BANKERS EXPECTATION TOWARDS AUDITORS by qbQK4BBT

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									               BANKERS EXPECTATION TOWARDS AUDITORS

       Bank utilizes the services of Chartered Accountants for different types of Audits
in an extensive manner i.e. for Statutory Audit, Non Statutory Audit, Inspection, etc.

                        Bankers expectation towards Auditors.

     Two aspects:
     A. In the role of Auditor of the Client (i.e. Borrower)
     B. In the role of Auditor of the Bank


            A. In the role of Auditor of the Client (i.e. Borrower)
1. Gap in Auditors scope of work and expectation from them

AUDITED ACCOUNTS certified by STATUTORY AUDITORS forms the basis
of decision making for extending credit facilities to the clients.

   1. The key factor in enhanced credibility is the perception of stakeholders (here
      Banks) that the external Auditors judge the financial statements provided by the
      management.
   2. In recent years corporate scandals have occurred, so third parties (here Banks)
      demand Auditors should be as an honest judge.
   3. Third parties (here Banks) expect the Auditors should have more responsibility
      to detect fraud.
   4. The Auditors role is bringing credibility to financial statements but due to
      limitation of their scope of responsibility, it becomes difficult to detect all kinds
      of fraud.
   5. Therefore, there is so called GAP.
   6. The bankers expect that this gap should be minimum- preferably nil.

2. Fraud & Audit
    Audits are not designed to detect fraud
    Goal: Determine whether the financial statement is free from material misstatements.
    Auditors test only a small fraction of transactions
    Auditors must:
           Be aware of the potential of fraud
           Discuss how fraud could occur
           Delve into suspicious observations and report them to the concerned
              authority
                                                Bankers expectations towards Auditors

In present days—lot of scams are happening--- the scams are not done in one or two
days—but these are cooked over a long period of time---it should be the duty of the
Auditors to be aware of the potential frauds.

Two-way-communication between Auditors and Banks to discuss the possibility of
fraud in the business.

Red Flags
             For Corporate
                  High Debt
                  High Working Capital Requirement
                  Vendors with similar names and address
                  Unapproved vendor or new vendor with very high level of activity

             For Individual
                  Significant change in lifestyle: New wealth
                  Criminal background
                  Chronic legal problems: person looks for trouble
                  Dishonest behavior in other parts of life
                  Beat the system: Break rules commonly
                  Chronically dissatisfaction with job




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                                                   Bankers expectations towards Auditors

                     B. In the role of Auditor of the Bank
1. Types of Audit
      i). Statutory Audit
      ii). Non – Statutory Audits
                  – Concurrent Audit
                  – Internal Audit
                  – Revenue Audit
                  – Stock Audit
                  – System Audit
                  – Special/Snap Audit

2. Role of Auditor
Banks appoint Chartered Accountants to carry out the Audit and Certification of their
books and returns, Role of the Auditor is to carry out Audit and submit the report to the
shareholders.

Role of Auditor:
 To know the policies and business of the bank
 Whether the work is being done as per the policies
 Flag the areas where there is non-compliance or revenue leakage

The Business of Banks is different from others.
In order to carry out Bank Audit the Auditors must know the following aspects of
bank:

2.1. Knowledge of bank business
    The Auditor needs to obtain a level of knowledge of bank's business that will
     enable him to identify the events, transactions and practices that may have
     significant effect on the financial information

    Knowledge of bank's business can be obtained from-
        1. Bank’s annual report to shareholders
        2. Internal financial management reports for current and previous periods
            including budget if any
        3. Previous year's Audit working papers
        4. Discussion with and Letters seeking Information from bank Branch-
            Head
        5. Bank policy and procedures manual




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                                                  Bankers expectations towards Auditors

2.2. Peculiar features of banking business
    Custody of large volume 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 through a wide network of branches and departments, which are
     geographically dispersed
    The nature of business which makes it susceptible to Frauds by Customers.

2.3. Laws applicable to the banking business
   1)  Banking Regulation Act, 1949
   2)  Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
   3)  Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
   4)  State Bank of India Act, 1955
   5)  State Bank of India (Subsidiary Banks) Act, 1959
   6)  Regional Rural Banks Act, 1976
   7)  Companies Act, 1956
   8)  Co-operative Societies Act, 1912 or the relevant state Co-operative Societies
       Act.
   9) Information Technology Act, 2000
   10) Prevention of Money Laundering Act, 2002
   11) Credit Information Companies Regulation Act, 2005
   12) Securitisation and Reconstruction of Financial Assets and Enforcement of
       Security Interest Act, 2002
   13)Service Tax (Chapter V of Finance Act,1994)
   14) Regulations relating to Foreign exchange

3. Letter seeking information
Before actual commencement of Audit a letter may be written to the management of
bank asking for information such as:

   1. Organizational chart of bank and bank branch
   2. List of departments in the bank branch along with name of head of department.
   3. Authority and responsibility of each officer in the bank
   4. Special feature of each banking product
   5. Areas where work has been outsourced to outsiders
   6. Copies of last year annual accounts and current year quarterly/half yearly
      accounts
   7. Information of top 10 borrowers for each kind of loan
   8. Instructions issued by Head office for closing of accounts
   9. Details of software used by bank


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                                                    Bankers expectations towards Auditors

   10. List of reports generated by the software
   11. Accounting policy followed by the bank

4. Usage of knowledge of bank business
   1.   To develop an overall Audit plan
   2.   To identify areas of special Audit consideration
   3.   To evaluate the reasonableness of management representations
   4.   To make judgments regarding the appropriateness of accounting policies and
        disclosures

5. Areas where special knowledge about the business of Bank Branch is required
       Special Features of Banking Business
       Special Audit considerations in bank branch Audits
       Laws applicable to the banking business
       Internal controls in banks
       Additional Controls for Computerised Environment
       Accounting System
       Accounting standards applicable to bank
       Formats of Financial Statements
       Important Circulars of RBI

6. Special Audit considerations in Bank Branch Audit
       Effect of the statutory and regulatory requirements
       The scale of banking operations and the resultant significant exposures
       Extensive dependence on IT to process transactions
       Continuing development of new services and banking practices
       Particular nature of risks associated with the transactions undertaken by banks

7. Additional Controls for Computerised Environment
   1) The system maintains a record of all log-ins and log-outs
   2) If the transaction is sought to be posted to a dormant (or inoperative) account,
      the processing is halted and can be proceeded with only with a supervisory
      password
   3) The system checks whether the amount to be withdrawn is within the drawing
      power.
   4) The system flashes a message if the balance in a lien account would fall below
      the lien amount after the processing of the transaction
   5) Access to the system is available only between stipulated hours and specified
      days only.
   6) Individual users can access only specified directories and files



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                                                   Bankers expectations towards Auditors

   7) Exception situations such as limit excess, reactivating dormant accounts, etc. can
      be handled only with a valid supervisory level password.
   8) A user timeout is prescribed
   9) Once the end-of-the-day process is over, the ledgers cannot be opened without a
      supervisory level password

8. Internal controls in Bank Branch
   1. Work of one staff member is invariably supervised / checked by another staff
      member, irrespective of the nature of work
   2. Banks have a system of job rotation among staff
   3. The financial and administrative powers of each official / each position are fixed
      and communicated to all persons concerned
   4. Branch managers have to send periodic confirmation to their controlling
      authority on compliance of the laid down systems and procedures.
   5. All branches of a bank have a unique code number which is circulated amongst
      all offices of the bank
   6. Fraud prone items like original documents, currency, valuables, draft forms,
      term deposit receipts, traveller’s cheques and other such security forms are in the
      custody of at least two officials of the branch

Conclusion:

After knowing the business of the bank the Auditors would be able to give a
complete report on the following:

      Whether there is any Revenue Leakage
      Whether the Policies of the bank followed
      Whether the applicable regulatory requirements are adhered to
      Whether the systems and procedures are adequate
      What are the risks to which the Bank is exposed to-gradation of the risks
      Assessment of Bank's Internal Control
      Detection of frauds




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