Audit of Banks Flashcards
You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals in providing credit card facilities to its account holder. The bank is aware of the fact that there should be strict control over storage and issue of credit cards.
How will you evaluate the ICS in the area of Credit Card operations of a Bank?
Evaluation of the ICS in the area of Credit Card Operations of a bank:
(i) There should be effective screening of applications with reasonably good credit assessments.
(ii) There should be strict control over storage and issue of cards.
(iii) There should be a system whereby a merchant confirms the status of unutilized limit of a credit-card holder from the bank before accepting the settlement in case the amount to be settled exceeds a specified percentage of the total limit of the card holder.
(iv) There should be a system of prompt reporting by the merchants of all settlements accepted by them through credit cards.
(v) Reimbursement to merchants should be made only after verification of the validity of merchant’s acceptance of cards.
(vi) All the reimbursement (gross of commission) should be immediately charged to the customer’s account.
(vii) There should be a system to ensure that statements are sent regularly and promptly to the customer.
(viii) There should be a system to monitor and follow-up customers’ payments.
(ix) Items overdue beyond a reasonable period should be identified and attended to carefully. Credit should be stopped by informing the merchants through periodic bulletins, as early as possible, to avoid increased losses.
(x) There should be a system of periodic review of credit card holders’ accounts. On this basis, the limits of customers may be revised, if necessary. The review should also include determination of doubtful amounts and the provisioning in respect thereof.
Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank follows financial year as accounting year. The bank is a consortium member of Cash Credit Facilities of ` 50 crores to X Ltd Bank’s own share is ` 10 crores only. During the last two quarters against a debit of ` 1.75 crores towards interest the credits in X Ltd’s account are to the tune of ` 1.25 crores only. Based on the certificate of lead bank, the bank has classified the account of X Ltd as performing. Advise your views on the issue which were brought to your notice by your Audit Manager.
The bank is a consortium member of cash credit facilities of ` 50 crores to X Ltd. Bank’s own share is ` 10 crores only. During the last two quarters against a debit of ` l.75 crores towards interest, the credits in X Ltd’s account are to the tune of ` 1.25 crores only. Sometimes, several banks form a group (the ‘consortium’) under the leadership of a ‘lead bank’ to make advance to a large customer on same conditions and security with proportionate rights. In such cases, each bank may classify the advance given by it according to its own experience of recovery and other factors. Since in the last two quarters, the amount remains outstanding and, thus, interest amount should be reversed. This is despite the certificate of lead bank to classify that the account as performing. Accordingly, the amount should be shown as non-performing asset.
Conclusion: Advance to be classified as NP A
Your firm has been appointed as Central Statutory Auditors of a NaUonalised Bank. The Bank
follows financial year as accounting year. Your Audit Manager informed that the bank has
recognised on accrual basis income from dividends on securities and Units of Mutual Funds held
by it as at the end of financial year. The dividends on securities and Units of Mutual Funds were
declared after the end of financial year. Comment.
Banks may book income from dividend on shares of corporate bodies on accrual basis, provided
dividend on the shares has been declared by the corporate body in its annual general meeting and
the owner’s right to receive payment is established. This is also in accordance with AS 9. In this
case the dividends have been declared after the financial year end. Therefore, the recognition of
income by the bank on accrual basis is not in order.
In respect of income from government securities and bonds and debentures of corporate bodies,
where interest rates on these instruments are pre-determined, income could be booked on accrual
basis, provided interest is serviced regularly and as such is not in arrears. It was further, however,
clarified that banks may book income on accrual basis on securities of corporate bodies/public
sector undertakings in respect of which the payment of interest and repayment of principal have
been guaranteed by the Central Government or a State Government.
