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Manual on Concurrent Audit of Banks (2016 Edition)

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Manual on Concurrent Audit of Banks (2016 Edition) Manual on Concurrent Audit of Banks (2016 Edition) DISCLAIMER: The views expressed in this publication are those of author(s). The Institute of Chartered Accountants of India may not necessarily subscribe to the views expressed by the author(s). Internal Audit Standards Board The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi © The Institute of Chartered Accountants of India All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Revised Edition : October, 2016 Committee/Department : Internal Audit Standards Board Email : [email protected] Website : www.icai.org Price : ` 350/- (including CD) ISBN No. : 978-81-8441-128-7 Published by : The Publication Department on behalf of the Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi - 110 002. Printed by : Sahitya Bhawan Publications, Hospital Road, Agra-282 003 October/2016/P2017(Revised) Foreword For a growing and dynamic economy like India, that aspires to be globally competitive, a sound and inclusive banking system is extremely important. The stability of various segments in the economy particularly of the financial sectors is directly or indirectly dependent on the banking sector. Indian banks have modernized their processes, restructured their organisations into business verticals, completed Core Banking Solution implementation and launched several products in both the retail and wholesale banking segments to keep pace with the growing challenges. This changing landscape and the emphasis on risk management and control function makes the role of concurrent auditors very critical. RBI has revised its 1996 concurrent audit guidelines and issued “Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines” in July, 2015. These guidelines focus on effective controls, importance of checking high risk transactions and coverage of fraud prone areas. In the light of these new Guidelines, the Internal Audit Standards Board (IASB) of the Institute has thoroughly revised “Manual on Concurrent Audit of Banks (2012 edition)”, including the impact of various applicable new/ revised RBI Circulars issued during the period. I congratulate CA. Mukesh Singh Kushwah, Chairman, CA. Anil S. Bhandari, Vice-Chairman and other members of the Internal Audit Standards Board on issuance of this revised Manual. I am sure that this revised edition would help the members in discharging their responsibility, as concurrent auditors, in an efficient and effective manner. September, 9, 2016 CA. M Devaraja Reddy New Delhi President, ICAI Preface Technological innovation, asset quality, capital adequacy, financial inclusion and talent management are some of the key issues facing the Indian banking industry. Banks are facing challenges related to implementation of Core Banking Solutions, compliance with Basel norms, Non-Performing Asset (NPA) management and above all dealing with the ever growing volume and complexity of transactions. These challenges make the role of chartered accountants crucial as they are instrumental in helping the banks to maintain reliability of different processes and timely reporting of lapses and irregularities. Concurrent audit is essentially a management process integral to the establishment of sound internal accounting functions and effective controls and setting the tone for a vigilance internal audit to preclude the incidence of serious errors and fraudulent manipulations. Reserve Bank of India had issued concurrent audit guidelines in 1996. Since then a number of development have taken place in banking sector and consequentlyRBI has issued revised Concurrent Audit Guidelines in July, 2015.Keeping this in view, the Internal Audit Standards Board has thoroughly revised “Manual on Concurrent Audit of Banks” which had been issued in 2012. Apart from taking impact of abovementioned circular and all other related new circulars/ directions issued by the RBI, the revised Manual also, includes thoroughly updated Checklist for Concurrent Audit. This revised edition includes new chapters on important areas like, Treasury, Forex and Core Banking Solutions. For ready reference, text of all important Master Circulars and Master Directions issued by the RBI, impacting concurrent audit,have been included in the CD. However, it is extremely important that the concurrent auditors should keep themselves updated regarding all relevant internal guidelines/circulars/important references as well as relevant circulars/ directions being issued by the RBI from time to time. At this juncture, I wish to place on record my sincere thanks to all the members of the Study Group formed under my convenorship at Delhi, viz., CA. Rakesh Garg (co-convener), CA. Sanjay Gupta, CA. Naresh Gupta, CA. Anil Aggarwal, CA. Anu Pandey, CA. Sandeep Goel, CA. Yogesh Malik and CA. Kapil Chatwal for taking time out of their pressing preoccupations and comprehensively revising and updating this Manual.I would also like to express my gratitude to CA. Shriniwas Y. Joshi, Shri Govadda Subba Rao, Shri P. T. S. Murthy, CA. Kuntal P. Shah, CA. Sachin Ambekar, CA. Tushar Kanti Basu, CA. Anagha Thatte, CA. Vinod Karandikar, CA. Sanjay V. Shah, CA. Dhananjay J. Gokhale, Shri V. Somasekhar, CA. Ramesh A. Shetty and CA. S. Dhayanidhi for providing important support to the group. The Study Group members were deeply concerned with the expanded scope of work of concurrent audit which may not so strictly fall within the ambit of concurrent audit, and also the remuneration which is not commensurate with the work load of concurrent auditors. Further, it was felt that for good governance and effective implementation of RBI Circulars, the banks should adopt uniform reporting format for concurrent audit, and also review requirement of compulsory attendance by certain banks. I would also like to thank to CA. M. Devaraja Reddy, President, ICAI and CA. Nilesh Shivji Vikamsey, Vice President, ICAI for their continuous support and encouragement to the initiatives of the Board. I must also thank my colleagues from the Council at the Internal Audit Standards Board, viz., CA. Anil Satyanarayan Bhandari, Vice- Chairman, IASB, CA. Tarun Jamnadas Ghia, CA. Mangesh Pandurang Kinare, CA. Dhinal Ashvinbhai Shah, CA. Babu Abraham Kallivayalil, CA. K. Sripriya, CA. M. P. Vijay Kumar, CA. Ranjeet Kumar Agarwal, CA. Sushil Kumar Goyal, CA. Debashis Mitra, CA. Shyam Lal Agarwal, CA. Kemisha Soni, CA. Sanjiv Kumar Chaudhary, CA. Sanjay Vasudeva and Shri Vithayathil Kurian for their vision and support. I also wish to place on record my gratitude for the co-opted members on the Board viz., CA. Anil Kumar Jain, CA. Kartik Bharatkumar Radia, CA. Krishna Kumar T., CA. Vipin Gupta, CA. Vishwanath K., CA. Yashwant Jaywant Kasar and special invitee viz., CA. Shobhit Dwivedi for their invaluable guidance as also their dedication and support to the various initiatives of the Board. I also wish to express my sincere appreciation for CA. Jyoti Singh, Secretary, IASB and her team for their efforts in revising this Manual. I am sure that the members and other interested readers would find this revised Manual immensely useful. October 13, 2016 CA. Mukesh Singh Kushwah New Delhi Chairman Internal Audit Standards Board vi Manual on Concurrent Audit of Banks Contents Foreword ................................................................................................... iii Preface ......................................................................................................... v Part I: Understanding the Banking Business and Its Legal Framework Chapter 1: Banking in India ...................................................................... 3-12 Chapter 2: Banking Products and Services ........................................... 13-26 Chapter 3: Organizational and Operational Structureof Banks ................ 27-35 Chapter 4: Legal and Regulatory Framework of Banks ........................... 36-48 Chapter 5: PMLA and Know Your Customer (KYC) Policy ...................... 49-66 Chapter 6: Internal Control, Inspection and Internal Audit ...................... 67-76 Part II: Domain of Concurrent Audit Chapter 1: Evolution and General Guidelines of Concurrent Audit ......... 79-96 Chapter 2: Concurrent Audit Universe .................................................. 97-113 Chapter 3: Conduct of Concurrent Audit ............................................. 114-122 Chapter 4: Prudential Norms for Assets Classification, Income Recognition and Provisioning Pertaining to Advance ....................................................... 123-136 Chapter 5: Internal Control and Vigil Mechanism ................................ 137-151 Chapter 6: Treasury and Investment Portfolio of Banks ...................... 152-173 Chapter 7: Foreign Exchange ............................................................. 174-228 Part III: Concurrent Audit Checklist and Core Banking System Chapter 1 : Concurrent Audit Checklist .............................................. 231-261 Chapter 2 : Core Banking System ...................................................... 262-323 Chapter 3 : Revenue Audit ................................................................. 324-328 Chapter 4 : Stock and Book Debt Audit .............................................. 329-334 vii Manual on Concurrent
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