Audit of Banking Companies

Introduction

The audit of Banks is made compulsory under the enactments governing the Banks. “Banking is such a unique industry where you do not want your competitor to fail.” Banks and Financial Institutions (FIs) play a central role in the economy. They hold savings of public provide a means of payment for goods & services, finance the development of business and trade.

Therefore, Banks and FIs must command the confidence of the public and those with whom they do business. Thus stability of the banking and financial systems, both nationally and internationally, recognized as a matter of general public interest.

As a result, naturally, stakeholders’ expectation from external or statutory auditors of a bank and FI is much higher than audit of another entity. From local view points, a number of high profile fraud/scam took place in recent years involving a number of Banks and FIs in Bangladesh. Many such fraud/scams took place due to the absence of robust risk management, internal control and internal audit function in those banks. In some cases, although these functions were present but it failed to operate effectively.

Aftermath of these scams/irregularities, as usual, along with others, criticisms were also directed towards auditors of those banks/FIs.

Unfortunately, many of these criticisms towards auditors were driven by emotion, and not by the fact. As a result, instead of constructive feedback/ criticism that could have assisted auditor to improve their quality, these were turned out to be wholesale abuse and at times finding a scapegoat.

Having said that, it is also imperative to note that as per the local regulations, roles and responsibilities of an auditor of Bank/FI are far greater than what is in place in other countries.

Additional risk factors for Bank /FI audit

o  Custody of large amount of monetary items

o  Assets that can rapidly change in value

o  Operate with high leverage (capital to assets)

o  Short term deposit, solvency, and liquidity issue

o  Complex accounting and IT systems

o  Assume significant commitments

o  Wide spread of branches and departments

o  Highly regulated with strict enforcement

o  Cross border involvement and FX issue

Scope of an audit of a Bank/FI

As per the current legislation in place, an auditor of a Bank/FI shall conduct the audit in compliance with the following major requirements:

• Bangladesh Standards on Auditing;
• The Companies Act, 1994;
• The Bank Company Act 1991 (as amended in 2013) for Banks and the Financial Institutions Act, 1993 for FIs;
• Specific regulations issued by Bangladesh Bank (e.g. Prudential Guidelines for Banks and FIs);
• Bangladesh Securities and Exchange Commission Rules and Regulations (if applicable).

Bangladesh Standards on Auditing (BSA)

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements of the Bank/FI. The procedures selected include assessment of the risks of material misstatement of the financial statements of the Bank/FI, whether due to fraud or error.

In making those risk assessments, auditor considers internal control relevant to Bank/FI’s preparation of financial statements in order to design audit procedures that are appropriate in circumstances, but not for the purpose of expressing an opinion on the effectiveness of those internal control. An audit also includes evaluating appropriateness of accounting policies used and reasonableness of accounting estimates. Based on these, the auditor provides an opinion as to whether, the financial statements of the Bank/FI give a true and fair view of the financial position of the Bank/FI at year-end and of its financial performance and cash flows for the year then ended in accordance with Bangladesh Financial Reporting Standards (BFRS). It is worthwhile to note that some guidelines of Bangladesh Bank are quite different to BFRS.

The Companies Act 1994

As per Section 213, paragraph 2 of the Companies Act, 1994 an auditor shall, amongst other inquire about the following:

a)     Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members:

b)     Whether transactions of the company which are represented merely as book-entries are prejudicial to the interests of the company;

c)     If the company is not an investment company or a banking company, whether any assets of the Company comprising of shares, debentures and other securities, have been sold at a price less than at which they were purchased by the company;

d)    whether loans and advances made by the company have been shown as deposits;

e)     whether personal expenses have been charged to revenue account;

f)      If any shares have been allotted for cash, whether cash has actually been received, and if no cash has actually been so received, whether the position as stated is correct, regular and not misleading.

As per Para 4, the auditor’s report shall state;

a)     whether he has obtained all the information and explanation which to the best of his knowledge and belief were necessary for the purposes of his audit;

b)     whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

c)     Whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

The Bank Company Act 1991

As per Section 39, Para 3 of the Bank Company Act 1991, as amended in 2013, in addition to the requirements of Section 213 of the Companies Act 1994, an auditor of a Bank shall also state the following matters in his/her report:

·        Financial statements of the Bank have been drawn up in conformity with prevailing rules, regulations and accounting standards as well as related guidance issued by Bangladesh Bank;

·        Adequate provisions have been made for advance and other assets which are in our opinion, doubtful of recovery;

·        The records and statements submitted by the branches have been properly maintained and consolidated in the financial statements;

·        The information and explanations required by auditors have been received and found satisfactory;

·        Capital Adequacy Ratio (CAR) as required by the Bangladesh Bank has been maintained adequately during the year;

·        Minimum coverage of risk-weighted assets during the course of audit; and

·        Any other matter which need to be brought to the attention of shareholders.

The following additional reporting requirements have been inserted through amendment in 2013, where an auditor is also supposed to report on:

·        Adequacy of internal audit, internal control and risk management related process;

·        Any fraud/forgery, irregularities or administrative error or anything harmful for the Bank committed by the officer-staff of the bank or its associated entity came to the attention of the auditor; and

·        If applicable, whether subsidiary company has been audited and properly consolidated.

Paragraph 4 of section 39 also requires an auditor of a Bank to report on the following matters immediately to Bangladesh Bank:

·        Any serious violation of the Bank Company Act 1991;

·        Due to loss, capital of entity came down below 50%;

·        Any other serious non-compliance occurred, including doubt on repayment of due to creditors; and

·        There is doubt whether assets are adequate to meet demand of creditors.

 

The Financial Institutions Act 1993

As per Section 24, paragraph 6 of the Financial Institutions Act 1993 an auditor shall inform Bangladesh Bank,

·        There has been serious violation or non-compliance of the FI Act 1991 or a criminal offence took place due to fraud or dishonesty;

·        Due to loss, capital of entity came down below 50%;

·        Any other non-compliance occurred, including doubt on repayment of due to creditors;

·        There is doubt whether assets are adequate to meet demand of creditors.

As per FID Circular 03 dated 02 March 1999, an auditor of an FI shall also state the following matters in his/her audit report:

·        Financial statements of the FI have been drawn up in conformity with prevailing rules, regulations and accounting standards as well as related guidance issued by Bangladesh Bank;

·        Whether adequate provisions have been made for advance and other assets which are in auditors opinion, doubtful of recovery;

·        The records and statements submitted by the branches have been properly maintained and consolidated in the financial statements; and

·        The information and explanations required have been received and found satisfactory. The same FID circular also requires an auditor to give specific focus and make observation on the following matters:

·        Whether internal control of the FI is in all respect and to prevent fraud-forgery;

·        Whether require policy and procedures have been followed for disbursement of loans and leases;

·        Whether required instructions of Bangladesh Bank have been followed for classification of loans and leases, provisioning and profit/interest in suspense;

·        Whether there are any mismatch on maturity of assets and liabilities and its potential impact on liquidity;

·        Whether there has been any irregularities adopted to increase profit;

·        Whether proper steps have been taken to rectify irregularities highlighted by Bangladesh Bank inspection team.

·        Whether various circulars issued from other departments of Bangladesh Bank have been followed properly; and

·        Whether internal policies have been properly followed.

 

Critical matters of the Bank Company Act

Section Title

10 Disposal of non-banking assets

13 Maintenance of Capital

14 Regulation on authorized, subscribed and paid-up capital and voting

rights

14 A Restriction on holding of shares

14 B Significant Share holder

15 (9) Number of director and independent director

15 (10) Number of directors from individual family

15 AA Term of Managing Committee

15 B Role of committee

15 C Internal Audit and Control

18 Submission of related party information

19 Restriction on commission, brokerage, discount etc. on sale of shares

22 Restrictions on the payment of dividends

23 Restriction on holding directorship

24 Statutory Reserve

25 Maintenance of CRR & SLR

26 A Holding share of any other company

26 B General Limitation for credit line

26 C Transaction with the related person

27 Restriction on loans and advances

28 Restriction on waiver of loans

28 Restriction on waiver of loans

32 Opening or transferring of business center

33 Maintenance of liquid assets

34 Assets in Bangladesh (Loan Deposit Ratio)

35 Unclaimed deposits and valuables

36 Half yearly report

38 Accounts and balance sheet

40 Submission of reports

42 Display of audited balance sheet

Assessment of Risk Management

In addition Bangladesh Bank has also issued guidelines on risk based capital adequacy, stress testing and managing the banking risks in the following six core areas: Internal Control and Compliance Risk Foreign Exchange Risk Credit Risk Asset Liability Management Risk Money Laundering Risk ICT Security Risk An auditor of a Bank need to review compliance of these guidelines by that Bank.

Effective audit

It is very important to note the fact that the quality of the external auditor’s opinion would also be influenced by multiple elements, notable amongst those are the proper observance of various roles and responsibilities of not only external auditors but the following parties as well: - the Bank’s Board of Directors;

o  The Bank’s Management; and

o  The supervisor (i.e. B Bank) and other regulators Therefore, commitments from all stakeholders required.

Salient Features of Enactments Affecting Banks:

1.     Restriction of Business:According to banking regulation act, a banking company is one which carries on the business of banking in Bangladesh includes foreign company carrying on banking business in Bangladesh.

A banking company is not allowed to carry on any business except those permitted. Banks to do the following business:

a.      Borrowing and the landing of money

b.     Dealing in negotiable/quasi negotiable instrument

c.      Issuing letter of credit/travelers cheques /circular notes

d.     Buying and selling of bullions, foreign exchange

e.      Underwriting, dealing in shares etc. acting as managers to public issue of share etc.

f.      Providing safe deposit vaults.

g.     Carrying on agency, guarantee and indemnity businesses

h.     Managing, selling or dealing with property acquired in full or part settlement of its claims (non-banking assets)

i.       Acting as trustees, executors

j.       Any other business notified by government

2.     Capital requirements:The act contains minimum capital to be maintained banks. Banks have to maintain at least 50% of required capital as tier 1 capital

Tier 1 Capital:Tier 1 capital called ‘core capital’ comprises of highest quality of capital elements that consists of:

a.      Paid up capital

b.     Non-Repayable share Premium account

c.      Statutory reserve

d.     General reserve

e.      Retained earnings

f.      Minority interest in subsidiaries

g.     Non-cumulative irredeemable preference shares

h.     Dividend equalization account,

Tier 2 Capital: Tier 2 capital called ‘supplementary capital’ represent other elements which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank and consists of:

a)     General provision

b)     Revaluation reserves

         i.           Revaluation reserve for fixed assets

        ii.           Revaluation reserve for securities

       iii.           Revaluation reserve for equity instrument

c)     All other preference shares

d)    Subordinated debt

Tier 3 Capital: Tire 3 capital called ‘Additional supplementary capital’, consists of short-term subordinated debt (original maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting a proportion of the capital requirements for market risk.

3.     Reserved Fund:All scheduled banks in Bangladesh have to maintain cash reserved ratio (CRR) and statutory liquidity ratio (SLR) in compliance with the instruction given in clause (1) of article 23 of Bangladesh bank order, 1972.

4.     Cash Reserve Ratio (CRR):At present, the required CRR is 6% on bi-weekly average basics of the average total demand and time liabilities (ATDTL) with a provision of minimum 5.5% on daily basic of the same ATDTL.

5.     Statutory liquidity Ratio (SLR): At present, the required SLR is 13% daily for conventional banks and 5.5% daily for Islamic sharia’s based banks and Islamic shari’ah based banking of conventional banks of their average total demand and time liabilities.

6.     Dividend:Banks cannot pay dividend unless all capitalized expenses are fully wiped

7.     Accounts:According to every banking company shall prepare its financial statements in the format prescribed in third schedule as of 31st march of each year.

8.     Audit: The act deals with audit of the accounts. The accounts of theIndian banking companies shall be audit by chartered accountants.The appointment, powers, duties, removal and liabilities of auditor are as same as company auditor’s. In case of audit of nationalized banks, the statutory auditor shall send his audit report to government and Bangladesh bank. The audit report shall state.

a.     Whether in his opinion. The balance sheet is a full and fair balance sheet containing all necessary particular and his property drawn up so as to exhibit true and fair view of state of affairs of the bank or not.

b.     Whether he has obtained satisfactory information and explanation or not.

c.      Whether the transactions which have come to his notice are within powers of bank or not.

d.     Whether the returns received from branches are found to be adequate or not.

e.      Whether profit and loss account give true and fair view of profit and loss of the bank for the period.

f.      Any other matter which auditor wants to bring to the notice of Bangladesh Bank.

Accounting system of a Bank

The business of a bank generally consists of acceptance of deposits, lending, investment, doing agency and other utility functions. All these transactions occur in any of these modes viz, cash, transfer of clearing. Banks follow double entry system of accounting. If one effect of a transaction (debit or credit) involves cash, it is called cash transaction. Transfer transections involve entries affecting two account heads of a bank other than cash. Clearing transections involve transfer of funds into or out of branch to other members of clearing house. The bank categories the transections into three of these to have close check of items comprised therein. The banks do not make use of journal vouchers. Rather, the slips used in ordinary business of a bank (like cheques, paying-in-slip, dischargeddeposit etc.)are used to make entries in ledger. Based on these slips or vouchers, clerks make entries in subsidiary ledgers maintained for each type of deposits/loans. These slips are collected at the day-end and entries are made in supplementary day books. Main day book is writing from these records. Daily supplementary day books are tallied with main day book. General ledger posting is made from day book. Periodically, the individual balances from subsidiary ledger are extracted and are compared with the respective total control accounts, maintained in general ledger to check the accuracy. Thus slip system of posting and existence of sectional balancing are unique features of accounting system of a bank.

Approaches of Bank Audit 

The statutory auditor of a bank cannot carry out post and vouch audit. It is sometimes, described as a balance sheet audit, a system audit and mostly an audit of advances. Though a bank audit cannot be taken to be all those only, these descriptions do throw light an approach adopted in bank audit. As there are special features in accounting of banks, so too are audit approaches.

(a)   Bank audit is a time-framed program

(b)  The aim of statutory audit it to express opinion on truth and fairness of balance sheet item and profit/loss of bank.

(c)   The transections of a bank are voluminous, repetitive. An auditor cannot checks all these the auditor cannot be familiar with signatures of all deposit holders. No useful purpose is to be served in wasting time on checking routines.

(d)  There exists well laid procedures to effect internal checks. What matters for an auditor is to apply checks and tests to ensure that the system actually functions effectively.

(e)   As auditor gives opinion on items of balance sheet, his attention will be more drawn on item ‘advance’ because the item advance constitutes major item of assets in the balance sheet. Hence the statutory audit of a bank can be described as an audit of

Balance sheet, system and advances.

Internal Control System in a bank

Good internal check is a pre-requisite in operating system of a bank for matters of convenience and control. Main internal controls operating in a bank are detailed hereunder:

(a)  Division of work: no individual clerk has control over a transaction from origin to end.

(b)  Slip system of posting: original vouchers evidencing transactions are used for making record in ledgers.

(c)   Job rotation among staff periodically.

(d)  Existence of sectional balancing system ensures accuracy of data at any point of time.

(e)   Joint custody: prescription of joint custody for dealing with vulnerable assets like crash, jewels pledged etc.

(f)   Authorization levels: existence of clear-cut authority level for Incurring monetary commitments either by way of loans, investment or incurring of expenditure (capital or revenue)

(g)  Monitoring: the transection effected by an officer is put to well-lead monitoring system. Self-monitoring and superior-monitoring occur in bank.

(h)  Review: independent review of operation by inspector, internal auditors and statutory auditors periodically or at surprise intervals add effective control to the system.

(i)   Reporting: periodical control statements on various operational areas are often submitted to the controlling authorities by banks.

Steps of bank audit

Like any other audit, the auditor has to plan and proceed in bank audit. In particular, he may identify the following areas as important in his programming:

(a)  Evaluation of internal control system

(b)  Checking of advance

(c)   Checking of other items of assets

(d)  Checking of liabilities

(e)   Scrutiny of P&L items

(f)   Making audit report

To evaluate internal control system, the auditor can make auditing in depth in respect of certain transactions. He may study the reports of internal auditor and inspectors to identify areas of frauds or malfunctioning. Checking of advances requires much time and energy of auditor.

Special Liabilities Imposed on the Auditors of Banking Company

According to Sectio30 (3) of The Banking Company act 1994, the auditor of a banking company incorporated in India is required to state in his report in addition to matters required by Section 227 of the Companies Act.

1.     Whether or not the information and explanation required by him have been found to be satisfactory;

2.     Whether or not the transections of the banking companies which have come to his notice have been within the powers of the company;

3.     Whether or not the returns received from the branch offices of the company have been found adequate for the purpose of audit;

4.     Whether the profit and loss account shows a true balance of profit and loss for the period covered by such account;

5.     Any other manner which he considers should be brought to the noticeof the shareholders of the company.

The accounts of such a company must be audited by an auditor duly qualified under the Companies Act or by a person who is duly qualified to be an auditor under the law of the country in which the company has been incorporated.

The auditor of a banking company will have the same powers, duties, responsibilities and is subject to the same penalties as that of an auditor appointed under the company act.

The auditor should examine the provisions of bad and doubtful debt because the advances and loans in the case of bank are other than those considered bad and doubtful.

If an auditor wilfully makes a false statement in any statement, returns, balance sheet, etc. or wilfully omits to make a material statement, he is liable to be imprisoned up-to a period of three years and is also to be fined.

Checking of Assets

Besides advances, the balance sheet contains the following assets:

Cash, Balance with Bank

Balance with other Banks, money at call and short notice

Investment, Fixed Assets, Others Assets

The auditor should physically check the cash balance as on the date of his audit. He should get all records and scrutinize them. He should see that cashers scroll, balance in cash book and general ledger balance for cash-all tally with each other in respect of receipts, payment and balance. He should obtain certificate of balance from manager of the bank for his records. Balance with other banks, money at call and short notice are checked by verifying confirmation of balances obtained from other bank/borrowers. If balance shown by them differs from that shown by books of the bank he should obtain reconciliation statement. He should scrutinize cause of difference and satisfy himself that nothing is unusual.

Investment: Auditor should check that efficient internal control operates with various aspect of investment viz – issuing order for purchase, decision to sell, custody, making entries in records etc. he should physically check all investments with bank to ensure ownership of bank and encumbrance if any. Where investments are with other party, say, brokers or safe deposit agency, he must ensure that there is nothing unusual in their having bank‘s investments. He must obtain written confirmation from them. The auditor should check the valuation of investments is properly made. According to gosh committee (1982) recommendations the investments are to be classified into permanent or current investment depending on the intention of bank. The permanent investment can be shown at cost or market value on a consistent basis. But current investments must always be shown at cost or market value whichever is lower. The auditor should ensure that bank complies to this valuation policy.

Checking of Liabilities

In capital and liability side of a bank the following appear: Capital, Reserve and Surplus, Deposits, Borrowings and other liabilities.

In checking capital, the auditor should ensure that legal requirements as regards to capital are met by the bank. In checking reserves, the auditor should see that reserve fund is created as per section 17 of B.R act. He must see that no appropriations are made out of it without RBI Approval. He must scrutinize various types of deposits and study the trend in their growth. He must satisfy himself that the deposits figure is not ‘bloated’ by adopting any window dressing method. While checking borrowings, he must satisfy himself about the power of the bank to borrow, the terms and conditions attached to borrowings. The auditor should ensure that adequate provision is made in respect of interest accrued on deposits but not paid to deposit holders. Similarly it is to be ensured that all outstanding expenses, provision for bounds, gratuity etc.

Scrutiny of Profit and Loss Items

In income side, interest earned on advantage constitute major revenue. Income from investment, discount on bills purchased etc. also constitute important sources of revenue. The auditor should ensure the income is properly recognized as per RBI guidelines. In respect of discount on bills, he must check rebate on unexpired discount had been created.

In expenditure side,interest on deposits constitutes major expenses. He must check few cases to ensure the accuracy. Unpaid interest should be adequately provided for. The auditor should test-check other items of expenditure like salary, depreciation, loss on sale investment, miscellaneous expenses.

Audit of Advanced

Checking of advances is a major area of bank audit. In checking advances, an auditor is guided by the following aims in viz:

1.     To check that there exist an effective internal control in various areas of credit management

2.     To check that the that the advance is shown in the balance sheet fairly in its realizable value

3.     To check that the income generated by the advance is properly recognized and measured and

4.     To check various information’s required to be disclosed in financial statements are properly disclosed

Classification of Advance

Advances in a bank can be classified into –

Facility-wise

a)     Cash credit, overdraft, demand loans, bills purchased and discounted

b)     Term loans

Cash credit, overdraft are drawl accounts with limit attached. Demand loans are repayable on demand or within a short period say, 36 months. Bills purchased and discounted are facility granted to drawer or holder of bills. Term loans mean loans repayable by instalments exceeding 36 months.

Security-wise

(a)   Secured loans

(b)  Unsecured loans

(c)   Loans guaranteed by banks/government

The security available for secured loan may be hypothecation, pledger equitable mortgage sector-wise

(a)   Advances to priority sector like agricultural advantages, advances to SSIs, or other priority industry, service or business

(b)  Advances to public sector

(c)   Advances to other sector

 Making report 

The report by the auditor should be in the prescribed format. The requirement of report had been discussed already in audit of bank (salient features of enactments). In addition to this report, RBI has issued a questionnaire called long form audit report (LFAR). It has prescribed LFAR for central auditor and LFAR for brace auditor. The questionnaire contains various areas of banks-assets, liability, income, expenditure, internal control, accounting accuracy, inter-branch transactions, reports of internal auditor, inspector, and frauds etc. the auditor is required to make specific comments on each item in the questionnaire.

Independent Auditors' Report, 2016

To the Shareholders of Sonali Bank Limited

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Sonali Bank Limited and its subsidiaries (the "Group") as well as the separate financial statements of Sonali Bank Limited (the "Bank"), which comprise theconsolidated balance sheet and the separate balance sheet as at 31 December 2016, and the consolidated and separateprofit and loss accounts, consolidated and separate statements of changes in equity and consolidated and separate cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatoryinformation.

Management's Responsibility for the Financial Statements and Internal Controls

Management is responsible for the preparation of consolidated financial statements of the Group and also separatefinancial statements of the Bank that give a true and fair view in accordance with Bangladesh Financial ReportingStandards as explained in note 2.00 and for such internal control as management determines is necessary to enablethe preparation of consolidated financial statements of the Group and also separate financial statements of the Bankthat are free from material misstatement, whether due to fraud or error. The Bank Company Act, l99l as amended and the Bangladesh Bank Regulations require the Management to ensure effective internal audit, intimal control and risk management functions of the Bank. The Management is also required to make a self-assessment on the effectiveness of anti-fraud intimal controls and report to Bangladesh Bank on instances of fraud and forgeries.

Auditors' Responsibility

Our responsibility is to express an opinion on these consolidated financial statements of the Group and the separate financial statements of the Bank based on our audit. We conducted our audit in accordance with Bangladesh Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statements of the Group and separate financial statements of the Bank are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements of the Group and separate financial statements of the Bank. The procedures selecteddepend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidatedfinancial statements of the Group and separate financial statements of the Bank, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of consolidated financial statements of the Group and separate financial statements of the Bank that give a true and fairview in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluatingthe appropriateness of accounting policies used and the reasonableness of accounting estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements of the Group and also separatefinancial statements of the Bank.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.

Opinion

In our opinion, the consolidated financial statements of the Group and also separate financial statements of the Bank give a true and fair view of the consolidated financial position of the Group and the separate financial position of the Bank as at 3l December 2016, and of its consolidated and separate financial performance and its consolidated andseparate cash flows for the year then ended in accordance with Bangladesh Financial Reporting Standards as explained in note 2.00.

Report on other Legal and Regulatory Requirements

In accordance with the Companies Act 1994, Securities and Exchange Rules 1987, the Bank Company Act, l99l asamended and the rules and regulations issued by Bangladesh Bank, we also report the following:

a)     We have obtained all the information and explanation which to the best of our knowledge and belief were necessary for the purpose of our audit and made due verification thereof;

b)     To the extent noted during the course of our audit work performed on the basis stated under the Auditors'Responsibility section in forming the above opinion on the consolidated financial statements of the Group and thefinancial statements of the Bank and considering the reports of the Management to Bangladesh Bank on anti-fraudinternal controls and instances of fraud and forgeries as stated under the Management's Responsibility for theFinancial Statements and Intimal Control:

    i.  intimal audit, internal control and risk management arrangements of the Bank as disclosed in note 2.33 ofthe financial statements appeared to be materially adequate;

   ii.  nothing has come to our attention regarding material instances of forgery or irregularity or administrativeerror and exception or anything detrimental committed by employees of the Bank and its related entities other than matters disclosed in these financial statements.

c)     financial statements of all subsidiaries of the Bank have been audited by other auditors and have been properlyreflected in the consolidated financial statements;

d)    in our opinion, proper books of accounts as required by law have been kept by the Group and the Bank so far asit appeared from our examination of those books and proper returns adequate for the purpose of our audit havebeen received from the branches not visited by us;

e)     the consolidated balance sheet and consolidated profit and loss account ofthe Group and the separate balancesheet and separate profit and loss account of the Bank dealt with by the report are in agreement with the booksof account;

f)      the expenditure incurred was for the purposes of the Bank's business;

g)     the consolidated financial statements of the Group and the separate Financial statements of the Bank have beendrawn up in conformity with prevailing rules, regulations and accounting standards as well as with relatedguidance issued by Bangladesh Bank;

h)     adequate provisions as explained in respective notes have been made for advances, investments and other assetswhich are, in our opinion, doubtful of recovery;

i)       the records and statements submitted by the branches have been properly maintained and consolidated in thefinancial statements;the information and explanation required by us have been received and found satisfactory; andwe have reviewed over 80o/o of the risk weighted assets of the Bank and we have spent around 17,650 personhours for the audit ofthe books and accounts ofthe Bank.

 

Auditors' Report, 2016

To the Shareholders of BRAC Bank Limited

We have audited the accompanying consolidated financial statements of BRAC Bank Limited and its subsidiaries (together referred to as the “Group”) as well as the separate financial statements of BRAC Bank Limited (the “Bank”) which comprise the consolidated and separate Balance Sheets as at 31 December 2016, consolidated and separate Profit and Loss Accounts, consolidated and separate Statements of Changes in Equity and Cash Flow Statements for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements of the Group and also separate financial statements of the Bank that give a true and fair view in accordance with Bangladesh Financial Reporting

Standards (BFRSs) as explained in Note 2 and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements of the Group and also separate financial statements of the Bank that are free from material misstatement, whether due to fraud or error. The Banking Companies Act, 1991 and the local central bank

(Bangladesh Bank) Regulations require the Management to ensure effective internal audit, internal control and risk management functions of the Bank. The Management is also required to make a self-assessment on the effectiveness of anti-fraud internal controls and report to Bangladesh Bank on instances of fraud and forgeries.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements of the Group and the separate financial statements of the Bank based on our audit. We conducted our audit in accordance with Bangladesh Standards on Auditing (BSA).

Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements of the Group and the separate financial statements of the Bank are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements of the Group and separate financial statements of the Bank. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements of the Group and the separate financial statements of the Bank, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation of consolidated financial statements of the Group and separate financial statements of the Bank that give a true and fair view in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements of the Group and the separate financial statements of the Bank.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements of the Group and also separate financial statements of the Bank give a true and fair view of the consolidated financial position of the Group and the separate financial position of the Bank as at 31 December 2016, and of its consolidated and separate financial performance and cash flows for the year then ended in accordance with Bangladesh Financial Reporting Standards (BFRS) as explained in note 2.

Report on other Legal and Regulatory Requirements

In accordance with the Companies Act, 1994, the Securities and Exchange Rules 1987, the Banking Companies Act, 1991 and the rules and regulations issued by Bangladesh Bank, we also report that:

       i.  we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit and made due verification thereof;

     ii.  to the extent noted during the course of our audit work performed on the basis stated under the Auditor’s Responsibility section in forming the above opinion on the consolidated financial statements of the Group and the separate financial statements of the Bank and considering the reports of the Management to Bangladesh Bank on anti-fraud internal controls and instances of fraud and forgeries as stated under the Management’s Responsibility for the Financial Statements and Internal Control:

a) internal audit, internal control and risk management arrangements of the Group and the Bank as disclosed in the financial statements appeared to be materially adequate;

b)     nothing has come to our attention regarding material instances of forgery or irregularity or administrative error and exception or anything detrimental committed by employees of the Bank and its related entities;

   iii.    Financial statements of three subsidiaries namely, BRAC EPL Investments Limited, BRAC EPL Stock Brokerage Limited and BRAC IT Services Limited have been audited by us and another two subsidiaries namely, bKash Limited and BRAC SAAJAN Exchange Limited have been audited by Rahman RahmanHuq and Reddy Siddiqui &Kabani respectively and have been properly reflected in the consolidated financial statements.

   iv.  in our opinion, proper books of account as required by law have been kept by the Group and the Bank so far as it appeared from our examination of those books and proper returns adequate for the purpose of our audit have been received from branches not visited by us;

     v.  the consolidated balance sheet and consolidated profit and loss account of the Group and the separate balance sheet and separate profit and loss account of the Bank together with the annexed notes dealt with by the report are in agreement with the books of account and returns;

   vi.  the expenditures incurred was for the purpose of the Bank’s business;

 vii.  the consolidated financial statements of the Group and the separate financial statements of the Bank have been drawn up in conformity with prevailing rules, regulations and accounting standards as well as related guidance issued by Bangladesh Bank;

viii.  adequate provisions have been made for advance and other assets which are in our opinion, doubtful of recovery;

   ix. the records and statements submitted by the branches have been properly maintained and consolidated in the financial statements;

     x.  the information and explanations required by us have been received and found satisfactory;

   xi. we have reviewed over 80% of the risk weighted assets of the Bank and spending over 4,000 person hours; and

 xii. Capital Adequacy Ratio (CAR) as required by the Bangladesh Bank has been maintained adequately during the year