Bank Audit--Every Thing You Needed to Know But were Afraid to Ask !

> The below is particularly relevant for members who are doing bank
audit
> for the first time:
>
>
>
> Stepping into your branch without having read the RBI Master Circular
on
> Prudential Norms on Income Recognition, Asset Classification and
> Provisioning pertaining to Advances is a bit like stepping into a
boxing
> ring without your gloves on. You will come out of the ring without a
> bloody nose only if your opponent is a featherweight and you are a
> heavyweight. Since the branch manager is likely to be around 50 years
of
> age and will therefore have already spent nearly half his life in
> banking, he will instantly know where you stand in terms of knowledge
of
> banking. Think thrice and be very sure before you raise a
> query/objection. A faux pas that betrays your featherweight status
will
> immediately give the manager a psychological upper hand over you. He
> will begin to patronize and be condescending towards you. It would be
> tragic if that happens.
>
>
>
> So steep yourself in the RBI Circular. You can't call yourself a
> statutory branch auditor till the time you have got that circular
> running in your blood. The ICAI Guidance Note on Bank Audit is also
> freely available on the ICAI website. It runs into 955 pages.
Obviously
> it's not possible to read it the way one read "A Suitable
> Boy" by Vikram Seth. Life would be awful if our computers didn't
> have the Ctrl + F function, wouldn't it?
>
>
>
> Please also go through the Circular/Manual for Annual Accounts Closing
> of the particular bank allotted to you. You must already have got it
via
> email. If you haven't, it's high time you laid your hands on it.
> Familiarize yourself with the account codes and account heads. If the
> manual says two codes in the ledger must tally, make sure they do
tally.
>
>
>
> Advances:
>
>
>
> Statutory branch audit is all about NPAs, is it not? The power to have
> an account declared NPA is the most lethal weapon an auditor has ever
> possessed. The way those branch managers plead before you to not to go
> ahead with that dreaded Memorandum of Changes (MOC) is to be seen to
be
> believed. Mind you, this is the same manager who might have turned up
> his nose at a local CA who approached him with a CC limit case and
> curtly told him "I don't deal with CAs!" Don't be taken
> in by his faux emotions. Remember these are the same guys whose
feedback
> has coined such colourful phrases as "multiplicity of audits"
> and "audit fatigue". Besides, if we are going to lose bank
> audits anyway, why have mercy? It's better to go down with our flag
> flying high.
>
>
>
> Window dressing:
>
>
>
> Jacking up advances as well as deposits—at the fag-end of the year
> is a tried-and-tested trick of the trade in bank branch accounts
> manipulation business. An auditor who can't detect it, or worse
> still after detecting it lets it go for a quid pro quo, has no right
to
> apply for bank audits in the coming year. It is because such black
sheep
> in our profession that things have come to such a pass on the bank
audit
> front. Watch out for unusual movements in advances and deposits after
25
> March 2013.
>
>
>
> For branch officials, getting around the CBS NPA detection software is
> as easy as pie. No matter how advanced the computer system for
Advances
> Classification installed in the bank is, it can't beat human
> ingenuity. To save an account turning into an NPA, the branch manager
> may generate artificial or even genuine credits in the account on the
> crucial dates. Such borderline cases that would have been NPAs but for
> that magic credit that materialized on the 90th day should cause alarm
> bells to ring in your head. There are some accounts that are kept
alive
> just like doctors keeping alive a patient on a ventilator—the
> solitary credit in the account being the ventilator in this case. But
> actually those advances are no more useful than a beating-heart
cadaver.
> They are clinically dead and non-performing and should be declared as
> such.
>
>
>
> Documentation:
>
>
>
> Keep an eagle eye out when you verify documentation relating to loans.
A
> coloured Xerox copy of a sale deed is scarcely distinguishable from an
> original one. We live in an age of 3-D photocopying, where even
metallic
> objects can be replicated. It might be unethical and not very
hygienic,
> but a good way to tell a photocopy apart from an original is applying
> your saliva to the portion of the document containing the signatures.
> Even if the document is 20 years old, the ink will disperse upon the
> application of the slightest amount of liquid. On a photocopy, it will
> not.
>
>
>
> Examine the loan application, the appraisal form, the CIBIL report to
> confirm the applicant's name does not figure in that all-India
> defaulter database, the sanction letter (the amount sanctioned may not
> necessarily be within the power of the branch incumbent), the approved
> valuer's report, the search report, the Non-Encumbrance Certificate
> (NEC), the mortgage deed executed in favour of the bank, the ROC
charge,
> the MOA and AOA or the Partnership Deed, the balance sheets—past
as
> well as projected. This list is by no means exhaustive.
>
>
>
> Housing Loans:
>
>
>
> Particularly be vigilant in auditing housing loan cases. Insist on an
> MC-approved map in case of a loan given for construction of a house.
> Nowhere else in banking business have we seen a more blatant misuse of
> bank funds than in housing finance. Thanks to those tantalizingly low
> rates of interest that a borrower is required to pay on a housing
loan,
> we've got hundreds of crores of outstanding housing loans in this
> country that are actually commercial loans camouflaged as housing
loans.
> An unscrupulous branch manager is ever ready to look the other way if
> the kickbacks are alluring enough.
>
>
>
> Examine the field officer's visit report and the photographs taken
> at various stages of construction of the house. In case you feel
> something is amiss, you can have yourself driven down to the site and
> see with your own eyes what the borrower has built up with the
> bank's funds is indeed a house and not a coaching centre or a gym or
> a beauty parlour!
>
>
>
> Rates of Interest, DP, Insurance:
>
>
>
> Check that the correct rates of interest are fed into the CBS in all
> loan cases. GIGO—Garbage in Garbage out. The CBS will not make a
> mistake in calculating interest. But it's a human being that feeds
> the parameters at the time of grant of a loan.
>
>
>
> In case of CC limits, make sure the DP (Drawing Power) is calculated
> with reference to the latest stock statements. Compare the value of
> stock statements with the value of stock in the balance sheet.
>
>
>
> Examine the insurance policy. Make sure the policy is alive and covers
> all stocks, no matter where lying. Policy should be adequate in terms
of
> value to cover up the primary security as well as the collateral one.
> See the bank clause in the policy.
>
>
>
> Annual audit of stocks is mandatory for all CC limits having
sanctioned
> limits of Rs 5 crore and above. Verify the CA's stock audit report
> in case of all such CC limits.
>
>
>
> General:
>
>
>
> Go through the previous year's statutory audit report, the
> concurrent audit report, the branch inspection report, et al.
>
>
>
> Go through the LFAR (Long Form Audit Report). It is a wonderfully
> compiled questionnaire. LFAR is the banking surrogate for a CARO
report
> we issue in case of corporate clients. Anyone having a basic
> understanding of banking and auditing can carry out a branch audit
just
> by going through that report. It is almost like an Audit Program. You
> can have an idea about the things you are required to verify in a bank
> audit.
>
>
>
> Bank audit is a race against time. With 12/13 April 2013 being the
> deadline for completion of branch audits in most cases, we hardly have
> two weeks to do two or three branches in. But our efforts and the
pains
> we take have to be commensurate with the remuneration.
>
>
>
> Of course, bank branch audit is an ocean and we haven't even skimmed
> the surface. To use another cliché, what you've read above was
> not even the tip of the bank audit iceberg.
>
>
>
> But I hope it was good entertainment.
>
>
>
> All the best to all bank auditors
> Sanjeev Bedi
>