PRACTICAL

HANDBOOK
FOR PERFORMING
BANK BRANCH AUDIT

CA Vinod Jain
[Link] (Hons), LLB, FCA, FCS, FCMA, DISA (ICAI), FAFD (ICAI)
CA Vaibhav Jain
[Link] (Hons), FCA, ACS, LLB, DISA (ICAI), MBF (ICAI), FAFD (ICAI),
CCIDT (ICAI), CCCA (ICAI), ID (MCA-IICA), Registered Valuer (SFA) (IBBI)
Acknowledgement

This Handbook is a special publication prepared by multiple experts in the

arena of Bank Audit alongwith CA Vinod Jain, Senior Partner, Vinod Kumar &
Associates and CA. Vaibhav Jain, Partner, Mehra Goel & Co, which include: -
Ÿ CA. Kanika Dhingra, Partner, A K Sharma & Co.
Ÿ CA Sanyam Gupta, Senior Manager, Mehra Goel & Co.
Ÿ CA. Krishan Arora, Senior Manager, Mehra Goel & Co
and many other team members of Vinod Kumar & Associates, Chartered
Accountants and Mehra Goel & Co, Chartered Accountants.

In last few years, Banking Sector has been revolutionized heavily to make it
more customer friendly and regulative in nature. This Publication is intended
to provide guidance to members on conducting quality Bank Audits. This
contains very useful information and references on Guidance Note issued on
Bank Audit (2024) by ICAI, which help members in conducting Bank Audit in a
planned and effective manner.

For further analysis and discussion, you may please reach out to any of our
team members.

CA Vinod Jain CA Vaibhav Jain

vinodjain@[Link] +91-97113-10004 vaibhavjain@[Link]
+91-98110-40004 vaibhavjain@[Link] +91-98681-44380 vaibhavjain@[Link]

© 2024 All Rights Reserved 02

Table of Contents
No Particulars Page No

1 Business Understanding 5

2 Audit Planning 5

3 Pre-commencement of Audit 6

4 Audit Documentation in Bank Branch Audit 6

5 Special Considerations in a CBS Environment 7

6 Audit of Cash 8

7 Audit of Balances with RBI, SBI & Other Banks (For Branches with Treasury
8
Operations)

8 Audit of Money at call and Short Notice (For Branches with Treasury Operations) 9

9 Audit of Investments (For Branches Outside India/Auditors of Treasury Operations) 9

10 Audit of Agriculture Advances 10

11 Audit of Advances and NPA related matters 11

12 RBI GUIDELINES ON INCOME RECOGNITION, ASSET CLASSIFICATION,

16
PROVISIONING AND OTHER RELATED MATTERS

13 Audit of Fixed Assets and Other Assets 22

14 Audit of Borrowings & Deposits 23

15 Audit of Other Liabilities & Provisions 24

16 Audit of Gold, Bullion & Security Items 25

17 Audit of Inter Branch/Office Accounts 25

18 Audit of Incomes – Interest on Advances, Dividend, Commissions, fees, etc. 26

19 Audit of Expenses – Interest expended and provision thereof, brokerage legal

26
charges, provision, etc.
20 GST Compliance 27

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Table of Contents
No Particulars Page No

21 Fraud 27

22 Books and Records 28

23 Audit of Financial statements 28

24 Audit Report & Certificates 28

25 Recovery of Non-Performing Assets by Asset Recovery Branches 29

26 Clearing House Operations by Service Branches 30

27 Audit of Foreign Exchange Business

30

28 Annexure 1- letter to Branch Management seeking initial information 32

29 Annexure 2- Illustrative list of documents to be maintained in Bank Branch Audit

34
specified under Chapter 3 of Guidance note on Audit of Banks (2024)]

30 Annexure 3- Checklist of applicable SAs for Bank Audit specified under Chapter 4 of
35
Guidance note on Audit of Banks (2024)]

31 Annexure 4- Illustrative checklist of special purpose /exceptional reports in CBS

48
prescribed under Chapter 5 of Guidance Note on Audit of Banks (2024)]

32 Annexure 5 - Audit Approach, Procedures including Regulatory Considerations

prescribed under Chapter 11 of Guidance Note on Audit of Banks (2024)] 50

© 2024 All Rights Reserved 04

PRACTICAL HANDBOOK FOR PERFORMING
BANK BRANCH AUDIT
All banks perform various functions / activities in compliance with RBI Guidelines and Banking Regulation
Act, 1949. Main activities of Bank are accepting deposits, granting loans and advances, payment and
settlement and Treasury i.e. investment of surplus funds.

Business Understanding
Ÿ Role and responsibilities of the branch officials,
internal controls and centralized /decentralized
operations.
Ÿ Obtain understanding of activities carried out at
the bank branch in line with SA 315 “Identifying
and Assessing the Risks of Material
Audit Planning
Misstatement Through Understanding the Ÿ Document audit plan in line with requirements
Entity and Its Environment”. of SA 300, “Planning an Audit of Financial
Ÿ Core business and products offered at the Statements”.
branches. Ÿ Apply concept of Materiality in planning and
Ÿ Check whether branch allotted is deposit performing audit of financial statements in line
oriented or advanced oriented. with SA 320.
Ÿ Special aspects to understand will include: Ÿ Obtain previous year/period's reports of the
Ÿ Fresh Loans and documentation and previous statutory auditor and its compliance
monitoring and classification of advance status.
Ÿ Foreign Exchange Business, Ÿ Obtain Bank Closing Guidelines / Instructions
Ÿ FDI transactions, Ÿ RBI mandated Internal control on Financial
Ÿ ODI transactions, Reporting (ICOFR) Reporting for Public Sector
Ÿ Import Export and other current account Banks from FY 2020-21. SCAs (Statutory Central
transactions. Auditor) submits ICOFR report based on testing
Ÿ Loan against Gold or loan against carried out by them. In case, SBAs selected for
securities/Shares or loan against property – testing ICOFR, same should be included while
Ÿ Operations of non- operative accounts planning.
Ÿ KYC up dation process and controls – this has Ÿ Make list of all annual returns / financial
been a source of several frauds. statements and certificates to be verified and
Ÿ Issuance of Bank Guarantees certified as part of Branch audit.
Ÿ Issuance of inland and foreign LC Ÿ Third Schedule of Banking Regulation Act, 1949
Ÿ Authorisation of swift messages and RBI Master Direction on “Financial
Ÿ Suspense account Statements - Presentation and Disclosures”
Ÿ Inter branch / HO balance reconciliation provides guidelines to the banks on the
Ÿ Bills sent for collection presentation of Financial Statements, regulatory
Ÿ Bills discounted – whether supported by LC clarification on compliance with AS and
or not disclosures in notes to accounts.
Ÿ understanding of compliances and guidelines of Ÿ The Statutory Branch Auditors (SBAs) should
RBI and the Bank management will be very report all the deficiencies noted by him in Long
important Form Audit Report (LFAR).
Ÿ Core banking solution used by the bank and the Ÿ List out specific representations on certain
reports and exception reports which can be matters where auditor relied upon during
generated from them course of audit for inclusion in the Management
Ÿ Soft data maintained by bank in respect of Representation Letter.
processing and monitoring of advances

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Pre-commencement of Audit
Ÿ Communicate with Retiring Auditor to meet
Ethical requirement
Ÿ Co-ordination with Branch Management is
essential for an effective audit and timely
completion. Branch Auditors (SBA) should send
communication for accepting the appointment
along with basic information that would be ₹
required in audit in line with SA 210 – Agreeing
the Terms of Audit engagement and other info.
Ÿ SBA should obtain basic information about
nature and size of banking activities, sanctioning
₹
terms, supervision and monitoring terms,
bank's closing circular, concurrent / internal /
ICOFR (mandatory for Public Sector Banks from
FY 2020-21) audit report.
Ÿ The Auditor should also seek a copy of Detailed
list of advances as on 31st March and identify
the Advances to be examined based on
materiality criteria determined.

[Refer Annexure 1- letter to Branch Management seeking initial information ]

Audit Documentation in Bank Branch Audit

Ÿ SBA should ensure that documentation meet
t h e r e q u i r e m e n t s o f S A 2 3 0 “A u d i t
Documentation” and specific documentation
requirements of other SAs and regulatory
norms.
Ÿ SBA should prepare audit documentation on a
real time basis.
Ÿ Maintain Documentation w.r.t to planning & risk
assessment (nature, timing and extent of audit),

audit strategy (risk based, compliance driven, and data driven) for performing the audit, any special
audit considerations for risks due to fraud and related party transactions, applicable legal and
regulatory framework, materiality levels, results of audit procedures performed and significant
matters arising during audit, conclusions reached and significant judgements made.

[Refer Annexure 2- Illustrative list of documents to be maintained in Bank Branch Audit

specified under Chapter 3 of Guidance note on Audit of Banks (2024)]
Ÿ Document checklist of SAs and remarks of signatory against each as to compliance to be maintained.

[Refer Annexure 3- Checklist of applicable SAs for Bank Audit specified under Chapter 4
of Guidance note on Audit of Banks (2024)]

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Special Considerations in a CBS Environment
Core Banking Solution (CBS) works on the concept
of centralized database and processing. Updating
of data is on real time basis. Under CBS, back office
of branches is considered as Service Outlets (SOL).
SBA should call for reports of CBS in use at branch.
SBA should scrutinize sample MIS reports and
master data / parameters to assess the accuracy
and adequacy thereof.

Bank should share information about key aspects

of IT environment with SCA /SBA at regular
intervals.
Ÿ This includes information about: Banks should ensure that the asset classification
Ÿ IT Policy, Structure and environment and status is updated as part of day end process and
changes thereof able to generate classification status report at any
Ÿ Data processing, interface, integrity and given point of time with actual date of classification
security of assets as NPAs/NPIs.
Ÿ Business Continuity and Disaster recovery
Manual intervention: Banks shall not resort
plans
tomanual intervention / over-ride in the system-
Ÿ Controls over key aspects such as account codes
based asset classification process. In any
and mapping, e-banking and internet banking
exc e p t i o n a l c i rc u m s t a n c e w h e re m a n u a l
products or channels, manual interventions, etc.
intervention is required to override the system
Ÿ Audit logs/ trails for changes in master data,
classification, it must have at least two-level
administrative privileges and backend access
authorisation.
Ÿ List of exceptions granted to system driven
classification and authorization Auditors need to check all material cases and
Ÿ MIS and Major Exception reports borderline cases about the transactions in last
Ÿ Major IT related issues having bearing on 2 weeks in the party ledger to identify any
preparation of financial statements window dressing or manual intervention
Ÿ Significant observation by Auditors on undertaken by bank.
computerized accounting and overall IT As per RBI Master Direction on “Frauds –
systems Classification and Reporting by commercial banks
Ÿ Banks are required to get system audit done and select FIs”, banks should track Early Warning
byAuditor who is CA and also a Certified Signals (EWS) integrating with the credit
Information System Auditor and registered monitoring process so that it trigger for any
with ISACA. possible credit impairment in the loan accounts,
given the interplay between credit risks and fraud
Ÿ Classification of Advances: As per RBI Circular risks. Most prominent EWS are suspicious related
on “Automation of Income Recognition, Asset party transactions, financial statement and stock
Classification and Provisioning (IRACP) statement manipulations for enhanced loan
processes in banks”, Banks should have system- eligibility and wrong IRAC classification due to
based asset classification for down gradation manual interventions and subjective
and upgradation of accounts. considerations in monitoring and restructuring
processes.

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Special Considerations in a CBS Environment
At branch Level, SBA should carry out test of Audit of Cash
controls and substantive checking of sample
Ÿ Compliance with cash management policy of the
transactions through CBS. All major loan accounts
bank
with borrowing in excess of Rs 2 Crores. There is a
Ÿ Check adequacy of internal controls on custody
need for examination by Auditors of Key security
of cash such as joint custody, rotation of duties
control. The Auditor need to ensure that:
for keys management, daily cash check etc.
Ÿ Authorised, accurate and complete data is made
Ÿ Proper system of Segregation of Duties for
available for processing. In case of interruption
receipt, accounting & physical verification.
due to power, mechanical or processing failures,
Ÿ Physically check cash at the branch, cash at the
the system restarts without distorting the
ATM forming part of branch and cash at CDM
completion of the entries and records.
(Cash Deposit Machines) and reconcile the same
Ÿ Segregation of duties while granting access
with GL balances.
controls
Ÿ If branch deposit a large portion of their cash
Ÿ Changes made in the parameters or user levels
balance with the RBI or the State Bank of India or
are authenticated.
any other bank on the closing day, verify
Ÿ Manually calculated charges are properly
sufficient appropriate evidence for the same
accounted and authorised. The interest
Ÿ Compliance with limit for cash holding by branch
calculation may need to be sample checked,
throughout the year.
as there could be bug in the system.
Ÿ Adequacy of Cash insurance to cover cash-in
Ÿ Amendments in master data especially
hand and cash-in transit.
relating to interest rate need closer
Ÿ Maintenance of Cash Reserve Ratio as per RBI
examination as there could be unauthorised
Guidelines.
manual intervention .
Ÿ Exceptional transaction reports are being
authorised and verified on a daily basis by the Audit of Balances with RBI, SBI &
concerned officials.
Ÿ Account master and balance cannot be
Other Banks (For Branches with
modified except by the authorised personnel. Treasury Operations)
Ÿ All general ledger accounts codes authorised by
Applicable only if branch has kept cash balance with RBI, SBI &
Head Office are in existence in the system.
Other banks.
General ledger balance tallies with the balance Ÿ Check balance confirmation certificates obtained from
in subsidiary book. banks.
Ÿ Review Bank Reconciliation Statement.
[Refer Annexure 4- Illustrative checklist of Ÿ Check charges or outstanding interest have been
considered.
special purpose /exceptional reports in Ÿ Check outstanding cheques and cheques returned unpaid,
CBS prescribed under Chapter 5 of if any.
Guidance Note on Audit of Banks (2024)] Ÿ Check bills or outstanding cheques sent for collection and
outstanding as on the closing date have been credited
subsequently.
Ÿ Examine Large transactions in inter-bank accounts.
Ÿ Check balance confirmation certificates obtained from
banks in respect of outstanding deposits and interest on
such deposits recorded on time proportion basis
Ÿ Verify balances with banks outside India and conversion
thereof in Indian currency at the rate prevailing on Balance
Sheet Date.

© 2024 All Rights Reserved 08

Audit of Money at call and Short Notice (For Branches with Treasury
Operations)
To maintain liquidity, banks invests/ lends and borrows fund for short term (14 days) through money
market. Generally, this activity is handled by treasury department of Bank. If such operations exist at
branch (confirm through trial balance), SBA should check:
Ÿ Obtain copy of communication between branch and treasury branch.
Ÿ Ensure entries pertaining to the branch are appropriately identified and passed in the books of
accounts.
Ÿ Check compliance with instructions/ guidelines issued by the controlling authorities of the bank.
Ÿ Confirmation and reconciliation of year-end balances
Ÿ Proper recording of interest accrued upto the year-end

Audit of Investments (For Branches Outside India/Auditors of Treasury

Operations)
Generally, such types of transaction not appear in branch books, except in case of branch handling
treasury operation. However, branches outside India, carry out investment activity as well. In such cases,
for investments appearing in branch trial balance, Auditor should:

Ÿ Verify (physical or based on custodian report) and reconcile investments with books.
Ÿ Check compliance with instructions/ guidelines issued by the controlling authorities for purchase and
sale of investments
Ÿ Check mode of valuation of investments in accordance with the RBI guidelines or the norms
prescribed by the relevant regulatory authority of the country in which the branch is located.
Ÿ Check matured or overdue investments which have not been encashed or not been serviced.
Ÿ Check classification of Investments as NPI and provision made if maturity amount not received or
interest not served, for more than 90 days.

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Audit of Agriculture Advances
RBI has classified lending to the agriculture and allied activities under
Priority Sector Lending (PSL). The categories under priority sector are as
follows: (i) Agriculture (ii) Micro, small and medium enterprises (iii)
Export credit (iv) Education (v) Housing (vi) Social infrastructure (vii)
Renewable energy (viii) Others. Lending to Agriculture includes Farm
Credit, Loan to corporate farmers, agriculture infrastructure, ancillary
services, Kisan Credit Card, Small & Marginal Farmers, etc.
Domestic commercial banks (excl. RRBs & SFBs) & foreign banks with 20 branches and above lend 40 per
cent of ANBC (Adjusted Net Bank Credit) to Priority Section. Method of computing ANBC specified under
RBI Master Direction on “Priority Sector Lending (PSL) - Targets and Classification”.
Ÿ Obtain written representation from Management about the scheme, its applicability and period of
loan disbursed.
Ÿ Verify sanction is as per Bank guidelines framed by the bank. Check pre & post sanction visit records.
Ÿ Verify Classification, lending percentage and utilization is as RBI Master Direction on “Priority Sector
Lending (PSL) - Targets and Classification”.
Ÿ Examine documents evidencing the utilisation of loans for agricultural & allied activities.
Ÿ Verify security offered for agricultural loans is legally enforceable. Refer RBI Circular on “Credit Flow to
Agriculture - Collateral free Agricultural Loans” for collateral free limit for agricultural loans (Rs.1.60
Lacs per farmer) and schemes implemented by State / Central Government for debt relief / waiver.
Ÿ Verify source, nature and timing of credits coming in to service the agricultural loans.
Ÿ Check accuracy of Interest on Agricultural Advances was in line RBI Circular on “Charging of Interest
at monthly rests – Agricultural Advances”. Circular specifies charging/compounding of interest on
agricultural advances linked to crop seasons. The State Level Banker's Committee of the respective
State decides the crop season for each crop. “Long duration” crops would be crops with crop season
longer than one year and crops, which are not “long duration” crops would be treated as “Short
duration” crops.
Ÿ The RBI Circular on “Modified Interest Subvention Scheme for Short Term Loans for Agriculture
and Allied Activities availed through Kisan Credit Card (KCC) during the financial years 2022-23 and
2023-24” provides limits and Interest subvention percentage (3%) on short term crop loans, short term
loans for allied activities and in case of severe natural calamities”.
Ÿ For interest subvention, Auditors have to submit a certificate of interest subvention along with annual
accounts of the branch audited by them. Verify book credit entries for availing the interest subvention,
list of eligible borrowers, limits, interest subvention rate.
Ÿ Check recognition and treatment of NPA in line with IRAC guidelines. Also, review NPA in case of
conversion or re-scheduling of loans. A loan may be treated as NPA immediately on completion of two
crop seasons / one crop season (depending on the duration of the crops) after the repayment due
date. In case of conversion or re-scheduling of loans due to natural, the asset classification of these
loans would thereafter be governed by the revised terms and conditions.
Ÿ NPA Quick identification: The outstanding in advance accounts , if it is more than the sanctioned limit
and interest for 18 months period , all such cases are likely to be NPA. This can be checked by excel
calculation of Outstanding divided by sanctioned limit – calculate as a percentage.
Ÿ Ensure reporting requirements as per closing instructions of the bank.

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Audit of Advances and NPA related matters
Advances generally comprise of Money lent by
bank to its customers including interest accrued
and due, Debit balances in depositor accounts and
Inter-Bank Participation Certificates. SBAs should
acquaint themselves with the credit policy of the
bank, advances portfolio composition, applicable
RBI guidelines, relevant laws and regulations.

Fund-based facilities are term loans, cash credits

and overdrafts while non-fund-based facilities are
letters of credit, bank guarantees, letter of
comfort/undertaking, etc. Non-fund-based facility
may turn into a fund-based facility on due date, if
not paid by the borrower, for e.g., devolvement of
bills under LC, invocation of bank guarantee, etc.

Ÿ Examine all large advances (where outstanding amount is in excess of 10% outstanding aggregate
balance of fund based or non- fund based advances of the branch or Rs.10 crores, whichever is less).
Also select advance accounts for each type – each of Unsecured, Educational, Housing, Vehicle,
Personal, loan against FD, Loan against Shares, Loan against property, Loans granted against other
securities. Besides loan accounts cash credit accounts, overdraft against property, bills discounting /
purchase accounts should be selected for verification, a mix of both - new sanctions in the current year
and sanctions of previous years. Sampling should be based on SA 530 Audit and in accordance with the
requirement of LFAR. The LFAR specifies the format in which the auditor has to obtain data from the
branch for large advances. The compilation has to be done by the branch. The auditor has to review on
a test check basis whether the data keyed into the system is correct.
Ÿ Personal visit to borrowers: In sample cases , it is very important to visit manufacturing plant and /or
warehouses of borrowers to see the operations, inventory levels, Debtors position and creditors
position live on the day of visit from accounting system, atmosphere in factory/ commercial
establishment , approximate head count – a sixth sense of Auditors will give them idea of problem
accounts.
Ÿ Looking too Good: Such accounts are more important to deeply examine by ledger scrutiny, review of
Financial statements, quarterly results, industry report, Google on Company and Promoters, GST
payment trends, Outstanding tax payments, delay in payment of statutory dues or delay in salary are
indicators of red flag.
Ÿ Visit and verify large collateral security: Examine samples to check validity of recorded amounts
and loan documentation. Loan documents would be affected by the legal status of the borrower and
the nature of security. Check there is no unrecorded advances.
Ÿ Valuation: concentrated valuation by few valuers from panel and their repetition is a red flag.
Ÿ Ensure stated basis of valuation of (primary/collateral) securities w.r.t advances is appropriately
applied and recoverability of advances is recognised in their valuation. Check existence, enforcement
and valuation of security. Valuation report can not be more than 3 years old.
Ÿ Check procedure for loan balance confirmation. Also check signatures with signatures on record of
authorised signatory.
Ÿ Advances are disclosed, classified and described and adequate provisions made in accordance with

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Audit of Advances and NPA related matters

regulatory requirements. procedures / instructions of the Controlling

Ÿ Security classification: In case an NPA or large authorities of Bank. In case of new sanctions –
advances are classified as secured , very review valuation of security very carefully.
carefully check the security papers and evidence Auditor can not rely on valuation report
of inventory details, Debtors list and also alone. The fraud of higher valuation at the
collateral security valuation – should not be time of sanction result in large bad debts of
more than the circle rates of area. Also examine bank.
that original genuine papers of title are with the Ÿ Examine all large advances (where outstanding
Bank amount is in excess of 5% outstanding aggregate
Ÿ Flat under construction: the flats or land balance of fund based or non- fund based
underneath can not be treated as security advances of the branch or Rs.10 crores,
unless the flats are allotted, and these are ready. whichever is less). Check status and security for
The cases of misuse of names of flat buyer to Top / Large Exposure Accounts. It is important
borrow need close attention, specially when a to carefully verify atleast 25% of such
significant percentage of flat booking persons advances very deeply including plant visit,
are with same builder. These could be cases of MCA public inspection, default reports, use
misuse of borrower names. Builders borrowing of specialsed data bases and tools to identify
from same bank are cases which need fraudster and manipulators.
investigative enquiry. Ÿ Change of Auditor : In all cases where
Ÿ Be a Blood Hound: The role of Bank auditor in borrower has changed theAudit firm before 5
case of advances is to work with suspicion on all years , it could be a case needing closer look.
lending transactions and it is important to rely Ÿ Disbursement: This is a requirement in the
only on original genuine documents. A little LFAR also. Review all disbursements during the
doubt as well as sample cases, it is important to year for large [Link] of
examine credential of borrowers deeply. An disbursement conditions s important.
examination of MCA data by public inspection, Ÿ Accounts that generally have overdue beyond
Review of income tax portal with the help of user 60 days or likely to slip to NPA at the quarter end
id and password provided by borrower, GST are termed as stressed accounts. Review the list
returns and GST portal in all sensitive cases will of stressed accounts for its completeness and
be very important. Examination of tax returns, accuracy. Perform analytical procedure to
large demands, litigation, failure to pay tax or identify trend of slippage in stressed accounts at
tds in time are indicators of a big problem. One quarter and month ends and actions taken
need to cover all major Companies and entities (tracking defaults and reporting) for resolution
of the Group. of stressed accounts.
Ÿ In case of duplicate title deed or signature of Ÿ Review restructured or rephased accounts with
title creation document not matching with reference to revised terms of sanction properly
the property owner's signature on the title approved by the relevant sanctioning authority
deeds as well as signature in the bank & check compliance thereof. Ensure compliance
account operated by such property owner. with RBI master circular which deals in detail on
The bogus title deed s fabricated by manner and mode of treatment of restructured
borrowers is a rampant fraud – very advances.
common. Ÿ Obtain List of borrowers referred and cases
Ÿ Check sanctioning, disbursement, review / admitted or filed under the Insolvency and
renewal and monitoring of advances in line with Bankruptcy Code 2016

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Audit of Advances and NPA related matters
Ÿ Unsecured exposure has significant impact on quantity, value and nature of hypothecated /
the bank, if it slips to NPA. Obtain List of pledged goods with stock statements received
Unsecured Exposures above Rs.1 Crore. from borrower. Ensure system of obtaining
Ÿ Check and report of quick mortality cases i.e. the stock audit reports or conduct stock audits,
accounts slipped to NPA within 12 months of where applicable.
sanction and verify action taken by bank in such Ÿ Ensure security /charges / lien are
cases. appropriately registered or assigned in the
Ÿ Check accounts upgraded or downgraded favour of bank. Verify procedure of Inspection or
during the year, accounts rated adversely as per physical verification carried out of branch.
bank's internal ratings, inspection or concurrent Check for deterioration in value of security by
audit, previous year audit, etc. comparing valuation reports on record.
Ÿ Obtain the list of accounts identified in EWS Ÿ In case of Gold Loans, sample check availability
(Early Warning Signals) reports at the branch of sealed packets with gold loans outstanding
to analyse the possible indication of stress and on reporting date. Verify valuers' certificate
accordingly factor-in for LFAR reporting regarding net gold content & their valuation and
purpose. ensure compliance with RBI Guidelines.
Ÿ Scrutinize advance accounts Ledgers: to Ÿ Accounts should be kept within the drawing
check compliance with limits, stagnancy, power and the sanctioned limit. The drawing
drawing against deposits not free from lien, power needs to be verified carefully in case of
window dressing, correctness of interest rates, working capital advances to entities engaged in
roll over and renewals, correct and valid credit construction business. Check mobilization
ratings fed in system, credit limit sanction advance being received by the contractors is
beyond delegated authority of limits fixed for reduced while calculating the drawing power. In
branch. respect of certain businesses such as diamond
Ÿ An advance is treated as secured to the extent merchants and jewellers, the SBA should
of the value of the security on the reporting exercise due caution while verifying realisable
date. Examine evidence available as to value of precious metals, diamonds, jewellery
ownership (title documents), existence (physical etc. In case of consortium accounts, the drawing
verification), enforceability and market / power calculation and allocation is made by the
realizable value of security. Security can be in Lead Bank and is binding on the member bank.
the form of goods, stock exchange securities & Ÿ Drawing Power (DP) is required to be arrived at
other securities, gold ornaments & bullions, life based on current stock statement. The drawing
insurance policies, bank's own deposit power calculated from stock statement older
certificates, plantations, immovable properties, than 3 months has to be considered as
third party guarantees, etc. irregular”(overdue). If such “irregular” account
Ÿ Review audited financial statements in case of continues for 90 days, it has to be classified as
non-corporate buyers, stock statements in case NPA, even though the account is otherwise
of hypothecated / pledged goods, demat operated regularly. Stock statements, quarterly
statements in case of stock exchange securities, returns, annual audit report (CARO & Schedule
surrender value certificate in Life Insurance III) and other statements submitted by the
Policies, lien in case of Bank's own deposit borrower to the bank should be scrutinized in
certificates, guarantee bonds / promissory detail. Monthly stock statement should be
notes in case of third party guarantees etc. to compared with the audited and the reasons for
assess recoverability of advances. Check deviations, if any, should be ascertained. For

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Audit of Advances and NPA related matters

accounts having funded exposure over Rs. 5 security, overdrawn accounts etc., needs to be
crores, review report submitted by the stock charged as per sanctioned terms and norms of
auditors and focus on comments made by the the bank.
stock auditors on valuation of security and Ÿ Check frequency and amounts of credits in
calculation of drawing power. account, commensurate with sanction limit &
Ÿ Bills purchased and discounted by the bank volume of borrower.
are generally drawn on outside parties and are, Ÿ Compliance with Income Recognition and Asset
therefore, sent by the bank to its branches or Classification (IRAC) Guidelines of RBI.
agents for collection immediately after their Ÿ Ensure correct classification of advances into
receipt. They are generally not in the possession performing and nonperforming categories.
of the bank on the closing date. They are shown From Dec.2021, RBI mandated that income
separately in the balance sheet as part of recognition, asset classification and
'advances. Examine whether registers of bills provisioning should be totally automated by the
purchased and discounted are properly banks. Prepare Memorandum of Changes for
maintained and all transactions are correctly incorrect classification, interest and collection
recorded. Check bills and supporting title charges.
documents are properly endorsed and assigned Ÿ Check adequacy of provisions for cases
in bank's name. wherein process under IBC is mandated but not
Ÿ In case of Retails loans acquired through initiated by Branch. Check ECGC (Export Credit
transfer of Pool of Assets either on Portfolio Guarantee Corporation) claims lodged with year
Basis or on Individual Loan Basis, Auditor should end status. In case of claims rejected, same
ensure transfer shall be only on cash basis and should be considered as uncovered while
the consideration calculated on arm's length calculating provision.
basis received immediately. Carry out due Ÿ For export financing, Export packing credit in
diligence of such loans, modification to rupees or foreign currency to be issued on the
exposure ceilings, classification and basis of letter of credit or a confirmed and
provisioning, if required. RBI master direction irremovable order for the export of
require performance and credit monitoring of goods/services, for a maximum period of 360
the pool assets at obligor level i.e., at the level of days. Liquidation of EPC / PCFC will be by way of
each asset. export proceeds only. RBI Master Direction on
Ÿ Check red flagged accounts for deviations with export of goods and services, prescribes that AD
Bank Policy & reported as fraud within 6 Category–I banks may permit exporters to repay
months. packing credit advances from balances in their
Ÿ In case of advances under consortium & EEFC (Exchange Earners' Foreign Currency) to
multiple banking arrangements, where the the extent exports have actually taken place.
bank, not being the leader, examine Check EPC (Export Packing Credit) / PCFC (Pre
classification, compliance with limits by shipment Credit in Foreign Currency) accounts
obtaining copy of certificate/report should be opened, maintained & liquidated as per RBI
obtained from lead bank for review and record. Guidelines. Check interest, sanction limits, credit
Ÿ In case of Inter – Bank Participation certificates report and use of advances as per Bank Policy.
on risk sharing basis, examine classification and Ÿ A bank guarantee is a written contract given by
adequate provisioning in case of loss of value. a bank on the behalf of a customer. By issuing
Ÿ Imposition of Penal interest on delayed this guarantee, a bank takes responsibility for
submission of stock statements, non-creation of

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Audit of Advances and NPA related matters
payment of a sum of money in case, if it is not Ÿ For Govt. Guarantees, specific rules apply, and
paid by the customer on whose behalf the the auditor should ensure that these are
guarantee has been issued. In return, a bank followed.
gets a commission for issuing the guarantee. Ÿ All accounts which are overdue or stops
Auditor should ensure proper classification of generating income for the banks
guarantees in to performance or financial as continuously for 90 days, have to be treated
they carry separate risk weights. Ensure as NPA and provision should be made as per
compliance with RBI Master Circular on extant guidelines of RBI. Obtain NPA Movement
“Guarantees and Co-acceptances”. As per statement. Compare NPA accounts with
circular, Bank guarantees issued for Rs. 50,000/- previous year. Check charging of penal interest,
and above should be signed by two officials bank charges, processing fees on due dates on
jointly unless lower cut-off is prescribed by bank. NPA classification. Ensure bank has not
Non fund based advances are prone to frauds recognised income on Non-Performing Assets
and due care needs to be taken while verifying until it is actually realised. In respect of NPAs,
these facilities Check sanction, documentation, fees, commission, lease charges and similar
approval, Margin money, collateral security, income that have accrued in the current period
disclosure, fees received, renewal, reconciliation should be reversed, if uncollected/ unrealized.
with GL & reversal on expiry in respect of Ÿ In the case of advances upgraded during the
Guarantees issued during the year. year, review such upgradation in the light of the
Ÿ A Letter of Credit is an arrangement whereby criteria specified for upgradation of NPA
Bank acting at the request of a customer accounts, considering the possibility of incorrect
(Importer / Buyer), undertakes to pay for the upgradation of account on the basis of partial
goods / services, to a third party (Exporter / recoveries made in the account wherein the
Beneficiary) by a given date, on documents overdue portion is not extinguished in entirety,
being presented in compliance with the recoveries made in the account subsequent to
conditions laid down. Check LC issued with the cut-off date, (i.e., date of financial
documentation, sanctioned limits, approval and statements) and non-identification of NPAs on
status of closure. For LCs devolved or on-going basis resulting in an account being
guarantees invoked, check removal from non- considered as standard though overdue portion
f u n d b a s e d a d v a n c e s a n d a p p ro p r i a t e of such unidentified NPAs is not recovered in
recording. Also, consider the probability of entirety.
invocation / devolvement of the guarantees / Ÿ Ensure that each customer of the bank is tagged
letters of credit on their due dates and consider under one single customer ID / Unique
making appropriate provisioning thereon as of Customer Identification Code (UCIC) in respect
current date. of all its accounts, including those in which credit
Ÿ In respect of non-fund based facilities (such facilities are granted, irrespective of their
as LCs/BGs/LoU/LoC) related to NPA borrowal location, to enable the bank, (subject to the
accounts (whether secured by tangible assets or relaxations/exceptions for the time being
not), provision is required to be made as applicable to any account/facility), to accord the
stipulated in AS 29. A borrowal account s a m e N PA c l a s s i fi c a t i o n s t a t u s t o t h e
becoming an NPA, does not necessarily mean customer/borrower, based on the most adverse
that non-fund based exposures of borrowal classification determined for any of its account/
account will also become NPA. Hence, it requires facility.
assessment on case-to-case basis. Ÿ Check up-dation of borrowers' defaults in

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Audit of Advances and NPA related matters
Central Repository of Information on Large Credits (CRILC) for advances over Rs. 5 Crores, which
maintains history of the borrowers from inception.
Ÿ For advances less than Rs. 5 Crores, check eligibility of borrowers before sanctioning from Central
Fraud Registry (CFR) (maintained by RBI) which holds all the data regarding frauds reported by banks in
India.
Ÿ Check the review / renewal of advances, availability of drawing power, restructured cases, credit and
debit summation in accounts, daily stamping of NPA, evergreening of loans, etc.

[Refer Annexure 5 - Audit Approach, Procedures including Regulatory Considerations

prescribed under Chapter 11 of Guidance Note on Audit of Banks (2024)]

RBI Guidelines On Income Recognition, Asset Classification, Provisioning And

Other Related Matters
The Auditor needs to review and comment as to whether has branch identified and classified advances
i n t o s t a n d a r d /
substandard/doubtful/loss assets through the computer system without manual intervention (in line
with the norms prescribed by the Reserve Bank of India) (The auditor may refer the relevant H.O.
instructions for identification of NPAs and classification of advances).

ASSET CLASSIFICATION

The guidelines require banks to classify their advances into four broad categories for the purpose of
provisioning as follows:
Ÿ Standard assets: A standard asset is one which is not a non-performing asset and does not carry
more than normal banking risk attached to the business. The banks shall recognise incipient stress in
loan accounts, immediately on default, by classifying such assets as Special Mention Accounts (SMA)-
0,1 &2 based on Principal or Interest payment or any other amount wholly or partly overdue between
1-30, 31-60, 61-90 days respectively.
Ÿ In the case of revolving credit facilities like cash credit, the SMA sub-categories will be SMA-1 & 2 based
on outstanding balance remains continuously in excess of the sanctioned limit or drawing power,
whichever is lower, for a period of 31-60 days & 61-90 days respectively. The date of SMA/NPA shall
reflect the asset classification status of an account at the day end of that calendar date. SMA
classification of borrower accounts are applicable to all loans, including retail loans, irrespective of the
size of exposure of the lending institution
Ÿ Sub-standard assets: A sub-standard asset is one which has remained NPA for a period less than or
equal to 12 months.
Ÿ Doubtful assets: An asset is classified as doubtful if it has remained in the sub-standard category for a
period of 12 months.
Ÿ Loss assets: A loss asset is one which has been identified as wholly irrecoverable either by the bank; or
the internal or external auditors; or the RBI inspectors, but the amount has not been written off wholly
i.e. an asset is considered uncollectible and of such little value that its continuance as a bankable asset
is not warranted although there may be some salvage or recovery value.

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RBI Guidelines On Income Recognition, Asset Classification, Provisioning And
Other Related Matters
Classification Norms relating to NPAs
Ÿ Cash credit/overdraft (CC/OD) account is classified as NPA if it is 'out of order'. An account shall be
treated as 'out of order' if:
Ÿ the outstanding balance in the CC/OD account remains continuously in excess of the sanctioned
limit/drawing power for 90 days, or
Ÿ the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but
there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is
less than the sanctioned limit/drawing power but credits are not enough to cover the interest
debited during the previous 90 days period
Ÿ A term loan is treated as a non-performing asset (NPA) if interest and/or instalment of principal
remain overdue for a period of more than 90 days.
Ÿ Bills purchased and discounted are treated as NPA if they remain overdue and unpaid for a period of
more than 90 days.
Ÿ Securitization asset is to be treated as NPA if the amount of liquidity facility remains outstanding for
more than 90 days, in respect of a securitisation transaction undertaken in terms of Reserve Bank of
India (Securitisation of Standard Assets) Directions, 2021.
Ÿ Agriculture Advances - A loan granted for short duration crops is to be treated as NPA, if the
instalment of principal or interest thereon remains overdue for two crop seasons and, a loan granted
for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains
overdue for one crop season
Ÿ Credit card account will be treated as NPA if the minimum amount due, as mentioned in the
statement, is not paid fully within 90 days from the payment due date mentioned in the statement.
The classification of an asset as NPA should be based on the record of recovery. Bank should not classify
an advance account as NPA merely due to the existence of some deficiencies which are temporary in
nature such as non-availability of adequate drawing power based on the latest available stock statement,
balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-
renewal of the limits on the due date, etc.

Banks should ensure that drawings in the working capital account are covered by the adequacy of the
current assets, since current assets are first appropriated in times of distress. Drawing Power (DP) is
required to be arrived at based on current stock statement. The outstanding in the account based on
drawing power calculated from stock statements older than three months is deemed as irregular. A
Working capital borrowing account will become NPA if such irregular drawings are permitted in the
account for a continuous period of 90 days even though the unit may be working, or the borrower's
financial position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months from the
due date/date of ad hoc sanction. An account where the regular/ ad hoc credit limits have not been
reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA.

Asset classification of borrower accounts where regularisation of account carried out near about
Balance Sheet date or by making payment through cheque should be handled with care and without
scope for subjectivity.
All facilities granted to a borrower and investment made in securities issued by the borrower will have to
be treated as NPA / Non-Performing Investments (NPI), once any or a part of the facility / investment has

© 2024 All Rights Reserved 17

Rbi Guidelines On Income Recognition, Asset Classification,
Provisioning And Other Related Matters
become irregular, except in case of preference shares wherein if the same are marked as NPI, the rest of
the exposures are not required to be considered as non-performing.

In case of bills discounted under LC favouring a borrower may not be classified as a NPA, when any other
facility granted to the borrower is classified as NPA. Further, in case of bills discounted under LC, if the
payment under the LC is not made on the due date by the LC issuing bank for any reason, unless the
amount is immediately made good by the borrower, the auditor needs to review the availability of
security in the light of the straight away classification norms specified.

Overdue receivables representing positive mark-to-market value of a derivative contract will be treated
as NPA, if these remain unpaid for 90 days or more. For unrealised income already booked by the bank on
accrual basis, after 90 days of overdue period, the amount already taken to 'Profit and Loss account'
should be reversed and held in a 'Suspense Account-Crystallised Receivables.
Normally NPA assessment is done based on record of recovery of dues in advances account. However,
there are many Other Non-Financial Parameters such as inherent weakness of the account, non-
achievement of date of commencement of commercial operations, failure to comply with key
restructuring conditions, Erosion in value of security, etc. which also should be considered while
assessing classification of NPA account.

In respect of accounts where there are potential threats for recovery on account of erosion in the value of
security or non-availability of security and existence of other factors such as frauds committed by
borrowers, such accounts should be straightaway classified as doubtful or loss asset, as appropriate.
Ÿ Erosion in the value of securities by more than 50 per cent of the value assessed by the bank or
accepted by RBI inspection team- considered as “significant”, requiring the asset to be classified as
doubtful and provided for adequately.
Ÿ In case of secured loan, if the realisable value of security as assessed by bank/approved valuers/RBI is
less than 10 per cent of the outstanding in the borrower accounts, should be classified as loss asset
and accordingly fully provided for.
Ÿ In respect of all cases of fraud, the entire amount due to the bank (irrespective of the quantum of
security held against such assets), or for which the bank is liable (including in case of deposit accounts),
is to be provided for.

The credit facilities backed by guarantees of Central Government though overdue may be treated as
NPA only when the Government repudiates its guarantee by invoking it. In case of State Government
guaranteed loans, this exemption will not be available and such account will be NPA if interest / principal /
other dues remain overdue for more than 90 days.

Where the remittances by the borrower under consortium lending arrangements are pooled with one
bank and/or where the bank receiving remittances is not parting with the share of other member banks,
the account should be treated as not serviced in the books of the other member banks and therefore, an
NPA.
Advances against term deposits, NSCs eligible for surrender, KVP and life policies need not be
treated as NPAs, provided adequate margin is available in the accounts.

© 2024 All Rights Reserved 18

Rbi Guidelines On Income Recognition, Asset Classification,
Provisioning And Other Related Matters

Where the credit extended by banks are guaranteed by EXIM Bank, the extent to which payment has
been received from EXIM Bank on guarantee the advance may not be treated as NPA.

Take out Finance - The taking over institution, on taking over such assets, should make provision treating
the account as NPA from the actual date of it becoming NPA even though the account was not in its books
as on that date.

Export Project Finance - Where the actual importer has paid the dues to the bank abroad and the
proceeds have not been made good to the bank granting finance due to any political reasons, such
account need not be classified as NPA if the bank is able to establish through documentary evidence that
the importer has cleared the dues in full by payment received to the credit of account of exporter
maintained in such country. The account will, however, have to be considered as NPA if at the end of one
year from the date the amount was deposited by the importer in the bank abroad, the amount has not
still been remitted to the bank.

INCOME RECOGNITION

Ÿ Banks recognise income (such as interest, fees and commission) on accrual basis, i.e., as it is earned.
Ÿ In view of the significant uncertainty regarding ultimate collection of income arising in respect of non-
performing assets, the guidelines require that banks should not recognise income on non-performing
assets until it is actually realised
Ÿ If any advance including bills purchased and discounted, becomes NPA, the entire interest accrued
and credited to the income account in the past periods should be reversed if the same is not realised.
Interest for the current year if recognised till the date of identification but not realised should also be
reversed.
Ÿ Interest income on advances against term deposits, NSCs, IVPs, KVPs and life policies may be taken to
income account on the due date, provided adequate margin is available in the accounts.
Ÿ Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of
outstanding debts should be recognised on accrual basis over the period of time covered by the re-
negotiated or rescheduled extension of credit.
Ÿ In cases of loans where moratorium has been granted for repayment of interest, income may be
recognised on accrual basis for accounts which continue to be classified as 'standard.
Ÿ If Government guaranteed advances become NPA, the interest on such advances should not be taken
to income account unless the interest has been realised.
Ÿ The finance charge component of finance income (as defined in AS 19 – Leases) on the leased asset
which has accrued and was credited to income account before the asset became non-performing, and
remaining unrealised, should be reversed or provided for in the current accounting period
Ÿ In the case of take-out finance, if based on record of recovery, the account is classified by the lending
bank as NPA, it should not be recognised as income unless realised from the borrower/taking-over
institution (if the arrangement so provides).

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Rbi Guidelines On Income Recognition, Asset Classification,
Provisioning And Other Related Matters
PROVISIONING FOR LOANS AND ADVANCES Period for which the advance
Percentage of provision on
has been considered as
Ÿ Loss Assets - The entire amount should be secured portion
doubtful
written off. If the assets are permitted to remain
in the books for any reason, 100 per cent of the
outstanding should be provided for. Upto 1 year 25

Ÿ Doubtful Assets - Provisioning for doubtful

assets under loans and advances is as under: More than 1 year and upto 3
40
Ÿ Full provision to the extent of the unsecured years
portion should be made.
Ÿ In regard to the secured portion, provision
SA-220 100
may be made on the following basis, at the
rates ranging from 25 to 100 per cent of secured portion depending upon the period for which the
asset has remained doubtful. The amount outstanding in excess of the guaranteed portion should
be provided for as per the extant guidelines on provisioning for non-performing advances

Ÿ In regard to the secured portion, provision may be made on the following basis, at the rates ranging
from 25 to 100 per cent of secured portion depending upon the period for which the asset has
remained doubtful. The amount outstanding in excess of the guaranteed portion should be provided
for as per the extant guidelines on provisioning for non-performing advances.
Ÿ Sub-Standard Assets - A general provision of 15 per cent on total outstanding should be made
without making any allowance for DICGC/ECGC cover and securities available. Unsecured exposures,
which are identified, as sub-standard would attract an additional provision of 10 per cent (i.e., total 25
per cent of total outstanding). However, in view of certain safeguards such as escrow accounts
available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-
standard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent.
Unsecured exposure' is defined as an exposure (including all funded and non-funded exposures)
where realisable value of the tangible security properly charged to the bank, as assessed by
bank/approved valuers/RBI inspectors, is not more than 10 per cent, ab initio, of the outstanding
exposure. 'Security' means tangible security properly discharged to the bank and will not include
intangible securities like guarantees (including State Government guarantees), comfort letters, etc.
Ÿ Standard Assets - The bank is required to make a general provision for 'standard assets' at the
following rates for the funded outstanding on global loan portfolio basis. The general provision is as
follows:
Ÿ a) Farm credit to agricultural activities, individual housing loans and Small and Micro Enterprises
(SMEs) sectors - 0.25 per cent.
Ÿ b) Advances to Commercial Real Estate (CRE) sector – 1.00 per cent.
Ÿ c) Advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at 0.75 per cent
Ÿ d) Housing loans extended at teaser rates– 2.00 per cent
Ÿ e) Restructured accounts classified as standard advances will attract a higher provision (as
prescribed from time to time) in the first two years from the date of restructuring. In cases of
moratorium on payment of interest/principal after restructuring, such advances will attract the
prescribed higher provision for the period covering moratorium and two years thereafter.
Ÿ All other loans and advances not included in (a), (b), (c), (d) and (e) above - 0.40 per cent

© 2024 All Rights Reserved 20

Rbi Guidelines On Income Recognition, Asset Classification,
Provisioning And Other Related Matters
Ÿ A high level of unhedged foreign currency exposures of the entities can increase the probability of
default in times of high currency volatility. Hence, banks are required to estimate the risk of unhedged
position of their borrowers and make incremental provisions on their exposures to such entities.
Ÿ
Ÿ Credit exposures computed as per the current marked to market value of the contract, arising on
account of the interest rate and foreign exchange derivative transactions, and gold, shall also attract
provisioning requirement as applicable to the loan assets in the 'standard' category, of the concerned
counterparties.
Ÿ
Ÿ Provisioning Norms for Leased Assets: For Substandard assets: a) 15 per cent of the sum of the net
investment in the lease and the unrealised portion of finance income net of finance charge
component. The terms 'net investment in the lease', 'finance income' and 'finance charge' are as
defined in 'AS 19 Leases' issued by the ICAI. b) Unsecured lease exposures which are identified as
'substandard' would attract additional provision of 10 percent, i.e., a total of 25 percent. For Doubtful &
Loss assets - Provisioning norms are same as applicable to advances.
Ÿ For advances guaranteed by ECGC, provision should be made only for the balance in excess of the
amount of such guarantee. Further, while arriving at the provision required to be made for doubtful
assets, realisable value of the securities should first be deducted from the outstanding balance in
respect of the amount guaranteed by these corporations and then provision should be made.

© 2024 All Rights Reserved 21

Audit of Fixed Assets and Other Assets

Ÿ Check classification of Assets as per third Schedule to the Banking Regulation Act, 1949 which requires
Fixed assets to be classified into two categories in the balance sheet, viz., 'Premises' and 'Other Fixed
Assets.
Ÿ Verify authorization, title deeds, invoicing, payment, approval, classification and recording of purchase
of fixed Assets is as per Bank Procedure.
Ÿ Check compliance. RBI Master Circular on “Para- Banking Activities”, provides methodology, exposure,
accounting, and prudential norms to be followed by banks undertaking leasing activity. In case of
leased assets, verify capitalization, amortization, accounting and provisioning in compliance with AS
19 and RBI guidelines. Section 9 of the Banking Regulation Act, 1949, which prohibits a banking
company from holding any immovable property exceeding seven years from the date of acquisition.
Ÿ For other fixed assets, check system of controlling, recording of movement and depreciation in line
with AS 10.
Ÿ Check compliance with provisions of the Schedule II to the Companies Act, 2013 and HO Policy for
Depreciation
Ÿ Ensure adequacy of insurance coverage and sample check existence of assets through physical
verification. Review the adequacy of internal control system for accountability & utilisation of fixed
assets.
Ÿ Ensure compliance with AS 28 for Assets no longer in use and provision for impairment.
Ÿ Check adequacy of records, receipts and communication to HO in respect of disposals (destroyed,
scrapped or sold) effected at the branch.
Ÿ In case of Capital WIP, check authorization, work records, estimation of capital expenditure
provisionally capitalized and disclosure under separate heading 'premise under construction”.
Ÿ For Other Assets such as stationary & stamps, non-banking assets acquired in satisfaction of claims,
etc. check controls over valuation, physical verification of assets acquired with reference to the
relevant documentary evidence.
Ÿ For Other Assets such as non-interest-bearing staff advances, examine the availability, enforceability
& valuation of security and recoverability in line with Bank's Policy.
Ÿ For Suspense account, obtain details of old outstanding entries/ age-wise balances along with
narrations, reconcile them and adequately provide for in Books.

© 2024 All Rights Reserved 22

Audit of Borrowings & Deposits

Ÿ Check compliance of RBI instructions and guidelines on opening of Current / CC / OD Accounts. Ensure
savings accounts are opened only for eligible entities for savings purposes and not for business
purposes.
Ÿ Status & Compliance of KYC, ReKYC and Statement of Financial Transactions reporting. Ensure
requirements specified by RBI vide Know Your Customer (KYC) Direction, 2016 has been complied.
Ÿ Ensure various types of deposits, and all known liabilities are recorded and stated at appropriate
amounts.
Ÿ For term deposits, check all such cases to verify the correctness of the interest rates offered. In case of
bulk deposits (Rs.2 crore and above for Scheduled Commercial Banks and Small Finance Banks and
Rs.1 crore and above for Regional Rural Banks), the auditor should check all such cases to verify the
correctness of the interest rates offered.
Ÿ For deposits designated in foreign currencies examine conversion and their effect on profit and loss
account. For interest rate on deposits held in held in FCNR(B) accounts, refer RBI Master Direction on
“Reserve Bank of India (Interest rate on Deposits) Direction, 2016.
Ÿ In terms of Foreign Exchange Management (Crystallization of Inoperative Foreign Currency Deposits)
Regulations, 2014 and as per RBI Circular9 on Instructions Relating to Deposits held in FCNR(B)
Accounts, inoperative deposits having a fixed term and those with no fixed term maturity after the
expiry of a 3 month notice, upon completion of 3 years, will get crystallized into Rupees
Ÿ Examine calculation and disclosure of interest accrued but not due on under the head 'other liabilities
and provisions'.
Ÿ Check unclaimed deposits and withdrawal from inoperative deposit account in depth being potential
fraud area.
Ÿ For Unclaimed Deposits / Inoperative Accounts, check compliance with RBI Circular on “Unclaimed
Deposits / Inoperative Accounts in banks”. As per RBI Circular on “Unclaimed Deposits / Inoperative
Accounts in banks”, a savings as well as current account should be treated as inoperative / dormant if
there are no transactions in the account for over a period of two years.
Ÿ Review sample some of the inoperative accounts revived / closed during the year to ascertain
inoperative accounts are 'revived' only with proper authority. Ensure system should not allow the
withdrawal in inoperative accounts through overrides.
Ÿ Verify the existence of audit log for cheque returns due to account dormancy and subsequent
activation and system to intimate and follow up with the customers in case of dormant accounts.
Ÿ As per RBI circular on Depositor Education and Awareness Fund (DEAF) Scheme, 2014 - Operational
Guidelines”, all such unclaimed liabilities (where amount due has been transferred to DEAF may be
reflected as “Contingent Liability”. Check compliance with DEAF Scheme 2014 for calculation and
disclosure of interest on such unclaimed interest-bearing de+posits.
Ÿ Ensure Proper Authorization for borrowings of money at call and short notice.
Ÿ Verify unveiled portion of the credit facilities (overdraft, cash credit), cheques /bills purchased /
discounted are used to boost the loans and deposit at the cut off dates to validate the element of
window dressing. Also, verify debits are made in suspense account/ sundries receivable account with
an offset credit in current account at the cut off dates.

© 2024 All Rights Reserved 23

Audit of Other Liabilities & Provisions

Ÿ Verify accuracy and appropriateness of identification, recording, accounting and squaring off of inter
branch transactions.
Ÿ Determine accuracy in calculating accrued interest.
Ÿ Conduct scrutiny of such accounts to verify the transactions in Bill Payable, Sundry Deposits, etc.
Ÿ Contingent liabilities includes Letters of Credit, Bank Guarantees and Letters of Comfort, Letters of
Undertaking, Liability on Partly Paid Investments, Liability on Account of Outstanding Forward
Exchange Contracts and Derivatives Contract, Guarantees Given on Behalf of Constituents,
Acceptances, Endorsements and Other Obligations.
Ÿ Check compliance with requirements of RBI directions for disclosure of Contingent liabilities. Refer
RBI Directions & Circulars on “Guarantees and Co-acceptances”, on “External Commercial Borrowings,
Trade Credits and Structured Obligations”, “Discontinuation of Letter of Undertaking (LOUs) and Letter
of Comfort (LOCs) for Trade credit” and on “The Depositor Education and Awareness Fund Scheme,
2014”.
Ÿ Other items for which the bank is contingently liable will include arrears of cumulative dividends, bills
rediscounted, commitments of underwriting contracts, estimated amount of contracts remaining to
be executed on capital account and not provided for etc.
Ÿ Seek information from the management as to the year- end status of claims outstanding against the
branch/ bank that are not acknowledged as debts.
Ÿ Check adequacy of internal control to ensure contingent liabilities are properly identified & recorded.
Ÿ Verify Margin and physical existence of outstanding forward exchange & derivatives contracts
including confirmations from merchants to test the existence of such outstanding contracts
Ÿ Verify classification, internal controls over issuance and custody, maintenance of register / statements
in respect LCs and guarantees given on behalf of constituents.
Ÿ Ensure all LCs and bank guarantees renewed/ extended after the original due dates. Ascertain
adequacy of internal controls over expired bills and guarantees.
Ÿ Evaluate amounts of the bills with the register maintained/statements with respect to Acceptances,
Endorsements and Other Obligations
Ÿ Check bills drawn on other branches of the bank are not included in bills for collection by referring to
the register maintained for outward bills for collection. Examine collections made subsequent to the
date of the balance sheet and procedure for crediting the party on whose behalf the bill has been
collected. Examine no income accrued in respect of bills outstanding at balance sheet date.
Ÿ Examine adequacy of internal control systems in respect of bills for collection and co-acceptance of
bills.

© 2024 All Rights Reserved 24

Audit of Gold, Bullion & Security Items

Ÿ Ensure adequacy of internal controls over issue,

custody and insurance of such items
Ÿ Verify stock records showing receipts, sales and
closing stock.
Ÿ Review proper entries are made in the books
and billing of invoices is done properly.
Ÿ Verify KYC of the customer has been obtained
during the issuance of the gold coins
Ÿ Carry out physical verification on test check
basis.

Audit of Inter Branch/O ce Accounts

Ÿ Review jottings/listing of current / savings bank account to check whether any account is opened with
generic name/ Branch Address/ Bank Address/ Bank PAN, etc and verify the purpose of opening the
account, periodicity of the parking of entries in the inter office accounts.
Ÿ Ensure that the adjustments are done properly and supported by adequate documentary evidence
under proper authority. Ensure controls over IT system and processes over passing automated
entries and system generated entries and its audit trail.
Ÿ Report on the year end status of office accounts and indicate the number of outstanding entries and
the amount involved, obtain the relevant information primarily from branch audit reports.
Ÿ Verify age-wise analysis of unreconciled entries as on balance sheet date along with subsequent
clearance, thereof if any. Verify bank procedure for auto and forced matching of entries.
Ÿ Check any unusual entries observed in the reconciliation process and made adequate provision w.r.t
unreconciled entries as per the RBI guidelines.
Ÿ Check all material transactions outstanding for more than 6 months even when 100 % of the amount
has been provided for.

© 2024 All Rights Reserved 25

Audit of Incomes – Interest on Advances,
Dividend, Commissions, fees, etc
Ÿ Assess the overall reasonableness of the figure of interest earned by working out the ratio. Analyse
Bank's credit portfolio and the interest income thereon.
Ÿ On test check basis, verify the rates of interest as per terms of sanction in the CBS as well as the
calculation of interest on all the performing accounts. Check sanction Letter, discount on bills
outstanding and interest subsidy received.
Ÿ Check compliance with RBI income recognition guidelines for reversal of interest accrued and credited
to income account, in respect of an advance (including bills purchased and discounted) that becomes
NPA during the year. Interest on non-performing advances in a separate account styled as 'Interest
Suspense/ Interest Not Collected Account (INCA)/ Unrealised interest of previous year (UIPY).\
Ÿ Understand the process of accrual of interest, assumption taken for accrual and accounting thereof.
Ÿ Understand the process of increase or decrease in Marginal Cost of funds-based Lending Rate (MCLR)
and process of updating in the system.
Ÿ Obtaining detailed breakup of the investment and money market lending portfolio along with the
interest accrued thereon. Re-compute and reconcile the interest accrual with the general ledger on
sample basis.
Ÿ Obtain details of loans sanctioned and disbursed. Check the items of processing fees, commission,
exchange and brokerage on a test check basis. Examine whether the bank has accordingly made
suitable adjustments for de– recognition/ reversal of uncollected commission, etc.

Audit of Expenses – Interest expended and provision thereof, brokerage legal

charges, provision, etc.
Ÿ Assess the overall reasonableness of the amount of interest on deposits.
Understand the process of computation of the average balance and re-compute
the same on sample basis.
Ÿ Check interest rates are in accordance with the bank's internal regulations, the
RBI directives, and agreements with the respective depositors. Compare interest
rate with the actual average rate. Ensure correct input and no unauthorized
amendments to interest rates.
Ÿ Check Interest on inter–branch balances have been provided at the rates
prescribed by the head office. Review overdue deposits report. Ensure interest
on overdue/ matured/ unpaid/ unclaimed term deposits has been estimated
and provided for.
Ÿ Ascertain compliance with the various regulatory requirements for provisioning.
Verify provision computed on standard assets and non-performing assets.
Ÿ Test check payment of brokerage and discounts on bills outstanding
Ÿ Obtaining the detailed breakup of the money market borrowing portfolio and
the interest accrued on sample basis.
Ÿ For legal expenses, review legal agreements, co-relate legal expenses with the
contingent liability appearing in financial statement or with the specific
annexure/report to be certified by the branch auditors.
Ÿ Carry out variance analysis of all expenses head, test check and seek clarification
from the branch.

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GST Compliance

Fraud
Ÿ Obtain internal circulars of the bank and history
of frauds. Review and analyse modus operandi
GST of major frauds from Staff angle
Ÿ Obtain and review reports of internal auditor,
concurrent auditor, internal inspector, revenue
audit, system audit, reports issued by ASMs and
vigilance functions and assess existence of any
of the Early Warning Signals.
Ÿ Review transaction/forensic audit reports
Ÿ Check GST is appropriately charged and conducted in the process of Corporate
complying with the due dates of payment of GST Insolvency Resolution Process (CIRP)
and all the returns filed reveal the correct Ÿ Verify Form FMR 1 has been filed with RBI
amount of liability. electronically.
Ÿ Suitable disclosure as to contingency exists in Ÿ Enquire about any fraud reported to Controlling
respect of applicable penalty may and proper Authority/vigilance department and local police
disclosure of all the interest amount. or CBI.
Ÿ Loans sold to factoring agents are not liable for Ÿ Ensure that the systems and procedures are
payment of GST. Examine to ensure that these scrupulously followed by the staff concerned.
transactions would be "exempt supply," Ÿ Inoperative accounts operation – fraud prone
depending on whether they are with or without Ÿ Transfer of accounts to other branches – Fraud
recourse. prone
Ÿ Check the agreements between the bank and Ÿ KYC change upgrade misuse fraud – signatures
the recovery agent on a sample basis. The bank and identity can be maliciously changed
should raise a self-invoice, and thereafter Ÿ Issue of FD and Charge certificate to wards
appropriate GST @ 18 percent should be paid on performance / other guarantee – can be fraud
the same. prone
Ÿ Check GST levied on interchange fees on card
settlement fees paid/shared by banks
Ÿ Check correct ITC is taken, and appropriate
person has discharged the tax.
Ÿ Check branch is reversing ITC in compliance with
the CGST Rule.
Ÿ Ensure expenses are correctly classified and all
input can be tracked and suppliers and services
providers have issued proper tax invoice.

© 2024 All Rights Reserved 27

Books and Records

Ÿ Ensure implementation of the core banking system and in-depth review of all systems. Check any
software / systems (manual or otherwise) which have an impact on the financial transactions,
reporting or any core activity used at the branch which are not integrated with the CBS
Ÿ Check books of accounts are maintained as per AS and as per fundamental accounting assumptions.
Ÿ Check degree / percentage of integration of SWIFT system, Structured Financial Messaging System
(SFMS), system for lockers etc.
Ÿ Any adverse features reported Information Systems (IS) audit and have a direct or indirect bearing on
the branch accounts and are pending compliance.
Ÿ Check generation and verification of exception reports at the periodicity as prescribed by the bank.
Ÿ Check procedures for manual intervention to system generated data and proper authentication of the
related transactions. Enquire about availability of audit trail / logs related to such manual
interventions and review.

Audit of Financial statements

Ÿ “Reserve Bank of India (Financial Statements - Presentation and Disclosures) Directions 2021” requires
the presentation and disclosures of profit and loss account.
Ÿ Check correctness of other Assets & other liabilities. Test the controls considering attributes such as
occurrence, completeness, accuracy, cut-off, classification and disclosures
Ÿ Check old balances in other assets and provisioning thereof
Ÿ Apply analytical procedures in line with SA 520 “Analytical procedures” - ratio and comparative analysis
to find out key variances.

Audit Report & Certificates

Ÿ The objective of the auditor is to form an opinion on the financial statements and to express clearly
that opinion through a written report.
Ÿ Audit issues need to be discussed with the branch management and after discussion if it is clear to the
auditor that the changes are required should be mentioned under Memorandum of Changes (MOC)
Ÿ Comply with the requirements of SA 700 (Revised), “Forming an Opinion and Reporting on Financial
Statements”, SA 705 (Revised), “Modifications to the Opinion in the Independent Auditor's Report” and
SA 706 (Revised), “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor's Report”.
Ÿ Matters to be dealt with by auditors in LFAR has been specified by RBI in Sep.2020. Auditor should have
appropriate audit documentation to cover all aspects on which reporting is to be done in his main
report and LFAR.
Ÿ In addition to their audit reports, the SBAs and SCAs may also be required by their terms of
engagement or statutory or regulatory requirements to issue other reports or certificates. Auditors to
correctness and accuracy of contents of certificates issued at branch level from the available branch
records such as:
Ÿ Compliance with BASEL Capital Adequacy Norms prescribed by RBI.
Ÿ Compliance with Ghosh & Jilani Committee Recommendation for Classification of Frauds,
Reporting of Frauds to RBI, Quarterly Returns, Reports to the Board, Fraud Monitoring Returns,
etc.
Ÿ Review compliance and request the concerned management to give a written representation as
to why the particular recommendation(s) has/have not been implemented.
© 2024 All Rights Reserved 28
Recovery of Non-Performing Assets by Asset Recovery Branches

Ÿ Obtain a list of all NPA accounts at the start of the

FY, movement during the year and closing.
Ÿ Understand the reason of NPA for each account
and policy of transferring NPA accounts.
Ÿ Check interest income on NPA and verify
adherence to policy related to expenses.
Ÿ Analyse the reason for movement during the
year like accounts transferred from other
branches, accounts upgraded or recovery
effected during the year.
Ÿ As regards recovery ensured that the credits
towards interest in the relevant accounts are not
out of fresh/additional credit facilities
sanctioned to the borrowers concerned.
Ÿ Cross check values of the security (i.e., primary
as well as collateral) as entered in the CBS with the terms in the sanction letter.
Ÿ Consider any orders issued by any of the authorities like DRT, SARFASEI etc. Verify the CGTMSE (Credit
guarantee fund trust for micro and small enterprises) amount proper classification and provision.
Ÿ Ensure compliance with the RBI IRAC guidelines in cases where the borrower has been referred to IBC.
Ÿ For reporting under LFAR obtain a list and information of borrowers having outstanding of Rs.10 Cr.
and above, review movement during the year in accounts, nature of each comment for proper action
to be taken by the Management / SCAs, impact on financial numbers like short provisioning, error in
valuation of securities etc. the same should be rectified and all accounts have met the legal
requirements.
Ÿ Review system of updating valuation of security charged to bank periodically against all the NPA
accounts
Ÿ Obtain the list of all recovery suits filed and its age wise details.
Ÿ Ensuring promptness in execution of decrees obtained for recovery from the defaulting borrower, also
list the time barred decrees, if any, and reasons thereof. Conduct age-wise analysis of decrees
obtained.
Ÿ List the recoveries and their appropriation against the interest and the principal and the accounts
settled / written off / closed during the year as per the bank's policy and satisfy that they are in
accordance with RBI guideline and accounting principles.
Ÿ List the new borrower accounts transferred to the branch during the year, obtained confirmation that
all the accounts of the borrower exposures and deposits pending adjustment / margin deposits

© 2024 All Rights Reserved 29

Clearing House Operations by Service Branches

Ÿ The Service Branch ensures that the duly

balanced outward clearing batches are received
from the various branches within the prescribed
time schedule.
Ÿ For income recognition, review SOP and
understand the basis of income booking,
examine the correspondence with RBI Clearing
house, check that RBI account, if any, is
reconciled as at the year-end, examine that the
compensation for delay in realisation of local
cheques is adequately accounted.
Ÿ For inward clearing, check signature of the
drawer of the cheque is being verified by the
staff, verify if any claims for refund of the
amount excess debited are received from the
customer, reconciliation and review of long outstanding entries.
Ÿ For outward clearing verify the cheque paper quality invariably, the signature of the drawer of the
cheque, any claims for refund of the amount excess credited are received from the other banks,
reconciliation and review long outstanding entries.
Ÿ Verify that cheque collection charges.
Ÿ Obtain necessary documents for reporting under LFAR like SOP followed by bank, old entries in
suspense account, long outstanding entries to HO, report on failure to lodge clearing cheques etc.
Ÿ Amount lying in suspense for clearing difference for an unusual long period (normally any entry
should not remain outstanding for more than 3 working days of lodgement).
Ÿ Review clearing adjustments accounts (inwards/ outwards) for any old/ large/ unusual outstanding
entries.
Ÿ Compliance with guidelines of the controlling authority of the bank with respect to operations
related to clearing transactions.

Audit of Foreign Exchange Business

Foreign banks generally operate in India through
branches. Some are set up as Indian subsidiaries of
the foreign banks.
Ÿ Check compliance with foreign legal and
regulatory requirements.
Ÿ Review the nature of transactions carried out by
branch, the role of bank branch in transaction in
terms of FEMA guidelines and should review
applicable Master Directions / Circulars
Ÿ Verify treasury operations and cross border
forex deals
Ÿ Compliance with Basel III Regulatory Framework
for Capital Adequacy.

© 2024 All Rights Reserved 30

Audit of Foreign Exchange Business

Ÿ Verify the cases of outstanding Letter of Credits (LC) as on 31st of March.

Ÿ Verify balance of letter of credits under contingent liability agrees with the outstanding letter of
credit liability (Under BASEL Guidelines computation of Capital Adequacy Ratio [CAR] takes
cognizance of contingent liabilities. Any excess amount appearing under contingent liability will
impact the bank's CAR).
Ÿ Check system of collection of charges, select appropriate sample based on the review of process,
and verify GST liability is determined and accounted correctly.
Ÿ For export bills, carry out physical verification, verify on sample basis the proof of export in EDPMS
(Export data processing and monitoring system), reconcile total of outstanding export bills on
collection as per bill balancing report with bills for collection under contingent liability.
Ÿ For Import Bills for Collection, carry out physical verification of all outstanding bills, generate bill
balancing report for import bills on collection transaction preferably for 31stMarch, reconcile total
of outstanding import bills on collection as per bill balancing report with bills for collection under
contingent liability, GST compliances on the charges so collected and accounting. Examine Overdue
Bills report
Ÿ Examine reports on concurrent audit of treasury transactions, system audit report verification of
voice recording mechanism.
Ÿ Verify half yearly review of portfolio by the Board of Directors of the bank and annual inspection
report of the RBI carried out under Section 35 of the Banking Regulation Act, 1949.
Ÿ Review linkages between CBS system and SWIFT system. Test check basis get the SWIFT messages
generated from the said system and compare the same with CBS information.
Ÿ Obtain a list of all the NOSTRO accounts maintained / operated by the branch and details of mirror
accounts should match
Ÿ Check system of periodic confirmation/ reconciliation of the balances in NOSTRO accounts
maintained with each overseas bank/ correspondent. In the case of Forex transactions, evaluate
Brokerage is paid on a settlement basis. All derivative transactions, including forward exchange
contracts, should be reported using the Present Value (PV) method.
Ÿ Examine transactions done in any dormant Nostro accounts in respect of which balances continue
to exist in the books of the branch, at year end
Ÿ Check balances in Nostro Accounts converted at year end at the rates of exchange as prescribed by
controlling authorities.
Ÿ · Compliance with prescribed procedures in relation to maintenance of VOSTRO Accounts
Ÿ For cash, review effectiveness of maintenance of cash on the date of verification and compliance to
periodic verification guidelines.
Ÿ Review compliance with Policy of bank for holding foreign currency (i.e., on period as well as
maximum amount) and obtain specific confirmation in Management Representation Letter.
Ÿ Adherence to prescribed bank guidelines in line with KYC & FEMA provision for determination of
residential status and documents in support thereof.
Ÿ Verify compliance with internal guidelines for communication and intimation of issuance / renewal
of FCNR (B) on sample basis.
Ÿ Review and assess the software's used for various Foreign Exchange books and records for the level
of integration and generation of inconsistency reports, updation of relevant data in without any
manual intervention.

© 2024 All Rights Reserved 31

Annexure 1 - Letter to Branch Management seeking initial information

The Manager
________________ Bank
________________ Bank (Branch)
________________________________

Dear Sir,
Sub: Audit of the accounts of your Branch for the year 2009-10 - Audit engagement/ Management
Representations:
You have already been informed by your Management, that we have been appointed as the auditors to audit
and report on the accounts of the Branch for the year 2009-10.
We have accepted the appointment, and we confirm that the audit shall be carried out in accordance with the
applicable legal provisions and the regulatory requirements, besides the applicable authoritative
pronouncements of the Institute of Chartered Accountants of India, with the objective of expressing an opinion
on the Branch financial statements. For this purpose we will perform sufficient tests to obtain reasonable
assurance as to whether the information contained in the accounting records and other source data is reliable
and sufficient as the basis of the preparation of the financial statements; and whether the information is
properly presented in the said statements.

You are aware that the responsibility for the preparation of the financial statements including
adequate disclosure is that of the Management, and this includes the maintenance of adequate
accounting records and internal controls, the selection and consistent application of appropriate
accounting policies, including implementation of applicable accounting standards along with proper
explanation relating to any material departures from those accounting standards. The management is
also responsible for making judgments and estimates that are reasonable and prudent so as to give a
true and fair view of the state of affairs of the Branch at the end of the financial year and of the profit or
loss of the Branch for that period, and the safeguard of the assets of the Bank/branch.

We will conduct our audit in accordance with the auditing standards generally accepted in India and with the
requirements of law. These Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in

We will conduct our audit in accordance with the auditing standards generally accepted in India and with the
requirements of law. These Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. However, having regard to the test nature of
an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitations of any
accounting and internal control system, there is an unavoidable risk that even some material misstatements of
financial statements, resulting from fraud, and to a lesser extent error, if either exists, may remain undetected.

In addition to our report on the financial statements, we expect to provide you with a separate letter concerning
any material weaknesses in accounting and internal control systems which might come to our notice through
the Long Form Audit Report (LFAR), or otherwise.
© 2024 All Rights Reserved 32
Annexure 1 - Letter to Branch Management seeking initial information

We also wish to invite your attention to the fact that our audit process is subject to peer review' under the
Chartered Accountants Act, 1949 and the reviewer may examine our working papers during the course of such
review.

We wish to complete some audit procedures even prior to the year-end, depending on your state of
readiness/response.

In view of the severe time constraints imposed, we are confident you will make available to us, within the dates
stipulated, the following Branch returns/statements duly completed, pre- reviewed and duly authenticated,
to enable us to furnish our reports in the form and manner desired of us by law or by the Reserve Bank of India
and not necessarily in the form and manner prescribed by the Bank.

Statements/returns:
Ÿ the Balance Sheet as at 31.3.2010;
Ÿ the Profit and Loss Account for the year 2009-10;
Ÿ the statements relating to the particulars of Advances as at 31.3.2010; and
Ÿ other supporting returns/statements/annexures (including those covering also the LFAR requirements).

Information/ clarifications as stated in Annexure 'I' to this letter in connection with our assignment, may please
also be expedited.

To enable us to monitor the progress of the audit and completion of the assignment, please
indicate/mention, the actual date(s) of completion as well as handing over to us of each
statement/return/ confirmation or other information required to be prepared by you (as per the
contents of the letter of appointment sent to us), by your endorsement on each such
statement/return/confirmation, before the same (duly authenticated) are handed over to us on 1st April,
2010.

We await your commitment.

As part of the audit process, we will expect to receive from the Management, written confirmation of the
representations made to us and a written response (para-wise), to our requirements is imperative, and
such response is to be based on your verification of facts.

We shall be grateful if you could confirm the name(s) of the Officer(s) designated by the Branch to comply with
our requirements in connection with the audit, so that our reports are expedited.

We shall appreciate your co-operation in the matter.

Thanking you,
Yours faithfully,
CHARTERED ACCOUNTANTS

© 2024 All Rights Reserved 33

Annexure 2- Illustrative list of documents to be maintained in Bank Branch
Audit specified under Chapter 3 of Guidance note on Audit of Banks (2024)]
An Illustrative list of documents to be maintained in the bank branch audit file is given below:
Ÿ Appointment formalities, including appointment letter, communication with previous auditor,
engagement letter etc.
Ÿ Remarks / Verification remarks against working sheet containing summary of latest RBI Master
Directions / Circulars, other material for conducting the audit.
Ÿ Working notes complying/ verifying closing guidelines / circular issued by the bank.
Ÿ Summary of the relevant provisions applicable as per latest updated RBI Master Directions/Circulars,
IRAC norms, closing circular used at the branch.
Ÿ Detailed branch audit plan and program as per SA 230.
Ÿ List of new deposit accounts opened during the audit period. List of samples selected of advances and
deposits along with criteria taken as base for selecting sample.
Ÿ Obtaining Delegation of Power (DOP) booklet to understand the powers and responsibilities at various
levels in the branch.
Ÿ Bank's accounting policies and how the auditor has verified their satisfactory compliances.
Ÿ Audit procedures adopted and determination of materiality levels. understanding of the internal
controls, IT system controls.
Ÿ Audit working paper documenting the audit procedures carried out for testing IFCOFR controls.
Ÿ Audit working papers and issue trackers. How the issues raised during audit were concluded.
Ÿ Financial statements of the previous year and current year.
Ÿ Management certified trial balance for the year (if available from the system).
Ÿ Summary of various audit reports such as internal inspection report, concurrent audit reports,
previous year statutory audit report.
Ÿ Statement of advances with classification along with various fields duly filled such as security, sanction
limits, date of sanction / renewal, outstanding balance etc.
Ÿ Specific representation, notes and working papers received from the bank's management on sensitive
or significant audit issues or accounts.
Ÿ List of latest and updated stock and security statements, valuation and inspection reports as on March
31.
Ÿ List of documents verified and minutes of meeting with the bank's management.
Ÿ Copies of supporting documents that are verified and confirmations obtained during the audit.
Ÿ Break-up of other assets and liabilities and Inter-Branch Adjustments including the confirmation of
deposits given by the branch.
Ÿ Proof of various securities, cash and other assets physically verified during the audit.
Ÿ ATM verification details.
Ÿ KYC verification, anti-money laundry verification, FEMA compliance at branches.
Ÿ Proof of verification of third-party products if any.
Ÿ Details of off-balance sheet items, claims against banks and contingent liabilities.
Ÿ Other Bank / RBI balance confirmation.
Ÿ List of customer complaints registered/responded by the branch- nature of complaint and its
resolution.
Ÿ Management Representation Letter.
Ÿ Various other audit documents / evidence considered in the audit process.
Ÿ Mail conversation with Bank branch can also be kept as PDF files to make it easily available in future for
ready reference along with all documentation in audit folder.
Ÿ

© 2024 All Rights Reserved 34

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]

Remark of
No Name of SA Scope and Objective
Auditor

SA-200 Overall Objectives of the This SA establishes the independent auditor’s overall responsibilities when
Independent Auditor and conducting an audit of financial statements in accordance with SAs. Specifically, it sets
the Conduct of an Audit out the overall objectives of the independent auditor and explains the nature and
in Accordance scope of an audit designed to enable the independent auditor to meet those
with Standards on objectives. It also explains the scope, authority and structure of the SAs, and includes
Auditing4 requirements establishing the general responsibilities of the independent auditor
applicable in all audits, including the obligation to comply with the Sas.

In conducting an audit of financial statements, the overall objectives of the auditor are:

Ÿ To obtain reasonable assurance about whether the financial statements as a whole

are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework; and
Ÿ To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.

SA-210 Agreeing the Terms of This SA deals with the auditor’s responsibilities in agreeing the terms of the audit
Audit engagement with management and, where appropriate, those charged with
Engagements governance. This includes
establishing that certain preconditions for an audit, responsibility for which rests with
management and, where appropriate, those charged with governance, are present.

The objective of the auditor is to accept or continue an audit engagement only when
the basis upon which it is to be performed has been agreed, through:

Ÿ Establishing whether the preconditions for an audit are present; and

Ÿ Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms
of the audit engagement.

© 2024 All Rights Reserved 35

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-220 Quality Control for an This SA deals with the specific responsibilities of the auditor regarding quality control
A u d i t o f F i n a n c i a l procedures for an audit of financial statements. It also addresses, where applicable,
Statements the responsibilities of the engagement quality control reviewer. The objective of the
auditor is to
implement quality control procedures at the engagement level that provide the auditor
with reasonable assurance that:

Ÿ The audit complies with professional standards and regulatory and legal
requirements; and
Ÿ The auditor’s report issued is appropriate in the circumstances.

The engagement quality control reviewer shall perform an objective evaluation of the
significant judgement made by the engagement team and the conclusion reached in
formulating the auditor’s report.

SA-230 Audit Documentation This SA deals with the auditor’s responsibility to prepare audit documentation for an
audit of financial statements. The specific documentation requirements of other SAs
do not limit
the application of this SA. Laws or regulations may establish additional documentation
requirements.

The objective of the auditor is to prepare documentation that provides:

Ÿ A sufficient and appropriate record of the basis for the auditor’s report; and
Ÿ Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.

SA-240 The Auditor 's This SA deals with the auditor’s responsibilities relating to fraud in an audit of financial
Responsibilities statements. Specifically, it expands on how SA 315 and SA 330 are to be applied in
Relating to Fraud in an relation to risks of material misstatement due to fraud
Audit of Financial
Statements The objectives of the auditor are:

Ÿ To identify and assess the risks of material misstatement in the financial statements
due to fraud;
Ÿ To obtain sufficient appropriate audit evidence about the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate
responses; and
Ÿ To respond appropriately to identified or suspected fraud.

SA-250 Consideration of Laws This SA deals with the auditor’s responsibility to consider laws and regulations when
and performing an audit of financial statements.
Regulations in an Audit
of Financial Statements The objectives of the auditor are:

Ÿ To obtain sufficient appropriate audit evidence regarding compliance with the

provisions of those laws and regulations generally recognised to have a direct effect
on the determination of material amounts and disclosures in the financial
statements;
Ÿ To perform specified audit procedures to help identify instances of non-compliance
with other laws and regulations that may have a material effect on the financial
statements; and
Ÿ To respond appropriately to noncompliance or suspected noncompliance with laws
and regulations identified during the audit

© 2024 All Rights Reserved 36

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-260 Communication with This SA deals with the auditor’s responsibility to communicate with those charged with
(Revised Those Charged with governance in an audit of financial statements. Although this SA applies irrespective of
) Governance an entity’s
governance structure or size, particular considerations apply where all of those
charged with governance are involved in managing an entity, and for listed entities.

The objectives of the auditor are:

Ÿ To communicate clearly with those charged with governance the responsibilities of

the auditor in relation to the financial statement audit, and an overview of the
planned scope and timing of the audit;
Ÿ To provide those charged with governance with timely observations arising from
the audit that are significant and relevant to their responsibility to oversee the
financial reporting process; and
Ÿ To promote effective two-way communication between the auditor and those
charged with governance.

SA-265 Communicating This SA deals with the auditor’s responsibility to communicate appropriately to those
Deficiencies in Internal charged with governance and management deficiencies in internal control that the
Control to Those auditor has identified in an audit of financial statements. This SA does not impose
C h a r g e d w i t h additional responsibilities on the
Governance and auditor regarding obtaining an understanding of internal control and designing and
Management performing tests of controls over and above the requirements of SA 315 and SA 330.
The objective of the auditor is to communicate appropriately to those charged with
governance and management deficiencies in internal control that the auditor has
identified during the audit and that, in the auditor’s professional judgment, are of
sufficient importance to merit their respective attentions.

SA-299 Joint Audit of Financial This SA lays down the principles for effective conduct of joint audit to achieve the
(Revised Statements overall objectives of the auditor as laid down in SA 200. This SA deals with the special
) considerations in carrying out audit by joint auditors. Accordingly, in addition to the
requirements enunciated
in this Standard, the joint auditors also need to comply with all the relevant
requirements of other applicable Sas.

The objectives of the auditor are:

Ÿ To lay down broad principles for the joint auditors in conducting the joint audit.;
Ÿ To provide a uniform approach to the process of joint audit.
Ÿ To identify the distinct areas of work and coverage thereof by each joint auditor.
Ÿ To identify individual responsibility and joint responsibility of the joint auditors in
relation to audit.

SA-300 Planning an Audit of This SA deals with the auditor’s responsibility to plan an audit of financial statements.
Financial Statements This SA is framed in the context of recurring audits. Additional considerations in initial
audit engagements are separately identified.

The engagement partner and other key members of the engagement team shall be
involved in planning the audit, including planning and participating in the discussion
among engagement team members.

© 2024 All Rights Reserved 37

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-315 Identifying and This SA deals with the auditor’s responsibility to identify and assess the risks of
Assessing the Risks of material misstatement in the financial statements, through understanding the entity
Material Misstatement and its environment, including the entity’s internal control.
through
Understanding the The objective of the auditor is to identify and assess the risks of material misstatement,
Entity and Its whether due to fraud or error, at the financial statement and assertion levels, through
Environment understanding
the entity and its environment, including the entity’s internal control, thereby providing
a basis for designing and implementing responses to the assessed risks of material
misstatement.
This will help the auditor to reduce the risk of material misstatement to an acceptably
low level.

SA-320 Materiality in Planning This SA deals with the auditor’s responsibility to apply the concept of materiality in
a n d P e r f o r m i n g a n planning and performing an audit of financial statements.
Audit
The objective of the auditor is to apply the concept of materiality appropriately in
planning and performing the audit.

SA-265 Communicating This SA deals with the auditor’s responsibility to communicate appropriately to those
Deficiencies in Internal charged with governance and management deficiencies in internal control that the
Control to Those auditor has identified in an audit of financial statements. This SA does not impose
C h a r g e d w i t h additional responsibilities on the
Governance and auditor regarding obtaining an understanding of internal control and designing and
Management performing tests of controls over and above the requirements of SA 315 and SA 330.
The objective of the auditor is to communicate appropriately to those charged with
governance and management deficiencies in internal control that the auditor has
identified during the audit and that, in the auditor’s professional judgment, are of
sufficient importance to merit their respective attentions.

SA-299 Joint Audit of Financial This SA lays down the principles for effective conduct of joint audit to achieve the
(Revised Statements overall objectives of the auditor as laid down in SA 200. This SA deals with the special
) considerations in carrying out audit by joint auditors. Accordingly, in addition to the
requirements enunciated
in this Standard, the joint auditors also need to comply with all the relevant
requirements of other applicable Sas.

The objectives of the auditor are:

Ÿ To lay down broad principles for the joint auditors in conducting the joint audit.;
Ÿ To provide a uniform approach to the process of joint audit.
Ÿ To identify the distinct areas of work and coverage thereof by each joint auditor.
Ÿ To identify individual responsibility and joint responsibility of the joint auditors in
relation to audit.

SA-300 Planning an Audit of This SA deals with the auditor’s responsibility to plan an audit of financial statements.
Financial Statements This SA is framed in the context of recurring audits. Additional considerations in initial
audit engagements are separately identified.

The engagement partner and other key members of the engagement team shall be
involved in planning the audit, including planning and participating in the discussion
among engagement team members.

© 2024 All Rights Reserved 38

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-315 Identifying and This SA deals with the auditor’s responsibility to identify and assess the risks of
Assessing the Risks of material misstatement in the financial statements, through understanding the entity
Material Misstatement and its environment, including the entity’s internal control.
through
Understanding the The objective of the auditor is to identify and assess the risks of material misstatement,
Entity and Its whether due to fraud or error, at the financial statement and assertion levels, through
Environment understanding
the entity and its environment, including the entity’s internal control, thereby providing
a basis for designing and implementing responses to the assessed risks of material
misstatement.
This will help the auditor to reduce the risk of material misstatement to an acceptably
low level.

SA-320 Materiality in Planning This SA deals with the auditor’s responsibility to apply the concept of materiality in
a n d P e r f o r m i n g a n planning and performing an audit of financial statements.
Audit
The objective of the auditor is to apply the concept of materiality appropriately in
planning and performing the audit.

SA-330 T h e A u d i t o r ' s This SA deals with the auditor’s responsibility to design and implement responses to
Responses to Assessed the risks of material misstatement identified and assessed by the auditor in
Risks accordance with SA 315 in a financial statement audit.

The objective of the auditor is to obtain sufficient appropriate audit evidence about the
assessed risks of material misstatement, through designing and implementing

SA-402 Audit Considerations This SA deals with the user auditor’s responsibility to obtain sufficient appropriate
Relating to an Entity audit evidence when a user entity uses the services of one or more service
Using a Service organisations. Specifically, it expands on how the user auditor applies SA 315 and SA
Organization 330 in obtaining an understanding of the user entity, including internal control relevant
to the audit, sufficient to identify and assess the risks of material misstatement and in
designing and performing further audit procedures responsive to those risks.

The objectives of the user auditor, when the user entity uses the services of a service
organisation, are:

Ÿ To obtain an understanding of the nature and significance of the services provided

by the service organisation and their effect on the user entity’s internal control
relevant to the audit, sufficient to identify and assess the risks of material
misstatement; and
Ÿ To design and perform audit procedures responsive to those risks.

SA-450 Evaluation of This SA deals with the auditor’s responsibility to evaluate the effect of identified
M i s s t a t e m e n t s misstatements on the audit and of uncorrected misstatements, if any, on the financial
Identified statements.
during the Audit
The objective of the auditor is to evaluate:

Ÿ The effect of identified misstatements on the audit; and

Ÿ The effect of uncorrected misstatements, if any, on the financial statements.

© 2024 All Rights Reserved 39

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-500 Audit Evidence This SA explains what constitutes audit evidence in an audit of financial statements and
deals with the auditor’s responsibility to design and perform audit procedures to
obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base
the auditor’s opinion.

The objective of the auditor is to design and perform audit procedures in such a way as
to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.

SA-501 Audit Evidence Specific This SA deals with specific considerations by the auditor in obtaining sufficient
Considerations appropriate audit evidence in accordance with SA 330, SA 500 and other relevant SAs,
for Selected Items w.r.t. certain aspects of inventory, litigation and claims involving the entity, and
segment information in an audit of financial statements.

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding
the:

Ÿ Existence and condition of inventory;

Ÿ Completeness of litigation and claims involving the entity; and
Ÿ Presentation and disclosure of segment information in accordance with the
applicable financial reporting framework.

SA-505 External Confirmations This SA deals with the auditor’s use of external confirmation procedures to obtain audit
evidence in accordance with the requirements of SA 330 and SA 500.

The objective of the auditor, when using external confirmation procedures, is to design
and perform such procedures to obtain relevant and reliable audit evidence.

SA-510 Initial Audit This SA deals with the auditor’s responsibilities relating to opening balances when
Engagements Opening conducting an initial audit engagement. In addition to financial statement amounts,
Balances opening balances include matters requiring disclosure that existed at the beginning of
the period, such as contingencies and commitments

In conducting an initial audit engagement, the objective of the auditor with respect to
opening balances is to obtain sufficient appropriate audit evidence about whether:

Ÿ Opening balances contain misstatements that materially affect the current period’s
financial statements; and
Ÿ Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current period’s financial statements, or changes thereto
are properly accounted for and adequately presented and disclosed in accordance
with the applicable financial reporting framework.

If the predecessor auditor’s opinion regarding the prior period’s financial statements
included a modification to the auditor’s opinion that remains relevant and material to
the current period’s financial statements, the auditor shall modify the auditor’s opinion
on the current period’s financial statements in accordance with SA 705 (Revised) and
SA 710.

SA-450 Evaluation of This SA deals with the auditor’s responsibility to evaluate the effect of identified
M i s s t a t e m e n t s misstatements on the audit and of uncorrected misstatements, if any, on the financial
Identified statements.
during the Audit
The objective of the auditor is to evaluate:

Ÿ The effect of identified misstatements on the audit; and

Ÿ The effect of uncorrected misstatements, if any, on the financial statements.

© 2024 All Rights Reserved 40

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-500 Audit Evidence This SA explains what constitutes audit evidence in an audit of financial statements and
deals with the auditor’s responsibility to design and perform audit procedures to
obtain sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base
the auditor’s opinion.

The objective of the auditor is to design and perform audit procedures in such a way as
to enable the auditor to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.

SA-501 Audit Evidence Specific This SA deals with specific considerations by the auditor in obtaining sufficient
Considerations appropriate audit
for Selected Items evidence in accordance with SA 330, SA 500 and other relevant SAs, w.r.t. certain
aspects of inventory, litigation and claims involving the entity, and segment
information in an audit of
financial statements.

SA-501 Audit Evidence Specific The objective of the auditor is to obtain sufficient appropriate audit evidence regarding
Considerations the:
for Selected Items
Ÿ Existence and condition of inventory;
Ÿ Completeness of litigation and claims involving the entity; and
Ÿ Presentation and disclosure of segment information in accordance with the
applicable financial reporting framework.

SA-505 External Confirmations This SA deals with the auditor’s use of external confirmation procedures to obtain audit
evidence in accordance with the requirements of SA 330 and SA 500.

The objective of the auditor, when using external confirmation procedures, is to design
and perform such procedures to obtain relevant and reliable audit evidence.

SA-510 Initial Audit This SA deals with the auditor’s responsibilities relating to opening balances when
Engagements Opening conducting an initial audit engagement. In addition to financial statement amounts,
Balances opening balances include matters requiring disclosure that existed at the beginning of
the period, such as contingencies and commitments

In conducting an initial audit engagement, the objective of the auditor with respect to
opening balances is to obtain sufficient appropriate audit evidence about whether:

Ÿ Opening balances contain misstatements that materially affect the current period’s
financial statements; and
Ÿ Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current period’s financial statements, or changes thereto
are properly accounted for and adequately presented and disclosed in accordance
with the applicable financial reporting framework.

If the predecessor auditor’s opinion regarding the prior period’s financial statements
included a modification to the auditor’s opinion that remains relevant and material to
the current period’s financial statements, the auditor shall modify the auditor’s opinion
on the current period’s financial statements in accordance with SA 705 (Revised) and
SA 710.

© 2024 All Rights Reserved 41

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-520 Analytical This SA deals with the auditor’s use of analytical procedures as substantive procedures,
Procedures and as procedures near the end of the audit that assist the auditor when forming an
overall conclusion on the financial statements

The objectives of the auditor are:

Ÿ To obtain relevant and reliable audit evidence when using substantive analytical
procedures; and
Ÿ To design and perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion as to whether the financial
statements are consistent with the auditor’s understanding of the entity

If analytical procedures performed in accordance with this SA identify fluctuations that

are inconsistent with other relevant information or that differ from expected values by
a significant amount, the auditor shall investigate such differences by:

Ÿ Inquiring of Management and obtaining appropriate audit evidence relevant to

management’s responses, and
Ÿ Performing other audit procedure as necessary in the circumstances

SA-530 Audit Sampling This SA applies when the auditor has decided to use audit sampling in performing audit
procedures. It deals with the auditor’s use of statistical and non-statistical sampling
when designing and selecting the audit sample, performing tests of controls and tests
of details, and evaluating the results from the sample.

The objective of the auditor when using audit sampling is to provide a reasonable basis
for the auditor to draw conclusions about the population from which the sample is
selected.

SA-540 Auditing Accounting This SA deals with the auditor’s responsibilities regarding accounting estimates,
Estimates, Including including fair value accounting estimates, and related disclosures in an audit of
Fair Value Accounting financial statements. Specifically, it expands on how SA 315, SA 330 and other relevant
Estimates, and Related SAs are to be applied in relation to accounting estimates. It also includes requirements
Disclosures and guidance on misstatements of individual accounting estimates, and indicators of
possible management bias.

The objective of the auditor is to obtain sufficient appropriate audit evidence whether
in the context of the applicable financial reporting framework:

Ÿ accounting estimates, including fair value accounting estimates, in the financial

statements, whether recognised or disclosed, are reasonable; and
Ÿ related disclosures in the financial statements are adequate.

SA-550 Related Parties This SA deals with the auditor’s responsibilities regarding related party relationships
and transactions when performing an audit of financial statements. Specifically, it
expands on how SA 315, SA 330 and SA 240 are to be applied in relation to risks of
material misstatement associated with related party relationships and transactions.
The objectives of the auditor are:

Ÿ Irrespective of whether the applicable financial reporting framework establishes

related party requirements, to obtain an understanding of related party
relationships and transactions sufficient to be able:
Ÿ To recognise fraud risk factors, if any, arising from related party relationships
and transactions that are relevant to the identification and assessment of the
risks of material misstatement due to fraud; and
Ÿ To conclude whether the financial statements, insofar as they are affected by
those relationships and transactions:
Ÿ Achieve a true and fair presentation (for fair presentation frameworks); or
Ÿ Are not misleading (for compliance frameworks); and

© 2024 All Rights Reserved 42

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-550 Related Parties Ÿ In addition, where the applicable financial reporting frameanwork establishes
related party requirements, to obtain sufficient appropriate audit evidence about
whether related party relationships and transactions have been appropriately
identified, accounted for and disclosed in the financial statements in accordance
with the framework.

SA-560 Subsequent Events This SA deals with the auditor’s responsibilities relating to subsequent events in an
audit of financial statements. It does not deal with matters relating to the auditor’s
responsibilities for other information obtained after the date of the auditor’s report,
which are addressed in SA 720(Revised). However, such other information may bring to
light a subsequent event that is within the scope of this SA.

SA-560 Subsequent Events The objectives of the auditor are to:

Ÿ Obtain sufficient appropriate audit evidence about whether events occurring

between the date of the financial statements and the date of the auditor’s report
that require adjustment of, or disclosure in, the financial statements are
appropriately reflected in those financial statements; and
Ÿ Respond appropriately to facts that become known to the auditor after the date of
the auditor’s report, that, had they been known to the auditor at that date, may have
caused the auditor to amend the auditor’s report.

SA-570 Going Concern This SA deals with the auditor’s responsibilities in the audit of financial statements
(Revised relating to going concern and the implications for the auditor’s report.
)
The objectives of the auditor are:

Ÿ To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of management’s use of the going concern basis of accounting in
the preparation of the financial statements;
Ÿ To conclude, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern; and
Ÿ To report in accordance with this SA.

SA-580 Written This SA deals with the auditor’s responsibility to obtain written representations from
Representations management and, where appropriate, those charged with governance.

The objectives of the auditor are:

Ÿ To obtain written representations from management and, where appropriate,

those charged with governance that they believe that they have fulfilled their
responsibility for the preparation of the financial statements and for the
completeness of the information provided to the auditor;
Ÿ To support other audit evidence relevant to the financial statements or specific
assertions in the financial statements by means of written representations, if
determined necessary by the auditor or required by other Sas; and
Ÿ To respond appropriately to written representations provided by management
and, where appropriate, those charged with governance, or if management or,
where appropriate, those charged with governance do not provide the written
representations requested by the auditor

SA-600 U s i n g t h e W o r k o f This SA establishes standards to be applied in situations where the principal auditor,
Another Auditor reporting on the financial information of an entity, uses the work of other auditor w.r.t.
financial information of components included in the financial information of the entity.
This Standard also discusses the principal auditor’s responsibility in relation to his use
of the work of the other auditor.

© 2024 All Rights Reserved 43

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-610 U s i n g t h e W o r k o f This SA deals with the external auditor’s responsibilities if using the work of internal
(Revised Internal Auditors auditors. This includes (a) using the work of the internal audit function in obtaining
) audit evidence and (b) using internal auditors to provide direct assistance under the
direction, supervision and review of the external auditor.

The objectives of the external auditor, where the entity has an internal audit function
and the external auditor expects to use the work of the function to modify the nature or
timing, or reduce the extent, of audit procedures to be performed directly by the
external auditor, or to use internal auditors to provide direct assistance, are:

SA-610 U s i n g t h e W o r k o f Ÿ To determine whether the work of the internal audit function or direct assistance
(Revised Internal Auditors from internal auditors can be used, and if so, in which areas and to what extent;
) and having made that determination:
Ÿ If using the work of the internal audit function, to determine whether that work is
adequate for the purposes of the audit; and
Ÿ If using internal auditors to provide direct assistance, to appropriately direct,
supervise and review their work.

SA-620 Using the Work of an This SA deals with the auditor’s responsibilities regarding the use of an individual or
Auditor's Expert organisation’s work in a field of expertise other than accounting or auditing, when that
work is used to assist the auditor in obtaining sufficient appropriate audit evidence.

The objectives of the auditor are:

Ÿ To determine whether to use the work of an auditor’s expert; and
Ÿ If using the work of an auditor’s expert, to determine whether that work is adequate
for the auditor’s purposes.

SA-700 Forming an Opinion This SA deals with the auditor’s responsibility to form an opinion on the financial
(Revised a n d R e p o r t i n g o n statements. It also deals with the form and content of the auditor’s report issued as a
) Financial Statements result of an audit of financial statements.

The objectives of the auditor are:

Ÿ To form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained; and
Ÿ To express clearly that opinion through a written report.

SA - 701 Communicating This SA deals with the auditor’s responsibility to communicate key audit matters in the
Key Audit matters in auditor’s report. It is intended to address both the auditor’s judgment as to what to
the Independent communicate in the auditor’s report and the form and content of such communication.
Auditor's report
The objectives of the auditor are to determine key audit matters and having formed an
opinion on the financial statements, communicate those matters by describing them
in the auditor’s report.

Key audit matters are those matters that, in the auditor’s professional judgment, were
of most significance in the audit of the financial statements of the current period. Key
audit matters are selected from matters Communicated with those charged with
governance.

SA-705 Modifications to This SA deals with the auditor’s responsibility to issue an appropriate report in
(Revised the Opinion in circumstances when, in forming an opinion in accordance with SA 700(Revised), the
) the Independent auditor concludes that a modification to the auditor’s opinion on the financial
Auditor's Report statements is necessary. This SA also deals with how the form and content of the
auditor’s report is affected when the auditor expresses a modified opinion.

The objective of the auditor is to express clearly an appropriately modified opinion on

the financial statements that is necessary when:

Ÿ The auditor concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement; or
Ÿ The auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement.
© 2024 All Rights Reserved 44
Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-706 Emphasis of Matter This SA deals with additional communication in the auditor’s report when the auditor
(Revised Paragraphs and Other considers it necessary to:
) Matter Paragraphs in
Ÿ Draw users’ attention to a matter or matters presented or disclosed in the financial
the Independent
statements that are of such importance that they are fundamental to users’
Auditor's Report
understanding of the financial statements; or
Ÿ Draw users’ attention to any matter or matters other than those presented or
disclosed in the financial statements that are relevant to users’ understanding of
the audit, the auditor’s responsibilities or the auditor’s report

The objective of the auditor, having formed an opinion on the financial statements, is
to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way
of clear additional communication in the auditor’s report, to:

Ÿ A matter, although appropriately presented or disclosed in the financial

statements, that is of such importance that it is fundamental to users’
understanding of the financial statements; or
Ÿ As appropriate, any other matter that is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.

SA-710 Comparative This SA deals with the auditor’s responsibilities regarding comparative information in
I n f o r m a t i o n an audit of financial statements. When the financial statements of the prior period
Corresponding Figures have been audited by a predecessor auditor or were not audited, the requirements
and Comparative and guidance in SA 510 regarding opening balances also apply.
Financial Statements
The objectives of the auditor are:
Ÿ To obtain sufficient appropriate audit evidence about whether the comparative
information included in the financial statements has been presented, in all material
respects, in accordance with the requirements for comparative information in the
applicable financial reporting framework; and
Ÿ To report in accordance with the auditor’s reporting responsibilities.

SA-720 The Auditor's This SA deals with the auditor’s responsibilities relating to other information, whether
(Revised Responsibilities financial or non financial information (other than financial statements and the
) Relating to Other auditor’s report thereon), included in an entity’s annual report.
Information
The objectives of the auditor, having read the other information, are:

Ÿ To consider whether there is a material inconsistency between the other

information and the financial statements;
Ÿ To consider whether there is a material inconsistency between the other
information and the auditor’s knowledge obtained in the audit;
Ÿ To respond appropriately when the auditor identifies that such material
inconsistencies appear to exist, or when the auditor otherwise becomes aware that
other information appears to be materially misstated; and
Ÿ To report in accordance with this SA.

SA-800 Special Considerations This SA deals with special considerations in the application of Sas in the 100-700 series
Audit of Financial to an audit of financial statements prepared in accordance with a special purpose
Statements Prepared framework.
in Accordance with
Special Purpose

© 2024 All Rights Reserved 45

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SA Scope and Objective
Auditor

SA-800 Special Considerations The objective of the auditor, when applying SAs in an audit of financial statements
Audit of Financial prepared in accordance with a special purpose framework, is to address appropriately
Statements Prepared the special considerations that are relevant to:
in Accordance with
Special Purpose Ÿ The acceptance of the engagement;
Ÿ The planning and performance of that engagement; and
Ÿ Forming an opinion and reporting on the financial statements but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal
control.

SA-805 Special This SA deals with special considerations in the application of Sas in the 100-700 series
Considerations Audit of to an audit of a single financial statement or of a specific element, account or item of a
Single Financial financial statement. The single financial statement or the specific element, account or
Statements and item of a financial statement may be prepared in accordance with a general or special
specific Elements, purpose framework. If prepared in accordance with a special purpose framework, SA
Accounts or Items of a 800 also applies to the audit.
Financial Statement
The objective of the auditor, when applying SAs in an audit of a single financial
statement or of a specific element, account or item of a financial statement, is to
address appropriately the special considerations that are relevant to:

Ÿ The acceptance of the engagement;

Ÿ The planning and performance of that engagement; and
Ÿ Forming an opinion and reporting on the single financial statement or on the
specific element, account or item of a financial statement but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control.

SA-810 Engagements to report This SA deals with the auditor’s responsibilities when undertaking an engagement to
on Summary Financial report on summary financial statements derived from financial statements audited in
Statements accordance with SAs by that same auditor.

The objectives of the auditor are to:

Ÿ Determine whether it is appropriate to accept the engagement to report on

summary financial statements;
Ÿ Form an opinion on the summary financial statements based on an evaluation of
the conclusions drawn from the evidence obtained; and
Ÿ Express clearly that opinion through a written report that also describes the basis
for that opinion.

Compliance with the SAs should be taken care of, while executing the audit as well as reporting.

Remark of
No Name of SQC Scope and Objective
Auditor

1 Quality Control for Ÿ The purpose of this Standard on Quality Control (SQC) is to establish standards and
Firms that Perform provide guidance regarding a firm’s responsibilities for its system of quality control
Audits and Reviews of for audits and reviews of historical financial information, and for other assurance
Historical Financial and related services engagements. This SQC is to be read in conjunction with the
Information, and Other requirements of the Chartered Accountants Act, 1949, the Code of Ethics and other
Assurance and Related relevant pronouncements of the Institute. (hereinafter referred to as “the Code”).
Services Engagements

© 2024 All Rights Reserved 46

Annexure 3- Checklist of applicable SAs for Bank Audit specified under
Chapter 4 of Guidance note on Audit of Banks (2024)]
Remark of
No Name of SQC Scope and Objective
Auditor

1 Quality Control for Ÿ The purpose of this Standard on Quality Control (SQC) is to establish standards and
Firms that Perform provide guidance regarding a firm’s responsibilities for its system of quality control
Audits and Reviews of for audits and reviews of historical financial information, and for other assurance
Historical Financial and related services engagements. This SQC is to be read in conjunction with the
Information, and Other requirements of the Chartered Accountants Act, 1949, the Code of Ethics and other
Assurance and Related relevant pronouncements of the Institute. (hereinafter referred to as “the Code”).
Services Engagements Ÿ Additional Standards and guidance on the responsibilities of firm personnel
regarding quality control procedures for specific types of engagements are set out
in other pronouncements of the Auditing and Assurance Standards Board (AASB)
issued under the authority of the Council. For example, Standard on Auditing (SA)
220, “Quality Control for an Audit of Financial Statements”, establishes standards
and provides guidance on quality control procedures for audits of historical
financial information.
Ÿ The firm should establish a system of quality control designed to provide it with
reasonable assurance that the firm and its personnel comply with professional
standards and regulatory and legal requirements, and that reports issued by the
firm or engagement partner(s) are appropriate in the circumstances.
Ÿ A system of quality control consists of policies designed to achieve the objectives
set out in paragraph 3 and the procedures necessary to implement and monitor
compliance with those policies.
Ÿ This SQC applies to all firms. The nature of the policies and procedures developed
by individual firms to comply with this SQC will depend on various factors such as
the size and operating characteristics of the firm, and whether it is part of a
network.

© 2024 All Rights Reserved 47

Annexure 4- Illustrative checklist of special purpose /exceptional reports in
CBS prescribed under Chapter 5 of Guidance Note on Audit of Banks (2024)]
Illustrative List of Special Purpose / Exception in date of NPA
Reports in CBS Ÿ List of accounts written off during the period /
year
The following indicative list of reports will benefit Ÿ List of accounts upgraded (along with date of
SCAs and SBAs (if shared in advance) while upgrade and the overdues on the date of
undertaking the audit in a fully computerised upgrade and the accounting treatment of
environment: recovery amount
Ÿ Quick mortality (NPA within 1 year of original
Advances sanction date)
Report Ÿ List of NPA accounts with security valuation not
carried out within the prescribed period
Ÿ Advances snapshot covering all important Ÿ List of accounts wherein re-phasement (change
parameters in EMI, tenor, moratorium period) is carried out
Ÿ Accounts with overdue in excess of 90 days and in CBS (excluding re-phasement due to change in
are classified as Standard Assets the reference rate)
Ÿ List of LCs devolved during the period / year and Ÿ Loan / OD against FD with no linkage to FD (i.e.,
current status of account, including list of forced Security)
debits pertaining to the devolvement, not Ÿ Loan to minors (Excluding Non-individual
debited to the operative accounts of the accounts and excluding Education, Loan/OD
borrower i.e. parked separated either under against deposit cases)
advances or office accounts Ÿ Loans below the benchmark rate (as applicable
Ÿ List of BGs invoked during the period / year and in each bank)
current status of account, including list of forced Ÿ Loans above the maximum lending rate (as
debits pertaining to the invocation, not debited applicable in each bank)
to the operative accounts of the borrower i.e. Ÿ Loans where disbursement is made in cash
parked separately either under advances or (Threshold limit may be prescribed)
office accounts Ÿ Credit transactions in CC / OD / Loan Accounts
Ÿ Standalone Non Fund Based Limits granted to with Value Date (Back Date) without Value Date
customers (Back Date) at Debit Leg
Ÿ List of accounts such as SMA / Watch list / Ÿ Advance accounts where effective interest rate
Probable NPA / Weak account as on the last date is Zero
of audit period Ÿ CC accounts with primary security is “Nil”
Ÿ Backdated updation of stock and book debt Ÿ Multiple TODs / Ad hoc Sanctions for a customer
statements (difference between date of Ÿ Non delinking of Ad hoc facility sanctioned on
updation in CBS and date of actual receipt of the expiry
stock statement) Ÿ Multiple customer IDs having common PAN
Ÿ List of accounts wherein the facility is not Ÿ Red flagged accounts since more than 6 months
renewed / reviewed Ÿ List of project loans (infra and non-infra)
Ÿ List of accounts which are short reviewed (which including fields such as Date of Financial
may have impact in NPA identification) Closure, Original DCCO, extended DCCO,
Ÿ List of accounts which slipped to NPA during the Achieved DCCO, Time/ Cost Overruns
current period Ÿ List of advances, where significant erosion in
Ÿ List of accounts wherein there is an amendment security value is observed. (Accounts where
erosion is more than 50 per cent)

© 2024 All Rights Reserved 48

Annexure 4- Illustrative checklist of special purpose /exceptional reports in
CBS prescribed under Chapter 5 of Guidance Note on Audit of Banks (2024)]
Ÿ Data submitted to CERSAI one / all FDs / RDs in cash
Ÿ SMA0, SMA1, SMA2 reports of all 12 months of Ÿ Cash payments from Office Accounts in excess
the audit period of Rs. 10,000
Ÿ Non senior citizen customers (based on DOB)
Profit & Loss with senior citizen interest table code
Report Ÿ Preferential interest rate applicable to staff
applied to non-staff deposit (Refer the policy of
Ÿ Manual debit to ‘Interest Income’ and ‘Other bank w.r.t. extending facility to ex-staff and
Income’ accounts relatives of staff / ex-staff)
Ÿ Manual credits to ‘Interest Income’ and ‘Other Ÿ List of outstanding office accounts entries
Income’ account (pointing type accounts).
Ÿ Manual debit to ‘Interest Expense Account’ Ÿ Accounts with invalid PAN (No. of digits,
Ÿ Interest pegging marked as “Y” for loans structure, constitution code mapping with 4th
sanctioned at variable rate i.e., w.r.t. benchmark digit) Guidance Note on Audit of Banks (Revised
rates (pegging may freeze the interest rate at the 2024) 369 Sr. No. Report
respective time) Ÿ List of foreign exchange transactions with
exchange rates beyond the card rate /
Foreign Exchange, Internal Controls, Regulatory maximum-minimum rate during the period
and Systems Ÿ List of foreign exchange transactions with
Report exchange rates beyond the card rate /
maximum-minimum rate during the period
Ÿ Bills under LC devolved and not crystallized. /
Bills under LC devolved wherein the Capital Adequacy
crystallization account is office account / not of Report
customer Ÿ Accounts above the threshold limit wherein
Ÿ Export bills discounted / purchased and external credit rating is not obtained / updated
outstanding beyond due dates Ÿ Bank guarantees and LC expired and not
Ÿ Packing Credits Accounts outstanding beyond reversed
due dates / Running Packing Credit accounts Ÿ Accounts with mismatch in constitution code
with age of un-utilized orders is more than 365 and BASEL mapping
days
Ÿ Resident customers having Non-Resident The above list of reports is indicative only. There are
Account (under same r multiple customer various other reports that can be generated.
master) However, the generation of reports requires in-
Ÿ NRE Account Holder having resident savings depth review of bank’s systems, processes and
account (under same or multiple customer gaps. The reports can be made more effective
master) through continuous review and update
Ÿ FDs / RDs with aggregate balance at customer mechanism.
master level in excess of Rs. 20,000 and closed

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Annexure 5 - Audit Approach, Procedures including Regulatory Considerations
prescribed under Chapter 11 of Guidance Note on Audit of Banks (2024)]
Audit Approach, Procedures including Regulatory Considerations
A. Preliminary Check

Ÿ SBA should review product note or circular or policy related to every loan product under the audit.
Also, check if the product note/ policy/ circular is in line with RBI guidelines.
Ÿ In retail advance, the volume of transactions are high; hence the auditor needs to apply effective
sampling to ensure proper coverage. While selecting sample, the auditor may consider loan
sanctioned/ disbursed near to reporting date, high/low in interest rate sanctions as compared to
average rate, coverage of different branches and different type of loans. The auditor should review the
compliance of Master Direction No. RBI/DBR/2015-16/20 [Link]. No.85/13.03.00/2015-16 dated
March 3, 2016 (Updated as on September 12, 2023) on "Reserve Bank of India (Interest Rate on
Advances) Directions, 2016".
Ÿ SBA should look into the following documents for checking the bank process for selected sample
accounts:
Ÿ Prescribed application form.
Ÿ Credit score by CIBIL or any other approved agency of borrower and guarantor.
Ÿ KYC compliance.
Ÿ Income proof like salary slip, financial statement, Income tax returns, bank statement.
Ÿ Property Valuation Report.
Ÿ Title clearance report in case where property like flat, plot, building is mortgaged.
Ÿ Technical review in case of mortgage of machinery.
Ÿ In case of vehicle loans, copy of original invoices, copy of RC and insurance policy of vehicle with
bank clause should be obtained.
Ÿ In case of education loans, document evidencing studies in affiliated universities/colleges,
prospectus and fees details should be obtained.
Ÿ Whether the bank has complied with the particulars given in the documentation manual.
Ÿ If the loan is taken over from another bank, satisfactory performance report from that bank needs
to be collected.
Ÿ If any additional limit is granted, ensure that security and eligibility is being considered.
Ÿ Whether the bank has obtained legal security report in addition to valuation report.
Ÿ Whether all registers required by the Bank/Branch are kept updated.
Ÿ Confidential report and NOC from the existing bankers.
Ÿ Valuation report in case of Gold loan.
Ÿ Master creation of loan in Core Banking System/Operating system including classification of loans
as priority sector loans.
Ÿ In respect of FDs pledge against the loans, the auditor should also verify the lien marking in the
system.
Ÿ Field verification in case of micro lending.
Ÿ The Insolvency and Bankruptcy Board of India (IBBI) has registered
Ÿ National E-Governance Services Limited (NeSL). RBI has advised the banks to adhere to the relevant
provisions of IBC, 2016 and IBBI (Ius) Regulations, 2017 and immediately put in place appropriate
systems and procedures to ensure compliance with the provisions of the Code and
Ÿ Regulations (RBI vide Circular No. RBI/2017-18/110 [Link].98/
Ÿ 09.08.019/2017-18 dated December 19, 2017 on Submission of Financial
Ÿ Information to Information Utilities).

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Annexure 5 - Audit Approach, Procedures including Regulatory Considerations
prescribed under Chapter 11 of Guidance Note on Audit of Banks (2024)]
Ÿ Legal Entity Identifier (LEI) for borrowers obtain specified limit borrower (RBI vide Circular No.
RBI/2022-23/34 [Link].28/21.04.048/2022-23 April 21, 2022).
Ÿ The SBA may also refer the Consolidated Circular on opening of current accounts and CC/OD
accounts by banks (RBI Circular No. RBI/2022-23/27 [Link].23/21.08.008/2022-23 April 19,
2022).
Ÿ In case of term loans with floating rate of interest, the auditor should review the existent system of
the bank w.r.t. applying the change in the RoI and its impact on either EMI or tenor of loan as per the
terms of sanction of the loan.
Ÿ
Ÿ The SBA should check the master data of the borrower in the CBS to ensure correct entering of data
about DCCO into CBS whenever applicable.
Ÿ Verify if the bank has abided by the Loan to Value (LTV) and Risk Weights (RWs) of para 3 of the
Master Circular No. RBI/2023-24/08 [Link].06/08.12.001/2023-24 dated April 3, 2023 on
Housing Finance.
Ÿ The Bank shall release all the original movable / immovable property documents and remove
charges registered with any registry within a period of 30 days after full repayment/ settlement of
the loan account. The borrower shall be given the option of collecting the original movable /
immovable property documents either from the banking outlet / branch where the loan account
was serviced or any other office of the bank where the documents are available, as per her / his
preference. The timeline and place of return of original movable / immovable property documents
should be mentioned in the loan sanction letters. The Directions RBI/2023-24/60
[Link].38/01.01.001/2023-24 dated September 13, 2023 on “Responsible Lending Conduct
– Release of Movable / Immovable Property Documents on Repayment/ Settlement of Personal
Loans” may be referred to.
Ÿ Penalty, if charged, for non-compliance of material terms and conditions of loan contract by the
borrower shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that
is added to the rate of interest charged on the advances. The RBI Circular No. RBI/2023-24/53
[Link].28/01.01.001/2023-24 dated August 18, 2023, on Fair Lending Practice - Penal
Charges in Loan Accounts has specified that the said revised treatment would come into effect from
January 1, 2024. However, as per RBI Circular RBI/2023-24/102 [Link].61/01.01. 001/2023-
24 dated December 29, 2023 on Fair Lending Practice - Penal Charges in Loan Accounts: Extension
of Timeline for Implementation of Instructions, the timeline for the implementation of the
instructions by three months is given and accordingly, the bank is required to ensure that the
instructions are implemented in respect of all the fresh loans availed from April 1, 2024 onwards
and in the case of existing loans, the switchover to new penal charges regime shall be ensured on
the next review/ renewal date falling on or after April 1, 2024, but not later than June 30, 2024.
Further, RBI issued FAQs on Fair Lending Practice - Penal Charges in Loan Accounts.
Ÿ In case of floating rate personal loans, bank should communicate to the borrowers about the
possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or
tenor or both. The SBA should verify same.23
Ÿ SBA should refer Circular no. RBI/2022-23/111 [Link].66/ 21.07.001/2022-23 dated
September 2, 2022, on Guidelines on Digital Lending and verify compliance thereof.
Ÿ SBA should refer RBI Notification No. RBI/2023-24/58 [Link].S-567/02-23-001/2023-
2024 dated September 4, 2023 on Operation of Pre-Sanctioned Credit Lines at Banks through
Unified Payments Interface (UPI) along with NPCI circular no. NPCI/UPI/OC No.171/2023-24 dated

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Annexure 5 - Audit Approach, Procedures including Regulatory Considerations
prescribed under Chapter 11 of Guidance Note on Audit of Banks (2024)]
September 20, 2023, and verify compliance thereof.
Ÿ SBA should refer RBI Circular No. RBI/2023-24/40 [Link].20/21.04.048/2023-24 dated June
8, 2023, on “Framework for Compromise Settlements and Technical Write-offs” and verify
compliance thereof. SBA should verify adherence to ‘Board approved policy for compromise
settlements with the borrowers as well as for technical write-offs’ of accounts which are subjected
to Compromise Settlement / Technical Write-Off with respect to following aspects which are
illustrative in nature:
Ÿ Definition of Compromise Settlement / Technical Write off and eligibility of accounts settled
thereunder.
Ÿ Compliance with Board approved policy for compromise settlements with the borrowers as well
as for technical write-offs.
Ÿ Policy lay down process.
Ÿ Delegation of power.
Ÿ Prudential treatment
Ÿ Reporting mechanism
Ÿ Oversight by the Board
Ÿ Cooling period for fresh exposures to such borrower
Ÿ Treatment of accounts categorized as fraud and wilful defaulter.
Ÿ Other legal provisions
Ÿ National Company Law Tribunal (NCLT)/National Company Law Appellate Tribunal (NCLAT) under
the Insolvency and Bankruptcy Code, 2016 are also required to be reported under the suit-filed
cases in reporting to the CICs.24

Ÿ Disbursement
Ÿ The SBA should check whether the disbursements had been made only if all the terms and
conditions of the sanction letter have been fulfilled and an acceptance letter for the same has been
obtained.
Ÿ Also check whether processing charges, inspection charges, mortgage charges and documentation
charges have been collected by the bank. The practice may differ between banks; in few cases these
charges are collected from the amount disbursed to the borrower.

Ÿ Post Disbursement Inspection

The bank should have a proper check on the active accounts. The important aspects that the SBA can
check are as follows:
Ÿ There should be an acceptance letter duly acknowledged by the borrowers and guarantors, if any
for all the loan accounts.
Ÿ Execution of the loan documents should be as per the terms and conditions of the sanction letter.
iii. All the original documents are held in the safe custody in fire resistance safe.
Ÿ Valuation of securities.
Ÿ External and internal credit rating.
Ÿ
Ÿ Due diligence certificate.
Ÿ Verify if the payment schedule as per the sanction letter is implemented. Check the approval
document for the same, if any.
Ÿ Whether the interest and principal repayment are received in time in accordance with the

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Annexure 5 - Audit Approach, Procedures including Regulatory Considerations
prescribed under Chapter 11 of Guidance Note on Audit of Banks (2024)]
repayment schedule as mentioned in the loan agreement/term sheet.
Ÿ Whether the SMAs/EWS are reported to the management on regular intervals and what course of
action has been taken to mitigate the same.
Ÿ Verify whether the group exposure and industry exposure are within the prescribed limits.
Ÿ The SBA should set the expectation for the movement in yield based on the discussion and inquiries
made with the management; rate movement observed in the industry, etc., and should obtain
explanations for major variances in the yield on monthly basis or quarterly basis.
Ÿ The SBA should perform analytical procedures for computing the processing fee percentage for
different ticket size loans.
Ÿ The SBA should check the master data of the borrower in the CBS to ensure correct feeding of data
with regard to sectorial classification of advances, e.g., priority sector and non-priority sector in
accordance with Master Direction No. RBI/FIDD/2020-21/72 [Link]. [Link].5/04.09.01/ 2020-21
dated September 4, 2020 (Updated as on July 27, 2023), amount of instalments with due dates of
payment etc. It is noted that 'Udyam Registration Certificate' or Udyam Assist Certificate is
mandatory to classify the account under Priority Sector classification as per Notification No.
RBI/2023-24/27 [Link] & [Link].09/06.02.31/2023-24 dated May 9, 2023 read with
Circular No. RBI/2020-2021/26 [Link] & [Link].4/06.02.31/2020-21 dated August 21,
2020). Additionally, SBA should check Individual women beneficiaries up to 1 lakh per borrower,
including cash credit or overdraft facility. Renewal above 1 lakh are classified as non-weaker.
Guidance Note on Audit of Banks (Revised 2024) 443
Ÿ The SBA should also carry out cut-off procedure for the purpose of ascertaining the completeness of
loans and also should review the subsequent cancellation of loan after balance sheet period.
Ÿ The SBA should check for any Non-Performing Asset (NPA). All accounts which are overdue or stops
generating income for the banks continuously for 90 days, have to be treated as NPA and provision
should be made as per extant guidelines of RBI.

© 2024 All Rights Reserved 53

About the Authors
• A Leading Professional Expert with In depth Knowledge
• Chairman of Northern India - The Institute of Chartered Accountants of India in 1983-84
• Member, Central Council of 'The Institute of Chartered Accountants of India' from 1998 to
2004 and 2007 to 2013 ( 12 Years) and supervised as a Member of the Council, framing of
Accounting standards, Auditing Standards, Education examination and training of CA
course, Investigation and disciplining of Chartered Accountants.
• Chairman, Board of Studies of The Institute of Chartered Accountants of India from 2010 to
2011 being in charge and overall responsibility for the Chartered Accountants education of
about 1 million CA students in the country.
• He has also served on different Committees of Central Board of Direct Taxes, Ministry of
Corporate Affairs and several committees of Securities and Exchange Board of India (SEBI)
• Mr. Jain has been elected member of National Council of CII and a former National President
of ANMI (Association Of National Stock Exchanges members of India)
• Shri Jain has been Member, High Powered Committee, appointed by Finance Ministry to
simplify Income Tax Law.
• He has been appointed by the Union Finance Minister as an Advisor to the GST Council for

CA Vinod Jain
[Link] (Hons), LLB, FCA, FCS, FCMA, DISA (ICAI), FAFD (ICAI)
•
reviewing GST Law.
Independent Director – Coal India Limited and South Eastern Coal Field
vinodjain@[Link]
+91-98110-40004 vaibhavjain@[Link]

Mr. Vaibhav Jain, a commerce graduate from Sri Guru Gobind Singh College of Commerce
(2007) is a qualified Chartered Accountant (2009), Company Secretary (2012), and Law
Graduate (2015). He has also qualified a Diploma in Information System Audit (DISA) and as a
s p e c i a l i s t i n F o r e n s i c A c c o u n t i n g & F r a u d D e t e c t i o n ( FA F D ) f r o m I C A I .

He has successfully qualified 1-year Course for Specialization in the field of Finance, i.e.
Master’s in Business Finance Certificate Course by ICAI in the year 2010. He has also passed
– National Institute of Securities Market’s Certification (NiSM) in Capital Market, Derivatives
Market, Depositories, Merchant Banking and Equity Research. He has also done a Certificate
Course in Indirect Taxes from ICAI. He has further qualified as a Registered Valuer in Securities
& Financial Assets and was awarded the Certificate of Membership by Insolvency and
Bankruptcy Board of India. He was among the First Registered Valuers in India.
He specializes in the field of Valuations, Mergers & Acquisitions, GST Advisory &
Assurance, Risk Advisory, Business Strategy and Financial Advisory. He has to his accord
very deep business acumen and angle of entrepreneurial and proprietary review. He has wide
experience in development of systems and control for operational efficiency and effectiveness.
He has also designed Management Information and Reporting Systems for many companies.
He has been a Special Invitee on IFRS (IndAS) Implementation Committee of ICAI. He has
CA Vinod Jain
[Link] (Hons), LLB, FCA, FCS, FCMA, DISA (ICAI), FAFD (ICAI)
been a faculty at GST Point – A Call in session for Members & Students at ICSI HO, Lodhi Road.
He is a Visiting faculty to various forums like ICAI, ICSI, Confederation of Indian Industry
(CII), Association of National Exchanges Members of India (ANMI), PHDCCI, etc. He is
+91-97113-10004 vaibhavjain@[Link]
+91-98681-44380 vaibhavjain@[Link] General Secretary at All India Chartered Accountants Society. He is Past President –
SGGSCC Alumni Association (2007-15 – 8 Years).
Experience Details – 14 years + of Post Qualification Experience
• He is a Senior Partner of M/s Mehra Goel and Co, Chartered Accountants, Nehru Place and Gurugram since April 2018 (5 years+).
Mehra Goel & Co is among the leading audit and assurance, financial & tax advisory firms in India. Mehra Goel & Co is a PCAOB (USA)
registered firm established in 1963 and Member of Morison Global, an International Association of Independent Firms.
• He is Director at INMACS Limited, Registered with SEBI as Category 1 Merchant Banker and Corporate Consultant. He is also Director
with INMACS Valuers Private Limited, a Registered Valuer Entity under all 3 classes of Assets viz Land & Building, Plant & Machinery and
Securities or Financial Assets with IBBI.
• He has been Partner for 8 years (2010-2018) with Vinod Kumar & Associates, Chartered Accountants, and Article Trainee for 3 years (2007-
2010) with Price Waterhouse & Co (PwC) from 2007-2010.

New Delhi: New Delhi: Gurugram: Chandigarh: Mumbai: Pune:

CA Vinod Jain 308-312A, INMACS 101, Global Business Square, SCO-705, 1st Floor, 305-306, 3rd Floor, Commercial Premises No. 5
4696, Brij Bhawan, Chiranjiv Tower, Building No. 32, Sector 44, NAC Manimajra, Garnet Palladium, Chaphalkar House,Market Yard,
21A, Ansari Road, 43, Nehru Place, Institutional Area, Chandigarh-160101. India Behind Express Zone, Next to Hotel Utsav Deluxe
Darya Ganj, New Delhi 110019. India Gurugram 122003, Ph: +91.172.5077789 Off Western Express Highway, Maharshi Nagar, Pune 411037,
New Delhi 110002. India Tel: +91-11-2622-3712 Ph: +91.124.4786200 Goregaon (East), Maharashtra, India
Ph: +91-11-2328-8101 Mumbai – 400063

© 2024 All Rights Reserved 54