Concurrent Audit of Banks

Evolution, Objective & Compliance areas

( PPF)

CA. Arijit Chakraborty

Organized by IASB of ICAI

C tifi t Course
Certificate C on Concurrent
C t Audit
A dit off Banks
B k
 Types of banks

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

2
 Special kinds of business
undertaken
d k bby bank b k bbranches
h
1. Foreign exchange business
2. NPA recovery business
3
3. Service branches dealing in Clearing house
operations business
4. Corporate banking and Industrial finance
b siness
business
5. Personal banking business
6. Housingg finance business
7. SSI business
8. Agricultural finance business

3
 Peculiar features of banking
business
z Custody of large volumes of monetary items, including
cash and negotiable instruments, whose physical
security has to be ensured
z Deals in a large volume and variety of transactions in
terms of both number and value.
z Operate
p through
g a wide network of branches and
departments, which are geographically dispersed
z The nature of business which makes it susceptible to
Frauds by Customers.

4
 Special audit considerations in
b k bbranch
bank h audits
di

z Effect of the statutory

y and regulatory
g y requirements
q
z The scale of banking operations and the resultant
significant exposures
z Extensive dependence
p on IT to p
process transactions
z Continuing development of new services and banking
practices
z Particular nature of risks associated with the
transactions undertaken by banks

5
 Banking Product & Services
z Acceptance of Deposits
z Granting of Advances
z Remittances
z Collections
z Clearing
z Treasury function
z Cash Management Product
z Issuance of Letters of Credit and Guarantees
z Merchant Banking Business
z Credit Cards
z Technology based Services
Technology-based
z Dividend/Interest/Refund Warrants 6
 Banking Product & Services
z Safe-keeping Services
z Lockers
z Handling Government Business
z Depository Participant (DP) Services
z ATMs
z Exchange of Notes
z Debit Cards
z Auto Sweep facility in saving account
z Third Party Advertisement on ATM Network
z Securitization of future lease rentals
z Derivatives
z Reverse Mortgage 7
 Para-Banking
Para Banking Activities

z Equipment Leasing,
Leasing Hire Purchase and
Factoring Services
z Mutual fund business:
z Money Market Mutual Funds (MMMFs):
z Insurance Agents:
z Acting as referee to financial status,
business reputation and respectability of
their customers.
z Tax Matters
z Transaction in Foreign Exchange

8
 Concurrent Audit

an examination
contemporaneous
with
the occurrence of transactions
carried out
as near as possible
9
 Objective
to
serve
as a
administrative support
to
b a c es
branches

RBI Circular also clarifies that CA is

essentially a management process.
10
 Indispensability
Banking g industry
y
involved in
dealing with public money
thus demands
proper checks and balances
to ensure
close monitoring of the dealing
minimizing the risk arising out
of
the banking business 11
 Internal Control System
in
Banks in India
Banks’
B k ’ iinternal
t l audit
dit
the primary source of information
about
b t
the effectiveness of the risk management
&
internal control system
in the bank
therefore
needs to be effective
12
 Internal Control System
in
Banks in India
Objective
j
z to ensure
– orderlyy an efficient conduct of business
– adherence to management policies
z safeguarding assets through
– prevention and detection of fraud and error
– ensuring accuracy and completeness of the
accounting
ti recordd
– timely preparation of the reliable financial
information

13
 Internal Control System
in
Banks in India
Vigilance Function in Banks
z functions
– include surveillance over the suspect staff/
transaction
– looking into cases of fraud/misappropriation/
connivance etc leading to´
Æl
Æloss t the
to th bank
b k
– to investigate & detect the reason for building up
large non performing assets
z relevance to the auditor
– in evaluating the efficacy of internal control
including
g the depth
p of p
preventing
g vigilance
g

14
 Internal Control System
in
Banks in India
Various Systems in existence
z Inspection
– branch inspection
– head
head-office
office inspection
– RBI inspection
z Revenue Audit/Income Expenditure Audit
z Stock & Debtors Audit
z Credit Audit/Pre-Disbursement Audit
z System Audit
z I f
Information
ti System
S t (IS) Audit
A dit
z Risk Based Internal Audit
z Depository
p y Participants
p ((DP)) Audit
z Concurrent Audit
15
Internal Control System in
B k iin India
Banks I di
Organization
g
each bank normally has a separate
department, namely
– internal audit
Or
– Inspection
– reporting to the´
´ dit committee
´audit itt off the
th board
b d off directors
di t

16
Internal Control System in
B k iin India
Banks I di
Basel Committee
pronounced
certain principle
required
to be followed
for
an effective internal audit
in
banks
17
Institution of Present System of CA
i the
in th CCommerciali l Banks
B k b by RBI
z Background
– arose out of the recommendation of the Ghosh Committee
on Frauds and Malpractices in Banks
z Formal introduction
– in terms of RBI circular dated 11.10.1993 with guidelines
z Subsequent revision and enlargement of scope
– vide circular dated 14.08.1996 & 12.08.1997
z Importance highlighted
– sound internal audit function
– effective Control
– setting the tone for vigilance internal audit to preclude
incidence of serious errors and fraudulent manipulations

18
Institution of Present System of CA
i the
in th CCommerciali l Banks
B k b by RBI
z 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 banks
– substantive checking in key areas and earliest rectification
of deficiency to preclude
the incidence of serious errors & fraudulent manipulation
– to improve the functioning of the branch, leading to up
gradation of working of the branch and prevention of fraud
– compliance with internal audit as well as RBI/Government
of India guidelines
– identification of areas/activities requiring corrective action
and urgency
g y

19
Institution of Present System of CA
i the
in th CCommerciali l Banks
B k b by RBI
zCoverage 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 p performed or decisions are
taken within the policy parameters stipulated by
the Head Office, and is not violating the
instructions or policy prescriptions of the RBI
– The delegated authority is exercised and the
same is within the terms and conditions of the
delegated authority

20
Institution of Present System of CA
i the
in th CCommerciali l Banks
B k b by RBI
zin very large branches CA is
– a means of ensuring that the different section function
within the parameters and procedures
zSystem
System (CA)
– to be integrated
with
other systems of internal audit/
inspection
already in existence
Suggested by RBI in its circular while framing the system, the
g between different form of internal inspection/audit
linkage p and
the scope of CA may be clearly spelt out.
21
Institution of Present System of CA
i the
in th CCommerciali l Banks
B k b by RBI
As stressed by RBI
CA a managementt process
CA,
integral
to
th establishment
the t bli h t
of
sound internal accounting function effective control
setting
the tone
for
a vigilance internal audit
to preclude
the incidence of
Serious error & fraudulent manipulation
22
Institution of Present System of CA
i the
in th CCommerciali l Banks
B k b by RBI
CA thus
expected by RBI
to verifyy
Æ whether the transaction or decision are
within the policy parameters laid down
by the head office
Æ that they do not violate the instruction or
policy
li prescription
i ti
Æ that they are within delegated authority

23
 General Guidelines
Framework of RBI Guidelines
z Concept of CA as directed by RBI conceived´
´ On the recommendation of high level committee setup
by RBI to enquire into various aspect of fraud and
malpractices in banks
z RBI found that process of examination is conducted
either simultaneously with the transaction or in the
earliest possible period
z The concurrent auditor mayy report p the minor
irregularities, wrong calculations etc to the br.
manager for immediate rectification & reporting
compliance
p

24
 General Guidelines
Framework of RBI Guidelines
z Needed to be subjected to CA
– Dept/divn at HO dealing with
• Treasuryy functions ((investment fund management
g including
g
inter 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 and
other risk exposures of the Bank,
– Branches whose aggregate deposits cover not less than
50% of the aggregate deposits of the Bank.

25
 General Guidelines
Framework of RBI Guidelines
zThese branches would include;
– Exceptionally large branches.
– Very large and large branches
– Special branches handling forex business,
merchant banking g business, largeg corporate/
p
wholesale banking business and forex dealing
rooms.
– Branches rated as poor/very poor
– Any other branch where in the opinion of the
Bank concurrent audit is desirable.
Branches subjected to concurrent audit should
normally not be included for revenue/income audit. 26
 General Guidelines
z Scope of the engagement
g g of Concurrent
Auditor is as per the terms of reference of each
bank.
z The
Th objective
bj ti & scope are more or less l as per
regulatory framework.
z Banks,
Banks while appointing concurrent auditors
normally provide them with a manual of
instruction for the assignment
z The focus of the manual is more on the areas
require to be cover by RBI in its various circular
on CA
27
 General Guidelines
Planning
g process as formulated in SIA 1 involves:
´Obtaining knowledge of the business
´Establishingg the audit universe
´Establishing the objective of the
engagement
g g
´Establishing the scope of the engagement
´Decidingg the resource allocation
´Preparation of Audit Programme

28
Background ..
1) Bank Branch audit process
2) Pre-commencement Work
3) Appointment of auditor
4) Types of Bank Branches
5) Peculiar features of banking business
6) Types of accounting software
7) Bank Branch Audit Planning and reporting
8) Internal Controls in banks
9)) Use of Audit Softwares ((CAAT))

29
Background ..
10) Making effective audit plan
11) Making effective Audit Programme
12) Checklists & Audit Procedures
13) Reporting
14) Critical areas for Internal Auditor

30
Audit Programme
An audit program can contain following
columns
z Particulars
z Nos.
z Total Value
z Sample
S l Si
Size
z Criteria for selection of data in sample
z Date/ Months/ Period
z Action to be taken
z Person In charge
31
Audit Procedures
1. Inspection
2. Observation
3
3. Inquiry & confirmation
4. Computation
5. Analytical Procedures

32
Standards on Internal Audit
z 18 SIA s have been issued by IASB of ICAI and are
currently recommendatory in nature
z Advisable to comply with SIA s to make CA more value-
additive and meaningful

1. Planning an Internal Audit

2. Basic Principles Governing IA
3. Documentation
4. Reporting
5. Sampling
p g
6. Analytical Procedures
7. Quality Assurance in Internal Audit
8
8. Terms of Internal Audit Engagement
 SIA 1, Planning an Internal
Audit
(Issued in May 2006)
zObtaining knowledge of the business
zEstablishing audit universe
zEstablishing
E t bli hi the
th objectives
bj ti off the
th
engagement
zEstablishing the scope of the
engagement
zDeciding the resource allocation
zPreparation of audit programme
 SIA 2, Basic Principles
G
Governing
i IInternal
t l Audit
A dit
(Issued in August 2007)

O
Overview
i
z Explains the principles which governs the internal
auditor’s pprofessional responsibilities
p :
– Integrity, objectivity and independence,
– Confidentiality
– Due professional care
care, skills and competence
– Work performed by others
– Documentation
– Planning
– Evidence
– Internal Control and Risk Management
– Reporting
SIA 3, Documentation
(Issued in August 2007)

Overview
zProvide guidance on
documentation requirements in
internal audit
zForm and content of
documentation
zDetention and retention of the
d
documentation
t ti
zIdentification of the preparer
SIA 4, Reporting
(Issued in August 2008)

Overview

z Establish standards on the form and

content of internal auditor’s report.
z Describes basic elements of an internal
auditor’s report
z Deals with different g
stages of
communication and discussion of the
report
z Describes the reporting responsibilities
of the internal auditor
Basic Elements of the Internal Audit
Report

z Title;
z Addressee;
z Report Distribution List;
z Period of coverage of the Report;
z Opening or introductory paragraph;
– identification of the processes/functions and
items of financial statements audited; and
– a statement of the responsibility of the entity’s
management and the responsibility of the
internal auditor;
z Objectives paragraph - statement of the
objectives and scope of the internal audit
engagement;
z Scope paragraph (describing the nature
off an internal audit):
)
– a reference to the generally accepted audit
procedures in India,
India as applicable;
–a description of the engagement
background and the methodology of the
i t
internal
l audit
dit together
t th with
ith procedures
d
performed by the internal auditor; and
– a description of the population and the
sampling technique used.
z Executive Summary, highlighting the key
material issues,
iss es observations,
obser ations control
weaknesses and exceptions;
SIA 5, Sampling
(Issued in August 2008)

Overview

z Provide guidance regarding the design

and selection of an audit sample
z Guide on the use of audit sampling in the
internal audit engagement
z Deals with evaluation of sample
p results
z Guidance on use of sample in risk
assessment procedures and tests of
controls performed by the internal auditor
Design of Sample
The internal auditor should consider:
– Specific audit objectives
– Population
– Sample size
Selection of Sample
Commonly used methods:
– Random selection and Use of CAATs
– Systematic selection
– Haphazard selection
SIA 6, Analytical Procedures
(Issued in August 2008)

Overview

z Provide guidance regarding the

application of analytical procedures
during internal audit
z 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
y procedures in the overall review at the
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 internal

audit should provide reasonable assurance that
the internal auditors comply with professional
standards, regulatory and legal requirements
so that the reports issued by them are
appropriate in the circumstances.
circumstances

z provide the guidance to the person entrusted

with the responsibility for the quality of the
internal audit whether in-house internal audit or
a firm carrying out internal audit.

z This Standard also provide the extensive

knowledge about the internal quality reviews,
external quality reviews and communicating the
SIA 8, Terms of Internal Audit Engagement
(I
(Issued
d iin August
A 2008)

Overview
z Establish standards in respect of terms
of engagement of the internal audit
activity whether carried out in house or
by an external agency.

z Clarity
Cl it on terms
t off internal
i t l audit
dit
engagement is essential for inculcating
professionalism
p and avoiding
g
misunderstanding as to any aspect of
the engagement.
Elements of Terms of Engagement

z Scope
z Responsibility
z Authority
z Confidentiality
z Limitations
z Reporting
z Compensation
p
z Compliance with Standards
Standards on IA (Cont
(Cont’d)
d)

9 Communication with Management

10 Internal Audit Evidence
11 Consideration of Fraud in an Internal Audit
12 Internal Control Evaluation
13 Enterprise Risk Management
14 Internal Audit in an Information Environment
15 Knowledge of the Entity and its environment
16 Using the Work of an Expert
17 Consideration of L&R in IA
18 Related Parties
 General Guidelines
Types of Activities to be covered
z Cash
– Daily cash transactions with particular reference
to any abnormal receipts and payments.
– Proper accounting of inward and outward cash
remittances.
itt
– Proper accounting of Currency Chest
transactions, its prompt reporting to RBI.
– Expenses incurred by cash payment involving
sizeable amount, whether such expenditure is
authorized
th i d by
b appropriate
i t authority.
th it
47
 General Guidelines
Types of Activities to be covered
z Investments
– Ensure that in respect of purchase and sale of
securities the branch has acted within its
securities,
delegated power having regard to its Head
Office instructions.
– Ensure that the securities held in the books of
the branch are physically held by it.
– Ensure that the branch is complying with
RBI/Head Office g guidelines regarding
g g BRs,, SGL
forms, delivery of scripts documentation and
accounting.
– Ensure that the sale or p purchase transactions
are done at rates beneficial to the Bank.
48
 General Guidelines
Types of Activities to be covered
z Deposits
– Check the transactions about term deposits
received and repaid.
– Percentage check of interest paid on deposits
may beb made,
d includ-ing
i l di calculation
l l ti off interest
i t t
on large deposits.
– Check new accounts opened, particularly current
accounts, opera-tions in new current/S.B.
accounts may be verified in the initial periods to
see whether there are any unusual operations.
operations
49
 General Guidelines
Types
yp of Activities to be covered
z Advances
– Ensure that loans and advances have been
sanctioned
ti d properly
l (i.e.
(i after
ft due
d scrutiny
ti and d att
the appropriate level).
– Verifyy whether the sanctions are in accordance
with delegated authority.
– Ensure that securities and documents have been
received and properly charged/registered.
charged/registered
– Ensure that post-disbursement supervision and
follow up is proper, such as receipt of stock
statement installments,
statement, installments renewal of limits etc.
etc

50
 General Guidelines
Types of Activities to be covered
z Advances
– Verify whether there is any mystification of the loans and
whether there are instances indicative of diversion of
funds.
funds
– Check whether the letters of credit issued by the branch
are within the delegated power and ensure that they are
for genuine trade transactions.
– Check the Bank guarantees issued, whether they have
been prop-erly worded and recorded in the register of the
Bank. Whether they have been promptly renewed on the
due 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.
– Verify
V if whether
h th the
th submission
b i i off claims
l i t DICGC and
to d
ECGC are in time.
51
 General Guidelines
Types of Activities to be covered
z Advances
– Verify that instances of exceeding delegated powers have
been promptly reported to controlling/Head Office by the
branch and have been got confirmed or ratified at the
required level.
– Verify the frequency and genuineness of such exercise of
authority beyond the delegated powers by the concerned
officials.
ffi i l
– Verify Balance Sheet items of the borrowal unit.
– Stock verification/security verification.
– Mortgages - Whether properly documented.
documented
– Registration of charges with Registrar of Companies and
Resolu-tion passed by appropriate authorities.
– Guarantees obtained and documents of net worth
statement.

52
 General Guidelines
Types of Activities to be covered
z Advances
– Latest audited accounts of the borrower.
– Non
Non-corporate
corporate borrowers audited accounts where credit
facilities exceed cutoff amount.
– Withdrawal within limit/Advance Value (Drawing Power
Limit).
– Documents
– Verification of Interest calculation to ensure that there is no
revenue leakage.
– Suggestions
gg for legal
g action in respect
p of sticky
y advances
and status of cases, where legal action has been initiated.
– Classification of loans and advances.

53
 General Guidelines
Types
yp of Activities to be covered
z Foreign exchange transactions
– Import transactions
• Collection of Bills
• Direct Bills
• Bills under L/C
– Export transactions
• Bills under L/ C
• Bills
Bill for
f collection
ll ti
– Remittances
• Inward
• Outward
O t d

54
 General Guidelines
Types
yp of Activities to be covered
z Foreign exchange transactions
– L/Cs
• Opened by the branch
• Advised and confirmed by the Bank
– Guarantees
– Financing of Import and Export under various
types of credit facilities
• Indian Rupees
• Foreign Currency
– Facilities

55
 General Guidelines
Types of Activities to be covered
z Foreign exchange transactions
– Reporting of foreign currency transactions to
authorized branch 'A' category.
– Submission of Statements
• Authorities in the Bank
• Other authorities
– Deposit A/cs. of Non Non-resident
resident and Special
Currency A/ c of Resi-dent.
– Booking, utilization and cancellation of Forward
C t t
Contracts.
56
 General Guidelines
Types
yp of Activities to be covered
z Foreign exchange transactions
– Reconciliation of Nostro and Vostro A/cs. and
t t checking
test h ki off transactions
t ti i Nostro
in N t ledger
l d i
in
terms of Reserve Bank of India's RBI guidelines.
– Check the foreign
g bills negotiated
g under letters
of credit.
– Check FCNR and other non-resident accounts
whether the debits and credits are permissible
under rules.
– Check whether inward/outward remittance has
been properly accounted for.
for

57
 General Guidelines
Types of Activities to be covered
z Foreign exchange transactions
– Examine extension and cancellation of forward
contracts for pur
pur-chase
chase and sale of foreign
currency. Ensure that they are duly authorized
and necessary charges have been recovered.
– Ensure that balances in Nostro accounts in
different foreign cur-rencies are within the limit
as prescribed by the Bank.
– Ensure that the overbought/g oversold p position
maintained in differ-ent currencies is reasonable,
taking into account the foreign ex-change
operations.

58
 General Guidelines
Types of Activities to be covered
z Foreign exchange transactions
– Ensure adherence to the guidelines issued by
RBI/HO of the Bank about dealing room
operations.
– Ensure
E verification/reconciliation
ifi ti / ili ti off Nostro
N t andd
Vostro account transactions/ balances.

59
 General Guidelines
Types
yp of Activities to be covered
z Housekeeping
– Ensure that the maintenance and balancing of
accounts,
t ledgers
l d and
d registers
i t i l di
including cash
h
book is proper. Prompt and regular reconciliation
of entries outstanding in the inter-branch and
i t B k accounts,
inter-Bank t suspense account, t sundry
d
deposit account, DDP account, Drafts Account
etc. Ensure early adjustment of large value
entries.
– Carry out a percentage check of calculations of
interest,, discount,, commission,, and exchange.
g

60
 General Guidelines
Types
yp of Activities to be covered
z Housekeeping
– Check whether debits in income account have
b
been permitted
itt d by
b the
th competent
t t authorities.
th iti
Check the transactions of staff members.
– In case of difference in clearing, g there is a
tendency to book it in an intermediary suspense
account instead of locating the difference.
Examine the dayy book to verifyy as to how the
difference in clearing has been adjusted.
– Such instances should be reported to Controlling
Office in case the difference persists.
persists

61
 General Guidelines
Types of Activities to be covered
z Housekeeping
– Detection and prevention of revenue leakages
through close exami-nation of income and
expenditure.
– Check
Ch k cheques
h returned/bills
t d/bill returned
t d register
i t
and look into rea-sons for return of those
instruments.
– Checking of inward and outward remittances
(DDs, MTs and TTs). Reconciliation of bankers
accounts
accounts.
62
 General Guidelines
Types of Activities to be covered
z Other items - High value transactions
– In case the branch has been entrusted with
Government Business,
Business ensure that the
transactions are done in accordance with the
instructions issued by Government, RBI and
Controllingg Office.
– Study internal inspection/audit reports and
ensure that the branch gives proper compliance
thereto.
– Ensure that customer complaints are dealt with
promptly.
– Verification of statements, controlling
g office
returns, Statutory Returns.
63
 General Guidelines
Reporting System
z Minor irregularities should be rectify on the spot
z Serious irregularities should be straight way
reported to the controlling offices for immediate
action
z Fraudulent transaction if detected should be
i
immediately
di t l reported
t d to
t inspection
i ti and
d audit
dit
department (HO) as also to CVO as well as br
manager (unless br. Manager is involved)
z Follow up action on CA report should be given high
priority and rectification of the feature should be
done immediately

64
 General Guidelines
Reporting System
z A special cell in the inspection and audit
department may be created in each bank
to: -
– Review the selection of auditors
– Initiate and operate a system for the appraisal of
the performance on Concurrent auditors
– Ensure that the work of Concurrent Auditors is
properly documented
– Be responsible for the follow-up on audit reports
and the presentation of the quarterly review to
th ACB
the
65
 General Guidelines
Extent of Checks
z Higher Coverage
– balance sheet items,
– investment portfolio,
portfolio
– foreign exchange trans-actions,
– fraud prone/sensitive areas,
– outstanding advances more than a specified amount and
also in accounts with less than a specified amount,
z May use test check in case of
– income and expenditure items,
items
– inter bank, inter branch transaction,
– interest paid and interest received,
– clearing transactions and deposit accounts

66
 General Guidelines
Extent of Checks
z Substantive/more detail Check in case of
– At a branch with poor performance in certain areas such
g on house keeping,
as monitoring p g, advances,, investment
z Concentrate on
– high-value transactions having financial implication for the
Bank,
rather than those involving lesser amount although
number-wise, they may be large.
z Should verify
– accuracy of statements and returns, compliance with
internal inspection/audit reports and as-pects relating to
customer service.

67
 General Guidelines
Extent of Checks
z Should identify
– problem areas at branch level and offer his suggestions to
overcome them.
z should
h ld give
i reasons suggestt steps
t th t may be
that b
taken to avoid their recurrence in case of
– any shortcomings, where an adverse remark is required to
be given,
given
z Should make maximum efforts for
– removal/rectification of irregularities on the spot
(List of irregularities should be given on a daily basis to the
Section In-charge against his receipt under intimation to the
Controlling Officer and it is suggested that their rectification
should be monitored by the Controlling Officer to avoid
unnecessary bulky report by the Concurrent Auditor)

68
 General Guidelines
Audit Documentation
z should document matters, important in providing
evidence that the audit was carried out in
accordance with the basic p principles
p of an audit
and as per terms of reference. The Institute has
also issued SIA 3, Documentation. This should be
referred for the purpose.
p p
z should record the audit plan as per the checklist
and the format of audit report given by the
respective banks.
banks Circulars,
Circulars terms of engagement,
engagement
scope of work etc., and the engagement letter
should also be taken into consideration in this
regard
regard.

69
 General Guidelines
Audit Documentation
z should keep all the working papers on record which
are used in finalizing the reports
z papers to be kept in permanent audit file:
– Letter of engagement, undertaking/comment by the firm to
the Bank
– Audit checklist
– Information regarding branch business, data, nodal officer,
status of branch, whether computerized/parallel category
of branch, etc.
– Performance of monthly, quarterly, annual report revenue
report
– Correspondence with the Bank for any matter

70
 General Guidelines
Audit Documentation
z papers to be kept in Current audit file:
– Branch Audit Programme
– Branch’s statement as on the data of the report p on which
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 his
observation in an appropriate
pp p record and bringg them
to the notice of concerned official of the Bank.
71
 General Guidelines
Frequency of checking different items
z depend on factors such as the guidelines given by the bank in
the scope of work, circulars issued by the RBI from time to
time, etc.
z own strategy/time frame covering all the areas need to be
devise.
(For this purpose, the auditor would need to first identify the
areas at the branch which need greater attention, the areas
which are to be regularly monitored,
monitored the items which are to be
checked daily, and the items which may be checked less
frequently).
z need to go through the previous reports such as the statutory
audit report,
report internal inspection reports,
reports RBI inspection
reports, and concurrent audit reports of the branch as well for
this purpose.

72
 General Guidelines
Monitoring
zWhile the basic responsibility of
monitoring the activities of the branch
rests with the branch in-charge, the
concurrent auditor
auditor’s
s work would
supplement the process with proper
and timely reporting.
reporting

73
 General Guidelines
Infrastructure for Concurrent Auditor
Necessary infrastructural facilities, all circulars
from the controlling office, operating
i t ti /di ti
instruction/directives should
h ld b
be made
d
available to the concurrent auditor.
Coordinator for Concurrent Audit
Concurrent audit is different from the statutory
and other audit of banks,
banks as this former is an
ongoing process. Appropriate co-ordination is
necessary for smooth conduct of the audit and
rectification
tifi ti off irregularities.
i l iti
74
 General Guidelines
Extension Counters/Service Branch
If any extension counter(s) is/are functioning under the
branch, such extension counters should also be taken
under the scope of the concurrent audit at appropriate
intervals.
intervals
In case of a service branch, checking whether a regular
statement of branch accounts are sent to all local
branches and outstanding g entries as per the statement
should also be scrutinized. If the originating entries pertain
to the service branch, duplicate advices would be sent to
the branches. In other case, it is important that the service
branch is informed by sending advices from branches
whenever the rectification entries are passed by branches
among themselves without routing the transaction through
service branch.

75
 General Guidelines
Focus of Concurrent Audit
A study of the modus operandi of the
fraudulent transactions generally indicates
th t the
that th processing
i off transactions
t ti i done
is d
without adhering to the systems and
procedures. This permits an unscrupulous
person to misuse the procedures of the bank
and undertake fraudulent transactions, which
remains
i unnoticed
ti d for f a long
l ti
time.
Concurrent Auditor would therefore, need to
focus on adherence to laid down systemsy
and procedures and safeguards.
76
 General Guidelines
Maintenance of appropriate Record
In order to keep correspondence between the
branch in charge and the Concurrent Auditor
under control,
control instead of daily/weekly reports,
reports
the concurrent auditor may maintain a record
of his observations, duly countersigned by the
bank official in the earliest possible period.
period
The recording should be made on a daily
basis with date with suitable column for
recording rectification/removal.
rectification/removal The record
preferably remains in the custody of the
incumbent in-charge with a copy to
Conc rrent Auditor.
Concurrent A ditor
77
 General Guidelines
Maintenance of appropriate Record
z The various items to be normallyy recorded are g
given below: -

Date Irregularity Initial/authorisation Initial of Bank official

Observed of Concurrent
Auditor

How Date of Initial/authorisation Initial of Bank

Irregularity Rectificatio of Concurrent Official
Rectified n Auditor
z The record should be made available to the officer in charge of the
controlling office or their representatives as and when they visit the
branch to apprise them of the state of working of the branch,
removal/rectification of irregularities by the branch, compliance of
systems and procedures by the branch.
branch

78
 General Guidelines
Reporting Frauds
The concurrentt auditor,
Th dit while
hil carrying
i outt
concurrent audit of the branches will ensure
tthat
at tthe
e laid
a d do
down guguidelines
de es a andd syste
systems, s,
and procedures are followed by the branch to
obviate the possibilities of frauds/irregularities
taking place.
place Wherever any irregular
fraudulent transactions are detected by the
concurrent auditor,, such matters should be
immediately reported to the concerned officer
of the controlling office through a Special
Report
Report.
79
 General Guidelines
Annual Report (AR)
z The Concurrent Auditor would submit an annual report to the
Controlling Office.
Office Features of regular inspection report on all areas
of the branch functioning will be incorporated into this report.

Time for submission of the AR and stay

y at the Branch
z This aspect varies from bank to bank but as a general practice i.e.
unless otherwise instructed, the Concurrent Auditor compiles the
Annual Report within the prescribed time while staying in the branch.
z During
g this tenure,, the concurrent auditor will also conduct audit on
regular basis for that month also and submit a separate concurrent
audit Report for the month, unless, he has been advised to
discontinue the present assignment/proceed for next assignment.
This monthly Concurrent Audit Report is to be submitted alongwith
the Annual Report and a copy handed over to the next concurrent
auditor for them to incorporate the irregularities mentioned in the
monthly report in the next of his first monthly concurrent audit report.

80
 General Guidelines
Confirmation Required
z The Concurrent Auditor would normally report only the irregularities
not rectified And confirm that all the areas mentioned in the check
list/ guidelines have been checked by them. He also needs to
confirm compliance of these instructions by the branches. The
Concurrent Auditor would verify and confirm that provisions made at
the branch on account of interest payable on deposits and
receivable on advances are realistic and regular and make an
appropriate report thereon. While the officials of the branch continue
to be responsible for any over or under provisioning, the concurrent
auditor should verify that all monthly Income and Expenditure
vouchers
h are passed d correctly
tl before
b f th date
the d t so that
th t profit/loss
fit/l off
the branch is reflected correctly.
z The concurrent auditor will also ensure that the interest charged on
advances and interest paid on deposits is as per the guidelines
issued from controlling office and is checked regularly to plug any
revenue leakage. The Concurrent Auditor will also need to point out
instances where rotation of employees has not been done e.g.
employees performing same duty/job for more than one year or as
the administrative p
policy
y of the Bank stipulates.
p

81
Conduct of Concurrent Audit
z Audit Programme
– General Reference
• the general references should be drawn from the
sources, including:
• Bank’s Book of Instructions
• Bank's
B k' Manual
M l on Documentation
D t ti
• Circulars of the Reserve Bank of India issued from
time to time.
• Exchange Control Manual and Rules of FEDAI
(Foreign Exchange Dealers Association of India.
• Inspection Reports of:
– RBI
– B k' Internal
Bank's I l Inspectors
I
– Long Form Audit Report (LFAR) of the statutory auditor
– Visit Reports of Executives from controlling offices
(ZO/HO)

82
 Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– Profile of the branch
Name of the Branch :
Date of Opening of Branch :
Area Classification – M/U/SU/R :
Category of Branch – EL/VL/M/S :
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 :
Foreign Exchange Business : Yes/No
Govt. Business : Yes/No
83
 Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– Profile of the branch
Merchant Banking Business : Yes/No
Mechanized with CBS (Core Banking : Yes/No
System
Particulars of the Manager in-charge of the : Tenure in the Branch
Branch
N
Name S l
Scale F
From T
To
Existing
Previous
Date of last internal inspection :
Date of submission of Rectification :
Confirmation
Date of last concurrent audit :
Date of submission of Compliance :
Report/Rectification Confirmation
84
 Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– Business Profile of the Branch
• Synopsis of Assets & Liabilities
Position
Assets As on last day of As of last Friday pf As of last Friday of
the financial year the previous month/ current month/
quarter quarter
Cash
Balance with Bank
Investment
Advances
Inter Branch
Transaction (Net Dr)
Other Assets
P/L/ A/c (Dr. Balance)
Total
85
Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– Business Profile of the Branch
• Synopsis of Assets & Liabilities

Position
As on last day As of last Friday As of last Friday
of the financial pf the previous of current month/
year month/ quarter quarter
Liabilities
Deposits
Borrowing from Banks
Inter Branch Transaction
Other Liabilities
P/L/ A/c
T t l
Total

86
Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– Business Parameters
Position
Particulars As of last Fridayy of As of last Fridayy of
the previous current month/
month/quarter quarter
Deposits
of which low cost deposits
Advances
Non performing Assets (NPA) % to total advances
Recovery performance
of which cash recovery
other than cash recovery
Priority sector advances
Export Credit
Profit
Staff Productivity observation on sudden spurt or fall in
deposit and advances
87
Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– The concurrent auditor would therefore need to the
following documents in particular before the
commencement of the audit.
• The appointment
pp letter together
g with the management
g circular/
instruction 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 auditor
– Send
S d A Acceptance
t l tt
letter along
l with
ith statement
t t t off Fidelity,
Fid lit
Confidentiality etc.
– Contact the respective Branch Manager – for programme,
arrangement and status report

88
Conduct of Concurrent Audit
z Understanding the Branch Business Profile
– checklist or flow till commencement is given below: -
• To carry with branch during their visit to the branch:
– Authorization Letter
– Necessary 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 Audit
z Items to be covered generally on the first day
of 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 pprofitability,
y, risk of theft or robberyy and loss of
insurance 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 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
Manager or any other officer other than the Custodian of Cash

90
Conduct of Concurrent Audit
z Items to be covered on the first day of
concurrent audit
– Physical Verification of Security
forms with the register
g i.e.
• Bank draft books,
• cash order books,
• FDR books,
books
• cheque books.
– Physical Verification of Government
securities like
• NSC, Bonds, etc. held in Bank's own and Government
S
Securities
iti held
h ld against
i t advances
d

91
Conduct of Concurrent Audit
z Items to be covered on the first day of
concurrent audit
– Physical Verification of Petty cash, postage, telegram,
stamps in hand/embossed stamps, travelers’ cheques,
gift cheques,
cheques articles and security in safe custody with
general ledger
– Physical Verification of Inward bills for collection
including parcels,
parcels DDs receivable and inland bills
discounted receivable and also verify that
• there is no old outstanding bills beyond the stipulated time
mentioned in bills particularly those purchase by any of the other
branches of the bank or other bank

92
z Cash Credit Including Temporary Overdrafts
– Whether the branch has identified and classified the
advance in accordance with the guidelines of the RBI
and the Head Office.
– Report individually on accounts in which there are
irregularities due to:
z Excess drawing
E d i over drawing
d i power.
z Excess drawing over limit
z Deficiency in documentation
z Operations unsatisfactory/no operation
z Drawings against unclear effects
z Non-inspection
Non inspection of securities
z Non-recovery/absorption of interest
z Not covered by sanction
z Unreported excesses
e cesses
z Drawings not reflected by QIS where applicable
z Account not brought to credit as per sanction
t
terms
93
 Initiatives of the ICAI
z Professional development committee (PDC) in its 157th
meeting decided to constitute study group in different region
to study system of CA in banks in terms of
– Scope & coverage
– Reporting requirement
– Appointment and fixation of remuneration of current auditors
– Other similar aspects
z PDC constituted a central sub committee at New Delhi with
the following terms of reference
– Need 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
Any other
th matters
tt which
hi h the
th committee/study
itt / t d group might
i ht
deem fit.

94
 Initiatives of the ICAI
z The sub committee after due consideration decided the following:
– Each bank may carry out risk profiling and risk assessment for itself on
the basis of g
guidance note on risk based internal audit issued byy RBI
and develop risk management procedures based on such a profile and
assessment.
– On the basis of risk profiling and risk assessment done by respective
bank, the concurrent auditors would prepare an audit plan focusing on
the material risk areas prioritization of audit areas and allocation of
audit resources in accordance with the risk assessment.
– To have a guidance note on concurrent audit of banks to assists the
concurrent auditors to perform the multifarious tasks assigned to them
during the course of their assignment and to enhance the quality of
their work
z It was also observed by the committee that there is no uniformity
and consistency in reporting and committee felt there is a need to
have reporting formats for the Concurrent Audit that can be
bifurcated in two parts: first part can be related to general areas
common to all the banks and second part can be related with the
peculiarities of the banks/branches and with the separate part for
specialized and uncommon areas of business activity of the
concerned branch.

95
 Initiatives of the ICAI
z The sub group of the sub committee and sub committee
considered
– 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
co cu e audaudit
– Need for proper mechanism for the appointment of concurrent
auditors to bring about transparency and to avoid and remove
pulls and pressures with the preparation of a panel based on a
norm
– Draft empanelment form prepared by the office
z The sub committee
– Accepted 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 allotment
be made based on RBI panel criteria
– Suggested
S t d ICAI would
ld host
h t this
thi panell att its
it website
b it for
f bank
b k to
t
visit the website and use the panel for their requirement
96
 Initiatives of the ICAI
z In the matter of remuneration though it was observed by the
Sub committee that there is a general feeling that the
remuneration
ti for
f CA is
i non commensurate t with
ith the
th level
l l off
the work and there is need to standardize with the fixation
of the minimum amount and to reduce level of variation. But
the nominee from the banking g industryy viewed that the
same should be avoided for the profitability
z No further progress in the matter of implementation is found
excepting 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
year 2008
– Launch of Certificate Course on Concurrent Audit
( 2012)

97
THANK YOU