Audit Approach
Bad housekeeping provides ample scope for frauds. Inter branch account has been very sensitive area and can prove to be problematic or prone to errors and frauds. The Auditor should review the system of operation for such sensitive account. Several times it has been observed that there are old entries in such accounts due to migration issues. The auditor should check thoroughly the details of such entries with their ageing and also the improvement in settlement of the entries on a periodic basis by the Bank and its reporting to the audit committee. Such old entries have been noticed between the Treasury Branch and other Branches/ Head Office.
Every bank has its own procedures and methodology for inter branch transactions hence it is very important for the auditor to understand the procedure followed by the bank for recording inter-branch transactions. The procedure followed by the bank for maintaining inter-branch transactions should be as per the RBI requirements.
RBI has directed banks to introduce the system of segregating DD/TT/MT transactions, with reconciliation at weekly intervals and close monitoring of large amounts vide its circular no. DBS.CO.SMC.BC No. 28/22.09.001 dated 20th August, 1998.
Bank has to provide 100% provision against the net debit balance arising out of the un-reconciled entries outstanding for more than 6 month in the inter-branch account, from the year ending March 31st, 2004 vide its circular no. DBOD No. BP.BC. 73 /21.04.018/2002-03 dated 26th February, 2003.
As per RBI Circular from 1st April 1999, Bank should maintain category wise/Head wise accounts of various types of transactions under inter branch accounts and the netting off the transactions should be done on category wise, hence the net debit in one category is not to be set-off against net credit in another category.
Banks have been advised by RBI to segregate the credit entries outstanding for more than five years in inter-branch accounts and transfer them to a separate Blocked Account which should be shown in the balance sheet under the head ‘Other liabilities and provisions–Others’ (Schedule 5). While arriving at the net amount of inter-branch transactions for inclusion in the balance sheet, the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries. Banks have been advised that any adjustment from the Blocked Account should be permitted only with the authorisation of two officials, one of whom should be from outside the branch concerned, preferably from the controlling/head office if the amount exceeds Rs.1 lakh
There are some transactions like dividend warrant, interest warrant, refund order etc. which required special attention because in the recent past number of transactions has been reported by the bank in these groups. In these transactions the funds are deposited at one branch and payments take place at many branches. Hence to prevent the frauds the outstanding balances of these accounts should be checked with professional skepticism.
Auditor should review all material transactions accounted in inter-branch account just before the year end and where required, request the bank management to rectify the same by accounting in the correct account head.
The auditor should cautiously review all material transactions outstanding in inter branch account even if it is outstanding for more than 6 month for which 100% provision is made.
The auditor should check all adjustments in the account and ensure that the adjustments are done properly and supported by adequate documentary evidence as to its validity. Also verify that the reversal entries are made under proper authority and after due explanation and evidence.
The account should be adjusted only on the basis of advices and not on the strength of entries found in the statement of account received from other branches.
Prompt action should be taken preferably by central authority, if any entries particularly debit entries are not responded to any branch within a reasonable time.
The auditor should report on the year end status of inter branch accounts indicating the dates upto which all or any segments of accounts have been reconciled. The auditor should also indicate the number and amount of outstanding entries in the inter branch accounts, giving the relevant information separately for debit and credit entries. The auditor can obtain the relevant information primarily from branch audit reports.
Normally Inter-branch accounts are reconciled at HO and unreconciled entries are sent to originating branches for their response. Branch auditor is expected to check whether such responses are sent promptly.
Branches must ensure to respond the entries in Inter Branch Transaction System (IBTS) at their earliest. Items of revenue nature such as travelling expenses bills, and any other expense/income item should not be allowed to float in Inter Branch Transaction System (IBTS) for a longer period.
Nostro Accounts at branch – Branches should also prepare reconciliation statement (REC) relating to those accounts for each of the Foreign Offices or Foreign Correspondents, as the case may be for examination by SBAs.