Systematic Audit Approach for Verification of Interest Revenue and Interest Expense

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Table of Contents

Possible Risks
Scope of Audit
Approach
Checking the Reliability of Client’s Electronic Data
Internal Control Weaknesses in Information and Data Flows

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.

Weakness Identified	Recommended Improvements
Shipping notices are forwarded by public warehouses to general accounting. In this case there will be no control on whether the goods are being shipped to the correct party and correct destination	The authorization to ship should generate from the general accounting department through pre-numbered invoices sent to shipping department
Billing clerk enters the price of the item. This may lead to wrong pricing	There should be system generated invoices based on customer orders specifying quantity and prices
Billing clerk accounts for numerical sequence of shipping notices	Shipping notices should follow the sequence of the invoices. The comparison of shipping documents with sales invoices will detect goods that have been shipped but not billed when no sales invoice is located for a particular shipping document
Billing clerk also prepares control tapes of the units shipped and the unit prices	Computer should generate these information and data based on the customer orders to ensure accuracy of quantity and price
Shipping notices and control tapes are forwarded to the IT department	Invoices pre-numbered and shipping notices should be forwarded to the IT department so that there will be a comparison of the shipping documents and invoices to check that all the items invoiced are shipped and vice versa with correct quantity and prices

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Systematic Audit Approach for Verification of Interest Revenue and Interest Expense

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