Statutory audit of banks explained

In our previous posts we talked about (1) Tax audit, (2) What is the stock audit, and (3) What is a forensic audit?  (4) What is a Legal Audit? (5) Concurrent Audit System in bank. In this post let us study what is a statutory audit.

RBI issues new guidelines for the Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs, and NBFCs (including HFCs) for financial year 2021-22. These guidelines supersede all previous guidelines. The NBFCs with asset size below Rs.1000 crore have the option to continue with their extant procedure. While NBFCs do not have to get prior approval from RBI for the appointment of SCAs/SAs, however, all NBFCs need to inform RBI about the appointment of SCA.

Statutory Audit is a type of audit carried out by charted accountants which is mandated by a Law or a Statute to ensure the books of accounts presented to different regulators and the public are true and fair. Such audit is mandatory for certain criteria prescribed by different statutes like the Reserve Bank of India, Income Tax, Companies Act, 2013, or any other statute governing the organization. Organizations that are subject to statutory audits include public companies, banks, brokerage, and investment firms, and insurance companies. The statutory audit would ensure that the books of accounts such as bank balances, financial transactions, and accounting records presented to the regulators and public are true and fair.

Statutory Auditors of banks are the Chartered Accountants appointed by RBI in association with the ICAI. As per RBI guidelines, the statutory audit shall be carried out at public sector bank branches in such a way that the audit covers 90% of all funded and 90% of all non-funded credit exposures of the bank. In terms of RBI guidelines on ‘Norms on eligibility, empanelment and selection of Statutory Branch Auditors in Public Sector Banks (PSBs)’, PSBs shall allot the Top 20 branches (to be selected strictly in order of the level of outstanding advances) to SCAs in such a manner as to cover a minimum of 15% of total gross advances of the bank by SCAs. For other Entities (excluding Payment Banks and Core Investment Companies), SCAs/SAs shall visit and audit at least the Top 20 branches/Top 20% of the branches of the Entities (in case of Entities having less than 100 branches), to be selected in order of the level of outstanding advances, in such a manner as to cover a minimum of 15% of total gross advances of the Entities. In addition, the banking companies and NBFCs shall ensure adherence to the provisions of Section 143 (8) of the Companies Act, 2013 regarding the audit of accounts of all branches.

The selection of branches for statutory audit shall include a representative cross-section of rural/semi-urban/urban and metropolitan branches, predominantly including branches that are not subjected to concurrent audit. CPUs/LPUs/and other centralised hubs, etc. would be included for branch audit every year as of 31^st of March. The selection of branches shall be finalised by each PSB with the consent of their Statutory Central Auditor/s. In respect of those branches, which are subject to concurrent audit by chartered accountants and not selected for branch audit, LFARs and other certifications done by concurrent auditors will be submitted to the Managing Director & CEO of the bank. The banks in turn will consolidate/compile all such LFARs and other certifications submitted by the Concurrent Auditors and submit them to the Statutory Central Auditor/s as an internal document of the bank. The Statutory Auditors should ensure that the audit report issued by them complies with the requirements of

• Revised SA 700 – Forming an Opinion and reporting on financial statements,
• SA 705 – Modifications to the opinion in the Independent Auditor’s Report &
• SA 706 – Emphasis on matter paragraphs and other matter paragraphs in the Independent Auditor’s Report.

The auditor’s report includes the quantification of advances, deposits, interest income, and interest expenses. The other important elements to check in the statutory audit of banks are (i) Cash Verification Procedure (ii) Tax-Related Items (iii) Verification of Loan Accounts. Further, the statutory shall check the following items and make note of irregularities and lapses detected in his audit report.

1. Comment on the quality of compliance if the bank is under concurrent audit.
2. Comment on security arrangement in the branch
3.  In case the branch was audited by RBI in the past, then the auditor has to comment on compliance with RBI’s findings.
4. The branch should maintain a copy of the Insurance Policy obtained by the corporate office.
5. The branch should maintain the lease document of the premises with them.
6. The branch should take balance confirmation from other banks in which it is maintaining the account.
7.  Explanation of the outstanding entry in the system suspense account, if any

MOC with the Audit report

A Memorandum of Change more often referred to as MOC is an important document enclosed with the Bank Audit Report. Whenever the Auditor observes significant issues affecting the Financial Statements of the Bank viz. items of profit and loss or balance sheet requires passing of a memorandum of changes.

Appointment of Statutory Auditors in PSBs:

As per RBI’s new guidelines, for entities (Banks/ UCB/NBFCs) with asset size of Rs.15000 crore and above as at the end of the previous year, the statutory audit should be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships (LLPs)]. All other entities should appoint a minimum of one audit firm (Partnership firm/LLPs) to conduct statutory audits. It shall be ensured that joint auditors of the Entity do not have any common partners and they are not under the same network of audit firms. Further, the Entity may finalise the work allocation among SCAs/SAs, before the commencement of the statutory audit, in consultation with their SCAs/SAs. The actual number of SCAs/SAs to be appointed by an entity shall be decided by the respective Boards/LMC subject to the maximum number of 4, 6, 8, 12 SCA/SA for entities of asset size up to 5lac crore, 10 lac crore, 20 lac crore and above 20 lac crore. An audit firm would not be eligible for reappointment in the same Entity for six years (two tenures) after completion of full or part of one term of the 3 years. However, audit firms can continue to undertake statutory audits of other Entities. One audit firm can concurrently take up statutory audit of a maximum of four Commercial Banks [including not more than one PSB or one All India Financial Institution (NABARD, SIDBI, NHB, EXIM Bank) or RBI], eight UCBs, and eight NBFCs during a particular year, subject to compliance with required eligibility criteria and other conditions for each Entity and within overall ceiling prescribed by any other statutes or rules. These guidelines supersede all previous guidelines.

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