From an audit perspective the emphasis is to be placed on the application of proper interest rates for both the deposits accepted and loans provided by the bank. Since there are different types of deposits and loans carrying different interest rates, there is a possibility that interest revenue as well as interest expense is calculated applying different rates. Therefore the verification of interest revenue and expense calls for a systematic audit approach.
Possible Risks
- Applying different interest rate for interest revenue and expense
- Calculation of interest on wrong average balance of deposit or interest
- Calculation of interest revenue and expense for a wrong period
- Interchange of deposit accounts leading to wrong credits of interest
- Interchange of loan accounts leading to wrong debits of interest
Scope of Audit
The scope of the audit includes verification of interest revenue and expense to check whether correct interest rates and periods have been applied for calculation and whether interest debits and credits have gone to the correct loan and deposit accounts.
Approach
A systematic audit approach should consist of the following steps
- Gathering proper understanding of different loan and deposit accounts along with the applicable interest rates. This calls for the compilation of a complete list of deposit and loan accounts with the applicable interest rates. The period applied in the calculation of interests is to be reckoned and a summary of the balances appearing on different loan and deposit accounts at the end of all the months to be obtained.
- Review of the month end balances will reveal any abnormalities in the application of interest rates or applying a wrong period for calculations. This review is an important step in the audit approach.
- Review of the loan documents for certain selected type of loan accounts where the revenue is more is to be undertaken. A similar review of the deposit accounts would reveal any abnormal changes in the deposit balances.
- A brief audit of the calculation of interest revenue and interest expense in respect of certain select accounts for the whole period under review will reveal the accuracy level of interest calculations
- Preparation of similar statements showing the interest revenue and expense for the yearly period for the past five years would provide the general trend of the revenue and expense account.
- A questionnaire on the internal control systems being adopted by the bank for ensuring the appropriateness of the application of interest rates and the authority for specifying different interest rates for different deposit and loan accounts need to be submitted to the management and the answers to be verified by test checking the existence of the internal control.
Checking the Reliability of Client’s Electronic Data
Integrity of transactions carried out through electronic data interchange refers to completeness, accuracy, timeliness and authorization of information. Audit procedures concerning the verification of electronic data is largely concerned with evaluating the reliability of such data by checking the reliability of the systems in use for capturing and processing of such data. In this connection the auditor should ensure that there exist adequate controls (i) to validate the input, (ii) have the capability to prevent the duplication or omission of certain transactions, (iii) provide for adequate safety against different persons accessing the system, (iv) ensure that there are adequate mechanism to prevent alterations to the data already entered in the system except with proper authority, (v) prevent incomplete processing of transactions – there should be mechanisms to reject the processing of a transaction if complete information is not fed, (vi) ensure that there is proper system for the distribution of information processed and (vii) ensure that the data and information processed are properly recorded, backed up and kept secured within the system.
Internal Control Weaknesses in Information and Data Flows
In the case of Alexandria Corporation the following weaknesses are identified and suitable corrective actions are recommended.