1. Introduction

Before we start any discussion about the topic, the first thing that we should be aware of – What is Treasury?

In simple language treasury is a fund or revenue of an organisation. Thus, Treasury Management of an entity basically consists management of its cash flows, its banking, money and capital market transactions & effective control of the risks associated with those activities.

Internal Audit

2. Audit Objective

As this area deals with the funds of an entity, it is very much prone to financial frauds. Thus, while dealing with this area the auditor should possess a better understanding of the transactions in this area. Some of the audit objectives that an auditor should observe are noted below:-

  • To ensure the entity has proper policy and procedure in place for all the treasury activities.
  • To ensure the entity has appropriate access control in place in the treasury department.
  • To ensure the entity has safeguarded the information and documents related to treasury functions.
  • To vouch that the entity has properly recorded all the transactions in the books of accounts.
  • To verify that authorised person is reconciling the accounts at regular intervals, any difference noted is properly dealt and the same has been reviewed as per the Entity’s policy.
  • To enquire that entity maintains short and long term budget of required funds and has also identified the sources of those required funds.
  • To ascertain that the Entity has taken decisions on the basis of best options available.

3. Some Audit Areas and Steps for Auditing

a) Cash Credit Account

Cash credit account is one of the primary sources of funding working capital requirements of an entity. Generally to secure their risk banks hypothecate accounts receivables and inventories of the borrower. Key points to be checked:

    • Go through the sanction letters for each cash credit account and document the important terms & conditions. Check adherence with those terms & conditions any deviation of which may increase credit risk of the Entity. Asses those identified risks.
    • Ensure that the Entity has communicated to appropriate authority in case of non – adherence with the above terms & conditions.
    • Ensure that the Entity has utilised the borrowed funds to fulfil its working capital requirements.
    • Verify that the bank has set the drawing power of the cash credit facility as per the sanction letter issued to the Entity.
    • Ensure the Entity does a periodical check of the bank charges levied by the bank.

b) Term Loan

Term loan is one of the sources for long term funding of an entity. There are some conditions commonly known as loan covenants such as debt-equity ratio, creation of charges etc. that an entity needs to comply. In case entity fails to comply any of those conditions they may need to pay some extra charges. Key points to be checked:

    • Ensure proper authorisation has been taken in case of new term loan account. Auditor may refer to minutes of the board meetings in such respect.
    • Check an entity has complied with all the loan covenants and where the company has failed to do so matter is informed to the management or the concerned authority.
    • In most of the cases, the entity opts for floating rate of interest which is linked to the base rate (MCLR) of the respective bank plus certain fixed margin. As the base rate is revised at regular intervals the auditor should verify that the interest charged by the bank resembles to it. Also ensure the Entity has policy to periodically check the correctness of the interest charged.
    • Ensure the provision for interest has been recorded in books of accounts by entity where the loan account has been termed as NPA by the bank and the entity is not paying  interest due on it.

c) Fixed Deposit (FD) / Term Deposit (TD)

Fixed deposit is one of the modes where entity invests their funds for risk free income. The rate of interest varies from bank to bank as well as it depends on the period for which the amount is invested. Key points to be checked:

    • Ensure the amount in FD has been invested by the entity after considering competitive rate of interest offered by different banks for different duration.

For example – If the amount is invested for 60 days it may earn 4.5% p.a. whereas if the same fund is invested for 360 or above days it may earn 6% p.a. Thus, there is an incremental income that could be lost if amount invested for short duration of time provided there is no liquidity issue.

    • Auditor should check that the different schemes of FD have been compared before investment. For example – if the amount is invested in non-callable schemes of FD with the PNB it earns incremental interest of at least 10 basis points as compared to the general FD. However, liquidity should be taken into consideration before investing in non-callable fund as the Entity would not be able to withdraw the amount before maturity.
    • While applying for Bank Guarantee (BG), bank demands for FD of an equivalent amount as BG money for security and pays interest on that at regular intervals. In most of the cases, the entity opts for cumulative FD i.e. instead of interest pay out, the interest is re-invested. Thus, the FD amount exceeds the BG amount. The Auditor should verify whether or not the interest amount which has been re-invested might have been used to fulfil working capital requirement resulting in savings of interest cost payable on the CC account.
    • Auditor should check that proper accrual of interest income has been done in books of accounts of the entity. Same can be cross verified from 26AS statement / interest certificate provided by banks.

d) Cash Management

Key points that needs to be checked:

    • The Auditor should conduct surprise audit of the cash available with the authorised person and any differences should be properly dealt including communication with those charged with the governance / management where there is a material discrepancy.
    • Verify that proper vouchers for each cash payment along with the supporting are available with proper signature of the person authorised to do.
    • Ensure that no idle balance is lying in the cash / current account for substantial period of time which might have been used to fulfil working capital requirement resulting in savings of interest cost payable on the CC account.
    • Whether any insurance policy is in place to cover the cash component in case of any embezzlement.

e) Other Areas

> Bank Guarantees (BG)

A guarantee means giving something as security. A bank guarantee is when a bank offers surety and guarantees for different business obligation on behalf of their customers within certain regulations. It is generally a promise made by the bank to any third person to undertake the payment risk on behalf of its customers. Some key points that need to be checked:

i. Auditor should ask for the list of BG taken from the bank along with the details of margin money deposited against it and ensure margin money does not exceed the BG amount.

ii. Verify the Entity has closed the BG and the margin money has been withdrawn at BG end date.

iii. Check entity has paid BG commission as per the agreement with the bank.

iv. As the BG commission varies with the bank, the auditor may ensure that an entity has chosen the best option available at the given cost.

> Bank Reconciliations Statements (BRS) and Cheque Books

Key points that needs to be checked:

i. Ensure the BRS has been prepared at the regular intervals (generally monthly). Discrepancies, if any, are noted and reviewed by the authorised person.

ii. Auditor should pay attention to cheques issued by the Entity but not cleared even after 3 months from the issuance date.

iii. Unused cheque books should be properly kept in the secured shelves.

I would like to hear any suggestions / recommendations from your side so that I can incorporate it in my next articles.

Author Bio

Qualification: CA in Job / Business
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Location: KOLKATA, West Bengal, IN
Member Since: 09 May 2020 | Total Posts: 2

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One Comment

  1. g hanumantha rao says:

    in cash item of treasury audit. no section of any denomination be kept for longer time without movement which creates a doubt of whther it is currency or mixed white papers inside in betyween which were adjusted to its size and colour in lieu of genuine can be traced out.

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September 2021