LONG FORM AUDIT REPORT

Statutory Central Auditors Meet13.3.2010

Scope of this presentation

RBI guidelines on LFAR Major issues /areas which needs to be commented upon in LFAR

LONG FORM AUDIT REPORT(LFAR)-Background

In the course of audit of a Bank or branch of a Bank, the auditor may come across several matters which are not included in the main report but nevertheless considered important enough to be communicated to the Bank Management. In such circumstances, the auditor in addition to the submitting main report in accordance with the extant requirements, may also submit a separate report to the Management which termed as LFAR In the year 1985, RBI advised PSBs to obtain LFAR from the auditors. The report is not a substitute for the statutory report and is also not deemed to be part of it. The format of LFAR as devised by RBI in 1985 and revised in 1992-93 and 2003

COVERAGE IN LFAR

The statutory Auditors are expected to comment on important issues related with

Advances Liquidity and funds management Internal controls Automation and computerization Profitability Others

The list of areas to be covered in LFAR are illustrative Therefore, decision to include any matter in the report has to be taken on merits.

PROCESS OF CONSOLIDATION

Matters reported by branch auditors

Comments given by Branch auditors needs to be reviewed Such comments to be included as qualification in main report depending on facts and circumstances of each case

Observations by individual CSAs for their respective functional area audit Adverse remarks/ observations to be supported through specific instances Previous observations and improvement Suggestions

I - ADVANCES

Loan Policy

Existence of Loan Policy specifying the prudential exposure norms, industry-wise exposures, regular updation of the policy systems of monitoring and adherence thereto

Issues

Deficiencies/ lacunae in coverage Below BPLR, circumstances for deviations, industry wise / risk perception wise benchmarks, basis for fixing internal exposure norms, ST loans, unsecured exposure, quantitative caps based on risk perception, hurdle rate Adherence to Policy guidelines and extent of deviations

I - ADVANCES

Credit Appraisal

Existence of a well laid-down system of appraisal of loan/credit proposals, including adequacy of information for appraising the credit worthiness of applicant, and adherence thereto ,

Issues

Efficacy of appraisal systems,Credit risk rating models, status of rating by external rating agencies. Projections vis-a viz underlying assumptions, NFB appraisal, Advance payment BGs, short term loans, project finance v/s ALM and proper due diligence, take over norms etc. Adherence to the appraisal system

I - ADVANCES

Sanction / disbursement

Delegation of powers/authority at various levels; adherence to authorised limits; whether limits are disbursed after complying with the terms and conditions of sanction.

Issues

Control mechanism to oversee judicious use of delegated powers and monitoring thereof System to ensure compliance of terms of sanction/ creation of security before release of facility Revalidation of facility in case of delay, change in underlying assumptions.

I - ADVANCES

Documentation

System of ensuring that documents are executed as per the terms of sanction. Nature of documentation defects observed during audit and suggestions to avoid such defects. System of documentation in respect of joint/consortium advances. Renewal of documents.

Issues

Vetting of documents , creation of charge Consortium/ multiple banking a/cs Analysis of irregularities and action plan for prevention

I - ADVANCES

Review/Monitoring / Supervision

Periodic balance confirmation / acknowledgement of debts. Receiving regular information, Stock/Book Debt statements, Balance Sheet etc. Receiving audited accounts in case of borrowers with limits beyond Rs. 10 lakhs. System of scrutiny of the above information and follow-up by the bank. System of periodic physical verification or inspection of stocks, equipment and machinery and other securities. System and periodicity of stock audits; Inspection reports and their follow up. Norms and awarding of Credit Rating. Review/renewal of advances including enhancement of limits.

I - ADVANCES
Review/Monitoring / Supervision

Monitoring and follow - up of overdues arising out of other businesses such as leasing, hire purchase, credit cards, etc. Overall monitoring of advances through maturity/ aging analyses; Industry-wise exposures and adherence to the Loan Policy System of monitoring of off - balance sheet exposures including periodic reviews of: (a) claims against the bank not acknowledged as debts (b) letters of credit (c) guarantees (d) ready forward transactions (e) coacceptances (f) swaps, etc.

Issues

Effectiveness and adequacy of LRM tools Credit monitoring system, portfolio review, credit audit Shortcomings/ gaps in monitoring mechanism and extent of adherence to existing system Credit audit/Stock audit policy/ coverage

I - ADVANCES

Recovery Policy in respect of and Bad/doubtful debts/ NPAs

Existence of Recovery Policy, regular updation thereof; monitoring and adherence thereto: compliance with the RBI guidelines. System of monitoring of recovery from credit card dues in respect of credit cards issued. Effectiveness of the system for compiling data relating to the bad and doubtful debts and the provision in respect thereof. System for identification, quantification and adequacy of provision (including at foreign branches). System for suspension of charging of interest and adherence thereto. Ascertaining the realisable value of securities (including valuation of fixed assets) and the possible realisation from guarantors including DICGCI/ECGC; Assessment of the efficacy of rehabilitation programmes. Method of appropriation of recoveries against principal, interest, etc.

I - ADVANCES

Recovery Policy in respect of and Bad/doubtful debts/ NPAs

System of compromise settlements : Review all such cases and cases of recovery of over Rs. 1.00 crore and also the cases wherein limits of sacrifice laid down in the Recovery Policy is exceeded. Compliance with RBI guidelines. Provision / write-off: under proper authority. Recovery procedures including that relating to suit filed and decreed accounts. System of identifying and reporting of willful defaulters.

Issues

Effectiveness/ reliability of the application for IRAC, Single ID, data capturing and modification thereof, data integrity Security valuation policy and extent of adherence Judicious exercise of OTS/ Write-off discretionary powers

I - ADVANCES

Large Advances

Comments on adverse features considered significant and which need management's attention

Issues

Instances of non detection of adverse comments in other audits/ monitoring mechanism. Exchange of information, sharing of reports/ documents in consortium/ multiple banking accounts. Compliance of CDR, restructure package stipulations

II LIQUIDITY AND FUNDS MANAGEMENT

Investment

Existence of Investment Policy and adherence thereto; compliance with RBI guidelines. System of purchase and sale of investments; delegation of powers; reporting systems, segregation of back office functions, etc. Controls over investments, including periodic verification/reconciliation of investments with book records. Valuation; mode; changes in mode of valuation compared to previous year; shortfall and provision thereof. Investments held at foreign branches; valuation mode; regulatory reserve requirements; liquidity. Composition of investment portfolio as per RBI guidelines and the depreciation on investments, if any, not provided for. System relating to unquoted investments in the portfolio and the liquidity of such investments. System relating to SGL / BRs; control over SGL / BRs outstanding at the year end and their subsequent clearance. System and periodicity of concurrent and internal audit/ inspection of investment activities; follow up of such reports.

II LIQUIDITY AND FUNDS MANAGEMENT

Investment

System of recording and accounting of income from investments. System of monitoring of income accrued and due but not received. System of monitoring matured investments and their timely encashment. Average yield on investments. System relating to Repos

Issues

Control and reporting mechanism, efficacy of treasury manual/policy. Mechanism to ensure adherence to exposure limits fixed to mitigate risks Transaction handling, effectiveness/ reliability of the treasury software. Shifting of securities, Non performing investments

II LIQUIDITY AND FUNDS MANAGEMENT

SLR/CLR requirements System of ensuring compliance

System of compiling weekly DTL position from branches. Records maintained for the above purpose

Issues Certification Data collection/compilation system and its reliability- Correctness of mapping Records maintained and MIS integrity and consistency

II LIQUIDITY AND FUNDS MANAGEMENT

Cash

System of monitoring of cash at branches; and management of cash through currency chest operations. Insurance cover (including insurance for cash in transit). System and procedure for physical custody of cash.

Issues

Cash management system. Cash retention limits Dynamic/static Functioning of currency chest- instances of penalties Exposure limits on other banks, control /reporting system of O/s balances

II LIQUIDITY AND FUNDS MANAGEMENT

Call Money operations

System relating to inter-bank call money operations

Issues

System and its efficacy for optimum use of funds Adherence to prudential limits under call money market.

II LIQUIDITY AND FUNDS MANAGEMENT

Asset Liability Management

Existence of Policy on Asset - Liability Management and monitoring thereof; compliance with the RBI guidelines. Functioning of Asset Liability Management Committee. Structural Liquidity at periodical intervals
Adequacy, efficacy and implementation of the ALM policy. ALCO- Deployment avenues/funding strategies, behavioral studies ,ROI movements, ST dynamic analysis on daily basis, Lines of credit Collection, compilation and integrity of data for ALM Liquidity mismatch vis-a-viz tolerance limits Reliability of reporting under off site surveillance system of the RBI

Issues

III INTERNAL CONTROL

Written guidelines /instructions/ manual for accounting aspects Issues

Updation of MOIs/ Job cards/ checklists Accessibility Intranet/ Soft copies Awareness of policies Analysis of audit observations and extent of corrective actions initiated

III INTERNAL CONTROL

Balancing of books /reconciliation of control and subsidiary records

System of monitoring the position of balancing of books/reconciliation of control and subsidiary records. Follow-up action.

Issues

Migration audits- Migra Accounts GL heads where balancing is not taken care by the system

III INTERNAL CONTROL

Inter branch reconciliation

Comments on the system/procedure and records maintained. Test check for any unusual entries put through interbranch/head office accounts. Position of outstanding entries; system for locating long outstanding items of high value. Steps taken or proposed to be taken for bringing the reconciliation up-to-date. Compliance with the RBI guidelines with respect to provisioning for old outstanding entries.

Issues

Gaps in reconciliation through CBS environment and controls Reconciliation status of old entries

III INTERNAL CONTROL

Branch Inspections

System of branch inspections: frequency; scope/coverage of inspection/internal audit, concurrent audit or revenue audit: reporting. System of follow-up of these reports; position of compliance.

Issues

Progress under Risk Based Audit Approach Effectiveness of concurrent audit Management audits. Trend in Income leakage/corrective actions

III INTERNAL CONTROL

Frauds / Vigilance

Observation on major frauds discovered during the year under audit System of follow up of frauds/ vigilance cases

Issues

FRMS RBI Circular dated 16.9.09 Level and adequacy of Off Site surveillance Analysis of frauds and extent of corrective actions initiated Comments on systemic failure, if any.

III INTERNAL CONTROL

Suspense accounts, sundry deposits

System for clearance of items debited/ credited to these accounts

Issues

System in CBS environment and its effective ness

IV CAPITAL ADEQUACY
Capital adequacy computation and relevant certificate Issues Reliability and integrity of application used for computation of Risk weights. Level of awareness at input level Audit of such application/ data

V AUTOMATION AND COMPUTERISATION

Automation and Computerisation Existence of Computerisation and Automation Policy; progress made during the year under review. Critical areas of operations not covered by automation. Number of branches covered by computerisation and the extent of computerization Procedures for back-ups, off-site storage, contingency and disaster recovery and adherence thereto Existence of Systems/ EDP audit; coverage of such audit. Electronic Banking; existence of systems and procedures; monitoring; regular updation of technology; method of review and audit of procedures. Suggestions, if any, with regard to computerisation and automation.

V AUTOMATION AND COMPUTERISATION

Issues

IT,IS Security,IS Audit, BCP ,BPR Policies, their implementation and gaps Standalone applications and extent of interface IS Audit infrastructure Scope/adequacy of IS Audit of Branches, EDPs, CBS, BCPs, Networking, Internet/Mobile Banking, ATMs, Application soft wares, Data centre, outsourcing arrangements Status of migration audit Analysis of audit observations and corrective actions initiated.

VI PROFITABILITY

Analysis of variation in major items of income and expenditure compared to previous year.
Important ratios such as RoA, RoE, etc: comparison and analysis in relation to previous year. Policy relating to general provisions/ reserves.

Issues

Gaps with respect to profit planning Early indications for meaningful corrections

VII SYSTEMS AND CONTROLS

Existence of systems and procedures for concurrent and internal audits, inspections, EDP audit of computer systems / software, etc., monitoring and follow - up of such reports: Existence of Management Information System: method of compilation and accuracy of information. Reliability of regulatory reporting under the Off Site Surveillance System of the RBI.

Issues

Existence , adequacy and effectiveness of various audit policies and role of ACB Quality of compliance and authority for closure Analysis of audit observations and its effective use for strengthening the systems and control Status of BPR

VIII OTHER MATTERS

Comments on accounting policies including comments on changes in accounting policies made during the period.

Policies and systems for monitoring activities such as underwriting, derivatives, etc.
Adequacy of provisions made for statutory liabilities such as Income Tax, Interest Tax, Gratuity, Pension, Provident Fund, etc. Adequacy of provisions made for off-balance sheet exposures and other claims against the bank. Any major observations on branch returns and process of their consolidation in final statement of accounts. Balances with other banks - observations on outstanding items in reconciliation statements.

Procedure for revaluation of NOSTRO accounts and outstanding forward exchange contracts.
Observations on the working of subsidiaries of the bank:(a) reporting system to the holding bank and(b )major losses of the subsidiary, if any.

Any other matter, which the auditor considers should be brought to the notice of the management.

MISCLLENEOUS

Corporate Governance Functionig of Board and various committees of Board. Borrowings and deposits Fixed assets Risk Management Effectiveness of ORMC/CRMC Jilani and Ghosh committee recommendationcompliance Implementation of the recommendation of Mitra committee BPC,Legal Complaince, data on use of discretionery powers Goiporia Committee recommendations