Day: April 22, 2017

Long Form Audit Report

The statutory Auditor of the Bank is required to submit Audit Report as per the requirements of the Banking Regulation Act, 1949. It is called as Statutory Audit Report. This audit report broadly gives a true and fair view on the financial statements. However, this report does not necessarily communicate the lacunae in the operations and internal control system at the bank. Hence, the RBI advised the Public Sector Banks to obtain the Long Form Audit Report (LFAR) from the auditor since 1985. LFAR is a separate report to be submitted to the Management in the format prescribed by the RBI. The format of LFAR was initially prescribed in 1985, was revised in 1992 and subsequently in the year 2003. The present format is effective from 31st March, 2003.

Over the period, there have been many changes in the operations in the Banking industry, viz. CBS environment, internet banking, SMS alerts, spread of ATM centres, etc. Considering the changes in the operations in the Banking industry, the format of LFAR is under review. However, till the new format is notified, the existing format is in use. Therefore, the statutory auditor is expected to report in the existing format given by RBI.

Statutory Auditor is expected to review the LFARs submitted by the branch auditors and draft his LFAR in the format prescribed for the bank as a whole. Therefore, it is necessary tor the branch auditors to draft the LFAR carefully and with clarity so that a relevant point if any, at the branch is not missed by the Central Statutory Auditor, while forming its opinion or giving his observations about the internal control and operations.

The format of LFAR is in a questionnaire form. These questions are to be answered clearly. These questions are only indicative and not exhaustive. Therefore, the auditor should not limit the report to only answering the questions. But, he may mention any relevant point which the auditor feels necessary

Bank Audit

to mention, in the same in the LFAR. The auditor should be clear, precise and relevant while finalising the LFAR of the branch.

While drafting the LFAR the following aspects need to be considered.

  • The LFAR is not a substitute for Statutory Audit Report. Nor is it deemed to be a part of Statutory Audit Report.
  • The Statutory Audit Report is a self contained document and the auditor should not make any cross reference to the observation in the LFAR. In case of any matter of emphasis, the auditor should mention the same in the report clearly.
  • The matters in the main report may be elaborated in the LFAR.
  • Any adverse comment made by the auditor in the LFAR, the auditor should consider whether qualification in the main report is required.
  • It is not necessary that every adverse comment in the LFAR will result into a qualification in the main report. Therefore, the auditor should use his judgment in the facts and circumstances in each case. However, every qualification in the auditors report should be elaborated in the LFAR.
  • The details given in the LFAR should be clear on facts and the opinion of the auditor is also to be mentioned so that the SCA can take up the point appropriately
  • Though the format of LFAR is in a questionnaire form, the auditor should not necessarily limit the answer to YES or NO. He should mention his opinion, if any, over there as well.
  1. Broad Structure of LFAR

In this article, the discussion is mainly on the LFAR applicable to the branch audit. Hence, the prescribed format of bank branch LFAR is discussed here.

The format of the LFAR consists of the questions on four major areas. Such as:

  1. Assets
  2. Cash
  3. Balances with RBI, SBI and other Banks.
  4. Money at call and Short Notice
  5. Investments
  6. Advances
  7. Other Assets
  8. Liabilities
  9. Deposits
  10. Other Liabilities
  11. Contingent Liabilities
  12. Profit and Loss Account
  13. General
  14. Books and Records
  15. Reconciliation of Control and Subsidiary records
  16. Inter branch Accounts
  17. Audits/Inspections
  18. Frauds
  19. Miscellaneous

In addition to these questions, are also given questionnaires applicable to specialised branches

  • Dealing in Foreign Exchange Transactions
  • Dealing in very large advances in excess of ^ 100 crore.
  • Dealing in NPAs such as Asset Recovery Management Branches.
  • Dealing in clearing house operations, normally referred to as service Branches.

In addition to these questionnaires, there is a format for Annexure for Large/Irregular/Critical Advances. Normally, this annexure is to be filled up by the branch management and the auditor should verify the details mentioned in the Annexure. The details will be pertaining to the advance granted in excess of ^100 crore.

Some of the matters mentioned in the LFAR needs compilation of information at the branch. It is the responsibility of the concerned branch to compile the information and hand it over to the auditor for verification. The auditor should verify the correctness of information and include the same in his LFAR. In case, auditor faces any problem in getting such information or has a doubt about the correctness of information, he should report the same in his LFAR.

  1. Reporting Under Specific Clauses

The following are the broad guidelines for verification

and reporting under specific clauses


  • The branch is expected to maintain the cash balance within the limit prescribed by the controlling authority. This is called the retention limit for the cash. In case the branch holds cash in excess of the retention limit, the auditor should report the same.
  • The auditor should count the cash including the cash in ATM and see whether it tallies with the books.

The excess balance should also be reported to the controlling authority within the prescribed time

Bank Audit Provisions under Special Circumstances

  1. Provision on additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, need not be made for a period of one year from the date of disbursement
  2. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies would attract provisioning requirements as applicable to their asset classification status.
  3. Advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.
  4. Advances covered by ECGC/CGTSI guarantee: In the case of advances classified as doubtful and guaranteed by ECGCI CGTSI, provision is required to be made only for the balance in excess of the amount guaranteed by the corporation. Further, while arriving at the provision required to be made for doubtful assets, realisable


Banks are required ta revert SNA acceuats as per
prescribed limit el expesare ta Central Repesitenr ef
Information an Large Credits ICRILC) ef RBL

value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the corporation and then provision should be made,

  1. Provisioning norms for sale of financial assets to securitisation company (SC)/ reconstruction company (RC)-
  2. If the sale of financial assets to SC/RC, is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall should be debited to the profit and loss account of that year.
  3. If the sale is for a value higher than the NBV, the excess provision will not be reversed but will be utilised to meet the shortfall/loss on account of sale of other financial assets to SC/RC.
  4. Framework for Revitalisation of Distressed Assets

The new frame work is given in part C of the Master Circular. The purpose of this frame work is to ensure that the banking system recognises financial distress timely, takes prompt steps to resolve it and ensures fair recovery for lenders and investors. Due to space constraints the same are not discussed in detail. However, some of the key aspects are discussed in brief hereunder: i) Banks are required to identify incipient stress

  1. Banks are required to report SMA accounts as per prescribed limit of exposure to Central Repository of Information on Large Credits (CRILC) of the RBI.
  • As soon as an account is reported as SMA2, banks have to form a committee called Joint Lender’s Forum (JLF). The JLF in turn would decide Corrective Action Plan (CAP) which would be either rectification or restructuring or recovery.
  1. While a restructuring proposal is under consideration by the JLF/CDR, the usual asset classification norm would continue to apply.
  2. As a measure to impose disincentives on borrowers not maintaining credit discipline, accelerated provisioning norms are prescribed (Refer para 26 of the Master Circular).
  3. As per para 27 of the Master Circular, banks would be required to identify directors whose name appear more than once in the list of willful defaulters as also no cooperative borrowers. The provisioning for such cases will be at the rate of 5% if it is a standard account and accelerated provision as per para 27 if it is NPA.

Having discussed the Master Circular, audit steps for verification of NPA and some important issues are discussed here:


  • Generally, all the banks have a system driven process of identification of account as NPA in place. Verify the system and various parameters to ensure the accuracy of classification, reversal of unrealised interest/ income, categorisation of account into substandard or doubtful I, II, III, calculation of provision, carry forward of classification of NPA date,
  • Some of the critical areas in CC/OD accounts which auditor need to verify are determination of correct drawing power, temporary deficiencies, fresh sanction to regularise an account, regularisation of account near about the balance sheet date through genuine sources,
  • Reversal of unrealised interest on classification of an account as NPA and non-recognition of income subsequently.
  • Accounting and recognition of income in NPA accounts on recovery.
  • If an account is classified as NPA, all the facilities of the borrower to be classified as NPA.
  • Up gradation of accounts from NPA to Standard if any and whether the same is in accordance with the guidelines given in the Master Circular.
  • Verification of secured and unsecured portion and provisioning. Many a times, valuation report of securities are not available. In such cases, auditor will have to be careful in evaluating the value of securities and take an appropriate view.
  • If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as part of the borrower’s principal operating account for the purpose of prudential norms on income recognition, asset classification and provisioning. (Para 4.2.7(ii) of Master Circular)
  • If an account is restructured, ensure that guidelines as prescribed in the Master Circular are followed.


Important aspects relevant for audit of NPAs have been discussed in this article. Needless to mention that auditor should refer Master circular dated 1st July, 2014 of RBI for better understanding of the subject. ■