The Auditor’s Lens:
Unveiling Potential Red Flags through Concurrent Audit
Every financial entity requires mandatory monitoring of their transactions in a particular period whether it is monthly, quarterly, half-yearly, or annually. For institutions like a bank, the review mechanism must be active, robust, and unabating – it should be done without batting an eyelid, with skepticism, and with a hunger to search out various financial loopholes.
Every financial entity is liable to get its financial statements reviewed, vouched, and ultimately audited every once in a while to ensure that documents and files are intact – and for an operation like this, there is an unapologetic and indispensable requisite for concurrent audits.
Concurrent audit is slightly different from the normal collection of terms you might have heard such as statutory, internal, cost, and tax audits. A concurrent audit is a parallel examination of all the financial transactions in a given period. It is in fact, part of an early warning system (like an alarm) of banks to ensure the timely detection of defaults, lapses, and irregularities of the statements, documents, etc.
What is a Concurrent Audit?
As the name suggests, concurrent audit takes place only when transactions take place – meaning they are parallelly conducted, unlike statutory audits that happen after a quarter finishes.
Concurrent audits take place side by side, as and when the transactions take place, which is absolutely quite the opposite from other audits which follow the age-old norm of being termed a post-transactional review.
Thus, a concurrent audit is defined as a systematic examination of all the financial transactions at a particular branch of a bank continuously. It comes as a no-brainer this is done to ensure accuracy and due compliance with the internal systems, procedures, laws, and guidelines of the bank.
As mentioned above, a concurrent audit can be compared to an early warning sign to ensure that the bank is not defaulting with lapses and irregularities.
The concurrent audit covers all transactions of the bank – thus to understand the workings of how an audit is conducted, you must be aware of the processes of a bank which include:
Acceptance of Deposits: This is a core function of banks and such deposits are of varied nature, depending on the type of holder and purpose of opening the account. The process of acceptance can be summed up as a collection of details, KYC AND AML norms compliance, and Core banking solution systems (CBS).
To prevent any fraudulent activities, concurrent auditors must check whether the account opening forms are duly filled, whether the application is signed by a designated officer, whether the proofs are collected in original as per the KYC and AML norms, whether the photo and signature have been submitted to CBS, etc,
Loans on Advances: This forms another core function of the bank as it accepts deposits at a certain rate, but lends at a higher rate whilst maintaining a margin which is specifically the bank’s profit. The lending function ranks high on the risk-factor level as there is a definite possibility of not being able to recover the debt. Thus a need for documentation is a prerequisite.
Auditors are required to check for any red flags in the sense that they are supposed to check whether the loan applications are duly checked or not, whether the documents collected for processing, whether the interest rates are in collaboration with the policies, etc.
Cash Management: A bank earns interest on the money it lends, thus maintaining a high cash balance may result in loss of interest. However, banks require enough funds to maintain ATMs as well – ultimately, it comes down to the point that they must achieve a balance and manage it.
Auditors must check the balances to ensure it is as per the policy of the bank, make surprise visits to verify cash-in-hand balances, check for any sizable expenses made in cash, etc.
Safety Lockers: Given that this is another key function, auditors must check for whether the lockers are registered properly, whether the locker rent has been duly collected and debited from the customer’s account, are there insurance policies for the lockers and if so, are they up to date?
Most importantly, auditors must check if there has been any suspicious activity like multiple visits to the locker within a very short period.
Forex: All banks offer forex services thus to ensure that there are no red flags for fraudulent activities, concurrent auditors are required to check the rate of foreign exchange on the date of transaction, and subsequently pass the corrected entry into the books; they must adhere to RBI norms related to forex; they must give the correct valuation of forex held in hand at the time of the audit being prepared.
Bill Payment: This isn’t considered a primary service – but just an add-on one where a customer can make a payment towards utilities offered by the bank. Where red flags are concerned, the auditor has to verify whether standing instructions have been received from customers and then subsequently ensure that the same has been mentioned and noted in the CBS to generate an auto-payment; he must also ensure that reconciliations of utility accounts have been made or not.
To conduct a concurrent bank audit, the bank functions need to be fragmented into transactions thus necessary vouching, checking, and balances must be done and assigned.
Identifying Red Flags in the Financials of a Company:
It is the duty of each and every auditor to check and review red flags in any company – for a concurrent, things are not much different. There are various red flags that a concurrent auditor is required to unveil – thus, the following red flags are found through the lens of a concurrent auditor:
Overly-attractive financial performance: For a bank, it is a requirement to make sure that the numbers match, with proper vouching, filing, etc. However, if it seems like the financial statements look too over-attractive or inconsistent – then chances are, this is a red flag and an auditor should sniff this out as skepticism and start investigating the reason for such a boost in financials since this is a parallel audit, the procedure won’t be too hard to manage and do damage-control.
Auditor’s report to management: When a bank’s financial statements are in the process of being audited, the concurrent auditor tracks all errors and misstatements and then lists these under ‘Summary of Misstatements’ in the Auditor’s report to management. This is an important section to look at, and if there are too many misstatements then this is a red flag and the auditor should investigate further.
Unusual Accounting Policies: Companies, including banks, may sometimes adopt some unusual policies and methods, thus making things difficult to adhere to. The AS may not be followed, and such unscrupulous methods may relate to over/underestimation of assets, over-estimation of expenses, cash-in-hand misstatements, etc. An auditor will be able to sniff out the red flags in such activities and will subsequently unveil such potential threats.
Complex and unexplained Transactions: The workings of a bank may be either very simple or very complex – some transactions may be made with internal and external parties. Sometimes these transactions may seem like they don’t make sense – this oftentimes is incurred to deceive but an auditor with his independent mind and a questioning perspective, will be able to treat this as a red flag and will spend time analyzing such abnormalities and complexities.
Abnormalities in the Financials: When going through a concurrent audit, the auditor may notice some anomalies in the financial statements – these may come in the form of higher or lower numbers which serve as potential red flags. Auditors are expected to review the profit and loss statements, and balance sheets for the current financial year. Sometimes it hides in plain sight – for instance, an exorbitant amount in Legal Fees mentioned in the P/L statement, or a sudden surge in fixed assets, cash balances, BRS not matching, etc.
