Profit on Exchange Transactions
This item includes profit (net of loss) on dealings in foreign exchange. All income earned by way of foreign exchange commission and charges on foreign exchange transactions except interest are to be included under this head.
As foreign exchange transactions take place only at a few select branches of a bank, this item may not appear in the profit and loss accounts of all branches.
The audit procedures in this regard would include:
a) Checking that the year-end outstanding entries are translated/restated at appropriate rates of exchange as communicated by the Controlling authority, for recording profit/ loss on exchange transactions. After the introduction of CBS, this has become a systems driven adjustment. The auditor should understand the process of foreign exchange rate upload in the system for revaluation of forward contracts and derivative contracts. Each bank has a process to daily upload of day’s foreign exchange rate and curves etc. in the system at the specific time. The auditor should verify independently rates on sample basis which are uploaded in the system. The auditor should verify the internal controls in place for such centralized system upload including whether the same are done under appropriate authority. The auditor should also obtain the audit trail from the system to understand whether subsequent modification in system has been made and reason for the same.
b) Obtaining the revaluation report of outstanding forward exchange contracts and other derivative contracts as on the reporting date and agreeing the currency-wise notional amounts of the forward exchange contracts and other derivative contracts with the foreign currency general ledger to ascertain completeness of revaluation report. Further, on a sample basis, recompute the valuation of the forward exchange contracts and other derivative contracts using a valuation tool.
c) Obtaining the bank’s risk policy to understand the bank’s process of classification of hedge, assessment of hedge effectiveness and accrual of hedge cost. The auditor should obtain the report of hedge transaction outstanding on reporting date and hedge effectiveness.
d) Testing large transactions and check whether these are recorded in compliance with the directions of the controlling authority.
e) Scrutinising transactions recorded in the post–balance sheet period to ascertain that no material items have been ignored up to the year end.
f) Enquiring and obtaining explanations regarding unusual large transactions/entries involving huge gains/ losses for the year and the same needs to be documented in the work paper.