Red Flags in Bank Branch Audits

CA Sripriya Kumar
 Bank Branch Audits

Income and
Assets and
Expenses are
Auditors Liabilities are
Long Form properly
completely
Report & and accurately
Audit stated
on Financial accounted
Report
statements

Internal RBI norms and

Standard
Tax Audit Controls over circulars are
and Special Banking properly
reports
Certificates operations complied

What We Do ? Why We Do ?

Red Flags in Bank Branch Audits - CA Sripriya Kumar A Smart CA Initiative

Bank Branch Audits – The delicate balance

For Us
Against us
 Frauds in Banks Frauds on Banks

Component

Components that are

affected Categories and lists
of frauds

RBI has issued a Master Direction on Frauds on July 1, 2016. This lists 42
Signals and Red flags that indicate potential fraud vulnerabilities that an
auditor may look out for
 Early Warning

Account Document Diversion of

Security Related Others
Operation Related funds

Impacted

Bank
Cash Advances Deposits Revenue
instruments
What we will talk about

Account 03
01 Operation Diversion of
Related funds

04
Security related
02 Document
Concealed
or falsified
 Account Operation Related

Frequent Bouncing
of Cheques Risk
• Repeated instances of high value cheque
bounces . Done to reduce account balances
and maintain under limits

Audit
• Auditor to review exception reports on Cheque
bounces
 Account Operation Related

Pending Export
Realisations
Risk
• Export realisation of Foreign LC’s / Bills pending
for a long time

Audit
• Auditor to review Export bills register
 Account Operation Related

Unpaid
Creditors
Risk
• Unpaid Statutory dues, Creditors outstanding
position indicating borrower liquidity issues

Audit
• Auditor to review financial statements for
early warning signals
 Account Operation Related

LC / BG related Risk
• Frequent devolvement of LC’s and invocation of
BG’s

Audit
• Auditor to review all such cases wrt LC / BG
register
 Account Operation Related
Risk
Inventory • Over valuation of inventory
Related • Non moving obsolete inventory to enable continued
enjoyment of CC/OD limits

Audit
• Review of stock statements,
• Ratio analysis and inventory rations
• Unit inspections
• Review of stock audit reports
 Account Operation Related

Fictitious
Purchases
Risk
Fictitious purchase bills for
• Over valuation of inventory for CC-OD
• Asset purchases for End use of Term loans
Audit
• Review of purchase bills to confirm if below
mentioned details feature to establish the genuineness
• Supplier name and address
• PAN / TIN / GST / Excise numbers
• Phone number, mail id, website etc
 Account Operation Related
Additional funding
Risk
in stressed
accounts Additional limits sanctioned to enable repayment of other
stressed accounts of the same borrower or to support
interest payments for the same account

Audit
• Check authority for sanction
• Review back up for new sanction
• Check if intended end use is accomplished
• Cases of restructuring / rephrasing and additional
funding to be examined carefully
 Account Operation Related
Adhoc /
Temporary Limits Risk
Adhoc limit enhancement are given to support borrower
in times of stress instead of for genuine working capital
needs supported by increased business activity

Audit
• Appropriate sanctioning authority
• Whether adhoc is relevant and is because of increased
activity or to manage stress
• Regularisation is done ?
• Frequent TOD / adhoc sanctions
 Account Operation Related

Cash withdrawals
in loan accounts Risk
Cash withdrawals should ideally be minimal in advances
accounts. Large withdrawals may indicate possibility
of siphoning to related party stressed accounts or to
other stressed accounts of the borrower

Audit
• Obtain exception reports for such cash withdrawals
• Enquire purpose and establish genuineness
 Account Operation Related

Working Capital Vs Risk

Sales turnover Enhanced working capital limits may be permitted
although there is no increased turnover to support the
same causing possible diversion of funds from such
sanctioned facilties

Audit
• Review base data for such enhancements
• Establish need for such enhancement
• Check if sales turnover has increased and more
importantly, if the debtors aging is within normal limits
What we will talk about

Account 03
01 Operation Diversion of
Related funds

04
Security related
02 Document
Concealed
or falsified
 Key Documents
Master Agreements Basic End use

Agreements that define the fundamental • Application forms • Purchase bills

purpose / need for the advances • Agreements • Installation Certificate
• Renewals • Completion certificates
• Key purchase agreements • Bill of entry
• Key sales agreements • Export documents for pre-shipment
• Franchisee agreements finance
• Construction permits

Sanction related Security related Monitoring

• Sanction letters • Audited / unaudited financial

• Borrower financial capability • Title deeds statements
• Projections CMA reports • Mortgage deeds • Ongoing EC
• Promissory notes • Insurance policies
• Insurance cover • Periodic Valuation reports
• Initial EC
• Valuation reports
 Document Related
Documentation
Lapses Risk
Non availability / improper execution of documents may
lead to impairment in recoverability

Audit
• Walkthrough tests to ensure compliance with
documentation standards as set by the bank
• Exceptions reports submitted to CO to be reviewed
• Review of concurrent and other audit reports for
documents missing / lapses
 Document Related

Accounting
policies Risk
Frequent changes
Inappropriate application of accounting policies
Unusual accounting policies
Extension of accounting period for window dressing

Audit
• Review of financial statements for above trends
• Compare audited and unaudited results and enquire
variances
 Document Related

Contingent
liabilities
Risk
Crystallised liabilities shown as contingent thereby
presenting a better than actual financial position

Audit
• Review of all claims not acknowledged as debts
 Document Related

Increase in
unbilled revenues
Risk
• Year over Year increase in unbilled revenues
• Unbilled revenue with related parties

Audit
• Review unbilled revenue if any disclosed in the financial
statements and enquire details of underlying contracts
 Document Related
Risk
Annual Reports Not in compliance with applicable statute
Statutory non compliances
Qualifications by auditors
Significant related party transactions

Audit
• Review of financial statements for unusual items
• Review Audit qualifications including going concern if any
• Review CARO reporting and ICFR reporting by auditor
• Review for any adverse items which are not properly
treated
 Document Related

Discrepancies in
annual report Risk
• Delays in submission
• Unsigned financials or unaudited financials
• Improper formats and disclosures not as specified

Audit
• Enquire all instances where financials have not been
furnished
• Check for unsigned / unaudited financials
What we will talk about

Account 03
01 Operation Diversion of
Related funds

04
Security related
02 Document
Concealed
or falsified
 Diversion of Funds

Frequent changes Risk

in scope of project Extension of time
Change in scope and mode
Time and Cost overruns

Audit
• TEV Study report
• Auditors end use certificates
• Project Status report
• Check records of site visits by borrower personnel
 Diversion of Funds

Sale proceeds not

routed through
borrower account Risk
• Decline in Sales proceeds ( not routed through the
relevant account )

Audit
• If turnover is high, but credit summation is low, may
indicate diversion . This needs to be reviewed
• If turnover and summation are low, may indicate a
liquidity issue . This needs to be reviewed
 Diversion of Funds

High value RTGS

for other than Risk
intended business
• High value transfers of funds for other than intended
purpose

Audit
• Obtain the STR report and review the receiver of funds
and the purpose for which the fund is transferred and
whether the same is backed by valid agreements /
contracts / invoices etc
 Diversion of Funds

High cash and

bank balances Risk
• Possibility of fictitious balances
• End use not monitored and funds are kept idle
• Idle funds could indicate potential project delays

Audit
• Confirm genuineness of such balances and reason for
the same
What we will talk about

Account 03
01 Operation Diversion of
Related funds

04
Security related
02 Document
Concealed
or falsified
 Security Related

Postponement of
audits and Risk
inspections Borrower does not permit stock audits / godown
inspections

Audit
• Understand bank policy on stock audits / inspections
and maintenance of records relating to the same
• Review cases where stock audits / inspections are not
done and check for lapses and reason therefor
 Security Related

Collaterals
without consent Risk
• Collaterals charged to a lender are extended to other
lenders without NOC

Audit
• Review latest EC to review charges created
• In case of frequent TOD / limit increases, there could be
stress which may have warranted fresh loans from
other
 Security Related

Stock audit
reports Risk
• Fictitious reports , Non moving stock , non submission
of stock statements , Inventory valuation issues,
Differences between books and auditors report,
difference between submission to bank and auditors
report, fixed assets included in stock

Audit
• Review of stock audit reports to identify any lapses
which impact the credit worthiness , liquidity of the
borrower which could impair the advances
 Security Related

RoC report
Risk
Difference between RoC Search and charges created by
borrower . This may mean that securities may be
offered as collaterals without the knowledge of the
lender(s) to whom such collaterals have been offered

Audit
• Any such differences should be investigated by the
auditor
 Security Related
End use not
confirmable by
bills Risk
• Only proforma, not original bills provided by the
borrower. Bills do not contain vital information such
as TIN, GST , Excise , phone number, website etc

Audit
• Bills such as those above need to be reviewed to
establish genuineness of end use and confirmation of
the procurement of goods and services
 Security Related
End use not
confirmable by
bills
Risk
• Loss of securities pledged to the bank

Audit
• In addition to routine walk through tests, auditors
should review stressed accounts specifically for
potential loss of securities pledged ( eg. Missing gold )
 Early Warning

Account Document Diversion of

Operation Related
Security Related
funds Others

Impacted

Bank
Cash Advances Deposits Revenue
instruments
 Related Party Transactions
Risk
RPTs • Loan repayments by group entities unless in a pre-
agreed system
• Investment of funds that are borrowed in group entities
( shares )
• Significant transaction with Related Party entities as per
the financial statements
• High value of outstanding balances with related entities
may also point to fictitious revenues etc
Audit
Auditor to review the above conditions and assess impact
on impairment of advances
 Regulatory Issues

Statutory Dues
Risk
• Non remittance of statutory dues beyond due dates
• Searches , raids etc in premises of borrower

Audit
• Reasons to be investigated especially when such dues
are not disputed by the management
• Details of such incidents to be reviewed
 KMP Changes and Promoter Stakes

Issues
Risk
• Frequent changes in Key Managerial Personnel and
Senior management of the company
• Significant dilution of promoter stakes

Audit
• Above instances need to enquired for potential
impairment in advances
This document has been prepared based on the RBI document Master Directions on
Frauds – Classification and Reporting by commercial banks and select FIs updated as
at July 3, 2017 . All contents are not covered. Only the Early Warning triggers listed in
the Annexure to the circular are covered here

https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD28A4C421E7F7724C07B38E3C6
207F3548E.PDF
THANK YOU
CA SRIPRIYA KUMAR
A Smart CA Initiative
sripriya@spka.in
9841012169 | 9841026973