Stressed Assets / Accounts

[SMA – Special Mention Accounts]
Lendors shall recognize Stress in Loan A/c immediately on Default by classifying such
assets as SMA as below mentioned:

SMA Sub categories Basis for Classification - Principal / Interest wholly / partly
overdue between
SMA - 0 ≤ 30 Days
SMA - 1 > 30 Days but ≤ 60 Days
SMA - 2 > 60 Days but ≤ 90 Days

SMA in the cases of CC/ Overdraft, it can be sub categorized as:

SMA Sub categories Basis for Classification: O/s Bal. > DP/Sanc. Limit
for a period of
SMA - 1 > 30 Days but ≤ 60 Days
SMA - 2 > 60 Days but ≤ 90 Days

Note1: The above mentioned instructions are applicable on all types of Loans (including Retail loans)
except Agriculture Advances.

Note2: The date of SMA/NPA shall reflect the asset classification status of an account at the day-end of
that calendar date.

Example:
If due date of a loan account is March 31, 2024, and full dues are not received before the bank runs the
day-end process for this date, the date of overdue shall be March 31, 2024. If it continues to remain
overdue, then this account shall get tagged as SMA-1 upon running day-end process on April 30, 2024 i.e.
upon completion of 30 days of being continuously overdue. Accordingly, the date of SMA-1 classification
for that account shall be April 30, 2024.

Similarly, if the account continues to remain overdue, it shall get tagged as SMA-2 upon running day-end
process on May 30, 2024 and if continues to remain overdue further, it shall get classified as NPA upon
running day-end process on June 29, 2024.

Some Concepts/ Terminology w.r.t. AGRICULTURE ADVANCES (Refer Page No. 377 of Guidance Note):
SMF: Small & Marginal Farmers (For F.Y. 2023-24 it is 10% & for Weaker sections, it is 12%)

ANBC: Adjusted Net Bank Credit

KCC: Kisan Credit Card, it is not a type of Loan but is a channel for granting either ST / LT Agriculture
Finance to:
 Farmers (Both Individual & Joint Borrowers who are Owner cultivators)
 Tenant Farmers/Oral Lessees & Share croppers.
 Self Help Group (SHG) or Joint Liability Group (JLG)

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Pledge:
It is used when the lender (pledgee) takes actual possession of assets (i.e. certificates, goods). Such
securities or goods are movable securities. In this case the pledgee retains the possession of the goods
until the pledgor (i.e. borrower) repays the entire debt amount. In case there is default by the borrower,
the pledgee has a right to sell the goods in his possession and adjust its proceeds towards the amount
due (i.e. principal and interest amount). Some examples of pledge are Gold /Jewellery Loans, Advance
against goods/stock, advances against National Saving Certificates etc.

Hypothecation:
It is used for creating charge against the security of movable assets, but here the possession of the
security remains with the borrower itself. Thus, in case of default by the borrower, the lender (i.e. to
whom the goods / security has been hypothecated) will have to first take possession of the security and
then sell the same. The best example is Vehicle loans. In this case Vehicle remains with the borrower but
the same is hypothecated to the bank / financer. In case the borrower defaults, banks take possession of
the vehicle after giving notice and then sell the same and credit the proceeds to the loan account. Other
examples are loans against stock and debtors. [Sometimes, borrowers cheat the banker by partly selling
goods hypothecated to bank and not keeping the desired amount of stock of goods. In such cases, if bank
feels that borrower is trying to cheat, then it can convert hypothecation to pledge i.e. it takes over
possession of the goods and keeps the same under lock and key of the bank].

Mortgage:
It is used for creating charge against immovable property which includes land, buildings or anything that
is attached to the earth or permanently fastened to anything attached to the earth (However, it does not
include growing crops or grass as they can be easily detached from the earth). The best example when
mortage is created is when someone takes a Home Loan. In this case, house is mortgaged in favour of
the bank / financer but remains in possession of the borrower, which he uses for himself or even may
give on rent.

Difference between Pledge, Hypothecation & Mortgage

Pledge Hypothecation Mortgage

Type of Security Movable Movable Immovable
Possession of the Remains with Lender Usually Remains with
Remains with Borrower
security (Pledgee) Borrower
Gold Loan, Advance against
Examples of Loan Vehicle Loans, Advance
NSC, Goods (also given Housing Loans
where used against stock and debtors
under hypothecation)

Equitable Mortgage
It is a type of mortgage in which the lender is secured by taking possession of all the original title
documents of the property that serves as security for the mortgage. It gives the mortgagee the right to
foreclose on the property, sell it, or appoint a receiver in case of non-payment.

English Mortgage
It is a type of mortgage where the ownership of property is transferred to the mortgagor on a condition
that the mortgagee will transfer the ownership on repayment of the loan, the title deeds are transferred
to the mortgagee.

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STANDARDS on AUDITING (SAs) at a Glance:

SAs are applicable to ALL audit engagements and categorized as follows:
S. No. SA Nos. Regarding
01. 200 to 299 General Principles & Responsibilities
02. 300 to 499 Risk Assessment & response to Assessed Risks
03. 500 to 599 Audit Evidence
04. 600 to 699 Using the work of Others
05. 700 to 799 Audit Conclusions & Reporting
06. 800 to 899 Specialized Areas

S. No. SA No. Regarding

01. 200 Overall Objectives
02. 210 Agreeing the Terms of Audit Engagements
03. 220 Quality control for audit of FST
04. 230 Audit Documentation
05. 240 Auditor’s Responsibility w.r.t. Fraud in audit of FST
06. 250 Consideration of Laws & Regulations
07. 260 Communication with those charged with Governance
08. 265 Communicating Deficiencies in Internal Control
09. 299 Joint Audit of FST
10. 300 Planning an Audit of FST
11. 315 Identifying & Assessing the risk of Misstatement
12. 320 Materiality in Planning & Performing
13. 330 Auditor’s responses to Assessed Risks
14. 402 Audit Considerations for a Service Entity
15. 450 Evaluation of Misstatements identified
16. 500 Audit Evidence
17. 501 Audit Evidence – Special Consideration
18. 505 External Confirmations
19. 510 Initial Audit Engagements – Open. Balances
20. 520 Analytical Procedures
21. 530 Audit Sampling
22. 540 Auditing Accounting Estimates incl. FMV
23. 550 Related Parties
24. 560 Subsequent Events
25. 570 Going Concern
26. 580 Written Representations
27. 600 Using the work of an Another Auditor
28. 610 Using the work of an Internal Auditors
29. 620 Using the work of an Auditor’s Expert
30. 700 Forming an Opinion & Reporting on FST
31. 701 Communicating Key matters in Independent AR
32. 705 Modifications to Opinion in Independent AR
33. 706 Emphasis of matter Paragraph
34. 710 Comparative w.r.t. Information, Figures, FST
35. 720 Auditor’s Responsibility w.r.t. Other Information
36. 800 Audit of FST prepared as per Special Purpose
37. 805 Audit of Single FST & Specific Element
38. 810 Engagements to Report on Summary FST

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OTHER ASPECTS/POINTS:

TYPES OF ADVANCES: A.) FUNDED B.) NON- FUNDED

A.) FUNDED ADVANCES:

 Working Capital (Cash Credit-CC)

Generally this facility is granted against the primary security of Stocks and receivables. These are
normally repayable on demand and renewed on yearly basis. CC is provided mainly for Working
Capital Requirements. Borrower is sanctioned a limit and is allowed to draw money on the basis
of DP worked out on the basis of Hypothecated security of Stocks of goods, book debts
representing Genuine Sales.
 Overdraft (OD):
This facility may be either secured or clean (i.e. without security) and does not generally carry a
repayment schedule.

 Demand/Term Loan (T/L):

Loans are repayable in EMI. T/L are for acquisitions of Capital Assets which then become the
security for the loan i.e. end use of funds is fixed. The repayment period is usually > 36 months.
 Export Credit:
Facilities extended to Exporters are in the form of:

 Pre-shipment credit - all advances required to finance the production cycle i.e. from
procurement of Raw materials to bringing them to the port for dispatch. The exporter
usually adjusts the A/c by drawing Bills of exchange on the foreign buyer which are
discounted by bank under LC and the proceeds collected from the foreign bank. The Pre-
shipment credit has to be liquidated out of the export proceeds only and cannot be
adjusted out of INR.
 Post-shipment credit – related to financing of bills raised in the overseas buyer upon
shipment of goods/services.

 Foreign Currency Loans:

Banks are authorized to lend in Foreign Currency (Forex). These loans are given as per
the EXIM policy and guidelines issued by RBI from time to time.
The nature of Foreign Currency Loans may be T/L or Working Capital loans.

B.) NON- FUNDED ADVANCES:

 Letter of Credit (LC):

A promise by the banker to honor the payments to be made by the customer/Buyer
(Importer) to the seller/exporter. At the request of the Buyer (Importer), his bank opens
an LC, which is sent to the seller. Based on such LC, seller dispatch the goods and send
the bills through his banker to the buyer’s banker to make the payment. In case buyer
fails to make the payments (i.e. Devolvement of LC) the buyer’s banker is liable to make
the payment to the seller.
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 Co-Acceptance of Bills

 Bank Guarantees (Financial Guarantee)

TYPES OF SECURITIES:

 Primary – Primary Security is the principal security for the advance.

 Collateral - Collateral Security is additional security provided to bank in case of need.

Bank accepts various types of assets as Collateral Security.

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