The ICAI guidance note on audit of accounts of members of stock exchanges prescribes stringent audit verification standards in the new scheme of things.
Senior ICAI officials told FE, that important disclosures which would be subject to audit verification include proper documentation of contract notes, client’s bills and ledger, brokerage account, margin deposit book, transfer of securities to the buying clients, demat account within 48 hours of the pay-out settlement and match pay-in and pay-out entries. The institution has requested SEs to notify through its rules, regulations, and bylaws the maintenance of documents required for these disclosures.
If a broker holds the membership of more than one stock exchange or of a different segment, such as the derivates segment, of the same exchange, he is required to maintain a separate set of books of account, records and documents for trades executed on each recognised stock exchange or each segment of the exchange.
Brokerage income will also come under the auditor’s lens as it has a revenue recognition component. According to ICAI, the auditor should monitor whether brokerage is credited for each settlement or not. Failure on this front by the auditor will trigger an inquiry into the reasons for non-compliance. The brokerage amount should be reconciled with the amount on which the service tax has been paid as disclosed in the service tax return.
As for margin requirements, the auditor should verify whether adjustment entries relating to settlement margin and daily margin, which is adjusted at the time of settlement, are correctly passed or not. The auditor should also ensure that exemptions from payment of margins of institutional trades has been correctly claimed, according to ICAI officials.
With a view to check broker-client nexus in operating the pool account, the auditor is required to verify whether securities received by the broker in the pool account are regularly transferred to the buying client’s demat account within 48 hours of the pay-out of the relevant settlement of the exchange.
In ICAI’s view, this stipulation is necessary because clients sometimes instruct the brokers to retain the shares in the pool account either because they have not opened a demat account or they intend to sell the shares they had bought earlier in the subsequent settlement and avoid transaction charges. The auditor must also check that shares lying in the pool account have not been utilised by the broker to meet pay-in obligations or for meeting auction obligations.