What is treasury?
A treasury can be :
The present study deals with treasury management of business entities. Treasury management of an entity would normally consist of management of its cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.
The effectiveness of treasury management is measured by the successful identification, monitoring and control of risk activities. The internal auditor should focus on the risk implications of the analysis and reporting of treasury activities.
An effective treasury management would support in the achievement of business and service objectives. It would aim to eliminate processing bottlenecks, inefficiencies leading to delays in mobilizing internal funds. Some of the activities of treasury management operation are as follows:
- Cash Flow (daily balances and longer term forecasting) to give an assessment of future borrowing requirements and help in the timing and planning of borrowing and investment decisions.
- Investing surplus funds in Approved Investments.
- Short Term Borrowing
- Funding of capital payments through borrowing, capital receipts, grants, or leasing.
- Management of debt and capital financing charges through debt restructuring and associated techniques.
- Interest rate exposure management.
- Dealing procedures with brokers and banks
- Foreign exchange risk management to reduce the impact of exchange rate variances on earnings.
The treasury management function should frame policies for:
c) Bank service charges:
d) Cash flow forecasting activities:
e) Investment activities:
– Reviewing and assessing the performance benchmarks
– Reviewing and assessing the credit structure
– Reviewing and assessing product management
– Reviewing and assessing liquidity management
f) Borrowing activities:
– Reviewing and assessing the borrowings strategy;
– Reviewing and assessing the borrowing limits;
– Reviewing and assessing interest rate risk management;
– Reviewing and assessing the company’s debt to equity ratio; and
– Reviewing and assessing the composition of borrowings.
g) Financial risk management activities:
h) Foreign exchange risk management activities
1. Physical controls:
a. Observe that entry into the dealing room (in case there is one) is restricted to authorised personnel only
b. Examine in case of physical securities
c. Securities are verified before signing the security movement form
a. For entities having dealing rooms and dealing for others:
i. Check that all sampled deals are authorised at the proper levels of authority against the deal slip (Chief Dealer or Treasury Manager)
ii. Ensure that alterations and cancellations on deal slips are authorised
iii. Ensure that acknowledged copy is taken from the client
iv. Observe that a copy deal slip is sent for second authorisation to the Back Office Manager.
b. For other entities:
i. Ensure that proper authorization levels are set for treasury operations.
ii. Observe and verify whether the above procedure is followed.
iii. Verify whether authority limits have been set.
3. Recording Control
1. Control over documents
i. Verify that all money market deals are timely and accurately recorded at the correct monetary value.
ii. Inspect and ensure that filed copies are pre-numbered and continuous for ease of reference and continuity in document filing.
iii. Verify that all the documents and statements have been received from concerned parties (brokers, bankers, lenders etc.) and properly filed in a logical sequence.
2. Control over Accounting Procedures
i. Verify that adequate systems are in place to track all matured investments.
ii. Check for accurate recording and accounting of positions.
iii. Verify that an independent person checks the recording of postings
iv. Trace all deals to the General Ledger and re-compute interest calculations.
v. Check that account reconciliation is done and time frame is set for clearing all outstanding items.
vi. Inspect source documents for accuracy of information on source documents and ascertain that they are initialled as evidence of checking.
4. Segregation of Duties
i. Check and ascertain that segregation of duties is in place. Under no circumstances staff involved in initiating deals staff be involved in checking or receiving the related documents.
ii. Check that there is segregation between functions of authorisation, execution and recording of transactions.
iii. Do an overall assessment and ensure that management supervision is practiced where segregation of duty is not possible
iv. In cases where management override has taken place , ensure that satisfactory reasons for doing so were recorded
1. Check counter-party exposure limit for all brokers, lenders etc.
2. Check deal limits- Maximum amount a person can transact without seeking higher-level approval.
3. Check product limits- Maximum exposure the entity should have in a particular instrument or product
4. Check sector limits – Maximum investment in a particular sector
1. Check that all printed reconciliations are filed in sequential order.
Select a sample for verification
i. Trace each individual item to the recon
ii. Follow up each item and note when it is cleared off the reconciliation. Establish that proper procedure on clearing the outstanding item are set and followed
iii. Establish that only outstanding items are carried on reconciliation.
iv. Trace items from the recon to the General Ledger and get an assertion that they are included in the management accounts.
2. Trace monthly figures to the Management Accounts and compare the figures for accuracy in compilation
3. Check opening balances in General Ledger and establish continuity of balances at close periods.
1. Examine deals from the front office and establish that they are confirmed by the Back Office Manager
2. Trace the selected deals to the filing system and establish that a systematic filing is in place.
3. Examine third party payment and establish that a letter of instruction to that effect is filed.
4. Establish that outward confirmations are recorded in a Register.
8. Bank Cheques
1. Verify whether unused bank cheques are kept under lock at all times.
2. Ensure that bank cheques for outward payments are accompanied by full documentation. (Two Confirmation Letters)
3. Observe that a limited number of personnel have access to Bank Cheque pad currently in use.
4. Inquire the check signing limits and ensure they are adhered to.
|Whether the entity has a policy for all treasury activities .|
|Whether the policy is commensurate with the nature of operations and adequately covers all the activities?|
|Interview selected treasury personnel & accounting personnel|
|Review internal control report and prior audit reports|
|Verify whether follow up activities have been undertaken and issues in past reports have been satisfactorily resolved|
|Review management reports|
|Review reconciliation of cash and investments|
|Are their policies for interest rate risk management?|
|Foreign Exchange risk management|
|Whether there are policies and procedures for foreign exchange risk management?|
|Review whether the policy is effective in controlling and monitoring risk|
|Are there predefined limits for different types of instruments ?|
|Are their policies establishing authority levels for approval of transactions?|
|Has the entity identified the counterparty to conduct foreign exchange transactions?|
|Who is authorised to approve hedging strategies, and the amount to be hedged|
|Is there adequate segregation of duties ?|
|Review the method adopted by entity to account for foreign exchange transactions|
|Are the counterparty banks informed of the names of employees authorised to execute foreign exchange transactions|
|Is there a system to track exposure in foreign exchange .Are timely reports from the system available to the decision makers?|
|Analyse the gains and losses from foreign exchange transactions|
|Review the investment strategy .Is the strategy followed in letter and spirit?|
|Are authority level set forinvestment in different instruments monetary limits|
|Obtain the list of investments|
|Analyse the investment portfolio statements|
|Are all investments in name of the entity .If not, review whether entity has valid reasons for not doing so.|
|Verify the entity has al the documents with regard to ownership of investments|
|Obtain Bank statements|
|Review the Statement of investments|
|Review the liquidity position|
|Who is/are responsible for cash management?|
|Does the entity follow specific technique for borrowing /investing short term funds?|
|Who is authorised to devise a strategy for deployment of surplus funds?|
|Does the entity utilise third party investment managers? Are reasons for selection recorded in writing?|
|How does the entity control the investment managers’ activities?|
|Are the investment mangers appraised of the investment policies of the entity? How does the entity ensure compliance with them?|
|How is the performance of internal/external investment managers evaluated?|
|Whether there is adequate segregation of duties?|
|Review accounting treatment to various transactions|
|Whether monthly statement reconciled?|
|Is there an effective procedure of following up with the unreconciled items?|
Authored by: Rajkumar S Adukia, FCA
Email: [email protected]