MOC - Memorandum of Changes

MEMORANDUM OF CHANGES, more often referred to as MOC is an important document enclosed with the Bank Audit Report whenever the Auditor observes significant issues effecting the Financial Statements of the Bank.

Usually, in case of other entities, first the accounts are audited and then the financial statements are drawn up adhering to all the regulatory principles as formulated by the laws of the land. Whereas in case of Banks, audit report is sent after the internal authorities have drawn up the final accounts which are already sent for compilation at Zonal levels. Hence, the term Memorandum of Changes, which incorporates in itself all the material changes effecting such final accounts.

MOC can be of following natures

1. Relating to suggested changes in Balance Sheet
2. Relating to suggested changes in Profit and Loss Account
3. Relating to suggested changes in advances portfolio of the bank
4. Relating to outstanding balances of the advances
5. Yearly return of provisions
6. Details of accounts for various changes
7. Reconciliation balances in interest not collected account
8. Summary of advance return
9. MOC for fixed assets

Even in case there are no such issues observed by the Auditor, NIL MOC is required to be enclosed with the report. All the facts and figures given in the MOC are also given a reference in the Main Audit Report.

The following points have to be noted about MOC:

1. There should be clear justification for every change suggested by auditor i.e. the nature of change as well as the quantification of suggested change and it impact otherwise.
2. The format of MOC in most banks will have both sides like a trial balance. It should be ensured that total of changes suggested in balance sheet and profit and loss account is tallied on both accounts.
3. The total of reclassification of the advances suggested in secured , unsecured ,guaranteed advance and sector wise advance should be correctly brought out in the MOC and total of both sides should tally.
4. In case of change suggested as per prudential norms on income recognition, the impact, if any on the provisioning of the assets is also to be looked into.
5. It is to be ensured that a NIL MOC is invariably forwarded, even if there are no change to report.
6. Branch manager are required to report on each item reported in MOC.

The format of MOC is provided along with other supporting material sent by Banks to the respective auditors. Usually, MOC is considered in reference to Bank Statutory Audit though MOC can also be given while conducting Concurrent Audits. 

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Internal Bank Auditor or Statutory Bank Auditor

Before taking up a Statutory Bank Branch Audit, the question which usually CA firms have to face is

"Can we take up the assignment when we are already working in the capacity of Internal Auditor of the same Branch ?"

The above question has been resolved by ICAI as under:

As per the directions of RBI, firms associated with internal assignment in the bank have to relinquish the internal assignment before accepting the statutory audit assignment during the year.

In this regard, we would like to invite your attention to the Code of Ethics Section 290 " Independence - Assurance Engagements":

" A statutory auditor of an entity can not be it's internal auditor as it will not be possible for him to give an independent and objective opinion (Para 173)".

Specifically, attention is also drawn to Para 3-4-9 of the Guidance Note on Independence of Auditors-

“A member must take care to see that he does not get into situations where there could be a conflict of interest and duty. ………….Attention of the members is drawn to the audit assignments where appointment is done by the Comptroller & Auditor General of India (C&AG), Reserve Bank of India (RBI) and such other authorities. In addition to ensuring independence during the assignment, it is also essential to avoid any situation in near future which may be interpreted as a threat to independence, as for example, he or any other partner of his firm should not accept any other assignment such as internal audit, system audit and management consultancy service within one year from the completion of audit assignment”.

Therefore if you accept the statutory audit of the bank in which you ware an Internal Auditor in the same financial year, you would be violating the Code of Ethics.

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Empanelment of CA Firm for Bank Statutory Audit

Getting your firm empaneled with ICAI for Bank Statutory Audit requires a Multipurpose Empanelment form to be filed. The e-form is to be filed as and when advised by ICAI at www.meficai.org.

Firms who are approved by ICAI and RBI, are allotted Bank Branch Statutory Audit based on the guidelines issued by RBI. The final approval list of Bank Branch Auditors is categorized as per the following criteria:

Categorization norms effective from the year 2005-06 for the empanelment of audit
firms to be appointed as statutory branch auditors for public sector banks

Cate-gory	No. of CAs exclusively associated with the firm (Full time)	No. of partners exclusively associated with the firm (full time) (Out of 2)	Profe-ssional staff	Bank audit experience	Standing of the audit firm
(1)	(2)	(3)	(4)	(5)	(6)
I.	5	3	8	The firm or at least one of the partners should have a minimum of 8 years experience of branch audit of a nationalised bank and / or of a private sector bank with deposits of not less than Rs.500 crore.	8 years
II.	3	2	6	The firm or atleast one of the partners should have preferably conducted branch audit of a nationalised bank or of a private sector bank with deposits not less than Rs.500 crore for atleast 5 years	6 years (for the firm or atleast one partner)
III.	2	1	4	The firm or atleast one of the CAs should have preferably conducted branch audit of a nationalised bank or of a private sector bank with deposits not less than Rs.500 crore for atleast 3 years	5 years (for the firm or atleast one partner)
IV.	2 2 Even proprietorship concern without bank audit experience may be considered as hitherto. (The proprietary concerns of Chartered Accountants with 1 paid CA, 2 professional staff and not having any statutory branch audit experience of a nationalised bank or of a private sector bank with deposits not less than Rs.500 crore will be treated at par with the partnership firm after deducting their 3 years seniority from the date of their establishment).		2	Not necessary	3 years

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Source: www.rbi.org.in

Based on the above categorization, firms are allotted Branches which differ in their nature and size i.e the advances made by a respective Branch as on 31st March. However, one firm is allotted only one Bank though the number of Branches could be more than one owing to the experience and size of the CA firm.

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Bank Statutory Audit - An Overview

Auditing in Banking sector is one of the most booming sectors owing to increasing number of complexities involved in their operational structure and the directions issued by the regulator RBI. Bank Audit is itself a large branch of auditing involving audits of varying scope and objectives. Audits of Banks are generally assigned as per the nature and size of Bank Branch to Chartered Accountant Firms, where the size of Branch itself depends upon the Size of Advances made by the respective Branch.

Statutory Audit is also one of such audits which is of significant value to the Bank as well as Auditors comprising of the reporting of entire year operations and future viability of the respective Bank.

Statutory Audit: The name itself describes the nature of audit i.e. as mandated by a Statute. The audit in accordance with the provision of statute governing it

-u/s. 30 of The Banking Regulation Act, 1949.

-u/s. 10 of The Banking Companies Act, 1970/1980.

-u/s. 41 of The State Bank of India(Subsidiaries Bank) Act, 1959

-u/s. 19 of The Regional Rural Bank Act, 1976.

-u/s. 224 of The Companies Act, 1956.

Provides for the audit of the accounts of the bank.

Generally Statutory Audits are assigned at the year start i.e. 1^st April to be carried out for the previous year ended on 31^st March. The assignments are made to the firms which are duly empanelled with the Board as per the regulation of ICAI. Audits of different branches are assigned as per the size and exposure of the firm keeping in view of the nature and size of the Branch to be assigned.

The scope of Statutory Audit includes the opinion of the auditor on several concerns ranging from the areas of risk and return to the general operation attributes viz. time-norms etc.

The various reports prepared in Statutory Audits are

1. Independent Auditor’s Report.

2. LFAR i.e. Long Form Audit Report

3. Tax Audit Report as required u/s 44AB of the Income Tax Act.

4. MOC i.e. Memorandum of Changes

5.There are various other Special Purpose Reports i.e. Report on Ghos and Jilani Committee, Report on Capital Adequacy, Report on Advances etc which are also annexed as per Bank’s guidelines.

It is to be noted that statement of companies (Auditors Report) order 2003 is not applicable to banking company as defined in clause c of section 5 of Banking Regulation Act,1949.

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