Bank concurrent audit

BANK CONCURRENT AUDIT

General Audit Procedures, Methods and Reporting

by

DINESH M, B.Com., A.C.A. Partner KNMA & ASSOCIATES, Chartered Accountants, Chennai. Email: [email protected]

INTRODUCTION

KNMA & ASSOCIATES.

INTRODUCTION Bank Concurrent audit was introduced and implemented primarily to attain

the following objectives:

To supplement the efforts of the bank in carrying out simultaneous

internal checks, not just reporting the errors identified.

To reduce the interval between a transaction and its examination by an

independent person not involved in its documentation.

To improve the functioning of the bank, resulting in the upgradation of

the working of the bank.

KNMA & ASSOCIATES.

INTRODUCTION

To identify whether the Systems & Procedures of the bank have been

properly complied and implemented by the bank.

To perform substantive checking of various areas of the bank operations

and to make adequate rectification of deficiencies in the earliest possible

period.

To give advisory opinions to bank in areas such as taxation, financial

analysis, etc., as and when it is necessary.

KNMA & ASSOCIATES.

SCOPE OF CONCURRENT AUDIT

KNMA & ASSOCIATES.


Verification of Advances –

Appraisal,

Pre-sanction

Documentation

Post-sanction

Unit inspection

Review & Renewal, etc.,

Verification of Deposits –

New accounts opened including operations in SB/CA,

Transactions regarding Term deposits,

KNMA & ASSOCIATES.


Inoperative accounts,

KYC Norms, etc.,

Verification of House keeping –

Cash Management,

Cheques & DDs,

Vouchers,

Periodical returns to Controlling office,

Maintenance of Specified Registers and Records

KNMA & ASSOCIATES.


Sensitive stationeries,

Locker maintenance, etc.,

Verification of Revenue Leakage –

Identification of Under recovery & Excess recovery of

Income & Expenditure including Interest credited & paid,

P&L Analysis,

Budgetary comparison, etc.,

KNMA & ASSOCIATES.


Verification of FOREX transactions –

NRE/NRO/FCNR accounts,

FCRA transactions,

Packing Credit,

Foreign currency business,

Submission of Returns, etc.,

Verification of Other Key areas –

TDS, Service tax,

Staff matters, Government transactions, etc.,

KNMA & ASSOCIATES.

DISCLAIMER

KNMA & ASSOCIATES.

DISCLAIMER

The Areas covered herein are ONLY GENERAL and would be included

MOSTLY in concurrent audits of the All the banks.

There are also CERTAIN AREAS which may be covered exclusively by Each

bank.

Hence, the SPECIFIC AREAS would have to be examined and understood

on CASE to CASE basis, subject to the requirement of each bank.

KNMA & ASSOCIATES.

GENERAL AUDIT PROCEDURE

KNMA & ASSOCIATES.


Concurrent Audit is not a ONE TIME activity.

It is CONTINUOUS process wherein each aspects of banking operations

are covered periodically & repeatedly

The General audit procedures includes of 2 kinds of verification:

ON-SITE

OFF-SITE

KNMA & ASSOCIATES.


ON-SITE:

Verification of Loan and other related documents.

KYC Norms.

Voucher verification (including income & expenses)

Cash management, Collection & clearing of Cheques.

Checking of Daily reports generated.

Unit inspection, Verification of Stock statements, Audited &

Projected Financials of the Borrowers.

KNMA & ASSOCIATES.


ON-SITE:

Application of Interest (received/paid) for all the accounts.

Verifying the suspicious transactions in all the accounts including

Staff accounts.

Checking the Various compliance functions to be adhered by the

Branch such as TDS & Service tax (Remittances & Returns), Monthly

& Quarterly returns & Certificates submitted to the Controlling office,

etc.,

KNMA & ASSOCIATES.


ON-SITE:

Physical verification of Sensitive items such as Cheque books, blank

DDs & Term deposit Forms, Jewels, etc.

Collection of Data regarding Loans accounts for the purpose of

creating a DATABASE.

KNMA & ASSOCIATES.


OFF-SITE:

Analysis of Various reports generated by us from the CBS regarding

areas such as

Irregular/Overdue Loans, TOD/Excess allowed, NPA & Watch category

accounts, Interest deviation, Day end reports, VVR, Cash Transactions, BS

& PL, etc.,

Reporting of Key deficiencies identified.

KNMA & ASSOCIATES.


OFF-SITE:

Identification of Accounts & Transactions that are subjected to further

verification(verification can be done either ON-SITE or OFF-SITE).

Comparison & Analysis of Branch performances in achieving its TARGETS

and Positions of its ACTUALS.

Comparative Analysis of BALANCE SHEET & PROFIT and LOSS

Creation and Updating the DATABASE for Loan accounts and scrutinizing it

periodically.

KNMA & ASSOCIATES.

ESSENTIAL DOCUMENTATION & OTHER RECORDS

KNMA & ASSOCIATES.

ESSENTIAL DOCUMENTATION &

OTHER RECORDS

Scope of the audit includes Verification of Several and Diversified

operations of the bank.

Concurrent audit requires PROPER DOCUMENTATION of the Auditor

with:

Completeness

Timely Updation

DOCUMENTATION refers both to the

Manuals concerning the Banking operations; &

Audit findings corroborating the discrepancies identified.

KNMA & ASSOCIATES.


OTHER RECORDS

BEFORE COMMENCEMENT OF AUDIT – (Permanent Files)

Following Documents to be collected and maintained :

BOOKS OF INSTRUCTIONS – Rules regarding Operations & Functioning

MANUAL OF DOCUMENTATION – Advances & Deposits.

LOAN POLICY DOCUMENT – Objectives & Stipulations for each financial year.

MANAGER’S DISCRETIONARY LENDING POWER– Credit facilities sanctioned by the

Branch Manager.

LOAN & DEPOSIT PRODUCTS – Category of Loans & Deposits & its conditions which

can be traced from the Bank’s website or Intranet.

KNMA & ASSOCIATES.


OTHER RECORDS

BEFORE COMMENCEMENT OF AUDIT – (Permanent Files)

Following Documents to be collected and maintained :

INTEREST RATES AND OTHER SERVICE CHARGES – Revenue Aspect.

CIRCULARS – Amendments & Highlights.

CBS MANUAL – Menus & Reports generated

BRANCH PROFILE – regarding Basic Data, Scale of Operations, etc., of the branch.

KNMA & ASSOCIATES.


OTHER RECORDS Perusal of following reports:

CONCURRENT AUDIT REPORT OF THE PREVIOUS MONTH – to understand the

Current Status of concurrent audit.

RBI/CO INSPECTION REPORT (Latest) – to make note of the Major findings &

observations regarding any account, particularly Advances.

STOCK AUDIT REPORTS – regarding Cash credit accounts more than Rs. One crores.

REVENUE AUDIT REPORTS – to understand the major deficiency found in the

Revenue aspect of the Branch

SPECIAL AUDITS (if any) – regarding any prime issue covered under such audits.

KNMA & ASSOCIATES.


OTHER RECORDS AFTER COMMENCEMENT OF AUDIT – (Current Files)

Following Documents to be collected and maintained:

MONTHLY REPORTS & WORKINGS – includes all the reports generated from CBS,

audit workings & findings, other data collected, etc. for the Respective month.

PENDING & FOLLOW –UP REGISTER– regarding the Areas which are pending and

are required to be followed-up in succeeding months.

UPDATION OF PERMANENT FILES – particularly concerned with recent Circulars

issued by RBI/Bank HO, Loan products, Changes in Interest rates & Service charges.

AUDIT NOTE ON KEY AREAS – based on matters discussed with Branch officials.

KNMA & ASSOCIATES.

ADVANCES

KNMA & ASSOCIATES.

BRIEF INTRODUCTION

Advances (or Credit Facility) are of following types:

FUND BASED & NON-FUND BASED

Fund based:

Term Loans – ex: Housing loan, Education loan, Car loan, Jewel loan, etc.,

Cash credit – ex. : Loan against Hypothecation of Stock/Debtors.

Overdrafts

Non-Fund based:

Letter of Guarantee & Letter of Credit

Co-acceptance of bills

Deferred Payment guarantee (for capital goods purchase)

KNMA & ASSOCIATES.

ADVANCES KEY ASPECTS & THEIR VERIFICATION

The following are steps followed by banks in sanctioning a Credit facility:

Appraisal

Pre-sanction

Documentation

Post-sanction compliances

Periodical assessing of the Working of the Account

KNMA & ASSOCIATES.


APPRAISAL:

In this process, the Bank would WEIGH & RATE the Financial Worth of the

prospective borrower in order to sanction the Credit facility.

Such WEIGHING & RATING would be based on following criteria:

Purpose of the loan – either Business or Personal

Income potential of the borrower – based on Income tax returns, Project reports,

Nature & Value of Security available with Borrower – ex: Property, Jewellary, Bank

deposits, Etc.,

Net-worth of the Guarantor – providing guarantee to the loan

KNMA & ASSOCIATES.


ASCERTAIN THE LOAN PRODUCTS

COMPARISON OF CONDITIONS & PROCEDURES

CRITICALLY ANALYSE CONSOLIDATE

& REPORT

KNMA & ASSOCIATES.

APPRAISAL – GENERAL STEPS


VERIFICATION OF APPRAISAL:

Following are the GENERAL steps to be employed by auditor for verification:

ASCERTAIN the Loan products regarding the pre-requisites, Eligibility criteria,

Essential documents to be obtained, etc.,

COMPARE these conditions with the procedures adhered by the Branch.

CRITICALLY ANALYSE whether borrower is eligible & has the potential to

repay specific loan.

CONSOLIDATE & REPORT any discrepancy noted during verification.

KNMA & ASSOCIATES.


VERIFICATION OF APPRAISAL:

Following PRECAUTIONS to be considered:

Verify the Manager’s Discretionary Power to ascertain whether the

amount of loan falls under his Lending powers. If the limit exceeds

the allotted power, then only the HIGHER AUTHORITY can process

the loan.

Examine carefully whether the branch has obtained all the

documents as stipulated by the bank.

Critical Analysis regarding Borrower’s potential should be done

with UTMOST DUE DILIGENCE so as to report any serious matters.

KNMA & ASSOCIATES.


PRACTICAL ISSUE IN APPRAISAL:

Since the verification is based on case-case basis, auditor should verify each

loan distinctly & not by same procedures.

Most of the banks have created separate Cell/Centre for processing

Important loans such as Housing loans, Business loans, High value Term

loans, etc.

In such cases, it is out of our scope of verification since we are concerned

mainly with the Branch’s operations.

KNMA & ASSOCIATES.


PRE-SANCTION :

Once the Appraisal has been completed & the Loan has been

processed, the Next stage is PRE-SANCTION.

In this stage, the branch has the following functions:

Preliminary inspection of the Business unit or Residence of the

Borrower.

Inspecting the nature of the securities offered particularly immovable

properties.

Preparing Reports after such inspection stating Specific reasons for

either SANCTIONING/REJECTING the loan.

KNMA & ASSOCIATES.


VERIFICATION OF PRE-SANCTION :

Perusal of the Inspection Reports – so as to ascertain the nature of

business functioning or regarding the immovable property charged

as Security.

Validating the remarks/comments mentioned in such report with

the areas verified under Appraisal.

KNMA & ASSOCIATES.


PRACTICAL ISSUE IN PRE-SANCTION :

Branches generally do not perform Pre-Sanction in REAL terms; but

just for the COMPLIANCE purpose.

Our scope is limited only to the verification of Inspection report at

this stage of loan.

We can verify the information given in this report only during OUR

UNIT INSPECTION.

Also, as specified earlier, when the loans are processed by Separate

Loan cells, Pre-sanction is done by their Officials not by the branch.

KNMA & ASSOCIATES.


DOCUMENTATION:

Documentation deals with preparation of Essential documents

before the Disbursement of the Loan sanctioned.

The type & Number of the document would be enlisted in the

Manual of Documentation.

Branch will prepare the Complete set of All documents signed by

the Borrower and the Officer Concerned.

These Documents should be maintained & kept separately in a SAFE

manner.

KNMA & ASSOCIATES.


VERIFICATION OF DOCUMENTATION:

Auditor should peruse the Loan Documents obtained & compare

with the list specified in the Documentation manual.

He should verify whether:

All the particulars in the document have been FILLED IN.

All the particulars filled in are CORRECT.

Signature and Acceptance from the BORROWER has been obtained

including the Sanction letter.

Branch official concerned have verified & authorized that all the

documents have been duly obtained.

KNMA & ASSOCIATES.


PRACTICAL ISSUES IN DOCUMENTATION:

Most Banks would not allow the Concurrent Auditors to mention

any Error in documentation.

They would convince us stating they would change it immediately.

But they may forget/omit to change those errors.

So, it is HIGHLIGHTED that the errors noticed in the

documentation should be specified in the Concurrent report.

KNMA & ASSOCIATES.


POST-SANCTION COMPLIANCES:

After the disbursement of the loan, the branch should monitor and

comply all the term & conditions specified in Loan sanction letter.

This compliance includes the following:

Verification of End-use of funds – whether they are utilized for intended

purpose.

In case of Immovable property offered as Security:

Mortgage has created & registered.

Valuation report, Legal opinion report, Latest Encumbrance certificate

have been obtained.

KNMA & ASSOCIATES.


POST-SANCTION COMPLIANCES:

This compliance includes the following:

In case of vehicle loan – whether Registration certificate & Insurance policy

has been obtained with one month of Loan.

In case Building and/or Stock given as security: Insurance policy has been

duly done with adequate value covering the risk.

KNMA & ASSOCIATES.


VERIFICATION OF POST-SANCTION COMPLIANCES:

Even though Post-Sanction compliances vary for each category of

loan, they would be enlisted completely in the sanction letter.

So, the Auditor should study it carefully & check whether all the

points are adhered 100% by the branch .

Any lapses should be reported both to the Branch officials & Higher

authority through audit report.

Also, Auditor should document the Key areas in the sanction letter

so as to verify it later during the periodical review of the account.

KNMA & ASSOCIATES.


PRACTICAL ISSUES IN POST-SANCTION COMPLIANCES:

Certain terms & conditions might not be complied immediately due

to some delays that are beyond the control of Branch authority.

Ex: Mortgage registration for Immovable property, Vehicle registration

from RTO, etc.

In such cases, Auditor should note these areas in his Follow up

register and has to verify them in the forthcoming months.

When they are pending for longer time, it should be reported by the

auditor.

KNMA & ASSOCIATES.


PERIODICAL ASSESSMENT OF THE LOAN ACCOUNT:

After all the Compliance enlisted above have been done, Loan

amount will be disbursed to the borrower.

After Disbursement, the Bank has to CAREFULLY follow-up &

monitor the following points:

Repayment of EMI & Servicing of Interest.

Utilising of Limit, Adequate Turnover, Submission of Periodical

Stock/Debtor statements, Unit inspection, Audited financial

statements, (in Case of Business accounts).

Overdue, if any, has been pending for longer period of time.

KNMA & ASSOCIATES.



The verification of auditor includes the following:

Assess the position of each loan account at the end of the month &

inform the bank regarding any IRREGULAR accounts.

Verify & analyse the FACTS & FIGURES presented in PERIODICAL

STATEMENTS filed by the Borrower.

Examine the Frequent UNIT INSPECTION done by the branch &

highlight any serious lapses. (Auditor may also accompany the bank officials

in any of the unit inspection.)

Verify & comment the recovery efforts done by the Branch in case of NPA

accounts & Potential NPA accounts.

KNMA & ASSOCIATES.



The verification of auditor includes the following:

Examine periodically INSURANCE details of each loan & report to bank

regarding EXPIRY date or INADEQUATE insurances.

Verify the accounts that are due for REVIEW/RENEWAL.

Check whether ACKNOWLEDGEMENT OF DEBT (AOD)/REVIVAL

LETTER(RL) has been obtained for all loans that are more than 36

months old. (Exception: Jewel Loan & Loan against bank deposits)

KNMA & ASSOCIATES.

ADVANCES IMPORTANT TECHNICAL TERMS

MORTGAGE:

It is an official registration which gives right to bank to hold it as

security for the loan.

Mortgage is done for Immovable property.

Mortgage is of TWO TYPES:

SIMPLE MORTGAGE

EQUITABLE MORTAGE

KNMA & ASSOCIATES.


KNMA & ASSOCIATES.

MORTGAGE

Simple Mortgage or Registered Mortgage

It is a proper mortgage where it is registered in the name of the Bank.

Hence, The borrower cannot dispose of this

property without Bank’s permission

Equitable mortgage

It is just Depositing of Original Title deeds to the Property with the Bank.

Hence, The Bank’s name is not official registered, even though

Property cannot be sold


KNMA & ASSOCIATES.

MORTGAGE

Simple Mortgage or Registered Mortgage

Generally done for properties that do not have Original

title deeds

Ex: Inherited Properties

COMPULSORY REGISTRATION

Equitable mortgage

It is MOST COMMON practice followed all over India (since procedures is

simple)

OPTIONAL REGISTRATION

Exception: Tamilnadu


HYPOTHECATION:

It is similar to Mortgage but it is applicable to MOVABLE

PROPERTIES that are given as security.

Even though the bank does not have Direct control over these

securities, Still the bank has the right to take the possession of

them whenever required.

Unlike Mortgage, there are no Stringent Procedures to be followed.

Ex: STOCK, DEBTORS, VEHICLES, ETC.,

KNMA & ASSOCIATES.


PLEDGE OR LIEN:

Pledge or Lien is surrendering of the Security to the bank’s control

for the loan.

Hence, the Bank have 100% control over the asset.

Ex: Jewel Loan, Loan against deposits

KNMA & ASSOCIATES.

ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS

Cash credit (CC)/Overdraft loans accounts are distinct from

Other type of loan accounts due to following reasons:

It is Limit based account mainly given for Business purposes.

(Mostly to meet the Working capital gap)

It is a continuous account wherein the Borrower utilizes the limit as

& when required.

There is no Fixed EMI repayment to this loan.

The Bank expects the borrower to route all this business turnover

through this account.

The Credits in this account should be sufficient enough to atleast

service the Interest debited.

KNMA & ASSOCIATES.


Cash credit (CC)/Overdraft loans accounts are distinct from

Other type of loan accounts due to following reasons:

Every month Bank fixes the Drawing power periodically (mostly

monthly) for this account.

Bank reviews the functioning & operation of this account

periodically (mostly quarterly).

KNMA & ASSOCIATES.


DRAWING POWER(DP):

It is common term associated with CC accounts.

DP is fixed by the Bank each month based on the Stock

statement/Debtors statement filed by the borrower.

Significance of DP is that it determines the limit up to which

amount can be withdrawn from CC account, i.e.,

KNMA & ASSOCIATES.

If Limit < DP

Max. Amount = Limit

If DP > Limit

Max. Amount

= DP


VERIFICATION OF DRAWING POWER(DP):

The Auditor has to analyse whether DP has been properly

calculated.

For this, he has to analyse the following: STOCK STATEMENT &

BOOK DEBTS. Their calculation is as follows:

KNMA & ASSOCIATES.

STOCK VALUE

LESS: CREDITORS FOR STOCK

LESS: MARGIN

DRAWING POWER AS PER STOCK

DEBTORS VALUE

LESS: DEBTOR AGING MORE THAN 90 DAYS

LESS: MARGIN

DRAWING POWER AS PER DEBTORS


VERIFICATION OF DRAWING POWER(DP):

Important points:

In case of Stock statement, auditor should verify, based on the

nature of the Business of the borrower, whether particulars given

are SUFFICIENT ENOUGH.

UNPAID STOCKS should be reduced for the computation.

In case of Debtors statement, the auditor should not take into

account the Value of debtors who are outstanding for more than 90

days.

Also, the Borrower should submit CA certificate for the Debtors

balance outstanding for every quarter.

KNMA & ASSOCIATES.


PRACTICAL ISSUES IN DRAWING POWER:

Creditors for Stock (or Unpaid stocks) are not reduced.

Debtors aging more than 90 days are not reduced.

Quarterly CA certificate not submitted by borrower.

Particulars regarding Stock not furnished comprehensively.

KNMA & ASSOCIATES.


TEMPORARY OVERDRAFT (TOD)/EXCESS ALLOWED:

Branch manager has the power to sanction an account holder to

draw amount in excess of the available limit or balance based on his

credibility & business expediency. Such excess is called TOD.

TOD is generally for a shorter period of time, say 30 to 60 days

within which the borrower has to repay the amount.

For this, Bank charges additional interest at prescribed rate.

TOD can also be sanctioned for SB & Current accounts.

KNMA & ASSOCIATES.


TEMPORARY OVERDRAFT (TOD)/EXCESS ALLOWED:

Auditor has to verify whether:

Branch manager has used his powers judiciously.

Frequent TODs granted to the same account more than the prescribed

times.

Proper documents & security have been obtained.

TODs have been settled within the due dates or there are still

outstanding in such accounts.

KNMA & ASSOCIATES.

ADVANCES NPA & WATCH CATEGORY ACCOUNTS

NON-PERFORMING ASSETS (NPA):

NPA is one which does not generate any income to the bank.

Following may be causes to become NPA:

Interest/EMI overdue for more than 90 days.

OD/CC account is out of order for more than 90 days.

In case of NPA, the bank should

Make Provision for Bad debts

Should Recognise Income only on RECEIPT basis not on ACCRUAL

BASIS

For better understanding, Refer RBI Master Circular on

Prudential Norms on IRAC dated 1.7.2011

KNMA & ASSOCIATES.


VERIFICATION OF NPA:

Auditor is concerned with whether the bank has

Correctly Classification of Each of Loan account as per IRAC norms

Provisioning has been done accurately.

Interest & other incomes have been charged as per the norms

Auditor should examine the Efforts taken by the Bank for recovery

of these accounts. Recovery procedures may be as follows:

Regular Follow-up of the accounts & the borrower.

Filing Suits in the Courts.

Taking action under the Securitization and Reconstruction of Financial

assets and Enforcement of Security Interest Act, 2002. (SARFAESI act)

KNMA & ASSOCIATES.


WATCH CATEGORY ACCOUNTS:

These are the Loan accounts which have the potential to become

NPA in the near future.

Every bank applies Different norms & uses Different names for

classifying these category of accounts.

General norm is that:

Account overdue for more than 30 days.

Interest not serviced for more than 30 days.

KNMA & ASSOCIATES.


VERIFICATION OF WATCH CATEGORY ACCOUNTS:

On the basis of the norms fixed by the Bank, Auditor should

scrutinize the accounts.

Identify such accounts & report to the Bank to take adequate steps

to prevent from becoming NPA.

Auditor should ensure that after the commencement of audit,

Accounts should not be classified as NPA without being reported

under Watch category list.

KNMA & ASSOCIATES.

DEPOSITS

KNMA & ASSOCIATES.

DEPOSITS BRIEF INTRODUCTION

KNMA & ASSOCIATES.

Deposits

Savings Bank

Current account

Term deposits

DEPOSITS KEY ASPECTS & THEIR VERIFICATION

In the deposits accounts, the auditor has to verify the following

things:

KNMA & ASSOCIATES.

Account opening forms

Adherence KYC guidelines (including AML)

Conduct in the Newly opened Accounts

Inoperative accounts


Account opening forms:

Auditor should verify all the Deposit account forms with regard to

whether :

All the particulars have been properly filled in.

Account holder has signed in all the appropriate places.

Photo have been properly affixed & attested.

Branch officials have authorized & signed.

PAN or Form 60 has been duly obtained.

Proof of Identity & Proof of Address have been Correctly obtained.

Details of the account holder keyed in the CBS correctly

KNMA & ASSOCIATES.


Adherence to KYC norms:

Know Your Customer (KYC) norms have been prescribed so as to:

Confirm regarding Identity & Existence of the customer.

Bank Account is not used for Illegal purposes.

Money laundering is strictly prevented. (as per PMLA, 2002)

KYC norms are as follows:

Introductory reference by Existing customer.

Obtaining Valid documents as Proof of Id & Address and Verifying them

with the original.

Ceiling on the Cash transactions to be entered by the Customer:

Ex: Issue of DD against cash for Rs. 50,000/- & more.

KNMA & ASSOCIATES.


Adherence to KYC norms:

Auditor’s responsibility is to check & examine whether the

Sufficient & Adequate Documents have been obtained to corroborate KYC

adherence.

Bank has in REAL terms implemented the policy of KYC norms.

Operations of the Accounts opened during last 6 months does not involve

High value transactions.

KNMA & ASSOCIATES.


Inoperative accounts:

If the Deposits Accounts (particularly SB & Current) are not

operated for a longer period of time, CBS of the bank automatically

categorize it into Inoperative/Dormant status.

Once an account is flagged Dormant, the Bank monitors all the

transactions done after that & also the Specimen signature is

automatically blocked.

Since there is a possibility that fraud can happen through

Inoperative accounts, Auditor has to be very cautious with

Inoperative accounts.

KNMA & ASSOCIATES.


Inoperative accounts:

The Auditor has to verify the Operations & Status of the Inoperative

Accounts once in a week in Off-site.

If any discrepancy is noticed, it should be examined so as to ensure

NO SERIOUS issue pertains to it.

Auditor should also discuss with the bank when any dormant is

shifted to ACTIVE status.

KNMA & ASSOCIATES.

HOUSE-KEEPING

KNMA & ASSOCIATES.

HOUSE-KEEPING

CASH MANAGEMENT:

Surprise verification of Cash by Auditor & Branch official

How many days Excess cash held by branch against the Retention

limit.

Amount of Cut-notes & Soiled notes held by Branch.

Nature of Dealing of Counterfeit currencies.

Inward & Outward remittance of Cash (including Insurance)

How Excess/shortage of cash by cashier is dealt with.

KNMA & ASSOCIATES.

HOUSE-KEEPING

CHEQUES:

Issue of Cheque books to the customers.

Procedure for Collection & Clearing of Cheques.

Reconciling of Inward & Outward cheques with Clearing house.

In case of Cheque returns, collecting appropriate charges.

DEMAND DRAFTS & PAY ORDER:

Procedure of Issue of Demand drafts & Pay Order

Collection of appropriate charges.

Service branch for making Payments against DD & Pay order.

KNMA & ASSOCIATES.

HOUSE-KEEPING

VOUCHERS:

Vouchers are the basic input documents which the Bank maintains

invariably for all the transactions.

Voucher Verification gives the auditor the COMPREHENSIVE

OPINION on the operations dealt with by the bank.

General procedures followed:

Vouchers should be stitched properly & in order.

Vouchers stitched should be kept safely & securely for prescribed period

of years.

Voucher verification report is prepared in CBS. (in some Banks, this is not

in practice.)

KNMA & ASSOCIATES.

HOUSE-KEEPING

VOUCHERS:

Voucher includes the following documents:

Deposit & withdrawal forms.

DD vouchers

Transfer challans

Cash Scrolls & EOD reports, etc.,

Auditor should examine

Whether All the vouchers are properly secured.

The Transactions represented by the Voucher & should get clarified

from the Branch officials in case of Queries.

KNMA & ASSOCIATES.

HOUSE-KEEPING

PERIODICAL RETURNS:

Branch should submit Certain Periodical returns to its Higher

authority as may be prescribed them.

Auditors should get the list of Such Returns to be filed along with

the Due Date of submission.

Each month, he should verify:

The Returns have been filed promptly.

The Facts mentioned in such returns & examine it accuracy.

KNMA & ASSOCIATES.

HOUSE-KEEPING

MAINTENANCE OF REGISTERS & RECORDS:

The Bank has prescribed the Branch to maintain Certain registers &

records in the Book of Instructions.

The auditor shall go through it & shall verify whether:

Prescribed registers & records are maintained.

Particulars written are complete & accurate.

The Records & Registers are Updated periodically.

Auditor should also mention in his report:

List of registers not maintained by the branch.

Any Factual errors identified in the report.

KNMA & ASSOCIATES.

HOUSE-KEEPING

SENSITIVE STATIONERY:

Sensitive Stationeries include

Cheque books

Demand Drafts & Pay orders

Term deposits Receipts

ATM cards & pin-mailers

Auditor should examine whether

Inward & Outward movement of these stationeries entered in the

Movement register.

Physically verify these items periodically

Proper control is exercised over Wasted items or Lost items.

KNMA & ASSOCIATES.

HOUSE-KEEPING

LOCKER MAINTENANCE:

Safe Custody Lockers are provided by Banks to their customers for

storing & maintaining their Essential items & documents.

For Locker operations, One key is provided to the Customer &

Another key is available with the concerned official. Only with these

two keys, lockers can be accessed.

Lockers of different size are held by Bank.

For this service, the Bank charges appropriate Locker rent.

KNMA & ASSOCIATES.

HOUSE-KEEPING

LOCKER MAINTENANCE:

Auditor should verify whether:

Locker Accessing Register are signed by customer before operating the

locker.

Locker rent is collected each year.

In case of Locker Rent Arrears, Reminders has been sent & customers

are prohibited from accessing the locker.

After the Locker is closed, the bank should interchange the Lock & Keys

before sanctioning it to another customer.

In case of a locker not being accessed for a longer time, the Branch has

referred the higher authority for breaking the lock.

KNMA & ASSOCIATES.

REVENUE LEAKAGE

KNMA & ASSOCIATES.

INCOME & EXPENDITURE

KNMA & ASSOCIATES.

INCOME

INTEREST FROM LOANS

PROCESSING CHARGES ON

LOANS

PENAL CHARGES

COMM. ON DD & FUND

TRANSFER

LOCKER RENTS

OTHER SERVICE CHARGES

EXPENDITURE

INTEREST PAID ON DEPOSITS

RENT & TELEPHONE

EB CHARGES

PRINTING & STATIONERY

TRAVELLING EXPENSES

OTHER OPERATING EXPENSES

REVENUE LEAKAGE

REVENUE LEAKAGE:

Revenue Leakage refers to the

Under Recovery in the Income of the bank.

Excess charging of the Expenditure of the Bank.

Banks generally STRESS more this aspect of the audit.

Auditor has to CAREFULLY & CRITICALLY examine each and every

transaction so as to ascertain whether there is a possibility of

leakage.

When leakage is found out, he should ensure that the amount has

been properly recovered for such transactions.

KNMA & ASSOCIATES.

REVENUE LEAKAGE

REVENUE LEAKAGE:

In case of Income, since there are large avenues covered by the

Branch, the Auditor should go thorough all the manuals regarding

to Interest rates & other charges levied by the bank.

He should be SPOT-ON in identifying the lapse & report it

immediately to the branch officials.

In case of Expenditure, auditor should go through the powers &

limits of Manager and should confirm whether Expenditure are

done accordingly.

Also, he should analyse the prudence & mode of operation in

incurring such expense.

KNMA & ASSOCIATES.

REVENUE LEAKAGE

INCOME LEAKAGE: Common reasons:

KNMA & ASSOCIATES.

• Interest rate wrongly keyed in the CBS

• Changes done in the Interest rates without Authorisation

• Interest debited not serviced.

INTERST ON LOANS

• Mistake in the calculation of Processing charges

• Non-recovery or Under recovery of PC

PROCESSING CHARGES

• Omission to collect it properly.

• Mistake in calculating the correct amount.

OTHER INCOMES

REVENUE LEAKAGE

EXPENDITURE LEAKAGE: Common reasons:

KNMA & ASSOCIATES.

• Interest rate wrongly keyed in the CBS

• Changes done in the Interest rates without Authorisation

INTERST PAID ON

DEPOSITS

• Incurring expenditure over & above the powers of the Manager.

• Incurring without proper bills & vouchers.

• Unreasonable amount

OPERATING & OTHER EXPENSES

REVENUE LEAKAGE

P&L ANALYSIS:

The auditor should analyse the P&L account of the branch at the end

of each month.

Profitability should compared for each month with the previous

month.

Any such following discrepancies should be noted & reported:

Debit Balance in Income head & Credit balance in Expenditure head.

Abnormal transactions occurred during the month

Revenue vs. Capital expenditure

Any other uncommon features.

KNMA & ASSOCIATES.

REVENUE LEAKAGE

BUDGETARY ANALYSIS:

Auditor should compare the ACTUALS vs. BUDGETARY TARGETS of

the Branch.

Any sudden spurt or fall should be examined & discussed with the

branch official.

This analysis is applicable both for Revenue items & Advances-

deposits items.

KNMA & ASSOCIATES.

OTHER KEY AREAS

TDS & SERVICE TAX:

With respect to TDS, auditor should verify the following:

TDS on Interest paid on Fixed deposits have been properly deducted.

Form 15G/H have duly obtained & submitted for applicable cases.

TDS made on other applicable expenses such as Rent, Professional charges,

etc. should be examined.

Whether TDS deducted is remitted within due date (i.e, 7th of next month)

Quarterly TDS return has been filed.

Form 16A has been given to respective deductees.

KNMA & ASSOCIATES.

OTHER KEY AREAS

TDS & SERVICE TAX:

With respect to SERVICE TAX, auditor should verify the following:

Service tax collected on incomes such as Processing charges, Charges on

Specific services rendered have been done at Statutory rate of tax.

ST collected have been remitted within due date (i.e. 6th of next month)

Half yearly return have been filed properly.

KNMA & ASSOCIATES.

OTHER KEY AREAS

STAFF MATTERS:

With respect to Staff, the Bank gives various concessions &

privileges to be enjoyed by them in banking operations.

Also, each staff enjoys certain administrative powers based on the

position of Duty.

Hence, it is possible that he/she may misuse the powers assigned to

them.

Thus, Auditor has the scope of verifying the Accounts & other

operations of the Staff.

KNMA & ASSOCIATES.

OTHER KEY AREAS

STAFF MATTERS:

Salary & other allowances to Staff are controlled directly by the

higher authority. Hence it is OUT OF AUDIT SCOPE.

Auditor should scrutinize the Bank accounts of the Staff maintained

in the respective branch so as to ensure that:

No Abnormal or Unrelated transactions are recorded frequently in their

account.

Staff does not misuse their powers to indulge in frauds or other serious

issues.

Auditor should verify each & every staff accounts in this respect.

KNMA & ASSOCIATES.

OTHER KEY AREAS

GOVERNMENT TRANSACTIONS:

Generally, Banks accepts & process Government challans thereby

acting as its Collecting agent.

Example of Transactions are:

Direct tax & Indirect tax collections

Pension payments for Government employees, etc.

For these transactions, they may/may not be given any commission

by the bank.

In case of commission being given, the auditor should check

whether the commission has been properly received & duly

accounted for.

KNMA & ASSOCIATES.

OTHER KEY AREAS

PENSION PAYMENTS:

For most government retired employees, Bank acts as collecting agent

for the pension paid by the government.

The government directly credits the pension to the Bank account

provided by the employees.

For such function, the Bank has the following functions which the

auditor has to verify:

Obtaining & submitting promptly the Life Certificate & other prescribed

documents (once in a year)

Pension payment register & master is maintained.

Securing safely the Records such as Pension payment orders, Life certificate,

Nomination form, etc.,

KNMA & ASSOCIATES.

Bank concurrent audit

Economy & Finance