Table of Contents:
- Introduction
- What is LFAR and Why It Matters
- LFAR 2025: Key Clauses and Reporting Requirements
- Sample Comments for Major Clauses
- Top 10 Red Flags Every Bank Auditor Must Watch
- Documentation Tips for LFAR
- Conclusion
1. Introduction
The Long Form Audit Report (LFAR) is one of the most critical deliverables of the statutory audit of a bank branch. It is more than just a compliance requirement—it is a window into the branch’s operational health and systemic vulnerabilities. A well-crafted LFAR highlights deficiencies that may not be visible in financial statements and helps banks and the RBI address systemic weaknesses.
For the financial year 2024–25, the LFAR assumes even more significance with updated reporting requirements from ICAI. Auditors must focus not only on procedural accuracy but also on identifying patterns of irregularity and potential fraud. This article presents a clause-wise breakdown, sample observations, and the top red flags to be aware of while preparing your LFAR this audit season.
2. What is LFAR and Why It Matters
The LFAR is a comprehensive report format prescribed by the RBI and ICAI that complements the main audit report. Unlike standard financial audits, the LFAR dives deep into operational, compliance, and risk areas.
Why it matters:
- Regulatory oversight: RBI uses LFARs to identify emerging risks and policy breaches.
- Audit quality: A strong LFAR reflects auditor diligence and professional scepticism.
- Management feedback: The branch uses the LFAR to address operational lapses.
LFAR isn’t a tick-box exercise. Each response must be tailored based on actual audit observations, supported by evidence, and phrased with professional objectivity.
3. LFAR 2025: Key Clauses and Reporting Requirements
The 2025 edition of the LFAR retains its structure but adds new emphasis to:
- Cash & ATM Verification: Check for frequency of verification, discrepancies, and ATM reconciliation timelines.
- Loans & Advances: Detailed reporting on sanction process, security documentation, income recognition, and classification under IRAC norms.
- Revenue Leakage: Cases of interest undercharging or delay in recovery.
- Fraud Reporting: Potential fraud indicators even if not officially reported.
- Stock Statements & DP: Timeliness, accuracy, and linkage to financials.
- KYC/AML Compliance: Incomplete KYC, inoperative accounts, and monitoring of suspicious transactions.
- Housekeeping Items: Review of suspense accounts, inter-branch items, and reconciliation gaps.
Auditors should ensure that responses are based on system-generated data, discussions with branch officials, and physical/verifiable audit evidence.
4. Sample Comments for Major Clauses
Crafting balanced, well-worded observations in LFAR is key. Here are sample phrases you can adapt:
- Cash Verification: “Branch maintains daily cash register. Surprise verification was carried out for only one quarter, indicating scope for improved internal control.”
- Loans & Advances: “Out of 8 advances examined, 2 lacked proper sanction notes and one case of renewal was pending for over 180 days without documented approval.”
- NPA Reporting: “One account of Rs. 88 lakhs was overdue by more than 90 days but continued to be shown as standard. The account should be downgraded as per IRAC norms.”
- Drawing Power Calculation: “In 3 cases, drawing power was derived from outdated stock statements over 60 days old, violating the bank’s policy.”
- Revenue Leakage: “Two accounts reflected interest computation based on incorrect slab rates, resulting in undercharging of Rs. 18,350.”
Such comments enhance the quality and usefulness of LFAR and reflect true branch performance.
5. Top 10 Red Flags Every Bank Auditor Must Watch
Here are practical red flags—rooted in real audit cases—that should prompt deeper scrutiny:
- OD Regularisation via Term Loan at Year-End: Window dressing practice that falsely upgrades NPAs.
- Unusual Related Party Transactions: Loans to sister concerns with no clear business justification.
- Excessive Ad-Hoc Sanctions or Rollovers: Indicates stress and non-transparent credit culture.
- Stock/DP Mismatch: Inflated stock statements to access higher limits, unsupported by actual turnover.
- Site Visit Reports Not Available: Especially in large advances, non-availability suggests poor post-disbursement monitoring.
- KYC Non-Compliance in High-Value Accounts: Missing PAN/Aadhar, unverified addresses, dormant accounts activated.
- Interest Not Reversed in NPA Accounts: Non-compliance with IRAC, leading to income overstatement.
- Same-Day Round Tripping Transactions: Entry-exit deposits of large funds within 24 hours across related entities.
- Loans Without Proper Sanction Notes or Deviations from Policy: Especially in corporate and gold loan segments.
- Increased Use of Suspense Accounts to Delay Booking of Expenses or Adjustments: Sign of weak housekeeping or potential fraud.
Each red flag should be followed up with documentation, staff interviews, and clear mention in the LFAR wherever applicable.
6. Documentation Tips for LFAR
Thorough documentation is your best defence during peer reviews and quality control audits. Tips:
- Use RBI/ICAI checklists and cross-reference with your remarks.
- Retain copies of trial balance, DP calculations, stock statements, visit reports.
- Document conversations with branch officials and date them.
- Note system limitations: e.g., CBS reports not showing real-time NPAs.
- Clearly document why you marked any clause as “Not Applicable.”
Digital folders structured clause-wise or area-wise will save significant time during reviews or when clarifications are sought.
7. Conclusion
The LFAR is not just an audit output; it’s an audit weapon. A sharp, well-reasoned LFAR sends a strong message about the auditor’s competence and the branch’s credibility. In FY 2024–25, with increasing regulatory scrutiny and operational complexity, auditors need to go beyond checklists and demonstrate insight, integrity, and independence.
Keep this guide handy as you finalize your LFAR. Look beyond numbers. Spot red flags. Add value.
Follow StoxNTax.com for expert-vetted LFAR samples, industry-wide fraud alerts, and practical audit tools this season.
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