How to do concurrent audit of banks?
by Umesh Rijal on 27 January 2014
The word concurrent itself defines its meaning, concurrent means happening at the time. Concurrent Audit means doing the examination of the financial transactions at the time of happening or parallel with the transaction.
Most of the new articles who have been assigned to do the concurrent audit become terrified when they have to go to bank alone, questions like what is this. How to do this? New and horrible banking software? Etc. arises. It is normal to be nervous at the first time but later on everything starts running smoothly. In my case such things had happened even I was out of station alone. So instead of getting lost what to do, we just can learn the things from there. If we do the concurrent audit of banks very precisely then we can learn a lot of banking core knowledge, new banking software, RBI norms and many more. So for the aid of new articles doing concurrent audit I am going to write this article so that they can make intellectual profit from this.
To conduct the concurrent audit of banks we should generally look forward following things:
1. Cash Balance:
Every morning we shall have to check the cash balance of Cash Book of Bank in which all details regarding cash balances are written on daily basis and manager and cashier do the authorization. Once in the month we have to do physical verification of cash in hand with bank and ATM (if any) surprisingly and if any discrepancy found shall be reported in the report.
This is the most sensitive and crucial part of the concurrent audit. KYC stands for “Know Your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity of the beneficiary of account, source of Fund, nature of customer’s business etc, which in turn helps bank to manage their risk prudently. The major things we observe in KYC checking are identity proof and address proof. We should be sure that whether AOF (Account Opening Form) is properly filled or not. The introducer who introduces the new customer to the bank should have maintained his/her account for at least 6 months without falling under inoperative account. In AOF there is clearly mentioned the required documents in order to open the account in bank. Recently RBI has fined some of the nationalized banks and other big banks for non-adherence of KYC norms and hence as a concurrent auditor we should ensure the KYC adherence of the customers and any irregularities should be reported duly in the report. We should also discuss the major irregularities with branch officials and look forward for the solution.
3. Loans and Advance Checking:
The most sensitive part of banking operation s Loans and Advances and their compliances. To check newly sanctioned loans and advances we’ve to ask the Loan Manager of Bank for Document Register and they’ll provide us that. Document register is nothing just a register maintained by bank for their advances, in which they usually write name of the party, details of sanction made, papers submitted by party to bank etc. and is verified by both credit manager and Manager of the Branch. Following are the crucial points to verify any advances:
- Fulfillment of KYC norms and proper fling of AOF.
- Whether CIBIL (Central Information Bureau of India Ltd.) report is good or not. Higher points in CIBIL report show the higher credibility of that party.
- Proper documents in order to sanction the loan are submitted by the party or not like Project Report, past few years’ statement of affairs and projected statement of affairs if the project is new then full proof projection and duly authorized by a Chartered Accountant or an expert on respective fields.
- If the loan is personal loan then purpose of loan should be mentioned, for vehicle loan RC i.e. Joint registration with transport department is required within one month from the date of purchase of vehicle further the copy of original invoice is also required.
- Details of primary and collateral security mortgaged with bank. Creation of charge with ROC.
- The form
should be signed by at least one guarantor.
- For CC (Cash Credit) account party shall have to submit stock statement within 7 days from the end of respective month. And we should have to check the DP (Drawing Power) calculation.
- See the Insurance register in order to verify the expiry of insurance of stock and securities mortgaged with bank.
- We’ve to check the account statement of the party and see the transaction there if any doubt arise then that should be cleared.
- NPAs and potential NPAs are to be checked carefully. And see the effort made by bank to recover the amount from NPAs
- See the regularity in payment of interest, installments etc.
- If Ad hoc limit is provided by bank then check the repayment of same and proper functioning of account because no ad hoc limit can be provided to irregular advance. Ad hoc limit means providing some amount to an existing customer temporarily when the fixed limit provided by bank is insufficient for spending. It should be repaid within 15 to 30 days. Usually there is the limit in providing ad hoc limit which varies over bank to bank.
Generally we have to look through some high balance account and the trail of transaction. If there is any non-operative account then we’ve to make effort to make them operative. We have to see whether interest code and rates are correctly fed in to the system, any change in interest rates are effectively fed into the system or not etc.
If your auditing branch is authorized to do foreign exchange transactions then you are lucky that you got to know about forex. In forex, we look through the exchange rate change and their correct valuation in books. Available foreign exchange with bank, profit and loss in foreign exchange. There are some RBI guidelines regarding foreign exchange and we have to see the adherence of same.
6. Income leakage:
This is the most important and sensitive part of concurrent audit. In most of the banks there are some income leakage and we have to find out that. Generally income leakage arises due to following reasons and we have to look that:
- Undercharge of processing fee, upfront fee and other charges by the bank during disbursement of loans.
- Wrong feeding of interest rates in the system.
- Wrong calculation of profit in forex transaction etc.
To overcome these types of revenue loss of bank we as an auditor go through the calculation and genuineness of the different charges. Though banks are working on highly intelligent software but due to human errors such kinds of leakage arise and we have to minimize those. Both the ICAI and Bank provides the manual for revenue audit, if we go through that very carefully then we can understand the leakage more effectively. We have to generate various MIS reports from the system and analyze them. If bank undercharges the fees then it lost its income & the performance of the bank looks very weak due to this reason its share on the market falls down. On the other hand, if bank does overcharge of such things then the false performance of bank is shown and customer may be misguided due to this. It is the prima facial duty of auditor to shoe the true and fair performance of the clients.
7. Housekeeping and computer:
As a concurrent auditor we have to check overall housekeeping maintenance of the branch. Whether the branch is located in safe area or not, what safety vaults are adopted by the bank, safety of lockers, computer, its software and its security etc.
It is also an important job of bank to provide remittance facility to their customer. We as an auditor should check the trail of remittance. If the remittance made in foreign country then adherence of Foreign Exchange Management Act, 1999, RBI guidelines etc are done or not.
There are other so many fields of banks. And as far as possible we have to cover all the areas, because there may be fraud prone areas. We have to see the clearing process of cheque, Bills for collection and other bills should be checked properly.