Bank Branch Audit under Core Banking System

Hosted by Hyderabad Branch of SIRC of ICAI

Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach Auditing through CBS
What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

Softwares used by Banking Industry

Base Software: Core Banking Software Add-on Softwares for,
Credit Risk Calculation as per Basel II Norms Risk Weighted Assets / Capital Adequacy Computation Asset Classification and NPA Provisioning computation Classification of Priority / Non-priority / Sensitive Sector Advances
CA. Kuntal Shah, Ahmedabad 3

Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach

Auditing through CBS

What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

Traditional Auditing Approach

Verification of Documents Physically Availability of Hard Copies for each transaction Number of Transactions for Audit

In nutshell
Computerization does not affect Audit objectives. It only requires change in Audit Methodology.

CA. Kuntal Shah, Ahmedabad

Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach

Auditing through CBS

What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

Auditing through CBS

Understand the Core Banking Software Review Internal Controls in CBS Carry out Risk Assessment (viz. Manual Interventions
in transaction processing, Modification of Master Data without proper documentations, Lack / non availability of Audit Trail)

Review Transaction Flow & Audit Trails Apply Exception Approach Determine Sample Size based on review Carry out substantive procedures in & around CBS Documentation of Audit Procedures Prepare report on Audit Findings and prepare final Report
CA. Kuntal Shah, Ahmedabad 7

What is Core Banking System?

Centralised Database Transactions take place at various locations Updation of Central Database on Real Time Basis Report Generation at Back-End Access Control

CA. Kuntal Shah, Ahmedabad

What is CBS An Overview

Back Office ATM Switch Mobile Banking

Branch

Central Server

Internet Banking

Data Warehouse

Credit-Card System

Phone Banking
9

CA. Kuntal Shah, Ahmedabad

Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach

Auditing through CBS

What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

10

Core Banking System - Concepts

Master Level Configuration
Account Level Configuration Separate series of Account Nos. for different Types of Accounts
E.g. An Account No. 0099 05 014678 is made up of Branch Code i.e. 0099, Account Type 05 say Current Account and Account No. 014678 Auditor should seek details of formation of Account No. during discussion with Branch Head.

Cont
CA. Kuntal Shah, Ahmedabad 11

Core Banking System - Concepts

Interest Calculation and Application Maker Checker Concept (Different Stages for a Transaction) Created by, Entered by, Authorised by, Posted by, Modified by, Deleted by SOL ID & SET ID Concept (SOL Service OutLet ID i.e. Branch, Back Office etc.) (SET ID Branch / Back Office who initiated the transaction) Pointing Type Office Accounts Auto generation of Exception Reports at EOD Generation of various Tailor-made Reports from Back-End / MIS Server
CA. Kuntal Shah, Ahmedabad 12

What is CBS Auditors Checklist

Document list of Softwares, Applications and interface details associated with CBS
Review Usage Manual (if available at Branch) or Document Software navigation options and Menu Codes. Document list of Reports available in CBS and its menu codes. Review Exception Reports generated by Data Center. / MIS Reports

CA. Kuntal Shah, Ahmedabad

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Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach

Auditing through CBS

What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

14

Audit Activity through CBS

Customer Master Level and Account Level Updations for Loans / CC Accounts
What to verify?
Interest Parameters (Regular & Penal Interest) Repayment Instructions Standing Instructions (SI) Parameters DP / SL monitoring Customer wise Limit Lookup Stock / Debtors Statements Tracking and calculation of DP

When to verify?
At the time of verification of Documents for Advance
CA. Kuntal Shah, Ahmedabad 15

Audit Activity through CBS

Analysis of Advance Accounts What to verify?

Turnover of CC Account based on Borrowers Business profile In case of Loan accounts ACTUAL recovery of Installments and Interest
After / during verification of Advances Documentation

When to verify?

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

NPA Analysis What to verify?

Reports on NPA and Probable NPA generated (if any) from CBS or CIS (Credit Information System) NPA Account, Probable NPA Account, Other Advance Accounts with some irregularities: Transactions & Account Scrutiny for Correct Classification After / during verification of Advances Documentation
CA. Kuntal Shah, Ahmedabad 17

When to verify?

Audit Activity through CBS

NPA Account Verification What to verify?

Classification of NPA Date of NPA Calculation of Provisioning System) Reversal of Revenue charged

(out

of

When to verify?

After / during verification of Advances Documentation

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Security details updation What to verify?

Whether Lien is marked in System for Fixed Deposits Accounts? Whether details of security obtained are mentioned in Master Details?
After / during verification of Advances Documentation

When to verify?

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Office Accounts (Inter Branch) Accounts What to verify?

Entries outstanding in Office Accounts as on date. Long Outstanding entries. Improper reversal of Office Account entries During verification of LFAR Compliance

When to verify?

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

TDS Related Records What to verify?

Debit to Charges Accounts and relevant entries to TDS Account. Reversals in TDS Account. Whether by Constructive Payment or otherwise? Account Code List / Name of Expense (charges) accounts Liable for TDS should be obtained from BM
During verification Compliance

When to verify?

of

Income

Tax

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Fixed Assets & Depreciation Entries What to verify?

Verify Calculation of Depreciation (mostly done out of the system) Entries passed in FA Accounts Check Repairs & Maint. A/c and other relative account for entries pertaining to Purchase of New Fixed Asset During verification Compliance

When to verify?

of

Income

Tax

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Logical Access Controls: Creation / Deletion / Amendment in User Profile, Powers done centrally. If not, verify the compliances as follows.
Records for User ID Creation properly maintained? Records for Deletion of user-ID with proper authorisation available? Other issues like security of password, compulsory change of password, Transaction Limit for employees etc.
CA. Kuntal Shah, Ahmedabad 23

Audit Activity through CBS

Output Controls:
Whether Hard copies of Accounts available? Whether such reports are signed?

Security of Data:
Whether the encryption software is available in Server / Backup Server (If data is stored) Whether the computers are having Antivirus Software? Whether the AV Software is updated on regular basis?
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Audit Activity through CBS

Backups Important Activity for Non CBS Branches Backup should be stored on Off-site Location Backup should have been tested at periodical intervals Backup Register should be maintained

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Auto Generated Reports Exception Report:
Reports for the month end and two days prior and after month end should be verified. Exceptions of following natures should be closely verified.
Balance exceeded Account Limit Manual debits to Income Account Value Dated Transactions Manual entry for SI Failure cases Instrument passed against Clearing

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Irregularity Report:
Reports for the month end and two days prior and after month end should be verified. Report contains details of Accounts where Balance in Accounts are greater than the Limits Sanctioned. Check whether the same is due to,
Application of Interest Granting of Intra Day TOD Passing of Instruments against Clearing Effects

CA. Kuntal Shah, Ahmedabad

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Audit Activity through CBS

Accounts where Interest Code is 0:
Interest will not be charged from Accounts where Interest Code is selected as 0. Hence, a detailed checking is required. Possible reasons can be,
Whether NPA Account Accounts with Moratorium?

Interest Collection Flag as No:

If Interest Collection Flag is selected as No, Software will not consider the account for calculation and entry for Debit Interest.
CA. Kuntal Shah, Ahmedabad 28

Audit Activity through CBS

Debit Interest SI Failed Report:
Failure of Standing Instruction for Debit Interest should be closely verified. If the SI is failed the Account will not be debited for Interest. SI Failure can be for any reason like
Non availability of Balance in Account (In case of TOD in Operative Account) Non availability of Limit in Account Technical Snag in execution

Whether Branch has manually passed the entry for all such cases should be verified.

Loan Installment SI Failed Report:

Same as above
CA. Kuntal Shah, Ahmedabad 29

Audit Activity through CBS

Report containing all Advance Accounts with Limits:
Generally, CBS Software generate a Report wherein details of all Advance Accounts are listed. Excel can be used to verify cases of DP > SL, Margin Requirement etc.

CA. Kuntal Shah, Ahmedabad

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Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach

Auditing through CBS

What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

31

Finacle Core Banking Software

Overview and Implementation Structure Some features of Transaction processing Audit Procedures and Menu Codes Generation of Reports through Finacle

CA. Kuntal Shah, Ahmedabad

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Finacle in IDBI Bank

Source: www.infosys.com

CA. Kuntal Shah, Ahmedabad

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Finacle - Overview
Some of the Banks using Finacle are
Bank of Baroda Bank of India Union Bank of India Canara Bank Federal Bank IDBI Bank ICICI Bank Axis Bank ABN Amro Vijaya Bank UCO Bank
CA. Kuntal Shah, Ahmedabad 34

Finacle Core Banking Software

Overview and Implementation Structure Some features of Transaction processing Audit Procedures and Menu Codes Generation of Reports through Finacle

CA. Kuntal Shah, Ahmedabad

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Finacle - Features in Transaction Processing

Features: Each Transaction has unique Tran ID. Combination of Tran ID and Date of Transaction is required to locate a Tran Tran Type, Sub Type are useful to Identify Nature of Transaction (like Cash Deposit, Withdrawal) Facility of exploring a Tran during Account Scrutiny [Drill Down Approach] - press CTRL + E on a Tran during scrutiny of Account. Driven by various Inter-linked menus Cont
CA. Kuntal Shah, Ahmedabad 36

Finacle - Features in Transaction Processing (Cont) Pointing Type Office accounts (Useful in review of outstanding / part reversed Office Account entries)

CA. Kuntal Shah, Ahmedabad

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Finacle Core Banking Software

Overview and Implementation Structure Some features of Transaction processing Audit Procedures and Menu Codes Generation of Reports through Finacle

CA. Kuntal Shah, Ahmedabad

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Finacle Audit Procedure

Verification Account Scrutiny Customer Master Account Level Inquiry Transaction Inquiry Fin. Tran. Inquiry Criterion Search Inquire on Transaction (Office Accounts) Bills Module (Inland) Foreign Bills Module Single Case Foreign Bills Inquiry Criterion Search
CA. Kuntal Shah, Ahmedabad

Menu Code ACLI CUMM ACM / ACI TI / TM FTI IOT BM FBM FBI
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Finacle Audit Procedure

Verification
Guarantee Inquiry Query on Documentary Credits - Criterion Search Docu. Credits (LC) Maintenance Module Account Search based on predefined Criteria (May not be available or Slow) TDS Inquiry

Menu Code
GI DCQRY ODCM ACS TDSIP

Pending Installment List

Loan Overdue Position Inquiry Account Turnover Report

PLIST
LAOPI ATOR

CA. Kuntal Shah, Ahmedabad

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Finacle Audit Procedure

Verification TOD Inquiry Account specific List of Pending and Dishonored Bills Menu Code ACTODI FBPADB

The list is only for guidance and the menu codes may not be applicable in all the banks.

CA. Kuntal Shah, Ahmedabad

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Finacle Core Banking Software

Overview and Implementation Structure Some features of Transaction processing Audit Procedures and Menu Codes Generation of Reports through Finacle

CA. Kuntal Shah, Ahmedabad

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Finacle Audit Procedure

Report Generation Printing of Office Accounts Bill Balancing Report Based on GL Code All Bills Balancing Report Menu Code ACLPOA BR BRBPR

Foreign Bills Balancing Report

Exception Report

FBBR
EXCPRT

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Table of Contents
Softwares used by Banking Industry Traditional Auditing Approach

Auditing through CBS

What is Core Banking System? Some basic concepts of CBS

Audit activity through CBS (Case Specific)

Audit through Finacle Software Capital Adequacy / Risk Weighted Assets and Credit Risk Calculation Certification

CA. Kuntal Shah, Ahmedabad

44

Credit Risk / Risk Weighted Assets Computation

Various softwares for computation of Credit Risk / Risk Weighted Assets CRisMAC by D2K Technologies The software is used by
Bank of Baroda Bank of Maharashtra Punjab National Bank The Bank of Rajasthan SBICI Vijaya Bank Dena Bank Deutsche Bank
(Details as per Companys website)

CA. Kuntal Shah, Ahmedabad

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Features of Credit Risk / Risk Weighted Assets computation softwares

Asset classification and provision computation as per IRAC Guidelines Sectorwise Asset Classification Credit Risk Calculation Risk Weighted Assets / Capital Adequacy Calculation

CA. Kuntal Shah, Ahmedabad

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Inconsistencies generally observed

Data as per one statement do not agree with the other statement E.g. Total amount of Advance figure as per Balance Sheet do not agree with Sectorwise or Classification of Advancewise Report Change in Date of NPA leading to incorrect Provisions Borrowerwise Asset Classification not followed. Manual Intervention between CBS and Risk Computation Software E.g. Security obtained for Advance Account needs to be entered manually
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Inconsistencies generally observed

Long Outstanding entries in Office Account / Sensitive Accounts Routing of cash shortages / other manipulation through Office Account / Inter Branch / Sensitive Accounts Improper reversal of entries of Sensitive Account leading to loss of Audit Trail E.g. Partial Reversal / Doubly reversal / Reversal exceeding entry amount etc. Restructured (other than CDR) proper updation not carried out in CBS / Risk Comp. Software
CA. Kuntal Shah, Ahmedabad 48

Thank You