5

Illustrative Bank Branch Audit

Programme for the Year
ended March 31, 2019
Introduction
In present scenario of audit of branches of banks, the most important aspect
is proper planning. Planning means advance thinking and that should be
done based on knowledge of branch business. It is important to have
knowledge about Composition of Business of a particular branch which is
under audit. Because of variety of products and diversified bank business,
auditor cannot apply the same yardstick for the branches under audit. Today,
the whole process of banking is computerized however; the Audit Report is
required to be signed manually after physical checking of records, documents
and accounts maintained under CBS.
Many of the Banks implemented a web application for posting & online
submission of Branch Audit Report, Long Form Audit Report, Tax Audit
Report and various certificates, therefore review the closing instruction of the
Bank prior to commencement of the audit is utmost need to understand the
manner and structure in which reporting is required to be made on online
web base application. The report in these cases signed digitally.

In absence of clear understanding and the pre-requisite information like

borrower account No/ Customer ID’s details of the facility, security, sector
etc. it would not be even possible to report any change in classification and
any adverse finding in the main report as well as in Long Form Audit Report.
In view of this it is important to understand the reporting structure and auditor
should prepare their comments / Memorandum of changes in the similar
format and manner for reporting, by getting system format as circulated by
the respective Banks with the closing instructions.

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The branch audit generally may be bifurcated into

following Components
Type of Report Coverage
Branch Statutory Audit 1. Audit of Advances and reporting on
divergence in assets classification and income
recognition, which is generally reported
through Memorandum of Changes which form
part of Main Audit Report;
2. Audit of all other items of Assets and
liabilities and Income and expenditure
appearing in the financial statement.
Tax Audit Reports and These reports are separate from Branch Audit
Long Form Audit Report Report:
1. As per Section 44AB of Income Tax Act,
1961, the Bank is under statutory
obligation to get the Tax Audit conducted
by Chartered Accountant; and
2. Long Form Audit Report covers reporting
on the operational aspects of the Branch
working as per RBI requirements.
Certificates Required to be verified as per respective
Banks Closing Instruction keeping in view RBI
Guidelines, Guidelines of the respective
schemes notified by the Central / State
Government.

Following are the generally followed steps for conducting of

Branch audit:
1. Appointment / engagement letter for Branch Statutory audit, with closing
circulars.
2. NOC from the previous auditor.
3. Pre-Audit discussion with branch.
4. Audit planning, to include Understanding of the Branch software and
commands for view of borrower accounts and generation of various MIS /
Critical / exceptional reports.
5. Execution of the audit as given in the Annexure I.

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6. Discussion of the draft branch audit report with bank.

7. Preparation of Memorandum of Changes and effect of the same in books
of account of bank.
8. Review of the Post Memorandum (Post MOC) trail balance and
reconciliation with the pre memorandum (Pre MOC) trial balance to
ensure the correct accounting effect of memorandum of changes,
wherever applicable.
9. Submission of audit report to branch and copy to central statutory
auditors.
Following are the area wise documents to be collected and
reviewed for conducting branch audit:
1. Trial Balance as on 31st March.
2. Closing circular issued by Bank’s head office for conducting branch audit
– Every bank issued the closing circular which contain the concern areas
and list of certificates required to be certified by the branch auditor.
3. Review of previous years auditor report / LFAR.
4. Latest RBI master circular for “Income recognition and assets
classification” & other relevant circulars.
5. List of comments of RBI inspection report towards the branch.
6. Latest branch concurrent audit report /Internal inspection report/
Diligence Report / Credit Audit Report with their compliances.
7. Copy of vigilance enquiry or any special investigation reports.
8. Comparative analysis of the trial balance with the last year’s audited trail
balance.
9. Review of Ghosh and Jilani committee Recommendations.
10. Documents related to verification of advances –
 List of stress advances (SMA-2) as on 15th March. (stress advances
/ SMA-2 report indicate the list of advances which are overdue for
more than 60 days and if the same is not regularized before year
end i.e. 31st march than the advance will become NPA)
 List of new sanction made during the year.
 List of account referred for Restructuring

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 Accounts wherein process under IBC is mandated but not initiated by

branch
 Borrowers wherein process of IBC initiated by any of the creditors
including bank
 List of Bank guarantee and Letter of credit.
11. Documents related to NPA’s:
 List of NPA accounts as on 31st March.
 List of accounts upgraded during the financial year.
 List of accounts downgraded during the year.
 List of early mortality cases for the year under audit.
 Details of the NPA classification with secured /unsecured details and
NPA provision amount.
 Review of the valuation report of loan account. Valuation report older
than 3 years cannot be consider as security (1 year in case of stock)
and 100% provision need to provide on the expired secured portion.
12. Fixed Assets:
 Fixed Assets register as on 31st March.
 List of new assets purchased during the year.
 List of fixed assets sold during the year.
 Physical verification report of branch fixed assets if conducted during
the year.
 Depreciation working as on 31st March.
13. Bank reconciliation:
 List of bank account which branch maintained with other banks.
 Reconciliation statement of all banks account as on 31st march.
14. Inter branch reconciliation:
 Inter branch reconciliation statement.
 Provision for net outstanding debit balance for more than 6 month.
(refer RBI circular DBOD No. BP.BC. 73 /21.04.018/2002-03)
15. Cash
 Physical cash balance verification during branch audit period (cash
on hand as well as cash at ATM, if applicable).

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 Report of the physical cash verification conducted by branch on 31st

March.
Audit of Advances
Audit of advances is discussed elsewhere in the ICAI’s Journal under
appropriate article. However from the angle of planning following aspects
must be kept in mind:
1. Obtain top exposure accounts: It may be advisable for a branch
auditor to ask the list accounts/ exposures along with all the details such
as status, overdue amount and security etc. before starting of the audit.
2. Obtain the list of stressed accounts: The banks monitors stressed
accounts on daily basis. The account that generally has overdue beyond
60 days or likely to slip to NPA at the quarter end is termed as stressed
account (some banks may use different terminology). It is advisable to
obtain such list of stressed accounts at least 15 days ahead of the
closing date i.e. say stressed account list as on 15th March. This will
provide the auditor a ready list of such accounts. The auditor then can
scrutinise each to know whether the account has slipped or if not
whether has been kept standard by unusual transaction that cannot be
termed as business transaction. Like deposit and withdrawal of cash, just
to show the credit turnover during the quarter in cash credit account.
3. Obtain the list of restructured accounts: Restructured account
portfolio requires separate additional provisioning. It is necessary to
obtain the list of such accounts and ensure whether the restructure is as
per the RBI directives. As per latest RBI guidelines, all new restructure /
CDR account will be classified as NPA.
4. Obtain the list of accounts covered under revised framework for
resolution of stressed assets: As per latest RBI guidelines, all new
restructure / CDR account will be classified as NPA. The accounts which
have been covered under revised framework for resolution of stressed
assets, the compliance with the terms of the revised framework needs to
be verified
5. Accounts referred to or directed to be referred under IBC
Obtained list of Accounts wherein process under IBC is mandated but not
initiated by branch and / or Borrowers wherein process of IBC initiated by

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any of the creditors including bank. Such accounts needs to be reviewed

carefully by the auditor and adequate provision needs to be made besides
correct classification of such advances.
6. Obtain the list of unsecured exposures above Rs. 25 Lacs.:
Unsecured exposure has significant impact on the bank, if slips to NPA.
Many times such accounts are reviewed in the traditional manner. These
require close monitoring not only from the perspective of financial
parameters of the prudential guidelines but also non-financial parameters
that give signals of the possible ill health. The banking industry has faced
severe damages on account of non-identification of such non-financial
parameters.
7. Early mortality cases: Any advance slippage to NPA within 12 months
of its introduction is called early mortality case. Early mortality cases
invoke penalty to the sanctioning authorities. This will have to be
checked to understand the reason for such happening to avoid such
cases in future and also to find out whether there are any cases
classified as performing on some untenable ground to push it beyond
early mortality.
8. Upgraded accounts during the Year: Review of the upgraded accounts
is one of the important area to be check during audit. As per RBI circular,
the account will get upgraded when arrears of interest and principal are
paid by the borrower. After recovery, the accounts will get upgraded to
standard assets. There should not be any overdue in borrower accounts
as on date of up-gradation. The recovery in the accounts need to be
review specially in cash of cash credit accounts where the borrower
rotate the fund just to keep the account as performing assets.
9. Evergreening of accounts: Evergreening refers to the practice of giving
a fresh loan to repay an old one. Technically, evergreening refers to the
practice of managing the balance sheet through means, which may not
be violating banking laws in letter, but breaching them in spirit. To
Illustrate and to make it more clear : say a bank disburse a loan of Rs
10000 to a borrower and the account become overdue after a year or two
, the same bank sanction a loan of Rs. 20000 or Rs. 30000 which enable
borrower to repay first loan. Therefore, the source of recovery needs to
be review in case of stress accounts.

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10. Other routine checks: The auditor may engage into other routine check
of advances to satisfy himself such as classification of advances, new
sanctions during the year, monitoring mechanism and provisioning under
prudential norms. It may be pertinent to mention here two broad aspects
that are heavily dependent on the branch auditor relating to advances.
Also these are one of the most strong argument, amongst many, why
branch audits are necessary even in CBS environment:
 Checking of documentation: Documentations for newly sanctioned
advances along with their enforceability, review documents and its
appropriate reflection in CBS;
 Security value for provisioning: After classification, the most
important aspect in presenting the true and fair view of the financial
statements of a bank is correct provisioning amount. This highly
depends on fair assessment of security value. The base documents
relating to the valuation are usually available at the branches.
Correct depiction thereof in the CBS is a crucial check.
Audit of other Items in Trial Balance
It may not be necessary to elaborate on this point as this has been basic skill
of auditing profession. However, following aspects may require specific
attention of a branch auditor:
1. Suspense, Inter Branch reconciliation and any other pending
reconciliation item in Trial Balance: As per the RBI guidelines, any
debit entry in these accounts appearing for more than 6 months require
100% provision.
2. Provisions other than relating to advances: Year-end accounting
provision that do not get generated through CBS require specific
attention at the branch level. It may be advisable to do a comparative
study of last year end, half year and current year end figure comparison.
This throws lot of insights into the branch operations.
Ensuring various compliances:
Generally the branch requires following various compliances in respect of
audit:
1. Concurrent Audit report: Any comments or remarks in the concurrent
audit report that the branch is required to comply with.

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2. Compliance to RBI Inspection report: If RBI has conducted inspection

in the branch, the comments in the report need compliance. Any non-
compliance under the pretext that the bank has represented to RBI to
reconsider the observation should not be accepted. RBI has clearly
taken a stand that unless auditor is physically shown a letter of reversal
from RBI comments in their report must be adhered to.
3. Compliance to Internal audit report: If the bank has conducted internal
audit, which usually an internal exercise, obtain the report and check for
the compliances thereof.
4. Stock audit report: Generally an account having exposure of Rs. 5 Cr.
and above requires stock audit, the compliance thereof should be
commented upon. Also any adverse comment in the report needs to be
dealt with appropriately.
5. Application of interest in CBS: Generally bankers always argue that
the interest is calculated by the system and requires no cross
verification. While this is true, the correct calculation by the system is
subject to correct input by the branch staff relating to interest. Hence
input of interest rates requires test check.

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Annexure I
Details of the Authorised Branch Manager:
Persons of the bank
Others (Specify):

Audit Aspects Covered By Extent of

Whom Check
General
1. Engagement letter to the
appointing authority
2. Letter for NOC to previous auditors
3. Meeting and discussion with the
bank branch management and
understanding the profile of the
branch and its business and take a
note on the same.
4. Letter of requirement to the Branch
5. Review of
 previous year's audit report/
LFAR;
 current period's Internal Audit
Report/ Concurrent Audit
Report;
 Revenue Audit Report;
 RBI Inspection Report;
 compliance of the branch to all
of the above; and
 any other special review
report.
6. Physical verification of
 cash;
 Gold ;(for Gold loan)
 and valuable securities.
7. Note down
 Shortage of cash appearing in
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Audit Aspects Covered By Extent of

Whom Check
Trial Balance;
 Difference in physical
verification of gold.
8. Reconciliation of the current account
maintained with other banks /
Reserve Bank of India
9. Reconciliation of NOSTRO account
with Nostro Mirror Account
10. Physical verification of Investments
(obtain certificate from bank
manager for the same). If
investment is hold /done by the
Branch.
11. Understand the system in CBS at
Branch
 verify controls;
 verify exceptional report;
 understand the editable &
uneditable fields at Branch;
 system of downgrading &
upgrading of accounts;
 interest calculations;
 Generation of reports relating to
advances classification and
Capital Adequacy calculation,
etc.

12. Compliance of instructions issued

by bank’s year and closing
circulars, other relevant internal
instructions/circulars, Master
circulars and other notifications
issued by RBI, significant
accounting policies of the bank
Mandatory Accounting
Standards/Auditing Standards and
other notification.
13. Prepare a list of various closing

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Audit Aspects Covered By Extent of

Whom Check
returns to be verified and certified,
and then checking of the same
during the audit.
Checking of Balance Sheet Items
1. Checking of the advances:
 Take list of all advances along with
facility wise limits, outstanding,
Name of Lead bank, Credit Rating,
Credit summations in the account,
last date of submission of stock
statement, date of review of
account, etc. This shall help to
select the accounts for scrutiny in
detail.
 Critical review of all large advances
and their reporting as per
prescribed norms.
 Classification of advances as per
IRAC norms.
 Latest valuation of security given
against advances.
 Provisions on NPA as per IRAC
norms.
 Review of all major restructured
cases along with the compliance of
norms as per RBI Guidelines.
 List of all SMA 2 accounts (and
other accounts mandated for
reporting) and reporting of the
same to concerned authorities
(CRILC).
Loan Accounts (Performing)
I. Review of all large advances with
balance of lower of 5 % or Rs. 2
crore of total advances.

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Audit Aspects Covered By Extent of

Whom Check
II. Review of loans sanctioned during
the year.
III. Review of other advances on test
check basis.
IV. Review of adverse comments by
Concurrent auditors, RBI/internal
inspectors and the reply given and
corrective actions taken by the
branch.
V. Review of suit filed and decree
accounts on sample basis with
respect to provision thereon and
progress of recovery thereof and
Classification as per IRAC norms.
VI. Review of accounts upgraded
during the year from NPA to
standard. and ensure full recovery
of total overdues before
upgradation.
VII. Review of all accounts frequently
exceeding limits/DP and watch-list
accounts.
VIII. Also verify all the credit card dues
which are overdue & debit
balances in SB A/c.
IX. Check Drawing Power calculation
in detail as per the norms of the
bank.
Loan Accounts (Non Performing)
I. Review the accounts which are
classified as NPA during the year
w.r.t Security Value, Interest
Reversed, Date of NPA,
provisioning thereon etc.
II. Review the annual stock audit
report for the NPA with balance of
Rs.5 cr. and above & latest

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Audit Aspects Covered By Extent of

Whom Check
valuation report for the immovable
properties in case the valuation is
older than 3 years.
NOTE:
(i) Following aspects of the advances
to be verified:
 Pre sanction: System of credit
Appraisal and review/renewal.
 Post sanction: Compliance of
terms of sanction,
documentation, end use of
funds.

 Monitoring: Stock and Book

statements, drawing power,
insurance, inspection of
stock/security, operations in the
account, etc.
(ii) All the accounts verified in category
(i) to (ix) should be documented.
2. Verify controls in respect of the
following important items of
assets.
(i) Dual custody of cash;
(ii) Custody and issue of /pay
orders/other stationery items
etc.;
(iii) ATM cash as per books and
actual balance tallied at year
end.
3.Fixed Assets
I. Checking of additions/deduction/
transfers of fixed assets,
supported by proper bills/invoices
and confirmation of date put to
use. Compliance of Accounting

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Audit Aspects Covered By Extent of

Whom Check
Standard related to fixed assets.
II. Checking of Depreciation on
additions, deduction during the
year and on existing assets as
per the policy of the bank.
III. Verification of Fixed Assets
Schedule for furniture & fixtures
and other assets and
reconciliation with figures
appearing in the Balance Sheet
and FA management software
used by the bank (if any).
4. Deposits
a) Verification of Anti Money
Laundering guidelines and
Compliance with KYC norms on
test check basis that overdue
deposits;
b) Check TDS compliance on the
interest paid and on test check
basis checking of Form 15G & 15H
and confirm whether those forms
are submitted with respective
Income Tax Authority;
c) Movement of Deposit vis-à-vis
movement in interest expense.
5. Inter-Office & Suspense A/c:
1. Reconciliation of accounts with
other banks, head office and inter
branch adjustment accounts.
2. Inter Office Reconciliation (IOR)
Accounts:
I. Verify Inter Branch Items In
Transit (IBIT) account for old
entries.
II. Compare on test Check basis,
the balance and the entries in
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Audit Aspects Covered By Extent of

Whom Check
IOR Accounts with the copies of
the statements submitted to the
IOR department/s.
III. Old un reconciled entries are
being provided/ reported to HO
for provision.
3. Detailed checking of suspense
accounts – credit as well as debit
schedules. i.e., Nominal ledger.
Balance Sheet Finalisation
1. Scrutiny of Balance Sheet,
particularly –
i) that all the balances are shown
in proper heads and broadly
compare previous year figure to
understand material variance;
ii) Check for any negative balance
in the trial balance. (i.e. assets /
expenses having credit
balances and liability / income
having debit balances)
ii) check in case of advances that:
a) interest accrued but not due
on loans is not included in
advances.
b) credit balances in O/D, CC
inoperative current accounts
should not be netted off with
advances and the same
should be shown under
demand deposits.
c) Verification of Anti Money
Laundering guidelines and
Compliance with KYC norms
on test check basis.
2. Checking:
(i) Liability under Bank Guarantee/

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Audit Aspects Covered By Extent of

Whom Check
L/C and effects of expired BGs.
(ii) Reconciliation of General
Ledger and Subsidiary Ledger.
Checking of Profit and Loss Items
1. Test checking of interest on
deposits, (particularly, Interest
checking should be done on test
basis for the period subsequent to
the period of revenue/ concurrent
audit). Ensure that interest
provision on overdue F.D. has been
made as per latest RBI guidelines.
Check the system is properly
configured to check the interest
calculation and the changes in
interest rate is changed in system
on respective dates.
2. Test checking of
interest/commission on various
advances, bills, L.C., Guarantees,
etc.
3. Test checking of
discount/commission on bills
discounted and others income like
commitment charges, processing
fees, recovery of insurance/ legal
fees etc.
4. Derive various ratios of items of
income with comparable and
related assets (like Avg. Interest
Income to Average Advances etc.)
and verify major movements or
variances.
5. Checking of interest in NOSTRO
Accounts debit balances.
6. Verification of recovery on account
of locker rent, staff accommodation,

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Audit Aspects Covered By Extent of

Whom Check
etc., with details of arrears, if any.
7. Commission income on account of
Government Business, i.e.,
collection as well as remittance of
Income tax, sales tax, excise duty,
etc.,
8. Details of Prior Period items of
Income as well as expenses and
complete details of provisions to be
made, if any.
9. Booking of Interest Income on
account of partial recovery in
NPA’s.
10 Note down the reasons for material
variances, if any.
Others
1. Checking of statement of frauds
adequacy of provision, timely
reporting to competent authority,
recovery and movement in
balances.
2. Checking of statement of claims
against the bank not acknowledged
as debt.
3. Checking of Foreign Currency
forward exchange contracts
showing sales and purchase
separately. Review of NRE and
FCNR accounts, if any.
4. Checking of Guarantees given on
behalf of Constituents.
5. Checking of Acceptance,
endorsements and other
obligations, i.e., L/C and bills
accepted by the bank on behalf of
customers.
(Particularly check in case of Clause 4 and 5 above, whether the above

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Audit Aspects Covered By Extent of

Whom Check
guarantees and LC issued are within the powers of the authorised person
and proper procedures have been followed for issuing the same. Review the
position of the above as at the year-end)
6. Other contingent liability, if any.
7. Checking of and preparation of
Interest Subsidy certificate (as per
various RBI & Government
schemes), correct accounting &
whether the same are given to the
eligible, borrowers.
8. Checking of write off proposal and
DICGC claims, sharing of recovery,
etc.
9. Checking of annual returns on
protested bills/ recalled debt
accounts (PB/RD).
10. Checking of LFAR schedules and
preparation of LFAR. (Detailed
planning for preparation of LFAR
be done at the time of
commencement of audit and
detailed guidance be sought from
the chapter on LFAR in this
guidance note).
11. Checking of Tax Audit annexures
and preparation of Tax Audit
Report.
Final Audit and Reporting
1. Preparation of Audit Report as per
format prescribed by ICAI under SA
700 (Revised) and under any other
regulatory authority.
2. Preparation of memorandum of
changes for changes to be made in
classification of advances and in
any item of asset/liability and profit

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Audit Aspects Covered By Extent of

Whom Check
and loss account with other
remarks and/ or information which
requires further attention at
Regional/Zonal Office level.
3. Preparation of Tax Audit Report.
4. Preparation of Long Form Audit
Report (by giving annexures where
ever necessary).
To collect the following Certificates:
1. Physical verification of the fixed
assets carried out on March 31,
2019/During the year.
2. Physical verification of Investment
carried out on March 31, 2019/
During the Year. If investment are
held or appearing in the Trial
Balance.
3. Physical verification of the cash &
other items as on March 31, 2019.
4. Written Representation Letter.
To verify and issue the certificates (as applicable):
Illustrative list
1. Certificate of Ghosh and Jilani
committee Recommendations.
2. Certificate giving details of claims
lodged with DICGC / ECGC
however, rejected by them.
3. Risk weighted assets as per the
capital adequacy report. (BASEL II
& III)
4. Certificate for treating an account
as bad or doubtful of recovery as
per the requirement of DI and CGC.
5. Subsidy claim under Prime Minister
Rojgar Yojna Or any other scheme
of the Central/State Government.

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Audit Aspects Covered By Extent of

Whom Check
6. Certificate for Interest Subvention.

Prepared by: Reviewed by:

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 6
Illustrative Flow Charts for Use of
Core Banking Solution Software in
case of Bank Branch Audit
The advances are categorized in different Schemes and each them is codified.
The Branch auditor is required to get the understanding of the Scheme code and
can generate the report for all account under the Scheme by giving account
Number.
The Branch auditor on start of the audit obtain the Balance Report of the
advances Facility Wise / Scheme wise to identify the Scheme code of facility.
The illustrative Scheme codes are CCAGR – Cash Credit Agriculture, CCOTH –
Cash Credit Other and TLEDU – Term loan Education etc.
Generally, in Branch audit if the Branch auditor can get the dump of the borrower
account for the given period in soft copy, the work of review of the advances can
be completed smoothly, the flow chart for Process of Generate A Pass Sheet will
be quite helpful to generate Scheme wise borrower account of the branch for a
given period (It can be for Four Years – if required in case of Agriculture
Advances).
The review of the advances account can be made by generating the report for
each of the Scheme account. The report is generated in Text file (with .rpt
extension) and can be easily opened in note pad / word pad and easily portable
to excel. It’s advisable to retain the main copy safe for documentation and
conversion to excel may be made coping the file with another name.
Illustrative important process Flow Chart of widely used banking software like
Finacle are given hereunder for:
1. How to know account number from Customer ID.
2. Flow Chart for review of the Loan account.
3. Flow chart to generate Text file for of Borrowers Accounts product wise /
Individual Account.
4. Flow Chart to Review Fixed Deposit Account – Interest / TDS inquiry etc.

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