Audit Approach and Procedures
The report of the statutory auditors in relation to compliance with SLR requirements has to cover two aspects:
(a) correctness of the compilation of DTL position; and
(b) maintenance of liquid assets as specified in section 24 of the Act.
The statutory central auditor should acquaint himself with the circulars/ instructions of the RBI regarding composition of items of DTL. For this purpose, he may request the management to provide him a copy of the relevant circulars/instructions. He should keep these circulars/instructions in mind while examining compliance with the SLR requirements.
To comply with the requirements relating to statutory liquidity ratio, banks have evolved system of consolidating trial balances of all branches and head office to compile consolidated trial balance of bank as a whole at its head office. Based on this consolidation , the DTL position is determined for every reporting Friday. The statutory central auditor should request the branch auditors to verify the correctness of the trial balances relevant to the dates selected by him. The statutory central auditor should also request the branch auditors to verify the cash balance at the branch on the dates selected by him.
It should be ensured that such request is communicated to the branch auditors well in advance of commencement of the audit so that they can draw up their audit programme accordingly.
Most of the liquid assets for the purpose of compliance with the SLR requirements comprise of approved securities, which are usually dealt with at the head office and a few large branches. The auditors should test check the relevant records maintained by the bank in respect of investments to verify the amount of approved securities held by the bank on the dates selected by him. The auditor should ascertain the valuation basis applicable at the relevant time and examine whether the valuation of securities done by the bank is in accordance with the guidelines prescribed by the RBI.
The auditor should examine the consolidations prepared by the bank relevant to the dates selected by him. He should test check the figures in the consolidations with the related returns received from the branches. He should also test check the arithmetical accuracy of the consolidations.
While examining the computation of DTL, the auditor may specifically examine whether the following items have been excluded from liabilities:
(a) Part amounts of recoveries from the borrowers in respect of debts considered bad and doubtful of recovery.
(b) Amounts received in Indian currency against import bills and held in sundry deposits pending receipts of final rates.
(c) Un-adjusted deposits/balances lying in link branches for agency business like dividend warrants, interest warrants, refund of application money, etc., in respect of shares/debentures to the extent of payment made by other branches but not adjusted by the link branches.
(d) Margins held and kept in sundry deposits for funded facilities.
Similarly, the auditor may specifically examine whether the following items have been included in liabilities:
(a) Net credit balance in Branch Adjustment Accounts. The credit entries in branch adjustment account which are outstanding for more than 5 years are required to be considered at gross;
(b) Interest on deposits as at the end of the first half year if reversed in the beginning of the next half-year.
(c) Borrowings from abroad by banks in India needs to be considered as ‘liabilities to other’ and thus, needs to be considered at gross level unlike ‘liabilities towards banking system in India’, which are permitted to be netted off against ‘assets towards banking system in India’. Thus, the adverse balances in Nostro Mirror Account needs to be considered as ‘Liabilities to other’
(d) The reconciliation of Nostro accounts (with Nostro Mirror Accounts) needs to be scrutinized carefully to analyze and ascertain if any inwards remittances are received on behalf of the customers / constituents of the bank and have remained unaccounted and or any other debit (inward) entries have remained unaccounted and are pertaining to any liabilities for the bank.
The auditor should also, particularly, examine whether the balances in Branch Adjustment Accounts of foreign branches have been taken into account in arriving at the net balance in Branch Adjustment Accounts.
The auditor should examine whether the consolidations prepared by the bank include the relevant information in respect of all the branches.
It may be noted that provisions for expenses and liabilities are usually made at the year-end. Similarly, even though interest accrues on a daily basis, it is recorded in the books only at periodic intervals. Thus, such interest accrued but not accounted for in books should be included in the computation of DTL.
As stated in preceding paragraphs, a considerable part of the information required by the central auditor for reporting on compliance with the SLR requirements will flow from the branches. It is suggested that the relevant information pertaining to the branches within a region may be consolidated at the regional level. The auditor of the region concerned should verify the same in the manner described in the above paragraphs and report on the same. The consolidated statement should also be counter-signed by the regional manager. The auditor at the central level should apply the audit procedures listed in the above paragraphs to the overall consolidation prepared for the bank as a whole. Where such a procedure is followed, the central auditor should adequately describe the same in his report.
While reporting on compliance with SLR requirements, the auditor should specify the number of unaudited branches and state that he has relied on the returns received from the unaudited branches in forming his opinion. Necessary audit procedures should be developed based on introduction of Automated Data Flow (ADF) for CRR & SLR reporting.