Technical Guide on Internal Audit of Treasury ... - CAalley.com

<strong>Technical</strong> <strong>Guide</strong> on Internal Audit of Treasury Function in Banks
issued and received by the back-office only. Discrepancies in transaction
details, non-receipts and receipts of confirmations without application
must be resolved promptly to avoid instances of unrecorded risk
exposure.
b) The control over dealing accounts (vostros and nostros) - Prompt
reconciliation of all dealing accounts is an essential control to ensure
accurate identification of risk exposures. Discrepancies, non-receipts and
receipts of funds without application must be resolved promptly to avoid
instances of unrecorded risk exposure. Unreconciled items and
discrepancies in these accounts must be kept under heightened
management supervision, and as such discrepancies may at times have
significant liquidity impacts, represent unrecognised risk exposures, or at
worst represent collusion or fraud.
c) Revaluations and marking-to-market of market risk exposures: All
market rates used by the bank for marking risk exposures to market or
used to revalue assets or for risk analysis models such as, Value at Risk
analysis must be sourced independently of the dealing room in order to
provide an independent risk and performance assessment.
One of the audit objectives with specific reference to treasury also includes
verifying the authenticity and appropriateness of the sources of inputs used
for valuation of unquoted treasury instruments and derivative products (such
as swaps, options) which the bank has entered into. When quotations or
rates are not directly available for treasury instruments, then usually such
instruments are valued as at any reporting date using appropriate valuation
techniques or models. Such valuation techniques involve an amount of
subjectivity and also certain objective parameters such as, reference to any
recent past market transaction in the underlying instrument or a like
instrument. Such model based valuations require data feed or inputs (such
as ‘volatility’ in case of valuing options using Black-Scholes Model).
The inherent risk here is the appropriateness of the input parameters fed into
the valuation model/technique, stale quotes. For example, where the bank
has positions in interest rate swaps then for the purpose of projecting the
future floating interest rates (for projecting future cashflows) the appropriate
interest rate curve should be used (this is usually the par curve). As per
extant RBI guidelines, investments in unquoted equity shares should be
valued at their break-up value, however, the latest financials of the respective
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