Audit Approach and Procedures
Cash
The auditor should count the balance of cash on hand. As far as possible, the auditor should visit the branch at the close of business on the last working day of the year or before the commencement of business on the next day for carrying out the physical verification of cash. If, for any reason, the auditor is unable to do so, he should carry out the physical verification of cash as close to the balance sheet date as possible. It is sometimes arranged by the branch to deposit a large portion of its cash balance with the RBI or the State Bank of India or any other bank on the closing day, in which case, the work of the auditor is reduced substantially; however, the auditor must request the branch to provide sufficient appropriate evidence for the same.
Care should be taken to ensure that if cash is kept separately in different departments or at different locations (e.g., at extension counters), all the balances are verified by the auditor simultaneously. He should also ensure that there is no movement of cash till the counting is over.
The auditor should evaluate the effectiveness of the system of internal controls in branch regarding daily verification of cash, maintenance of cash related registers and vault register, custody of cash, custody of keys, daily cash holding and retention limit of the branch, etc. The auditor should examine whether there is a global (insurance) policy taken for safety of cash from theft or burglary and such policy is effective as on reporting date. This would be relevant for a bank as a whole and there would not be any insurance policy at the branch level. The Central Statutory Auditor should also make an analysis of the quantum of cash holding and whether the insurance cover is adequate.
For physically verifying the cash-on-hand, the auditor may proceed as below:
(a) Physically verify the cash-on-hand. The extent of verification would depend upon the auditor’s assessment of the efficacy of internal control system including adherence to cash retention limits fixed by the head office, mode of custody of cash (whether single or joint), and frequency of cash verification by branch officials and/or by internal or concurrent auditors. Normally, in a bank, 100 notes of each denomination and thereafter 10 packets of 100 notes each are bundled together. Wherever sample checking is conducted, it is advisable that number of bundles of 100’s is fully counted. Besides, the number of notes in samples of bundles of old notes of different denominations may also be checked, the sample size for larger denomination notes being higher than that in the case of smaller denomination notes. The number of notes in a small sample of bundle of new notes of larger denominations (say, Rs. 100 or more) may also be counted. In any event, care should be taken to ensure that all bundles produced for audit verification are properly sealed. Loose/soiled notes should be counted in full. Coins may be counted, or weighed and converted into monetary value as per RBI guidelines. The process and unprocessed notes should be separately kept and mentioned in the cash balance register.
(b) Obtain a certificate from the bank indicating denomination-wise cash balance as per physical verification.
Notes/coins in sealed packets may be accepted based on a written representation from the branch management and cross-checked with subsequent entries in the books of account.
The cash balance as physically verified should be agreed with the balance shown in the cash book and the books of account. When the physical verification of cash is carried out by the auditor before or after the date of the balance sheet, the auditor should reconcile the results of his verification with the cash balance as at the balance sheet date.
Foreign currency notes should also be verified by actual inspection. When incorporating them in the balance sheet, they should be converted at the market rate prevailing on the closing day as notified by the Foreign Exchange Dealers’ Association of India (FEDAI) in accordance with the accounting policy followed by the bank.
Special care needs to be exercised in cases where the branch operates currency chest and/or Small Coin Deposits. In respect of currency chest operations, the branch merely acts as an agent of the RBI to facilitate the distribution of bank notes and rupee coins. The balance in currency chest at any point of time is the property of the RBI and not of the bank. Therefore, while the auditor may not physically count the balance in currency chest at the year-end, he needs to take sufficient safeguards to ensure that currency chest balance is not mixed up in the cash balances produced to him for physical verification. Also, it should be recognised that the bank may be contingently liable for any shortfall in the currency chest balance. Accordingly, the branch auditor should pay special attention to the system of operation of currency chest transactions, recording of such transactions, method and frequency of counting of cash, and reconciliation with the link office. The auditor should perform compliance tests to evaluate the effectiveness of the system of operation of currency chest. He should examine whether the system is such that the transactions relating to deposits into and withdrawals from, currency chest are recorded appropriately. In case the relevant transactions are required to be communicated to a link office of the bank (which maintains the account of RBI) for the purpose of reporting the same to the RBI, the auditor should evaluate the effectiveness of the system of reporting in terms of timeliness and accuracy.
In terms of the Master Direction No RBI/DCM/2016-17/35 Master Direction DCM(CC) No.G -2/03.35.01/2016-17 dated July 20, 2016 on “Levy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-Reporting of Currency Chest Transactions and Inclusion of Ineligible Amounts in Currency Chest Balances” the banks are required to report the minimum amount of deposit into/withdrawal from currency chest of Rs.1,00,000/- and thereafter, in multiples of Rs. 50,000/-. Further, the banks are obliged to follow the instructions regarding timely reporting of Currency Chest Transactions by the banks for branches to which Currency chests are attached; and noncompliance of the RBI instructions invite Levy of Penal Interest for delayed reporting/wrong reporting/non-reporting of Currency Chest transactions and penal measures for cases involving shortages/inclusion of counterfeit bank notes in chest balances/ chest remittances.
All currency chest transactions (deposits into /withdrawals from currency chest) at the respective branch, must be reported through ICCOMS on the same day by 9 PM [by uploading data through the Secured Website (SWS)] to the link office to which the branch is attached for this purpose. Each Link office must, in turn, report to the RBI Issue Office concerned, latest by 11 PM on the same day, the consolidated net position for all the linked branches; except in certain exceptional circumstances, like during strike period and on account of genuine difficulties faced by chests especially in hilly/remote areas and other chests affected by natural calamities, etc., where the default may be acceptable to the RBI, at its discretion. However, in case of wrong reporting representations for waiver will not be considered.
The said directions cover:
a. Levy of penal interest for delays.
b. Wrong reporting and levy of penal interest.
c. Maximum penal interest to be charged.
d. Penal interest for inclusion of ineligible amounts in the currency chest balances.
e. Rate of penal interest (to be levied at the rate of 2% over the prevailing Bank Rate for the period of delayed reporting/wrong reporting/non-reporting /inclusion of ineligible amounts in chest balances).
f. Levy of penal interest in respect of currency chests at treasuries.
The operation of currency chests attached to the various branches of the bank, affects the balances in accounts of RBI maintained by the bank at the designated branches; and it is imperative that the transactions on value date basis are recorded (as it affects the cash balance and that with RBI, on the day of the cash withdrawal from or deposit into the currency chest). Designated branches that maintain the RBI account should pass the entries the day of the transaction for currency chest attached to it; and as the Link Office for other branches operating Currency chests, based on inward communication from such other branches linked to it.
Due to any delays in communication by such branches to the Link Office, the amount required to be debited or credited to RBI Account, remains in a nominal account (Inter branch Adjustments) and affects the RBI account balance in the books of the Link Office. On line communication system should remedy this to ensure recording of entries at the designated Link Office, simultaneously as they take place at all currency chest branches.
The auditor should examine whether the account of the RBI at the designated branch maintaining the RBI Account has incorporated all the currency chest transactions on a value date basis as at the year end. He should also enquire as to whether the Bank has received any communication from RBI regarding any defaults in the operation of the currency chests, that may have penal consequences and whether during the year, any penalties have been levied on this account.
RBI Master Circular No. RBI/2016-17/21 DCM (NE) No.G- 1/08.07.18/2016-17 dated July 18, 2016 on “Facility for Exchange of Notes and Coins” requires that all designated bank branches should display at their branch premises, at a prominent place, a board indicating the availability of note exchange facility with the legend, “Soiled/Mutilated notes are Accepted And Exchanged Here”. Banks should ensure that all their designated branches provide facilities for exchange of notes and coins. The branches should ensure that the note exchange facility is not cornered by private money changers / professional dealers in defective notes.
The auditor should verify that the banks have not stapled the notes. Some banks in spite of RBI’s instructions continue to follow the practice of stapling of note packets. This practice, apart from damaging notes, reduces the life span of notes and renders it difficult for customers to open note packets easily. Banks should do away with stapling of any note packets and instead secure them with paper bands. Further, RBI has issued, Master Circular No. RBI/2016-17/22 DCM (FNVD) G-6/16.01.05/2016-17 dated July 20, 2016 on “Detection and Impounding of Counterfeit Notes” which provides operational guidance on detection and impounding of Counterfeit notes. The Government of India has framed Investigation of High Quality Counterfeit Indian Currency Offences Rules, 2013 under Unlawful Activities (Prevention) Act (UAPA), 1967.
The Third Schedule of the Act defines High Quality Counterfeit Indian Currency Note. Activity of production, smuggling distribution and circulation of High Quality Counterfeit Notes has been brought under the ambit of UAPA, 1967.
Increasingly banks are entering into an agreement with third party vendors for management of their ATM operations. These vendors collect amount from banks and are responsible for loading amount in the ATM. They are also responsible for collecting (deposited by customers) amount from ATM and depositing with bank. The auditor should verify an agreement entered with these vendors. The auditors should also understand the process of providing, collecting and reconciliation etc. with these vendors and test controls in the process. At each period end, the auditor should send independent balance confirmation to these vendors about balance held by them and should verify reconciliation statements.
Also in respect of ATM operations, banks are centralizing the process of monitoring ATM balance. This division monitors balance as per the books and balance as per ATM machine (commonly termed as Switch balance) and their reconciliation and ensuring timely adjustment of reconciling entries. The auditor should understand the process of monitoring of balance, reconciliation etc. and based on the risk assessment should understand controls in the process and strategy of testing these controls.
Where ATMs are operated by bank themselves, auditor should verify the cash at ATMs also and tally the same with books of accounts. At each reporting period end, the auditor should obtain the reconciliation statement and should verify the reconciliation statement.