Explore the importance of Statutory Audit in the banking sector, covering risk-based internal audits, statutory auditors’ roles, and the audit process for advances, revenue items, expenses, and provisions. Ensure transparency and compliance for a healthy financial system.
Banks play a crucial role in any economy. They provide the necessary finance for households and businesses. They are the bloodstream of all the countries. A proper and transparent banking system is very root of the economy to function efficiently. As all economic activities are exposed to risks, banks are also areas where surveillance is required. It is of prime importance that the bank stays healthy, safe and sound. The banks are places where money gets accumulated and gets circulated for running the economy. The success of any bank lies in its reliable financial statements which is a byproduct of quality audits undertaken by them. The main objective of the bank audit is to conduct an independent inspection of the bank’s performance, its information systems and control.
There are various audits being carried in the banking sector to ensure the commitment of the banking sector to the economy.
1. Risk Based Internal Audits
2. Statutory Audit
3. Stock Audit
4. Credit Audit
5. RBI Inspection System Audit
6. Forensic Audit
7. Concurrent Audit
8. Snap Audit
9. Revenue Audit
10. IT Audit
11. Investment/Treasury Audit
All the audits mainly are in the nature of financial statement audit or operational audits. A financial statement audit is done in order to comply with relevant statutes whereas an operational audit involves checking the efficiency of routine operations of the bank, assessment of the reliability and accuracy of the financial records and reports, implementation of policies and procedures, and ensure its effectiveness. A Statutory Audit of the bank is a combination of mix of financial statement audit and operational audit.
Statutory Audit is a type of audit which is mandated by a Law or a Statute to ensure the books of accounts presented to the regulators and public are true and fair. It is performed by qualified Chartered Accountant who is independent of the business.
Statutory Auditors are appointed by RBI in association with the ICAI. Every year after the end of the previous financial year, in every branch of the banks, a very rigorous audit is conducted.
Sub-section (1) of section 30 of the Banking Regulation Act requires that the balance sheet and profit and loss account of a banking company should be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.
STATUTORY CENTRAL AUDITORS:
Public sector banks and Nationalised banks appoint four or more (depending upon their size and Board decision, as per RBI guidelines) firms of chartered accountants to act jointly as statutory central auditors (SCAs).
They will be appointed in AGM of the shareholders whereas the auditor of a nationalised bank will be appointed through the board of directors in either case after the approval from RBI.
RBI approves the appointment of Statutory Central/Branch Auditors of Public Sector Banks (PSBs) in terms of Section 10(1) of Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/1980, and Section 41(1) of SBI Act, 1955.
STATUTORY BRANCH AUDITORS:
The following procedure will be adhered to for appointment of Statutory Branch Auditors (SBAs) in PSBs:
i. The list of eligible auditors/audit firms will be prepared by the Institute of Chartered Accountants of India (ICAI) as per the norms prescribed by RBI.
ii. The above list will be subjected to scrutiny by RBI for identifying the continuing and rested firms and excluding audit firms who have been denied audit.
iii. RBI will, thereafter, forward the final list of all eligible auditors/audit firms to PSBs for selection of the required number of branch auditors/audit Banks will be required to clearly advise the selected audit firms that each audit firm can take up audit assignment (branch audit) in one PSB only. The audit firm should give its consent in writing for consideration of appointment in the bank concerned for the particular year and the subsequent continuing years.
iv. The consent given by an audit firm is irrevocable and no request from audit firms for changing the bank, after giving its consent will beentertained.
v. After the selection of branch auditors, PSBs will be required to recommend the names of both continuing and selected branch auditors to RBI for seeking its prior approval before their actual appointment, as per statutory requirement.
SBAs will have a maximum tenure of four years in a particular bank. The appointment of SBAs will be made on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time to time, and also subject to their suitability.
On completion of four years of continuous branch audit, will be subjected to the policy of rotation i.e. they may be considered for appointment as SBAs of any other PSB.
Banks are advised to allot branches, to the extent possible, to the audit firms taking into consideration their category and audit experience in such a way that specialised and larger branches are audited by bigger/experienced audit firms.
As regards statutory branch audit to be carried out by SCAs, banks will allot the top 20 branches (to be selected strictly in order of the level of outstanding advances) in such a manner as to cover a minimum of 15% of total gross advances of the bank by SCAs.
A. Norms for selection of branches of Public Sector Banks (PSBs) for Statutory Audit
1. The norms for selection of branches of PSBs for statutory audit from the year 2020-21 onwards will be based on the following guidelines:
i. Statutory branch audit of PSBs should be carried out so as to cover 90% of all funded and 90% of all non-funded credit exposures of a bank. The selection of branches for statutory audit shall include a representative cross section of rural/semi-urban/urban and metropolitan branches, predominantly including branches which are not subjected to concurrent CPUs/LPUs/and other centralised hubs, by whatever nomenclature called, would be included for branch audit every year. The selection of branches shall be finalised by each PSB with the consent of their Statutory Central Auditor/s.
ii. In respect of those branches, which are subject to concurrent audit by chartered accountants and not selected for branch audit, LFARs and other certifications done by concurrent auditors will be submitted to the Managing Director & CEO of the bank. The banks in turn will consolidate/compile all such LFARs and other certifications submitted by the Concurrent Auditors and submit to Statutory Central Auditor/s as an internal document of the bank.
STATUTORY AUDIT – CONDUCTING THE AUDIT:
♦ Initial Considerations by the Statutory Auditor:
The initial considerations involves acceptance of audit engagement and in planning the engagement
|The Statutory Auditor has to submit a declaration of indebtedness that they or their family members are not declared willful defaulters by any financial institution.
|They should not be associated with any internal assignment with the bank.
|They should draft the terms of audit engagement as per SA 210 and agree upon the same to fix their respective responsibilities.
|They need plan the audit with appropriate engagement team depending upon the size, nature and complexity of the bank’s operations
♦ Understanding the bank and its environment
The auditor has to obtain an understanding of the bank to determine and assess the risk and operating effectiveness of various controls.
|The Auditor has to understand the accounting process of the bank and written and approved Risk Management Methodologies.
♦ Risk Assessment
The Auditor has to identify and assess the risk of material misstatement as per SA 315
|The Auditor has assess the risk of fraud including money laundering and he/she also has to assess the specific risks associated with the particular audit engagement
|The assessment of risk includes assessing the risk related to use of IT and risk associated with outsourcing of activities.
Engagement team discussions about performance review about the various controls operating in the bank.
|The auditor should design and perform further audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level.
|Establishing the overall audit strategy and preparing an audit plan memorandum.
|Determine the audit materiality for each branch and consider the going concern aspect of the bank.
The report should address whether in the opinion of the auditor the balance sheet and profit and loss exhibits true and fair view of the affairs of the bank.
|Preparation of LFAR
|Other such reports as required by the statute
AUDIT OF ADVANCES:
♦ The bank should make an advance only after satisfying itself as to the credit worthiness of the borrower and after obtaining sanction from the appropriate authorities of the bank.
♦ All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation, ) should be executed by the parties before advances are made. The compliance with the terms of sanction and end use of funds should be ensured. Sufficient margin as specified in the sanction letter should be kept against securities taken so as to cover for any decline in the value thereof. The availability of sufficient margin needs to be ensured at regular intervals.
♦ If the securities taken are in the nature of shares, debentures, , the ownership of the same should be transferred in the name of the bank and the effective control of such securities be retained as a part of documentation.
♦ All securities requiring registration should be registered in the name of the bank or otherwise accompanied by documents sufficient to give title to the bank. In the case of goods in the possession of the bank, contents of the packages should be test checked at the time of documentation.
♦ The godowns should be frequently inspected by responsible officers of the branch concerned, in addition to the inspectors of the bank.
♦ Drawing Power Register should be updated every month to record the valuel of securities These entries should be checked by an officer. The accounts should be kept within both the drawing power and the sanctioned limit. All the accounts which exceed the sanctioned limit or drawing power or are otherwise irregular should be brought to the notice of the controlling authority regularly.
♦ The operation of each advance account should be reviewed at least once a year and at more frequent intervals in the case of large advances.
AUDIT OF REVENUE ITEMS:
♦ Income such as interest, fees, and commission are recorded on an accrual basis, e., as it is earned. It is an essential condition for accrual of income if there is a certainty for its ultimate collection.
♦ However, in case, where, a signiﬁcant uncertainty regarding the ultimate collection of income arises in respect of non-performing assets, then banks should not recognize income on non-performing assets until it is actually realized.
♦ In the case of a credit facility and Government guaranteed account, when it is classiﬁed as non-performing for the ﬁrst time, interest accrued and credited to the income account in the corresponding previous year which has not been realized should be reversed or provided for.
♦ In case of Interest on advances against Term Deposits, National Savings Certiﬁcates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
♦ In case of bills purchased outstanding at the close of the year the discount received thereon should be properly apportioned between the two Interest (discount) component paid by Bank/Branch on rediscount of bills from other ﬁnancial institutions, is not to be netted off from the discount earned on bills discounted.
♦ In case of bills for collection, the auditor should also examine the procedure for crediting the party on whose behalf the bill has been collected. The procedure is usually such that the customer’s account is credited only after the bill has actually been collected from the drawee either by the bank itself or through its agents, etc. The commission of the branch becomes due only when the bill has been collected.
♦ Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.
AUDIT OF EXPENSES:
♦ The auditor is primarily concerned with assessing the overall reasonableness of the amount of interest expense by analyzing ratios of interest paid on different types of deposits and borrowings to the average quantum of the respective liabilities during the year.
♦ The auditor should study and evaluate the system of internal control relating to expenses, he should examine whether there are any divergent trends in respect of major items of expenses.
AUDIT OF PROVISIONS AND CONTINGENCIES:
♦ The auditor should obtain an understanding as to how the bank computes provision on standard assets and non-performing assets.
♦ The auditor should obtain the detailed break up of standard loans, nonperforming loans and agree the outstanding balances with the general ledger.
♦ The other provisions for expenses should be examined vis-a-vis the circumstances warranting the provisioning and the adequacy of the same by discussing and obtaining the explanations from the bank’s management.
♦ It will primarily include checking the basis of classification of loans and receivables into standard, sub-standard, doubtful, loss and nonperforming The auditor may verify the loan classification on a sample basis.
It is responsibility of statutory central auditors to obtain understanding of IT environment as almost bank has shifted its operations based on IT and various controls put in place by management and evaluate whether controls are operating effectively. As such, the Government mandates these Audits for the proper functioning of the banks under RBI and maintaining transparency in the system. The target of a bank audit is to review whether the financial activities of the institutions are legal, fair, and complete.
The banking audit uncovers the breaching of laws and regulations of the financial institutions and their negligence in following the bank’s policies. Bank auditors focus on the cause of issues and make favourable recommendations for the institution. They document their findings and keep them on the file of the bank. Bank audits are essential to ensure that the bank’s practices are good.