Concurrent Audit of Banks - Webs · Arijit ChakrabortyCA. Arijit Chakraborty Organized by IASB of ICAI C tifi t C C t A dit f B kCertificate Course on Concurrent Audit of Banks. Types

Concurrent Audit of Banks Evolution, Objective & Compliance areas

( PPF)

CA. Arijit ChakrabortyCA. Arijit Chakraborty

Organized by IASB of ICAIC tifi t C C t A dit f B kCertificate Course on Concurrent Audit of Banks

Types of banksTypes of banks

1) Nationalised banks 2) C ti b k2) Co-operative banks 3) Private sector banks 4) Foreign banks4) Foreign banks 5) Regional rural banks

2

Special kinds of business d k b b k b hundertaken by bank branches

1. Foreign exchange business2. NPA recovery business3 Service branches dealing in Clearing house3. Service branches dealing in Clearing house

operations business4. Corporate banking and Industrial finance

b sinessbusiness5. Personal banking business6. Housing finance businessg7. SSI business8. Agricultural finance business

3

Peculiar features of bankingPeculiar features of banking business

Custody of large volumes of monetary items, including cash and negotiable instruments, whose physical security has to be ensuredsecurity has to be ensuredDeals in a large volume and variety of transactions in terms of both number and value. Operate through a wide network of branches and p gdepartments, which are geographically dispersedThe nature of business which makes it susceptible to Frauds by Customers.

4

Special audit considerations in b k b h dibank branch audits

Effect of the statutory and regulatory requirementsy g y qThe scale of banking operations and the resultantsignificant exposuresExtensive dependence on IT to process transactionsp pContinuing development of new services and bankingpracticesParticular nature of risks associated with thetransactions undertaken by banks

5

Banking Product & ServicesBanking Product & ServicesAcceptance of DepositsGranting of AdvancesGranting of AdvancesRemittancesCollectionsCollectionsClearingTreasury functionCash Management ProductIssuance of Letters of Credit and GuaranteesMerchant Banking BusinessCredit CardsTechnology based Services

6

Technology-based ServicesDividend/Interest/Refund Warrants

Banking Product & ServicesBanking Product & ServicesSafe-keeping ServicesLockersLockersHandling Government BusinessDepository Participant (DP) ServicesDepository Participant (DP) ServicesATMsExchange of NotesDebit CardsAuto Sweep facility in saving accountThird Party Advertisement on ATM NetworkSecuritization of future lease rentalsDerivatives

7

DerivativesReverse Mortgage

Para-Banking ActivitiesPara Banking Activities

Equipment Leasing Hire Purchase andEquipment Leasing, Hire Purchase andFactoring ServicesMutual fund business:Money Market Mutual Funds (MMMFs):Insurance Agents:Acting as referee to financial status,business reputation and respectability oftheir customers.Tax MattersTransaction in Foreign Exchange

8

Concurrent AuditConcurrent Audit

an examinationcontemporaneouscontemporaneous

withthe occurrence of transactions

carried outcarried out as near as possible

9

Objective

to

Objective

to serve as aas a

administrative support to

branchesb a c es

RBI Circular also clarifies that CA is

10

RBI Circular also clarifies that CA is essentially a management process.

IndispensabilityBanking industry

Indispensability g y

involved indealing with public moneydealing with public money

thus demandsproper checks and balancesproper checks and balances

to ensureclose monitoring of the dealingclose monitoring of the dealingminimizing the risk arising out

of

11

ofthe banking business

Internal Control Systeminin

Banks in IndiaB k ’ i t l ditBanks’ internal audit

the primary source of informationb tabout

the effectiveness of the risk management&

internal control system in the banktherefore

12

needs to be effective

Internal Control Systemin

Objective

in Banks in India

jto ensure– orderly an efficient conduct of businessy– adherence to management policies

safeguarding assets through– prevention and detection of fraud and error– ensuring accuracy and completeness of the

ti daccounting record– timely preparation of the reliable financial

information

13

information


Vigilance Function in Banks

in Banks in India

Vigilance Function in Banksfunctions– include surveillance over the suspect staff/

transactiontransaction– looking into cases of fraud/misappropriation/

connivance etc leading tol t th b kloss to the bank

– to investigate & detect the reason for building uplarge non performing assets

relevance to the auditor– in evaluating the efficacy of internal control

including the depth of preventing vigilance

14

g p p g g


Various Systems in existence

in Banks in India

Various Systems in existenceInspection– branch inspection– head-office inspectionhead office inspection– RBI inspection

Revenue Audit/Income Expenditure AuditStock & Debtors AuditStock & Debtors AuditCredit Audit/Pre-Disbursement AuditSystem AuditI f ti S t (IS) A ditInformation System (IS) AuditRisk Based Internal AuditDepository Participants (DP) Audit

15

p y p ( )Concurrent Audit

Internal Control System in B k i I diBanks in IndiaOrganizationgeach bank normally has a separatedepartment, namely– internal audit

Or– Inspection– reporting to the

dit itt f th b d f di taudit committee of the board of directors

16

Internal Control System in B k i I diBanks in India

Basel Committeepronounced

certain principlecertain principlerequired

to be followedto be followedfor

an effective internal auditan effective internal auditin

banks

17

banks

Institution of Present System of CA i th C i l B k b RBIin the Commercial Banks by RBI

Background– arose out of the recommendation of the Ghosh Committee

on Frauds and Malpractices in Banks

Formal introductionFormal introduction– in terms of RBI circular dated 11.10.1993 with guidelines

Subsequent revision and enlargement of scope– vide circular dated 14.08.1996 & 12.08.1997

Importance highlighted– sound internal audit function– sound internal audit function– effective Control– setting the tone for vigilance internal audit to preclude

incidence of serious errors and fraudulent manipulations

18

incidence of serious errors and fraudulent manipulations


Objective– primarily to shorten the interval between a transaction and

its independent examination– simultaneous internal checks of transactions and

compliance with the systems and procedures of the bankscompliance with the systems and procedures of the banks– substantive checking in key areas and earliest rectification

of deficiency to precludethe incidence of serious errors & fraudulent manipulationthe incidence of serious errors & fraudulent manipulation

– to improve the functioning of the branch, leading to upgradation of working of the branch and prevention of fraud

– compliance with internal audit as well as RBI/Governmentcompliance with internal audit as well as RBI/Governmentof India guidelines

– identification of areas/activities requiring corrective actionand urgency

19

g y


Coverage in general– The transactions are properly recorded/

documented and vouched– The irregularities are rectified on spot, and– The systems and procedures of the Bank are

implemented properly– The transactions are performed or decisions arep

taken within the policy parameters stipulated bythe Head Office, and is not violating theinstructions or policy prescriptions of the RBI

– The delegated authority is exercised and thesame is within the terms and conditions of thedelegated authority

20


in very large branches CA is– a means of ensuring that the different section function

within the parameters and procedures

System (CA)System (CA)–to be integrated

withother systems of internal audit/

inspectionalready in existence

Suggested by RBI in its circular while framing the system, thelinkage between different form of internal inspection/audit and

21

g pthe scope of CA may be clearly spelt out.


As stressed by RBICA tCA, a management process

integralto

th t bli h tthe establishmentof

sound internal accounting function effective controlsetting

the tonefor

a vigilance internal auditto preclude

the incidence of

22

Serious error & fraudulent manipulation


CA thus expected by RBI

to verifyywhether the transaction or decision arewithin the policy parameters laid downby the head officethat they do not violate the instruction or

li i tipolicy prescriptionthat they are within delegated authority

23

General GuidelinesGeneral GuidelinesFramework of RBI Guidelines

Concept of CA as directed by RBI conceivedOn the recommendation of high level committee setupby RBI to enquire into various aspect of fraud andby RBI to enquire into various aspect of fraud andmalpractices in banks

RBI found that process of examination is conductedeither simultaneously with the transaction or in theearliest possible periodThe concurrent auditor may report the minory pirregularities, wrong calculations etc to the br.manager for immediate rectification & reportingcompliance

24

p


Needed to be subjected to CA– Dept/divn at HO dealing with

• Treasury functions (investment fund management includingy ( g ginter bank borrowing, bill rediscount)

• Foreign exchange business– Service branches– Branches with total credit and other risk exposures

aggregate to not less than 50% of the total credit andother risk exposures of the Bank,

– Branches whose aggregate deposits cover not less than50% of the aggregate deposits of the Bank.

25


These branches would include;– Exceptionally large branches.

Very large and large branches– Very large and large branches– Special branches handling forex business,

merchant banking business, large corporate/g g pwholesale banking business and forex dealingrooms.Branches rated as poor/very poor– Branches rated as poor/very poor

– Any other branch where in the opinion of theBank concurrent audit is desirable.

26

Branches subjected to concurrent audit shouldnormally not be included for revenue/income audit.

General GuidelinesGeneral GuidelinesScope of the engagement of Concurrentg gAuditor is as per the terms of reference of eachbank.Th bj ti & lThe objective & scope are more or less as perregulatory framework.Banks while appointing concurrent auditorsBanks, while appointing concurrent auditorsnormally provide them with a manual ofinstruction for the assignmentThe focus of the manual is more on the areasrequire to be cover by RBI in its various circular

CA27

on CA

General GuidelinesGeneral GuidelinesPlanning process as formulated in SIA 1 involves:g

Obtaining knowledge of the businessEstablishing the audit universegEstablishing the objective of theengagementg gEstablishing the scope of the engagementDeciding the resource allocationgPreparation of Audit Programme

28

Background ..Background ..

1) Bank Branch audit process1) Bank Branch audit process 2) Pre-commencement Work3) Appointment of auditor3) Appointment of auditor4) Types of Bank Branches5) Peculiar features of banking business5) Peculiar features of banking business6) Types of accounting software7) Bank Branch Audit Planning and reporting7) Bank Branch Audit Planning and reporting 8) Internal Controls in banks9) Use of Audit Softwares (CAAT)

29

) ( )

Background ..Background ..

10) Making effective audit plan10) Making effective audit plan11) Making effective Audit Programme12) Checklists & Audit Procedures12) Checklists & Audit Procedures13) Reporting14) Critical areas for Internal Auditor

30

Audit ProgrammeAudit ProgrammeAn audit program can contain following

columns ParticularsNos.Total ValueS l SiSample SizeCriteria for selection of data in sampleDate/ Months/ PeriodDate/ Months/ PeriodAction to be takenPerson In charge

31

Person In charge

Audit ProceduresAudit Procedures

1. Inspection1. Inspection2. Observation3 Inquiry & confirmation3. Inquiry & confirmation4. Computation5. Analytical Procedures

32

Standards on Internal AuditStandards on Internal Audit 18 SIA s have been issued by IASB of ICAI and are currently recommendatory in natureAdvisable to comply with SIA s to make CA more value-additive and meaningful

1. Planning an Internal Audit2. Basic Principles Governing IA3. Documentation4. Reporting5. Samplingp g6. Analytical Procedures7. Quality Assurance in Internal Audit8 Terms of Internal Audit Engagement8. Terms of Internal Audit Engagement

SIA 1, Planning an Internal AuditAudit(Issued in May 2006)

Obtaining knowledge of the businessObtaining knowledge of the businessEstablishing audit universeE t bli hi th bj ti f thEstablishing the objectives of the engagementEstablishing the scope of the engagementDeciding the resource allocationPreparation of audit programmePreparation of audit programme

SIA 2, Basic Principles G i I t l A ditGoverning Internal Audit(Issued in August 2007)

O iOverviewExplains the principles which governs the internal auditor’s professional responsibilities:p p– Integrity, objectivity and independence,– Confidentiality– Due professional care skills and competence– Due professional care, skills and competence– Work performed by others– Documentation

Planning– Planning– Evidence– Internal Control and Risk Management– Reporting

SIA 3, Documentation(Issued in August 2007)

OverviewOverviewProvide guidance on documentation requirements indocumentation requirements in internal auditForm and content of documentationdocumentationDetention and retention of the d t tidocumentationIdentification of the preparer

SIA 4, Reporting(Issued in August 2008)

Overview

Establish standards on the form andEstablish standards on the form andcontent of internal auditor’s report.Describes basic elements of an internalDescribes basic elements of an internalauditor’s reportDeals with different stages ofgcommunication and discussion of thereportDescribes the reporting responsibilitiesof the internal auditor

Basic Elements of the Internal AuditBasic Elements of the Internal Audit Report

Title;Addressee;Addressee;Report Distribution List;Period of coverage of the Report;Period of coverage of the Report;Opening or introductory paragraph;

identification of the processes/functions and– identification of the processes/functions anditems of financial statements audited; and

– a statement of the responsibility of the entity’smanagement and the responsibility of theinternal auditor;

Objectives paragraph - statement of theobjectives and scope of the internal auditobjectives and scope of the internal auditengagement;Scope paragraph (describing the nature

f )of an internal audit):– a reference to the generally accepted audit

procedures in India as applicable;procedures in India, as applicable;– a description of the engagement

background and the methodology of thei t l dit t th ith dinternal audit together with proceduresperformed by the internal auditor; and

– a description of the population and thea description of the population and thesampling technique used.

Executive Summary, highlighting the keymaterial iss es obser ations controlmaterial issues, observations, controlweaknesses and exceptions;

SIA 5, Sampling(Issued in August 2008)

OverviewOverview

Provide guidance regarding the designProvide guidance regarding the designand selection of an audit sampleGuide on the use of audit sampling in theGuide on the use of audit sampling in theinternal audit engagementDeals with evaluation of sample resultspGuidance on use of sample in riskassessment procedures and tests ofcontrols performed by the internal auditor

Design of SampleThe internal auditor should consider:The internal auditor should consider:

– Specific audit objectives– Population– Population– Sample size

Selection of SampleSelection of SampleCommonly used methods:

– Random selection and Use of CAATs– Systematic selection– Haphazard selection

SIA 6, Analytical Procedures(Issued in August 2008)

Overview

Provide guidance regarding theapplication of analytical proceduresduring internal auditDeals with the aspects such as:Deals with the aspects such as:– the nature and purpose of analytical procedures,– analytical procedures as risk assessment

procedures and planning the internal audit– Analytical procedures as substantive procedures– Analytical procedures in the overall review at they p

end of the internal audit– Extent of reliance on analytical procedures

SIA 7, Quality Assurance in Internal Audit(Issued in August 2008)

Overview

A system for assuring the quality in internalaudit should provide reasonable assurance thatthe internal auditors comply with professionalstandards, regulatory and legal requirementsso that the reports issued by them areappropriate in the circumstancesappropriate in the circumstances.

provide the guidance to the person entrustedwith the responsibility for the quality of thewith the responsibility for the quality of theinternal audit whether in-house internal audit ora firm carrying out internal audit.

This Standard also provide the extensiveknowledge about the internal quality reviews,external quality reviews and communicating the

SIA 8, Terms of Internal Audit Engagement(I d i A 2008)(Issued in August 2008)

Overview

Establish standards in respect of termsof engagement of the internal auditactivity whether carried out in house oractivity whether carried out in house orby an external agency.

Cl it t f i t l ditClarity on terms of internal auditengagement is essential for inculcatingprofessionalism and avoidingp gmisunderstanding as to any aspect ofthe engagement.

Elements of Terms of Engagement

ScopeResponsibilityAuthorityConfidentialityLimitationsReportingCompensationpCompliance with Standards

Standards on IA (Cont’d)Standards on IA (Cont d)

9 Communication with Management10 Internal Audit Evidence11 Consideration of Fraud in an Internal Audit11 Consideration of Fraud in an Internal Audit12 Internal Control Evaluation13 Enterprise Risk Management14 Internal Audit in an Information Environment15 Knowledge of the Entity and its environment16 Using the Work of an Expert16 Using the Work of an Expert 17 Consideration of L&R in IA18 Related Parties

General GuidelinesGeneral Guidelines

Types of Activities to be coveredTypes of Activities to be coveredCash– Daily cash transactions with particular referenceDaily cash transactions with particular reference

to any abnormal receipts and payments.– Proper accounting of inward and outward cash

ittremittances.– Proper accounting of Currency Chest

transactions, its prompt reporting to RBI.transactions, its prompt reporting to RBI.– Expenses incurred by cash payment involving

sizeable amount, whether such expenditure isth i d b i t th it

47

authorized by appropriate authority.

General GuidelinesGeneral GuidelinesTypes of Activities to be covered

Investments– Ensure that in respect of purchase and sale of

securities the branch has acted within itssecurities, the branch has acted within itsdelegated power having regard to its HeadOffice instructions.

– Ensure that the securities held in the books ofEnsure that the securities held in the books ofthe branch are physically held by it.

– Ensure that the branch is complying withRBI/Head Office guidelines regarding BRs, SGLg g g ,forms, delivery of scripts documentation andaccounting.

– Ensure that the sale or purchase transactions

48

pare done at rates beneficial to the Bank.


Types of Activities to be coveredTypes of Activities to be coveredDeposits– Check the transactions about term depositsCheck the transactions about term deposits

received and repaid.– Percentage check of interest paid on deposits

b d i l d i l l ti f i t tmay be made, includ-ing calculation of intereston large deposits.

– Check new accounts opened, particularly currentCheck new accounts opened, particularly currentaccounts, opera-tions in new current/S.B.accounts may be verified in the initial periods tosee whether there are any unusual operations

49

see whether there are any unusual operations.

General GuidelinesGeneral GuidelinesTypes of Activities to be coveredyp

Advances– Ensure that loans and advances have been

ti d l (i ft d ti d tsanctioned properly (i.e. after due scrutiny and atthe appropriate level).

– Verify whether the sanctions are in accordanceywith delegated authority.

– Ensure that securities and documents have beenreceived and properly charged/registeredreceived and properly charged/registered.

– Ensure that post-disbursement supervision andfollow up is proper, such as receipt of stockstatement installments renewal of limits etc

50

statement, installments, renewal of limits etc.


Advances– Verify whether there is any mystification of the loans and

whether there are instances indicative of diversion offundsfunds.

– Check whether the letters of credit issued by the branchare within the delegated power and ensure that they arefor genuine trade transactions.

– Check the Bank guarantees issued, whether they havebeen prop-erly worded and recorded in the register of theBank. Whether they have been promptly renewed on thedue date.

– Ensure proper follow up of overdue bills of exchange.– Verify whether the classification of advances and income

booking has been done as per RBI guidelines.V if h th th b i i f l i t DICGC d

51

– Verify whether the submission of claims to DICGC andECGC are in time.


Advances– Verify that instances of exceeding delegated powers have

been promptly reported to controlling/Head Office by thebranch and have been got confirmed or ratified at thebranch and have been got confirmed or ratified at therequired level.

– Verify the frequency and genuineness of such exercise ofauthority beyond the delegated powers by the concernedffi i lofficials.

– Verify Balance Sheet items of the borrowal unit.– Stock verification/security verification.

Mortgages Whether properly documented– Mortgages - Whether properly documented.– Registration of charges with Registrar of Companies and

Resolu-tion passed by appropriate authorities.– Guarantees obtained and documents of net worth

52

statement.


Advances– Latest audited accounts of the borrower.– Non-corporate borrowers audited accounts where creditNon corporate borrowers audited accounts where credit

facilities exceed cutoff amount.– Withdrawal within limit/Advance Value (Drawing Power

Limit).Documents– Documents

– Verification of Interest calculation to ensure that there is norevenue leakage.

– Suggestions for legal action in respect of sticky advancesgg g p yand status of cases, where legal action has been initiated.

– Classification of loans and advances.

53


Foreign exchange transactions– Import transactions

• Collection of Bills• Direct Bills• Bills under L/C• Bills under L/C

– Export transactions• Bills under L/ C

Bill f ll ti• Bills for collection– Remittances

• InwardO t d

54

• Outward


Foreign exchange transactions– L/Cs

• Opened by the branch• Advised and confirmed by the Bank

Guarantees– Guarantees– Financing of Import and Export under various

types of credit facilities• Indian Rupees• Foreign Currency

– Facilities

55

– Facilities


Types of Activities to be coveredTypes of Activities to be coveredForeign exchange transactions– Reporting of foreign currency transactions toReporting of foreign currency transactions to

authorized branch 'A' category.– Submission of Statements

• Authorities in the Bank• Other authorities

– Deposit A/cs. of Non-resident and SpecialDeposit A/cs. of Non resident and SpecialCurrency A/ c of Resi-dent.

– Booking, utilization and cancellation of ForwardC t t

56

Contracts.


Foreign exchange transactions– Reconciliation of Nostro and Vostro A/cs. and

t t h ki f t ti i N t l d itest checking of transactions in Nostro ledger interms of Reserve Bank of India's RBI guidelines.

– Check the foreign bills negotiated under lettersg gof credit.

– Check FCNR and other non-resident accountswhether the debits and credits are permissiblewhether the debits and credits are permissibleunder rules.

– Check whether inward/outward remittance hasbeen properly accounted for

57

been properly accounted for.


Foreign exchange transactions– Examine extension and cancellation of forward

contracts for pur-chase and sale of foreigncontracts for pur chase and sale of foreigncurrency. Ensure that they are duly authorizedand necessary charges have been recovered.

– Ensure that balances in Nostro accounts inEnsure that balances in Nostro accounts indifferent foreign cur-rencies are within the limitas prescribed by the Bank.

– Ensure that the overbought/ oversold positiong pmaintained in differ-ent currencies is reasonable,taking into account the foreign ex-changeoperations.

58


Types of Activities to be coveredTypes of Activities to be coveredForeign exchange transactions– Ensure adherence to the guidelines issued byEnsure adherence to the guidelines issued by

RBI/HO of the Bank about dealing roomoperations.E ifi ti / ili ti f N t d– Ensure verification/reconciliation of Nostro andVostro account transactions/ balances.

59


Housekeeping– Ensure that the maintenance and balancing of

t l d d i t i l di haccounts, ledgers and registers including cashbook is proper. Prompt and regular reconciliationof entries outstanding in the inter-branch andi t B k t t dinter-Bank accounts, suspense account, sundrydeposit account, DDP account, Drafts Accountetc. Ensure early adjustment of large valueentries.

– Carry out a percentage check of calculations ofinterest, discount, commission, and exchange.

60

, , , g


Housekeeping– Check whether debits in income account have

b itt d b th t t th itibeen permitted by the competent authorities.Check the transactions of staff members.

– In case of difference in clearing, there is agtendency to book it in an intermediary suspenseaccount instead of locating the difference.Examine the day book to verify as to how they ydifference in clearing has been adjusted.

– Such instances should be reported to ControllingOffice in case the difference persists

61

Office in case the difference persists.


Types of Activities to be coveredTypes of Activities to be coveredHousekeeping– Detection and prevention of revenue leakagesDetection and prevention of revenue leakages

through close exami-nation of income andexpenditure.Ch k h t d/bill t d i t– Check cheques returned/bills returned registerand look into rea-sons for return of thoseinstruments.

– Checking of inward and outward remittances(DDs, MTs and TTs). Reconciliation of bankersaccounts

62

accounts.


Other items - High value transactions– In case the branch has been entrusted with

Government Business ensure that theGovernment Business, ensure that thetransactions are done in accordance with theinstructions issued by Government, RBI andControlling Office.g

– Study internal inspection/audit reports andensure that the branch gives proper compliancethereto.

– Ensure that customer complaints are dealt withpromptly.

– Verification of statements, controlling office

63

greturns, Statutory Returns.

General GuidelinesGeneral GuidelinesReporting System

Minor irregularities should be rectify on the spotSerious irregularities should be straight wayreported to the controlling offices for immediatereported to the controlling offices for immediateactionFraudulent transaction if detected should bei di t l t d t i ti d ditimmediately reported to inspection and auditdepartment (HO) as also to CVO as well as brmanager (unless br. Manager is involved)Follow up action on CA report should be given highpriority and rectification of the feature should bedone immediately

64

General GuidelinesGeneral GuidelinesReporting System

A special cell in the inspection and auditdepartment may be created in each bankto:to: -– Review the selection of auditors– Initiate and operate a system for the appraisal ofInitiate and operate a system for the appraisal of

the performance on Concurrent auditors– Ensure that the work of Concurrent Auditors is

properly documentedproperly documented– Be responsible for the follow-up on audit reports

and the presentation of the quarterly review toth ACB

65

the ACB

General GuidelinesGeneral GuidelinesExtent of Checks

Higher Coverage– balance sheet items,– investment portfolioinvestment portfolio,– foreign exchange trans-actions,– fraud prone/sensitive areas,– outstanding advances more than a specified amount and– outstanding advances more than a specified amount and

also in accounts with less than a specified amount,May use test check in case of

income and expenditure items– income and expenditure items,– inter bank, inter branch transaction,– interest paid and interest received,

clearing transactions and deposit accounts

66

– clearing transactions and deposit accounts


Substantive/more detail Check in case of– At a branch with poor performance in certain areas such

as monitoring on house keeping, advances, investmentg p g, ,Concentrate on– high-value transactions having financial implication for the

Bank,Bank,rather than those involving lesser amount althoughnumber-wise, they may be large.

Should verifyShould verify– accuracy of statements and returns, compliance with

internal inspection/audit reports and as-pects relating tocustomer service.

67


Should identify– problem areas at branch level and offer his suggestions to

overcome them.h ld i t t th t bshould give reasons suggest steps that may be

taken to avoid their recurrence in case of– any shortcomings, where an adverse remark is required to

be givenbe given,Should make maximum efforts for– removal/rectification of irregularities on the spot

(List of irregularities should be given on a daily basis to the(List of irregularities should be given on a daily basis to theSection In-charge against his receipt under intimation to theControlling Officer and it is suggested that their rectificationshould be monitored by the Controlling Officer to avoidunnecessary bulky report by the Concurrent Auditor)

68

General GuidelinesGeneral GuidelinesAudit Documentation

should document matters, important in providingevidence that the audit was carried out inaccordance with the basic principles of an auditp pand as per terms of reference. The Institute hasalso issued SIA 3, Documentation. This should bereferred for the purpose.p pshould record the audit plan as per the checklistand the format of audit report given by therespective banks Circulars terms of engagementrespective banks. Circulars, terms of engagement,scope of work etc., and the engagement lettershould also be taken into consideration in thisregard

69

regard.


should keep all the working papers on record whichare used in finalizing the reportspapers to be kept in permanent audit file:papers to be kept in permanent audit file:– Letter of engagement, undertaking/comment by the firm to

the Bank– Audit checklistAudit checklist– Information regarding branch business, data, nodal officer,

status of branch, whether computerized/parallel categoryof branch, etc.

– Performance of monthly, quarterly, annual report revenuereport

– Correspondence with the Bank for any matter

70


papers to be kept in Current audit file:– Branch Audit Programme– Branch’s statement as on the data of the report on whichp

basis it is prepared.– Periodic correspondence with the concerned departmental

officer– Irregularities intimated to the Controlling Officer– Discussion of the audit report– Particulars of big borrowers, depositors etc.– Circulars received from head office of the auditee Bank.

It is necessary for the auditor to record hisobservation in an appropriate record and bring them

71

pp p gto the notice of concerned official of the Bank.

General GuidelinesGeneral GuidelinesFrequency of checking different items

depend on factors such as the guidelines given by the bank inthe scope of work, circulars issued by the RBI from time totime, etc.own strategy/time frame covering all the areas need to beown strategy/time frame covering all the areas need to bedevise.(For this purpose, the auditor would need to first identify theareas at the branch which need greater attention, the areaswhich are to be regularly monitored the items which are to bewhich are to be regularly monitored, the items which are to bechecked daily, and the items which may be checked lessfrequently).need to go through the previous reports such as the statutoryaudit report internal inspection reports RBI inspectionaudit report, internal inspection reports, RBI inspectionreports, and concurrent audit reports of the branch as well forthis purpose.

72


MonitoringMonitoringWhile the basic responsibility ofmonitoring the activities of the branchmonitoring the activities of the branchrests with the branch in-charge, theconcurrent auditor’s work wouldconcurrent auditor s work wouldsupplement the process with properand timely reportingand timely reporting.

73

General GuidelinesGeneral GuidelinesInfrastructure for Concurrent AuditorNecessary infrastructural facilities, all circularsfrom the controlling office, operatingi t ti /di ti h ld b dinstruction/directives should be madeavailable to the concurrent auditor.Coordinator for Concurrent AuditCoordinator for Concurrent AuditConcurrent audit is different from the statutoryand other audit of banks as this former is anand other audit of banks, as this former is anongoing process. Appropriate co-ordination isnecessary for smooth conduct of the audit and

tifi ti f i l iti74

rectification of irregularities.

General GuidelinesGeneral GuidelinesExtension Counters/Service BranchIf any extension counter(s) is/are functioning under thebranch, such extension counters should also be takenunder the scope of the concurrent audit at appropriateintervalsintervals.In case of a service branch, checking whether a regularstatement of branch accounts are sent to all localbranches and outstanding entries as per the statementgshould also be scrutinized. If the originating entries pertainto the service branch, duplicate advices would be sent tothe branches. In other case, it is important that the servicebranch is informed by sending advices from branchesbranch is informed by sending advices from brancheswhenever the rectification entries are passed by branchesamong themselves without routing the transaction throughservice branch.

75

General GuidelinesGeneral GuidelinesFocus of Concurrent AuditA study of the modus operandi of thefraudulent transactions generally indicatesth t th i f t ti i dthat the processing of transactions is donewithout adhering to the systems andprocedures. This permits an unscrupulousprocedures. This permits an unscrupulousperson to misuse the procedures of the bankand undertake fraudulent transactions, which

i ti d f l tiremains unnoticed for a long time.Concurrent Auditor would therefore, need tofocus on adherence to laid down systems

76

yand procedures and safeguards.

General GuidelinesGeneral GuidelinesMaintenance of appropriate RecordIn order to keep correspondence between thebranch in charge and the Concurrent Auditorunder control instead of daily/weekly reportsunder control, instead of daily/weekly reports,the concurrent auditor may maintain a recordof his observations, duly countersigned by thebank official in the earliest possible periodbank official in the earliest possible period.The recording should be made on a dailybasis with date with suitable column forrecording rectification/removal The recordrecording rectification/removal. The recordpreferably remains in the custody of theincumbent in-charge with a copy toConc rrent A ditor

77

Concurrent Auditor.

General GuidelinesGeneral GuidelinesMaintenance of appropriate Record

The various items to be normally recorded are given below: -y g

Date Irregularity Observed

Initial/authorisation of Concurrent

Initial of Bank official Observed of Concurrent

Auditor

How Date of Initial/authorisation Initial of Bank

The record should be made available to the officer in charge of the

How Irregularity Rectified

Date of Rectification

Initial/authorisation of Concurrent Auditor

Initial of Bank Official

The record should be made available to the officer in charge of thecontrolling office or their representatives as and when they visit thebranch to apprise them of the state of working of the branch,removal/rectification of irregularities by the branch, compliance ofsystems and procedures by the branch

78

systems and procedures by the branch.

General GuidelinesGeneral GuidelinesReporting FraudsTh t dit hil i tThe concurrent auditor, while carrying outconcurrent audit of the branches will ensurethat the laid down guidelines and systems,t at t e a d do gu de es a d syste s,and procedures are followed by the branch toobviate the possibilities of frauds/irregularitiestaking place Wherever any irregulartaking place. Wherever any irregularfraudulent transactions are detected by theconcurrent auditor, such matters should be,immediately reported to the concerned officerof the controlling office through a SpecialReport

79

Report.

General GuidelinesGeneral GuidelinesAnnual Report (AR)

The Concurrent Auditor would submit an annual report to theControlling Office Features of regular inspection report on all areasControlling Office. Features of regular inspection report on all areasof the branch functioning will be incorporated into this report.

Time for submission of the AR and stay at the BranchyThis aspect varies from bank to bank but as a general practice i.e.unless otherwise instructed, the Concurrent Auditor compiles theAnnual Report within the prescribed time while staying in the branch.During this tenure, the concurrent auditor will also conduct audit ong ,regular basis for that month also and submit a separate concurrentaudit Report for the month, unless, he has been advised todiscontinue the present assignment/proceed for next assignment.This monthly Concurrent Audit Report is to be submitted alongwiththe Annual Report and a copy handed over to the next concurrentthe Annual Report and a copy handed over to the next concurrentauditor for them to incorporate the irregularities mentioned in themonthly report in the next of his first monthly concurrent audit report.

80

General GuidelinesGeneral GuidelinesConfirmation Required

The Concurrent Auditor would normally report only the irregularitiesnot rectified And confirm that all the areas mentioned in the checknot rectified And confirm that all the areas mentioned in the checklist/ guidelines have been checked by them. He also needs toconfirm compliance of these instructions by the branches. TheConcurrent Auditor would verify and confirm that provisions made atthe branch on account of interest payable on deposits andthe branch on account of interest payable on deposits andreceivable on advances are realistic and regular and make anappropriate report thereon. While the officials of the branch continueto be responsible for any over or under provisioning, the concurrentauditor should verify that all monthly Income and Expenditure

h d tl b f th d t th t fit/l fvouchers are passed correctly before the date so that profit/loss ofthe branch is reflected correctly.The concurrent auditor will also ensure that the interest charged onadvances and interest paid on deposits is as per the guidelinesissued from controlling office and is checked regularly to plug anyissued from controlling office and is checked regularly to plug anyrevenue leakage. The Concurrent Auditor will also need to point outinstances where rotation of employees has not been done e.g.employees performing same duty/job for more than one year or asthe administrative policy of the Bank stipulates.

81

p y p

Conduct of Concurrent AuditConduct of Concurrent AuditAudit Programme– General Reference

• the general references should be drawn from thesources, including:

• Bank’s Book of InstructionsB k' M l D t ti• Bank's Manual on Documentation

• Circulars of the Reserve Bank of India issued fromtime to time.

• Exchange Control Manual and Rules of FEDAIExchange Control Manual and Rules of FEDAI(Foreign Exchange Dealers Association of India.

• Inspection Reports of:– RBI

B k' I l I– Bank's Internal Inspectors– Long Form Audit Report (LFAR) of the statutory auditor– Visit Reports of Executives from controlling offices

(ZO/HO)

82

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– Profile of the branch

Name of the Branch :

Date of Opening of Branch :Date of Opening of Branch :

Area Classification – M/U/SU/R :

Category of Branch – EL/VL/M/S :

Risk – H/M/L :Risk H/M/L :

Whether Branch is provided with :

Currency Chest : Yes/No

SDV : Yes/No

SDL : Yes/No

ATM Facility : Yes/No

Whether Branch is provided with :

83

Foreign Exchange Business : Yes/No

Govt. Business : Yes/No

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– Profile of the branch

Merchant Banking Business : Yes/No

Mechanized with CBS (Core Banking : Yes/NoMechanized with CBS (Core Banking System

: Yes/No

Particulars of the Manager in-charge of theBranch

: Tenure in the Branch

N S l F TName Scale From To

Existing

Previous

Date of last internal inspection :Date of last internal inspection :

Date of submission of Rectification Confirmation

:

Date of last concurrent audit :

84

Date of submission of ComplianceReport/Rectification Confirmation

:

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– Business Profile of the Branch

• Synopsis of Assets & Liabilities

PositionPosition

Assets As on last day ofthe financial year

As of last Friday pfthe previous month/quarter

As of last Friday ofcurrent month/quarter

Cash

Balance with Bank

Investment

AdvancesAdvances

Inter BranchTransaction (Net Dr)

Other Assets

85

P/L/ A/c (Dr. Balance)

Total

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– Business Profile of the Branch

• Synopsis of Assets & Liabilities

Position

As on last dayof the financialyear

As of last Fridaypf the previousmonth/ quarter

As of last Fridayof current month/quarter

Liabilities

Deposits

Borrowing from Banks

Inter Branch Transaction

Other Liabilities

P/L/ A/c

T t l

86

Total

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– Business Parameters

Position

Particulars As of last Friday of As of last Friday ofythe previousmonth/quarter

ycurrent month/quarter

Deposits

of which low cost deposits

Advances

Non performing Assets (NPA) % to total advances

Recovery performance

of which cash recoveryof which cash recovery

other than cash recovery

Priority sector advances

Export Credit

87

Profit

Staff Productivity observation on sudden spurt or fall indeposit and advances

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– The concurrent auditor would therefore need to theThe concurrent auditor would therefore need to the

following documents in particular before thecommencement of the audit.

• The appointment letter together with the management circular/pp g ginstruction on the subject.

• Acceptance Letter• Communication to previous auditor

– checklist or flow till commencement is given below: -• On receipt of appointment letter:

– Write for No Objection to the immediate previous auditorS d A t l tt l ith t t t f Fid lit– Send Acceptance letter along with statement of Fidelity,Confidentiality etc.

– Contact the respective Branch Manager – for programme,arrangement and status report

88

Conduct of Concurrent AuditConduct of Concurrent AuditUnderstanding the Branch Business Profile– checklist or flow till commencement is given below: -checklist or flow till commencement is given below: -

• To carry with branch during their visit to the branch:– Authorization Letter– Necessary guidelinesNecessary guidelines– Various Formats– Letter head of the branch

• Audit Programme– Allocation of work– Commencement of the work as per schedule given in

subsequent paragraphs

89

Conduct of Concurrent AuditConduct of Concurrent AuditItems to be covered generally on the first dayof concurrent auditof concurrent audit– Physical Verification of Cash in Hand &

Foreign Currency and also verifying that• there is no accumulation of large stocks of heavy cash and

cut/mutilated/soiled notes,• cash holdings are within the prescribed cash retention limit (to avoid

adverse affect on the profitability, risk of theft or robbery and loss ofp y, yinsurance claim).

• cash is promptly remitted to the currency chest or to RBI.• whether, credit for the remittance is received same day or next day

or notor not• promptly disposed off by selling or by remitting as per direction of

the Bank authorities (in case of foreign currency)• entire cash is checked physically at least once in a month by the

90

Manager or any other officer other than the Custodian of Cash

Conduct of Concurrent AuditConduct of Concurrent AuditItems to be covered on the first day ofconcurrent auditconcurrent audit–Physical Verification of Security

forms with the register i.e.g• Bank draft books,• cash order books,

FDR books• FDR books,• cheque books.

–Physical Verification of GovernmentPhysical Verification of Governmentsecurities like• NSC, Bonds, etc. held in Bank's own and Government

S iti h ld i t d

91

Securities held against advances

Conduct of Concurrent AuditConduct of Concurrent AuditItems to be covered on the first day ofconcurrent auditconcurrent audit– Physical Verification of Petty cash, postage, telegram,

stamps in hand/embossed stamps, travelers’ cheques,gift cheques articles and security in safe custody withgift cheques, articles and security in safe custody withgeneral ledger

– Physical Verification of Inward bills for collectionincluding parcels DDs receivable and inland billsincluding parcels, DDs receivable and inland billsdiscounted receivable and also verify that

• there is no old outstanding bills beyond the stipulated timementioned in bills particularly those purchase by any of the otherbranches of the bank or other bank

92

Cash Credit Including Temporary Overdrafts– Whether the branch has identified and classified the

advance in accordance with the guidelines of the RBIadvance in accordance with the guidelines of the RBI and the Head Office.

– Report individually on accounts in which there are irregularities due to:

E d i d iExcess drawing over drawing power.Excess drawing over limitDeficiency in documentationOperations unsatisfactory/no operationDrawings against unclear effectsNon-inspection of securitiesNon inspection of securitiesNon-recovery/absorption of interestNot covered by sanctionUnreported e cessesUnreported excessesDrawings not reflected by QIS where applicable Account not brought to credit as per sanction t

93

terms

Initiatives of the ICAIInitiatives of the ICAIProfessional development committee (PDC) in its 157th

meeting decided to constitute study group in different regionto study system of CA in banks in terms ofto study system of CA in banks in terms of– Scope & coverage– Reporting requirement– Appointment and fixation of remuneration of current auditors– Other similar aspects

PDC constituted a central sub committee at New Delhi withthe following terms of reference– Need for uniformity in the scope of the CANeed for uniformity in the scope of the CA– Need for a revised format for the reporting requirements– Proper mechanism for the appointment of auditors– Development of norms for fixation of remuneration

A th tt hi h th itt / t d i ht– Any other matters which the committee/study group mightdeem fit.

94

Initiatives of the ICAIInitiatives of the ICAIThe sub committee after due consideration decided the following:

– Each bank may carry out risk profiling and risk assessment for itself onthe basis of guidance note on risk based internal audit issued by RBIg yand develop risk management procedures based on such a profile andassessment.

– On the basis of risk profiling and risk assessment done by respectivebank, the concurrent auditors would prepare an audit plan focusing onthe material risk areas prioritization of audit areas and allocation ofthe material risk areas prioritization of audit areas and allocation ofaudit resources in accordance with the risk assessment.

– To have a guidance note on concurrent audit of banks to assists theconcurrent auditors to perform the multifarious tasks assigned to themduring the course of their assignment and to enhance the quality oftheir worktheir work

It was also observed by the committee that there is no uniformityand consistency in reporting and committee felt there is a need tohave reporting formats for the Concurrent Audit that can bebifurcated in two parts: first part can be related to general areasbifurcated in two parts: first part can be related to general areascommon to all the banks and second part can be related with thepeculiarities of the banks/branches and with the separate part forspecialized and uncommon areas of business activity of theconcerned branch.

95

Initiatives of the ICAIInitiatives of the ICAIThe sub group of the sub committee and sub committeeconsidered– Draft reporting format with a decision to sent AASB with a

request to prepare a guidance note– Conducting capsule course for those members involve in the

concurrent auditco cu e aud– Need for proper mechanism for the appointment of concurrent

auditors to bring about transparency and to avoid and removepulls and pressures with the preparation of a panel based on anormnorm

– Draft empanelment form prepared by the officeThe sub committee– Accepted draft empanelment form with minor modificationAccepted draft empanelment form with minor modification– Suggested the empanelment for CA be done by ICAI out of the

firms/members having the relevant experience and allotmentbe made based on RBI panel criteriaS t d ICAI ld h t thi l t it b it f b k t

96

– Suggested ICAI would host this panel at its website for bank tovisit the website and use the panel for their requirement

Initiatives of the ICAIInitiatives of the ICAIIn the matter of remuneration though it was observed by theSub committee that there is a general feeling that the

ti f CA i t ith th l l fremuneration for CA is non commensurate with the level ofthe work and there is need to standardize with the fixationof the minimum amount and to reduce level of variation. Butthe nominee from the banking industry viewed that theg ysame should be avoided for the profitabilityNo further progress in the matter of implementation is foundexcepting publication of two book captioned– Concurrent Audit in Banks published by CPE committee

in the year 2005– Manual on Concurrent Audit published by IASB in the

2008year 2008– Launch of Certificate Course on Concurrent Audit( 2012)

97

THANK YOU