Revised LFAR format with audit scope on areas of credit risk, market risk, operational risk, capital adequacy among others

RBI on Saturday announced the revised long format audit report (LFAR) norms with the scope of the mandate of an audit covering areas of ‘Credit risk’, ‘market risk’, assurance functions and operational risk areas’, ‘capital adequacy’ and ‘going concern and liquidity risk assessment’, among others. This may also involve commenting on various risks to which the banks are exposed to like credit, market, operational and liquidity risk and risk management efficacy, assessment of the appropriateness of procedures for preparation of supervisory returns, KYC/AML/CFT issues, cybersecurity, business performance, business strategy including very high growth / high ROE accompanied with high risks, etc., RBI said. The revised LFAR format will be put into operation for the period covering 2020-21 and onwards, the central bank said.

The LFAR which applies to statutory central auditors (SCA) and branch auditors of banks has been updated keeping in view the large scale changes in the size, complexities, business model, and risks in the banking operations, the RBI said.  “The mandate and scope of the audit will broadly be as per given format and if the SCA feels the need of any material additions, etc., this may be done by giving specific justification by the SCA and with the prior intimation of the bank’s Audit Committee of Board (ACB)” it said. SCA may resort to need-based limited transaction testing as hitherto.    In deciding whether a qualification in the main report is necessary, the auditors should use their judgment based on the available pieces of evidence/facts and circumstances of each case, it said.

The Central Bank further said that the LFAR should be placed before the Audit Committee of Board and Local Advisory Board of the bank indicating the action taken or proposed to be taken for rectification of the irregularities. A copy each of the LFAR (i.e. for the bank / all Indian Offices of a foreign bank as a whole) and the relative agenda note, together with the Board’s views or directions, should be forwarded to the concerned Senior Supervisory Manager (SSM) in the Department of Supervision, Reserve Bank of India within 60 days of submission of the LFAR by the statutory auditors, Central Bank said.

Under the new norms, banks are asked to ensure timely receipt of the LFAR from auditors and send a copy the LFAR and the relative agenda note, together with the Board’s views or directions, to the Reserve Bank within 60 days of submission of the LFAR by the statutory auditors.