Underlying document
The audit procedures for this aspect include:
Understand the process and policy of the Bank in respect of the underlying documents.
The auditor should ensure that the bank should obtain the original documents from the client and or certified document by the person who is authorised to do the derivative deal. The auditor should check the details in client master page by checking the board resolution.
The auditor should ascertain whether the Bank has a mechanism whereby, if the documents are not submitted by the customer within 15 days, the contract gets cancelled, and the exchange gain, if any, is not passed on to the customer. The primary responsibility for ensuring this remains with the Bank and the auditors should verify controls around the same.
The auditor should ensure that the Bank has a mechanism to ensure that if the underlying is not provided three times a year; then the client will have to produce upfront underlying and the 15 days grace will not be allowed to the client.
For the selected samples, review and check the underlying documents duly received by the bank.