Liquidity and Funds Management
Investments
The auditor is expected to comment on the following aspects of investments:
Existence of investment policy and adherence thereto; compliance with RBI guidelines.
System of purchase and sale of investments; delegation of powers; reporting system; segregation of back office function, etc.
Controls over investments, including periodic verification/ reconciliation of investments with book records.
Valuation mode; changes in mode of valuation compared to previous year; shortfall and provision thereof.
Investments held at foreign branches; valuation mode; regulatory reserve requirements; liquidity.
Composition of investment portfolio as per RBI guidelines and the depreciation and diminution in the value of investments, if any, not provided for.
System relating to unquoted investments in the portfolio and the liquidity of such investments.
System relating to SGL/BRs; control over SGL/BRs outstanding at the year end and their subsequent clearance.
System and periodicity of concurrent and internal audit/ inspection of investment activities; follow up on such reports.
System of recording and accounting of income from investments
System of monitoring of income accrued and due but not received.
System of monitoring matured investments and their timely encashment.
Average yield on investments.
System related to Repos
The auditor is required to comment whether there exists any investment policy in accordance with RBI guidelines and whether the same has been properly implemented. For that purpose, the auditor should not only familiarise himself with the investment policy of the bank, including broad investment objectives, authorities competent to make investments, procedure to be followed to put through deals, procedure to be followed for obtaining sanction of the appropriate authority, prescribed exposure limits and the system of reporting but also report whether the same is in existence in accordance with the RBI Guidelines and whether the same is being properly implemented. The RBI has issued detailed guidelines concerning investment portfolio of banks (Master Circular on “Prudential Norms for Classification, Valuation and Operation of Investment portfolio by Banks” DBR No BP.BC.6 /21.04.141/2015-16 dated July 1, 2015). These guidelines include instructions in respect of ready forward or buy-back deals, transactions in government securities for which Subsidiary General Ledger (SGL) facility is available, issue of bank receipts (BRs) and related records, internal control system for buying and selling securities, dealings through brokers and uniform accounting for Repo/Non-Repo transactions. The RBI has also issued detailed guidelines in respect of accounting of investments, including their classification under permanent and current categories. The auditor should familiarise himself with these guidelines and examine whether the bank has complied with them.
The auditor should examine the efficacy of various controls over investments, including the functional separation of various operations, custody of investment scrips, periodic physical verification of investments and reconciliation with book records. Any shortcomings in the prescribed system or non-compliance with the prescribed system should be reported.
The auditor should enquire into the mode of valuation of investments and ascertain whether the mode of valuation followed during the year is same as that followed in the previous year. The auditor’s reporting requirements include: (a) the mode of valuation of year-end investments, and (b) any change in the mode of valuation of investments as compared to that of the previous year.
The auditor should ascertain the method followed for recording of the shortfall (depreciation) in the value of investments which is arrived at by comparing the market value of Investments with their book value as at the year end. If bank has not provided for depreciation on investments then the auditor should state the fact.
While reporting on the shortfall in value as at the year-end, the auditor may give the relevant information separately in respect of various kinds of investments (e.g., government securities, other approved securities, etc.). The manner of arriving at the shortfall in the value of securities should be indicated particularly in the case of non-traded or unquoted securities. Further, the auditor should also verify entries made in “Investment Reserve Account” and proper utilisation of the same, if any.
The auditor should carefully scrutinize the entire investment portfolio keeping in mind the RBI guidelines and comment whether investment portfolio is as per the RBI guidelines. The auditor should also verify that the accounting methodology for Repo/ Reverse Repo transactions is appropriate and uniform throughout the year. For this purpose, the auditor should thoroughly familarise himself with the RBI guidelines. A brief discussion of RBI guidelines is already given in earlier chapters.
In case of unquoted investments, reporting requirements of the auditor include:
Whether appropriate system is followed for valuation of the unquoted investment in the portfolio. The basis of valuation is different depending on the type of investment.
Whether the unquoted investments are liquid in nature, i.e., they are easily saleable in the open market. This depends on the trend of the sale price, net-worth of the enterprise, the market condition, etc.
Amongst internal audit of various areas and departments, internal audit of investment activities is one of the important requirements. While not only the scope and frequency of various types of internal audits in different banks varies, their form also varies, one of which is concurrent audit. Concurrent audit is to be regarded as bank’s early-warning system to ensure timely detection of irregularities and lapses which helps in preventing fraudulent transactions. It also refers to examination of the transactions by an independent person not involved in its documentation. The emphasis is in favour of substantive checking in key areas rather than test checking.
Auditor is expected to report whether the bank has a proper system of conducting concurrent and internal audit of investment activities either through its own staff or external auditors. The option to consider bank’s own staff or external auditors is at the discretion of the individual banks. The auditor is expected to comment on the system in existence. The auditor should also enquire whether the bank has appropriate system for carrying out the inspection of investment activities on a regular basis. The auditor should report whether the bank has undertaken a follow up of the report and implemented relevant suggestions.
Income from investments includes all income derived from the investment portfolio by way of interest and dividend etc., from subsidiaries and joint ventures abroad / in India. The bank should have an appropriate system of recording income so that all the incomes which arose from the transaction which took place during the relevant period and pertain to the bank are actually recorded. The auditor should report whether there are no unrecorded incomes and that income is recorded in proper amounts and that it is allocated to the proper period.
The auditor should report whether there is a proper system for monitoring income accrued and due but not received and whether appropriate steps have been taken by the bank to recover the same.
The bank should have a system of keeping a track of investments which would mature in the near future so that its encashment can be done as soon as they mature. The auditor is required to report whether investments are encashed on time. The auditor should also report whether the bank has a system of monitoring the matured investment, i.e, the matured investments and depending on the requirement for funds, reinvestment of the same. The funds should be reinvested taking into consideration the risk-return analysis.
In case of investments held at foreign branches, the auditor should satisfy himself for existence of such investments. The auditor should examine that such investments are as per the rules and regulations set out by the bank and the RBI. Valuation policy of such investment should be on same line as of investments held in India. Such investment should be critically examined from the point of view of their liquidity.
Auditor should find out average yield on investments made by the bank. Such yield should be compared with the previous year as well as with industry norms. In case of investment where average yield is not adequate, such investment should be scrutinized for their continuity.