Ch-10 Bank audit Flashcards
Types of Banks
- Commercial banks are the most wide spread banking institutions in India, that provide a number of products and services to general public and other segments of economy. Two of its main functions are:-
(a) accepting deposits and (b) granting advances. - Regional Rural Banks known as RRBs are the banks that have been set up in rural areas in different states of the country to cater to the basic banking and financial needs of the rural communities. Examples are:- Punjab Gramin Bank , Tripura Gramin Bank , Allahabad UP Gramin Bank , Andhra Pradesh Grameen Vikas Bank, etc.
- Co-operative Banks function like Commercial Banks only but are set up on the basis of Cooperative Principles and registered under the Cooperative Societies Act of the respective state or the Multistate Cooperative Societies Act and usually cater to the needs of the agricultural and rural sectors. Examples are :- The Gujarat State Co-operative Bank Ltd., Chhatisgarh Rajya Sahakari Bank Maryadit, etc.
- Payments Banks are a new type of banks which have been recently introduced by RBI. They are allowed to accept restricted deposits but they cannot issue loans and credit cards. However, customers can open Current & Savings accounts and also avail the facility of ATM cum Debit cards, Internet-banking & Mobilebanking. Examples are :- Airtel Payments Bank , India Post Payments Bank, Paytm Payments Bank , etc.
- Development Banks had been conceptualized to provide funds for infrastructural facilities important for the economic growth of the country. Examples are:- Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI) , etc.
- Small Finance Banks have been set up by RBI to make available basic financial and banking facilities to the unserved and unorganised sectors like small marginal farmers, small & micro business units, etc. Examples are:- Equitas Small Finance Bank , AU Small Finance Bank , etc.
RBI is responsible for
- development and supervision of the constituents of the Indian financial system (which comprises banks and non-banking financial institutions)
- determining, in conjunction with the Central Government, the monetary and
credit policies keeping in with the need of the hour. - regulating the activities of commercial and other banks
Important functions of RBI are
- issuance of currency;
- regulation of currency issue;
- acting as banker to the central and state governments; and
- acting as banker to commercial and other types of banks including term- lending institutions. Besides, RBI has also been entrusted with the responsibility of regulating the activities of commercial and other banks.
No bank can commence the business of banking or open new branches without obtaining license from RBI. The RBI also has the power to inspect any bank.
Regulatory Framework of banking systems
Banking Regulation Act, 1949. State Bank of India Act, 1955.
Companies Act, 2013.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Regional Rural Banks Act, 1976.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
Information Technology Act, 2000. Prevention of Money Laundering Act, 2002.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Credit Information Companies Regulation Act, 2005. Payment and Settlement Systems Act, 2007
Peculiarities involved in banking systems:
Huge volumes and complexity of transactions;
Wide geographical spread of banks’ network;
Large range of products and services offered;
Extensive use of technology;
Strict vigilance by the banking regulator etc
Types of Bank Audit Reports to be issued
(a) Report on adequacy and operating effectiveness of Internal Controls over Financial Reporting in case of banks which are registered as companies under the Companies Act in terms of Section 143(3)(i) of the Companies Act, 2013 which is normally to be given as an Annexure to the main audit report as per the Guidance Note on Audit of Internal Financial Controls over Financial Reporting issued by the ICAI.
(b) Long Form Audit Report. (LFAR)
(c) Report on compliance with SLR requirements.
(d) Report on whether the treasury operations of the bank have been conducted in accordance with the instructions issued by the RBI from time to time.
(e) Report on whether the income recognition, asset classification and provisioning have been made as per the guidelines issued by the RBI from time to time.
(f) Report on whether any serious irregularity was noticed in the working of the bank which requires immediate attention.
(g) Report on status of the compliance by the bank with regard to the implementation of recommendations of the Ghosh Committee relating to frauds and malpractices and of the recommendations of Jilani Committee on internal control and inspection/credit system.
(h) Report on instances of adverse credit-deposit ratio in the rural areas.
FORM AND CONTENT OF FINANCIAL STATEMENTS OF BANKS
Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance Sheet and Form B contains the form of Profit and Loss Account.
Short note on Long Form Audit Report
- The terms of appointment of auditors of public sector banks, private sector banks and foreign banks (as will as their branches), require the auditors to also furnish a long form audit report (LFAR).
- The matters which the banks require their auditors to deal with in the long form audit report have
been specified by the Reserve Bank of India. - The LFAR is to be submitted before 30th June every year.
- To ensure timely submission of FAR, proper planning for completion of the LFAR is required.
- While the format of FAR does not require an executive summary to be given, members may consider providing the same to bring out the key observations from the whole document.
Reporting to RBI IN CASE OF FRAUD Detection in Banks
The RBI issued a Circular relating to implementation of recommendations of Committee on Legal Aspects of Bank Frauds applicable to all scheduled commercial banks.
- the member shall be required to report the kind of matters stated in the circular to RBI. Circular states “If an accounting professional, whether in the course of internal or external audit or in the process of institutional audit finds anything susceptible to be fraud or fraudulent activity or act of excess power or smell any foul play in any transaction, he should refer the matter to the regulator. Any deliberate failure on the part of the auditor should render himself liable for action”.
- Auditor should also consider the provisions of SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”. The said Standard explains that the duty of confidentiality is over-ridden by statute, law or courts.
- SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements“ states that an auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.
what are ADVANCES? Types of advances.
Advances are amount of money or credit, given as a loan from a bank to another party with an agreement that the money will be repaid.
Types of Advances: Funded Loans & Non-Funded Loans
* Funded loans are those loans where there is an actual transfer of funds from the bank to the borrower. Examples of funded loans are Term loans, Cash credits, Overdrafts, Demand Loans, Bills Discounted and Purchased, Participation on Risk Sharing basis, Interest-bearing Staff Loans.
* Non-funded facilities are those which do not involve such transfer. Examples of non-funded loans are Letters of credit, Bank guarantees, etc.
Classification of advances
Sector wise - priority and non-priority
Security wise - secured and non secured
Prudential norms - Standard and NPAs.
What are the modes of creation of securities?
(i) Mortgage: Mortgage are of several kinds but the most important are the Registered Mortgage and the Equitable Mortgage.
(ii) Pledge: A pledge thus involves bailment or delivery of goods by the borrower to the lending bank with the intention of creating a charge thereon as security for the advance. The legal ownership of the goods remains with the pledger while the lending banker gets certain defined interests in the goods. The pledge of goods constitutes a specific (or fixed) charge.
(iii) Hypothecation: The hypothecation is the creation of an equitable charge (i.e., a charge created not by an express enactment but by equity and reason), which is created in favor of the lending bank by execution of hypothecation agreement in respect of the moveable securities belonging to the borrower.
Neither ownership nor possession is transferred to the bank. However, the borrower holds the physical possession of the goods as an agent/trustee of the bank.
The borrower periodically submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to the lending banker on the basis of which the drawing power of the borrower is fixed.
(iv) Assignment: Assignment represents a transfer of an existing or future debt, right or property belonging to a person in favor of another person. Only actionable claims (i.e., claim to any debt other than a debt secured by a mortgage of immovable property or by hypothecation or pledge of moveable property) such as book debts and life insurance policies are accepted by banks as security by way of assignment.
An assignment gives the assignee absolute right over the moneys/debts assigned to him.
(v) Set-off: Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit balance in the debtor’s account against any credit balance lying in another account of the debtor. The right of set-off enables a bank to combine two accounts (a deposit account and a loan account) of the same person provided both the accounts are in the same name and same right (i.e., the capacity of the account holder in both the accounts should be the same).
For the purpose of set-off, all the branches of a bank are treated as one single entity. The right of set-off can be exercised in respect of time-barred debts also.
(vi) Lien: Lien is creation of a legal charge with consent of the owner, which gives lender a legal right to seize and dispose / liquidate the asset under lien.
In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence about?
(a) Amounts included in balance sheet in respect of advances which are outstanding at the date of the balance sheet.
(b) Advances represent amount due to the bank.
(c) Amounts due to the bank are appropriately supported by loan documents and other documents as applicable to the nature of advances.
(d) There are no unrecorded advances.
(e) The stated basis of valuation of advances is appropriate and properly applied and the recoverability of advances is recognised in their valuation.
(f) The advances are disclosed, classified and described in accordance with recognised accounting policies and practices and relevant statutory and regulatory requirements.
(g) Appropriate provisions towards advances have been made as per the RBI norms, Accounting Standards and generally accepted accounting practices.
How can the auditor can obtain sufficient appropriate audit evidence about advances by study and evaluation of internal controls relating to advances?
by:
examining the validity of the recorded amounts;
examining loan documentation; reviewing the operation of the accounts;
examining the existence, enforceability and valuation of the security;
checking compliance with RBI norms including appropriate classification and
provisioning;
and carrying out appropriate analytical procedures.
Evaluation of Internal Controls over Advances. the internal controls over advances should include ?
The bank should make an advance only after satisfying itself as to the credit worthiness of the borrower and after obtaining sanction from the appropriate authorities of the bank.
All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation, etc.) should be executed by the parties before advances are made.
The compliance with the terms of sanction and end use of funds should be ensured.
Sufficient margin as specified in the sanction letter should be kept against securities taken so as to cover for any decline in the value thereof. The availability of sufficient margin needs to be ensured at regular intervals.
If the securities taken are in the nature of shares, debentures, etc., the ownership of the same should be transferred in the name of the bank and the effective control of such securities be retained as a part of documentation.
All securities requiring registration should be registered in the name of the bank or otherwise accompanied by documents sufficient to give title to the bank.
In the case of goods in the possession of the bank, contents of the packages should be test checked at the time of receipt. The godowns should be frequently inspected by responsible officers of the branch concerned, in addition to the inspectors of the bank.
Drawing Power Register should be updated every month to record the value
of securities hypothecated. These entries should be checked by an officer.
The accounts should be kept within both the drawing power and the sanctioned limit.
All the accounts which exceed the sanctioned limit or drawing power or are otherwise irregular should be brought to the notice of the controlling authority regularly.
The operation of each advance account should be reviewed at least once a year and at more frequent intervals in the case of large advances.
In the case of goods in the possession of the bank, contents of the packages should be test checked at the time of receipt. The godowns should be frequently inspected by responsible officers of the branch concerned, in addition to the inspectors of the bank.
Drawing Power Register should be updated every month to record the value
of securities hypothecated. These entries should be checked by an officer.
The accounts should be kept within both the drawing power and the sanctioned limit.
All the accounts which exceed the sanctioned limit or drawing power or are otherwise irregular should be brought to the notice of the controlling authority regularly.
The operation of each advance account should be reviewed at least once a year and at more frequent intervals in the case of large advances.
