BANK BRANCH AUDIT

PLANNING AND DOCUMENTATION

CA Gautam Shah
KKC & Associates LLP

Ahmedabad Branch of WIRC of ICAI

10 March 2023
STRUCTURE OF PRESENTATION

SETTING THE AUDIT PLANNING AUDIT Q&A

CONTEXT DOCUMENTATION
SETTING THE CONTEXT
 KEY CHARACTERISTICS OF A BANK
Creation Acceptance of deposits → commercial lending activity +
of money treasury/ investment activity
supply
▪ Governed by Banking
Regulation Act, 1949
(e.g. Presentation &
disclosures-Schedule III)
Conduct of business & operations is either centralised at HO
Operations
▪ Regulated by the RBI and/or decentralised in branches;
(e.g. Prudential norms
etc.)

▪ Key Characteristics:
Technology
Significant dependence on technology due to very high volumes
and high degree of automation of operations
BANKING FACTS
Reserve Bank of India

Scheduled Banks

Commercial Banks State Co-op Bank (34)

Public Sector Bank RRB Foreign Bank Private Sector Bank *

(12) (43) (46) (37)

* Includes Small Finance Banks and Payment Banks

BANKING STRUCTURE
BANK AUDIT PROCESS
Branch’s financial statement gets consolidated to RO

RO to Zone

Zone to Bank’s Financial Statements

While auditing the bank’s financial statements, Statutory Central Auditor (SCA) relies on the
Bank’s Branch Auditor’s report & fact is also mentioned in audit report for the Bank as whole

SA 600 – Permits Auditor to rely on work of Component Auditors

Hence Branch Auditor is Responsible for Financial Statements, RBI Compliances, NPAs,
Restructuring of the Branch
 KEY STEPS IN BANK BRANCH AUDIT
Engagement
Letter and
NOC from Execution of
Appointment Pre-Audit Audit Planning
previous auditor Audit
discussion with
branch

Submission of
Discussion of
audit report, Post MOC v/s Preparation of
draft branch Audit
LFAR, Tax audit, Pre MOC and Memorandum of
audit report Documentation
returns & reconciliation Changes (MOC)
with bank
certifications
KEY DELIVERABLES
Branch’s
Balance Sheet Audit Report
Profit & Loss LFAR
Account

Returns &
Certificates as
Tax Audit per closing
instructions of
Bank
RELEVANT TECHNICAL SA
• Audit Documentation (SA- 230)

• Planning (SA- 300)

• Materiality & Risk Assessment (SA – 320 & SA 315)

• Audit Evidence (SA – 500)

• Audit Reporting (SA- 700)

AUDIT PLANNING
AUDIT PLANNING
Planning is required at 3 stages -
Completion

◆ Closing Meeting for all open

matters
Execution ◆ Statutory Audit Report, Others
◆ Documentation
◆ Audit Program
◆ Audit Performance
Pre-Commencement ◆ Internal Controls in Bank Branch
along with additional controls for
◆ Understanding the branch computerized environment
business
◆ Knowledge Bank
◆ Changing scenarios in Banking
industry
AUDIT PLANNING : PRE-COMMENCEMENT
Nature, size
Understanding the Branch Business – & category of
branch, Any
▪ Preliminary Enquiries: major events
or changes
▪ Focus not just on core business but newer Computer Inspection
banking products as well; E.g. – Digital Loans Systems, reports -
softwares & Internal/
▪ Preparation of audit program exception Concurrent/
reporting RBI/ SCA
▪ Overall Time & Manpower Planning
Preliminary
▪ Accounting Policies followed by Bank Enquiries
▪ Copy of previous accounts Organisation
Chart, List of Evaluate
▪ Instructions issued by HO for closing of accounts departments, Internal
Outsourced Controls
▪ Intimation to BM regarding requirements for Operations
audit and documents to be kept ready for audit Business mix
& determine
sample size
& materiality
AUDIT PLANNING : PRE-COMMENCEMENT
Systems Check
To understand the functioning of Information system in the Bank and need to find answers for following
questions:

What is CBS

1
Environment?

3
Steps at branch
Does CBS have any when software
interface with is modified /
softwares? updated
centrally?
Whether
Which software is

2
System
implemented Audit
across bank? conducted,
if yes, what
Details of other are the
softwares at the findings?
branch?
AUDIT PLANNING : PRE-COMMENCEMENT
Understanding the Branch Business – Evaluation of Control
Extent would depend on assessment of EFFICACY of control
▪ Existence of clearly laid down delegation of authority
▪ Existence of clearly laid down eligibility criteria for loans
▪ Existence of system of communication with Customers
▪ Existence of system of execution of documents before disbursement
▪ Existence of system of post disbursement monitoring and reporting irregularity
▪ Existence of system for implementation of IRAC Norms
▪ Adequate control on changing of interest rates, terms and conditions, etc. in CBS environment
AUDIT PLANNING : PRE-COMMENCEMENT
Knowledge Bank -
▪ Knowledge of the Banking Master Directions, Circulars Changing Scenario in
Industry; & Notifications issued by RBI Banking Industry
▪ Guidance Note on Bank Audit;
• IRAC Norms & related circulars • Focus on frauds
▪ Technical Guide on LFAR; • Frauds classification & • Impact of IBC
▪ Applicable Accounting and Reporting • Recapitalisation of PSB’s
Auditing Standards • CRR / SLR • GST, E-TDS in Bank Branch
• Capital Adequacy Audit & its reporting
• Exposure Norms • Covid Impact, Stress Accounts
• Guarantees and co-acceptances
• Wilful Defaulters, etc.
AUDIT PLANNING – EXECUTION

• Key Audit Area – Need to prioritize

• Set Materiality levels and lay down over all time schedule
Audit • Train audit staff and special skill, if required
Program
• Focus on weak areas identified during audit
• Analytical Procedures
• Frauds/ Sundry assets/ Suspense accounts/ Inter-branch reconciliations
AUDIT PLANNING – EXECUTION

• Ensure Work as per audit program and schedule

• Review compliance with Concurrent/ Internal / RBI Inspection/ Other
Audit reports
Audit
Performance • Core Banking Solution/ CBS system – Manual Intervention
• Get Rectifications/ MOC passed
• Prepare reports according to requirement
 AUDIT PLANNING – EXECUTION
Internal Controls at Branch – Controls for Computerised Environment–
▪ Job rotation of staff ▪ Record of log-ins & log-outs
▪ Maker Checker Control ▪ System check to ensure withdrawal within DP
▪ Financial & Administrative power of each is fixed and ▪ Flag if balance in lien a/c would fall below lien amount
communicated after processing of transaction
▪ Periodic confirmations of compliance to systems & ▪ Specified user access, user timeout is prescribed
procedures to controlling authority
▪ Following activities only after supervisory level password
▪ Fraud prone items are in custody of at least two
officials ▫ Posting in dormant/ inoperative a/c
▪ All books are periodically balanced and confirmed by an ▫ Opening of ledger after EOD Process
official
▫ Exception situations like limit excess, reactivating
dormant accounts, etc.
 AUDIT PLANNING – COMPLETION
• Limitation of time – Appropriate attention to important areas
Focused • Focus on NPA, possibility of frauds
• Complex transactions / Data constraints / High volume
Approach
• Professional responsibilities

• From eyes and ears of SCA

Expectation
• Effective reporting and compliance with RBI/ICAI guidelines, AS, SA, terms of appointment
from branch • Adherence to professional standards to add comfort to SCA/RBI/Govt/Shareholders
auditor • Completion of work in time

• Documentation as per SA 230

Documentation • Depends on factors size & complexity, nature of audit procedures, identified RoMM, significance of audit
evidence, audit methodology, nature and extent of exceptions

• Statutory Audit report (SA 700 and 701) – Addressed to SCA/Bank, Compliance with AS to be mentioned,
Qualifications can be through MOC or specific remarks in last para
Others • LFAR, UDIN
• Other returns and certifications as per closing instructions from HO
CHALLENGES
Limited Time
Availability
and format
of data
Talent Retention &
Development Delay in
Complex regulatory
Obtaining Audit
and compliance
Determining the Information
requirements
nature, timing & Complex
Expectation extent of audit Use of
Quality of Products
of SCA procedures technology
Information
Documentation
Received CAAT Centralised/ Lack of clarity of
Tools Decentralised Proficiency/ Skills
Regulatory law for new-age
processes businesses on client side
Expectations
Nature & Volume of Visibility of bank
Inherent
transactions as a whole
Risk
AUDIT DOCUMENTATION
AUDIT DOCUMENTATION – SA230
Why Documentation is necessary ?

▪Evidence for the auditor’s basis for opinion on the financial statements along with achievement
of the overall objectives

▪ Assisting the engagement team to plan and perform the audit

▪ Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work and be accountable for its work
▪Retaining a record of matters of continuing significance to future audits

▪ Enabling the conduct of quality control reviews and external inspections in accordance
with applicable legal, regulatory or other requirements
AUDIT DOCUMENTATION
Importance of Documentation in Bank Branch Audit

▪ Complexity in transactions and operations

▪ Reliance on systems and automated processes

▪ Short duration and time bound activity

▪ To substantiate auditor’s opinion, LFAR and Certificates

▪ SCA of the Bank relies on the audit reports issued by the branch auditors

▪ Inspection by various regulators

KEY AREAS OF DOCUMENTATION
▪ Appointment as auditors of the branch
o Appointment Letter from bank & Reply to Appointment Letter
o No-Objection Certificate (‘NOC’) received from previous auditors
o Partner/Proprietor declaration submitted to bank
o Engagement Letter (‘EL’) between auditors and bank

Practical observations:
• Forget to obtain the NOC from the previous auditor

• Appointment letter from the bank comes at very last minute

• Time chronology in appointment documents not followed (Example: NOC is obtained after signing of
EL)
KEY AREAS OF DOCUMENTATION
▪ Audit planning
o Audit planning memorandum enlisting indicative processes to be undertaken for key areas
o Details of team member along with their qualification and experience

o Establishing firm and team level independence

o Agenda and minutes of first meeting with branch manager

Practical observations:
• Audit planning memorandum for key areas and Independence confirmation not found as part of
documentation

• Audit planning memorandum contains references of old RBI regulation and guidelines, not updated

• Agenda and minutes of first meeting which includes discussion on understanding the nature of services
and operation of the branch not found as part of documentation
KEY AREAS OF DOCUMENTATION
▪ Verification of Advances
o SOP documents relating to credit appraisal, disbursement and collection processes
o Loan book (Fund based and Non fund based) as at the end of the year
o Reconciliation of loan book balance vis a vis loan balances in financial statements
o Approval and Deviation Matrices as applicable to respective branch

o List of new files sanctioned, selected on sample basis for file review along with rationale of
selection
o Checklist of verification of advances in compliance with latest guidelines issued by RBI and
in sync with the credit process to be followed by the respective branches, duly filled and updated
o Verification of stock statements, computation of drawing power limit, financial statements, end
use, valuation reports, insurance policies, original executed documents etc.

o Key pending and query list relating to advances, shared with branch manager on timely basis
as well as responses obtained by auditors in relation to the same
KEY AREAS OF DOCUMENTATION
▪ Verification of Advances

Practical observations:
• Reconciliation of loan book balance with financial statements not found as part of documentation
• Rationale for sample selection not documented
• Checklist is not updated as per RBI regulation and guidelines / not filled / incomplete / responses
are restrictive to Yes or No and not elaborative, exposing audit firm to risk during inspections
• Approval and Deviation Matrices not obtained; no documentation maintained on verification on
sanctioning of advances
• Documentation on verification and review of end use of loans, comparison of stock statement with
financial statements and other critical pending documents along with list of observations raised by
auditors, if any, not found as part of documentation
• Key pending and query list not shared with the client or communicated orally, not documented.
Responses received from branches not updated and concluding remarks not updated
KEY AREAS OF DOCUMENTATION
▪ Verification of NPAs

o Obtain system generated Listing of NPAs and computation of NPA provision, reconciliation of the same
with the financial statements

o Identify, enquire and document for any manual intervention in identification of NPA and computation
of NPA provision

o Work papers on review of borrower credit file in compliance with IRAC norm, key documents,
highlighting pending documents and identification of potential NPAs
KEY AREAS OF DOCUMENTATION
Practical observations:
• Reconciliation of NPA loans and NPA provision computation with financial statements not found as part
of documentation

• Documentation on enquiry and review of manual intervention on NPA identification and computation of
NPA provision, whether in compliance with RBI guidelines and management policy along with
communication of observations with management not updated

• Documentation of verification of processes relating to recent critical RBI updates relating to NPA on 12
November 2021 and 15 February 2022 not found / not updated

• Working paper relating to identification of an account as NPA or suggestion on additional provisioning on

the advances not found in the audit record

• Concluding remark on pending documents and observations resulting in potential NPAs discussed orally
and not documented
KEY AREAS OF DOCUMENTATION
▪ Other critical areas

o Verify CASA and TD account opening process, obtain accounting opening and KYC documents for
sample accounts and include it as a part of audit work papers

o Obtain cash balance certificate along with teller cash register, ATM / CDM balances

o Obtain fixed asset verification reports, internal audit reports, concurrent audit report, latest rbi
inspection observation points, etc. Enquire, conclude and document on discrepancies / observations
noted, if any

o Obtain from head office the list of general ledgers which are under branch’s purview along with list of
employees authorized to operate these ledgers. On sample basis, verify and enquire and accordingly
conclude and document if on significant discrepancies

o Ensure adequate documentation on ledger scrutiny of key expense general ledgers along with
verification of vouchers for material transactions

o Document the reason for any significant variation in balance sheet and statement of profit and loss
and should assess whether the same need to be brought to the attention of the bank’s management
KEY AREAS OF DOCUMENTATION

Practical observation:
• Verification of levy of deposit related charges (Eg: RTGS, IMPS, NEFT charges, etc.) and advances related
fees (Eg: Processing fees, Legal fees, etc.) not adequately documented.

• This is one key area prone to revenue leakage, hence understanding of process of the levy of such fees and
charges, comparison of the same with schedule of charges, verification of the same on sample basis and
adequate documentation is must
KEY AREAS OF DOCUMENTATION
▪ Audit Report, LFAR, MOC and Certificates

o Share a complete list of all the issues identified during the course of the audit across all the areas.
Obtain management’s response. Accordingly update auditor’s concluding remark

o The auditor to ensure that proper rationale, supporting documents / audit evidences are included in
its working paper for the following indicative matters.
▪ Observations that lead to modification of auditor’s opinion on financial statements
▪ Observation that needs reporting in LFAR
▪ Audit adjustment entries are passed through Memorandum of Changes (MOC’s)

o These evidences will be helpful to the auditor in replying any query either from the Head
office/Regional office/ SCA’s or during inspections at later stage
KEY AREAS OF DOCUMENTATION
▪ Audit Report, LFAR, MOC and Certificates

o The auditor should ensure that the certificates issued by the auditor are properly supported with the
documentary evidences. Auditor to use its judgement in obtaining the stamped/signed annexures to
such certificates from management.

Practical observations:
• Lack of adequate documents in working paper file to substantiate observations reported in LFAR
or audit adjustments accounted through MOCs

• Failure to obtain signed representation letter from the management on letter head of bank or
failure to escalate management’s resistance on sharing representation letter
AUDIT DOCUMENTATION – CONCLUSION

o Working papers act as audit evidences act as auditors shield and safeguard
auditor’s interest at the time of inspection or enquiry

o While not obtaining appropriate audit evidence for critical areas definitely put
auditors in a position of risk, having incomplete / unfilled audit working papers
poses higher risk

o With the regulators increasing their focus more on documentation, it is

imperative for auditors to ensure timely closure of documentation
AUDIT DOCUMENTATION – TEMPLATES

Engagement MRL Audit Report

Letter

Management
Engagement Letter Representation Audit Report
Letter
KEY TAKE AWAY
• Banking Business – Different, Regulated, Public Interest

• Limited Time for Audit, hence effective planning is critical

• Reporting Exceptions

• Documentation – “Not documented not done”

• Regulatory Oversight on Auditors

QUESTIONS?
 Contact–

CA Gautam Shah
THANK YOU KKC & Associates LLP
Chartered Accountants

E: gautam@kkcllp.in