ATLAS BANK LIMITED

(Financial Concern)

REPORT ON AUDITING SYSTEM

Name : Mohammad Ahmed Jilani

Student ID # 2009-1-15-10382
Course : Auditing
Instructor : Darrel Parera
Semester : Spring 2011
ATLAS BANK LIMITED - PROFILE
Envisioned to operate as a progressive and dynamic banking entity, Atlas Bank today stands
as a firm reality with a futuristic approach to help manage personal and commercial finances
with ease and convenience.

Poised to offer an extensive range of commercial banking services, lucrative assets and
liability products, Atlas Bank will be catering to satisfy and exceed the needs of its valuable
customers. With a devoted and professional team endeavoring to top off the satisfaction of
the customers, Atlas Bank will provide leasing, financing and trade finance along with export
re-finance and wealth management services. In addition, brokerage and corporate advisory
services will also be offered through its wholly owned subsidiary. The wide range of asset
and liability products being designed will not only suit the needs of customers but will also
make financial management convenient for them through innovative deposit schemes that
will provide most favorable profit and security with monthly, quarterly, semi-annual and term
income options or alternatively nest eggs for long term planning. It will provide solutions for
multiple requirements of clients of diverse financial nature on both institutional and
individual levels through its array of funded and non-funded products and services.

Atlas Bank, having a futuristic approach, is positioned to improvise with the changing trends
of the modern day financial market. Operating through a growing network of branches across
Pakistan, the entire retail network is real-time online, providing banking convenience,
especially for those on the move. Enjoying the privilege of having diverse groups as its
valued customers, Atlas Bank serves through its strong network of branches, backed by
advanced computerized and control system, positioning its priorities in accordance with the
needs, convenience and satisfaction of its customers and stakeholders.

'With equity of over Rs.3.41 billion and assets base of over Rs.30.40 billion, Atlas Bank is
determined to expand within and contribute aggressively to the growing economy of Pakistan
and its flourishing banking sector. To stand out in the market through competitive positioning
as its prime objective, Atlas Bank will always be committed to deliver consistent quality
services and customer satisfaction.

HISTORY
Atlas Bank Limited is supported by the trusted equity of Atlas Group, a leading
manufacturing, financial services and trading group that has been at the forefront of country’s
economic development since 1962. With a long-term credit rating of A- and a short-term
credit rating of A2 by PACRA, Atlas Bank began its journey back in the year 1990 when
Atlas Group and the Bank of Tokyo-Mitsubishi Limited entered a joint venture as Atlas
Investment Bank Limited. Later in 2002, the Bank established a merger with Atlas Lease
Limited and acquired Dawood Bank Limited in December 2005 and renamed it as Atlas Bank
Limited and merged Atlas Investment Bank in to Atlas Bank in 2006. Atlas Capital Markets
(Private) Limited was also incorporated in 2006 and is currently a wholly owned subsidiary
of the bank.
 VERIFICATIONS OF ACCOUNTS
AUDIT OF FIXED ASSETS
In auditing fixed asset the auditor looks for the following;

 Internal controls are adequate.

 Fixed asset subsidiary records are in balance with the respective general ledger account.
 Fixed assets are properly recorded at cost and are properly capitalized.
 Depreciation periods are reasonable and consistent with the useful life of the asset.
 Depreciation/amortization and consistent.
 Purchases and disposals authorized and recorded.
 Adequate insurance coverage
 Fixed assets are properly financial condition.

STEPS INVOLVED IN FIXED ASSET AUDIT

 Review the external control checklist for fixed assets. Complete a schedule summarizing
fixed asset account activity since the last audit date through the current audit date. Use the
work paper for your review of fixed assets. The purpose of the work paper is to summarize
the account activity (purchases, disposals, and depreciation). Alternatively, you may obtain
and use the general ledger account history for fixed assets and depreciation expense (copies
should be retained for your work papers).

 Complete a schedule summarizing fixed asset account activity since the last audit date
through the current audit date. A sample work paper, with instructions, is provided in the
Appendix to this chapter. Use the work paper for your review of fixed assets. The purpose of
the work paper is to summarize the account activity (purchases, disposals, and depreciation).
Alternatively, obtain and use the general ledger account history for fixed assets and
depreciation expense (copies should be retained for your work papers).

 Review original invoices for significant fixed asset purchases. Most credit unions maintain a
file for fixed asset invoices. Obtain the invoice file. Trace significant purchases to the original
invoice to determine if the item is recorded at original cost. The invoice should be reviewed to
determine if the item purchased is a tangible asset which must be capitalized. Costs which
may not be capitalized are routine repairs and maintenance expenses.

 Review depreciation expense recorded in the audit period.

  Test depreciation calculations for reasonableness and consistency with the useful life of the
asset.

 Determine if insurance coverage is adequate for fixed assets. Obtain the insurance policy.
Compare the net book value for each classification of fixed assets with the insurance coverage
amount on the policy. At a minimum, fixed assets should be insured for the net book value
(original cost less accumulated depreciation). Insuring fixed assets for replacement value is
something to consider for major assets, such as the building and computer equipment.

 Determine if fixed assets are accurately reported on the statement of financial condition. This
is accomplished by tracing the accounts and balances reported on the general ledger trial
balance, to the statement of financial condition.

CURRENT ASSETS

AUDIT OF ACCOUNTS RECEIVABLE

In auditing receivables the auditor looks for the following;

 Internal controls are adequate

 Adequate accounting records exist.
 The assets are properly classified on the statement of financial condition.

STEPS INVOLVED IN THE AUDIT OF RECEIVABLES:

 Review the “Other Assets” external control checklist.

 Review the account reconcilement for Accounts Receivable as of the audit date.
 Foot the reconcilement.
 Trace significant amounts listed on the reconcilement to the general ledger history report.
 Trace significant amounts listed on the account reconcilement to supporting documentation
 Review the general ledger account history for the month subsequent to the audit date to
determine if significant amounts are clearing properly.

PREPAID EXPENSES
In auditing prepaid expenses the auditor looks for the following;

 Internal controls are adequate.

 Adequate accounting records exist.
 The write-off period is reasonable.
 The balance in the account represents costs that will benefit future periods.
 Prepaid expenses are properly classified on the statement of financial condition.
STEPS INVOLVED IN THE AUDIT OF PREPAID EXPENSES

 Review the “Other Assets” external control checklist.

 Trace the balance of the subsidiary records to the general ledger as of the audit date.
 Review a sample of original invoices for significant dollar amount prepaid expenses recorded
in the audit period.
 Review the write-off period in relation to the cost benefit period of the prepaid expense.
 Test a sample of monthly write-off calculations.
 Test a sample of prepaid expense write-offs to the applicable operating expense account.

ACCRUED INCOME

In auditing Accrued Income the auditor looks for the following;

 Internal controls are adequate.

 Adequate accounting records exist.
 Accrued interest receivable on loans and accrued income receivable from investments are
fairly stated.
 Accrued income receivable accounts are properly classified on the statement of financial
condition.

STEPS INVOLVED IN THE AUDIT OF ACCRUED INCOME

 Trace the balance of accrued interest receivable on loans to supporting documentation.

 Test the calculation of accrued interest receivable on a sample of loan accounts.
 Review the schedule for accrued income receivable from investments and test a sample of
individual accrual calculations for reasonableness. Include testing of large
 Balance accruals.

OTHER ASSETS
In auditing Other Assets the auditor looks for the following;

 Internal controls are adequate.

 Adequate accounting records exist.
 Assets Acquired in Liquidation of Loans and other real estate owned are carried on the books
at the lower of cost or current fair value.
 The credit union is listed as the owner on the title of assets acquired in liquidation.
 Sales of Assets Acquired in Liquidation of Loans and other real assets owned are properly
recorded.

STEPS INVOLVED IN THE AUDIT OF OTHER ASSETS

 Review the “Other Assets” external control checklist.

  Review the account reconcilement for other assets and trace amounts to supporting
documentation.
 Confirm significant amounts for other asset accounts. Use this letter to confirm account
balances for applicable other asset accounts.
 Obtain the account reconcilements for Assets Acquired in Liquidation of Loans and other real
asset owned (if these assets are applicable to your credit union).
 Review the most recent appraisal.
 Ensure that the asset is recorded at the lower o of cost or fair value, less any costs to sell the
asset.
 Examine evidence of title, paid property taxes, and current insurance.

AUDIT OF CASH

In auditing cash the auditor looks for whether or not;

 Cash exists and is a credit union asset.

 Balances are complete and accurate.
 Transactions have been properly recorded and all reconciling items identified for the period
under audit.
 Restricted cash (limited as to use) is so identified and labeled.

STEPS INVOLVED IN THE AUDIT OF CASH

 Review internal controls over cash.

 Perform tests of controls.
 Review bank account reconciliations as of the audit date.
 Foot the bank account reconciliations.
 Trace the bank account balance on the reconciliation to the bank statement.
 Trace the general ledger balance on the reconciliation to the general ledger trial balance.
 Trace all significant reconciling items to supporting documentation (bank statements if
applicable).
 Trace the amount reported as a deposit in transit to the following month’s bank statement as a
deposit.
 Trace the amount reported as a deposit in transit to the general ledger history for the same
month of the bank reconciliation.
 Foot the outstanding checks list.

 Trace the outstanding checklist as of the audit date to the following month list of checks
cleared on the bank statement.
 Review original checks issued for the month of the audit for unusual transactions, (check
copies may be reviewed if the original checks are not returned). A random selection of
another one-month period is recommended also.
 Review any inter-bank transfers recorded on the general ledger for the month of the audit
period to determine that transfers are correctly accounted for in the proper period.
 Complete a reconciliation of receipts with deposits.
INVESTMENTS

AUDIT OF INVESTMENTS
In auditing investment the auditor wants to:

 Determine whether internal controls over investment transactions are adequate.

 Verify that management classifies securities when acquired as held-to-maturity, available-for-
sale or trading.
 Ensure that management has properly recorded and reported investments, related accounts,
and fair values.
 Verify that management has recorded all investments owned and related investment
transactions in the appropriate period.
 Verify that management has recorded and reported realized and unrealized gains/losses,
accrued income, investment income, and unamortized premiums/discounts appropriately.
 Verify the ownership and existence of the investments.
 Verify that investments are either on hand, or held in safekeeping.

STEPS INVOLVED IN THE AUDIT OF INVESTMENTS

 Test the internal control structure surrounding investments to identify any internal control
weaknesses.
 Determine how management classified investments.
 Verify the accuracy of the general ledger investment and related accounts.
 Confirm the ownership and existence of the investment.
 Verify the accuracy of the investment fair value and maturity sections of the financial
statements

LIABILITIES

AUDIT OF LOANS

STEPS INVOLVED IN THE AUDIT OF LOANS

 Verify the accuracy of record keeping

 Ensure loan policies set by the board of directors are followed.
 Review a sample of each loan type offered. More specifically, you must review the
company’s system of internal controls over the lending activity and perform audit tests on
loan receivables addressing whether:
 Loans exist at a given date and recorded transactions occur during a given period.
 All loan transactions and accounts that should be presented in the financial statements are so
included.
 Loans are included in the financial statements at appropriate amounts.
 Loans represent the rights of the credit union at a given date.
 Loans are properly classified, described and disclosed.
 OTHER LIABILITIES

Other liabilities include the following:

 Accounts Payable.
 Dividends Payable.
 Interest Refunds Payable.
 Taxes Payable.
 Accrued Expenses.
 Other Liabilities.

In auditing other liabilities the auditor looks for the following:

 Internal controls are adequate.

 Adequate accounting records exist for other liability accounts.
 Liability accounts represent authorized obligations of the company
 Liability accounts are established for all estimated future expenses and contingencies as of the
audit date.
 Other liability accounts are properly classified on the balance sheet.

STEPS INVOLVED IN THE AUDIT OF ACCOUNTS PAYABLE

 Review the Other Liabilities internal control checklist.

 Review the reconcilement for accounts payable as of the audit date.
 Trace a sample of significant amounts recorded on the reconcilement to supporting
documentation.
 Review the general ledger account activity subsequent to the audit date to determine timely
payment or clearing of the account balance.
 Review a sample of invoices to determine if invoices are properly approved, marked paid, and
are paid in the proper time period.
 Determine if all known significant expenses are recognized as of the audit date by reviewing
expenses paid subsequent to the audit date.

STEPS INVOLVED IN THE AUDIT OF DIVIDENDS PAYABLE

 Review the Other Liabilities internal control checklist.
 Review the frequency of dividend payments for all share types offered by the company
 Ensure that the dividends payable accounts for all share types are fairly stated for dividends
earned and not yet paid, based on the board approved dividend rate, as of the audit date.

STEPS INVOLVED IN THE AUDIT OF TAXES PAYABLE

 Review the Other Liabilities internal control checklist.

  Review the taxes payable general ledger accounts as of the audit date and trace the account
balance to the company payroll records and/or the payroll tax returns.
 Review a sample of payroll tax payments (check disbursements) to ensure that payroll taxes
are paid promptly.
 Review a sample of payroll tax returns to determine that payroll tax returns are filed as
required by state and federal regulations.

STEPS INVOLVED IN THE AUDIT OF ACCRUED EXPENSES

 Review the Other Liabilities internal control checklist.

 Review the subsidiary records for accrued expenses for reasonableness and agreement with
the total in the GL.
 Determine that accrued expense accounts are established for known liabilities and
contingencies.
 Review the need for the following accrued expense accounts related to employee benefits:

1. Accrued unused vacation and sick pay (if applicable);

2. Accrued employee post retirement benefits (if applicable)
3. Accrued pension plan liability (if applicable).

 Review a sample of significant payments made from accrued expense accounts.

 Determine if accrual rates are reasonable and consistent with the amount and expected date of
the payout of the liability.

STEPS INVOLVED IN THE AUDIT OF OTHER LIABILITIES

 Review the Other Liabilities internal control checklist.

 Review the reconcilement as of the audit date for Other Liabilities
 Trace significant amounts listed on the reconcilement to supporting documentation.
 Review the general ledger activity subsequent to the audit date to determine if Other
Liabilities are properly clearing.

INCOME

AUDIT OF INCOME
Income accounts are maintained according to their function, such as loans, investments, and fees and
charges. Income is accumulated in these accounts until they are closed into Undivided Earnings at the
end of each accounting period. Loan income is usually accrued when earned even if not yet received.
As a rule of thumb, the account(s) for accrued income from current loans should have a balance of no
more than approximately one-half the earnings for a single month, plus whatever is earned but not yet
collected on delinquent loans.
In auditing income the auditor ensures that the income is properly recorded and reported.

STEPS INVOLVED IN THE AUDIT OF INCOME

 Perform an analytical test of the income earned in relation to the income actually recorded.
Significant differences you may identify between the incomes earned and the amount actually
collected and/or recorded may indicate fraud and should be reported immediately to the board
of directors. A difference greater than +/- 5 percent is typically cause for further and more
detailed auditing, such as reviewing income accounts for the possibility of debit entries being
used to offset credits to an insider’s share account.
 Another tool used to review accrued interest is a computer generated Accrued Loan Interest
Report, which lists accrued interest by each loan. Any loan with a high accrued interest
amount should be a delinquent loan or one with a high principle balance. If not, the high
figure could be an indication of fraud. If you find unexplained high accruals, check for
payment due dates that are advanced to hide delinquency and divert the credit union’s income
to an insider’s account. You should also be aware of the need for sound, written internal
control policies and procedures in relation to the receipt and recording of income.

CREDIT CARD OPERATIONS

1. There should be effective screening of applications with reasonably good credit

assessment.

2. There should be strict control over storage and issue of credit cards.

3. The system whereby the merchant confirms the unutilized balance of the customer with the
bank before accepting payment should be properly installed.

4. There should be a system of prompt reporting by the merchants of all settlements

accepted by them through credit cards.

5. All the reimbursements should be immediately charged to the customer's account.

6. Items overdue beyond a reasonable period should be identified and attended to carefully.

7. There should be a system of periodic review of credit card holder's accounts.

EXPENSES

AUDIT OF EXPENSES
In auditing expenses the auditor looks for the following:

 Determine that internal controls relating to expenses are adequate.

 Determine that accounting practices recognize expenses on a reasonable and consistent
basis.
 Determine that expenses are authorized and are approved
  Credit union business expenses.
 Determine that expenses are properly classified on the income statement.

STEPS INVOLVED IN THE AUDIT OF EXPENSES

 Review internal controls relating to operating expenses.

 Complete an analytical review of each operating expense account.
 Test expenses by selecting a sample of expenses recorded in the general ledger in the audit
period and trace to source documentation such as the bill of sale or subsidiary ledgers for
prepaid and furniture and fixtures.
 Review the board meeting minutes to determine that operating expenses are approved
monthly.
 Trace the general ledger expense account balances to the company’s income statement.

EQUITY

AUDIT OF EQUITY
In auditing equity the auditor looks for the following:

 Determine if internal controls are adequate,

 Verify proper authorization and transactions.
 Verify that all transactions are amounts and accounting period.
 Verify that transfers to the Regular comply with regulations.

STEPS INVOLVED IN THE AUDIT OF EQUITY

 Test the internal control structure relating to equity. You can place less emphasis on internal
controls with equity accounts because of required substantive testing under all circumstances.
 Obtain a listing of equity account transactions for the audit period. Ensure that the history
includes closing entries for the period.
 Verify that beginning balances tie to the closing balances from the prior audit’s work papers.
Tie the ending balances to the appropriate general ledger accounts. Tie the general ledger
balances to the financial statements.
 Review transactions in all equity accounts. Are all transactions properly:

1. Authorized (Other than net income closings, and required regular reserve
transfers).
2. Classified (Should entries run through this account?).
3. Recorded (Including appropriate amounts, and on the correct date).

 Determine the transfer required to the Regular Reserve account, and verify that staff
transferred the appropriate amount.
 Audit Plan
In developing an overall plan for the audit of the financial statements of a bank, the
auditor gives particular attention to:

• The complexity of the transactions undertaken by the bank and the documentation
in respect thereof;

• The extent to which any core activities are provided by service organizations;

• Contingent liabilities and off-balance sheet items;

• Regulatory considerations;

• The extent of IT and other systems used by the bank;

• The expected assessments of inherent and control risks;

• The work of internal auditing;

• The assessment of audit risk;

• The assessment of materiality;

• Management’s representations;

• The involvement of other auditors;

• The geographic spread of the bank’s operations and the co-ordination of work
between different audit teams;

• The existence of related party transactions; and

• Going concern considerations.