Bank Branch Audit –Audit Planning CA. Rashmikant C. Thakkar firstname.lastname@example.org /email@example.com (M) 09879447009 BARODA BRANCH OF WIRC OF ICAI
Need for Planning : • Primary Objective of Audit – to ensure that Annual Accounts of the Branch give a True and Fair View. • Features of Bank Audit : • Balance Sheet Audit • Rapidly changing Accounting Software, Technological up-gradation by banks like CBS, RTGS etc. • Frequent RBI Guidelines to Banks and Auditors • Frequent Pronouncements by ICAI. • Tight Audit Schedules. Limited Time period. • Effective Internal Check and Internal Control System. • Number of Audit Reports/ Certificates to be signed by Branch Auditor.
Audit Planning: • IF YOU FAIL TO PLAN…, • ………YOU PLAN TO FAIL. • If an auditor overlooks importance of Audit planning, he is likely to spend more time on collection of data etc. and it will disturb the entire audit schedule. • Poor Audit Planning → Poor Allocation of Work → Inadequate attention to high risk areas → Poor Audit Quality.
* Bank Branch Audit Process: • Appointment of auditor • Pre-commencement Work- Types of Bank Branches- Peculiar features of banking business- Types of accounting software • Bank Branch Audit Planning and Reporting- Making effective Audit plan/ Audit Programme-Audit Procedures – Reporting. • Internal Controls in Banks • Use of Audit Software (CAAT-Computer Assisted Audit Techniques- Inbuilt Audit Trails) • Form and Contents of Financial Statements • Compilation of Information and Reports to be signed.
Bank Audit Process: • Pre-commencement Work • Understanding the business of Bank Branch • Effective Audit Planning • Audit Procedures • Reporting
Pre-commencement Work • Audit Planning starts with the Receipt of Appointment Letter. • Check the compliance u/s. 226 (3) with regard to qualifications/disqualifications. • Decision for Acceptance or Refusal of Audit Assignment. • Communication with Previous Auditors • Expected Date of Submission of Reports • Finding out the Scope of Work. • Issue Engagement Letter under SA 210- “Agreeing the terms of Audit Engagements”.
Understanding the Business of Bank Branch: • Type of Branch and Nature of Business handled by the Branch. • Laws applicable to Bank* • Accounting Standards applicable to Bank* • Obtain management representation letter for each type of report like - LFAR, Tax Audit Report, Ghosh and Jilani committee • Type/Nature of transactions at Branch. • Quantum of Transactions.
Understanding the Business of Bank Branch: • Computerization System – software • Internal Control – Risk Assessment • Risk Management – Back up system • Obtain previous year audit reports • RBI inspection reports, Internal Inspection/ Concurrent audit reports • Attend the Meeting of Statutory Auditors and Bank Audit seminar.
Audit Planning and Reporting • Audit Planning and Reporting are two critical stages in the entire audit process. • Audit Planning is before the start of audit process and beginning of the field work and Reporting is the last stage in bank audit process. • Good Planning leads to Effective Reporting. • SA-300 - “Planning an Audit of Financial Statements” emphasizes the need for Audit Planning.
Audit Planning(SA-300) : • The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. • Audit Plan should be based on -knowledge of the client’s business. • Plans should be further developed and revised as necessary during the course of a audit.
Audit Planning: • The Process of Audit Planning should cover, amongst other things: • acquiring knowledge of client’s accounting system, policies and internal control procedures; • Determining the expected degree of reliance to be placed on internal controls; • determining the nature, timing, and extent of the audit procedures to be performed; and preparing the audit plan accordingly. • Allocation and Coordination of the work to be performed.
Audit Planning: • Audit Planning - Divided into two stages : • a) In-house Planning/ Planning at Office • b) On-site Planning/ Ground work at Branch • IN-HOUSE PLANNING : • Starts with Appointment Letter • Obtain basic information about the Nature and Type of Branch, Regional/Head Office, Central Statutory Auditors, Previous Auditors, Time Limit for completion of Audit, Reports/ Certificates to be signed etc. • Send Acceptance Letter to Bank with necessary declarations. • Obtain NOC from Previous Auditors • Communication with Branch.
Audit Planning (Contd.): • Prepare Detailed Branch profile covering the details about – • Nature and Type of Branch (CBB/IFB/ SME/ AFB/ Service Br/ Asset Recovery Br.etc.) • Size of the Branch (Small/Medium/Large/Very Large etc.) No. of Extension Counters/ATMs • Key Business Figures – Deposits, Advances, Net Profit, NPA Level, New NPA Accounts etc. • Operating Environment (CBS, Internet Banking, RTGS etc.) • Details of Government / Other Contractual Business handled by the Branch • Details of Audits/ Inspections during the year – Obtain copies of the reports • Internal Audit Rating/ Risk rating of the Branch assigned by Internal Auditors • Collect Closing Instructions Circular, Important H.O. Circulars and details of Changes in Accounting Policies.
Audit Planning (Contd.) • On-Site Planning at Branch: a)Evaluation of the Accounting and Internal Control System. • Development of Audit Programme. • Allocation of Work according to Audit Programme • Review of Progress of Work and Revision of Audit Plan, if necessary. • Compilation of Information for Reporting and Summary of Audit Queries & Observations
Evaluation of Accounting System and Internal Controls : • SA-265 (Earlier AAS-01) States: • Management is primarily responsible for maintaining an adequate accounting system incorporating various internal controls to the extent appropriate according to the size and nature of the business. • The auditor should examine and study the accounting system and related internal controls and should evaluate the operation of those internal controls upon which he wishes to rely in determining the nature, timing and extent of other audit procedures.
Evaluation of Accounting System and Internal Controls : • Where the auditor concludes that he can rely on certain internal controls, his substantive procedures would normally be less extensive and may also differ as to their nature and timing. • If he observes any deficiencies in the internal controls in any area- his substantive procedures would be more extensive.
Evaluation of Internal Controls: • The auditor should obtain information in respect of Internal Control Systems in the following areas: • General Software related controls • Revenue Items Related Controls • Controls related to General Administration and Housekeeping • Controls related to certain Special Accounts like Sundries and Suspense Accounts • Controls with respect to Advances- Sanctions, Renewals, Credit Appraisal, Disbursement, Documentation, Recovery etc. • Controls related to Classification of Advances and Income Recognition • Deposit related Controls and Controls with respect to Inoperative/ Dormant Accounts • Controls with respect to Compliance of Tax Laws.
System Controls in Banks: • Access to the system is available only between stipulated hours and specified days only. • Individual users can access only specified directories and files • Exception situations such as limit excess, reactivating dormant accounts, etc. can be handled only with a valid supervisory level password. • A user timeout is prescribed • Once the end-of-the-day process is over, the ledgers cannot be opened without a supervisory level password.
System Controls in Banks: • The system maintains a record of all log-ins and log-outs • If the transaction is sought to be posted to a dormant (or inoperative) account, the processing is halted and can be proceeded with only with a supervisory password • The system checks whether the amount to be withdrawn is within the drawing power. • The system flashes a message if the balance in a lien account would fall below the lien amount after the processing of the transaction.
Internal controls in bank branch • Work of one staff member is invariably supervised / checked by another staff member, irrespective of the nature of work • Banks have a system of job rotation among staff • The financial and administrative powers of each official / each position are fixed and communicated to all persons concerned • Branch managers have to send periodic confirmation to their controlling authority on compliance of the laid down systems and procedures.
Internal controls in bank branch • All branches of a bank have a unique code number which is circulated amongst all offices of the bank • All books are to be balanced periodically. Balancing is to be confirmed by an official • Particulars of lost security forms are immediately advised to branches so that they can exercise caution • Sensitive items like currency, valuables, draft forms, term deposit receipts, traveller’s cheques and other such security forms are in the custody of at least two officials of the branch.
Audit Planning –Why? • SA 300 -Audit Planning emphasizes that the auditor should plan his audit work to enable him to conduct an effective audit in efficient and timely manner. • In Bank Branch Audit, adequate audit planning is required because it facilitates the following: • ensures that appropriate attention is devoted to all important areas of audit like deposits,advances,Bank charges etc • Ensures that potential problems are properly identifiede.g frauds
Audit Planning –Why? • Ensure that work is completed expeditiously and effectively. • Effective Utilization of Audit Staff. No important area of work is left out and No work is duplicated. • Coordination of the work done by other auditors – Important Points of Other Inspection/Audit Reports are taken care of.
Considerations for Overall Audit Plan: (SA-300) • The terms of engagement- scope of work and statutory responsibility. • The nature and timing of reports to be submitted. • Applicable Legal/Statutory Requirements • The accounting policies adopted by Bank and changes in these policies. • The identification of significant audit areas • The degree of reliance by Auditor on accounting systems and internal controls.
Considerations for Overall Audit Plan: (SA-300) • The nature and timing of audit evidence obtained • The work of internal auditors and extent of their involvement • The involvement of expert • The allocation of work to be undertaken between joint auditors and procedures for its control and review • Establishing and coordinating staffing requirements
Other Factors to be considered for audit planning: • Size and Complexity of audit • Environment in which Bank operates – Past Experience with the Entity. • Qualification and Experience of Audit Team in bank audit work. • Knowledge of Bank’s Business- Type of Business handled by the Branch. • Discussion with Bank Manager.
Audit Procedures to be Applied: 1.Inspection e.g. Vouching. 2.Observation 3.Inquiry & confirmation e.g. Confirmation of Bank Balances 4.Computation e.g. Interest Calculations. 5. Analytical Procedureslike Comparisons- Ratio Analysis etc.
Documents/ Certificates to be Collected: Following certificates should be obtained from Branch Management: • Cash Retention Limit duly certified by the Branch Manager. • A photo copy each of the confirmation certificates for Balances with RBI, SBI and other banks. • A copy of the reconciliation statement in respect of differences in such balances with RBI, SBI and other banks. • List of overdue or matured investments at the end of the year duly confirmed by the Branch Manager;
Documents/ Certificates to be Collected: • A certificate stating that the Branch did not hold any investments on behalf of the Head Office (if there are no such investments held by the Branch). • List of large advances i.e. those in respect of which the outstanding amount is in excess of 5% of the aggregate advances of the Branch or Rs.10.00 crores whichever is less duly certified by the Branch Manager • A copy of the letter from Head Office regarding Sanction Powers of the Branch Manager.
Documents/ Certificates to be Collected: • List of cases where the Branch has not obtained stock/book debts statements at the end of the year; • List of cases where insurance copies are yet to be received at the end of the year • A copy of the Head office instructions for identification of NPAs and classification of advances. • List of major items pending for reconciliation under Inter-Branch Accounts; List of all fraud cases reported to HO/RBI.
Compilation and Verification of Information relating to different Reports: • Main Audit Report as per (sec.30(3) of) Banking Regulation Act, 1949. • Long Form Audit Report • Tax Audit Report • Jilani Committee Report • Ghosh Committee Report • Special Certificates/ Reports as applicable (e.g. Prime Minister Rojgar Yojana Scheme Certificate etc.)
Reporting under Banking Regulation Act,1949: As per section 30(3) of a Banking Regulation Act,1949; an auditor of a banking company is required to state in his report :-- (a) whether or not the information and explanations required by him have been found to be satisfactory; (b) whether or not the transactions of the company which have come to his notice have been within the powers of the company;
Reporting under Banking Regulation Act,1949: (c) whether or not the returns received from branch offices of the company have been found adequate for the purposes of his audit (not applicable to bank branch) (d) whether the profit and loss account shows a true balance of profit or loss for the period covered by such account; (e) any other matter, which he considers should be brought to the notice of the shareholders of the company.
Reporting under Banking Regulation Act,1949: Distinct Feature of Bank Branch Audit: Memorandum of Changes (MOC) In other audits, normally errors found during the audit are modified/ given effect in the books of accounts and modified financial statements are prepared; But, in case of banks, by the time, the branch audit is completed, there is compilation of data at regional and zonal level hence, any modification in the financial statements is given effect through MOC. The main report must state about this and shall also mention whether MOC is NIL or it contains any items affecting the financial statements or Statement of Advances.
Points to be noted for Final Reporting: • Address the Report to the Central Statutory Auditors (sec.228 (3)(c) of the Co.Act,1956). • Financial statements to be approved by Branch Manager. • Take Management Representation Letter for each type of report. • Before the final report is submitted, ensure that your queries are solved to your satisfaction. • Take acknowledgement of submission of report. • Submit the professional fees bill (after charging service tax) to the relevant authorities.