BANK BRANCH AUDIT 2016 - Independent Bank Branch Auditor’s Report (Illustrative format) for Modified Report – Qualified or Adverse Opinion

[CA GOPALJI AGRAWAL]

Independent Bank Branch Auditor’s Report (Illustrative format) for Modified Report – Qualified or Adverse  Opinion

To,

The Statutory Central Auditors,

Name of the bank

Region _______________                

1.     We have audited the accompanying Financial Statements of _XYZ_ Branch of __ABC Bank____ which comprise the Balance Sheet as at 31^st March 2016, Profit and Loss Account for the year ended on that date and other explanatory information.

 

Management’s Responsibility for the Financial Statements

2.     Management of the branch is responsible for the preparation of these financial statements that give true and fair view of the financial position and financial performance of the Branch in accordance with the Banking Regulation Act, 1949 complying with Reserve Bank of India guidelines, the provisions of  the other Statute _________ (if any) and recognised accounting policies and practices, including the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

3.     Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

4.     An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Branch’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the branch internal control {329^th meeting in JAN 2014-para 31(b) of 700}. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

5.     We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion or adverse opinion.

6.    Basis for qualified Opinion or  Adverse Opinion

1. Our test check reveals that there are several borrower accounts in the Annual Advance Statements carrying the following errors:

1. Several borrower accounts have been classified as standard assets instead of non-performing assets (NPA) and unrealized interest for the current as well as prior periods have been accounted for resulting overstatement of the profit & advances at branch level and would result the under provisioning for advances as per Reserve Bank of India prudential norms on income recognition, asset classification and provision for advances. Our test check identified 161 such borrower accounts amounting to ₹ 304 Lacs Approx as per annexure to this opinion which indicates that the system for classification of advances including recognition of NPA is not satisfactory. The branch could not ascertain the amount of NPA categorized into performing assets and the interest reversal of the current as well as prior periods.

The possibility of claiming interest subvention on the irregular accounts cannot be ruled out.

2. In case of non performing agriculture and government sponsored scheme advances, the security has been presumed without the physical verification and valuation of such tangible security, which would have been deteriorated or eroded due to efflux of time which might affect the provisions for advances materially. 

2. We also observed that the interest on KCC accounts which are irregular in payment, interest is being charged @ 7% resulting the lower rate of interest as well as claiming the interest subvention on such accounts.

3. The advances categorized even under standard assets have been stated as unsecured despite having security. The total standard advance at the year end is ₹ 3955 lac while ₹ 536 lac has been stated as unsecured. The total unsecured advances as stated in the summary advance statement is ₹ 876 lac (total advance is ₹ 4227 lac). This is materially misstated security wise classification and would result the overstatement of provisioning on advances.

4. Our test check has further revealed that:

The branch had not been following properly the prudential norms on income recognition, asset classification and provisioning pertaining to advances in the past periods hence  the advances amounting to Rs. _____crore approximately were recognized as NPA (sub-standard) during the financial year 2016-16 or in the month of ______ or on _________, in terms of HO Letter No…….  to rectify the errors occurred in the past  periods. The unrealized income including interest has been partially reversed in the current year. Therefore the income recognition, asset classification and provisioning are materially misstated due to the following reasons:

1. These advance accounts had not been classified as NPA in the past periods in accordance with the IRAC norms of RBI.
2. All such aforesaid accounts have been classified as sub-standard instead of the correct classification into three   categories viz. sub standard, doubtful and loss since the relevant date of each such account becoming NPA is more than 12 months.
3. The unrealized income including interest on these accounts has been partially reversed.
   1.  
4. As required by Accounting Standard 5- The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived but it has not been followed.

Qualified Opinion

7.     In our opinion, read with adjustments (NOT SUBJECT TO)to be made at Head Office as given in para 11 below and  Memorandum of Changes as given in Para 12 below and except for the effects of the matters described in the basis of qualified opinion in the aforesaid paragraph and to the best of the information and according to the explanations given to us and as shown by the books of the branch, we report that:

(a)    The aforesaid Balance Sheet read with summary of advances, is a full and fair balance sheet of the branch containing the necessary particulars and is drawn up so as to exhibit a true and fair view of the branch as at the 31^st March 2016 except the wrong classification  of advances including errors in some fields of advance statements like irregular amount, date of NPA etc.

(b)    The aforesaid Profit and Loss account exhibits a true and fair view of the Operating Profit of the branch for the year ended the 31st March 2016;                                                     OR  (Alternatively)

Adverse Opinion

In our opinion, because of the significance of the matters discussed in the basis for Adverse Opinion paragraph, the financial statements do not represent a true and fair view in conformity with the framework under which these have been prepared:

1. In the case of Balance Sheet, of the state of affairs of the branch as at March 31, 2016
2. In the case of Statement of Profit & Loss, of the profit /loss of the branch for the year ended on that date.

Report on Other Legal and Regulatory Requirements:

8.     The Balance Sheet and the Profit and Loss Account contains the data required to draw up the Balance Sheet and the Profit and Loss Account in Form A and B respectively of the Third Schedule of the Banking Regulation Act, 1949;

9.     Subject to the limitations of the audit indicated above in para 3 to 5 above and paragraph 11 below, we report that:

(a)    We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of the audit and have found them to be satisfactory.

(b)    The transactions of the branch which have come to our notice have been within the powers of the Bank.

10.     We further report that:

a.         the Balance Sheet and Profit and Loss account dealt with by this report are in agreement with the  books of account and returns; and

b.       in our opinion, proper books of account as required by law have been kept by the branch so far as appears from our examination of those books unless otherwise stated; (not  in 2016 GN)

c.       In our opinion, the Balance Sheet and Profit and Loss Account comply with the Accounting Standards (new 2016)

Other matters {A 1, should  be placed before report on other legal and regulatory requirements)

11.      No adjustments/provisions have been made in the accounts of the Branch in respect of matters usually dealt with at Head Office, including in respect of:

a.     Various disclosures are required by Accounting Standards, RBI guidelines and other rules and regulations    (MUST READ CLOSING CIRCULAR)

b.       Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;

c.       Terminal permissible benefits to eligible employees on their retirement (including additional retirement benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in terms of ‘AS 15 –Employee Benefits’ issued by the Institute of Chartered Accountants of India;

d.       Arrears of salary/wages/allowances, if any, payable to staff;

e.       Staff welfare contractual obligations;

f.         Old un-reconciled/unlinked entries at debit under various heads comprising Inter branch/office Adjustments;

g.       Auditors’ fees ;

h.       Taxation (Current Tax and Deferred Tax);

i.          Provision for Advances;

j.      Reversal of interest of new Non performing accounts

k.        Provision for office rent

12.    We have given _____Memorandum of Changes on the financial statements of the branch, which is summarized as below:

	MOC No.	Increase Amount (Rs.)	Decrease Amount (Rs.)
In respect of Income
In respect of expenditure
In respect of Assets
In respect of Liabilities
In respect of Gross NPAs
In respect of  Provision on NPAs*
In respect of Classification of Advances
In respect of Risk Weighted Assets
Other items (if any)

*Provisions to be made at HO level

For ____________________________

Chartered Accountants

Firm registration number _________

Name of the Partner

Partner

Membership number   _________

Place of Signature:

Date:

• Encl:   No. of MOCs /Annexure                                                                                                                                                                                                

BANK AUDIT PROGRAMME  2016 - ILLUSTRATIVE

CALENDAR OF RETURNS

COPIES OF LATEST RETURNS AS PER CALENDAR

COPY OF CLOSING CIRCULAR AND OTHER CIRCULARS

COPY OF COMPLETE CLOSING RETURNS

REVIEW OF REPORTS WITH COMPLIANCE REPORTS

  Statutory report L/Y 20XX-20XX

  Concurrent

  Inspection/Revenue

  Internal

  RBI

  others

BALANCE SHEET

  Scrutiny of Balance Sheet & Profit & Loss Account

  (Including analysis of subsidiary records other than deposits & advances)

  General Ledger / Profit & loss Accounts Ledger

  Ratio analysis [comparison with previous year]

Interest earned to net advances

Interest paid on deposits

Analytical comparison as per ICAI book

Inter branch Reconciliation/ Service branch (LFAR)

Balance with RBI/SBI and other bank  and reconciliation thereof

 

ADVANCES

  Advances Ledger with Advances such as ascrom/book debts/turnaround  statements

  Analysis of NPA statements with L/Y & Last Quarter NPA statements

  List of upgraded/degraded advances

  List of fresh advances during the year

  Housing Loans documentation with lawyer report and stamp paper no.

  Demand Loan against NSC+LIC-method of charge creation

  Staff Loan-Title deed

  Fees and charges on NPA should be reversed

  FDRS matured against demand loan must be adjusted.

 STOCK/ INSURANCE REGISTER / PARTY INSPECTION REGISTER /DP  -

  For LFAR reporting –large advances [Lower of 5% of total or ₹ 2 crore]

  CC-Yearly renewal Register–partywise details-

  Excess drawings

  Balance Confirmation (BC) Register –Limitation Register- NPA

  Provisioning in case of NPAs with regard to security valuation

  Implementation of procedure for verification & valuation of security

 

 

LETTER FROM BRANCH MANAGER

  Cash Balance at at 31.03.2016

  No personal /Capital expenses

  No frauds /audits

  Housing Loans documents-staff

  DICGC Certificates

  No repayment of deposits in cash

No investment held on behalf of HO- Register of Investment

  No audit other than disclosed one

  No violation of TDS, Service Tax and BCT

  ATM Balance confirmation

MISC. WORK

·         Day Book/Cash Book whether signed daily by two signatory

·         Excess cash balance maximum balance to be noted for LFAR

·         Periodical physical verification by senior officer fortnightly

·         Excess cash reported to controlling authorities

·         Scrutiny of inoperative accounts

·         KYC-New customer account

PHYSICAL VERIFICATION

·         Cash with certificate

·         Fixed assets register with few items

·         Tokens (missing tokens records)

·         Stationery items (test basis)/security register with working papers-certificate

·         Gold Coins

BALANCING OF DEPOSITS SUBSIDIARY RECORDS

DEPOSITS- Balancing, interest calculation, matured term deposits and its treatment with circular for overdue deposits

FIXED ASSETS DEPRECIATION

LOCKER RENT REGISTER (ARREAR RECORDS)  TO BE PREPARED BY BANK

BANK CHARGES   

      Bills (old outstanding for usanse/sight bills)

·         Guarantees

·         Inspection Charges

·         Advance income to be c/f as per policy

·         Commission on govt. transactions

                                                                                                                                                                     

GUARANTEE /LC ETC

TICKING OF BALANCE SHEET & PROFIT & LOSS ACCOUNT WITH GL

TAX AUDIT

·         Tds 

·          Non deduction of TDS

·          Cash Above ₹ 20000/- for expenses/term deposits

·         TDS demand on TDS CPC

CURRENT ACCOUNTS LEDGER FOR THE PURPOSE OF OVERDRAWN ACCOUNTS –TO BE CLASSIFIED UNDER UNSECURED ADVANCES

INTEREST CALCUATIONS ON ADVANCES/DEPOSITS ON TEST BASIS

LAST TWO DAYS DAY BOOK VOUCHING

TOTALLING/CHECKING OF EACH RETURNS TO BE SIGNED

LAST YEAR COMPARASION-NPA STATUS/SECURED AMOUNT/DATE OF NPA

BREAK UP OF SUNDRIES AND SUSPENSE

GHOSH COMMITTEE/JHILANI COMMITTEE REPORT WITH EVIDENCES

EXCEPTIONAL REPORTING TO BE CHECKED-OVERDUE DEPOSITS, TRANSACTION ON OPERATIVE A/C, LOST TOEKNS ETC.

NEW ACCOUNT OPENING FORM-S/A+C/A

SERVICE TAX – REPORTING TO CONTROLLING AUTHORITIES CHECK

VAT REPORTING (IN CASE OF GOLD COINS) TO CONTROLLING AUTHORITIES

RBI REPORTING IF CURRENCY CHEST BRANCH

                            

                                                                                                                                                                                                                                           BANK

BRANCH

Registers	Whether maintained (Y/N)	Updated till	Auditor's Remarks
Loan Application
Sanction/Disbursement
Pre-post Inspection
EM/LIEN
BMDP
Insurance
Stock/DP
Irregularity
NPA Movement
Balance Confirmation/LAD/Limitation
Renewal/Review
Recalled Assets
Write off
RC issued
Recovery
Suit Filed
Compromise/settlement
Rehabilitation
OTS
Bank Guarantee
LC
Bills purchased
OTHERS
Token
Locker Rent
BMCC
Obsolete/destroyed
Missing Voucher
Increment
Fixed assets
Salary register
Attendance register
Dak Inward
Dak Outward
Exception Report