LFAR and Statutory Audit in Banks

What is a Long Form Audit Report (LFAR)?

: LFAR (Long Form Audit Report) must be issued by Statutory Auditors apart from the standard audit report that is required as per regulatory requirements. LFAR serves as a vital tool for auditors and their team members, the audit process providing detailed insights into the bank’s operations, risk management practices, and compliance with regulatory requirements. Auditors have to offer comments and feedback on the Profit & Loss Account, Balance sheet, Advances, and all other matters. LFAR has questions for specialised branches in banks such as Forex Branches, Service Branches, and Branches having large advances. Normally auditors verify and offer their comments on the details complied by the branch management.

Generally, the audit team goes through LFAR before actual verification. Before any area is started, questions to be answered in LFAR should be kept in mind. Check List based on questions can be prepared and the same will help as a ready tool for verification of that area by the audit team. While replying to the questions LFAR auditor must be clear in his thoughts and to the point. The answer should be descriptive and Yes/NO/Not applicable types of replies should be avoided. General comments/ copy paste of previous should be strictly avoided. All irregularities pointed out should be specific and given with examples. Many times auditors are giving cross-references in LFAR/ of LFAR in another report, which needs to be avoided. The Main Auditor’s Report is a self-contained document. Same way matters of the Main Statutory Auditor’s Report should not be reported in LFAR. The matter concerning the subject of qualification and affecting true & fair views should be reported only in the Main Auditor’s Report.

In the whole exercise of Bank audit, Documentation plays a very important role. Auditors should collect all important documents and create proper working papers. All documents should be preserved as required by Statutory Auditors.

The statutory audit of financial statements of banks is mandatory according to different prescribed statutes such as the Reserve Bank of India, Income Tax, Companies Act, and so on at the end of every financial year.

The Statutory Auditors audit the financial statements and books of accounts of the Banks are audited by the statutory auditors and certify that the statement account of the bank for the financial year is fair and accurate.  The audited financial statement will be later presented to the Reserve Bank and other statutory Authorities and also publish the annual report in the printed media for the purview of all the stakeholders. 

The statutory audit reports of banks issued by the auditors should be compliant with the following standards.

Standard of Auditing 700: Forming an Opinion and Reporting on Financial Statements (Revised)

Standard of Auditing 705: Modifications to the Opinion in the Independent Auditor’s Report

Standard of Auditing 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report (Revised).

Statutory Auditors are generally given a time frame within which they are required to undertake the audit of the bank’s branches that are allocated to them. An auditor must accept the appointment immediately send a formal intimation to the management of the branch and inquire about the information necessary to conduct an audit.

With the advent of increasing technological changes, there has been an increased focus on the spectrum of risk management, information systems, and internal financial controls in banks by the regulatory authorities. These developments have significant implications for the functioning of banks and simultaneously have more expectations from the auditing profession than before.

The auditor report consists of the qualification of deposits, advances, interest income, and interest expenses. The auditors have to check whether the appropriate presentation of deposits is made in the financials of the bank concerning the classification of deposits between demand, savings, and term deposits, interest accrued thereon, and also verify the requirement for disclosure of contingent liability, if any, arising out of consumer court and other cases, related to deposits. Based on audit issues, appropriate reporting of adversities observed in the Deposit section and customer services needs to be made. The auditor should also verify the correct classification of Credit balances in overdrafts, cash credit accounts under deposit, and the correctness of depositor disclosure of the top 20 largest depositors in the notes to accounts. The auditor should also look for transactional errors pointed out in the concurrent/internal audit reports and ensure that operational deficiencies or gaps are rectified by process improvements. The key is to correct the root cause that led to the operational error.

The statutory auditor of the bank has to essentially verify the following;

1. Cash Verification Procedure
2. Tax-Related Items
3. Verification of Loan Accounts

Cash Verification Procedure:

As of March 31, of every year, the statutory auditor must verify the cash balance at the branch of a bank. The auditor has to follow the below Checklist:

• Whether the branch is being opened at the time as indicated in the guidelines and the branch manager is present at the branch when it is being opened.
• Whether the Joint Custodians are opening the cash safe/ cash vault.
• If any unrecorded security documents or objects are placed in the cash safe.
• If the branch is maintaining a record of when a currency is accepted from the public. This would also include the records of receiving mutilated notes.
• If the burglar alarm system is functioning properly.
• If all the other entrances to the bank and the ones within the bank are locked at the time of opening the cash room.
• Ensure that any weapon stays outside the cash room when it is being opened or closed.
• If the cash is being carried from the cash room to the counter and vice versa in a locker box.
• Ensure that the UV lamps and the cash counting machine are in working condition.

Tax-Related Items:

A tax audit is an examination of accounts from an income tax perspective to ensure correctness and compliance. A statutory auditor is required to ensure that all the tax-related items and compliances that are generally applicable to a bank.

Checklist for auditor:

1. The tax must be levied and deducted at an appropriate rate on all the payments made by the bank towards interest on deposits, rent, payments to professionals/ contractors, and so on.
2. Confirm that all the payments for the tax are on time and all the challans for the same are present.
3. Confirm that all the tax returns are filed on time.
4. Confirm that the TDS certificate is issued and Form 15G/ 15H is collected and sent on time.
5. Review the quality of compliance if concurrent audits are being conducted at the bank.
6. Verify if the RBI has audited the branch in the past. If yes, ensure the same is closed and review the quality of compliance seen at the moment.
7. Verify whether the branch has a copy of the Insurance Policy obtained by their corporate office.
8. Verify whether the branch has the lease documents with them.
9. Verify whether the branch is taking a confirmation of balance from other banks in which they are maintaining an account.
10. Review, if any, the explanation of an outstanding entry in the system suspense account.

Loan Accounts Verification

The assets of most banks majorly comprise of loan accounts. A statutory auditor is required to review the loan accounts with extra care.

The verification of loan accounts is split into three parts viz.(i) Preliminary Check (ii) Disbursement (iii) Post Disbursement Inspection

The statutory Auditor would examine and comment on the following.

Loan Application of the borrowers, compliance with KYC norms, Latest Audited Financial Statements and projected balance sheet, P&L sheet, cash flow, funds flow statements, and Board resolutions for availing credit facility from the bank in case of limited companies. Credit appraisal and technical review carried out by the bank.

Confirm whether the disbursement happened on fulfillment of the terms and conditions of the sanction letter and acceptance letter by the borrower for agreeing terms and conditions of the sanction. Confirm that proper execution of the loan documents and records is as indicated by the terms and conditions of the sanction letter.

Confirm that the branch is holding a post-disbursement inspection report, and find out any adverse comments on utilization funds released. Does any lapse exist in the borrower’s account?

Checklist:

1. All the original documents must be held in safe custody which is fire resistant.
2. Confirm proper maintenance of Confidential Reports and NOCs from existing bankers.
3. Availability of the CIBIL Report and check the Score for any adverse comments.
4.  Availability of External & Internal Credit Rating, Valuation of Securities, Due Diligence Certificate,
5.  Verification of the drawing power of the accounts is calculated precisely, and a margin is maintained according to the sanction letter.
6. Verification of any adverse comments on the audited balance sheet or stock audit reports.
7. Verification of the schedule of payments according to the sanction letter is initiated. Verify the approval document for the same, if any.
8. The statutory auditor must inspect for any Non-Performing Assets (NPA). Every account must be treated as NPA if they are overdue or stop generating any income for the bank for 90 days continuously.

The standard audit report of the Statutory Auditor after conducting a thorough audit of the bank’s branch has to certify that;

Whether the balance sheet shows a fair and accurate view of all the essential particulars required to exhibit an honest and right view of affairs within the bank.

Whether the profit and loss accounts shown are the display of the correct balance for a period covered by such an account.

Are there any transactions carried out by the branch which does not come within the power of a bank’s branch?

Any other issues the statutory auditor feels have to be brought to the notice of the Statutory Central Auditor.

Long Form Audit Report (LFAR): LFAR must be issued apart from the standard audit report that is required as per regulatory requirements. LFAR serves as a vital tool for auditors and their team members, the audit process providing detailed insights into the bank’s operations, risk management practices, and compliance with regulatory requirements. Auditors have to offer comments/feedback on the Profit & Loss Account, Balance sheet, Advances, and all other matters. LFAR has questions for specialised branches such as Forex Branches, Service Branches, and Branches having large advances. Normally auditors verify and offer their comments on the details complied by the branch management.

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