HBL

Saher Aslam 11581 Khadija Iqbal 11577

Audit

HBL

Contents
Contents..............................................................................................................................3 INTRODUCTION OF HBL...............................................................................................4 Brief History of HBL..........................................................................................................4 MISSION ...........................................................................................................................6 ........................................................................................................................................6 ANALYSIS OF ORGANIZATIONAL STRUCTURE.....................................................7 Centralized Decision Making.........................................................................................7 Downward Communication............................................................................................7 Chain of Command.........................................................................................................8 Authority and Responsibility..........................................................................................8 Delegation.......................................................................................................................8 INTRODUCTION......................................................................................................9 THE GROUP AND ITS OPERATIONS............................................................................9 SIGNIFICANT ACCOUNTING POLICIES.....................................................................9 Advances.......................................................................................................................10 a)Current.......................................................................................................................11 b)Deferred.....................................................................................................................11 Currency Risk Management.........................................................................................12 Credit Risk Management..............................................................................................12 Interest rate Risk Management.....................................................................................13 Conducting operational audit ...........................................................................................17

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INTRODUCTION OF HBL
It 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 HBL

HBL 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 from Pakistan. 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 4

HBL 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. In association 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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MISSION
To 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
Chairman

President

Board of Directors

SEVP International Operations SEVP Corporate Banking & Treasury

SEVP Finance, Audit & Administration SEVP Asset Remedial Management

SEVP Retail Banking & Information Technology

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 the subordinates 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 allocates resources 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.

HBL 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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HBL 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 11

HBL 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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HBL 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 14

HBL 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 o o o o o Risk assessment Defining Materiality Financial statement assertions Financial analysis of cash flow statement Compliance and substantiative procedures Analytical procedures

Meeting these objectives involves verification of: o o Revenue Sales

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o o o o o o o o Bank deposits Bank reconciliation Accounts payable Accounts receivable Disbursements Petty cash transactions Loans & Advances 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 objectives of 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. i. Industry, trade journals and publications 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 staff c. 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. j. Focus on possible cost savings from inefficiencies Present the survey results

Update (or create) audit objectives based on this larger information bases. Make the audit plan - time , resources and expertise required, audit programme, audit tests and identify audit risks 1 3. 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 information regarding 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 whether there 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 this stage.. 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 activity Matters to be considered before accepting new assignment would be: i. ii. iii. iv. Gathering information on the integrity, competence of the management Past experience, if any with the management Communication with previous auditors Significant accounting policies of the client

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v. vi. Assessment of Managements ability to have effective and efficient internal control Financial viability of the entity

The auditor should consider the following matters while planning:

o o o o

Nature of work Knowledge of business Policies and procedures of the entity The methods used by the entity to process significant accounting information, including the use of service organisations, such as outside service centers.

Preliminary judgment about materiality levels for audit purposes.

i. various sources would be: area assigned. - Discuss with auditee: -

Understanding the nature of work: The Likely 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 impact of applicable

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 minutes financial of statements meetings or of reports filed with various agencies or regulatory bodies stockholders, the board of directors and relevant committees - effect of various laws and regulations on financial statement of auditee business business, industry like economic competition, financial trends. Other external sources such as industrial publications, ICAI standards and guidance etc. iii. Methods used by entity to process products & offices/branches/factories obtain condition, knowledge government of auditees regulations, client correspondence file gain an understanding of services, capital type of structure, information about nature of entitys

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. vi. nature of audit complexity of work staff availability special skills required audit period 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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