Procedure for Conducting Concurrent Audit of Banks

Areas to be Covered

Bank Concurrent Audit is a kind of internal audit/ where auditor responsibility is to review and correct assign bank branch internal control system.

However compare to other internal auditing, concurrent audit is little different; in concurrent audit auditor seats in branch for whole month (either himself/herself or his/her assistant) like any other branch employee, bank also allots a separate PC to them for their work. However like other employee he doesn’t report to Branch Manager since he recruited by HO hence work with Branch Manager.

Most important challenges to any auditor in concurrent audit is, he seats in branches do audit of branch books, identify branch employee mistakes, ask them to rectify even if they are not directly liable to do so and with all this maintain good relation with bank employees.

We must note that this is very routine job until and unless you are highly interested in banking sector and want to learn and grow in banking sector, in that case this is an excellent platform, it might not be very remunerative at begging but learning is unlimited if you really want to learn since you have access of all area of any bank branch like any other internal auditor there is no limitation in your scope as a concurrent audit.

Some Important information about Bank concurrent Audit

Attendance schedule
Senior Partner attendance – 8 to 10 Days
Audit assistant – 20 to 25 Day

Payments
Normally varies from 8 to 16 Thousand per Branch depend on size of Branch.
However you may get extra incentive as rewards, if you identify some fraud in bank and let Zonal office and HO management to aware of this.
Auditor may also get some work as other assignment to identify fraud in other banks etc.

Important point to checks

I. Revenue Leakages
Objective of this is to identify and review area of revenue leakages on day to day basis. Most of auditors limit this area as checking of charges for cheque returns either inwards or outwards, DD charges, penalty and interest for not making interest payment on time in case of CC or OD, not submitting of stock statements.

However in most of the cases auditor doesn’t check month on month interest calculations with believe that since it is system generated it will be true, even if during new loan & advances review he found some differences in his calculation and system generated interest calculations. In this case he accept that his calculation is wrong, however I will suggest we must go ahead and escalate this issue to HO, in 90 % of the cases we may be wrong even if, it will improve our understanding about interest calculation and we will not make such mistake in future, but suppose our observation lie in 10 % of the cases where we are right what can be the benefits.

From bank point View
1) If interest is under calculated
a. Bank will able to save crors of Rs
2) If it is over calculated
a. Bank will able to save its goodwill in market which may lose if some outsiders identify this case (By this bank can eliminate most of legal audit, compliance etc before arising which may arise if some outsider identify this satiation). In this case bank will be most benefited.

From Auditor point of View
1) Auditor will get professional recognition which increases his firm goodwill and he may get some more excellent remunerative work either from same bank of from others.
2) He may get handsome money by way of rewards

II. KYC Norms
It is Know Your Customer means looking for all bank compliance before giving any loan or opening any Deposit accounts. Some important document to be checked is

1) Photo Identification proof
2) Address proof
3) Guarantor having account with bank
4) Income proof mainly in advances
5) Attached attested photograph of customer in account opening form.

III. Cash management
It includes at least once in a month cash physical verification
Identifying reasons of keeping cash in access of retention limit

IV. House keeping
It includes
1) Discrepancies, if any observed during physical verification (Cash, Foreign Currency, Security forms i.e. blank draft cheques etc):
2) Accounts with RBI/SBI have been reconciled
3) Accounts showed Debit balances
4) Balancing of books
5) Reconciliation of Clearing Accounts.
6) TDS deduction in area of salary/Interest on deposits
7) Service tax matter if any
8) Any other irregularity the Auditors desire to mention including Computer Deficiencies:
9) Locker rent
10) Total account open and close during the month

V. Foreign exchange transaction if any
An FX transaction may be useful in managing the currency risk associated with importing or exporting goods and services denominated in foreign currency, investing or borrowing overseas, repatriating profits, converting foreign currency denominated dividends, or settling other foreign currency contractual arrangements.

On the contract date the contract amount must be exchanged with your FX provider at the contract rate, irrespective of where the foreign exchange rate is at the time.

How does your FX provider determine your contract rate?

It is the agreed exchange rate at which the currency pair will be exchanged on the date of maturity. Your currency provider determines the contract rate, taking several factors into account including:

the currency pair and the time zone you choose to trade in

the maturity date set by you

inter-bank spot foreign exchange rates

the contract amount, and your currency providers ability to trade small amounts on the inter-bank market

market volatility

inter-bank interest rates of the countries of the currency pair.

VI. Advances
Important area to check
1) Non Submission of Stock Statement
2) Inadequate / Non Insurance of Stock
3) CC Accounts Due for Review as at end of Month
4) Branch manager Visit to HNW customer place
5) Cases of Overdrawing in CC/OD Accounts
6) Cases of Overdrawing in Term Loan Accounts
7) Irregularities / Defects in documentation / Non-Compliance of Terms – this require through checking of all document start from KYC till assurance of loan amount and payment of installment on time
8) NPA Position on month on month basis
9) List of Potential NPA

VII. Deposit
Other then KYC we need to check all transaction over and above Rs 10 Lakh objective is to identify any abnormal transaction.
Debit balance in deposit account.

I thing I have cover most of important area that we need to look during bank concurrent audit, however this list is not exclusive but it is inclusive as I discussed at the begging of this post that bank concurrent audit is like internal audit and as we know internal audit is like ocean which have no limitation.

I hope you will like this information about bank concurrent audit and it will help you in your assignment

Check List of items to be checked in abovesaid areas of coverage

For New account

1)      Name of the account holder

2)      Type of a/c saving/current/time/advance

3)      A/c no

4)      A copy of verified Identity proof

5)      A copy of verified residential address proof

6)      Verification of introducer’s signature

7)      Whether letter of thanks is send or not to the introducer as well as to new depositor.

8)      Signature of authorized signatory obtained

9)      Check Certificate of incorporation/MOA/AOA, board resolution, Copy of PAN, power of attorney

10)   Cross check no of a/c opening forms with a/c opened in the system

11)  Ensure photograph of the a/c holder is obtained and fixed or stapled on the a/c opening form.

A/C No.

Name of the A/c holder

PAN/Form 60

Type of account

Operating Instructions

Nomination detail

Sign of the applicants

Sign & Stamp of Relevant Officer

Details of the introducer

Letter of thanks

Scanning of Photo & Sign on the same day

Identity Proof

Residential Proof

Fill up KYC Certification

Imp Notes

For  Transaction

Records/register to be maintained for all cash transaction of the value more than Rs. 10 lacs or

its equivalent in foreign currency.

Records for cash transaction to be maintained for 10 years from the date of cessation of

transaction between bank and customer.

Identification of customer through PAN for Rs.10000 and above transaction

Loan Files checking:

1)   Verify rate of interest with rate circulars

2)   Compare rate of interest and calculate EMI on calculator

3)             Check title of clearance in respect of Housing or any other property loan and whether it is authorized by bank’s approved advocates.

4)      Where immovable properties are held as security by way of deposit of title deeds, verify title deeds register to see whether narration is written for additional limits and all formalities complied with.

5)   In the case of company, Whether common seal affixed on the relevant document.

6)   Check valuation of assets as per govt authorized valuer.

7)   For education loan check receipt or fees payment sleep and confirm it with the college/institution

8)   Check the person’s other loan and installment amount. If total installment amount is more than 60% of its net income, then loan cannot be issued.

9)   Confirm proper insurance coverage for loan asset or mortgaged asset and their renewal.

10)Check ,Are all documents correctly executed in the latest revised prints of

prescribed formats and properly stamped wherever necessary in terms of Stamp

Act as per manual on documentation and as per circulars on the subject

11)Check requirement of Letter of acknowledgement of debt(LAD). If loan

agreement is there then no need to take LAD. If once taken then it is

compulsory to review before 3 years.

12)Ensure maintenance of Insurance register

13)Submission of Tax audit report for all CC a/c

14)Submission of CMA data

15)Check crisil credit rating

16)Submission of monthly Stock statement for C.C. a/c and stock statement

register

17)Ensure regular quarterly stock audit for C.C

18)Compute loan rate in case of LABOD by adding 1.5% to average rate of

all F.D.

19)Physical verification of loan asset

20)Verify whether credit limits are reviewed or not.

21)Verify whether security documents are held with the bank vis-à-vis

stipulation on the sanctioning documents.

22)Verify whether the advances have been classified as per RBI guidelines.

23)Check whether the letters of credit issued by the branch are within the

delegated power and ensure that they are for genuine trade transactions

24)Check the Bank guarantees issued, whether they have been properly

worded and recorded in the register of the Bank. Whether they have been

promptly renewed on the due date.

25)Ensure proper follow up of overdue bills of exchange.

26)Verify whether the submission of claims to DICGC and ECGC are in

time.

27)Registration of charges with Registrar of Companies and Resolution

passed by appropriate authorities. (By filing Form 8)

28)Withdrawal within limit/ Advance Value (Drawing Power Limit) (D/P)

29)Check Processing fees, stamp duty at the time of sanctioning new

advances.

30)Report excess drawing over D.P. (For CC and temporary O.D.)

31)Whether Select Operational Data and Quarterly Information System (now

FRS) Statements in respect of big borrowers have been received

promptly? Whether penal rate of interest@ 1% is being charged for

delayed submission/non-submission?

32)Verify whether the branch has charged lead Bank charges in respect of

advances under consortium norms.

33)Check folio charges

34)Check  Penal interest for delayed/non-submission of returns, financial

statement required to be submitted

35)Check  Penal interest on advances in respect of lapsed sanction/limit.

36)Check Penal interest on excess over limit.

37)Check Overdue interest on all types of bills, loans and packing credits

for overdue period.

38)Check Commitment fee for unutilized limit is collected as per rules.

39)Check Commission of letter of credit, letter of guarantee and charges for

safe custody etc.

40)Check Standing information charges.

41)Check stop payment charges. (For all accounts)

Cash:

1)   Verifying whether exchange of cash between cashiers is made after making entry in the register.

2)   Ensure dual control system for cash safe/counting of bundles.

3)   verifying cash scroll and the token book with cashier’s summary and Cash Abstract.

4)   Verifying whether Cash Remittance in Transit Account is reversed on the same day by debit to a proper head of account designated for it after receipt of proper acknowledgement/receipt where cash is remitted to a branch/Bank.

5)   Verifying whether accounting of currency chest transactions and their reporting to RBI is done promptly

6)   Ensure cash is retained as per cash retention limit of the branch. Report if the cash is retained in excess of the cash retention limit with the reasons thereof.

7)   Verify expense incurred by cash payment involving a sizable amount.

8)    Verifying whether keys to Strong Room, Cash Safe, and Almirah for Security Printing Books are in joint custody of the authorized officials?

9)   Verifying whether there is any entry outstanding in Cash Remittance in Transit Account for more than 3 days

10)Verifying whether the branch remits all its excess cash to link branch or

Currency Chest.

11)Verifying whether the branch remits its surplus balance with other banks

regularly to the designated RBI centre

12)Conducting a surprise physical verification of cash in hand , foreign

currencies, and foreign travelers’ cheques on any day during the month

13)Verifying whether the receipt and delivery of Security Printing Books are

properly recorded under joint signatures

14)Verifying whether physical verification of the Security Printing Books

and tallying with the balance.

15)Whether surprise verification of cash done by officer other than joint

custodian officer/manager.

Clearing:

16)If the branch is independently handling clearing, whether the clearing

account is brought to nil every day, if not, comments to be noted down.

17)Whether safeguards are observed to ensure proper handling and custody

including returned instruments?

18)Whether service charges/incidental charges as prescribed are charged for

the cheques returned in clearing.

19)Whether drawings are allowed against unclear cheques.Whether such

cheques are referred through prescribed register and passed by the

Controlling Officer, if the drawings exceed the prescribed limit whether

these are reported to the Controlling Authority. Examine whether interest

was charged and report such omission for rectification.

20)Verifying entries which remain outstanding for more 2 days and checking

for action taken for their disposal

21)Verifying whether account with the Main Branch is reconciled every

week

Other:

22)Check cheques returned/bills returned register and look into reasons for

return of those instruments.

23)In case of difference in clearing, there is a tendency to book it in an

intermediary suspense account instead of locating the difference.

Examine the day book to verify as to how the difference in clearing has

been adjusted.

24)Such instances should be reported to Controlling Office in case the

difference persists.

25)Check whether debits in income account have been permitted by the

competent authorities. Check the transactions of staff members.

26)Study internal inspection/audit reports and ensure that the branch gives

proper compliance thereto.

27)Verifying whether the deduction of tax at source (TDS) from interest

income on Term Deposits is done as per laid down procedure. Or Form

15H/15G received or not.

28)Verifying whether Form No. 60 where the depositor does not have PAN is

held on record and the same are submitted as per laid procedure (For

deposit accounts)

29)Verify if inoperative accounts ledger and Specimen Signatures are kept

under the custody of Manager/Asst.Manager and access thereto is

controlled. (For deposit accounts)

30)Whether dormant/inoperative accounts are transferred to inoperative

ledger. If not, it should be noted in the register and they should be

transferred. (For deposit accounts)

31)Verify that all transactions relating to inoperative ledgers are allowed

under the written authorization of the Manager.

32)Check Incidental charges and service charges in Saving Bank Account

(including inoperative) having balance below prescribed limit.

33)Check Destruction of old records as per time schedule prescribed.

34)Check Locker rent.

35)30% scrutiny of transactions relating to the payment of pension..

36)Whether the prescribed certificates – Life, Re-employment, Re marriage

etc. obtained, wherever required, in all pension accounts.

37)Physical checking of Govt. and other securities held on behalf of

Investment Department and timely collection of interest thereon and their

maturity proceeds.

Records to be maintained by concurrent auditor:

Permanent File:

1)                   Letter of engagement, undertaking/comment by the firm to the Bank

2)                   Communication to previous Auditor (NOC)

3)                   Audit checklist

4)                   Information regarding branch business, data, nodal officer,status of branch, whether computerized/parallel category of branch, etc.

5)                   Performance of monthly, quarterly, annual report revenue report

6)                   Correspondence with the Bank for any matter

Current File/Working paper File:

1)   Branch Audit Programme

2)   Branch’s statement as on the data of the report on which basis it is prepared

3)   Periodic correspondence with the concerned departmental officer

4)   Irregularities intimated to the Controlling Officer

5)   Discussion of the audit report

6)   Particulars of big borrowers, depositors etc

7)   Circulars received from head office of the auditee Bank

8)   Reporting to branch head in the below format

Date

Irregularity Observed

Initial/Authorization of  the Concurrent Auditor

Initial of Bank Official

How irregularity rectified

Date of rectification

Initial/Authorization of  the Concurrent Auditor for Auditing

Initial of Bank Official

Reporting:

Demand Deposit includes

1)   Credit balance in overdrafts & Cash Credit accounts

2)   Deposits payable at call

3)   Overdue deposits

4)   Inoperative current accounts

5)   Matured term deposits and cash certificates

6)   Certificates of deposits, etc

7)   The cash credit account would be included if the balance is showing credit balance. The current accounts are also payable on demand. The outstanding telegraphic and mail transfer demand drafts are also to be included under the demand deposit head.

Term deposit includes

1)   All deposits repayable after a specified term

2)   Fixed deposits

3)   Cumulative and recurring deposits

4)   Cash certificates

5)   Certificates of deposits

6)   Annuity deposits

7)   Deposits mobilized under various schemes

8)   Ordinary staff deposits

9)   Foreign currency

10) Non-resident deposit accounts, etc