LONG FORM AUDIT REPORT

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LONG FORM AUDIT REPORT

• Statutory Central Auditors Meet-13.3.2010

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Scope of this presentation

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

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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

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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.

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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

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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

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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

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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.

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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

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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.

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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) co-acceptances (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

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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.

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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

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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

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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.

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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

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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

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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

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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.

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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
• Issues
• 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

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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

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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

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III INTERNAL CONTROL

• Inter branch reconciliation
• Comments on the system/procedure and records
  maintained.
• Test check for any unusual entries put through
  inter-branch/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

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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

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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.

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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

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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

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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.

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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.

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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

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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

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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.

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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 recommendation-
  compliance
• Implementation of the recommendation of Mitra
  committee
• BPC,Legal Complaince, data on use of
  discretionery powers
• Goiporia Committee recommendations

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• Thank you