Examination of Existence of Investments
The auditor may advise the bank to list out investments held in physical form separately from those held in dematerialised form with the PDO or with a depository.
The auditor should verify the investments held with PDO, custodians and the depository, at the close of business on the date of the balance sheet with the statement of holdings. The auditor should circulate and maintain control over independent investments’ balance confirmation requests to the custodian and other constituents (for example, RBI for SGL and CSGL
balances) in accordance with SA 505, “External Confirmations” issued by ICAI. Furthermore, an auditor should design sufficient alternative audit procedures in situations where the independent confirmations are not received back (after reasonable follow up procedures) before the auditor signs off on the bank’s financial statements. These alternative procedures should also be designed in such a way that independent data points are used for corroborating investment balances. (e.g.: the auditor gets the bank personnel download the investment statement in his own presence.)
The auditor should peruse banks process of periodic physical verification of investments and satisfy himself with adequacy of process and controls. Based on assessment of physical verification process of bank, the auditor may verify the investment scrips physically at the close of business on the date of the balance sheet. In exceptional cases, where physical verification of investment scrips on the balance sheet date is not possible, the auditor may carry out the physical verification on a date as near to the balance sheet date as possible. In such a case, they should take into consideration any adjustments for subsequent transactions of purchase, sale, etc. In the current environment, where the banks generally have their investment securities in dematerialised form, the importance of independent audit confirmation requests multiplies.
Investments are normally dealt with at the head office and not at the branches. However, sometimes, for realisation of interest etc., and other similar purposes, some of the investment scrips may be held at branch offices. In such cases, the auditor needs to examine the records maintained at the head office to record details of scrips held at other locations and request the respective branch auditors to physically verify such scrips as a part of their audit. The auditor needs to obtain a written confirmation to this effect from the branch auditors. The branch auditors should also be requested to report whether adequate records are maintained by the branch for the securities held by it on behalf of the head office.
The auditor may specifically request the branch auditors to examine and report any cases of non-receipt of income against investments for a long period or of scrips being held without being redeemed long after the redemption date, as these situations might be indicative of the scrips being forged or otherwise unrealisable.
In case the investment scrips are held at an unaudited branch, the auditor should request the management to obtain the scrips at the head office for his examination.