Statutory Audit of Banks

Statutory audit of banks can be defined as an audit to ensure that the financial statements and books of account presented to the regulators and the public are fair and accurate. It is an audit that is prescribed by a different statute such as Income Tax, Reserve Bank of India, Companies Act and so on. The Statutory Audit of Banks is mandatory and, the RBI in association with the ICAI appoints Statutory Auditors for the same. At the end of every financial year, a rigorous statutory audit is conducted in every branch of a bank. This article talks about the various essentials of the Statutory Audit of Banks.

Statutory Audit Process

It is vital that Statutory Auditors ensure that the audit reports issued by them are compliant with the requirements prescribed in following standards.

Standard of Auditing 700: Forming an Opinion and Reporting on Financial Statements (Revised)
Standard of Auditing 705: Modifications to the Opinion in the Independent Auditor’s Report
Standard of Auditing 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report (Revised).

Statutory Auditors are generally given a time frame within which they are required to undertake the audit of the bank's branches that are allocated to them. An auditor must accept the appointment immediately and send a formal intimation to the management of the branch and inquire about the information necessary to conduct an audit. The assigned auditor would have to ensure that their report includes the qualification of deposits, advances, interest income and interest expenses. The essential elements to verify in a statutory audit of a bank are the following.

Cash Verification Procedure
Tax-Related Items
Verification of Loan Accounts

Cash Verification Procedure

A statutory auditor must verify the cash balance at the branch of a bank by the 31st of March of every year. Below is the checklist for cash verification that an auditor must follow.

Whether the branch is being opened at the time as indicated in the guidelines and the branch manager is present at the branch when it is being opened.
Whether the Joint Custodians are opening the cash safe/ cash vault.
If any unrecorded security documents or objects are placed in the cash safe.
If the branch is maintaining a record when a currency is accepted from the public. This would also include the records of receiving mutilated notes.
If the burglar alarm system is functioning properly.
If all the other entrances to the bank and the ones within the bank are locked at the time of opening the cash room.
Ensure that any weapon stays outside the cash room when it is being opened or closed.
If the cash is being carried from the cash room to the counter and vice versa in a locker box.
Ensure that the UV lamps and the cash counting machine are in a working condition.

Tax-Related Items

A statutory auditor is required to ensure that all the tax-related items and compliances that are generally applicable to a bank. Below is the checklist for compliance that an auditor must follow.

The tax must be levied and deducted at an appropriate rate on all the payments made by the bank towards interest on deposits, rent, payment to professionals/ contractors and so on.
Ensure that all the payments for the tax are on time and all the challans for the same are present.
Ensure that all the tax returns are filed on time.
If the TDS certificate is issued and Form 15G/ 15H is collected and sent on time.
Review on the quality of compliance if concurrent audits are being conducted at the bank.
Verify if the RBI has audited the branch in the past. If yes, ensure the same is closed and review on the quality of compliance seen at the moment.
If the branch has a copy of the Insurance Policy obtained by their corporate office.
If the branch has the lease documents with them.
If the branch is taking a confirmation of balance from other banks in which they are maintaining an account.
Review, if any, the explanation of an outstanding entry in the system suspense account.

Loan Accounts Verification

The assets of most banks majorly comprise of loan accounts. A statutory auditor is required to review the loan accounts with extra care. The verification of loan accounts is split into three parts.

Preliminary Check
Disbursement
Post Disbursement Inspection

Preliminary Check

Banks are vested with the responsibility of conducting a preliminary check of all the accounts prior to considering the project for evaluation. A statutory audit must review the documents below for evaluating the bank's preliminary process.

Prescribed Application form
Loan Application
KYC Compliance
Latest Audited Financial Statements
Project Report, Projected P&L, Balance Sheet and Cash Flow Statement
Board Resolution for Availing the Credit Facilities
All the Government Department's Registration
Technical Review

Disbursement

A statutory auditor has the responsibility to check the disbursement and if it happens under the fulfilment of all the terms and conditions of the sanction letter. It should also be ensured that an acceptance letter for the same has also been acquired.

Post Disbursement Inspection

The bank maintains a proper review of the active documents. A statutory auditor has the responsibility to check the following essential elements.

There must be an acceptance letter that is duly acknowledged by the borrowers concerning all the loan accounts.
There should be a proper execution of the loan documents and records as indicated by the terms and conditions of the sanction letter.
All the original documents must be held in safe custody which is fire resistant.
Proper maintenance of Confidential Reposts and NOCs from existing bankers.
The bank should check the CIBIL Report and Score for any adverse comments.
External & Internal Credit Rating
Valuation of Securities
Due Diligence Certificate
Verification of the drawing power of the accounts are calculated precisely, and a margin is maintained according to the sanction letter.
Verification of any adverse comments on the audited balance sheet or stock audit reports.
Verification of the schedule of payments according to the sanction letter is initiated. Verify the approval document for the same, if any.

The statutory auditor must inspect for any Non-Performing Assets (NPA). Every account must be treated as NPA if they are overdue or stops to generate any income for the bank for 90 days continuously.

Audit Report

A statutory auditor has to submit an audit report after conducting a thorough audit of the bank's branch. An auditor has the responsibility to create a report in which the following has to be stated, as mentioned in the engagement letter.

If the balance sheet shows a fair and accurate view of all the essential particulars required to exhibit an honest and right view of affairs within the bank.
If the profit and loss accounts display the correct balance for a period covered by such an account.
If there were any transactions carried out by the branch which does not come within the power of a bank's branch.
Any other issue that the statutory auditor feels that has to be brought to the notice of the Statutory Central Auditor.

Long Form Audit Report (LFAR)

The terms and conditions of Public, Private and Foreign Sector Banks required the branches of the bank to be audited by a statutory auditor and furnish a Long Form Audit Report (LFAR). This LFAR must be issued apart from the standard audit report that is required as per regulatory requirements. The Reserve Bank of India prescribes the matter of the bank that the auditors have to check. The LFAR of a bank's branch must be submitted before the 30th of June of every year. This means that an auditor has to plan the audit for submitting the LFAR without any delay. An auditor may submit an executive summary of the LFAR if they feel it is required.