hbl audit sytem

7/27/2019 HBL AUDIT SYTEM

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Saher Aslam11581 KhadijaIqbal 11577

Audit


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Contents

Contents..............................................................................................................................3INTRODUCTION OF HBL...............................................................................................4Brief History of HBL..........................................................................................................4

MISSION ...........................................................................................................................6

........................................................................................................................................6ANALYSIS OF ORGANIZATIONAL STRUCTURE.....................................................7

Centralized Decision Making.........................................................................................7

Downward Communication............................................................................................7Chain of Command.........................................................................................................8

Authority and Responsibility..........................................................................................8

Delegation.......................................................................................................................8

INTRODUCTION......................................................................................................9THE GROUP AND ITS OPERATIONS............................................................................9

SIGNIFICANT ACCOUNTING POLICIES.....................................................................9

Advances.......................................................................................................................10a)Current.......................................................................................................................11

b)Deferred.....................................................................................................................11

Currency Risk Management.........................................................................................12Credit Risk Management..............................................................................................12

Interest rate Risk Management.....................................................................................13

Conducting operational audit ...........................................................................................17

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INTRODUCTION OF HBLIt is the prime Bank in country established in 1941 having a registered head office in

Karachi. It was nationalized in 1974, but recently on 26 th February 2004 it has been

privatized by Government of Pakistan and is taken over by Aga Khan Fund for

Economic Development (AKFED). They acquired 51 percent of shares of HBL.

It is one of the largest Banks of Pakistan with 1439 branches and having total assets of

Rs. 434,931,930,000.

Brief History of HBLHBL at its present state has a long and rich history of deeds and sacrifices. All this has

been possible on the account of sustained efforts.

The first branch of HBL started functioning on 30 th August, 1941 at Muhammad Ali

Road Bombay, where Quaid-e-Azam Muhammad Ali Jinnah first of all opened his

personal account. Mohammad Ali Habib was a man of stern and persistent will. God.

Almighty had bestowed him with extra ordinary capabilities. He was devoted to his

Bank with a view to take his share in the uplift of the strife-torn and devastated Muslim

community. At the time of its inception, the Bank's total paid up capital was Rs.2.5

million but it is evident from the following data that the Bank experienced a steep rise in

the business in a few years.

In 1942, on the desire of Quaid-e-Azam, Habib family migrated to Pakistan and later on

shifted the Bank's Head Office from Bombay to Karachi on 7 th August, 1947 just one

week prior to independence, to play its pivotal role in the development of this newly

born country.

At the time of independence, the areas which now constitute Pakistan were producing

only agricultural products raw material for indo-Pak subcontinent. Partially no industries

were there to process the raw material, therefore the raw material was exported fromPakistan. There were 19 non-Indian foreign Banks which were engaged in the export of

crops from Pakistan with only two Pakistani Banks i.e. HBL and the Australia Bank. The

circumstances were completely un-certain. The confidence of the people had been

shaken by the un-friendly environment and till the time peace had not been restored,

people would naturally have been interested in other things. The nation was quite young

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with extreme scarcity of resources and these definitely added to the difficulties of the

govt., to run its own Banking system immediately.

Following the announcement of the independence plan in June, 1947, the Hindus

residing in the territories now comprising Pakistan started transferring their assets to

India and vice versa. The Banks included those having their registered offices in

Pakistan, transferred them to India in order to bring a total collapse of the new state. It

had been decided that the Reserve Bank of India would continue to function in Pakistan

so that the problem of demand and time liabilities, coinage, currencies, exchange rate etc

be settled between India and Pakistan and the Indian Notes would continue to be legal

tender in Pakistan till 30th September, 1948. Again due to certain differences between

Indian Pakistan, the Indian Govt., withheld Pakistan's share of Rs.75 core in forward and

subscribed heavily to the Govt. of Pakistan to the tide over the crises, Payment was made

to the Govt., by the Bank at a very nominal rate of interest, even before the actual issue

of securities.

At a time when this newly born country was at whirlwind of crises, it was HBL which

fulfilled generously the financial needs of all its sectors, paid salaries to the employees of

all Govt. departments, helped in the establishment of State Bank of Pakistan which the

Quaid-e-Azam inaugurated on July 1st, 1948. HBL after partition opened its branches

throughout Pakistan to provide finance and other facilities to the business community. Inassociation with HBL, the Govt. sponsored Pakistan Finance Corporation Limited for

financing of cotton. The Bank helped handsomely in the construction of WARSAK

DAM PROJECT, WAPDA, & K.D.A. by provided finance and other facilities.

Another innovation introduced by HBL is the evening Banking cash long after the

crossing of normal Banking hours. It was also the first in making available such new

facilities as Gift Cheques, Rupee Travelers Cheques, Credit Card System, short term

and long term schemes for small businessmen.

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MISSIONTo be recognized as the leading financial institution of Pakistan and a dynamic

international bank in the emerging markets, providing our customers with a premium set

of innovative products and services, and granting superior value to our stakeholders

shareholders, customers and employees.

OR

Opening new horizons and fresh perspectives of trust, dependability and service through

1425 domestic branches and 112 overseas offices with a comprehensive range of

financial products.

2.1.6.3 Organizational Chart

6

Chairman

President

Board ofDirectors

SEVP

International

Operations

SEVP Corporate

Banking & Treasury

SEVP RetailBanking &

Information

Technology

SEVP Finance, Audit

& Administration

SEVP Asset Remedial

Management

SEVP Credit Policy

SEVP Corporate Banking,

financial institute & Project

Finance


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ANALYSIS OF ORGANIZATIONAL STRUCTURE

The purpose of an organizational structure is to help in creating an environment for

human performance. It is then, a management tool and not an end in its own. Although

the structure must define the task to be done, the rules so established must also be

designed in the light of abilities and motivation of the human recourse available. By

analyzing the organizational structure of HBL presence of the following elements can be

found in its structure.

Centralized Decision Making

By looking at the organizational structure of HBL would be found that the structure at

HBL is a critical one. All the decisions are made at the top management level and thesubordinates have to obey these decisions. This trend in the decision making shows a

pattern of rigidity in structure of HBL.

Downward Communication

Communication is the process by which information is exchanged and understood by

two or more people, usually with the interest to motivate or influence the behavior of

others in the organization. Downward communication is the message and information

sent from top management to subordinates in a downward direction. Managers can

communicate downward to the employees through speeches, massages in company

publications, information leaflets, tucked into pay envelops material on bulletin boards,

policy and procedure mandates.

The same pattern is followed at HBL. No doubt its a very traditional approach but it can

create problems because it ignores the receiver of the communication because the issuer

of policies and procedures does not ensure communication. In reality may the messages

communicated downward are not understood perfectly.

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Chain of Command

The chain of command is an unbroken line of authority that links all persons in an

organization and shows who reports to whom. By analyzing the organizational structure

it can be found that there is a scalar principle followed with in the Bank because each

and every person knows to whom can one report. The authority and responsibility for

different tasks and duties are different, as well as every one knows the successive levels

of management all the way to the top.

Authority and Responsibility

The chain of command illustrates the authority structure of HBL. Authority is the formal

and legitimate right of the manger to make decisions, issues orders and allocatesresources to achieve organizational desired outcomes. By analyzing the chain of

command of HBL, one can come to the conclusion that, as there is scalar pattern

followed at the organizational setup of HBL therefore it is implied that everyone in his

position knows that what is ones authority and what is the responsibility and the

authority it allocated.

Delegation

Delegation is the process, which managers use to transfer the authority and responsibility

to position below in the hierarchy. Most organizations today encourage managers to

delegate authority to the lowest possible level to provide maximum flexibility to meet

customer needs and adapts to the environment. But at HBL no such system prevails the

managers try to keep as much of the authority as they can and if some authority is

delegated it is sure that it will be misused

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FINANCIAL ANALYSIS

INTRODUCTION

These section efforts have been made to cover all relevant aspects of the financial

performance of HBL. Overtime comparison and Common Size analysis are carried out

with the view to extract concrete conclusion to describe financial standing and

performance of the bank.

THE GROUP AND ITS OPERATIONS

The group consists of

a) Holding Company

United Bank Limited, Pakistan

b) Subsidiary Companies

United National Bank Limited, UK

United Bank AG (Zurich), Switzerland

United Executers and Trustees Company Limited

United Bank Financial Services (Pvt) Limited

BASIS OF PRESENTATION

The purchase and sales of HBL are restricted to the amount of facility actually utilized

and the appropriate portion of mark up there on. They strictly observe the rules and

regulations as applicable and promulgated by the GOP and or SBP.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Returns on advances and investments are recorded on accrual basis. Debts securities

purchased at premium or discount are amortized over their maturity periods.

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Dividend income is recognized on accrual basis of declaration of dividend up to the

year-end. Returns on classified assets are recorded on receipt basis, rescheduled and

restructured loans are treated in accordance to SBP regulations. Fees/commissions etc.

on Letter of Credit and others are recorded on accrual basis.

ADVANCES

These items are stated net of provisions against non-performing loans as per SBP PR

IIIV.

Investments

HBL classify its investments as stated below;

a) Held for trading

b) Held to maturity

c) Available for sale-other than the above two types

In the light SBP regulations quoted securities are shown at market values and any

changes arising are taken to profit and loss account only upon actual realization.

Unquoted securities are valued at the lower of cost and break up value and difference is

charged to income. Provisions for diminution in the values are made after permanent

impairment, if any.

Lending/Borrowing from Financial Institutions

a) Sales under Purchase Obligation: These are reflected as liabilities and the charges

against these are recorded as an expense on pro rata basis.

b) Purchase under Resale Obligation: The differential of the contracted price and

resale price is amortized over the period of their contract and recorded as income.

Fixed Assets and Depreciation

a. Owned

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Such assets are showed at their cost or revalued amount less accumulated

depreciation and impairment loss, if any. No depreciation is charged on freehold

land. During the year, amendment related to section 235 of the Companies

Ordinance 1984, surplus on revaluation can now be reversed to the extent of

incremental depreciation charged. As a result such differentials are now

transferred to retained earnings/accumulated losses as per the Securities and

Exchange Commission of Pakistans (SECP) clarifications.

Gains and losses on sale of fixed assets are included in income currently, except

that the related surplus on revaluation of fixed assets is transferred directly to

retained earnings/accumulated losses.

b. Leased

Assets under financial leases are stated at cost. The outstanding obligations are

shown as a liability. The finance charges are allocated to accounting periods in a

manner so as to provide a constant periodic rate of charge on the outstanding

liability.

Taxation

A) CURRENT

Provision is based on the taxable income for the year or minimum tax computed on the

basis of turnover, whichever is higher.

B) DEFERRED

The bank accounts for deferred taxation on major timing differences, using the liability

method in respect of those timing differences, which may reverse in the foreseeable

future. Deferred tax debits are, however, recognized only if there is reasonable

expectation of realization of the amount.

c. Foreign Currencies

Balances are translated into rupees at the applicable rate of exchange prevailing at the

balance sheet date or where applicable at contractual rates. During year transactions are

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converted into Pak rupees applying the exchange rate at the date of respective

transactions. Gains and losses are included in income currently.

d. Deferred Cost and Lease Payments

These are amortized over a period of five years. Rental obligations under operating

leases are charged to profit and loss account as incurred.

RISK MANAGEMENT

The bank is primarily subject to interest rate, credit and currency risks. The bank has

designated and implemented a frame work of controls to identify, monitor and manage

these risks are as follow;

CURRENCY RISK MANAGEMENT

For the purpose of efficient management of this risk, the group enters into ready, spot,

forward and swap transactions in the inter bank market and with the State Bank of

Pakistan in order to kedge its assets and liabilities and cover its foreign exchange

position.

CREDIT RISK MANAGEMENT

Out of the total assets of Rs.183, 139.879M assets subject to credit risk amounted to

Rs.178; 958.323M. The banks major credit risk is concentrated in textile sector. To

manage it the bank applies credit limits to its customers and obtains collaterals. Credit

risk in the portfolio is monitored by the CRM who formulate appropriated policies and

procedures to ensure building and maintaining quality credits and efficient credit

process.

The banks financial institution risk management unit assesses, recommends financial

institutions and also controls cross border/country risk.

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INTEREST RATE RISK MANAGEMENT

The group is mainly exposed to mark up interest rate risk on its deposit liabilities and its

loans and advances and investment portfolios. The asset liability committee of the bank

reviews the portfolio of the bank to ensure that risk is managed within acceptable limits.Most of the loans and advances portfolio comprises of working capital, which are

reprised on a periodical basis. The groups interest is limited since the majority of

customers deposits are retrospectively reprised on a six monthly basis due to the profit

and loss sharing principles.

CONCENRATION OF CREDIT AND DEPOSITS1

The major class of business for HBL related to advances is the textile and private

sectors. HBL is advancing 27.2% to textile and 74.5% to private sector. Majority of the

depositors fails in the category of individuals, contributing 65% of the total deposits.

INVESTMENT PORTFOLIO

HBL employs diversified investment portfolio. The bank invests its funds both in risk

free assets as well as in risky assets. This enables it to minimize its unsystematic risk to a

great extent.

HBL values its security holding on market value, in accordance with the guidelines

given in SBP circular. Any unrealized surplus/deficit arising on such revaluation is taken

directly to Surplus/Deficit on revaluation of securities in the balance sheet. Where an

active market is not available, securities continue to be stated at cost. Provision for

diminution in the value of these securities is made after considering permanent

impairment, if any, in their value.

Where securities are sold subject to commitment to repurchase them at a predetermined

price, they remain on the balance sheet and a liability is recorded in respect of the

consideration received in Borrowing from Bank or Deposits as appropriate.

Conversely, securities purchased under analogous commitments to resell are not

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recognized on the balance sheet and consideration paid is record in lending to financial

institutions or loans and advances as appropriate.

PROFITABILITY

The operating profit before provisions and write offs increased by 80%, where as the

profit before tax and extraordinary items increased by 62% as compared to last year. The

increase is mainly attributed to 14% increase in the net revenue from funds (NRFF), 10%

increase in fee and brokerage income and 75% reduction inn write offs/provisions for

non-performing assets as compared to year 2002.

Performing advances increased by Rs. 2 billion as compared to 2002 while NPAs

decreased by 53%. Presently NPA constitutes 7.4% as compared to 14.6% in 2002 of the

total loan portfolio. The branches reduced to 1077 from 1112. The

bank handled over Rs. 96 billion of import and export business during the year, an

increase of 24.7% as compared to last year.

FINANCIAL ANALYSIS

Financial statements are the principal means of reporting the financial condition and

results of operations of a business entity. These statements are meant to assist various

parties in decision making who are interested in the activities of the business. These

statements are means to an end of helping stakeholders in decision-making. To improve

the quality of decision making proper analysis of these statements helps a lot. Financial

statements analysis helps in determining the financial conditions at any particular points

in time and effectiveness of operations of a firm during a specific period.

The various stakeholders of business are interested in the analysis of financials

statements. But the focus of interest of all is not the same. For example, creditors and

credit reporting agencies are interested in finding out the credit worthiness of the firm to

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which they have extended credit or intend to extend credit. Short term creditors are

interested in short term liquidity of the business and long term creditors are interested in

the long term cash flow which the firm can generate over the long period of time.

Investors are interested in the firms ability to sustain profitability over a period of time.

Government agencies analyze financial data for tax purposes. The internal users of

financial statements like management also analyze financial data for planning and

control.

Financial Audit

This type of audit involves a thorough review of a departments records and

reports, in order to check that assets and liabilities are properly recorded on

the balance sheet, and, all profits and losses are properly assessed.

In financial audits, significance or materiality is usually defined as a

monetary value Consequently, planning decisions mainly involve the

intended degree of audit assurance and the extent of audit work required to

provide it. The requirements will vary from one organisation to another and

applicable laws and regulations. Some activities common to most audits:

o Risk assessment

o Defining Materiality

o Financial statement assertions

o Financial analysis of cash flow statement

o Compliance and substantiative procedures

o Analytical procedures

Meeting these objectives involves verification of:

o Revenue

o Sales

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o Bank deposits

o Bank reconciliation

o

Accounts payable

o Accounts receivable

o Disbursements

o Petty cash transactions

o Loans & Advances

o Assets

2.1 Operational Audit

This type of audit involves a thorough review of a departments operating

procedures and internal controls. They deal with broad performance issues,

focusing on whether funds and resources have been economically, efficiently

and effectively managed to fulfill the mission and objectives. An operational

audit includes elements of a compliance audit, a financial audit, and an

information systems audit. In particular, management audits examine and

report on matters related to any or all of the following:

the adequacy of management systems, controls and practices,

including those intended to control and safeguard assets, to ensure

due regard to economy, efficiency and effectiveness;

the extent to which resources have been managed with due regard to

economy and efficiency; and,

the extent to which programs, operations or activities of an entity

have been effective.

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Conducting operational audit

1. Scope-Unlike financial audit, the objectives and scope of operational

audit are not so clear or well defined. The first step would be to

brainstorm along with the client and define the scope and objectivesof audit. It is also necessary to decide the exclusions to the scope.

2. Set audit objectives -The second step would be to set audit

objectives. Appropriate audit evidence can be gathered only when

objectives are clear. Three elements need to be identified-criteria,

cause and effect. They will be concerned with whether the operating

objectives will be met.

Review and update the audit objectives after the preliminary survey.

3. Set scope- To manage expectations on what will be achieved by the

audit by setting the boundaries of what will and will not be included.

4. Gathering information: The sources would be

a. Operating standards

b. Organisation chart

c. Nature of operations

d. Operating reports

e. Senior management

f. Prior audit papers, if available

g. Internet

h. Industry, trade journals and publications

i. Files and papers

2. Preliminary survey: preliminary survey is essential to gain a working

knowledge of the operation to be audited, to logically investigate and

evaluate all information. It would be something like:

a. Information on overall business operations.

b. Develop a questionnaire for discussions with staffc. Interview people within the operation

d. Learn the objectives, goals, and standards of the operation.

e. Ascertain any initial opportunities for improvement.

f. Understand the inherent risks and internal controls.

g. Learn about the people performing the operation key

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personnel, job descriptions, evaluation methods

h. Physically inspect operations by touring the entitys facilities

i. Focus on possible cost savings from inefficiencies

j. Present the survey results

Update (or create) audit objectives based on this largerinformation bases. Make the audit plan - time , resources andexpertise required, audit programme, audit tests and identify auditrisks

13. Review of Internal Controls: To determine what level of reliance

can be placed on internal controls. This step takes place throughout

the audit process. Methods to review would include

a. Responses of interviewing staff to control questions in the

Internal Control Questionnaire would indicate areas of control

weakness to concentrate on

b. Prepare flow charts or narrative descriptions

c. Walk-through and limited system testing

d. Evaluate policy and procedures manuals

Results of Internal Control Review: This will provide informationregarding

e. Identification of the controls that the auditor will rely on during

detailed testing

f. Analysis of the controls

g. Evaluation of the appropriateness of the controls

h. Risk Assessment

4. Existence of controls: It is important to consider whetherthere are

any factors which might render controls ineffective.

a. Accidental or deliberate avoidance

b. Management override

c. Inadequate Backup and recovery

d. Environmental impact

e. Access control over computer systems

A re-analysis of risk and budget time will need to be done at thisstage..

5. Detailed testing: Carry out sufficient audit tests of compliance and

substantiation to gain sufficient evidence on the objective of the audit.

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The testing is aimed at significant controls that have previously been

assessed as adequate to evaluate their effectiveness, and those

controls assessed as inadequate to verify that the required results are

not being consistently achieved.

6. Report: the report should inform the recipients of the issues or

opportunities for improvement and provide constructive means of

achieving the goals.

Managing the Audit

Internal Audit needs a mission statement or audit charter outlining the

purpose, objectives, organisation, authorities, and responsibilities of the

internal auditor, audit staff, audit management, and the audit committee. A

big part of the management profession is creating and enforcing policies and

procedures. Policies interpret and tailor laws that apply to an organisation;

serving as a written record for good practices the management wants to

emphasize and enforce in the organisation, whether or not there are legal

implications. While policies are general, procedures are specific.

3.3.1 Audit Planning

Every audit assignment should be planned carefully prior to its start.

Circumstances may occur which might call for unscheduled reviews or there

might be pressures to begin special audit without delay. However, a properly

planned audit will almost always have better audit results. A long-range audit

plan should be developed which should be reviewed at regular intervals.

Pre engagement activityMatters to be considered before accepting new

assignment would be:

i. Gathering information on the integrity, competence of the

management

ii. Past experience, if any with the management

iii. Communication with previous auditors

iv. Significant accounting policies of the client

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v. Assessment of Managements ability to have effective and

efficient internal control

vi. Financial viability of the entity

The auditor should consider the following matters while planning:

o Nature of work

o Knowledge of business

o Policies and procedures of the entity

o The methods used by the entity to process significant accounting

information, including the use of service organisations, such as

outside service centers.

o Preliminary judgment about materiality levels for audit purposes.

i. Understanding the nature of work: The

various sources would be:

- Likely impact of applicable

accounting and auditing pronouncements

- Financial statements of the entity

- Prior internal audit reports, external

audit reports and reports of any special audits or investigation of the

area assigned.

- Discuss with auditee:

- Changes in accounting methods or policies

- Changes in information processing methods

- Timing of preliminary audit work, confirmation

procedures,

- Assistance required from client personnel

- Records required

- Facilities required like physical space, computer

systems etc.

ii. Knowledge of business

- review the prior audit reports

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- policy and procedure manual, org chart, flowcharts etc.

- review financial statements or

reports filed with various agencies or regulatory bodies

- minutes of meetings of

stockholders, the board of directors and relevant committees

- effect of various laws and regulations on financial statement of

auditee

- information about nature of entitys

business

- client correspondence file

- gain an understanding of type of

business, products & services, capital structure,

offices/branches/factories

- obtain knowledge of auditees

industry like economic condition, government regulations,

competition, financial trends.

- Other external sources such as

industrial publications, ICAI standards and guidance etc.

iii. Methods used by entity to process

information: The methods used need to be considered as the methods

influence the design of internal control. The extent of computer

processing and the complexity of processing will influence nature, timing

and extent of audit procedures.

iv. Determining audit objectives: Objectives

based on managements needs, nature of prior work, available resources

and time is an important aspect of planning. General objectives would be

part of audit plan and they should be re-examined before each audit and

defined in detail before each audit.

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v. Audit Scheduling: on the basis of annual

plan and preliminary survey the manpower requirements and time

budgets need to be fixed. The following factors need to be considered.

- nature of audit

- complexity of work

- staff availability

- special skills required

- audit period

vi. The auditor should consider whether

specialized skills are needed for any area such as the effect of computer

processing on the audit, to understand the controls, or to design and

perform audit procedures. If specialized skills are needed, the auditor

should seek the assistance of a professional possessing such skills.

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hbl audit sytem

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