Introduction to concurrent audit

Introduction concurrent audit

1. Inroduction Bank Concurrent Audit

2. Need of concurrent audit Concurrent audit is designed for the continuous external control on the branch Concurrent audit is the first check on transactions by bank

3. Objectives of concurrent audit To supplement the efforts of the bank in carrying out simultaneous internal checks, not just reporting the errors identified . To reduce the interval between a transaction and its examination by an independent person not involved in its documentation. To improve the functioning of the bank, resulting in the upgradation of the working of the bank . To identify whether the Systems & Procedures of the bank have been properly complied and implemented by the bank.

4. Main products of a bank Savings Bank Account Cash Credit Account Retail loans Gold Loans Current Account Bank Guarantees Letter of credit Lockers

5. Scope of audit Verification of Advances – Appraisal, Pre-sanction Documentation Post-sanction Unit inspection Review & Renewal, etc.,

6. Verification of Deposits – New accounts opened including operations in SB/CA, Transactions regarding Term deposits, Inoperative accounts, KYC Norms, etc.,

7. Verification of House keeping – Cash Management, Cheques & DDs, Vouchers, Periodical returns to Controlling office, Maintenance of Specified Registers and Records Sensitive stationeries , Locker maintenance, etc.,

8. Verification of Revenue Leakage – Identification of Under recovery & Excess recovery of Income & Expenditure including Interest credited & paid, P&L Analysis, Budgetary comparison, etc.,

9. Verification of FOREX transactions – NRE/NRO/FCNR accounts, FCRA transactions, Packing Credit, Foreign currency business, Submission of Returns, etc.,

10. Verification of Other Key areas – TDS, Service tax, Staff matters, Government transactions, etc.,

11. Perusal of following reports: CONCURRENT AUDIT REPORT OF THE PREVIOUS MONTH – to understand the Current Status of concurrent audit. RBI/CO INSPECTION REPORT (Latest) – to make note of the Major findings & observations regarding any account, particularly Advances. STOCK AUDIT REPORTS – regarding Cash credit accounts more than Rs. One crores . REVENUE AUDIT REPORTS – to understand the major deficiency found in the Revenue aspect of the Branch SPECIAL AUDITS (if any) – regarding any prime issue covered under such audits.

12. A D V ANC E S Advances (or Credit Facility) are of following types: FUND BASED & NON-FUND BASED Fund based: Term Loans – ex: Housing loan, Education loan, Car loan, Jewel loan, etc., Cash credit – ex. : Loan against Hypothecation of Stock/Debtors. Overdrafts Non-Fund based: Letter of Guarantee & Letter of Credit Co-acceptance of bills Deferred Payment guarantee (for capital goods purchase)

13. PERIODICAL ASSESSMENT OF THE LOAN ACCOUNT: After all the Compliance enlisted above have been done, Loan amount will be disbursed to the borrower. After Disbursement, the Bank has to CAREFULLY follow-up & monitor the following points: Repayment of EMI & Servicing of Interest. Utilising of Limit, Adequate Turnover, Submission of Periodical Stock/Debtor statements, Unit inspection, Audited financial statements, (in Case of Business accounts). Overdue, if any, has been pending for longer period of time

14. PERIODICAL ASSESSMENT OF THE LOAN ACCOUNT: The verification of auditor includes the following: Assess the position of each loan account at the end of the month & inform the bank regarding any IRREGULAR accounts. Verify & analyse the FACTS & FIGURES presented in PERIODICAL STATEMENTS filed by the Borrower. Examine the Frequent UNIT INSPECTION done by the branch & highlight any serious lapses. (Auditor may also accompany the bank officials in any of the unit inspection.) Verify & comment the recovery efforts done by the Branch in case of NPA accounts & Potential NPA accounts.

15. Examine periodically INSURANCE details of each loan & report to bank regarding EXPIRY date or INADEQUATE insurances. Verify the accounts that are due for REVIEW/RENEWAL. Check whether ACKNOWLEDGEMENT OF DEBT (AOD)/REVIVAL LETTER(RL) has been obtained for all loans that are more than 36 months old. (Exception: Jewel Loan & Loan against bank deposits)

16. MORTGAGE: It is an official registration which gives right to bank to hold it as security for the loan. Mortgage is done for Immovable property. Mortgage is of TWO TYPES: SIMPLE MORTGAGE EQUITABLE MORTAGE

17. Mortagage Simple Mortgage or Registered Mortgage Generally done for properties that do not have Original title deeds Ex: Inherited Properties COMPULSORY R E GI S TR A TIO N Equitable mortgage It is MOST COMMON practice followed all over India (since procedures is simple) OPTIONAL R E GI S TR A TIO N Exception: Tamilnadu

18. HYPOTHECATION: It is similar to Mortgage but it is applicable to MOVABLE PROPERTIES that are given as security. Even though the bank does not have Direct control over these securities, Still the bank has the right to take the possession of them whenever required. Unlike Mortgage, there are no Stringent Procedures to be followed. Ex: STOCK, DEBTORS, VEHICLES, ETC.,

19. PLEDGE OR LIEN: Pledge or Lien is surrendering of the Security to the bank’s control for the loan. Hence, the Bank have 100% control over the asset. Ex: Jewel Loan, Loan against deposits

20. Cash credit (CC)/Overdraft loans accounts are distinct from Other type of loan accounts due to following reasons: It is Limit based account mainly given for Business purposes. (Mostly to meet the Working capital gap) It is a continuous account wherein the Borrower utilizes the limit as & when required. There is no Fixed EMI repayment to this loan. The Bank expects the borrower to route all this business turnover through this account. The Credits in this account should be sufficient enough to atleast service the Interest debited.

21. Cash credit (CC)/Overdraft loans accounts are distinct from Other type of loan accounts due to following reasons: Every month Bank fixes the Drawing power periodically (mostly monthly) for this account. Bank reviews the functioning & operation of this account periodically (mostly quarterly).

22. ADVANCES CC/OD ACCOUNTS – SPECIAL POINTS DRAWING POWER(DP): It is common term associated with CC accounts. DP is fixed by the Bank each month based on the Stock statement/Debtors statement filed by the borrower. Significance of DP is that it determines the limit up to which amount can be withdrawn from CC account, i.e., If Limit < DP Max. A m ou n t = Limit If DP > Limit Max. A m ou n t = DP

23. TEMPORARY OVERDRAFT (TOD)/EXCESS ALLOWED: Auditor has to verify whether: Branch manager has used his powers judiciously. Frequent TODs granted to the same account more than the prescribed times. Proper documents & security have been obtained. TODs have been settled within the due dates or there are still outstanding in such accounts.

24. NON-PERFORMING ASSETS (NPA): NPA is one which does not generate any income to the bank. Following may be causes to become NPA: Interest/EMI overdue for more than 90 days. OD/CC account is out of order for more than 90 days. In case of NPA, the bank should Make Provision for Bad debts Should Recognise Income only on RECEIPT basis not on ACCRUAL BASIS

25. VERIFICATION OF NPA: Auditor is concerned with whether the bank has Correctly Classification of Each of Loan account as per IRAC norms Provisioning has been done accurately. Interest & other incomes have been charged as per the norms Auditor should examine the Efforts taken by the Bank for recovery of these accounts. Recovery procedures may be as follows: Regular Follow-up of the accounts & the borrower. Filing Suits in the Courts. Taking action under the Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act, 2002. (SARFAESI act)

26. DEPOSITS BRIEF INTRODUCTION Deposits S a vi n gs Bank Current ac c ou n t Term deposits

27. DEPOSITS KEY ASPECTS & THEIR VERIFICATION In the deposits accounts, the auditor has to verify the following things: Account opening forms Adherence KYC guidelines (including AML) Conduct in the Newly opened Accounts Inoperative accounts

28. Inoperative accounts: The Auditor has to verify the Operations & Status of the Inoperative Accounts once in a week in Off-site. If any discrepancy is noticed, it should be examined so as to ensure NO SERIOUS issue pertains to it. Auditor should also discuss with the bank when any dormant is shifted to ACTIVE status.

29. HOUSE-KEEPING LOCKER MAINTENANCE: Safe Custody Lockers are provided by Banks to their customers for storing & maintaining their Essential items & documents. For Locker operations, One key is provided to the Customer & Another key is available with the concerned official. Only with these two keys, lockers can be accessed. Lockers of different size are held by Bank. For this service, the Bank charges appropriate Locker rent.

30. HOUSE-KEEPING LOCKER MAINTENANCE: Auditor should verify whether: Locker Accessing Register are signed by customer before operating the locker. Locker rent is collected each year. In case of Locker Rent Arrears, Reminders has been sent & customers are prohibited from accessing the locker. After the Locker is closed, the bank should interchange the Lock & Keys before sanctioning it to another customer. In case of a locker not being accessed for a longer time, the Branch has referred the higher authority for breaking the lock.

31. REVENUE LEAKAGE INCOME LEAKAGE: Common reasons: Interest rate wrongly keyed in the CBS Changes done in the Interest rates without Authorisation Interest debited not serviced. INTERST ON LOANS Mistake in the calculation of Processing charges Non-recovery or Under recovery of PC P R OC E S S ING CHARGES Omission to collect it properly. Mistake in calculating the correct amount. OTHER IN C O M E S

32. REVENUE LEAKAGE EXPENDITURE LEAKAGE: Common reasons: Interest rate wrongly keyed in the CBS Changes done in the Interest rates without Authorisation INTERST PAID ON DEPOS I TS Incurring expenditure over & above the powers of the Manager. Incurring without proper bills & vouchers. Unreasonable amount OPER A TING & OTHER EXPENSES

33. OTHER KEY AREAS TDS & SERVICE TAX: With respect to TDS, auditor should verify the following: TDS on Interest paid on Fixed deposits have been properly deducted. Form 15G/H have duly obtained & submitted for applicable cases. TDS made on other applicable expenses such as Rent, Professional charges, etc. should be examined. Whether TDS deducted is remitted within due date (i.e, 7 th of next month) Quarterly TDS return has been filed. Form 16A has been given to respective deductees.

34. OTHER KEY AREAS TDS & SERVICE TAX: With respect to SERVICE TAX, auditor should verify the following: Service tax collected on incomes such as Processing charges, Charges on Specific services rendered have been done at Statutory rate of tax. ST collected have been remitted within due date (i.e. 6 th of next month) Half yearly return have been filed properly.

35. By Vamsi lade & Laxman reddy