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Bank Audit under CBS

CA. Premnath. D.C Ramachandram & Co.,

Hyderabadpremnathd@gmail.com

9347556771

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Elon Musk

In aerospace in order to create SpaceX

In automotive in order to create Tesla with

self-driving features

In trains in order to envision the Hyperloop

In aviation in order to envision electric

aircraft that take off and land vertically

In technology in order to envision a neural

lace that interfaces your brain

In technology in order to help build PayPal

In technology in order to co-found OpenAI,

a non-profit that limits the probability of

negative artificial intelligence futures

Can Audit Become Agile?

Seven Keys To Thinking The Unthinkable

1st , active and broader involvement in disruption:

2nd , being prepared and adaptive

3rd , assessing the risk of future disruption

4th , proactive involvement in disruptive events

5th , flexible talent management

6th , flexible planning

7th , put new technologies to work.

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New & Emerging Technology – Impact on CA Mobility

Cloud

Digital Service Delivery

Big Data

Social Collaboration

Block Chain Technology

Artificial Intelligence

Machine Learning

IOT

Payment Systems

Cyber Security

Robotic4

Embrace and leverage newtechnologies in performing audit work.Auditors need to be at the forefront ofadopting artificial intelligence,cognitive computing, and smart robots.Auditors need to understand howtechnologies such as blockchain workand how they can be used in theirorganizations. They must takeadvantage of machine learning anddata analytics in their audit processes— real-time auditing should be arequirement as organizationsimplement new business processes.

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Blockchain tech could help prevent frauds like at PNB

Given the distributed ledger technology’s

potential to improve monitoring, SBI has

adopted it in its reconciliation systems,

payment gateways

‘Immediate notification’

“Transaction reconciliation systems at

present do not result in immediate

notification,” Mrutyunjay Mahapatra,

Deputy Managing Director and Chief

Information Officer at State Bank of India,

told The Hindu. “Using blockchain, all

parties on the chain will be immediately

notified about a transaction.”

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Letter of Credit Workflows Put on the Blockchain

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AI, BOT, ML in bankingHDFC Bank has developed an AI-based chatbot, “Eva”,built by Bengaluru-based Senseforth AI Research.Since its launch in March this year, Eva (which standsElectronic Virtual Assistant) has addressed over 2.7million customer queries, interacted with over 530,000unique users, and held 1.2 million conversations.

Eva can assimilate knowledge from thousands ofsources and provide simple answers in less than 0.4seconds, the bank said. Within the first few days of itslaunch, Eva has answered more than 100,000 queriesfrom thousands of customers from 17 countries acrossthe globe.

“With the launch of Eva, the bank’s customers can getinformation on its products and servicesinstantaneously. It removes the need to search, browseor call. Eva also becomes smarter as it learns throughits customer interactions. Going forward, Eva would beable to handle real banking transactions as well, whichwould enable HDFC Bank to offer the true power ofconversational banking to its customers,” thebank stated in a company news release.

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Banking Industry in Indian Economy

GDP – Rs. 190 Lakhs Crores

Deposits Rs 127.80 Lakhs Crores & Bank

credit Rs 96.80 Lakhs Crores

NPAs Rs. 10.00 Lakhs Crores

Banking Frauds Rs. 2.05 Lakhs Crores during

last 11 years of 50000 cases

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How Control Lapses : Banks Non Compliance to RBI circulars

S

#

Banks Year Fine

Rs.

Violation

1 SBI, Corp

Bank,

BOB,UBI,

AHB, AB,

BOM, IOB

Feb

2019

6.5Cr non-compliance with various directions issued by

the RBI on monitoring of end use of funds,

exchange of information with other banks,

classification and reporting of frauds, and on

restructuring of accounts, the central bank said in a

statement, SWIFT, FEMA,

2 Karnataka

Bank

Feb

2019

4 delays in the implementation of new controls

relating to the SWIFT system of international

payments. Gitanjali Gems related fraud, with an

exposure of around Rs 86 crore.

3 UBI, BOM Nov

2018

3 Cr delay in detection and reporting of fraud in some

accounts11

S

#

Banks Year Fine

Rs.Cr

Violation

4 ICICI 2018 58.9 non-compliance of its directions on direct sale of

securities from its held-to-maturity (HTM)

portfolio and specified disclosure.

5 Indian Bank 2018 1 violating cyber security guidelines.

6 Federal Bank 2018 5 KYC/Anti Money Laundering

7 Axis, IOB 2018 5 NPA, AML, KYC

8 HDFC,PNB, 2016 10 irregularities in advance import remittances,

KYC/AML

7 22 Banks 2014 49.5 flouting norms and may be allowing customers to

launder money12

How Control Lapses : Banks Non Compliance to RBI circulars

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NPA RBI AQI DivergenceBank Divergence Rs. Crs

UBI 589

LVB 54.9

Indian Bank 820

UCO 1217

SBI 11932

IOB 358

BOI 329

Central Bank 2565

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RBI told banks to disclose divergence

when the additional provisioning for NPAs

assessed by RBI exceeds 10% of the

published net profits after tax

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RBI AQI NPA Divergence in PSU Banks 45600Crs

How far NPAs are system Driven ?????

SC Judgement on Amrapali

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• It is observed that there was no monitoring done by the

officials of Bank of Maharashtra, Andhra Bank and other

banks by releasing of term loan to the Company.

• Even basic checks, End Use of funds were forgone

• No technical requirements followed as relating to release

of Term Loan facilities to a borrower.

• The banks acted as mute spectator to unapproved

diversion which was almost happening evidently in all

banking transactions

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CBS versions in use are different, security solutions,

controls divergent: RBI ex-ED - RBI G. Padmanabhan “Customisation is varied. Security solutions and controls are divergent.

Pointing out the process of merger was complex, he said the banks ought to be

conscious of the security challenges. “Banks have started discussions… but they

should focus on security as much as on functionalities or user interfaces,” he said,

adding skill set availability on security will be a greater challenge.

“There is a lot of dependency on service providers. There is a significant

cybersecurity risk in that a lot of data is going back and forth and held by third

parties,” he said, asking “will a merger of different versions of CBS enhance the

challenge?”

Another challenge would be merging of SOC operations of the banks.

Different banks may have different set of controls and until these are fully merged the

weakest link threat needs to carefully monitored and controlled, he said.

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Bank Audit - Mantra

Knowledge of Banking and Allied Laws & CBS

Discretionary Powers – Impact on

Corruption/Fraud/Errors

Control – Manual/System, Preventive, Corrective,

Compensating

Audit Risk - Selection of Sampling – Data analytics

Audit Tools – Spread sheet, Word, Google Docs

Audit Documentation17

Learning Objectives

Audit As Per Standards

Software Usage in

Banks

Usage of Finacle &

BANCS

Data Extraction &

Analysis

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•Verify System /Manual Controls•Verify Preventive Controls•Verify Detective Controls•Verify Corrective Controls•Verify Compensating Controls•Extract CBS Reports

Audit Under CBS

Compliance Procedure –Controls around CBS

Assertions & ROMM

Substantive Procedure –inspection, observation, inquiry,

confirmation, recalculation, reperformance, or

analytical procedure

Assertions & ROMM

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We state in our Audit Report.

“We have conducted our audit in

accordance with generally accepted

auditing standards in India………”

Non Compliance will attract

penal action U/s 21 of CA Act

SA – 230, 300-499, 500,520, 530, 710

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230 Audit Documentation 240 The Auditor’s

Responsibilities Relating to

Fraud

250 Consideration of Laws

and Regulations in an Audit

of Financial Statements

260 Communication with

Those Charged with

Governance

265 Communicating Deficiencies in Internal Control to

Those Charged with Governance and Management

300 Planning an Audit of

Financial Statements

315 Identifying and Assessing the Risks of Material

Misstatement Through Understanding the Entity and Its

Environment

500-599 Audit Evidence 500 Audit Evidence 520 Analytical Procedures

505 External Confirmations 530 Audit Sampling 580 Written Representations

700-799 Audit Conclusions and Reporting

AUDIT PROCESS FLOW ASSERTIONS

CHECK CONTROLS

1. COMPLIANCE TEST

AUDIT TEST

2. SUBSTANTIVE TEST

ANALYTICAL PROCEDURES

ROMM - RISK OF MATERIAL

MISSTATEMENTS

OBSERVATIONS

DISCUSS WITH TCWG(THOSE CHARGE WITH GOVERNANCE)

AGREENO POSSIBILITY TO

RECTIFY DISAGREE

1. PROVIDE/CREATE PROVISION

2. WRITTEN OFF

DISCLOSE QUALIFY

EMPHASIS MATTER PARAGRAPH

Existence,

Completeness,

Valuation,

Rights and Obligations,

and

Presentation and

disclosure

SA 315

Identifying and Assessing the Risks of Material

Misstatement Through Understanding the Entity

and Its Environment

Business of bank is collecting deposits and

lending loans/LC/Guarantees

Runs as per Banking Regulation Act, FEMA, PMLA, IT Act, GST, IBC

Negotiable Instruments Act, Etc.,

Accounting as per Accounting Standards

issued by ICAI

Major Business is operated and controlled

thru CBS & Other Standalone Applications

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Various Application – Banking System Core Banking Application – “FINACLE” of Infosys Ltd inclusive of modules

including NPA Management system (as IRCA norms), Government Business Module (GBM), etc.

Core Banking Application – “FINACLE” of Infosys Ltd for Overseas branches and UK subsidiary of Bank.

Application Audit for Internet Banking for Domestic and overseas branches.

Treasury Application from M/s Infosys (Replaced existing KASTLE system), being used at our Treasury branch.

Application purchased from CMC (TCS) for our Demat operations.

LAS (Lending Automation Solution)

MIS (Management Information System)

PeopleSoft HRM Solution32

Various Application – Banking System MFTP (Matched Fund Transfer Pricing)

SWIFT

ATM Switch

Document Management System (Account Opening Process)

Enterprise Application Integrator (EAI)

Oracle GL

Centralised FI gateway Application including E-KYC, DemoAuth, APBS, etc.

E-Remit

GSTN System

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System Driven NPAs - Can the system detect the ever greening?

1. Servicing interest/installment

from CC/PC account to C/A;

from C/A to TL or

disbursement to CC.

2. Adhoc limits to regularise.

3. Transfer from associate units by allowing excess in CC or new TOD.

4. Cheque purchase account to CC and chequereturned next day.

System Driven NPAs - Can the system detect the ever greening?

5. Intra day credits & debits

7. Same credit for two quarters

8. Accounting of Devolved LCs

9. Exceeding in Bills limit

10. Inadequate/ wrong DP

11. Combined excess of CC & Devolved LC

System Driven NPAs - Can the system detect the ever greening?

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System Driven NPAs - Non financial aspects

1. Extension of COD

2. Non satisfactory performance in restructured accounts

3. Additional Finance on restructured account

4. Stock statement older by 6 months.

5. NPI of the borrower account

6. Interest accrued during extended COD period.

7. Where the CC limit is full, credit in CC towards Term loan installments/ interest and debit to CC and transfer to TL but in CC, there are not other credits enough to CC interest debits.

System Driven NPAs - Non financial aspects

Materiality & Audit Risk

Loans issued are not used

for the purposes for

which it is sanctioned

Prudential norms are

not followed

Accounting treatment is

not in accordance

with AS

control under CBS is

not adequate

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Evidence of Import - Physical Imports(i) If Rem. exceeds USD 100,000 or its equivalent, it is obligatory on the part of

the AD to ensure that the importer submits :-

(a) EC copy of B/E for home consumption, or

(b) EC copy B/E for warehousing, in case of 100% EOU/ or

(c) Customs Assessment Certificate or Postal Appraisal Form, as declared by the

importer to the Customs Authorities, where import has been made by post, as

evidence that the goods for which the payment was made have actually been

imported into India.

(ii) For imports on D/A basis, AD should insist on production of evidence when

effecting remittance. However, if importers fail to produce documentary

evidence due to genuine reasons such as non- arrival of consignment, delay in

delivery/ customs clearance of consignment, etc., AD may, if satisfied, allow

reasonable time, upto 3 months from the date of remittance, to the importer.

BoB were alleged to have remitted Rs 6,000 crore of black money late last year.

Pursuant to the internal audit of the Bank of Baroda, the Reserve Bank of India and

investigative agencies in October 2015 were advised by the bank of certain

irregularities observed

The RBI carried out the investigation and noted the deficiencies which were

reflective of weaknesses and failures in internal control mechanisms in respect of

certain anti-money laundering provisions such as monitoring of transactions, timely

reporting to Financial Intelligence Unit and assigning of Unique Customer

Identification Code to customers, BoB said.

In a clarification to the exchanges on October 12, 2015, BoB had said that a total of

5,853 outward foreign remittances transactions aggregating to $546.10 million

(around Rs 3,500 crore) for the purpose as ‘Advance remittance for Imports’ and for

other purposes have been remitted through 38 current accounts to various overseas

parties numbering about 400, mainly based in Hong Kong and one of them in the

UAE. PNB also informed the BSE that the RBI has imposed an aggregate penalty of

Rs 3 crore on it.

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Overview of Finacle

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Overview of Finacle

Menu Block: The block houses all the menu and sub-menu options available in Finacle.

Menu Option Block: Menu Code to be entered to gain access to the respective menu.

Action Bar: User can execute the process of Finacle Operations by clicking on various options on this bar. The Hot-Keys are also assigned for all options, which appear on the bar.

Message Bar: The message Bar displays warnings, exceptions, errors or Lists under a specific field code.

Favorites: Menu items which are required and used on Regular basis can be put in favorites by copying from Menu Block. As a one time process Specific Menu Item which is required to be copied to Favorites should be located in Menu Block and with the use of Drag and Drop the function can be stored under Favorites menu.

Progress Indicator: It shows the progress of the action initiated through the use of Colours (i.e.Green indicates that the System is “Ready” for processing and Red indicates that the “System is busy in Processing Activity:

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Type abrep at the

menu option and

press enter it

shows the following

screen

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ABC Bank Reports

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ABC Bank ReportsType module name, you will get the

list by pressing F2 then select the

required module by holding Shift+F4

and then press F4 it goes to report

number and then follow the same

procedure.(by pressing F2 and then

select required no. by holding shift +

F4 ) .For Going Back screen F3

should be used. And then press F4 it

displays the following screen

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Type Branch code , and then

date other fields are optional

and then press F4 it displays

the following screen

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Type F/B and then Y or N in print

required press F4 for going next tab

and come to BG Queue and then

Press F10. Type y at print option it

will give the print directly. for soft

copy u have to follow the following

procedure

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The above screen

means some working is

going on after

processing it displays the

following screen

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Type t at box and press

CTRL+e it displays the

following screen

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Then come to main menu screen by

clicking at menu option which is

available at down tool bar or u can

come by pressing F3 upto u get the

following screen

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Type PR at menu option

and press enter it displays

the following screen.

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Type t at box and press

CTRL+e it displays the

following screen

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Then press Ctrl +e it

displays the message at

the bottom whether file has

been transferred or not like

in the following screen.

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It saves the file

in the path given

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LOG on Screen

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Enter the user no., Password, Branch No., Terminal No. and then click to transmit

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menu screen, for enquiry about the customer is Short, &

long EnquiryEvery Customer must

have a CIF no. (Customer information

form no.)

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Click at DEPOSIT /CC/OD Accounts Menu it gives the different options and then click at Enquires again it

gives the different options.. For term

Loan there is another Menu DL/TL Accounts & Services.

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click at transmit

click at Long Enquiry

enter account no.

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We can see Rate of interest, Outstanding Balance, and basic

information about the customer.

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To View the transactions in a customer account. click DEPOSIT/cc/od Accounts and then Enquires, and then at transactions it displays the following

screen.

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It displays the above screen, if we enter the account no. and enter the start date

and end date and click at transmit, it displays the following screen.

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It Displays the above screen, it displays only 14 transactions at a time, for next transactions we have to enter the

transactions number at (like 15 ) Next Transactions Serial No. and then click at

transmit

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CBS Reports

Interest Report for Accounts : AINTRPT

Loan Interest Details Inquiry :

AITINQ

Abnormal Transaction Inquiry

: ATIBills Inquiry : BI

Rate List History Query : RTHQRY

Standing Instructions Inquiry

: SII

TDS Inquiry & Printing : TDSIP

Transactions Exceptions Inquiry :

TEI

Customer Unutilised Limit

Inquiry : CULI

Charges Income Report: CHGIR

Exceptions Report : EXCPRPT

Report for Matured OD/FD Accounts :

ODFDREP

Loans Overdue Position Inquiry :

LAOPI

Loans Repayment Schedule Report :

LARSH

PCFC Balancing Report : PCFCBAL

Pending Installments List :

PLIST

BG Margin Printing : BGMARGIN

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Menus used for verification account wise

ACLI (Account Ledger Inquiry):

ACI (Account Inquiry)

LAOPI (Loans & Advances Overdue Position Inquiry):

Account TOD Inquiry : ACTODI

Accounts Turnover Report : ATOR

Insurance Expired Yesterday : INSEXPD

Loan Overdue Details :

LOANODUE

List of Pending and DishonoredBills : FBPADB

)Overdue Foreign Bills : ODFB

Guarantees Expired but not

Reversed : GENR

Guarantees Invoked or not Paid : GIPNP

Guarantees Issued Cum Liability

Register : GILR

Loan Sanction Limit Review :

LAROR

Insurance Expiry List : INSTOEXP

Loan document expiry date

:INQLAC

Change in sanction limit :

CHLMT

Non submitted stock statement :

STKSTMT/SRM

Loan account Master report :

LAMP

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Benefits of Excel as DSS - Compliance of SA

• (Revised) Audit Documentation230

• Risk Assessment and Response to Assessed Risks300-499

• Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment315

• (Revised) Audit Evidence500

• (Revised) Analytical Procedures520

• (Revised) Audit Sampling530

• (Revised) Comparative Information—Corresponding Figures and Comparative Financial Statements710

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1. Analytical Tests

Horizontal Analysis

Vertical Analysis

Ratios Trend analysis

Performance Measures

Statistics Stratifications Aging

Benford’s Law Regression Monte Carlo simulation

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Data Management/ Analysis Reports

Append/Merge Calculated

Fields/Functions Cross Tabulate Duplicates

Extract/Filter Export Gaps Index / Sort

Join / Relate

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Lesson Summary

NPA’s in a matter of minutes

Selection of cases for LFAR

verification

Documentation of Observations

on Loans

Automated Reporting of LFAR

Observations

Automated Working papers,

Peer ReviewSA Compliance

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The tools would help us to

identify the following:

March 2, 2020Premnath D.S. B.Com., FCA 74

As the Chandokya Upanishad says:

If we apply knowledge with faith, dedication and deep analysis, our actions become stronger. This will

lead to success.

Yadaiva Vidyaya Karoti Shradhaya Upanishada

Tadeva Viryavattaram Bhavati!*****