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Unit 10: Audit of Financial Statements

profitability. The importance of securitization lies in the fact that it helps to convert illiquid Notes
assets or future receivables into current cash inflows and that too at a low cost. The company
may sell the receivables in the market and raise loans.

!
Caution The guidelines on Securitization of Standard assets (RBI guidelines) may be referred
as and when required. It may be noted that these guidelines are applicable to bankers,
financial institutions and non-banking financial companies.

10.9 Internal Control System

The auditors must ensure that the guidelines issued by the RBI in regard to the Internal Control
System are strictly adhered to. There should be a clear functional separation of (i) trading,
(ii) settlement, monitoring and control and (iii) accounting. Similarly, there should be a functional
separation of trading and back office functions relating to bank’s own Investment Accounts,
Portfolio Management Scheme (PMS) Clients’ Accounts and other Constituents (including
brokers’) accounts.

For every transaction entered into, the trading desk should prepare a deal slip which should
contain data relating to nature of the deal, name of the counter-party, whether it is a direct deal
or through a broker, and if through a broker, then name of the broker, details of security,
amount, price, contract date and time. The deal slips should be serially numbered and controlled
separately to ensure that each deal slip has been properly accounted for. For PMS transactions
separate serial number should be maintained. Once the deal is concluded, the dealer should
immediately pass on the deal slip to the back office for recording and processing. For each deal
there must be a system of issue of confirmation to the counter-party. The timely receipt of
requisite written confirmation from the counter-party, which must include all essential details
of the contract, should be closely monitored by the back office.
Transactions put through the NDS-OM module do not warrant counter-party confirmation. All
other government securities transactions/deals would require physical confirmations by the
counter party. On the basis of vouchers passed by the back office (which should be done after
verification of actual contract notes received from the broker/counter-party and confirmation
of the deal by the counter-party), the Accounts Section should independently write the books of
account. It must be ensured that the counterparty bank or the security purchased/sold should
not be substituted. With regard to Subsidiary General Ledger (SGL) related transactions, the
records of transfers must be maintained, the balances in bank’s books must be matched with the
statements received from the Public Debt Offices (PDOs) and reconciled on a quarterly basis.
Before issue of SGL transfer forms covering their sale transactions, it should be ensured that
sufficient balances are available in the respective.
No ready-forward and double ready-forward deals should be put through in any security
including government securities on behalf of Portfolio Management Scheme (PMS) client’s
account or on behalf of other constituents including brokers.

A record of BRs issued/received, which are serially numbered, should be maintained and a
system for verification of the authenticity of the BRs and SGL transfer forms received from the
other banks and confirmation of authorized signatories should be put in place. It should be
ensured that no bank receipts are issued under any circumstances in respect of transactions in
government securities for which SGL facility is available. No BR should be issued on the basis of
a BR (of another bank) held by the bank and no exchange should take place on the basis of
exchange of BRs held by the bank. No BR should remain outstanding for more than 15 days.

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