Special Audit Considerations

Special audit considerations arise in audit of banks because of:

o Particular nature of risks associated with the transactions undertaken
o scale of banking operations and resultant significant exposures which can arise within short period
of time
o extensive dependence on IT to process transactions
o effect of the statutory and regulatory requirements
o continuing development of new products & services & banking practices which may not be matched
by concurrent development of a/c principles & auditing practices.
o Evolution of technology and providing services through Net Banking & Mobiles has exposed banks to
huge operational & financial risk.

Legal Framework
Principal enactments governing functioning of bank are:
o Companies Act,2013
o Banking Regulation Act, 1955
o Prevention of Money Laundering Act, 2002
o RBI Act 1934
o SBI Act 1955
o Information Technology Act, 2000 etc..

Contents of Appointment Letter

Most banks appoint 4 or more CA firms as Statutory Central Auditors.
Appointment letter contains following:
o Period of appointment.
o Particulars of other central auditors.
o Particulars of previous auditors.
o Procedural requirements to be complied with in accepting the assignment
o Statement of division of work and review and reporting responsibilities amongst joint auditors in
case of nationalised banks
o Scope of assignment which included spl certificates or reports to be given by CSAs
o Basis of computation of audit fee and scale of travel and related allowances and conveyance charges
and other expense reimbursement entitlements, if any.

Authority appointing the auditor:

o Banking Co. → Appointed at the AGM of the shareholders
o Nationalised bank → appointed by concerned bank acting through its BOD
o In either case, approval of RBI is required before appointment is made
o SBI → appointed by C&AG in consultation with CG
 o Regional rural banks are to be appointed by concerned bank with approval of CG

Conduct of Audit
1. Initial Considerations
o Acceptance & Continuance: Assessing engagement risk prior to acceptance.
o Declaration of Indebtness: Written confirmation that credit facilities obtained by auditors & their
family members have not been declared wilful defaulters by any bank/financial indebtness.
o Internal Assignments in Banks by Statutory Auditors: Not take stat audit assignment if associated
with internal audit assignment
o Terms of Audit Engagements: As per SA 210, agree terms of engg before beginning fieldwork
o Communication with Previous Auditor: As per Clause 8 of Part I of First Schedule of CA Act 1949
o Planning: Documenting NTE of audit procedures & flexible to make changes
o Establish Engagement Team: Qualified & experienced professionals to manage engg. risk

2. Understanding
o Understanding the Bank and Its Environment including Internal Control
o Understand Bank’s Accounting Process
o Understanding Risk Management Process
✓ Oversight by TCWG: They should approve risk mgt policies consistent with bank’s objectives,
strategies, regulatory requirement etc
✓ Identification, Measurement and Monitoring of Risks: Risks should be identified, measured &
monitored against pre-approved limits & criteria
✓ Control Activities: Segregation of duties, verification & approval of transactions, physical security
✓ Monitoring Activities: Conducted by independent risk mgt unit
✓ Reliable information systems: That provide adequate compliance, financial & operational info

3. Risk Assessment
o Identifying and assessing ROMM: As per SA 315, Identifying & assessing ROMM at F.S. level &
assertion level for ABCD
o Assess the risk of fraud including Money Laundering: As per SA 240, assess risk due to fraud
o Assess specific risk: ROMM at F level relating to banking industry & use of IT
o Risk of outsourcing activities: Used for reducing costs as well as making use of services of an expert
not available internally but risk associated with it.

4. Execution: Engagement team discussion, Response to assessed risks, Establishing Audit strategy,
Determining audit materiality, Consider Going concern

5. Reporting (discussed later in this chap)

 Special considerations in IT Environment
Considering the importance of IT systems in PPFS, it is imperative that bank should share detailed
information with auditors like: -
o Overall IT policy, structure and environment of Bank’s IT system
o Data processing and data interface under various systems
o Data integrity and data security
o Controls over key aspects, use of various a/c heads, expense booking, overdue identification etc.
o Controls on recording of various e-banking and internet banking products and channels
o MIS reports being generated and their periodicity
o Major exception reports and process of generation including embedded logic

Note:
o Overall review of IT environment and computerized a/c system has to be taken at HO level.
o Branch auditors don’t have access to IT policy & processes implemented by bank.
o Based upon guidance and info received from SCAs, branch auditors need to ensure that data review
and analysis through CBS is carried out & TOCs & substantive checking of sample transactions is
carried out at branch level & results are shared with SCAs.

Key control aspects that auditor needs to address while undertaking audit in a Computerised bank.
o Ensure authorised , accurate and complete data available for processing
o Ensure in case of power failure → system restarts without affecting completion of entries/records
o Verify access controls of staff working match with responsibilities as per manual.
o Verify segregation of duties ensured while granting system access to users
o Ensure system prevents unauthorised amendments to programme

Data → power failure → access controls → SOD → Prevent unauth. amend + Changes authenticated

Risk-based Internal audit is conducted based upon risk assessment of business & control risks of
branches.
Risk assessment process includes: -
o Identification of inherent business risks in various activities undertaken by branches (Business risk)
o Assessment of effectiveness of control systems for monitoring inherent risks of business activities
of branch (Control risk)
o Making an assessment of level and direction of various risk areas and assess level and direction of
overall business risk and control risk
o Drawing up of risk matrix taking into account factors viz. Risk of branch
 Internal Controls
General:
o Staff of bank shifted from one position to another frequently & without prior notice.
o Work of one person should always be checked by another person (Internal check)
o Arithmetical accuracy of books should be proved independently every day.
o All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, etc.) should be
kept in possession of an officer & another officer should verify issuance & stock of such stationery.
o Mail should be opened by responsible officer. Signatures on all letters & advices received from other
branches of bank or its correspondence should be checked by officer with signature book.
o Signature & telegraphic code book kept with resp. officers & access allowed only to authorised officers.
o Bank should take insurance policies against loss due to all risks such as fire, natural calamities, theft &
employees’ infidelity.
o Surprise inspection of HO & Branches by Internal Audit Dept

Shift/Check/Accuracy → Forms →Mail → Sign/Code → Surprise → Insurance Policies

Cash:
o Cash should be kept in joint custody of 2 responsible officers.
o Test-checked daily & counted in full occasionally by a responsible officer other than one handling cash.
o Cashier should have no access to customer’s ledger accounts and Day Book.
o Payments made only after vouchers (e.g. cheques, demand drafts etc) have been passed for payment
o High value cash receipts & payments should be verified by a higher officer/ branch manager

Joint custody → check → SOD → Payments

Clearings
• Cheque Truncation System (CTS) implemented by RBI, electronic image of cheque is transmitted to
paying branch through clearing house, along with relevant info. like data on MICR band, date of
presentation, presenting bank, etc. This eliminates associated cost of movement of physical cheques,
reduces time reqd for their collection.
• As per RBI guidelines, branch is required to either call customer or email him for any cheque recd for
amt of 5L & above in respect of inward clearings. Auditor may verify compliance on test check basis.
• Auditor is to check whether sign of drawer of cheque is being verified by staff or not as else there will
be liability of paying bank under all circumstances.
• Unpaid cheques received in outward clearing should be either sent to customers at their recorded
address or customers be informed to collect the same from bank branch.

CTS → Call/E-mail 5L or above → Sign verify → Unpaid

 Bill for collection
o Docs recd & entered in register by responsible officer. At time of dispatch make sure docs sent
along with Bills.
o Accounts credited only after bill collected or advice recd from bank branch or agent to which they
were sent for collection
o Ensure → Bill sent by 1 branch to another not taken in bills for collection twice in amalgamated B.S.
of Bank. So, receiving branch needs to reverse entries at end of year for closing purpose.

Recd docs register → A/c cr → twice?

Bills Purchased
o All documents of title should be assigned to bank
o Sufficient margin → cover decline in value of security
o Unable to collect bill on due date → immediate steps to recover amt.
o Irregular a/c report to H.O.
o Bill purchased o/s at year end → discount is apportioned between 2 years

Docs of title → margin → unable to collect → irregular → discount in 2 yrs

Loans & Advances

o Advance only after verifying Creditworthiness & obtaining sanction from proper authority
o Necessary documents (agreements, letter of hypothecation etc) executed before advance made
o Sufficent margin → cover against decline in security value & comply with RBI Directives
o Securities recd and return by responsible officer only + kept in joint custody
o Securities registered in name of bank only
o A/c kept within drawing power & sanctioned limit as per norms. Add. temporary limit maybe
sanctioned → max 20% of existing limit & 90 days max tenure.
o Operation in each advance a/c should be reviewed atleast once every year.
o Irregular a/c report to Management/H.O. regularly

Creditworthiness → Docs → Security [Margin/recd/regd] → A/c within DP/SL → review →irregular

Demand Drafts
o Check signature with signature book
o DD sold/ issued confirmed by advice to paying branch
o Paying branch not receive confirmation or credit in account → steps to ascertain reasons
 Credit Card Operations
o There should be effective screening of applications with reasonably good credit assessments.
o There should be strict control over storage and issue of cards.
o There should be prompt reporting by merchants of all settlements accepted through credit cards.
o Reimbursement to merchants made only after verification of validity of merchant’s acceptance of cards.
o All reimbursement (gross of commission) should be immediately charged to customer’s account.
o There should be a system to ensure that statements are sent regularly and promptly to customer.
o There should be a system to monitor and follow-up customers’ payments.

Screening → Storage/Issue → Reporting → Reimbursement → Charge → Statement → Follow up

SLR/CRR Requirements
Cash Reserve Ratio: min. fraction of deposits in cash/ deposits with RBI. Check master circular of RBI
to check compliance.
Statutory Liquidity Ratio: Required to maintain gold/cash/govt approved securities/other liquid assets.
Report submitted to top mgt & RBI.

Correctness of compilation of DTL Maintenance of liquid Assets

o Verify compliance on 12 odd dates, not being Fridays

o Audit procedure:
✓ Understand circular/direction of RBI
✓ Request branch auditor → weekly trial balance on Friday for consolidation at H.O. Also on dates
selected by auditor. Specific request examine cash balance on selected dates.
✓ Test basis examine consolidation Demand Time Liability position with reference to branch returns
✓ Exclusions from liabilities:
o Paid up capital, reserve, any cr. balance in P&L a/c of bank, amt of loan taken from RBI and amt of
refinance taken from EXIM bank, NHB, SIDBI and NABARD
o Part amounts of recoveries from borrowers in respect of debts considered bad and doubtful.
o Amounts recd in Indian currency against import bills and held in sundry deposits pending receipts
of final rates.
o Un-adjusted deposits/balances lying in link branches for agency business like dividend, interest
warrants etc. to the extent of payment by other branches but not adjusted by link branched
o Margins held & kept in sundry deposits for funded facilities
✓ Inclusions in liabilities:
o Net credit balance in branch adjustment accounts including relating to foreign branches.
o Borrowings from abroad by banks in India considered as ‘liability to other’ taken at gross level
can’t be netted off (Adverse balance in Nostro Mirror A/C)
o interest accrued but not accounted for in books
 Verification of Assets
Balance with RBI
o Verify ledger balance w.r.t confirmation certificates and reconciliations.
o Review reconciliation statements with spl. attention to:
✓ Cash transactions remaining unresponded
✓ Revenue items requiring adjustment/write off &
✓ Other cr. and debit entries originated in RBI Statement remaining unresponded for > 15 days.

Money at call/short notice

➢ Examine-proper system of authorization + compliance with HO instructions
➢ Verify call loans wrt to certificates of borrowers & call loan receipts held by bank
➢ Examine-balance in registers tally with general ledger
➢ Examine subsequent repayments from borrowing banks to verify balance at year end. Call loans made
can’t net off with loans recd.
➢ Verify-interest accrued & accounted year end

Authorised → Certificates/receipts → Register → Subs. Receipts → Intt.

Spl purpose certificates relating to investments

o Examine-bank maintain separate accounts for investments
✓ Own a/c
✓ PMS clients
✓ Other constituents (including brokers)
o RBI Guidelines-separate audit of investments under PMS-external auditor

Note: There should be half yearly reviews of Investment portfolios (30th Sept & 31st Mar)

Advances
Audit Approach: Auditor is concerned with obtaining evidence about following:-
o Amounts included in B.S. in respect of advances are o/s at date of B.S.
o Advances represent amounts due to bank
o Amounts due to the bank are appropriately supported by loan documents
o There are no unrecorded advances
o Stated basis of valuation of advances is appropriate and properly applied and recoverability of
advances is recognized in their valuation.
o Appropriate provisions towards advances are made as per RBI norms, a/c standards and GAAP
 Substantive Audit Procedures
o Verify correctness of master data of loan a/cs updated in CBS. Check parameters like instalments,
EMI, rate of intt, tenure of loans etc.
o Verify that each customer of bank is tagged under single customer id in respect of all it’s a/cs including
those in which cr. facilities are granted.
o Examine a/cs identified to be problem a/cs but which have not yet slipped into NPA category. This can
be done by obtaining list of SMA1 and SMA2 borrowers from bank and same can be considered for
selection of problematic accounts.
o Examine those a/cs → adversely commented upon by concurrent auditors/bank’s internal
inspection/RBI inspection team.
o Examine list of restructured a/cs to ensure that restructure is as per RBI guidelines. Remember
restructured a/c portfolio requires additional provisioning.
o Examine quick/early mortality accounts. Any advance slippage to NPA within 12 months of its sanction
is called as quick/early mortality case.
o Examine all large advances & others on sample basis
o Completeness & accuracy of interest charged

Recoverability of advances
➢ Review periodic statements submitted by borrower indicating extent of compliance with T&Cs
➢ Latest financial statements of borrower
➢ Reports on inspection of security
➢ Review audit report → borrowers having cr. facilities beyond cut-off limit fixed by BOD of bank.

Provisioning of NPA
Classification & Provision
o Verify whether bank has a system of ongoing identification and classification of advances through CBS
without manual intervention & its accuracy in crystallising date of NPA.
o Examine classification appropriate → particularly those advances with threat to recovery
o Examine secured & unsecured portion segregated correctly & calculation of provision
o Review & compare date of NPA of loan a/cs mentioned in CY statements with PY. Reasons for any change
should be ascertained.

Accounts Regularised near B.S. Date

o A/c regularised before B.S. date by payment from genuine sources need not be classified as NPA
o If subsequently, branch lends funds to borrower → auditor assess genuineness of source of payment
o Indicates Inherent weakness in a/c based on available data → deemed NPA
o Classification as per position as on date & review of all std accounts on B.S. date
o Recognition on basis of Past Due/Overdue Concept & not based on balance sheet date.
 Drawing power calculation (DP)
o Ensure calculation as per extant guidelines i.e. credit policy of bank formulated by Board & agreed
by stat auditors reflected in respective sanction letters
o Spl consideration should be given to proper reporting of sundry creditors and stocks covered under
LCs/guarantees for purposes of calculating drawing power.
o Calculated carefully for working capital advances to Cos. in construction business. Valuation of WIP
proper & consistent manner. Mobilisation advance reduced to calculate DP.
o Stock audit for a/c funded exposure > stipulated limits. Review report of stock auditor with spl.
focus to comments on valuation of security & calculation of DP

Extant guidelines >> Proper reporting [Crs & stocks] >> Construction >> Stock audit

Accounts with temporary deficiencies

• Banks shouldn’t classify as NPA merely due to existence of some temporary deficiencies such as non-
availability of DP based on latest available stock statement, balance o/s exceeding limit temporarily
& non-renewal of limits on due date.
• Stock statements for determining DP shouldn’t be older than 3 months.
• o/s in account based on DP calculated from stock statements older than 3 months are considered as
irregular. Ensure adherence to these guidelines.

Limits not reviewed

Where ad hoc/ regular limit not reviewed within 180 days from due date, consider as NPA. Also
ensure review not done on repetitive basis.

Asset classification → Borrower wise & not facility wise

It is to be ensured that all facilities granted by a bank to borrower will have to be treated as NPA
and not particular facility which has become irregular.

Govt Guaranteed Advances

o If it becomes NPA, income recognition on realisation basis
Asset classification
o CG guarantee: treat NPA only if CG repudiates guarantee when invoked
o SG guarantee: no such exception, i.e. NPA if overdue > 90 days
o If CG guarantee not invoked for long → report in LFAR

Agricultural Advance
As per norms, Agri. advances are of 2 types:
a. Long Duration Crops (crop season > 1 year)
b. Short Duration Crops (crop season <= 1 year)
NPA Provisions:
LDC → Principal or intt overdue for 1 crop season
SDC → Principal or intt overdue for 2 crop seasons
o NPA norms applied as per crop season determined by State Level Bankers’ Committee in each State.
o Also ensure that these norms are made applicable to all direct agricultural advances listed in Master
Circular on lending to priority sector.
o In respect of agricultural loans, other than those specified in circular, ensure that identification of
NPAs has been done on the same basis as non-agricultural advances.

Restructured Advance
o Restructuring is an act in which lender for economic or legal reasons relating to borrower’s financial
difficulty, grants concessions to borrower.
o It may involve modification of terms of advances including alteration of amt of instalments/alteration
of repayment period/rate of intt/sanction of additional cr. facilities etc. to help in curing of default.
o Auditor should verify compliance with requirements of circular issued in this regard.
o Banks may restructure a/cs classified under std, substandard or doubtful categories. Banks can’t
restructure a/cs with retrospective effect.
o Once bank receives an application in respect of an a/c for restructuring, it implies that account is
intrinsically weak. During the time a/c remains pending for restructuring, auditors need to take a view
whether provision needs to be made in respect of such a/cs, pending approval for restructuring.
o On restructuring, a/c will be downgraded from Std to sub-std. NPAs remain in same category.

Upgradation of Account
o Examine all accounts upgraded from NPA to std. category during year, to ensure that upgrading of
each account is strictly as per RBI guidelines.
o There can be a possibility of incorrect upgradation of a/c on basis of partial recoveries made in the
a/c & overdue portion might not have wiped out completely.
o There can also be a possibility of recoveries being made in account after cut-off date and a/c being
upgraded as on date of B.S.

Sale/ Purchase of NPAs

General points:
o Policy of BOD relating to procedures, delegation of power and valuation
o Only such NPA can be sold that remained in books for atleast 2 years
o Sale/purchase without recourse only i.e. entire cr. risk related to NPA trfd to purchasing bank
o Subsequent to sale bank doesn’t assume ‘any risk’
o NPA sold at cash basis only. Can’t be sold at contingent price.
o Bank don’t purchase NPA already sold

Spl. Points for Sale of NPA

o Removed from books after sale
o Shortfall on sale charge to p&l i.e. Sale below Net Book Value
o Sale > Net book value, excess retained to meet loss on sale of other NPA (don’t recognize profits)

Spl points for purchase of NPA

o Provision as per classification status in books of purchaser
o Any recovery first adjust against acquisition cost & excess as profit
o Capital adequacy → 100% risk weight to NPAs purchased from other banks

Stationery & Stamps

o Ensure it includes only exceptional items of expenditure on stationery like bulk purchase of security
paper to be written off over period of time. Such items valued at cost. Normal expenditure on
stationery is charged to p&l a/c. This item may not appear at branch level as considerable part of
stationery is supplied to branches by head office.
o Check Internal Controls. Specific reporting in LFAR.
o Physical verification at year end. Shortage to be inquired into.
o Check cost charged to p&l

Non-Banking assets acquired in satisfaction of claims

• Ensure it includes those immovable properties/tangible assets which bank has acquired in
satisfaction of debts due or its other claims and these are being held with intention of being
disposed off.
• Verify with ref. to documentary evidence, eg. order of court, or award of arbitration
• Check ownership legally vested with bank. If dispute, check if recording as asset appropriate. If
dispute arise later on, check if provision reqd as per AS 29.
• Ensure compliance with Sec 9 of Banking Regulation Act
[Prohibits banking Co. from holding any immovable property, howsoever acquired, for period
exceeding 7 years from date of acquisition, except required for own use]
• Ensure that as at date of acquisition, assets should be recorded at lower of net book value of advance
or NRV of asset acquired.

Verification of capital:
• Capital Risk Adequacy Ratio = (Eligible total capital funds/Risk weighted assets & off balance
sheet items ) * 100
• RBI requires banks to maintain minimum 9% CRAR.
 Stress Testing: These are designed to understand whether bank has enough capital to survive plausible
adverse economic conditions and to maintain enough buffer to stay afloat under extreme scenarios.

BASEL III framework :Basel III norms relate to Capital Adequacy requirement compliance which
Bank has to achieve as contained in BASEL III accord.
Basel capital adequacy norms are meant for protection of depositors and shareholders by prescriptive
rules for measuring capital adequacy, thereby evolving methods of determining regulatory capital and
ensuring efficient use of capital.
Aim:
a) improving the banking sector's ability to absorb shocks arising from financial and economic stress
b) improving risk management and governance practices
c) strengthening banks' transparency and disclosure standards.

Verification of Liabilities (selected items)

Current and saving accounts
o Verify on a sample basis current and saving a/c opened during year for adherence to KYC norms. Verify
saving a/c opened in name of individuals, HUF, trusts, educational institutes etc. Saving a/c aren’t
opened for business or professional concern. Business transactions are carried in current a/c which can
be opened for all kind of customers like companies, individuals, partnership firms etc.
o Verify balances in individual accounts on a sample basis.
o Check calculations of intt. on test check basis. No intt. paid generally on current a/c by banks.
o Examine whether procedure for obtaining balance confirmation periodically has been followed
consistently. Examine, on sampling basis, confirmations received.
o Ensure that debit balances in current a/c not netted out on liabilities side but included under ‘advances’.
o Inoperative a/cs (both current and saving) are high-risk area of frauds in banks. As per RBI guidelines,
a savings/current a/c treated as inoperative/dormant if no transactions for over a period of 2 years.
Verify on a sample basis some of inoperative a/c revived/closed during year. Ensure that inoperative
a/c revived only with proper authority. Cases where there is significant reduction in balances of such
a/c compared to previous year, examine authorisation for withdrawals.

Opened >> balances >> interest >> confirmation >> dr. balance >> Inoperative a/c

Case Study: During audit you notice that large no. of cash credit a/c in branch are only partially
utilized during substantial part of year. However, in month of March, accounts are fully utilized.
On further scrutiny, it is observed that these a/c holders made FDs from these utilized amounts at
end of year. These deposits have been liquidated in first week of April of next financial year.
Comment upon how this situation would be dealt by you as a statutory branch auditor?
 Many of cash credit a/c are only partially utilized during substantial part of year. However, in month
of March, accounts are fully utilized. Further, its observed that these a/c holders have made FDs
from these utilized amounts at end of year. These deposits have been liquidated in first week of
April of next financial year.

This is eg. of window dressing. Branch is resorting to window dressing by artificially boosting its
advances and deposits. To inflate its advances as well as deposits artificially.

Relevant regulatory guidelines also prohibit such type of practices & these might involve penal action
in terms of Banking Regulation Act, 1949.

Same needs to be suitably reported in audit report and commented in LFAR also.
In appropriate cases, making a suitable qualification in the main audit report has also to be
considered.

Borrowings
• Obtain & verify confirmation certificates & other docs
• SA 505, “External Confirmation” –audit evidence to respond to significant risks
• Examine- clear distinction b/w rediscount and refinance, as rediscount doesn’t appear in this head
• Examine borrowing at call & short notice-authorised

Bills payable
• Evaluate the existence, effectiveness and continuity of internal controls over bills payable.
Controls should usually include the following-
➢ Drafts, mail transfers,etc. made out in std printed forms.
➢ Unused forms of drafts, traveller’s cheques, etc. kept under custody of responsible officer.
➢ Bank should have a reliable private code known only to responsible officers of branches, coding
and decoding of telegrams should be done only by such officers.
➢ The signatures on demand draft, checked by officer with specimen signature book.
➢ All TTs and DDs issued by a branch should be immediately confirmed by advices to the branches
concerned. On payment, paying branch should send a debit advice to originating branch
• Examine sample of outstanding items comprised in bills payable accounts with relevant registers.
Reasons for old outstanding debits in respect of drafts or other similar instruments paid without
advice should be ascertained.
• Correspondence with other branches after year-end should be examined specially for large value
items outstanding on balance sheet date.
 Contingent Liabilities
Management Representation:
Auditor should obtain representation from mgt that:-
i) all off-balance sheet transactions have been accounted in books of a/cs as and when such transaction
has taken place
ii) all off balance sheet transactions have been entered into after following due procedure laid down
iii) all off balance sheet transactions are supported by the underlying documents
iv) all year end contingent liabilities have been disclosed
v) disclosed contingent liabilities don’t include any crystallised liabilities which are of nature of loss/
expense and which require creation of a provision/adjustment in F.S.
vi) estimated amounts of financial effect of contingent liabilities are based on best estimates in terms
of AS 29, including consideration of possibility of any reimbursement

Contingent Liabilities (Presentation)

o Claims against the bank not acknowledged as debts
o Liability for partly paid investments
o Liability on account of outstanding forward exchange contracts.
o Guarantees given on behalf of constituents (within India; outside India)
o Acceptances, endorsements and other obligations
o Other items for which the bank is contingently liable

Audit procedures:
Contingent Liability (CL)
• Adequte Internal Controls ensure transactions executed by persons authorised
• Verify in case of LCs for import of goods, payments made in terms of LC
• Test completeness of recorded obligations
• Review reasonableness of year end CL in light of previous experience & current year activities
• Review whether comfort letters issued included in CL

Claims against bank not acknowledged as debt

• Examine relevant evidence, e.g. correspondence with lawyers, workers, officers etc.
• Review minutes of meetings of BOD/committees of BOD, contracts, agreements & arrangements
• Ascertain from mgt the status of claims o/s at year end
• Review of subsequent events: completeness & valuation

Guarantees given on behalf of constituents

• Check Internal Controls over issue of guarantees
• Controls over unused guarantee forms e.g. under custody of responsible officers
• Examine guarantee register- procedure of marking off expired guarantees
• Check guarantee register- ensure all included in disclosures
• If claim risen, provision as per AS 29

Auditor’s Reports
In case of nationalized bank, report is issued to Central Govt. stating following:
• Whether, in auditor’s opinion, balance sheet is full and fair balance sheet containing all necessary
particulars and is properly drawn up to exhibit true and fair view of affairs of bank.
• In case auditor had called for any explanation or information, whether it has been given and whether
it is satisfactory.
• Whether or not transactions of bank, which have come to auditor’s notice, have been within powers
of bank.
• Whether or not returns recd. from offices & branches found adequate for purpose of audit.
• Whether P&L a/c shows true balance of profit or loss for period covered by such a/c.
• Any other matter which auditor considers should be brought to notice of Central Government.

Long Form Audit Report (LFAR)

➢ LFAR is to be given by SBAs as well as SCAs.
➢ LFAR for branch is in form of questionnaire where observations/comments must be provided on
range of matters including cash, balance with banks, investments, advances, deposits etc.
➢ These are submitted by SBAs to SCAs.

Consolidation is done at HO level and LFAR for bank is submitted by SCAs to mgt. LFAR, on the bank,
after due examination, should be placed before ACB of bank indicating action taken/proposed to be
taken for rectification of irregularities, if any, mentioned therein; & a copy of LFAR and relative
agenda note, together with Board's views or directions, is submitted to RBI within 60 days of
submission of LFAR by statutory auditors.

In case of fraud report to:

➢ RBI
➢ Chairman/MD/CEO of bank
➢ CG u/s 143(12)

SCAs have to furnish following reports in addition to main report:

• Report on ICFR as per Sec 143(3)(i) of Cos Act 2013
• Long Form Audit Report (LFAR)
• Report on compliance with SLR Requirements
• Report on income recognition, asset classification & provisioning as per RBI Guidelines
• Report on whether any serious irregularity was noticed in working of bank which requires immediate
attention (as per sec 143(12) of Companies Act, 2013.)
• Report on whether treasury operations conducted as per RBI instructions
• Report on status of compliance by bank with regard to implementation of recommendations of Ghosh
Committee relating to frauds and malpractices and Jilani Committee on internal control and
inspection/credit system.

Concurrent Audit
Scope of Concurrent Audit in Banks
Cash + Deposits + Advances + Investments + Foreign Exchange + House Keeping + Other Items

Coverage of Business/Branches for concurrent Audit

Scope of work to be entrusted to concurrent auditor, coverage etc is discretion of head of Internal
Audit with due approval of Audit Committee of Board of Directors (ACB)

Areas of focus in Concurrent Audit

Cash
• Daily cash transactions with reference to any abnormal/high value receipts and payments.
• Proper accounting of inward and outward cash remittances.
• Proper accounting of currency chest transactions, its prompt reporting to the RBI.
• Expenses incurred by cash payment involving sizeable amount.

Investments
• Purchase/sale of securities should as per:
➢ HO instructions
➢ Rates beneficial to bank
• Securities in books → should be physically held by it
• Compliance with RBI/HO guidelines

Advances
• Ensure proper sanction of advances
• Securities properly recd and regd in name of bank.
• Proper post disbursement supervision & follow-up
• LC issued within delegated power
• BG issued, properly worded & recorded in register
• Classification as per RBI guidelines
• Claims to ECGC & DICGC submitted in time
 Foreign Exchange
• Check foreign bills negotiated under letters of credit.
• Examine extension and cancellation of forward contracts for purchase and sale of foreign currency.
Ensure that they are duly authorised and necessary charges have been recovered.
• Ensure that balances in Nostro accounts in different foreign currencies are within prescribed limit.
• Ensure verification/reconciliation of Nostro and Vostro a/c transactions/balances.
• Check FCNR and other non-resident a/c whether debits and credits are permissible under rules.
• Check whether inward/outward remittance have been properly accounted for.
• Ensure adherence to guidelines issued by RBI/HO of bank about dealing room operations.

Appointment of concurrent auditor

• Option: own staff or external auditor → discretion of bank
• If own official: experienced, trained & senior + independent of branch where audit is conducted
• AC Board of bank shall decide max. tenure of external concurrent auditor. Generally, it’ll not be more
than 5 years. No auditor will continue with a branch/Business unit for more than 3 years.
• If omission/commission by auditor report to RBI & ICAI & appointment maybe cancelled.

Reporting Systems in case of concurrent audit

• There should be proper reporting of findings of concurrent auditors. For this purpose, each bank
should prepare a structured format.
• There should be zone-wise reporting of findings of concurrent audit to ACB and annual
appraisal/report of audit system should be placed before ACB.
• Before submission of report auditor should discuss important issues with branch manager and
concerned officers. This will enable auditor to consider opposite view point and clarify any doubts.
• Minor irregularities pointed out by concurrent auditors are to be rectified in timely manner. Serious
irregularities should be reported to controlling offices/ Head Offices for immediate action.
• Whenever fraudulent transactions are detected, they should immediately be reported to Inspection
& Audit Department (Head Office) + Chief Vigilance Officer + Branch Managers concerned (unless
branch manager is involved).
• Follow-up action on concurrent audit reports should be given high priority by controlling
office/Inspection and Audit Department and rectification of features done without any loss of time.

“Once you become Fearless, life becomes Limitless”