Long Form Audit Report in Case of Banks
The statutory auditors should address their LFAR to the Chairman of the bank concerned and also a copy thereof should be forwarded to the designated office of the RBI. Many of the matters to be dealt with by the statutory auditors in their LFARs are, normally, based on the LFARs received from the branch auditors. In dealing with such matters, the statutory auditors are expected to make their observations on the basis of review of branch auditors’ LFARs.
Where any of the comments made by the auditor in his LFAR is adverse, he should consider whether a qualification in his main report is necessary. It should not, however, be assumed that every adverse comment in the LFAR would necessarily result in a qualification in the main audit report. In deciding whether a qualification in the main report is necessary, the auditor should use his professional judgement having regard to the facts and circumstances of each case.
Where the auditors have any reservation or adverse remarks with regard to any of the matters to be dealt with in their LFARs, they should give the reasons for the same.
The matters to be dealt with by the statutory auditors in their LFARs are discussed in the following paragraphs.
I. Advances
Lending activities constitute an important part of a bank’s operations. The statutory auditors are expected to offer their comments on various aspects of lending activities in their LFARs. The format of LFAR requires the statutory auditors to offer their comments on the following aspects:
a. Credit policy |
b. Credit appraisal |
c. Sanctioning / Disbursement |
d. Documentation |
e. Review / Monitoring / Supervision |
f. Recovery Policy in respect of Bad / Doubtful Debts/NPAs |
g. Large advances |
The statutory auditors are expected to offer their comments on the adequacy and effectiveness of the internal control systems relating to the above aspects of credit administration. In order to form an opinion on these matters, the statutory auditors would also need to consider the branch auditors’ LFARs. In cases where sanctions are accorded otherwise than at the branch level (i.e., by higher / Controlling Authorities), the auditors should carry out, on a selective basis, an examination of the specified matters at the head office and / or other controlling offices of the bank.
Every bank usually has a written manual of instructions which describes in detail the procedures to be followed for executing various types of transactions and also lays down limits on delegated powers in respect of various operations of the bank. The auditor should examine such manual of instructions and report his views as to the adequacy of the relevant instructions in the LFAR. Further every bank will have its own limits above which the instances of observations be attached to LFAR comments. It would be prerogative of the auditors to revise these limits in consultation with the Management.
Further, as per the “Master Circular – Loans and Advances – Statutory and Other Restrictions” dated July 1, 2015, DBR.No.Dir.BC.10/13.03.00/2015- 16 dated July 1, 2015 issued by the RBI, all banks are required to frame “Fair Practices Code for Lenders” based on the Guidelines contained in this Master Circular. The Fair Practices Code Covers areas, such as, applications for loans and their processing, loan appraisal and terms / conditions, disbursement of loans including changes in terms and conditions, post disbursement supervision, general aspects, etc. Further, RBI vide its circular no. DBOD. Leg. BC. 61 /09.07.005/2010-11 dated November 12, 2010 on “Guidelines on Fair Practices Code for Lenders – Disclosing all information relating to processing fees / charges” requires the banks to disclose ‘all in cost’ inclusive of all such charges involved in processing / sanction of loan application in a transparent manner to enable the customer to compare the rates / charges with other sources of finance. It should also be ensured that such charges / fees are nondiscriminatory.