Bank Audit Sundries and Suspense Accounts

  • In case of stationery and stamps the auditor should check the control on custody and issue of stationery items, stamps The auditor should review the process and registers for the same. Stationery items will also include Term deposit receipts drafts, pay orders, cheque books, traveler cheques, Gift Cheques etc.
  • The auditor should offer the suggestions for better control in maintenance and use of stationery.
  • The instances of lost or missing stationery should also be mentioned in the report.
  • In case of Sundries and Suspense Accounts, the auditor should obtain the details of agewise analysis of pending entries in the account, inquire about reason for entry being pending for unreasonable period and assess the position of recoverability of the amount. The auditor should exercise his judgment about making necessary provision against such amounts.
  • In case any unusual items are notices while perusing the account, the auditor should report the same.
  • The auditor should not restrict his checking only to the pending entries, but he should also look into the entries which are squared off during the audit period.

Liabilities – Deposits

  • A deposit accepted from the public is a liability for the bank. Inoperative deposit accounts could be viewed as one of the fraud prone areas. Therefore, there are certain guidelines for operations in inoperative accounts. The auditor should see whether operations in inoperative accounts are carried out as per the guidelines issued. In case the guidelines are not followed, the details of deposits should be given name of the party, the amount due, the due date, the nature of the deposits etc.
  • The auditor should also review the deposit accounts both operative and inoperative to find out whether there are any unusual large movements (whether increase or decrease) in the aggregate deposits held at the year end. In such situation, the explanation from the branch management should be obtained. The movements without proper explanation should be reported in LFAR.
  • The auditor should obtain a list of overdue/ matured deposits at the end of the year. The amount of overdue/matured deposits should be mentioned in LFAR.

Other Liabilities – Bills payable, Sundry Deposits etc.

  • The auditors should obtain age wise details of pending entries in bills payable, sundry Deposits Accounts from the branch management.
  • The details obtained should be scrutinised to find out whether there exists any unusual items or material withdrawal/debits; The auditor should take appropriate view on such items.

Contingent Liabilities

  • The auditor should see that there exists a system which gives a reasonable assurance that all contingent liabilities are identified and properly disclosed.
  • The auditor should mention the list of major items of contingent liabilities (Other than constituent’s liabilities such as guarantees, Letters of Credit, acceptances, endorsements, ) not acknowledged by the branch.
  • The auditor should also obtain representation from branch management that all contingent liabilities have been disclosed and that the disclosed contingent liabilities do not include any contingencies which are likely to result in a loss and which therefore, require consequent adjustments of assets and liabilities.

Profit and Loss Account

  • The auditor should review the system at the branch to compute the discrepancy in interest, discounts or commission and for timely adjustment thereof. The Auditor should see the guidelines of controlling office in this regard.
  • The interest and commission should be checked on test check basis to find out whether there exists proper system to compute them correctly.
  • The income recognition Norms issued by the RBI should be followed at the branch. The auditor should report any deviation in that regard.
  • The report should also mention whether there is a system to estimate and provide interest accrued on the overdue/matured deposits.
  • The auditor should carry out the analytical procedure to find out whether there are any divergent trends in major items of income or expenditure. A suitable explanation should be asked for any divergent trend from the branch management. In case the auditor is not satisfied with the explanation he should mention the same in his report with proper details for the said divergent trend.


Books and Records

  • In most of the situations, nowadays, the books are maintained in the computerised environment.
  • If the books are maintained manually, the auditor should peruse them to find out whether they are maintained properly. The balancing is done and it is properly inked out. The books are to be authenticated by proper signatory at the branch.
  • In respect of computerised environment, the hard copies of certain accounts should be printed regularly.
  • The auditor should also mention the extent of computerisation and adequacy of the access and data security measures and other internal controls.
  • The auditor may review the process of creation of new logins, change of password the administrative control to access different files or reports through computerised system. There should be maker checker system.
  • Updating of the master data should be under supervisory control. The modification in the master data should be registered to Branch Manager only.
  • The auditor should also review the contingency
    and disaster recovery plan for the computer system. Timely backups, offsite backups, should be reviewed to understand the backup procedure.
  • The auditor should also mention any suggestion for efficient operation of the computer system.

Reconciliation of control and subsidiary Records

  • The auditor should see whether the subsidiary records are tallied with the control accounts. In case there are differences the same should be reported. He should also mention the date upto which the control and subsidiary records are balanced.

Inter branch Accounts

  • Normally, the inter branch transactions are passed through Head office account. The balance in Head Office Accounts as shown in the statement should be in agreement with the Head office Account in General Ledger. In case of any difference, the reconciliation statement should be obtained. The pending entries should be scrutinised to report whether there is a system of responding the entry promptly.
  • The outstanding debit entries in the Head office




rHAL Expression of Interest for Appointment of Internal Auditors For the period 01st April 2015 to 31st March 2017 for HAL Bangalore complex,

Helicopter Complex and Design Complex, Bangalore

Hindustan Aeronautics Limited (HAL) is a Public Sector Undertaking under the Administrative control of the Ministry of Defence. Bangalore Complex, Helicopter Complex and Design Complex are three of the five Complexes under HAL. These Complexes are engaged in the Design, Manufacture, Repair, Overhaul of Aircraft/Helicopters/Engines and Aircraft accessories. These Complexes have an annual turnover in excess of Rs. 6000 Crores for the year 2013-14.

These Complexes are in the process of appointing CA firms for carrying out the Internal Audit function for each Division / Office separately for the period from 1st April’ 2015 to 31st March’2017). Keeping with the requirements of transparency and equality of opportunity, the HAL Bangalore Complex is seeking to make these appointments on the basis of tenders benchmarked against a minimum viable offer. Interested CA firms may please visit the HAL website at under tenders of Aircraft Division for more details and information on how to apply.

For Hindustan Aeronautics Ltd H.K.Prakash

DGM(P&S)-Aircraft, Bangalore

Bank Audit Balances with RBI, SBI and Other Banks

  • Normally, the global Insurance Policy for cash- in-custody or cash-in-transit is taken at the head office level. The head office of the bank normally sends confirmation to that effect to the branches.
  • The branch should hold cash in joint custody of the cashier and the Branch Manager. The Branch Manager is also expected to verify the cash periodically and put his signature to that effect. The auditor should report whether these directions are followed properly or not.
  • Apart from answering the questions in the LFAR format the auditor should comment on identification and disposal of soiled notes, counterfeit notes, stapling of notes, use of ultra violet lamps, Note counting machines,

Balances with RBI, SBI and Other Banks

  • In case the branch maintains the account with RBI, SBI or any other bank, the auditor should see whether the reconciliation statement for the year-end balances is prepared or not.
  • He should peruse the reconciliation statement and find out the long outstanding entries in the statement. An explanation from the branch for pending entries should be obtained. In case any revenue item is required to be adjusted or written off in the accounts, the same should be reported in the LFAR.
  • The auditor should give the details of entries outstanding in the Reconciliation statement which are outstanding for more than six months, with specific details of outstanding entries for more than one year. The auditor may ask the bank to compile such information and verify the same before giving it in the LFAR.
  • The continuous failure of the branch to obtain the balance confirmation certificates and/or preparing reconciliation statements should also be reported in the LFAR.

Money at call and short Notice

  • Normally, money at call and short Notice are accounted for at the treasury department, Headoffice. However, in case such transactions are located at the branch, the auditor should examine the balances held at the branch with reference to the general or specific authority and instructions/ guidelines from the controlling authority. The cases of non-compliance of relevant instructions should be reported, including unauthorised deposits or deposits in excess of authorised limit.
    • It is also important to see whether the income has been booked properly or not.
    • The yearend balance should be confirmed with the third party confirmation.


    • There are separate questionnaires for the branches in India and for branches outside India. Though the reporting is to be done separately, the points to report are more or less the same.
    • The auditor should obtain a certificate from the branch regarding investments held by the branch on behalf of the head office. The auditor should verify the security physically. In case the security is not available physically, the holding certificate/ confirmation to that effect should be obtained. The income on investment should be reported to the head office. The auditor should see that accounting of such income is done properly.
    • The matured investments should be encashed and the RBI guidelines for valuation should be followed properly. In case of any deviation, the auditor should report the same. For valuation of investment, the auditor should refer to the master circular on “Prudential Norms for Classification, Valuation and Operation of Investment portfolio by banks” issued by the RBI.
    • The auditor should find out the unserviced investment and report the same, whether it could be considered as non performing investment (NPI).


    The reporting under advances is to be done under four broad categories viz. Credit Appraisal, Sanctioning and Disbursement, Documentation, Review/ Monitoring and Supervision. Since this topic is dealt separately, the aspects of verification and reporting on Advances are not elaborated in this article.

    Other assets

    • The Balance Sheet of the bank contains residual items about the assets which are not specified above, such as Stationery and Stamp, Sundries, Suspense A/c

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. ■

Bank Audit Loss assets should be written off

If loss assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.

brought by them should be a minimum of 20% of banks’ sacrifice or 2% of restructured debt whichever is higher. The term bank’s sacrifice’ means the amount of “erosion in the fair value of the advance”. The additional funds required to be brought in by the promoter should be brought up front and not be phased over a period of time.

  1. Promoter’s contribution need not necessarily be brought in cash and can be brought in the form of de-rating of equity, conversion of unsecured loan brought by the promoter into equity and interest free loans.
  2. The restructuring under consideration is not a ‘repeated restructuring’
  • Promoter’s personal guarantee should be obtained in all cases of restructuring. Corporate guarantee cannot be accepted as a substitute for personal guarantee. However, the same can be accepted in cases where promoters of a company are not individuals.
  1. Provisioning Norms
  • Substandard assets

A general provision of 15% on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.

The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10%, i.e., a total of 25% on the outstanding balance! 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% instead of the aforesaid prescription of 25%.

  • Doubtful assets
  1. a) 100% of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid

recourse and the realisable value is estimated on a realistic basis (unsecured portion), b) In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25% to 100% of the secured portion depending upon the period for which the asset has remained doubtful:

Period for which the advance has remained in ‘doubtful’ category Provision requirement (%)
Up to 1 year 25
1 to 3 years 40
More than 3 years 100



  • Loss assets

Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

  • Standard assets
  1. Direct advances to agricultural and SME sectors at 0.25%;
  2. Advances to Commercial Real Estate (CRE) Sector at 1%;
  3. Advance to commercial Real Estate – Residential Housing Sector at 0.75%
  4. Housing loan at teaser rates 2% and 0.40% after 1 year from the date on which the rates are reset at higher rates
  5. All other loans and advances not included in (a), (b), (c) and (d) above at 0.40%
  6. Restructured account classified as standard would attract higher provision. Para of Master Circular may be referred for the same.
  • Valuation of security for provisioning


  1. There are specific guidelines in para 5.4(iii) of the Master Circular for consideration of security in respect of infrastructure projects. The same may be referred.

In cases of NPAs with balance of ^ 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the board of the bank would be mandatory. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.