Presentation on theme: "Legal and Regulatory Framework Effective Concurrent Audit"— Presentation transcript:
1 Legal and Regulatory Framework Effective Concurrent Audit Ninetieth Batch - Certificate Course on Concurrent Audit of Banks Internal Audit Standards Board of the ICAI On June 28&29, July 5&6 and July 12 & 13, 2014 At Moradabad Host :- Moradabad Branch of CIRC Faculty:- CA P.R.ARULOLI.Legal and Regulatory FrameworkEffective Concurrent Audit
2 Course ObjectivesTo supplement the effort of the banks in carrying out internal check of the transactions and other verifications and compliance with the procedures laid down;To improve the effectiveness of concurrent audit system in banks;To improve quality and coverage of concurrent audit reports.
3 Plan for the Session. UNDERSTANDING THE CURRENT TREND. LEGAL AND REGULATORY FRAMEWORK.Effective Concurrent Audit.With Approach, Analysis, Case Study,Objective Q & A & Interaction.
4 F.No 7/124/ BOAMASTER CIRCULAR ON AUDIT SYSTEMS - 26TH SEPTEMBER 2012.OBSERVATIONMULTIPLICITY OF OVERLAPPING AUDITS IN PUBLIC SECTOR BANKSENGAGE LOT OF ATTENTION, RESOURCES & TIMEINCREASING COMPUTERIZATION AND SHIFTING OF OPERATIONSON IT BASED SYSTEMSPRESENT AUDIT SYSTEM LAGS TECHNOLOGY ADVANCEMENTAREAS OF CONCERN70 % OF BANK BUSINESS UNDER CASIRREGULARITIES / FRAUDS NOT UNDER CONTROLSA HAS BECOME ROUTINE AND NOT MUCH EFFECTIVE--- POST IMPLEMENTATION OF CBS IN PSB’s
5 UNDERSTANDING OF THE CURRENT TREND GENERAL PRINCIPLEPROPER OFF-SITE MONITIRING CELL TO APPRISE TOP MANAGEMENT OF SERIOUS IRREGULARITIESSOFTWARE BASED AUDIT PROCESSSYSTEM EXPOSURE MANDATORY FOR DGM PROMOTIONSUITABLE TRAINING PROGRAMS
6 TYPES OF AUDITS. RISK BASED INTERNAL AUDIT FREQUENCY SHALL BE UNIFORMLY FIXED(9-12 M) (12-15 M) (15-18 M)SPOT RECTIFICATION CLOSURE BY DAYS.IS AUDITSSEPARATE IS AUDIT TEAMSCISA QUALIFIED PROFESSIONALSCONTINUOUS IS AUDIT ESSENTIAL PART OF IA
7 CONCURRENT AUDIT RBI PANEL AS PER GRADATION SUBSTANTIVE CHECKING OF HIGH RISK AREAS- CREDIT RISK, STATUTORY COMPLIANCE RISK- FRAUD RISK, REVENUE RISKINTERACTION WITH INTERNAL AUDIT DEPARTMENT (QUARTERLY)FEEDBACK TO CA , REVIEW ON ANNUAL BASISSTATUTORY AUDITORS FUNCTION TO BE TRANSFERRED NPA PROVISIONING, INSURANCE COVERAGE, P&L ACCOUNT ALM, CRAR, DICGC, LFAR & TAX AUDIT.
8 LEGAL & REGULATORY • State Bank of India Act, 1955. • Banking Regulation Act, 1949.• State Bank of India Act, 1955.• Companies Act, The Companies Act 2013.• State Bank of India (Subsidiary Banks) Act, 1959.• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.• Regional Rural Banks Act, 1976.
9 LEGAL & REGULATORY The Reserve Bank of India Act, 1934, • Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.• Information Technology Act, 2000.• Prevention of Money Laundering Act, 2002.• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.• Credit Information Companies Regulation Act, 2005.• Payment and Settlement Systems Act, 2007.The Reserve Bank of India Act, 1934,
10 Legal Banking Practice The Uniform Customs and Practices (UCP) for Documentary Credits were first issued in 1933 by the International Chamber of Commerce. The purpose was to overcome conflicting national laws on letters of credit as well as to bring about uniformity in banking practices. The rules have been revised a number of times. The recent revision, UCP 600, took more than three years of consultation and the Consulting Group, which comprised more than 40 representatives from 26 countries proposed changes to the various drafts.
11 Law, Theory and Practice Legal Amount Vs Courtesy AmountIf an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers.Signature"A document may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.""prompt", "immediately" or "as soon as possible":In accordance with Article 46 b UCP 500/ISBP, the above mentioned terms will be disregarded, unless they are an express provision that these terms be used in a document.
12 Other Acts. Transfer of Property Act, 1882 Power of Attorney Act, 1882 Indian Stamp Act, 1899The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
13 REGULATORY DIRECTIVES. Section 35A of the Banking Regulations Act empowers the RBI to issue directions to banking companies generally or in particular, from time to time and such directions shall be binding on all the banking companies. Vested with such power, RBI has issued various circulars regarding banking supervision, banking operations, etc. The circulars issued by RBI deal with issues among other things, accounting, accounting standards, financial statement disclosures, etc.
14 SAMPLE ONEThe contractor shall provide qualified personnel in sufficient quantities to perform this task and conduct security background checks for each employee prior to hiring”It is the responsibility of the supplier to adhere to ( and ensure that the personnel adhere to ) all statutory and regulatory requirements and laws of the land which shall include where applicable ( but not limited to ) the ESI Act 1948, The EPF & MP Act 1952, The Contract Labour (Regulation & Abolition ) Act 1970 and in each case, their applicable rules, together with all RBI IBA regulation, circulars, notices and guidelines as issued from time to time and as applicable to the services provided by the supplier and the personnel under the agreement.
15 SAMPLE ONE (CONT….) CONTRACTOR :- INDIVIDUAL CONTRACT WITH :- FOREIGN BANKLENDOR :- NATIONALISED BANKLOAN AMOUNT :- > 100 LAKHSPRIMARY SECURITY :- RECEIVABLESEPF :- NO REGISTRATION
16 SAMPLE ONE (CONT….) AUDITED PROFIT AND LOSS ACCOUNT AGENCY COMMISSION Cr O CrSALARY EXPENSES CrAUDIT FEES Cr CrSCHEDULE TO AUDITED PROFIT & LOSS ACCOUNTSALARY MOBILE 0.03 Cr 0 CrINCENTIVE 0.30 Cr 0.27 CrSALARY 1.58 Cr 2.96 CrBONUS 0.09 Cr 0 Cr
17 SAMPLE ONE (CONT….) 44 AB AUDIT REPORT CHAPTER XVII B NO / NA NO / NA AUDITED BALANCE SHEET SCHEDULETDS PAYABLEON SALARIES Cr Cr
18 EROSION IN THE VALUE OF SECURITY FAILURE TO PAY STATUTORY DUES BY BORROWERSRBI Ref: DBS:CO:PPD /DATED April 16, 2012.IN PUBLIC INTEREST, IN THE INTEREST OF BANKING POLICY AND IN THE INTEREST OF THE DEPOSITORS
19 THE EXPLANATIONAs you are aware, there are legislations like The Employees Provident Funds and Miscellaneous Provisions Act, 1952 which declare priority to the dues under those enactments over others, sometimes including those of secured creditors. The realization of such dues by respective authorities by proceeding against the assets of the borrower companies cannot be ruled out. This might, in turn, adversely affect the financial position of the borrower firm or result in reduction or loss of security given to the bank, in case the authorities choose to move against such securities. It would therefore be in the interest of the lending banks to ensure that the borrowing firms are making payments of their statutory dues in time, strictly in compliance of the provisions of the relevant statutes.
20 RBI GUIDELINETO SAFEGAURD THE INTEREST OF THE LENDING BANKS, BANKS ARE ADVISED TO OBTAIN CERTIFICATE FROM THE BORROWER’S AUDITOR ON AN ANNUAL BASIS THAT ALL STATUTORY DUES, INCLUDING EPF DUES, HAVE BEEN PAID BY THE BORROWER.
21 SAMPLE TWO POWERS AND DUTIES OF TRUSTEES (C) Without prejudice to the above such general powers, the Trustees shall have the following additional powers(VII) To borrow from time to time such sums of monies for such period and on such terms with or without security as the Trustees may think fit.LOAN AMOUNT LAKHS
22 SUSCEPTIBLE TO FRAUD“ANY MATTER, SUSCEPTIBLE TO BE A FRAUD OR FRADULENT OR ANY FOUL PLAY IN ANY TRANSACTION”
23 Objective Q & A Statutory Audit. Internal Audit. I.S. Audit. Master Circular on Audit System does not deal with:Statutory Audit.Internal Audit.I.S. Audit.Concurrent Audit.
24 Objective Q & A Health of the PSB’s. Prosperity of the PSB’s. Audit is essential forHealth of the PSB’s.Prosperity of the PSB’s.Growth of the PSB’s.Development of the PSB’s.
25 Objective Q & A Software based audit process. The banks should move over toSoftware based audit process.Hardware based audit process.Profit based audit process.Revenue based audit process.
26 Objective Q & A 120 days. 110 days. 100 days. 090 days. Audit Qualification should be rectified by120 days.110 days.100 days.090 days.
27 Objective Q & A Size of the Branch. Size of the Auditor. Concurrent Audit should be allotted from the panel as per gradation on the basis ofSize of the Branch.Size of the Auditor.Size of the Audit.Size of the Proximity.
28 Objective Q & A Annual Basis. Bi-annual Basis Once in Three years Concurrent Audit Performance shall be reviewed onAnnual Basis.Bi-annual BasisOnce in Three yearsOnce in Five years
29 POWER OF ATTORNEY ACT, 1882 Statement of objects and reasons: The first object of this Bill is to render it legal for such donees to execute in and with their own names and seals.The second object of this Bill is to preclude doubts as to the liability of a donee of a power of attorney who makes payments in good faith after the donor of the power has died or become lunatic or bankrupt or insolvent or has revoked the power when the fact of death, lunacy, bankruptcy, insolvency or revocation was not known to the donee at the time of making the payment.The third and last object of the Bill is to provide for the deposit of instruments creating powers-of-attorney and for the evidence of the contents of such instruments.
30 POWER OF ATTORNEY ACT, 1882Definition: In this Act, Power of attorney includes any instrument empowering a specified person to act for and in the name of the person executing it.Execution: The donee of power of attorney may, if he thinks fit, execute or do any instrument or thing in and with his own name and signature, his own seal where sealing is required by the authority of the donor of the power and every instrument and thing so executed and done shall be as effectual in law as if it had been executed or done by the donee of the power in the name, and with the signature and seal, of the donor thereof.
31 POWER OF ATTORNEY ACT, 1882Payment: Any person making or doing any payment or act in good faith, in pursuance of a power of attorney shall not be liable in respect of the payment or act by reason that before the payment or act, the donor of the power had died or become of unsound mind or insolvent or had revoked the power if the fact, unsoundness of mind, insolvency or revocation was not at the time of the payment or act, known to the person making or doing the same.Deposit: An instrument creating a power of attorney, its execution being verified by affidavit, statutory declaration or other sufficient evidence may, with the affidavit or declaration, if any, be deposited in the High Court within the local limits of whose jurisdiction the instrument may be.
32 POWER OF ATTORNEY ACT, 1882Married Women: A married women of full age shall by virtue of this Act, have power, as if she were unmarried by a non-testamentary instrument to appoint an attorney on behalf, for the purpose of executing any non-testamentary instrument, or doing any other act which she might herself execute or do; and the provisions of this Act, relating to instruments creating powers-of-attorney shall apply thereto.
33 Acceptance as acceptable The Public Sector Bank has executed a document with the Secretary and the Treasurer of the Trust who were officers only entitled to operate bank account and lent a sum of 2000 lakhs and the bank was not aware of the changes in the Trustees over a period of time when the loan was renewed on a yearly basis. The reason stated for execution of the documentation is that it was the same way in which the previous private bank has done for the customer and customer satisfaction is paramount.
34 EFFECTIVE CONCURRENT AUDIT 1. UNDERSTANDING THE BASIC PRINCIPLESStandard on Internal Audit (SIA) 2,Basic Principles Governing Internal Audit2. ACCEPTANCE OF ENGAGEMENTStandard on Internal Audit (SIA) 8,Terms of Internal Audit Engagement3. PLANNING THE INTERNAL AUDITStandard on Internal Audit (SIA) 1,Planning an Internal Audit
35 EFFECTIVE CONCURRENT AUDIT 4. EXECUTIONStandard on Internal Audit (SIA) 5, SamplingStandard on Internal Audit (SIA) 6, Analytical ProceduresStandard on Internal Audit (SIA) 7, Quality Assurance in Internal AuditStandard on Internal Audit (SIA) 10, Internal Audit EvidenceStandard on Internal Audit (SIA) 11,Consideration of Fraud in an Internal AuditStandard on Internal Audit (SIA) 12, Internal Control EvaluationStandard on Internal Audit (SIA) 13, Enterprise Risk Management
36 EFFECTIVE CONCURRENT AUDIT 5. DOCUMENTATIONStandard on Internal Audit (SIA) 3, Documentation6. REPORTINGStandard on Internal Audit (SIA) 9,Communication with ManagementStandard on Internal Audit (SIA) 4, Reporting
37 EFFECTIVE CONCURRENT AUDIT 7. SPECIAL CONSIDERATIONSStandard on Internal Audit (SIA) 14,Internal Audit in an Information Technology EnvironmentStandard on Internal Audit (SIA) 15,Knowledge of the Entity and its EnvironmentStandard on Internal Audit (SIA) 16, Using the Work of an ExpertStandard on Internal Audit (SIA) 17,Consideration of Laws and Regulations in an Internal AuditStandard on Internal Audit (SIA) 18, Related Parties
38 PRESENT STATE OF AFFAIRS Audit Manuals are provided by the Banks.Reporting Formats are provided by the Banks.Reporting Frequency is fixed by the Banks.Little scope for the auditors to modify the format.Limited scope for bringing in any innovation.Under these restrictions auditors have to achievemaximum effectiveness.
39 How to add value for the auditee Adhere to the audit scope, frequency and time normsFollow the format provided by the auditeeReview new circulars issued since last auditIdentify the impact of the same in audit program andrevise the audit program accordinglyDiscuss audit observation on day to day basis with theconcerned ?!?For all observations try and give circular / manual Ref:-Highlight the violation to internal / RBI guidelines.
40 How to add value for the auditee Root cause and persons responsible for deviation may be highlighted.Try to get conflicts resolved before finalizing the report.Conflicts shall be handled by the audit team leader.Management response to be obtained for all observations.Implications of deviations to be highlighted.Repeated observations to be highlighted.Pending observations of earlier reports should begrouped at one place.
41 Protection of Auditor interest. Follow Standard on Internal Audit SIA-4Give CLEAR, FACTUAL, SPECIFIC, CONCISE, TIMELY report.Compliance to generally accepted audit procedure.Disclose the limitations on scope.Bring out the Restrictions on usage.Observation should be brought out in right perspective.
42 Follow Standard on Internal Audit SIA-4 Appropriate TitleAppropriate AddresseeReport Distribution list mentioning the receipitients.Period of the coverage.Opening or Introductory Paragraph stating the responsibility.Objectives and scope Paragraph.Executive Summary Paragraph.Observations, findings and recommendations.Comments from Local ManagementAction taken Report.Date of report and Place of Signature with Membership Number.
43 Observation should be brought out in right perspective. Comments on Cash verification in cash vaults and ATMs – On site/Off siteKnow Your Customer (KYC) GuidelinesOther examples of Observation.Perfect Balance, Think Different, Work Different, Innovate Change.