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The Reserve Bank has asked banks to implement revised Long Form Audit Report (LFAR) norms to improve audit efficiency and risk management. The Reserve Bank stated that the revised LFAR format would be put into operation for the period covering 2020-21 onwards.
The Reserve Bank stated that the overall objective of LFAR should be to identify as well as assess the gaps and vulnerable areas in the business operations, risk management, and compliance, and the efficacy of internal audit and provide independent opinion to the board of the bank and give their observations.
The Reserve Bank said this might also involve commenting on different risks to which banks are exposed, such as credit, market, operational and liquidity risk and risk management efficacy, assessment of the appropriateness of the procedures for preparation of supervisory returns.
Besides, through LFAR, Statutory Central Auditors can give an opinion on KYC/AML (Anti-Money Laundering)/Countering of the Financing of Terrorism issues, cybersecurity, business performance, business strategy.
The LFAR will cover areas like market risk, credit risk operational risk, capital adequacy, going concern, and liquidity risks assessment, information systems, among others.
The Statutory Central Auditors’ observations in LFAR should cover the sufficiency and effectiveness of the loan policy with the compliance to instructions issued by the Reserve Bank in areas such as exposure norms, interest rates, statutory and other restriction, among others.
Statutory Central Auditors are required to declare if the credit assessment process is placed sufficiently to capture the risk as also the adequacy of information or data available with the bank. They have been asked to closely examine quick mortality cases.
Further, the auditors are required to examine the policy relating to the delegation of powers at different levels, appropriateness of checks and balances, adherence to authorized limits, disbursal after complying with terms and conditions of disbursal.
The Reserve Bank stated that the whole process, including the system of ensuring execution according to the terms of sanction, the structure of documentation with respect to joint/consortium advances, availability of the relevant documents to ensure creation of charge in favor of banks when required, renewal of documents must be examined.
Statutory Central Auditors are required to pay special attention to the functioning and effectiveness of the system of identifying as well as reporting of Red flagged accounts, Early-Warning System, receipt of periodic balance conformation /acknowledgment of debts, stock/book debt statements, balance sheet, audited accounts, etc.
The auditors will have to comment on deviations observed in restructured accounts/ stressed accounts under resolution regarding internal/RBI guidelines.
The Statutory Central Auditors are required to be provided a special emphasis on the stance of the bank about the resolution of the stressed accounts, primarily covering compliance to regulatory guidelines, formulation of board-approved policies including timeline for resolution, how decisions are made during review period, board-approved policies regarding recovery, compromise settlements, exit of exposure via sale of stressed assets among others.
The auditors are required to examine and comment on the effectiveness of the system for compiling data related to the NPA and their provision, data integrity, the system of suspension of charging of interest, and adherence thereto. If any deviation is observed, it should be provided with requisite examples.
The Reserve Bank stated that SCAs should comment specifically on instances observed/reported where the instructions of the controlling authority related to legal action for recovery or recalling of advances are not acted upon, the system of compromise settlement, the system of monitoring accounts under the IBC 2016, write off.
The Statutory Central Auditors should examine and comment on the appropriateness of the fraud risk management system and processes for the early detection, timely reporting to the RBI, investigation of frauds as also adequacy of provisioning for reported fraud and deviations observed in compliance with directives issued by the Reserve Bank.
The Reserve Bank wants the auditors to examine and specifically comment on the system of clearance of items debited or credited to suspense/sundry accounts with the focus on audit trail, along with the age-wise analysis of uncleared entries of suspense account, sundry deposit, etc. as on balance sheet date along with subsequent clearance thereof if any.
In case of any unusual entries observed in a suspense account, sundry deposit, etc. it should be specifically commented. It must be examined as well, if the bank has made adequate provision to uncleared entries in a suspense account, sundry deposits, etc., according to the guidelines of the Reserve Bank and to the satisfaction of the auditor.
The RBI says that the auditor should comment if the going concern basis of preparation of financial statement is appropriate and auditor’s evaluation of bank’s assessment of its ability to continue to meet its obligations for the foreseeable future, i.e., at least 12 months after the date of financial statements with reasonable assurance for the same.
It further states that any material uncertainties related to going concern should be disclosed. The auditor should also consider robustness of banks’ liquidity risk management system and controls for managing liquidity, as part of the ongoing concern basis, any external indicators that tell liquidity or funding concerns, the availability of short term liquidity support, and compliance with norms related to LCR (Liquidity Coverage Ratio) and NSFR among others.
Read our article:Roles and Responsibilities of Statutory Auditor