Concurrent Audit Mechanism in banks, scope of audit, working papers
Concurrent Audit Mechanism in banks: The banking industry in India has a huge canvas of history. Banking industry plays a critical role in driving the economic growth. It is closely regulated and supervised to monitor the sector and bring synergies with other sectors. The Government and the banking regulator needs credible financial and non-financial information to channelize the growth in the desired direction and keep economy in proper shape. Banks, function under the tight supervisory and regulatory directions of the Reserve Bank of India to minimise these internal and external risks that face the banking industry.
Apart from this, the non-traditional functions of banks, e.g., foreign exchange activities, merchant banking, portfolio management, investment, etc., have acquired considerable importance during this period. The concurrent audit system of banks has become very crucial and important for banks. The main objective of the system is to ensure compliance with the audit systems in banks as per the guidelines of the Reserve Bank of India and importantly, to ensure timely detection of lapses/ irregularities. In view of the core competence of the auditor in the area of finance and accounting, risk management; understanding of the internal functioning and controls of banks, etc., the banking sector has been relying extensively on them to comply with these requirements of the regulator.
I am happy to share my experience of conducting Concurrent audit in a commercial Bank. In my opinion Cost Accountants in practice can give valuable inputs. Cost Accountants have better understanding of business credibility, financial statements, financial ratios etc.
Scope of Audit
Concurrent audit is a real-time examination of transactions to ensure accuracy, bank compliance, and to prevent frauds. It involves audit of a bank’s financial transactions while they are taking place, verifying loan and deposit accounts, sanctioning processes, bill transactions, foreign Exchange, cash transactions and all other day- to-day activities in the Bank including external compliances.
It is part of a bank’s early warning system to ensure timely detection of irregularities and lapses, and helps prevent fraudulent transactions at branches. In 2015, the Reserve Bank of India asked banks to bring new areas posing risk under the purview of concurrent audit. It also said that the branches with high risk are to be subjected to concurrent audit irrespective of their business size. Many specialised branches such as agriculture, SME, corporate, retail assets, portfolio management, treasury, forex and back office among others are also covered under concurrent audit.
NPA problem- India ranked 5th in bad loans in world: Gross NPAs increased to 10.2% in September 2017, compared to 9.6% in March, according to the Reserve Bank of India (RBI), which has cautioned against further deterioration as gross NPAs could inch up to 10.8% by March 2018.
Banking in India has become service oriented, maturing from the days of ‘walking in business’ to the present situation of 24 hours banking solutions to attract customers. With such widespread and rapid growth of the banking industry and their entry into a wide variety of services like insurance, mutual funds, etc,, the onus of the healthy sustenance and growth of the banking industry lies on the back of reliable financial statements which can only be assured by good quality audits. The bank audit is thus an important step for all banks who seek a better optimization of its overall management.
The changes in the nature and volume of activities of banks also affect the work of the auditors. In particular, the treasury functions of banks such as investments, foreign exchange, etc., have assumed considerable significance in the last few years. The portfolio management services rendered by banks have also been a subject matter of considerable interest during the last couple of years.
Responsibility of Auditor
It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal, disbursement without observing the terms of sanction, failure to exercise proper post-disbursement supervision, even suppression of information relating to unauthorised excess drawals allowed, kite flying in bills and cheques, etc. or bring to light frauds.
A concurrent auditor may not sit injudgement of the decision taken by bank/branch Manager or an authorised official. However, the auditor will necessarily have to see whether the transactions or decisions are within the policy parameters laid down by the Head Office/Board of Directors, they do not violate the instructions or policy prescriptions of the Reserve Bank of India
The auditor of a bank needs to obtain an adequate understanding of the accounting system of the bank to assess the relevance and reliability of the accounting records and other source data underlying the financial statements. He should gain an understanding of the books of accounts and other related records maintained by the auditee including an understanding of the flow of various kinds of transactions. He can gain such understanding through enquiries of appropriate personnel, corroborated by making reference to documents such as accounting and procedures manual, flow charts, underlying documentary evidence and by observing the actual conduct of operations. Audit also covers Security Control over IT system to maintain the integrity of the data & information.
- The concurrent auditors may report the irregularities, wrong calculations etc. to the Branch Manager for an on-the-spot rectification and reporting compliance.
- If these irregularities are not rectified within a reasonable period of time say a week, these may be reported to the head office. If the auditors observe any serious irregularities, these should be straight away reported to Head Office immediately. The auditor will have to lay emphasis on the propriety aspect of the audit. Banks may institute an appropriate system of follow-up of the reports of the concurrent auditors. There must be a system of annual review of the working of concurrent audit.
- Monthly Reporting to Head Office in the prescribed Format within due date.
Types of Activities
To Be Covered The main role of the concurrent audit is to supplement the efforts of the bank in carrying out simultaneous internal check of the transactions and other verifications and compliance with the procedures laid down. In particular, it should be seen that the transactions are properly recorded/documented and vouched. The concurrent auditor is supposed to cover Minimum Audit Programme for Concurrent Audit System in Commercial Banks issued as per Revised Guidelines by RBI
- Letter of engagement, undertaking / comment by the firm to the Bank
- Communication to previous Auditor (NOC)
- 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
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
The fundamental aspects of banking are trust and confidence. This unwavering trust has placed the accountancy profession in a unique position to command authority and respect, it has also been something which has given sleepless nights to not only the regulators but also the professional accountancy bodies across the world. These professional bodies have been working relentlessly towards equipping their members with the latest knowledge and skill sets to help them, perform efficiently and uphold that trust. The Institute too has been committed to that cause and has a clear approach to keeping its members technically sound. Issuing authoritative technical literature has been an integral part of this approach.
This uniqueness of banking industry, however, poses a major challenge in the audit of banks. The answer to this challenge for the auditors lies, to a considerable extent, I personally believe, in two things, one, having a firm grip on the knowledge of the banking industry and second, in keeping update with the professional auditing standard and industry related developments.
In order to equip our members with requisite updated knowledge on functional areas of the banking operations, the Institute has been published various technical material & Guidance Notes. The Institute is actively supporting the members in performing their role as concurrent auditors of banks.