Bank Branch Audit under Core Banking System

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Bank Branch Audit under Core Banking System

• Hosted by Hyderabad Branch of SIRC of ICAI

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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

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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

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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

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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.

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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

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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

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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

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What is CBS An Overview
ATM Switch
Back Office
Mobile Banking
Central Server
Internet Banking
Branch
Data Warehouse
Phone Banking
Credit-Card System
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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

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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
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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

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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 / MIS Reports generated
  by Data Center.

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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

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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

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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
• When to verify?
• After / during verification of Advances
  Documentation

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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
• When to verify?
• After / during verification of Advances
  Documentation

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Audit Activity through CBS

• NPA Account Verification
• What to verify?
• Classification of NPA
• Date of NPA
• Calculation of Provisioning (out of System)
• Reversal of Revenue charged
• When to verify?
• After / during verification of Advances
  Documentation

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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?
• When to verify?
• After / during verification of Advances
  Documentation

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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
• When to verify?
• During verification of LFAR Compliance

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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
• When to verify?
• During verification of Income Tax Compliance

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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
• When to verify?
• During verification of Income Tax Compliance

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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.

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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

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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

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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

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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.

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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

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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 gt SL,
  Margin Requirement etc.

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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

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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

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Finacle in IDBI Bank
Source www.infosys.com
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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

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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

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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
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Finacle - Features in Transaction Processing
(Cont)

• Pointing Type Office accounts (Useful in review
  of outstanding / part reversed Office Account
  entries)

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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

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Finacle Audit Procedure
Verification Menu Code
Account Scrutiny ACLI
Customer Master CUMM
Account Level Inquiry ACM / ACI
Transaction Inquiry TI / TM
Fin. Tran. Inquiry Criterion Search FTI
Inquire on Transaction (Office Accounts) IOT
Bills Module (Inland) BM
Foreign Bills Module Single Case FBM
Foreign Bills Inquiry Criterion Search FBI
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Finacle Audit Procedure
Verification Menu Code
Guarantee Inquiry GI
Query on Documentary Credits - Criterion Search DCQRY
Docu. Credits (LC) Maintenance Module ODCM
Account Search based on predefined Criteria (May not be available or Slow) ACS
TDS Inquiry TDSIP
Pending Installment List PLIST
Loan Overdue Position Inquiry LAOPI
Account Turnover Report ATOR
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Finacle Audit Procedure
Verification Menu Code
TOD Inquiry Account specific ACTODI
List of Pending and Dishonored Bills FBPADB
The list is only for guidance and the menu codes
may not be applicable in all the banks.
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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

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Finacle Audit Procedure
Report Generation Menu Code
Printing of Office Accounts ACLPOA
Bill Balancing Report Based on GL Code BR
All Bills Balancing Report BRBPR
Foreign Bills Balancing Report FBBR
Exception Report 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

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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)

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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

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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

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Thank You