In this article we will look into statutory audits for banks and the procedures involved therein

For the smooth functioning of any system, it is necessary to conduct periodical checks and inspections to ensure all is fine and if any maintenance is required. Banking is a very important cog right at the heart of the economic machinery of our country. So naturally it is important to conduct frequent and thorough audits of the banking system to ensure everything is fine and solid at the ground level. It is one of the fundamental aspects of the Government on which the economy and different major things depend. It is quite essential to carry out regular audits to help formulate unbiased decisions and rules to every individual. In this article we will take a closer look at Statutory audit of banks are conducted and what are the procedures that entail it.

What are Statutory Audits Of Banks?

Statutory audits of banks are carried out to check and ensure that the accounts and financial statements presented to the stakeholders as well as the Income Tax Department are fair and correct. It is mandated by the Income Tax Department that banks conduct these audits regularly. The RBI (Reserve Bank of India) along with the ICAI appoints qualified Chartered Accountants also called the Statutory Auditors. These audits are conducted rigorously for every branch of a bank at the end of the financial year.

Process of Statutory Audit

While issuing the reports, the auditors ensure that these reports follow the essential requirements and auditing standards which include:

• SA (Standard of Auditing) 700: An opinion is formed, along with which the financial statements are reported.
• SA (Standard of Auditing) 705: On the report provided by the Auditor, various opinions regarding the modifications are offered.
• SA (Standard of Auditing) 706: In the report provided by the Auditor, the emphasis is laid on matter paragraphs and others.

All these audits have to be conducted within a given frame of time by the appointed auditors. The auditors intimate the banks in advance for the same along with a list of details of the information that they would require during the audits.

Elements to be verified during a Statutory Audit

The Auditor checks whether all the financial statements including the interests, deposits, incomes, loans, advances and other such things in the report.

The elements that have to be verified during the Statutory Audits include:

• The procedure for cash verification
• Items related to tax
• Loan accounts and their verification

Cash Verification Procedure

Before the termination of the financial year, i.e. 31st March, the auditors have to check the cash balance mandatorily for every branch of the bank. While verifying the cash balance, the various points that one should consider includes:

1. Checking whether the department is open according to the timings specified by the guidelines. Also, the branch manager must be present while opening the bank each day.
2. Checking whether the joint custodians themselves are always opening the cash safe/cash vault.
3. No unrecorded documents are placed in the cash safe or lockers.
4. A record has to be mandatorily maintained while collecting cash from the people, along with proper checking of the currency for originality and mutilation.
5. Checking whether the burglar alarm system is functioning or not.
6. While opening the cash room, all the other doors and entrances of the bank have to be closed for security purposes.
7. No weapons are present inside the cash room.
8. Carry the cash in a locker box always.
9. Checking the condition of the lamps, and all the other machines along with the cash-counting equipment.

Tax-related Items

The Auditor also has to check whether the bank follows all the items related to tax, along with the compliances. These include:

1. During all the transactions and payments, the appropriate tax as per the guidelines is applied or not.
2. On-time payments of all the taxes have to be done.
3. On-time filing of the tax returns is done.
4. Collection of TDS certificate along with the Form 15G/15H is done, and timely submitted.
5. The RBI conducts the Checking of quality of the compliance and that verification and audits for the branch earlier.
6. The branch must have an insurance policy.
7. Checking whether any outstanding entry has been made. If yes, then the reasons for the same.

Verification Of Loan Accounts:

The loan accounts are quite a significant part of the transactions and finances of the bank, due to which their confirmation takes place carefully in three steps, including.

Preliminary Check

Before diving into the details of your loan application, the bank will perform a preliminary check to ensure everything is in order. Here’s what they’ll typically look for:

1. Complete Application: The bank will verify you’ve submitted the prescribed application form along with the loan application itself.
2. Know Your Customer (KYC) Compliance: This ensures they have all the necessary identification and verification documents for your business.
3. Up-to-Date Financials: The bank will need your latest audited financial statements to assess your company’s financial health.
4. Project Viability: A well-structured project report outlining your plan, with projected profit and loss statements, balance sheets, and cash flow statements, is essential.
5. Board Approval: The bank will want to see a board resolution from your company officially authorising you to seek this loan.
6. Government Registrations: Copies of any relevant registrations with government departments may be required.
7. Technical Feasibility (for some loans): In certain cases, the bank might require a technical review of your project by qualified professionals.

Disbursement

Once your loan application is approved, it’s time for the bank to release the funds. But before they do, a statutory auditor plays a key role in ensuring everything goes according to plan. Here’s what they’ll verify:

• Following the Rules: The auditor checks if the loan amount disbursed adheres to all the terms and conditions laid out in the initial sanction letter you received from the bank. This ensures you get the agreed-upon amount and that the bank isn’t releasing more than what was approved.
• Acceptance Confirmation: The auditor also verifies that you, the borrower, have acknowledged receiving the loan amount. This is usually done through a signed acceptance letter from your end.

Post Disbursement Inspection

After you receive your loan, the bank doesn’t just sit back and wait for repayment. They conduct a post-disbursement inspection to ensure everything is on track. Here’s what a statutory auditor typically reviews:

Double-Checking the Paperwork:

• The auditor verifies you’ve signed an acceptance letter acknowledging receipt of the loan funds.
• They confirm that all loan documents and records are completed and executed according to the terms outlined in the initial sanction letter.

Safeguarding Important Documents:

The bank must securely store all original loan documents in a fire-resistant location.

Borrower’s Financial Health:

The auditor checks the borrower’s credit report (CIBIL report) for any negative remarks that might indicate potential repayment issues.

Loan Security and Limits:

• They verify that any collateral offered as loan security is properly valued.
• They ensure the loan amount drawn doesn’t exceed the approved limit as per the sanction letter and that a safety margin is maintained.

Performance Monitoring:

• The auditor reviews past audited financial statements and stock audit reports to identify any potential red flags.
• They confirm that loan repayments are being made according to the agreed-upon schedule.

Identifying Risk:

The auditor looks for signs of non-performing assets (NPAs) – loans that are overdue or haven’t generated income for the bank for 90 days or more.

Audit Report

Once the audit is complete, the statutory auditor plays a crucial role by presenting a comprehensive report. This report, based on the terms outlined in the engagement letter, addresses several key points:

• Financial Accuracy: The auditor reviews the bank branch’s balance sheet and assesses whether it accurately reflects the bank’s financial position. This ensures a clear and truthful picture of the branch’s assets, liabilities, and overall health.
• Profitability Check: The auditor examines the profit and loss accounts to verify if they correctly represent the branch’s financial performance for the given period. This helps identify any discrepancies or unexpected gains or losses.
• Following the Rules: The audit ensures the branch hasn’t conducted any transactions that fall outside the authorised scope of a bank branch’s operations. This helps maintain compliance with banking regulations.
• Raising the Flag: If the auditor identifies any other issues during the audit, they have the responsibility to bring these matters to the attention of the Statutory Central Auditor, who oversees the entire bank’s financial health.

Long Form Audit Report (LFAR)

An LFAR is an in-depth report prepared by a statutory auditor specifically for bank branches. It goes beyond the standard audit report by delving deeper into various aspects of the branch’s operations. The Reserve Bank of India (RBI) outlines the specific areas auditors need to examine.

Why is an LFAR Important?

The LFAR serves several critical functions:

• Comprehensive Review: It provides a detailed analysis of the branch’s performance, loan portfolio, risk management practices, and adherence to regulations.
• Early Warning System: By identifying potential issues early on, the LFAR helps prevent problems from escalating.
• Management Insights: The report offers valuable feedback to bank management, allowing them to address weaknesses and improve overall branch efficiency.

Conclusion

As such, the Government conducts these Audits for the proper functioning of the banks under RBI and maintaining transparency in the system. It is also to ensure there are ample internal checks and controls in place and the corporate governance is thorough. Banks accept the savings of millions of people in the form of deposits. So it is extremely important for them to function without any blind side. Any blunder in corporate governance can wipe out the savings of an entire class of people and plunge the economy into recession. This is why statutory audits of banks are given a higher priority than normal statutory audits and usually have more tight procedures and regulatory requirements during the audits.