BANK BRANCH AUDITS

A C2C INITIATIVE
CONCEPT TO COMPLETION
CA P R SURESH
CA SRIPRIYA KUMAR
 Presentation Path

• Overview -Objective and Scope of Audit

• Understanding Perspective
Auditors • Bank Audit Unique Dynamics
Report & Long Form • Understanding P&L, B/S and certificates
on Audit • Engagement formalities
Financial Report • Understanding CBS environment
statements • Master Circular on IRAC norms
• Case Studies on advances
• MS Excel in bank audits
Standard • Audit Planning and sampling
Tax Audit and • Audit Program & documentation –
reports Special A Check list driven approach
Certificates • Reporting and closure
• Precautions
Bank Branch Audits – An overview – Scope and objective

• The basic objective of Bank Branch audits is to provide an opinion on True and Fair
status of the financial statements as at the Balance Sheet date

• The key reports issued are :

• Branch Auditors Report

• Certified Copies of the Balance Sheet and Profit and Loss Account
• Long Form Audit report
• Tax Audit report under Section 44AB of the Income Tax Act
• Special reports and certificates

• A Unique feature in a bank audit is that unlike in corporates, we are also required to
confirm if the transactions of the branch which have come to our notice have been
within the powers of the bank.
 Bank Branch Audits – The Auditors Perspective
• Audit as you would if you OWNED
Assurance on the branch, then it is very simple !
Internal
Controls • All bank audit documents that are
certified are mostly directed only
at the these four perspectives at
the Core of True and Fair

Revenue and • In a limited sense, LFAR, Ghosh

Expense
Assurance
True RBI / HO / CO
Norms and Jilani are like CARO in a
and and Fair Compliance Corporate audit
Recognition

Assets
Impairment
 Bank Branch Audits – Unique Dynamics

• The Branch Auditors Report is an

Income and objective certification of the True
Assets and and Fair position of the P&L and the
Expenses are
Liabilities are Branch Balance Sheet
completely
properly
and accurately
stated • Additionally, we are required to
accounted
provide assurance on status of
regulatory compliances and internal
controls in the following sign offs
Internal RBI norms and namely the :
Controls over circulars are • LFAR
Banking properly • Ghosh Committee recos
operations complied • Jilani Committee recos
Bank Branch Audits – Unique Dynamics

• Most of us have no familiarity with

the branch and we somehow need to
hit the ground running
Inspection
Reports
• We can however derive strong
comfort from the following
Concurrent documents which would be available
at the branch
Audit reports
• Concurrent Audit reports
• Inspection Reports
RBIA reports • Risk based internal audit
reports where the branches
are objectively rated
 The Landscape

Bank Branch Audits

True and Fair -
Asset quality /
Income
Assurance

Internal LFAR
controls and
fraud risks
Fin.
statements Master
Concurrent Compliance
Audit
Engage and Audits , RB Tests and
Circular on working Reports
Planning audits, Substantive
IRAC norms papers
Specific Certificates
Inspections Tests

Certifications
Bank Branch Audits – The delicate balance

Against us For Us

Enormous Guidanc
e and
Training and Litera
ture

Robust Control
frameworks and CB
S
Availability of Tim Inspection, RBIA an
e d
Concurrent audit
process
Volume and compl
exity GAAP – benefit of
sampling
 Understanding Financial statements

• Balance Sheet of a Bank as finally presented

Schedule –1 Capital
Schedule –2 Reserve and surplus
Schedule –3 Deposits
Schedule –4 Borrowings
Schedule –5 Other Liabilities and provisions
Schedule –6 Cash and bank balance with RBI
Schedule –7 Balance with bank and money at call and short notice
Schedule –8 Investments
Schedule –9 Advances
Schedule –10 Fixed Assets
Schedule –11 Other Assets
Schedule –12 Contingent Liability
 Engagement formalities

1. Receipt of appointment letter

2. Address qualifications and disqualifications of auditors - (Concurrent ,Internal,
Revenue, Stock, System, Credit Risk or other Special Audits conducted in same
previous year)
3. The following category of persons ( Section 226(3) of Companies Act 1956)
• Body Corporate
• An officer or employee of the Bank
• A person who is a partner, or who is in the employment, of an officer or
employee of the Bank
• A person who is indebted to the Bank 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 bank for an
amount exceeding one thousand rupees
• person holding any security of that bank, Security means an instrument
which carries voting rights.
• Member associated with bank in the capacity as concurrent auditor, stock
auditor, revenue auditor etc., except systems auditor.
4. Communication with Previous Auditor by Registered AD (clause 8 of First
Schedule to the Chartered Accountants Act, 1949
5. Expected date of submission of reports
What we certify - an indicative checklist

Make your own

checklist of what
is expected as
the end state
deliverable in
order to ensure
that we
understand what
we are to do and
to ensure that
there are no
omissions
What we certify - an indicative checklist

Make your own

checklist of what
is expected as
the end state
deliverable in
order to ensure
that we
understand what
we are to do and
to ensure that
there are no
omissions
Understanding CBS environment
• Core Banking solutions are integrated farmeworks that automates all aspects of
core banking operations across entities, languages and currencies.

• Master data , transaction data , access restrictions and business process logic is
all in built in the CBS platform minimising and mostly eliminating need for
manual intervention beyond input stages

• Core banking solutions helps banks with:

• Entire range of banking products including savings, checking, overdraft and
deposit accounts
• Entire range of lending products
• Complement of transactional services including remittance, foreign exchange,
cards and trade finance
• Accessibility through multiple channels, including mobile banking and web
• Full integration of front-, middle-, and back-office processes
• Accurate, timely and actionable information about customer relations
• Single view between bank and customer
• “Anytime anywhere” banking
Understanding CBS environment
• CBS does not obviate the need for bank branch audits because

• NPA classifications are system driven, however cannot replace human

intelligence

• Work flow integration for documentation aspects is not complete across all
banks. Hence documentation and security cover lapses may still impair asset
quality

• No scale and complexity of automation can substitute human intuition

• Window dressing and borderline cases – analytical reviews

• CBS is a good audit enabler as it permits simple views of large transactions , by

excel manipulation of text files and helps us to profile and stratify data for sample
selection
Master Circular on IRAC norms

• The classification of assets of banks has to be done on the basis of objective

criteria, which would ensure a uniform and consistent application of the norms.
• The provisioning should be made on the basis of the classification of assets based
on the period for which the asset has remained non-performing and the availability
of security and the realisable value thereof.

• Master Circular dated 1st July 2012 on IRAC Norms.

• Other Circulars : Master Circular on Capital Adequacy norms

• Master Circular on Priority sector lending

• Master Circular on SLR / CRR

• Master Circular on Fraud

• Definition of Infrastructure lending.

 Asset Type
• STANDARD ASSET / PERFORMING ASSET
The account is not non-performing and does not carry more than the normal risk
attached to the business.

• NON-PERFORMING ASSET (NPA)

 The asset ceases to generate income for the bank.
 Higher risk than normal risk attached to business.
 Non performing as per criteria for various types of loans.
Identification of Account as NPA

Loans or Advance  Interest and/or installment remains overdue for a period of

more than 90 days in respect of a term loan.

 As per para 2.1.3, an account is classified as NPA only if

interest due and charged during any quarter is not serviced
fully within 90 days from the end of the quarter.

Exceptions  Loans with moratorium for payment of interest .

 Housing Loan or similar advance to staff.

 Loan against banks own deposits, against surrender value of

LIC policies, government securities such as NSC, NSS etc.,
Identification of Account as NPA ...

Bills Purchased and Bill remains overdue for a Discounted period of more than 90
discounted days.

Agricultural Advances Interest or installment remains overdue for two crop seasons
for short duration crop, one crop season for long duration crop.

Derivative Transaction Overdue receivables representing positive mark to market value

of a derivative contract remaining unpaid for a period of 90 days
from specified due date.

Liquidity facility Remains outstanding for more than 90 days in respect of

Securitisation transaction.
Identification of Account as NPA ...

 Cash Credit / Overdrafts  Account remains

‘out of order’
The account is treated as ‘out of order’ if :
 Outstanding Balance remains continuously in excess of sanctioned
limit/drawing power for 90 days or
 No credit continuously for 90 days as on the date of Balance Sheet or
 Credits in the account are not sufficient to cover interest debited during the
same period.
 Exceptions / Clarifications
• Temporary Deficiencies:

• TOD : Outstanding Balance in account based on the drawing power calculated from stock statements older than
3 months would be deemed as irregular & if such irregular drawing are permitted for a period of 90 days,
account needs to be classified as NPA.

• Non-renewal/ Non-regularisation of regular/ adhoc limit within 180 days from the due date would also qualify
for NPA

• Advances against term deposits, NSCs, IVPs, KVPs and Life Insurance Policies need not be treated as NPAs, till
security cover is sufficient to cover outstanding balance.

• Income to be recognised subject to availability of margin.

• Advance against gold ornaments / Government securities not exempt.

 Exceptions / Clarifications …
• Central Government guaranteed advance to be classified as NPA only if Government
repudiates the guarantee when invoked.

• Classification Qua Borrower - All facilities granted to a borrower shall be treated as

NPA & not only that facility which has become irregular. Exception: Credit facility to
Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) under on
lending arrangement.

• Consortium Advance - Member banks shall classify the accounts according to their own
• record of recovery. Bank needs to arrange to get their share of recovery or obtain an
express consent from the Lead Bank
 Exceptions / Clarifications …
Straightaway Classification

 Where realisable value of security is less than 50% of the value assessed, account
to be straightaway classified as Doubtful Asset.

 Where realisable value of security is less than 10% of outstanding balance, account
to be straightaway classified as Loss Asset.

Valuation of Securities

 In respect of NPAs with the balance of Rs. 5.00 crores & above, bank needs to
formulate policy for annual stock audit by external agencies & in respect of
immovable properties, valuation to be carried out once in 3 years by approved
valuer.
Exceptions / Clarifications …
Solitary Credit Entry

 Care should be taken that a solitary or few credits in the account made at/near the
balance sheet date extinguishing the overdue interest/principal is not the only
criteria for classifying the asset as standard.

Regularisation of Account

 Account need not be classified as NPA if account has been regularised by the date of
Balance sheet by payment of overdue through genuine sources & not by sanction of
additional facility or transfer of funds between accounts.
Income Recognition
 For NPA accounts income should be recognised on realisation basis.
 When an account becomes non-performing, unrealised interest of the previous periods
should be reversed or provided.
 Interest income on additional finance in NPA account should be recognised on cash
basis.
 In project loan, funding of interest in respect of NPA if recognised as income, should be
fully provided.
 If interest due is converted into equity or any other instrument, income recognised
should be fully provided.
Income Recognition…
Adjustment of Recoveries - Priority

Unrealised Expenses

Unrealised Interest

Amount of Principal Outstanding

Clarification vide Master Circular - in the absence of clear agreement between the Bank
and the Borrower, an appropriate policy to be followed in uniform and consistent
manner.
 Classification Norms

 Standard Asset

The account is not non-performing.

 Sub-Standard Asset

A sub standard Asset is one which has remained NPA for a period of less than or equal
to 12 months.

 Loss Assets

These are accounts, identified by the bank or internal or external auditors or by RBI
Inspectors as wholly irrecoverable but the amount for which has not been written off.
 Classification Norms…
 Doubtful Asset - Three Categories

Category Period

Doubtful - I up to One Year

Doubtful – II One to Three Years

Doubtful - III More than Three Years

 Provisioning Norms
Standard Asset

 Agricultural and SMEs Sectors 0.25%

 Housing Loan with teaser rates of interest 2.00%
 Restructured Advances 2.00%
 Commercial Real Estate (CRE) Section 1.00%
 Others 0.40%
 Restructured Advances upgraded as Standard advance 2.00%

Sub-standard Asset
 Secured exposure - 15% of total outstanding
 Unsecured Expsoure – Infrastructure – 20% of total outstanding
 Unsecured – other than Infrastructure - 25% of total outstanding
unsecured
 Provisioning Norms…
Doubtful Assets:
Period Provision (Secured + Unsecured)
Up to 1 year 25% + 100%
1to 3 years 40% + 100%
More than 3 years 100% + 100%

Loss Asset:
100% should be provided for
 Provisioning Norms
Provision Under Special Circumstances
 Advance under rehabilitation programme approved by BIFR / Institutions, Provision
should be continued to be made on existing facilities.

 Additional facilities no provision for a period of one year.

 In case of advances guaranteed by CGTSI/ECGC, Provision should be made only for

balance in excess of the amount guaranteed by these corporations.
Guidelines on Restructuring of Advances
 Restructuring divided in following four categories;

i. Industrial Units.
ii. Industrial Units under CDR Mechanism
iii. SMEs
iv. All other advances.

Infrastructure lending

Special Regulatory Treatment ( Para 14 of Master Circular)

Guidelines on Restructuring of Advances…

 Eligibility

 Any account classified as standard, sub standard or doubtful.

 Restructuring cannot be done retrospectively and usual asset classification norms
would continue to apply.
 Restructuring should be subject to customer agreeing to terms and conditions.
 Financial viability should be established.
 Borrowers indulging in frauds and malfeasance or in eligible.
 BIFR cases eligible for restructuring subject to approval from BIFR.
Guidelines on Restructuring of Advances…

 Asset Classification Norms

 Restructuring of accounts could take place in following stages:

 Before commencement of commercial production
 After commencement of commercial production / operation but before the
asset has been classified as ‘Sub Standard’.
 After the commencement of commercial production / operation but after the
asset has been classified as ‘Sub Standard’ or doubtful.
Guidelines on Restructuring of Advances…

 Asset Classification Norms (Cont’d)

 Standard Asset would get reclassified as sub standard and account which is
already NPA would continue to have the same classification.
 Additional finance would be treated as standard upto a period of one year.
 All restructured accounts, classified as NPA upon restructuring would be eligible
for upgradation after observation of satisfactory performance for the period of
one year.
Guidelines on Restructuring of Advances…

 Provisioning Norms
 Total provision required would be normal provision plus provision in lieu of
diminution in fair value of advances.
 Diminution in fair value would be required to be recomputed on each balance
sheet date.
 Banks have option of notionally computing the diminution in fair value and
providing at 5% in case of all restructured accounts where the total dues to bank
is less than one crore.
Guidelines on Restructuring of Advances…

 Special Regulatory Treatment for asset classification.

 Not available to following categories of advances:
 Consumer and personnel advances
 Advances is classified as capital market exposure
 Advances classified as commercial real estate exposure.
I. Incentive for quick implementation of package
The asset classification status may be restored if the approved package is
implemented :
 Within in 120 days from the date of approval under CDR
 Within 90 days from the date of receipt of application by Bank in
other cases.
Guidelines on Restructuring of Advances…
II. Asset classification benefits
a. Standard advance will not be reclassified as sub standard upon restructuring if
following conditions are satisfied.
i. Dues of the bank are fully secured by tangible security (except SSI borrower
with outstanding upto Rs.25 lacs & infrastructure projects)
ii. Unit becomes viable in 10 years, if it is engaged in infrastructure activities and
in 7 years in case of other units.
Guidelines on Restructuring of Advances…
iii. Repayment period including moratorium does not exceed 15 and 10 years for
infrastructure and other projects respectively ( 10 years ceiling won’t apply to
restructured hosing loan accounts)
iv. Promoters sacrifice and additional funds brought by them should be a
minimum of 15% of bank’s sacrifice (Ref RBI Circular dated 7th October 2010)
v. Personal guarantee is offered by promoters.
vi. The restructuring is not ‘repeated restructuring’
.
During the specified period the asset classification of sub standard / doubtful accounts
will not deteriorate, if satisfactory performance is demonstrated during the
specified period.
 Need for MS Excel in bank audits
• Enables a good look and feel of the transactions that
Data Volume are audited

And to top it all a Very complex regulatory

Sample Selection • Identification of samples for audit

• CBS outputs are there as text files that can be

It is possible converted to excel

framework
• Seamless integration of work done and working
Integration papers for the audit

Analytical • Easy to recheck interest calculations, NPA

Procedures movements etc
 USING MS EXCEL

Index all transactions

Select Fixed Width Classify by year using
Obtain Text File by nature of advance
option year() function
/ deposit type

Select data for

Save to excel work Ensure that numbers audit , document
Eliminate blank
book are not truncated in standard Work
rows
template

Check the balances

Block area of data to
Check for texts in of the file with the Complete the
be converted
number fields Balance Comparison template
( Select)
report

Report exceptions in
Use function Data - Finish the Action by Sort by Loan type by
LFAR / provision for
text to columns clicking finish amount
NPA
Practical Issues in audit of advances
• Drawing Power
• Classification Date of NPA
• Realisable Security Value
• Inter Company transactions
• Ever greening/ Restructured Advances
• Temporary Deficiencies - renewal
• Temporary Deficiencies – Stock Statements
• Term Loans
• EMI Concepts
• Circular Credits
• SARFAESI notice
• Financial Statement Analysis - threat of recovery
• Sale of Assets – Threat of recovery
Practical Issues in audit of advances
• Diversion of Funds.
• Devolved Letters of Credit / Bank Guarantees invoked
• Borrower Wise Classification
• Knowledge of business
• Physical Stock Verification
• Government Guaranteed Advances
• Agricultural Advances
• Continuous Overdrawing – Discretionary power
• Staff Advances against Shares
• Window dressing
• Premises Loans
• PMRY Loans
Case Studies on Advances – Drawing Power

A & Co, a Partnership firm enjoys a Cash Credit Limit of Sanction letter, terms
Rs.1,00,000/-, the account is operated within the sanctioned limit. of sanction, margin
The borrowers Statements Contains the following details stock stipulated to be
Rs.1,50,000/- Debtors Rs.50,000/- and creditors Rs.60,000/- verified for
determining DP
C & Associates, has reported a stock of Rs.10,00,000/- in their Access to other
monthly stock statements, the Cash Credit limit enjoyed by them is information
Rs.5,00,000/-. The inspection report of the Concurrent auditors available at branch
states that the stock figures reported includes dead and slow in determining DP
moving stocks to the tune of Rs.1,75,000/-, creditors is Rs.300000

Darshini, a small hotel, enjoys a Cash Credit Limit of Rs.100000/- Knowledge of business
against hypothecation of stocks in rural area, their annual turnover
is Rs.1080000/-. Operation in the account is satisfactory and within
the limit.
Case Studies on Advances – Classification Date of NPA

Elango Engineering was reported as an NPA Since 30.9.2012. Certificate versus

Statement of True
and fair.
Francis Furniture's was reported as NPA since 3.4.2012 Audit perspective
Case Studies on Advances – Realisable Security Value

Gopi Aqua Ltd., an NPA account had 100 acres of coastal land on Realisable Value of
which aqua culture was carried on. The land was pledged as Security - Land
security against its loan outstanding of Rs.2 crores. The unit was
infested with a disease and hence the account turned sick on
30.9.2009.
During the boom period for aqua culture the price of these lands Validity of valuation
was Rs.3 lacs an acre, the valuation report dated 31.3.2010 report
showed the value of land to be Rs.0.5 lac per acre.
Harsha P Ltd., engaged in leather garments, had an outstanding Common sense
of Rs.50 laksh the account was classified as a NPA by the branch approach to audit
auditor since August 2012, the unit is not functioning since July
2012, As per stock statement of January 2013 it has a stock of
Rs.100 lacs consisting of raw hides / leather of Rs.20 lakhs, Semi
finished goods of 70 lakhs and Finished goods of Rs.10 lacs
(manufactured to a particular specification)
Case Studies on Advances – Realisable Security Value
(Cont…)

Imaging links, Who had availed of a Term Loan for Purchase of Application of
Machinery worth Rs.10 lacs during 2010 has defaulted to repay generally accepted
the loan, the guestimated machinery value as per the branch principles
management as at 29th January 2013 is Rs.10lacs.
Jessi & co, owes a bank Rs. 25 lakhs, the owner has given his Impossibility of
property in his remote native village, the single largest land of performance
1000 acres values at Rs.25 lakhs.
Case Studies on Advances – Inter Company
Transaction
Khan Bros, is a group concern, enjoying loan facilities along with Caution in cases of
ghan bros in the same branch, each with Rs.5 lakhs limit. There circular credits
are periodic inter transfer of funds between these two firms. But
there is no business transactions between the same.

Best Shoes is a shoe exporter enjoying Rs.5 crores Packing Credit Exclusion of credit
Limit, Best Leathers is also in the business of exporting of shoe summations of
uppers, shoe intermediaries etc., enjoying Rs.2 crores Packing circular and non
Credit Limit. genuine credits
Best Shoes did job works for best leathers to the tune of Rs. 50 Accomodation and
lakhs during financial year ending 2012. The Turnover of Best diversion
Shoes for the year ended 31.3.2012 was Rs.25 crores and that of
Best Leathers was Rs.10 Crores, During the year Best Shoes
received an advance of Rs. 1.50crores from Best leathers
Both the companies Fund based Limits are fully utilized Audit processes
throughout the year and periodically beyond the limits, however enable
not for 90 days continuously. determination
Case Studies on Advances – Ever Greening /
Restructured Accounts

Ever Green P Ltd., Engaged in horticulture, obtained a Term Loan Provisions of

of Rs.100 lacs on 1.6.2011, repayable in 50 Monthly Installments Restructuring of
of Rs.2,00,000/- with a moratorium of 15 months. Repayment to Advances,
commence from 1.09.2012. Specifications,
special regulatory
However due to delay in commissioning of the project by 18 treatment, para
months, the loan was rescheduled with the following terms: 11.1 and Para 14
Repayment to commence from 1.12.2012 of RBI Master
  Circular on IRAC
Though the Company has been functioning, the capacity norms.
utilization was less than 50% and the cash flow position of Ever
green P Ltd., was not comfortable and hence sought the
rescheduling of the Term Loan Repayments from 1.12.2012 vide
their letter dated 30.08.2012, which has been sanctioned by the
bank on 3.2.2013.
Case Studies on Advances – Temporary Deficiency - Renewal of Cash
Credit, Overdraft and Demand Loans.

Lawrance & co, enjoying a Cash Credit limit of Rs.5 lakhs Temporary
sanctioned on 1st October 2011 has been a very good account deficiencies – non
operating within the sanctioned limit, however due to the branch renewal
not having adequate officers his C/C limits has not been renewed
since 1.10.2012.
Mohan, a Machinery Manufacture obtained a Temporary Exceptions to asset
Overdraft for 6 months against LIC Policies of Rs.25000/- on 1st classification
July 2012.

Nath, a trader was sanctioned an adhoc limit of Rs.1 lac on Provisions on Adhoc
15.4.2012 for 6 months and the same was further extended for 4
months on 18.10.2012.

Jewel Loans Obtained by Jugraj on 30th December 2010 for a Security not a cover
period of 2 years is still not redeemed for asset
classification
Case Studies on Advances – Temporary Deficiency - Renewal of Cash
Credit, Overdraft and Demand Loans.

Varadaraj a spare part dealer does not submit his stock 90 days after the
statements for 3 months. delay / non
submission.

The branch auditor during the course of verification of the stock Consideration of facts
statement of X finds that out of the total stocks reported 25 and info in audit.
percent is reported as non moving and 15 damaged, the
drawings power is less that the limit sanctioned. The borrower
has been operating within the Sanctioned Limit.
Case Studies on Advances – Term Loans

O' Coffee, has defaulted in repaying their Instalments and are Determination of
classified as a Sub Standard Asset, they have not paid 3 monthly date of NPA
instalments as on 31.3.2013, a scrutiny of the ledger reveals that obligation on
the instalments not paid pertains to the period 1.4.2011 to auditors
30.6.2011.
Prince Pens have paid their Term Loan dues of 6 months on Window dressing –
3.2.2013 by issuing a cheque of Rs.60000/- from their Cash Credit analytical
Account. Upon transfer the balance Loan outstanding in the Cash procedure enable
Credit Account was Rs.135000/- as against a sanctioned limit of proper
Rs.100000/-. The manager has reported the excess drawing to classification –
the controlling authority. human intelligence
Case Studies on Advances – EMI Concepts

Prince was sanctioned a Housing Loan of Rs.72 lakhs on Sample selection,

10.4.2010 repayable in 180 instalments the EMI fixed was parabolic effect
Rs.45000/-. The Borrower has been regularly repaying the EMI of and compliance
Rs.45000/-. The balance outstanding as at 31st March 2013 is with terms of
Rs.76.5 lakhs. sanction
Case Studies on Advances – Circular Credits

Rajesh was sanctioned a Demand Loan of Rs.20000/-, on the Careful schemes,

same day he deposited the money into his firm's account, which unintelligible to
was used for paying a creditor S, which S, in turn paid towards his systems deduction
Term Loan account with the same branch.

Thomas & Unni are related entities both enjoying Cash Credit Circular credits
Limits of Rs.50000/- each. During the year the Credit summation
of Thomas was Rs.200000/- and unni was Rs.250000/-, the Cross
transfer of funds from Thomas to Unni was Rs.150000/- and from
unni to Thomas Was Rs.225000/-.
Case Studies on Advances – SARAFEASI Cases

Zaheer Ltd, Could not repay their Term Loan instalment of Rs.5 Events occuring after
lacs for the months of January, February & March 2013 due on balance sheet date
10th of every month, During April the borrower was served with
notice u/s 13 for possession of the securities.
Case Studies on Advances – Financial Statement
Sheet Analysis – Threat of recovery

AAA Hosiery, a proprietary firm, was sanctioned a Cash Credit Tendencies of

Limit of Rs.10 lakhs during 2011, the operation in the account is sickness warrant
satisfactory, all the interest is paid up and credit summations has closer scrutiny and
been good. The Net Profit for the year 31.3.2012 was reporting in LFAR
Rs.1,75,000/- against a turnover of Rs.1.75 crores. The Balance
sheet of the firm reflects that debtors beyond 2 years is Rs.15
lakhs. Creditors remain unpaid for more than 6 months.
Vikram Ltd whose networth has eroded by 50% was declared sick Threat of recovery
by the management in the Audited Financial Statements for the
y.e. 31.03.2012, the Term Loan repayments are irregular as on
31st March 2013, two intalments are pending. The unit has
stopped functioning since February 2013.
Case Studies on Advances – Sale of Asset – Threat of
recovery

Zen who had obtained a Term Loan for buying a car had an Loss of primary
outstanding of Rs.150000/- in his account, he has not paid 2 security – threat of
months installment, however it came to the notice of the branch recovery – loss
that he has sold the car on 28th March 2013, there are no other asset
securities/ assets with Zen.
 
Case Studies on Advances – Diversion of funds

Rohan bought a Hyundai Accent Car, his balance sheet reflected Absence of drawing
capital including Current Account of Rs.5 lakhs, fixed assets power – diversion
including the car Rs.15 lakhs. He enjoys Rs.10 lakhs Cash Credit of funds
Limit and there are no other loans. 
Case Studies on Advances – Letters of Credit
Devolved / Bank Guarantees Invoked

On 30th March 2013 Vikrams Letters of Credit and Bank Accounting treatment
Guarantees were devolved and invoked by the respective and grouping
persons, the branch paid the same on 1st April 2013, by keeping
them under other assets.
Case Studies on Advances – Borrower Wise Asset
Classification

Raghuram has three accounts with the branch, a Term Loan Borrower wise
which was a standard Asset, A Cash Credit account which was classification
also a standard asset however a Bill Purchased for Rs.10,000/- on
18th December 2012 had not been realized as on 31st March
2013 by oversight.
Restructured Accounts – fresh limits. Exceptions to
borrower wise
classification
Case Studies on Advances – Knowledge of business

The Total Turnover of Yash for the current year is Rs.6,00,000/- Knowledge of
which is 10% higher than their previous year turnover, the stocks business reflect
held by them are Rs.3,00,000/- as against a Cash Credit Limit of reality
Rs.2,00,000/-. Yash is engaged in Bakery business.

Francis, a retailer of FMCG goods very frequently draws cash Business

other than for salaries and other expenses. considerations
Case Studies on Advances – Physical Stock
Verification

Rao, the branch statutory Auditor, during his visit to one of the Inclusion of stock
borrowers premises observed the following: verification of
single largest client
a. Stock books are not properly maintained. of the branch to
b. The stocks reflected in the stock statement and physical form part of the
verification showed significant variance audit program
c. There was slow moving / seconds stocks
d. There was damaged goods.
Case Studies on Advances – Government Guaranteed
Advances

KBG a power project of a state government was outstanding to Accouting versus

the tune of Rs.10. lakhs, the original amount sanctioned was asset classification
Rs.75 crores. The last date for repayment was 31.3.2012. Ledger
Account shows that the amount outstanding is disputed interest
on account of excess charged by the branch over and above the
refinance rate.

Loan Sanctioned to a unit with Central Government Guarantee Distinction between

has become overdue, the guarantee is invoked. asset classification
and interest
Will the answer be different if the guarantor is State Government. recognition of
government
guaranteed
advances
Case Studies on Advances – Agricultural Advances

Muniyappa had taken a crop loan on 25.3.2012 of Rs.25000/- on Repayment of one

25.3.2013 he took a mortgage loan of Rs. 25000/- which was loan with another
directly paid to repay his crop loan. not permitted

Ramappa had also done the same thing as above towards his Drought hit – SLBC -
sugarcane crop which was affected by drought during the year norms
2012 -13.
Case Studies on Advances – Continuous Overdrawing
– Discretionary power

Mahesh Associates ledger account in the branch reflected that Discretionary power
they had continuously been using Rs.110000/-as against the not a substitute to
sanctioned limit of Rs.100000/- for four months, the branch sanctioned limit
manager has stated that he has used his discretionary power (up
to 20% of sanctioned limit) and hence the account is a
performing asset.
Case Studies on Advances – Staff Advances against
Shares

Prabhu a staff of a bank apart from availing other loans has also Staff loan does it fall
availed loans against shares, the market value of such shares has outside the scope
reduced by 50% for the last 1year due to huge volatility in the for asset
stock market. classification
 
Case Studies on Advances – Window Dressing

There is a solitary credit of Rs.15000/-on 31st March into the Window dressing
account of Venkat in his Cash Credit account of Rs.112000/-, by
discounting of a cheque.
 
Case Studies on Advances – Premises Loan

A Term Loan was given to Raja the landlord by the branch, the Terms of sanction –
terms of repayment was the entire rent to be adjusted towards non compliance –
the Term Loan, The EMI was Rs.8,000/- per month, rent was asset downgrade
Rs.7,000/- per month. The land lord has not been paying the
additional Rs.1000 from his pocket since the repayment
commenced during January 2010, the accountwas not classified
as a non performing asset since the branch has the possession
and security of the premises.
The Landlord has also been asking for an increase in the rent of Moc for increased
the extent of Rs.10,000/- being the market rent, however as per rent or increase in
the agreement rent is to be enhanced one in two years of 10% Contingent liability
the matter is pending settlement. provision as the
case may be.
Case Studies on Advances – PMRY Loans

As per PMRY Loan scheme a moratorium of a maximum of 18 Scope beyond

months can be offered, however the branch manager has not authority.
given any moratorium to Ramesh an unemployed youth to set up
his Xerox shop, Ramesh has not paid last 6 months installment.
The branch manager states that the account will remain a
standard asset considering the moratorium that is permissible.
 AUDIT PLANNING
Phase Actions

One • Call the Branch manager to confirm the size of the branch and the unique
advances of the branch, restructuring, audit level ( covered under concurrent
etc)

• Document the key data on total advances, total deposits ( value and volume )
to form an idea on the time to be taken and the resources to be deployed

• The audit can be commenced and completed even for a date prior to March
31, 2013 and the final movements can be analysed after the Balance Sheet
date

• Understand the CBS reports that are being pushed on a daily basis ( 200+ )
including Specially Marked Accounts, Irregular loans, NPA reports

• Obtain opening balance files for NPA as at April 1, 2012 and reconcile to
previous Balance Sheet
 AUDIT SAMPLING
Phase Actions

Two • The Balance Sheet totals ( general ledger ) are reflected in the loan
balances , CC OD and deposits file

• Take samples of high value transactions on

• transactions initiated during the year
• transactions initiated during previous years

• The focus will be on documentation for current year disbursements and

asset backing for previous year cases as documentation would be more or
less verified by the previous auditors

• Large advances need to covered completely anyway

• Pareto is a good, tested, safe and acceptable sampling protocol ( 20 % of

transactions will account for 80% by value ) . The certification is under
GAAP
 AUDIT PROCEDURES
Phase Actions

Three • Audit procedures are the same for bank audits like in the case of other
audits and include the following
Inspection
Observation
Inquiry & confirmation
Computation
Analytical Procedures

• The auditor should apply commensureaudit procedures to obtain

sufficient and appropriate Audit evidence to confirm his opinion on the
component / branch being audited
 AUDIT DOCUMENTATION

Phase Actions

Four • Audit Documentation should cover

• What was checked – particular account / group

• Why it was checked – rationale for sample selection
• When it was checked – date of review / visit
• How it was checked – base documents / visit / system review /
calculation verification etc
• Who checked – audit staff who performed the work

• A checklist driven approach will ensure speed and confidence in the

performance of work especially when assistants are engaged

• Illustrative checklists are attached

 DEPOSIT – CHECKLIST ILLUSTRATION

The key risks associated with audit of Deposits are KYC, AML compliance,
deposit related documentation, interest rate application , TDS compliance
and Lien on deposits
 SB / CURRENT ACCOUNTS – CHECKLIST

The key risks associated with audit of Deposits are KYC, AML compliance,
related documentation, authorization to operate, identity of entity, interest
rate application. The checklist should cover all entity types to be filled up
after audit as Yes, No or Not applicable
 CHECKLIST – LOAN AGST DEPOSITS

Key risks : Loan without deposit,

duplication of loan against same
deposit and escaped security due
to lien not marked
 CHECKLIST – LOAN AGST FINANCIAL ASSETS

Key risks : Loan without asset,

duplication of loans for same asset
, decline in value of security, not
lien to bank
 CHECKLIST – VEHICLE LOAN

Key risks : Loan without original

RC, non availability of security
 CHECKLIST – HOUSING LOAN

Key risks : Loan without housing

documents, title issues, unapproved
constructions, non registration of mortage
in favour of the bank,

Delayed constructions ( land and building )

and possession not complete within 24
months cannot be “housing loans”
CHECKLIST – EDUCATION LOAN
CHECKLIST – CC / OD
CHECKLIST – TERM LOAN
 REPORTING

Bank Branch audit reports will be covered by SA700 and stands revised for the present year and
audit reports in respect of audits of financial statements for periods beginning on or after 1 st
April 2012 are to be issued in this revised format.  T

he text of the revised auditor’s report format appears in the Appendix to the Revised SA 700 and
can be downloaded from website of the Institute of Chartered Accountants of India at URL:
http://220.227.161.86/17874sa700annx1.pdf .

For the ready reference of members carrying out audit of banks/ bank branches, the Auditing
and Assurance Standards Board of ICAI has developed relevant audit report formats in line
with the requirements of the revised SA 700 which are once again attached for your perusal.

Further, members undertaking bank branch audits are also requested that, pursuant to a recent
communication by the Reserve Bank of India to ICAI in this regard, the total number and amount
of debits/ credits arising pursuant to the Memorandum of Changes submitted by them, be given
under the heading “Other Matters Paragraph” on the face of the bank branch audit report/s
issued by them. 

Necessary guidance in this regard is being provided in the 2013 Guidance Note on Audit of Banks
which would be issued soon.
PRECAUTIONS
Questions ?