Bank Branch LFAR CA Ketan Saiya
Bank Branch LFAR CA Ketan Saiya
Bank Branch LFAR CA Ketan Saiya
Branch level. Reserve Bank of India had originally introduced system of LFAR submission
by auditors way back in 1985, same was subsequently revised twice in 1993 and 2003 and
now in 2020. Branches LFAR are consolidated and Bank level LFAR is prepared. For branches
that are below cut off level for statutory audit, LFAR is to be prepared by concurrent
auditors. LFAR serves as vital tool for auditors and their team members. Auditors have to offer
comments/feedback on the Profit & Loss Account, Balance sheet, Advances and all other
matters. LFAR has questions for specialised branches such as Forex Branches, Service Branches
and Branches having large advances. Normally auditors verify and offer their comments on
the details complied by the branch management.
Normally audit team should go through LFAR well in advance and study the same
thoroughly. Before any area is started, questions to be answered in LFAR should be kept in
mind. Check List based on questions can be prepared same will help as ready tool for
verification of that area by audit team. While replying to the questions LFAR auditor must be
clear in his thoughts and to the point. Answer should be descriptive and Yes/NO/Not applicable
type of replies should be avoided. General comments/ copy paste of previous should be
strictly avoided. All irregularities pointed out should be specific and given with examples. Many
time auditors are giving cross references in LFAR/ of LFAR in other report, that needs to be
avoided. Main Auditor’s Report is self-contained document. Same way matters of Main
Statutory Auditor’s Report should not be reported in LFAR. Matter concerning subject of
qualification and affecting true & fair view should be reported only in Main Auditor’s Report.
In whole exercise of Bank audit, Documentation plays very important role. Auditors should
collect all important documents and create proper working papers. All documents should be
persevered as required by SAs.
Following points are to be kept in mind while making audit plan and doing actual
verification
Long Form Audit Report (LFAR) to the Management and the Statutory Central Auditors of the bank by the
branch auditors in case of bank branches
The following paragraphs list the matters which the branch auditors of the bank are required to comment upon
in their Long Form Audit Reports (LFAR). This questionnaire additionally contains questions, which are relevant
to the specialized branches dealing in foreign exchange transactions, branches having very large advances,
recovery of non- performing assets (NPA) and clearing house operations, if any. Auditors of foreign branches of
Indian banks should also furnish this report. In the case of foreign branches, reference to Reserve Bank of India
should be construed to include Reserve Bank of India, as well as the relevant regulating authority of the foreign
country where the branch is located.
A. Guiding principles on objective, strategy, scope and coverage of LFAR for branch auditors
i. The overall objective of the branch audit should be to have transaction testing and provide inputs to
the Statutory central Auditors on adequacy of implementation of various policy and regulatory
requirements, including efficacy of the system and assurance functions (risk management, compliance
and internal audit) at branch level.
ii. The threshold fixed for different purposes for comments in the LFAR will decide that above the
threshold, the transaction detailing needs to be seen and commented upon. However, below the
threshold, the system and processes should be checked andcommented upon.
iii. Verification of data integrity and data related control systems and processes should becarried out and
commented upon, with the special thrust on those data inputs which are to be used for MIS at
corporate office level and for supervisory reporting purposes.
iv. Where any of the comments made by the auditors in their LFAR is adverse, they should consider
whether a qualification in their main report is necessary. It should not, however, be assumed that
every adverse comment in the LFAR would necessarily result in a qualification in the main report. In
deciding whether a qualification in the main report is necessary, the auditors should use their
professional judgment in the facts andcircumstances of each case.
B. Indicative Format / Coverage in the Long Form Audit Report (LFAR) by theStatutory Branch Auditors
(SCB)
I. ASSETS
(a) Does the system ensure that cash : Verify the Internal Guidelines of Bank with regards to
maintained is in effective joint custody of custody of cash.
two or more officials, as per the instructions
of the controlling authorities of the bank? Verify the facts through records kept for cash
custody/changes in custody. Normally Key Register is
maintained.
(b) Have the cash balances at the branch/ATMs : Auditor need to conduct physical verification of cash at
been checked at periodic intervals as per the branch and at ATMs during the statutory audit.
procedure prescribed by the controlling
authorities of the bank? Find out what is the policy of Bank with regards to cash
verification by senior staff.
(c) (i) Does the branch generally maintain / : Verify the Cash retention limits fixed for branch
carry cash balances, which vary significantly including ATM and extension counters if any.
from the limits fixed by the controlling
authorities of the bank? Check cash balance for the year under audit and report
excess cash held if any.
(ii) Does the figure of the balance in the branch Check the cash balance as per branch books and as per
books in respect of cash with its ATM(s) tally ATM Report. If there, is any difference call for the
with the amounts of balances with the reconciliation statement, verify the same, and report the
respective ATMs, based on the year-end : discrepancies found.
scrolls generated by the ATMs? If there is any
difference, the same should be reported.
(d) Whether the insurance cover i s available : Insurance is normally taken at Head office level. Hence,
with include the point in management representation
the branch adequately meets the regarding the same if original policy document is not
requirement to cover the cash-in hand and verified by auditor.
cash-in transit?
Verify Insurance Policy/Head office letter for insurance
cover for branch and in transit.
Verify w h e t h e r cash in hand d u r i n g t h e y e a r i s
within insured limits and report the instances when the
actual cash held is above insured limits.
2. Balances with Reserve Bank of India, StateBank of India and other banks (For
branches with Treasury Operations)
(a) Were balance confirmation certificates Find out whether branch has any accounts with
obtained in respect of outstanding balances RBI/SBI/Other Banks.
as at the year-end and whether the aforesaid
balances have been reconciled? The nature : Call for balance confirmation certificates and verify the
and extent of differences should be same with books. If balance is not tallied call for
reported. Reconciliation. Verify the reconciliation items and if it
requires any provisioning do call for the same.
(b) Observations on the reconciliation : Auditor should verify that there are no abnormal
statements items in reconciliation. If there are any expense/
charges lying in records or old debit entries a r e l y i n g ,
may be reported in the following manner:
same should be provided for.
(i) Cash transactions remaining un- Verify the Cash transactions remaining un-responded.
responded : Normally on second or third day, response comes for
year end transactions. Report un-responded transactions
(give details) at the year-end in LFAR.
(ii) Revenue items requiring adjustments / Auditor should examine pending items in reconciliation
write- : and if there is any revenue, item requiring adjustment /
write off of the same should be done.
off (give details)
(iii) Other credit and debit entries originated in Auditor should call for statement of pending unreconciled
the statements provided by RBI/other banks, : entries and if the responded outstanding entry is older
remaining un-responded for more than 15 than 15 days same should be reported.
days:
Has the branch kept money-at-call and : Verify the branch has such transactions.
(a) short notice during the year?
If yes, verify all RBI/Bank’s guidelines are followed.
(b) Has the year-end balance been duly confirmed : Verification of year-end balance confirmation is to be
and reconciled? done .
(c) Has interest accrued up to the year-end : Calculation of interest accrued on year-end transaction is
been properly recorded? to be obtained and same needs to be examined by branch
auditor.
(d) Whether instructions/guidelines, if any, : Verify Bank Policies in this regards and it is actually being
laiddown by the controlling authorities of the followed or not? Report non-compliances if any.
bank have been complied with?
4. Investments (for branches outside India) Confirm with management that branch is having
investment activities, if yes call for all guidelines and
study RBI guidelines and check whether the same are
followed or not.
(a) In respect of purchase and sale of : Check the guidelines/ instructions for delegation of
investments, has the branch acted within its authorities for purchase and sale of investments to find
delegated authority, having regard to the out whether branch has acted within delegated authority
instructions/ guidelines in this behalf issued or not.
by the controlling authorities of the bank?
Report discrepancies if any.
(b) Have the investments held by the branch Conduct physical verification of investments with holding
whether on its own account or on behalf of : statement, certificates, deal slips etc. Report
the Head Office/other branches been made discrepancies if any.
available for physical verification? Where the
investments are not in the possession of the If the investments are held on the behalf of Head Office
branch, whether evidences with regard to and physical verification of the same is not done. This
their physical verification have been should be mentioned in the management representation.
produced?
In current situation DMAT / Holding statement should be
verified.
(c) Is the mode of valuation of investments in Ask for Banks valuation policy and verify the same is in
accordance with the RBI guidelines or the : accordance with RBI guidelines or not. Verify the actual
norms prescribed by the relevant regulatory investment valuation done. Normally Bank Branch cannot
authority of the country in which the branch hold investment in its own name except investments held
is located whichever are more stringent? for collection on revenue on behalf of the HO.
Advances
5.
General Instructions
(i) The answers to the following questions may : Select the advances as given in this question and
be based on the auditor’s examination of all verify the same in all aspect.
large advances.
(a) List of accounts examined for audit This is new requirement where in auditor has to
report how much advances / which accounts are
verified during the course of their audit. Percentage
of advances verified as compare to total advances
are to be mentioned.
Total A B C=A+B
Total X Y Z=X+Y
Outstanding
of the branch
Percentage A as % of X B as % of Y C as % of Z
examined
(i) In your opinion, has the branch generally : Carry out test check in advances verification and
complied with the procedures / instructions of list all deficiencies, which you found and based in
the controlling authorities of the bank area in which there is a deficiency report that.
regarding loan applications, preparation of
proposals for grant/ renewal of advances, Specifically call for advances sanctioned during the
enhancement of limits, etc., including adequate reporting period and call for those advances files
appraisal documentation in respect thereof. and verify the credit appraisal as prescribed in
bank’s policy is being followed.
What, in your opinion, are the major For credit appraisal, verify the process to be
shortcomings in credit appraisal, etc. carryout pre sanction and check whether the
same is followed or not? Check all required
documents are collected for appraising particular
loan. Requisite Application Forms duly filled are
collected.
(iii) Whether in borrowal accounts the : Verify whether interest rates actually applied to
applicable interest rate is correctly fedinto loans in the computer system are same as
the system? prescribed by the Head Office of the Bank.
Report discrepancies found if any. Shortage
/excess if material issue Memorandum of
Changes.
(iv) Whether the interest rate is reviewed : Check the guidelines/ instructions for review/
periodically as per the guidelines revision for interest of loans lined to MCLR/ EBLR.
applicable to floating rate loans linked to MCLR /
EBLR (External Benchmark Lending Rate)? Whether interest rate have been revised
periodically as per the circulars of the RBI and
effect of the same has been given in the loan
accounts as per the RBI Guidelines.
(v) Have you come across cases of frequent : Call for all short term accounts renewed, rolled
renewal / rollover of short-term loans? If yes, over during the year. Report such accounts where
give the details of such accounts. frequently the such renewals are is done.
For example in Gold loans, Verify accounts opened
and closed on same day for the same borrower in
the system and if such accounts found to be non-
genuine, report the same. Cases of ever greening
should be reported.
(vi) Whether correct and valid credit rating, if : Cases where credit rating is applicable, auditor has
available, of the credit facilities of bank's to verify credit rating from RBI accredited Credit
borrowers from RBI accredited Credit Rating Rating Agencies has been obtained and whether
Agencies has been fed into the system? the credit rating has been fed in the system.
(i) In the cases examined by you, have you come : Find out what are delegated authorities at various
across instances of: levels
(a) credit facilities having been sanctioned Check sanction letters so you can find whether
beyond the delegatedauthority or limit fixed for person sanctioned the loan had authority to
the branch? sanction.
(b) Are such cases promptly reported to higher Test check all new loan sanctioned and verify this
authorities? aspect.
Whether cases if any wherein credit facilities have
been sanctioned beyond the delegated authority
have been reported in higher authorities
(ii) Whether advances have been disbursed : Study terms and conditioned which bank has
without complying with the terms and stipulated in sanction letter and verify the same
conditions of the sanction? If so, give are compiled or not if not report the same.
details of such cases.
(iii) Did the bank provide loans to companies : Call for details of loans if any provided for buyback
of shares/ securities and report the same.
for buy-back of shares/securities?
(d) Documentation
(i) Credit facilities released by the branch without : Verify the standard documents to be executed and
execution of all the necessary documents? If if they are not completely filed or not executed
so, give details of such properly report the same here.
cases.
(ii) Deficiencies in documentation, : List all deficiencies found in documentation in all
including non-registration of charges, non- advances verified and report the same.
obtaining of guarantees, etc.? If so, give details
of such cases.
(iii) Advances against lien of deposits have been : Call for guidelines for loan against fixed deposit.
granted without marking a lien on the bank’s Verify loans against fixed deposit with guidelines
deposit receipts and the related accounts in of controlling authorities of bank.
accordance with the guidelines of the Verify the physical FD receipts and the CBS for
controlling authorities of the bank. Term Deposits lien marking and in cases where
lien is not marked comment accordingly.
(e) Review/Monitoring/Supervision
(i) Is the procedure laid down by the controlling : Find out bank’s guidelines for Periodic Review &
authorities of the bank, for periodic review of Balance confirmation of accounts and
advances, including periodic balance acknowledgment of debt.
confirmation / acknowledgement of debts,
followed by the branch? Provide analysis of the Verify accounts selected on test check basis and
accounts overdue for review/renewal. comment accordingly.
What, in your opinion, are major If there are any major shortcomings found in
shortcomings in monitoring, etc. monitoring needs to be reported such as
Blank/incomplete loan documents, non-
availability of original agreements, defect in
documents, Non availability of valuation report ,
Title certificate report etc. if any.
b) over 6 months :
(ii) a) Are the stock/book debt statements : Review the stock and book debt statements
and other periodic operational data and submitted by the borrowers. Check financial
financial statements, etc., received statements submitted by borrower. If bank has
regularly from the borrowers and duly examined and called explanation on these
scrutinized? Is suitable action taken on statements check the same. Verify that stock &
the basis of such scrutiny in appropriate book debt statements have been submitted with
cases? complete details along with movements. Compare
b) Is the DP properly computed? credits in accounts with sales in financial
statements along with receivables/payable
c) Whether the latest audited financial position.
statements are obtained for accounts
reviewed / renewed Check margins as prescribed in sanctioned letters
during the year? are deducted from stock and debtors.
a) Whether there exists a system of : Bank should have prescribed system of carrying
(iii) obtaining reports on stock audits out stock audit of advances.
periodically?
b) If so, whether the branch has complied Check Banks requirements to conduct stock audit.
with such system? If stock audits are required to be undertaken for a
particular borrower accounts, whether the same is
c) Details of:
undertaken or not.
cases where stock audit was
required but was not conducted Where stock audits are carried out, whether bank
where stock audit was conducted officials have reviewed stock audit report? And
but no action was taken on adverse they have called for explanation on negative
features remarks from borrower.
(iv) Indicate the cases of advances to non- : Take list of non-corporate borrowers with limits of
corporate entities with limits beyond that is set set by bank, check whether all borrowers have
by the bank where the branch has not obtained submitted audited financial statements or not, if
the duly audited accounts of borrowers. not comment accordingly.
(v) Does the branch have on its record, a due : Check the RBI guidelines/ instructions for due
diligence report in the form and manner diligence of the advances. Verify whether bank
required by the Reserve Bank of India in respect has carried out due diligence for advances under
of advances under consortium and multiple consortium and multiple banking arrangements
banking arrangements. that fulfill criteria’s specified.
Give the list of accounts where such Auditor should report list of accounts where such
certificate/report is not obtained or not certificate/report is not obtained or not available
available on record. on record.
(In case, the branch is not the lead bank, copy of Verify the visit report of bank official and check if
certificate/report should be obtained from lead any negative observations are reported and check
bank for review and explanations called from borrower of the same.
record)
(vi) Has the inspection or physical verification of Check guidelines issued by the controlling
securities charged to the bank been carried out : authorities by the bank for physical verification of
by the branch as per the procedure laid down securities charged. Verify whether branch has
by the controlling authorities of the bank? followed the same.
Whether there is a substantial deterioration in Check Valuation reports and compare the value
value of security during financial year as per with earlier valuation report and if substantial
latest valuation report in comparison with deterioration in value of security during financial
earlier valuation report on record? year, report the same.
(viii) Whether the branch has any red-flagged : Ask for guidelines for the red flagging any account and see
account? If yes, whether any deviations were whether branch has followed the same.
observed related to compliance of bank's
policy related with Red Flag Accounts? Accounts that have been Red Flagged by the bank on various
grounds have to be mentioned here.
(ii) a) Whether the branch has reported : Verify that the accounts restructured or rephrased by the
accounts restructured or rephased banks are done as per the guidelines provided by the banks
during the year to Controlling controlling authority and the changes in the account have been
Authority of the bank? reported to the controlling authorities of the bank.
b) Whether the RBI Guidelines for
restructuring on all such cases have Also, check if RBI Guidelines on Restructuring of accounts have
been followed. been followed by the bank. Accounts should not be upgraded
upon restructuring.
c) Whether the branch complies with
Call for policy/ guidelines for stressed assets and board
the regulatory stance for resolution of
approval for such cases.
stressed assets, including the
compliance with board approved
policies in this regard,
tracking/reporting of defaults for
resolution purposes among others?
(iii) a) Whether the upgradations in non- : Verify the cases where the IRAC status has been upgraded and
performing advances is in line with the the same is in line with norms of Reserve Bank of India. If the
norms of Reserve Bank of India any upgradation is not in line with RBI Norms auditor must
b) Where the auditor disagrees with report the same under this clause.
upgradation of accounts? If yes, give
reasons thereof.
(iv) Have you come across cases where the : Call for the cases where in controlling authority has authorized
relevant Controlling Authority of the bank has legal action for recovery of advances or recalling of
authorized legal action for recovery of advances and verify the same is being done or not, if not
advances or recalling of advances, but no report the same under this clause.
such action was taken by the branch? If so,
give details of suchcases.
(v) Whether there are any accounts wherein : Call for cases wherein IBC is mandated by bank / creditors.
process under IBC is mandated but not Check adequacy of the provisions in such cases.
initiated by the branch?
Whether there are any borrowers at the
branch against whom the process of IBC is
initiated by any of the creditors including
bank? If yes, provide the list of such accounts
and comment on the adequacy of provision
made thereto?
(vi) a) Have appropriate claims for credit : Call for details of Guarantees issued and margin & securities
guarantee (ECGC and others), if any, obtained against the same. Check charges are recovered as per
been duly lodgedand settled? Bank’s Rules.
b) Give details of claims rejected? (As Verify all the o/s guarantees. Examine List of guarantees
per the given table) invoked and funded by bank. Further examine steps taken for
recovery from customers.
c) Whether the rejection is appropriately
considered while determining the
Report all cases of guarantees invoked in LFAR.
provisioning requirements
Verify the details in prescribed format prepared by branch and
comment.
Amounts representing
(i) Claimsaccepted/settled
(ii) Claimsrejected
Total B
(viii) In the cases examined by you, has the branch : Call for list of cases wherein in compromise/settlement and
complied with the Recovery Policy prescribed write-off cases involving write-offs/waivers in
by the controlling authorities of the bank with excess of Rs. 50.00 lakhs is being done and verify the same is in
respect to compromise/settlement and write- line with the Recovery Policy prescribed by the controlling
off cases? Details of the cases of authorities of the bank with respect to
compromise/settlement and write-off cases compromise/settlement and write-off cases. Report such cases
involving write-offs/waivers in here.
excess of Rs. 50.00 lakhs may be given.
(ix) Is the branch prompt in ensuring execution of : Call for list of cases where execution of decrees obtained for
decrees obtained for recovery from the recovery from the defaulting borrowers and check the status
defaulting borrowers? Give Age-wise analysis of the same. Obtained & report age wise list of cases, where
of decrees in execution is pending.
obtained and pending execution.
(x) Whether in the cases concluded the recoveries : Call for the list of accounts where in recovery has been done.
have been properly appropriated against the Check appropriation of recover in interest and principal and
principal / check whether the same is done asper bank’s policy. Bank’s
interest as per the policy of the bank? Policy must be consistently followed in all cases of recovery.
(xi) In cases where documents are held at : Check the system of keeping documentation and call for
centralized processing centres / office, verification of documents and comment on the same under
whether the auditor has received the this clause.
relevant documents as asked by
them on test check basis and
satisfied themselves. Report the
exceptions, if
any
(xii) List the major deficiencies in : Report the major deficiencies in credit
credit review, monitoring and supervision under this clause.
review, monitoring and supervision.
(g) Non-Fund Based facilities
(i) List of borrowers with details of : Call for list of Non-fund based facility. Report cases of LC
LCs devolved or guarantees devolvement and guarantees invoked and report the same
invoked during the year. here:
(ii) List of borrowers where the LCs : Report here the cases where in recovery is not done in case of
have been devolved or guarantees LC devolvement and guarantees invoked:
have been invoked but not paid Sr. Inv Part Bene A Reaso
with amountthereof.
N ocat y ficia mt n for
o. ion Na ry non
Dat me Nam Payme
e e nt
(iii) List of instances where : Check cases wherein interchangeability between fund based
interchangeability between fund and non-fund based of facility is allowed and if the same is
based and non-fund-based done after devolvement of LC / invocation of BG, report the
facilities was allowed subsequent same here.
to devolvement of
LC / invocation of BG.
6. Other Assets
II. LIABILITIES
1. Deposits
(a) Does the bank have a system of identification : Check how system is flagging an account as
of dormant/ inoperative accounts and internal dormant/ inoperative.
controls with regard to operations in such
accounts? In the cases examined by you, have Obtain list of inoperative accounts & verify the
youcome across instances where theguidelines transaction on test check basis. Check bank policy
laid down in this regard have not been for making accounts operative, & verify. Report
followed? If yes, give details thereof. deficiencies.
(d) Is the branch complying with the regulations : Check norms for minimum balance as fixed by
on minimum balance requirement and levy of controlling office. Verify whether branch is
charges on non- maintenance of minimum complying with the same or not, if not report the
balance in individual savings accounts? same here.
(a) The number of items and the aggregate : Obtain List and verify all items pending for more
amount of old outstanding items pending for than one year and comments on the same.( earlier
one years or more be obtained from the this was 3 years and now updated as 1 year)
branch and reported under appropriate Year Number Amounts Remarks
heads. Give details thereof.
of Items
(b) Does your test check indicate any unusual : Verify transactions during the year and report
items in these accounts? If so, report their such transactions. Examine debits are genuine if
nature and the amounts involved. Are there not call for provisioning of the same.
any intangible items under this head e.g. losses
not provided / pending investigation?
3. Contingent Liabilities
List of major items of the contingent liabilities : Verify previous year’s audited statements for list
(other than constituent’s liabilities such as of contingent liabilities at the beginning of the
guarantees, letter of credit, acceptances, year. Take current list of contingent liabilities.
endorsements, etc.) not acknowledged by the Verify and Report the same under this clause.
branch?
III. PROFIT AND LOSS ACCOUNT
(a) Has the test checking of interest/discount/ : Verify the system for finding discrepancies in
commission/ fees etc. revealed excess/short Interest/Commission/Processing Fees
credit of a material amount? If so, give details paid/received.
thereof.
Test check the system followed by branch during
the year. Comment on the discrepancies found if
any.
(b) Has the branch complied with the Income : Check the interest is derecognized if the same is
Recognition norms prescribed by R.B.I.? (The not recovered on accounts classified as NPA
Auditor may refer to the instructions of the during the year. Also, check no interest is charged
controlling authorities of the bank regarding on old NPA accounts.
charging of interest on non-performing assets).
Guidelines as given in Master Circular on IRAC
issued by RBI needs to be followed.
c) Has the test check of interest on deposits : If any material discrepancies are found issue
revealed any excess/short debit of material memorandum of changes for corrections to be
amount? If so, give details done and report the same under this clause.
thereof.
(d) Does the bank have a system of estimating and : Check the policy of bank. Generally provided at
providing interest accrued on HO through CBS.
overdue/matured/ unpaid/ unclaimed term
deposits including in respect of deceased The same is not verifiable at Branch level.
depositors?
(e) Are there any divergent trends in major items : Follow analytical procedures and find out is there
of income and expenditure, in comparison any divergent trend in in major items of income
with corresponding previous year, and expenditure, in comparison with
which are not satisfactorily explained by the corresponding previous year, which are
branch? If so, the same may be reported. not satisfactorily explained by the branch, if so
report the same here.
IV. GENERAL
(b) Does the branch maintain adequaterecords for : Check records for receipt, issues and balances of
receipt, issues and balances of gold/bullion gold/bullion being maintained by branch and
and updated regularly? Does the periodic comment upon adequacy of the same.
verification reveal any excess/shortage of Verify whether the periodic verification is done?
stocks as compared to book records and if any Whether it revealed any excess/shortage of stocks
discrepancies observed have been promptly as compared to book records. if any discrepancies
reported to controlling authorities of the observed t h e s a m e have been promptly
bank? reported to controlling authorities of the bank?
Report such discrepancies here.
(c) Does the system of the Bank ensureadequate : Obtain current process and internal control details
internal control over issue andcustody of regarding issue and custody of security items
security items (Term DepositReceipts, Drafts, (Term Deposit Receipts, Drafts, Pay Orders,
Pay Orders, ChequeBooks, Traveller's ChequeBooks, Traveller's Cheques,
Cheques, GiftCheques, Gift Cheques, etc and verify the same is
etc.)? Whether the system is being followed by adequate? Carryout physical verification and
the branch? Have you report if you come across cases of missing/lost
come across cases of missing/lost items? items
(a) Whether there are any software / systems : Obtain list of manual registers required to be
(manual or otherwise) used at the branch maintained at branch level and examine the same
which are not integrated with the CBS? If yes, are actually maintained or not?
give details thereof.
Records maintained in computer needs to be
examined. Call for list of reports being generated
at periodic interval and verify the same on test
check basis.
(b) i) In case the branch has been subjected to IS : Call for Information System audit report and
Audit whether there are any adverse features report discrepancies if any report there in under
reported and have a direct or indirect bearing this clause.
on the branch accounts and are pending
compliance? If yes give details.
ii) Whether branch is generating, and : Check whether the guidelines given by the HO for
verifying exception reports at exception reports to be generated are being
theperiodicity as prescribed by adhere to and verify that the exception reports.
the bank Comment on the same under this clause.
iii) Whether the system of bank warrants : Check whether all compliance required by the
expeditious compliance of daily exception branch/ bank have been complied by, exception
reports and whether there are any major reports for these compliances should also be
observations pending such compliance at the checked for pending compliances and material
year end. observations should be reported.
iv) Whether the bank has laid down : Call for the laid down procedures for manual
procedures for manual intervention to system intervention to system generated data. and
generated data and proper authentication of verify proper authentication of the related
the related transactions arising there from transactions arising there from along with
along with proper audit trail of manual proper audit trail of manual intervention
intervention has has
been obtained. been obtained. Comment upon the same under
this clause.
v) Furnish your comments on data integrity : Review the process of access controls and data
(including data entry, checking security. Check internal controls on computer
correctness/integrity of data, no back ended system and other sensitive information. If any
strategies etc.) which is used for commands are passed at back end for generation
MIS at HO / CO level. of reports verify and comment upon the same.
Normally no such authorities are given at branch
level.
3. Inter-Branch Accounts
Does the branch expeditiously comply : Reconciliation in CBS environment is done at head
with/respond to the communications from the office level. Understand the system being
designated cell/Head Office as regards followed at branch and role of branch for
unmatched transactions? As at the year-end, originating entries un-reconciled and same way
are there any un- responded/un- error in responding entries originated by other
complied queries or communications branch this branch.
beyond 7 days? If so,give details?
Enquiry for unreconciled entries must be attended
and necessary action must be taken by branch
official in timely manner.( In maximum 7 days )
4. Frauds
(ii) Whether any suspected or likely fraud : Report cases of suspected or likely fraud cases
cases are reported by branch to higher and find whether same has been informed to
office during the year? If yes, provide the higher office.
details thereof related to status of
investigation.
(iii) In respect of fraud, based on your overall : Provide your comments on the potential riskareas
observation, please provide your which might lead toperpetuation of fraud.
comments on the potential risk areas
which might lead to perpetuation of fraud
(e.g. falsification of accounts/false
representation by the borrower;
misappropriation of funds especially
through related party/ shell company
transactions; forgery and fabrication of
financial documents like invoices, debtor
lists, stock statements, trade credit
documents, shipping bills, work orders
and encumbrance certificates and avail
credit; Use of current accounts outside
consortium where Trust and Retention
Account (TRA)
is maintained, to divert funds; List of
Debtors/ Creditors were being fabricated
and receivables were not followed up/
write off of debt of related parties; Fake
export/shipping bill, etc.; Over statement
of invoice amounts, stock statements,
shipping bills, turnover; fly by night
operations -including the cases where
vendors, related/ associate parties,
manufacturing units etc. aren’t available
on the registered addresses; Round
Tripping of funds, etc.)
(iv) Whether the system of Early Warning : Verify the Early Warning Framework set up.
Framework is working effectively and, as Comment upon the same is working or not.
required, the early warning signals form
the basis for classifying an account as
RFA.
5. Implementation of KYCAML
Verify relevant Circular by RBI on KYC Anti Money
Guidelines
Laundering
Whether the branch has adequate systems : Verify the system at branch level for KYC/AML.
and processes, as required, to ensure Comment upon whether the same is adequate or
adherence to KYC/AML guidelines towards not
prevention of money laundering and terrorist
financing
Whether the branch followed : Carry out test check and comment whether
theKYC/AML guidelines based on branch has followed KYC/AML guidelines.
the test
check carried out by the branch auditors
(a) Whether the branch has the proper : Verify the current process of obtaining data for
systems and procedures to ensure data MIS and whether branch has any authority /
integrity relating to all data inputs which are possibility of data integrity can be compromised; if
to be used for MIS at corporate office level yes report such issues under this clause.
and for supervisory reporting purposes. Have
you come across any instances where data
integrity was compromised?
7. Miscellaneous
(a) In framing your audit report/LFAR, have you : Auditor is expected to go through all past reports
considered the major adverse comments which are mentioned in this clause and he has to
arising out of the latestreports such as: consider major adverse comments.
i) Previous year’s Branch Audit Report /LFAR;
ii) Internal audit/ Snap Audit/ concurrentaudit
report(s);
iii) Credit Audit Report;
iv) Stock audit Report;
v) RBI Inspection Report, if suchinspection
took place;
vi) Income and Expenditure (Revenue)Audit;
vii) IS/IT/Computer/Systems Audit; and
viii) Any special inspection
/investigation report?
(b) Are there any other matters, which you, as : Any other matter which branch auditor would
branch auditor, would like to bring to the like to bring to the notice of the management
notice of the management or the or the Statutory Central Auditors needs to be
Statutory Central Auditors? reported under this clause.
Conclusion
Plan to update the LFAR simultaneously along with audit. Most of the time audit team fills the LFAR
post completion and they find it difficult or they need go back to records to again note details to
be reported in LFAR. Auditor’s Team should bifurcate the questions based area being audited by each
team member. When irregularities are reported, the same should be reported with sufficient details.
Once the report is ready same need to be discussed with Branch Head. During the course of audit, where
we are not able to verify the documents/we are relying on explanations we should obtain confirmations on
such points in Management Representation letter.
2. In respect of Column 9 above, “Irregularity No.”, the number as given in the “Glossary to Irregularities” in Point5, under
the head “Item” below should be given for the irregularity applicable to respective borrower.
In case the auditors feel that in spite of the list of irregularities given below, there are some other
irregularities, which the auditor would like to bring to notice, the auditor may separately disclose
under the given head by giving “appropriate number”.
For the aforesaid purpose, “appropriate number” would mean, for example, if the auditors feel that in
case of “Review/Monitoring/Supervision”, which has the number “4”, any additional irregularity has
to be incorporated, he may give a number after the last number appearing in the list, such as “4.62”,
and onwards.
Similarly in case of “Credit Appraisal” which has the number “1”, any additional irregularity may be
given “1.19”, and so on
3. The borrower-wise details may be given in descending order based on the amount outstanding.
4. Glossary to Irregularities
Item Remarks
1. Credit Appraisal
1.1 Loan application not on record at Branch
1.2 The appraisal form was not filled up correctly and thereby the appraisal and assessment was
not done properly
1.3 Loan application is not in the form prescribed by Head Office
1.4 The Bank did not receive certain necessary documents and annexures requiredwith the
application form
1.5 Basic documents such as Memorandum & Articles of Association, Partnership deed,
etc., which are a pre-requisite to determine the status of the borrower, not obtained
1.6 Certain adverse features of the borrower not incorporated in the appraisal noteforwarded to the
management
1.7 Industry/group exposure and past experience of the Bank is not dealt in the appraisal note
sent to the management for sanction
1.8 The level for inventory/book–debts/creditors for finding out the working capital is
not properly assessed
1.9 Techno–economic feasibility report, which is required to know the technical aspectsof the
borrower’s business, is not obtained from Technical Cell
1.10 Credit report on principal borrowers and confidential report from their banks are
not insisted from the borrowers
1.11 The opinion reports of the associate and/or sister concerns of the borrower are not
scrutinised
1.12 The opinion reports of the associate and/or sister concerns of the borrower are not called
for
1.13 The opinion reports of the associate and/or sister concerns of the borrower are not
updated
1.14 The opinion reports of the associate and/or sister concerns of the borrower are not
satisfactory
1.15 The procedure/instructions of head office regarding preparation of proposals for
grant not followed
1.16 The procedure/instructions of head office regarding preparation of proposals for
renewal of advances not followed
1.17 The procedure/instructions of head office regarding preparation of proposals for
enhancement of limits, etc. not followed
1.18 No exposure limits are fixed for forward contract for foreign exchangesales/ purchase
transactions
2. Sanctioning and Disbursement
2.1 Credit facility sanctioned beyond the delegated authority or limit of the branch
Item Remarks
2.2 Certain proposals were sanctioned pending approval of higher authorities whereverrequired
2.3 Ad hoc limits were granted for which sanctions were pending since long
2.4 Facilities were disbursed before completion of documentation
2.5 Facilities were disbursed without following sanction terms
2.6 Facilities were disbursed without any sanction
2.7 Sanction letter was missing in the branch
2.8 Guarantor as required in the sanction letter was not obtained
2.9 Required promoters stake not invested before disbursement of loan
2.10 Sanctions were made without proper appraisal
2.11 Security charge not created before disbursement as required by sanction letter/renewed letter
3. Documentation
3.1 The security against which the advance was sanctioned was not available/was noton record
3.10 Documents signed by persons not duly authorised to sign or who have signed inother
capacity accepted by the bank
Item Remarks
3.11 Signatures of the executants were not found on all the pages of the documents
3.12 Some of the documents on record were blank, without signatures of Branch Manager,
witnesses, or guarantors, etc.
3.13 Revival letters in respect of documents to be reviewed from the borrowers
notreceived
3.14 Guarantors have expired
3.15 Guarantors not on record
3.16 Guarantors not renewed
3.17 Guarantors not assigned
3.18 Worth of the Guarantors not available
3.19 Stamping not as per the amended Stamps Act
3.20 Documents have become mutilated, soiled, time barred or not obtained
3.21 Opinion report by the field officer for the borrowers not found on record
3.22 “Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No lien Letters” not
obtained for the mortgage/s
3.23 Advances for vehicle loans, Registration certificate, transfer certificate, etc. not
obtained
3.24 Work completion certificate, sale deeds, share certificates in societies, etc. not on
record for housing loans
3.25 Documents are not duly attested/signed by concerned officials/not renewed
3.26 The agreements for hypothecation do not contain details regarding goods hypothecated
3.27 Copy of Bills/receipts, on the basis of which the amount was disbursed not found
on record. For e.g. Vehicle Loans, Plant & Machinery
3.28 Charge on main &/or collateral securities not created in terms of sanction letter
3.29 Original security papers/sale deed/lease deed/title deed/agreement of sale notavailable on
record
3.30 TDR are not discharged or renewed
3.31 Control returns not sent to the H.O.
3.32 The branch has not taken any action for not compliance with terms of agreement
3.33 No documents executed for enhancement of limit/document not on record
3.34 ECGC Post shipment policy not obtained
3.35 Credit facility released without execution of all necessary documents
3.36 Common Seal not affixed on Letter of Comfort
3.37 Confirm orders for export credit not found on record for facilities released
Item Remarks
4. Review / Monitoring / Supervision
4.1 The account is frequently overdrawn
4.2 The account is continuously overdrawn
4.3 The account is overdrawn and the branches have not taken sufficient steps toregularise the
accounts promptly
4.4 The balance outstanding has exceeded the drawing power
4.5 Balance confirmation and acknowledgment of debt not obtained
4.6 The stock book – debts statements not received regularly/promptly
4.7 The FFI/financial statements/audited statements/FFR 1 & 2/other operational data,
etc., not received regularly/promptly
4.8 The stock, book – debts statements, etc., not scrutinised and no suitable actionis taken
4.12 Wide discrepancies observed in the stock statements and stock figures in the
annual audited financial statements
4.13 No penal interest has been charged for delay in submission of various statementsas per the
terms of agreement depending upon the type of loan/credit availed bythe borrower
4.14 Many branches have not adhered to the prescribed frequency of physical
verification of securities given against loans & advances
4.15 Drawing power limits are not revised as per market value of shares for advancesagainst
security of shares
4.16 End–use of funds not ensured/not known funds utilised for purpose other than forwhich
granted
4.17 The projections submitted by the borrower stay far beyond the actual performance.Further,
no explanation for the same is taken from the borrower
4.18 Major sale proceeds of the borrower not routed through the Bank
4.19
Audited statements of non-corporate borrowers having limit beyond ` 10 lakh notreceived
4.20 Renewal proposals of advances not received on time and in many cases the limitsare not
renewed
Item Remarks
4.21 Application of wrong rate of interest, processing charges, commission, other
charges, etc. resulting in income leakage/excess book in go finterest of the bank
4.22 Insurance cover for stock/property is inadequate/not on record/not renewed/notendorsed in
favour of the Bank
4.23 Inspection/physical verification of security charged, not been carried out
4.24 Expired bills/foreign currency sight bills which are outstanding, have not been crystallised
4.25 EBW statements on write-off of overdue export bills of ECM not found on record
4.26 Confirmation as to genuineness of export transactions not obtained from Bank’sforeign
offices/correspondents/customs department
4.27 Import credit, bill of entry evidencing import of goods not found
4.28 Documents are not obtained for bills discounted under Letter of Credit
4.29 Advances, which are eligible for whole turnover packing credit guarantee cover of ECGC,
are not brought under its cover
4.30 Though government guaranteed accounts are irregular since long, the issue of invocation of
guarantee does not seem to have been considered
4.31 Prescribed margins not maintained as per sanctions
4.32 Allocated limits, full terms of sanctions, stock statements, inspection reports,margin, etc.
not available at monitoring branches
4.33 For allocated limits, inordinate delays were noticed in responding to transfer bythe
allocator branch
4.34 Regular meetings not held with other consortium members to review the performance
of borrowers and to assess the current state of affairs/not been held as per norms
4.35 Individual members of the consortium are not advised about the quarterly operatinglimits/D.
P. allocated to each one of them
4.36 Minutes of the consortium meetings not found on record/not been held as per norms
4.52 Security disposed off/entity closed by borrower and no action taken by the branch
4.53 Irregularity not advised to controllers
4.54 Letter of subordination of deposits not taken
4.55 Secured and unsecured portion not segregated properly in advance return of thebranch
4.56 Renewal of limits was done before the receipt of financial statements
4.57 Heavy cash withdrawal for which consent of corporate Guarantor is not taken
4.58 Proper valuation of stock not done/needs critical scrutiny
4.59 Security obtained is inadequate/lower as compared to amount of outstanding/nocollateral
security
4.60 The party was dealing with other banks also though it was not permitted
4.61 Sticky accounts require close follow-up by the management
5. Bad and Doubtful Debts
5.1 The IRAC norms for classification of advances were not followed and the same is
implemented through Memorandum of Changes by auditors during audit
5.2 Instalments were not received from the borrowers
5.3 Interest was not received from the borrowers
5.4 Legal action for recovery of advances was not taken although authorised by the
Board/Controlling Authority
Item Remarks
5.5 Discontinuance of application of interest not followed although authorised by the
Board/Controlling Authority
5.6 Government guarantees have expired and fresh guarantees not obtained/not renewed
5.11 Compromise proposals pending at various levels where local government/outside agencies
are involved as guarantors
5.12 Copy of Search Report not on record
5.13 Decree awarded but no further steps taken for recovery
5.14 DI&CGC claims submitted/rejected/pending data not available
5.15 Irregular/sticky advance not reported to the controlling authority promptly
5.16 Compromise/OTS proposal is recommended and is under negotiation since long
but not finalised. Suit is filed in the court/DRT and pending to be finalised
5.17 ECGC claim not submitted/lodged for recovery