The Chartered Accountant • Journal of ICAI April 2022 • Vol. 70 • No. 10 • pp. 67–85 (Journal pp. 1239–1257)
AUDIT • STATUTORY BANK BRANCH AUDIT & REGULATORY REPORTING

LFAR Reporting and its Requirements

CA. A. MONY

The author is a member of the Institute of Chartered Accountants of India (ICAI). He can be reached at lrp2201@yahoo.co.in and eboard@icai.in.

Overview of the Revised LFAR Framework

The Reserve Bank of India has widely covered the scope of LFAR to converge the broad areas of credit risk, market risk, Assurance and operational risk, Capital Adequacy, Liquidity risk and going concern in the newly designed LFAR.

This article aims at giving a brief write up on the clause-to-clause points included in the LFAR for the Bank Branch Audit. This format is only an indicative one and the RBI has given leverage to the Central Statutory Auditors to add any further points requiring specific reporting from the Branch Auditors apart from the general points in the indicative format. Thus, it alludes that there is all possibility of a bank specific LFAR with additional clauses as per the reporting requirement envisaged by the Central Statutory Auditors.

“The members are expected to bestow utmost care and caution in the reporting as the new format is more subjective and is oriented towards discrete reporting from auditors which will turn out to be fixing specific accountability on the members.”

Indicative Format / Coverage in the Long Form Audit Report (LFAR) by Statutory Branch Auditors (SCB)

Name of Bank [To be filled by Branch Auditor]
Name of Branch [To be filled by Branch Auditor]
Branch Code [To be filled by Branch Auditor]
Zone / Circle Code [To be filled by Branch Auditor]
Financial Year [e.g., 2020-21 / 2021-22]
I. ASSETS

1. Cash

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Does the system ensure that cash maintained is in effective joint custody of two or more officials, as per the instructions of the controlling authorities of the bank? • Give details of custodians of cash.
• Verify the key register at random.
(b) Have the cash balances at the branch/ATMs been checked at periodic intervals as per the procedure prescribed by the controlling authorities of the bank? • The ONLINE ATM cash has to be checked with the cash scroll taken on the closing hours of 31st.
• In case of OFFLINE ATMs the cash is controlled by the central Hub.
• Cash with ATM replenisher should be reconciled with disbursement account maintained at branch.
(c)(i) Does the branch generally maintain / carry cash balances, which vary significantly from the limits fixed by the controlling authorities of the bank? • Verify the cash retention limit. See average cash balance, proper utilization of float.
• Desirable to verify physical cash on the date of audit.
• Physical cash at chest need not be verified. But the reporting to RBI of cash balance may be verified.
• Obtain a letter mentioning retention limit for auditor’s records.
(c)(ii) Does the figure of the balance in the branch books in respect of cash with its ATM(s) tally with the amounts of balances with the respective ATMs, based on the year end scrolls generated by the ATMs? If there is any difference, same should be reported. • The timing of taking scroll and the closing of balance sheet is vital for the reconciliation.
• In case of OFFLINE ATMs controlled by ATM Hub, branch auditor has limited role.
(d) Whether the insurance cover available with the branch adequately meets the requirement to cover the cash-in hand and cash-in transit? • The blanket insurance is usually taken by head office.
• Ensure that the copy of policy is at branch or get a representation to the effect.

2. Balances with Reserve Bank of India, State Bank of India and Other Banks

(For branches with Treasury Operations — Refers to balance with clearing house and with other banks)

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Were balance confirmation certificates obtained in respect of outstanding balances as at the year-end and whether the aforesaid balances have been reconciled? The nature and extent of differences should be reported. • The confirmation of balance needs to be obtained and copy kept for auditor’s record.
• Report difference if any with details.
• Reconciliation entries: if any to be verified with specific reference to long outstanding items, unusual items, revenue items requiring adjustments, etc.
• The account copy for the year needs to be verified to see huge cash withdrawals, its authority and requirement.
• Verify any credits for other claims as pension disbursement routed through the account.
(b) Observations on the reconciliation statements may be reported in the following manner:
The long outstanding entries, cash transactions and high value entries should be CRITICALLY examined and reported.
(b)(i) Cash transactions remaining un-responded (give details) • Get details of such un-responded entries if any and enquire into reasons and furnish date of squaring off, if done before completion of audit.
(b)(ii) Revenue items requiring adjustments / write-off (give details) • Usually clearing house charges may appear which should be taken as revenue expenses.
• MOC to be passed, if the amount is material.
(b)(iii) Other credit and debit entries originated in the statements provided by RBI/other banks, remaining un-responded for more than 15 days: • Old outstanding balances remaining unexplained/unadjusted.
• Give details for entries outstanding for more than 15 days.
(b)(iv) Where the branch maintains an account with RBI, the following additional matter may be reported: Entries originated prior to but communicated/ recorded after the year end in relation to currency chest operations at the branch/other link branches, involving deposits into/withdrawals from the currency chest attached to such branches (Give details) • This is applicable to branches operating Chest of RBI and direct link branches designated to maintain RBI account.
• The pipeline entries between chest and branch as on 31st Mar should be properly addressed by MOC.
• Any long outstanding entries other than year-end entries are to be verified CRITICALLY and reported.
(c) In case, any matter deserves special attention of the management, the same may be reported. • The reconciliation of cash balance with ATM replenisher with the base branch, un-responded entries of chest branches, holding huge cash balance without sufficient security etc. are to be reported.

3. Money at Call and Short Notice

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Has the branch kept money-at-call and short notice during the year? Usually this is applicable only at treasury branches. Specify if not applicable.
(b) Has the year-end balance been duly confirmed and reconciled? This is normally applicable at HO level.
(c) Has interest accrued up to the year-end been properly recorded? This is normally applicable at HO level.
(d) Whether instructions/guidelines, if any, laid down by the controlling authorities of the bank have been complied with? Verify compliance with treasury circulars.

4. Investments (For Branches Outside India)

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) In respect of purchase and sale of investments, has the branch acted within its delegated authority, having regard to the instructions/ guidelines in this behalf issued by the controlling authorities of the bank? Not applicable for branches in India
(b) Have the investments held by the branch whether on its own account or on behalf of the Head Office/other branches been made available for physical verification? Where the investments are not in the possession of the branch, whether evidence with regard to their physical verification have been produced? Not applicable for branches in India
(c) Is the mode of valuation of investments in accordance with the RBI guidelines or the norms prescribed by the relevant regulatory authority of the country in which the branch is located whichever are more stringent? Not applicable for branches in India
(d) Whether there are any matured or overdue investments which have not been encashed and / or has not been serviced? If so, give details? Not applicable for branches in India

5. Advances (The Core Section of LFAR)

Threshold for Large Advances:

The answers to the questions may be based on the auditor’s examination of all large advances and a test check of other advances. In respect of large advances, all cases of major adverse features, deficiencies, etc., should be reported. For this purpose, large advances are those in respect of which the outstanding amount is in excess of 10% of outstanding aggregate balance of fund based and non-fund based advances of the branch or Rs. 10 crores, whichever is less.

Auditor Guidance on Threshold: Obtain a list of advances above 10 crores or 10% of branch aggregate advances including fund based and non-fund based for thorough verification. Classify the borrower’s constitution-wise for allocation of work among auditors. Also classify as consortium advances, syndicated loans, multiple banking arrangement, group accounts, etc., for bringing more focus.

Dual-Methodology Framework:
• Transaction Audit: For all accounts above threshold, examine account-specific details: overall operations, cash vs. account transactions, business vs. personal transactions, cheque returns, operating at the brim of limits, frequent overdrawings, frequent inter-bank transfers, and round tripping.
• Process Audit: For accounts below threshold, verify overall control framework and procedures: documentation, request letters for OD, flagging stop-payments, monitoring/follow-up, credit department manning, and credit concentration.
• COVID Relief & ECLGS: Verify COVID relief packages and Emergency Credit Line Guarantee Scheme loans for special emphasis to Statutory Central Auditors (SCA).
Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) List of accounts examined for audit NEWLY ADDED TO BE FILLED AS PER TABLE.
(b)(i) Credit Appraisal Compliance: In your opinion, has the branch generally complied with the procedures/ instructions of the controlling authorities of the bank regarding loan applications, preparation of proposals for grant/ renewal of advances, enhancement of limits, etc., including adequate appraisal documentation in respect thereof. What, in your opinion, are the major shortcomings in credit appraisal, etc.? • Any comments on advance processing, preparation of proposals, analysis of financial credentials/statements, rating need to be reported.
• The appraisal report of branch manager and his comments and recommendation to higher authorities should be verified.
• If it is branch sanction, sanction order and comments of credit manager and senior manager/branch head to be verified.
(b)(ii) Quick Mortality in Accounts: Have you come across cases of quick mortality in accounts, where the facility became non-performing within a period of 12 months from the date of first sanction? Details of such accounts may be provided in following manner:
• Account No.
• Account Name
• Balance as at year end 		• Quick mortality is referred to accounts becoming irregular/sticky and stagnant from day one of availing or becoming NPA within one year of sanction.
• The sanction procedure, appraisal, group accounts, accounts opened anew as fresh customer, loans taken over should be given more emphasis.
(b)(iii) Interest Rate System Master Feeding: Whether in borrowal accounts the applicable interest rate is correctly fed into the system? Verification points include:
• Feeding of rate to account master.
• Linking of rates to MCLR.
• Periodicity of interest application.
• Change management from CORE.
• Simple Interest / compound interest Moratorium period interest (compounding factor during COVID period to be excluded).
(b)(iv) Floating Rate MCLR / EBLR Periodic Review: Whether the interest rate is reviewed periodically as per the guidelines applicable to floating rate loans linked to MCLR / EBLR (External Benchmark Lending Rate)? • The influence of CORE in the application of interest should be analysed.
• The sanction condition as floating/fixed should be fed to master properly.
(b)(v) Frequent Renewal / Rollover of Short-Term Loans: Have you come across cases of frequent renewal / rollover of short-term loans? If yes, give the details of such accounts. • Process of renewal/review should be verified.
• Rollover of renewal dates and making short/adhoc/limited review should be verified.
• Refer RBI Circular: RBI2020-21/Dos_CO-PPG_BC_1/11.01.002/2020-21 (August 2020).
• Bank policy for renewal/review to be obtained, strict adherence verified and deviations reported.
(b)(vi) Credit Rating from RBI Accredited Agencies: Whether correct and valid credit rating, if available, of the credit facilities of bank’s borrowers from RBI accredited Credit Rating Agencies has been fed into the system? • Comment if time lag between last rating to balance sheet date is more than 2 years.
• Deterioration in latest rating is to be considered for further monitoring.
• Interest rate setting attuned to rating granted to be verified.
• Accounts becoming NPA even after high rating should be commented separately.
(c)(i) Sanctions Beyond Delegated Authority & TOD/TOL Reporting: In the cases examined by you, have you come across instances of: (a) Credit facilities having been sanctioned beyond the delegated authority or limit fixed for the branch? Are such cases promptly reported to higher authorities? • Obtain latest extant guidelines of the bank regarding delegated powers.
• TOD/TOL powers, casual business powers, loan sanction powers need to be examined.
• Verify records / registers maintained for reporting to controlling authority.
• Obtain regular/exception report of TOD/TAL as on 31.3.2021 and compare with reports as on 28.2.2021 and 20.3.2021.
(c)(ii) Disbursement Without Complying with Sanction Terms: Whether advances have been disbursed without complying with terms and conditions of sanction? If so, give details. Selected accounts should be verified with special reference to sanction terms. Usual slippages are:
1) Failure to conduct pre-sanction and post-sanction inspection.
2) Legal audit of documents executed and obtained.
3) Creation of charge.
4) Conditions attached to and between consortium members.
5) Failure in obtaining personal guarantees of owners and family members, satisfaction letter, NOC etc. as per sanction.
(c)(iii) Loans for Buy-Back of Shares / Securities: Did the bank provide loans to companies for buy-back of shares/securities? • Find out for any increase in promoter’s shareholding pattern between last year and this year.
• If so, enquire source of buying such shares, and if buy-back, analyse for any funding made by bank just before buy-back.
(d)(i) Release Without Execution of Documents: Credit facilities released by branch without execution of all necessary documents. Give details. • Legal audit report needs to be verified for inadequacy of documentation.
• Obtain a letter of representation in this regard from branch manager.
(d)(ii) Deficiencies in Documentation & Non-Registration of Charge: Deficiencies including non-registration of charges, non-obtaining of guarantees, etc.? • Verify creation of charge: nature, extent, details, and location of assets charged (First charge, second charge, Pari-Passu charge).
• Obtain latest search report if any change in advances by our bank or any other bank/FI. Verify loan modifications with charge created.
• Obtain MRL from branch manager.
(d)(iii) Advances Against Lien of Deposits: Advances against lien of deposits granted without marking lien on deposit receipts and related accounts. • Compare list of advances against TDR with lien-marked report generated from system.
• Specific verification regarding continuation for TDR modified as to term, date, interest rate.
• Obtain MRL from branch manager.
• Deposit lien should extend to related loans/accounts to enforce general lien before return to customer.
(e)(i) Periodic Review & Age-wise Overdue Analysis: Is procedure for periodic review of advances followed? Provide analysis of accounts overdue for review/renewal:
a) Between 3 to 6 months [Earlier 6 months to 1 year]
b) Over 6 months [Earlier over 1 year] 		• Obtain due date report/diary of advances and inspections.
• Ensure no review is overdue for more than six months; classify as NPA if overdue beyond 6 months per prudential norms.
• Short reviews and time extensions must be commented on merits.
• Obtain confirmation from higher authorities if pending at their end.
(e)(ii) Stock / Book Debt Statements & Drawing Power (DP):
a) Is DP properly computed?
b) Whether latest audited financial statements obtained for accounts reviewed/renewed? 		• Verify stock statement register, date stamping, and DP calculation.
• Eliminate slow moving, obsolete stocks and unpaid creditors.
• Separate stock details for packing credit loans.
• Eliminate overdue and disputed debtors beyond stipulated sanction periods.
• Ensure DP is fed to system periodically for charging interest.
• In Consortium/MBA, verify share of DP communicated by lead bank.
• Verify audited statements with UDIN and CA membership number.
(e)(iii) Stock Audits:
a) System of obtaining periodic stock audit reports?
b) Compliance with system?
c) Details of cases where stock audit required but not conducted, or where conducted but no action taken on adverse features. 		• Stock audits conducted yearly above bank’s benchmark working capital limits.
• Obtain list from BM, verify reports, report adverse features.
• Report stock audits initiated but pending with special reference to delinquent accounts.
• Report branch regularization of adverse remarks.
(e)(iv) Audited Accounts of Non-Corporate Borrowers: Advances to non-corporate entities beyond bank limits without audited accounts. • Obtain list; verify financial statements, auditor seal, and membership number.
• Limit is now as per bank policy (earlier fixed at Rs. 10 lakhs and above).
(e)(v) Consortium & MBA Due Diligence Reports: Due diligence report in RBI format on record for consortium/multiple banking arrangements. • Information exchange between member banks.
• Sharing of DP and status of accounts.
• If non-lead branch, obtain copy from lead bank. Report if absent from file.
(e)(vi) Security Inspection & Significant Deterioration in Valuation: Physical verification of securities & substantial erosion in value compared to earlier valuation. • Periodical inspection reports and security verification must be recorded.
• Report long-pending inspections on COVID-affected borrowers.
• Master Circular Clause 4.2.9: Security value erosion below 50% classifies account as Doubtful straight away; erosion below 10% classifies as LOSS asset.
(e)(vii) Group Loan Security Coverage & Insurance: Deficiencies in value/inspection, unauthorized overdrawings, inadequate insurance. • Comprehensive analysis of loans to group concerns with overlapping charges on same security.
• Analyse overall asset coverage against group outstandings.
• Verify insurance register; confirm all policies contain bank clause; obtain MRL.
(e)(viii) Red-Flagged Accounts (RFA): Deviations observed related to bank policy on Red Flagged Accounts. • Obtain RFA policy and process.
• Synchronise SMA categorization and early warning signals.
• Examine EXIT-marked accounts, watch category, and delinquent accounts for red flagging.
(e)(ix) Top 5 Standard Large Advances: Comment on adverse features in top 5 standard large advances requiring management attention. • Mandatory minimum of 5 accounts selected based on exposure and CRITICALITY.
• Blend post-COVID conduct of accounts with auditor’s industry-specific knowledge.
(e)(x) Leasing Finance Activities: Compliance with guidelines relating to security creation, inspection, insurance, and accounting norms. • Verify lease financing where depreciation claim is made by bank.
• Report any inconsistencies with accounting standards/principles.
(f)(i) Automated System NPA & SMA Classification:
a) System-based classification into Standard, Substandard, Doubtful, Loss without manual intervention.
b) Alignment with RBI norms.
c) Implementation of SMA-0, SMA-1, SMA-2 classification.
d) MOC recommendations.
e) List of accounts > Rs. 10.00 crore upgraded or downgraded with reasons.
f) Compliance with IRAC provisioning guidelines. 		• Verify system reliability for programming errors, manual intervention in DP feeding, sanction condition tampering, ECLGS loans.
• Compare NPA statements across two periods for upgrades/downgrades.
• Verify bank year-end circular against RBI Master Circular.
• Review SMA reports and keep copy on record.
• Document justification for upgrades/downgrades above Rs. 10 crore with auditor remarks.
• Restructuring and re-phasing to be reported separately.
(f)(ii) Restructuring & Resolution of Stressed Assets: Reporting of restructured/rephased accounts; compliance with RBI Prudential Framework (June 7, 2019 Circular). • Refer RBI Circular: RBI/2018-19/203 DBR No. BP.BC.45/21.04.048/2018-19 dated June 07, 2019.
• Verify restructuring provisioning and compliance with Regulatory Packages I to V.
(f)(iii) Upgradations in NPA Accounts: Compliance with RBI norms and auditor disagreement. • Upgradation of restructured assets allowed only after satisfactory performance for one year.
• Verify critical upgradation factors: Fresh valuation of assets/security, borrower capital infusion, transfer of funds from other branches.
(f)(iv) Authorized Legal Action Pending Execution: Cases where recovery/recalling authorized by controlling authority but not initiated. • Obtain list of core NPAs; check stage of legal proceedings.
• Verify files for instructions from controlling authority; obtain MRL from BM.
(f)(v) IBC Mandated / Initiated Accounts: Accounts where IBC process is mandated but not initiated, or initiated by bank/other creditors. • Obtain list from BM; verify adequacy of provisioning made under IBC norms.
(f)(vi) Credit Guarantee Claims (ECGC / DICGC): Lodgement, settlement, claims rejected, and impact on provisioning. • Verify DICGC recovery remittance.
• Verify pending and rejected ECGC claims; ensure share of recovery forwarded to DICGC.
• Evaluate overseas buyer country risk for rejected claims.
• Ensure proper provisioning of ECGC rejected accounts at branch or report to CSA.
(f)(vii) Triennial Revaluation of Immovable Securities in NPAs: Valuation reports from approved valuers once in 3 years. • Immovable security valuation must not be older than 3 years.
• Insist on fresh valuation if post-COVID market value eroded.
• RBI insists on valuation by two valuers for properties above prescribed limits; obtain MRL.
(f)(viii) Compromise / OTS / Write-offs > Rs. 50 Lakhs: Compliance with recovery policy for settlements/waivers exceeding Rs. 50.00 lakhs. • Obtain list of OTS/write-offs > Rs. 50 lakhs.
• Verify sanction authority, accounting, and compliance with conditions.
• Note: OTS/settlement does not impact prudential norms until final settlement/write-off.
(f)(ix) Execution of Court / DRT Decrees: Age-wise analysis of decrees obtained and pending execution. • Obtain list of decrees pending execution from legal department/branch and report.
(f)(x) Recovery Appropriation Policy: Proper appropriation of recoveries between principal and interest. • Verify bank policy: general rule is adjusting first towards interest then principal.
• Note any divergent practices in merged banks vs. parent bank.
(f)(xi) Centralised Processing Centres (CPC) Documents: Availability of loan documents held at central processing centres. • Report if physical custody of centralized documents could not be verified.
• Report list of documents sought but not provided separately.
(f)(xii) Major Deficiencies in Supervision: List major deficiencies in credit review, monitoring, and supervision. • Report follow-up on watch category, SMA 0 to 2 accounts, and recovery initiatives.
(g)(i) Devolved LCs / Invoked BGs During the Year: List of borrowers with details of LCs devolved or guarantees invoked during the year [Earlier at year-end]. • Transfer invoked BGs to protested bills account per HO guidelines.
• Verify guarantees closed during the year.
• Comment on LCs due near balance sheet date for delinquent borrowers; obtain MRL.
(g)(ii) Unpaid Devolved LCs / Invoked Guarantees: List of borrowers where LCs devolved / guarantees invoked but unpaid [New Format]. • Verify overdue LCs in NPA accounts.
• Insist on provisioning if confirmed/potential loss; escalate to SCA; obtain MRL.
(g)(iii) Interchangeability Post-Devolvement: Instances where interchangeability between fund and non-fund based facilities allowed post-devolvement of LC / invocation of BG. • Check if devolved LC was debited to CC/OD to avoid NPA tagging.
• Report impact on NPA classification to CSA.
• Verify limit enhancements against security cover and borrower capacity.

6. Other Assets: Suspense Accounts / Sundry Assets

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a)(i) Does the system ensure expeditious clearance of items debited to Suspense Account? Details of outstanding entries in excess of 90 days. Does scrutiny reveal unrecoverable balances requiring provision/write-off? • Obtain jotting of sundry deposits and suspense accounts as on 31st March.
• Verify long pending, unusual and high-value items.
• Long pending debits older than 90 days require special reporting.
• Irrecoverable debits must be provided for under prudential norms.
(a)(ii) Does test check indicate any unusual items? Report nature and amounts. Are there any intangible items under this head (e.g., losses not provided / pending investigation)? • Obtain details and MRL from branch manager; report material figures.
• Any loss DEBITED to suspense account must be reported separately.
II. LIABILITIES

1. Deposits

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Does the bank have a system of identification of dormant/inoperative accounts and internal controls with regard to operations in such accounts? Instances where guidelines were not followed? • Study internal control of identification, classification, and activation.
• Obtain list of inoperative accounts above benchmark.
• Verify operations involving high value put through inoperative accounts immediately upon activation from AML angle.
(b) Unusual large movements (increase or decrease) in aggregate deposits held at year-end after balance sheet date till audit date? • Obtain general ledger extract of last reported Friday and compare with 31st March figures.
• Verify post balance sheet figures for window dressing.
• Obtain written clarification from BM for deviations; report material variances.
(c) FCNR(B) deposits auto-renewal: Did branch satisfy itself regarding non-resident status, adhere to regulatory guidelines, and dispatch original/soft receipts? • Pure branch monitoring matter.
• Obtain internal instructions on ensuring residential status during auto-renewal of FCNR deposits.
• Report compliance or lack of instructions.
(d) Compliance with regulations on minimum balance requirement and levy of charges for non-maintenance in individual savings accounts? • Charges must only be proportionate to the shortfall in minimum balance.
• Sample accounts just below threshold and verify compliance.

2. Other Liabilities & 3. Contingent Liabilities

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
2(a) Bills Payable, Sundry Deposits, etc.: Number of items and aggregate amount of old outstanding items pending for 1 year or more. • Obtain jotting of sundry deposits, bills payable, pay orders, banker’s cheques as on 31st March.
• Verify long pending and unusual items.
2(b) Unusual items, material withdrawals, or debits in sundry deposits? • Obtain ledger copy of sundry deposits; verify debits and sanctity.
• Keep ledger copy on auditor records; obtain MRL from BM.
3 Contingent Liabilities: Major items of contingent liabilities (other than constituent liabilities like guarantees/LCs) not acknowledged by branch. • Common items include rent escalation demanded by landlord pending sanction, litigations on branch premises, ATM claims and customer complaints.
• Obtain details and MRL from branch manager.
III. PROFIT AND LOSS ACCOUNT
Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Test checking of interest / discount / commission / fees: Excess or short credit of material amount? • If system applies patches to software, verify date of receipt, updation at branch, maintained records, and system-generated logs.
(b) Compliance with RBI Income Recognition Norms (IRAC): De-recognition of interest on NPAs. • Ensure accounting does not result in income recognition on NPAs.
• Treatment and apportionment of recoveries must follow bank accounting policy consistently (read with Para 5(f)(x)).
(c) Test check of interest on deposits: Excess or short debit of material amount? • Study system of interest change updates and patch verification logs.
(d) System of providing interest accrued on overdue / matured / unpaid / unclaimed deposits including deceased depositors? • Study system for consistency with accounting standards.
• Report procedure for handling deposits of deceased without nominees, transmission to legal heirs, and court orders.
(e) Divergent trends in major income/expenditure items compared to previous year not satisfactorily explained? • Verify P&L analysis statement sent to controlling office.
• Conduct analytical review of deposits/advances with interest margins.
• Compare ratio of interest paid to deposits vs. interest received to advances across both years; report major CASA divergences to CASA.
IV. GENERAL

1. Gold / Bullion / Security Items

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Joint custody of two or more officials for gold/bullion? • Restricted to metal desk branches; examine custody and physical handling.
(b) Adequate records for receipt/issue/balances of gold/bullion; periodic verification for excess/shortage? • Verify against extant RBI guidelines.
• Report stock held from suspended gold business with quantity, branch GLB value, custody, and reason for holding.
(c) Internal controls over issue and custody of security items (TDRs, Drafts, Pay Orders, Cheque Books, Travellers Cheques)? Cases of missing/lost items? • Verify movement passbook between vault and counters.
• Merged Banks Critical Focus: In merged entities (Corporation Bank, Allahabad Bank, Dena Bank, Vijaya Bank, Syndicate Bank), reporting old stationery is VERY CRITICAL from control perspective.

2. Books and Records

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
(a) Software / systems used at branch not integrated with CBS? • Check export platforms, locker software, cheque book issue systems, separate MIS tools, EM Creation registers, and their CBS integration.
(b)(i) IS Audit adverse features pending compliance having direct/indirect bearing on branch accounts? • Critically examine financial aspects of IS audit.
• Report failure to evaluate financial implications of system/hardware errors as an IS audit weakness.
• Report pendency of IS audit.
(b)(ii) Generation and verification of exception reports at prescribed periodicity? • Verify regularity in generation and authentication; report non-generation.
(b)(iii) Expeditious compliance of daily exception reports and major pending observations at year-end? • Focus on: TOD/TAL reports, Online TODs, DEBIT in Income & CREDIT in Expense, Routing Account reports, Loan Overdues, Disbursement against clearing, Cash transactions without ID proof, Debit balance in SB accounts, Incomplete KYC reports.
(b)(iv) Procedures for manual intervention to system-generated data, authentication, and audit trails? • Verify procedures and audit trail for changing parameters in masters, interest rates, limit masters, EMI, and initial holiday periods.
(b)(v) Data integrity (data entry, correctness, no back-ended strategies) used for MIS at HO/CO? • Examine data accuracy and timelines of updating DP, security values, insurance, and short review dates.

3. Inter-Branch Accounts & 4. Frauds

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
3 Inter-Branch Accounts: Expeditious compliance with HO communications regarding unmatched transactions? Un-responded queries beyond 7 days? • Obtain balance jotting and year-wise break-up.
• Report core-to-core and core-to-non-core entries separately.
• Report all pending items beyond 7 days.
4(i) Frauds detected/classified but confirmation of reporting to RBI not available on record? • Obtain fraud details and MRL from BM.
• Recommend 100% provision for any amount lying in fraud account.
• Report internal control vulnerabilities.
4(ii) Suspected or likely fraud cases reported to higher office? Details of investigation status. • Report any indications based on auditor’s professional skepticism.
4(iii) Potential Risk Areas Leading to Perpetuation of Fraud: Detailed comments on potential risk areas: falsification of accounts; misappropriation of funds through related party / shell company transactions; forgery and fabrication of invoices, debtor lists, stock statements, trade credit documents, shipping bills, work orders, encumbrance certificates; use of current accounts outside consortium to divert TRA funds; fabricated debtors/creditors; fake export bills; invoice overstatement; fly-by-night operators; round tripping of funds. • The branch auditor must provide comprehensive comments across all potential risk vectors and early warning red flags observed during audit.
4(iv) Early Warning Framework (EWS) effectiveness and classification as Red Flagged Accounts (RFA)? • Verify EWS reports generated, SMA tracking, and RFA classification framework.

5. KYC/AML, 6. MIS Data Integrity & 7. Miscellaneous

Clause LFAR Questionnaire Requirement Auditor Verification Points & Guidance
5 KYC / AML Guidelines: Adequate systems and processes to ensure adherence to KYC/AML guidelines towards prevention of money laundering and terrorist financing? Did branch follow guidelines based on test check? • Focus on Foreign Inward remittances, foreign cheques, and funds from sensitive countries.
• Cross-verify forex transactions with R Returns submitted to RBI.
6(a) MIS Data Integrity: Proper systems/procedures to ensure data integrity for inputs used for MIS at corporate office level and supervisory reporting? Instances where data integrity was compromised? • Examine data accuracy and timelines of DP updates, security values, insurance, short review dates affecting corporate MIS integrity.
7(a) Consideration of Adverse Audit Reports: Have you considered major adverse comments arising out of:
i) Previous year’s Branch Audit Report / LFAR;
ii) Internal / Snap / Concurrent audit reports;
iii) Credit Audit Report;
iv) Stock Audit Report;
v) RBI Inspection Report;
vi) Revenue Audit;
vii) IS / IT / Systems Audit;
viii) Special inspection / investigation reports? 		• Report in a Tabular Form: date of audit, next due date, pendency after due date, branch replies, closure by controlling authority, and compliance with previous year MOC.
7(b) Other Matters for SCA / Management Attention: Any other matters branch auditor would like to bring to the notice of management or Statutory Central Auditors? • Report inconsistencies with RBI guidelines or statutes.
• Explicitly disclaim matters dealt with at HO where branch has little control.
• Report local matters having material impact on branch business, P&L, or balance sheet.