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 of f Banks B k

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

Special kinds of business undertaken d k b by bank b kb branches h

1. 2. 3 3. 4. 5. 6. 7. 8.
3

Foreign exchange business NPA recovery business Service branches dealing in Clearing house operations business Corporate banking and Industrial finance b siness business Personal banking business Housing g finance business SSI business Agricultural finance business

Peculiar features of banking business

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

Special audit considerations in b kb bank branch h audits di

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

Banking Product & Services

Acceptance of Deposits Granting of Advances Remittances Collections Clearing Treasury function Cash Management Product Issuance of Letters of Credit and Guarantees Merchant Banking Business Credit Cards Technology based Services Technology-based Dividend/Interest/Refund Warrants

Banking Product & Services

Safe-keeping Services Lockers Handling Government Business Depository Participant (DP) Services ATMs Exchange of Notes Debit Cards Auto Sweep facility in saving account Third Party Advertisement on ATM Network Securitization of future lease rentals Derivatives Reverse Mortgage

Para-Banking Para Banking Activities

Equipment Leasing, Leasing Hire Purchase and Factoring Services Mutual fund business: Money Market Mutual Funds (MMMFs): Insurance Agents: Acting as referee to financial status, business reputation and respectability of their customers. Tax Matters Transaction in Foreign Exchange
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Concurrent Audit
an examination contemporaneous with the occurrence of transactions carried out as near as possible
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Objective
to serve as a administrative support to b a c es branches
RBI Circular also clarifies that CA is essentially a management process.

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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

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Internal Control System in Banks in India

Banks B k i internal 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
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Objective j to ensure

Internal Control System in Banks in India

orderly y an efficient conduct of business adherence to management policies

safeguarding assets through

prevention and detection of fraud and error ensuring accuracy and completeness of the accounting ti record d timely preparation of the reliable financial information
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Vigilance Function in Banks functions

Internal Control System in Banks in India

include surveillance over the suspect staff/ transaction looking into cases of fraud/misappropriation/ connivance etc leading to loss l t the to th bank b k to investigate & detect the reason for building up large non performing assets

relevance to the auditor

in evaluating the efficacy of internal control including g the depth p of p preventing g vigilance g
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Internal Control System in Banks in India

Various Systems in existence Inspection
branch inspection head head-office office inspection RBI inspection

Revenue Audit/Income Expenditure Audit Stock & Debtors Audit Credit Audit/Pre-Disbursement Audit System Audit I f Information ti System S t (IS) Audit A dit Risk Based Internal Audit Depository p y Participants p (DP) ( ) Audit Concurrent Audit
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Internal Control System in B k i Banks in India I di

Organization g each bank normally department, namely has a separate

internal audit Or Inspection reporting to the audit dit committee itt of f the th board b d of f directors di t

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Internal Control System in B k i Banks in India I di

Basel Committee pronounced certain principle required to be followed for an effective internal audit in banks
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Institution of Present System of CA i the in th C Commercial i l Banks B k b by RBI

Background
arose out of the recommendation of the Ghosh Committee on Frauds and Malpractices in Banks

Formal 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 effective Control setting the tone for vigilance internal audit to preclude incidence of serious errors and fraudulent manipulations
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Institution of Present System of CA i the in th C Commercial i l Banks B k b by RBI

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

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

in very large branches CA is
a means of ensuring that the different section function within the parameters and procedures

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 p and linkage the scope of CA may be clearly spelt out.
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Institution of Present System of CA i the in th C Commercial i l Banks B k b by RBI

As stressed by RBI CA a management CA, t process 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
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Institution of Present System of CA i the in th C Commercial i l Banks B k b by RBI

CA thus expected by RBI to verify y whether the transaction or decision are within the policy parameters laid down by the head office that they do not violate the instruction or policy li prescription i ti that they are within delegated authority
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General Guidelines
Framework of RBI Guidelines
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 RBI found that process of examination is conducted either simultaneously with the transaction or in the earliest possible period The concurrent auditor may y report p the minor irregularities, wrong calculations etc to the br. manager for immediate rectification & reporting compliance p
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General Guidelines
Framework of RBI Guidelines
Needed to be subjected to CA
Dept/divn at HO dealing with
Treasury y 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.

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General Guidelines
Framework of RBI Guidelines
These branches would include; Exceptionally large branches. Very large and large branches Special branches handling forex business, merchant banking g business, large g 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
Scope of the engagement g g of Concurrent Auditor is as per the terms of reference of each bank. The Th objective bj ti & scope are more or less l as per regulatory framework. Banks, Banks while appointing concurrent auditors normally provide them with a manual of instruction for the assignment The focus of the manual is more on the areas require to be cover by RBI in its various circular on CA
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General Guidelines
Planning g process as formulated in SIA 1 involves:

Obtaining knowledge of the business g the audit universe Establishing Establishing the objective of the engagement g g Establishing the scope of the engagement g the resource allocation Deciding Preparation of Audit Programme

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Background ..
1) 2) 3) 4) 5) 6) 7) 8) ) 9) Bank Branch audit process Pre-commencement Work Appointment of auditor Types of Bank Branches Peculiar features of banking business Types of accounting software Bank Branch Audit Planning and reporting Internal Controls in banks Use of Audit Softwares ( (CAAT) )
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Background ..
10) Making effective audit plan 11) Making effective Audit Programme 12) Checklists & Audit Procedures 13) Reporting 14) Critical areas for Internal Auditor

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

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Standards on Internal Audit

18 SIA s have been issued by IASB of ICAI and are currently recommendatory in nature Advisable to comply with SIA s to make CA more valueadditive and meaningful 1. 2. 3. 4. 5. 6. 7. 8 8. Planning an Internal Audit Basic Principles Governing IA Documentation Reporting Sampling p g Analytical Procedures Quality Assurance in Internal Audit Terms of Internal Audit Engagement

SIA 1, Planning an Internal Audit

(Issued in May 2006)

Obtaining knowledge of the business Establishing audit universe Establishing E t bli hi the th objectives bj ti of f the th engagement Establishing the scope of the engagement Deciding the resource allocation Preparation of audit programme

SIA 2, Basic Principles G Governing i I Internal t l Audit A dit

(Issued in August 2007)

O Overview i
Explains the principles which governs the internal auditors p professional 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

Provide guidance on documentation requirements in internal audit Form and content of documentation Detention and retention of the d documentation t ti Identification of the preparer

SIA 4, Reporting
(Issued in August 2008)

Overview
Establish standards on the form and content of internal auditors report. Describes basic elements of an internal auditors report g of Deals with different stages communication and discussion of the report Describes the reporting responsibilities of the internal auditor

Basic Elements of the Internal Audit Report

Title; Addressee; Report Distribution List; Period of coverage of the Report; Opening or introductory paragraph;
identification of the processes/functions and items of financial statements audited; and a statement of the responsibility of the entitys management and the responsibility of the internal auditor;

 Objectives paragraph - statement of the objectives and scope of the internal audit engagement; Scope paragraph (describing the nature of f 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.

Executive Summary, highlighting the key material issues, iss es observations, obser ations control weaknesses and exceptions;

SIA 5, Sampling
(Issued in August 2008)

Overview
Provide guidance regarding the design and selection of an audit sample Guide on the use of audit sampling in the internal audit engagement Deals with evaluation of sample p results 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
Provide guidance regarding the application of analytical procedures during internal audit 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 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. 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

(Issued I di in August A 2008)

Overview
Establish standards in respect of terms of engagement of the internal audit activity whether carried out in house or by an external agency. Clarity Cl it on terms t of f 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

Scope Responsibility Authority Confidentiality Limitations Reporting Compensation p Compliance with Standards

Standards on IA (Cont (Contd) d)

9 10 11 12 13 14 15 16 17 18 Communication with Management Internal Audit Evidence Consideration of Fraud in an Internal Audit Internal Control Evaluation Enterprise Risk Management Internal Audit in an Information Environment Knowledge of the Entity and its environment Using the Work of an Expert Consideration of L&R in IA Related Parties

General Guidelines
Types of Activities to be covered
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
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General Guidelines
Types of Activities to be covered
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.
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General Guidelines
Types of Activities to be covered
Deposits
Check the transactions about term deposits received and repaid. Percentage check of interest paid on deposits may be b made, d includ-ing i l di calculation l l ti of f 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
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General Guidelines
Types yp of Activities to be covered
Advances
Ensure that loans and advances have been sanctioned ti d properly l (i.e. (i after ft due d scrutiny ti and d at t the appropriate level). Verify y 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
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General Guidelines
Types of Activities to be covered
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 of f claims l i t DICGC and to d ECGC are in time.
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General Guidelines
Types of Activities to be covered
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.
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General Guidelines
Types of Activities to be covered
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.

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General Guidelines
Types yp of Activities to be covered
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
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General Guidelines
Types yp of Activities to be covered
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
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General Guidelines
Types of Activities to be covered
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.
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General Guidelines
Types yp of Activities to be covered
Foreign exchange transactions
Reconciliation of Nostro and Vostro A/cs. and t t checking test h ki of f 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
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General Guidelines
Types of Activities to be covered
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.
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General Guidelines
Types of Activities to be covered
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 of f Nostro N t and d Vostro account transactions/ balances.

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General Guidelines
Types yp of Activities to be covered
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 , discount, , commission, , and exchange. g interest,
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General Guidelines
Types yp of Activities to be covered
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 day y book to verify y as to how the difference in clearing has been adjusted. Such instances should be reported to Controlling Office in case the difference persists. persists
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General Guidelines
Types of Activities to be covered
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.
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General Guidelines
Types of Activities to be covered
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 g Office. Controlling 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.
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General Guidelines
Reporting System
Minor irregularities should be rectify on the spot Serious irregularities should be straight way reported to the controlling offices for immediate action 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) Follow up action on CA report should be given high priority and rectification of the feature should be done immediately
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General Guidelines
Reporting System 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
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General Guidelines
Extent of Checks
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, income and expenditure items, items inter bank, inter branch transaction, interest paid and interest received, clearing transactions and deposit accounts
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May use test check in case of

General Guidelines
Extent of Checks
Substantive/more detail Check in case of
At a branch with poor performance in certain areas such g on house keeping, p g, advances, , investment as monitoring

Concentrate on
high-value transactions having financial implication for the Bank, rather than those involving lesser amount although number-wise, they may be large.

Should verify
accuracy of statements and returns, compliance with internal inspection/audit reports and as-pects relating to customer service.
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General Guidelines
Extent of Checks
Should identify
problem areas at branch level and offer his suggestions to overcome them.

should h ld give i reasons suggest t 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

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)

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General Guidelines
Audit Documentation 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 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.
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General Guidelines
Audit Documentation should keep all the working papers on record which are used in finalizing the reports 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

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General Guidelines
Audit Documentation papers to be kept in Current audit file:
Branch Audit Programme Branchs 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 bring g them to the notice of concerned official of the Bank.
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General Guidelines
Frequency of checking different items
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. 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). 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.

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

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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 of f irregularities. i l iti
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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.

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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 of f 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 systems y and procedures and safeguards.
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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
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General Guidelines
Maintenance of appropriate Record
The various items to be normally y recorded are g given below: -

Date

Irregularity Observed

Initial/authorisation Initial of Bank official of Concurrent Auditor Initial/authorisation Initial of Bank of Concurrent Official Auditor

How Date of Irregularity Rectificatio Rectified n

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
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General Guidelines
Reporting Frauds
The concurrent Th t auditor, dit while hil carrying i out t concurrent audit of the branches will ensure that t at t the e laid a d do down gu guidelines de es a and d 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.
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General Guidelines
Annual Report (AR)
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

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. g this tenure, , the concurrent auditor will also conduct audit on During 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.

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General Guidelines
Confirmation Required
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 of f the branch is reflected correctly. 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

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Conduct of Concurrent Audit

Audit Programme General Reference
the general references should be drawn from the sources, including: Banks 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)

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Conduct of Concurrent Audit

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 SDV SDL ATM Facility Whether Branch is provided with Foreign Exchange Business Govt. Business : : : : : : : : : : : : : Yes/No Yes/No 83 Yes/No Yes/No Yes/No Yes/No

Conduct of Concurrent Audit

Understanding the Branch Business Profile
Profile of the branch
Merchant Banking Business Mechanized with CBS (Core Banking System Particulars of the Manager in-charge of the Branch : : : Yes/No Yes/No Tenure in the Branch N Name 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 S l Scale F From T To

Conduct of Concurrent Audit

Understanding the Branch Business Profile
Business Profile of the Branch
Synopsis of Assets & Liabilities
Position Assets As on last day of the financial year As of last Friday pf the previous month/ quarter As of last Friday of current month/ 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

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

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Conduct of Concurrent Audit

Understanding the Branch Business Profile
Business Parameters
Position Particulars As of last Friday y of the previous month/quarter As of last Friday y of current month/ 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

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 of f Fidelity, Fid lit Confidentiality etc. Contact the respective Branch Manager for programme, arrangement and status report

88

Conduct of Concurrent Audit

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

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Conduct of Concurrent Audit

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 p profitability, y, risk of theft or robbery y 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

Items to be covered on the first day of concurrent audit

Physical Verification of forms with the register g i.e.

Bank draft books, cash order books, FDR books, books cheque books.

Security

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
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Conduct of Concurrent Audit

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

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 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:

Excess drawing E d i over drawing d i power. Excess drawing over limit Deficiency in documentation Operations unsatisfactory/no operation Drawings against unclear effects Non-inspection Non inspection of securities Non-recovery/absorption of interest Not covered by sanction Unreported excesses e cesses Drawings not reflected by QIS where applicable Account not brought to credit as per sanction t terms
93

Initiatives of the ICAI

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

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.

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Initiatives of the ICAI

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 by y 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

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

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 aud audit 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

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 panel l at t 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

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 of f the work and there is need to standardize with the fixation of the minimum amount and to reduce level of variation. But g industry y viewed that the the nominee from the banking same should be avoided for the profitability 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)

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