Audit Procedures
1. Daily Transactions List (Sauda Book)
This is the basis record maintained by the member containing details of all transactions entered by them on a daily basis. It contains information on
• Name of the client
• Securities traded on behalf of client
• Rate and quantity of securities bought and sold.
Daily transaction register contains a record of all the following categories of transactions
i. Member’s own business on the exchange
ii. Member’s business on behalf of his clients
iii. Member’s business with his clients on a principal to principal basis
iv. Member’s own business with member’s of other stock exchanges
v. Member’s business on behalf of his clients with members of other stock exchanges
vi. Spot transactions
2. Contract Notes
Every member of the stock exchange has to issue contract notes to its clients for all business executed on their behalf within 24 hours of the execution. In reference to contact notes, the auditor should ensure that
i. Contract notes are serially numbered
ii. These are in the format prescribed by relevant exchange.
iii. Brokerage has been charged within specified limits and shown separately
iv. Ordering time should be reflected on contract notes along with the time of execution of order.
v. Member/authorized signatory should sign contract notes.
vi. Brokerage, Service tax & security transactions tax shown separately.
3. Client bills
(i) It contain summary of all trades executed on behalf of the client during a period.
(ii) It shows the net amount receivable from or due to the client.
(iii) The auditor should ensure their proper postings.
4. Clients ledger
It contains transactions with each client. The auditor should examine
i. Transactions remaining unsettled for a long time.
ii. Whether amounts received from clients is consistently different from the contract bills.
iii. That amounts received or paid as loans or deposits have not been passed through clients ledger.
iv. Confirmation of balances received from clients of the member.
5. Settlement / Vallan control account
(a) It shows the net amount receivable from or payable to the exchange or clearing house.
(b) The auditor should verify that balance in this account is nil after settlement.
(c) If not reconciliation should be obtained.
6. Margin Deposit Book
It records the margin deposited by the member with the Clearing house.
The auditor should check
i. Whether margin has been in accordance with SEBI guidelines.
ii. The margin statement downloaded from the stock exchange / clearing member should be verified.
iii. Whether margins have been properly calculated, collected and paid
iv. Any exemptions from deposit of margin for particular trades available to the members
7. Member’s own Trading Account
(a) The auditor should verify the entries with the bills raised for trading on own account.
(b) He should also ensure that there is a proper system for revenue recognition and closing stock from such transactions.
(c) No brokerage is charged on this account.
8. Bank book
The member holds a fiduciary position in the security trading system and hence certain restrictions are imposed on the operation of the bank account in respect of his clients. According to these restrictions –
A. No money be paid into clients account other than
i. Money held or received from clients
ii. Money for replacement of withdrawal by accident from such account.
C. No money can be paid from clients account other than
(i) Settlement with the client
(ii) Payment to clearing house on behalf of client
(iii) Money for replacement of deposit by accident into such account.
9. Documents Register / (Inward / Outward) Register
It contains particulars of securities including their distinctive numbers received from or delivered to the client in physical form. With regard to documents register, the auditor should check
i. Balance of stock as shown in deposit register segregated into client stock and own stock.
ii. The reasons for client’s stock remaining with the member for a long time.
iii. The auditor should also physically verify the stocks.
10. Dematerialized securities
(a) Now-a-days, most of the securities have been converted into dematerialized form because of benefits of electronic trading system.
(b) Under this system, each member has to maintain two demat accounts.
(c) One of these is used to hold its own securities and known as “Beneficiary Account”.
(d) The other one, ‘Pool Account’, is meant for trades executed on behalf of clients.
(e) The securities meant for sale are transferred to the ‘Pool Account’ from where these are given to the clearing house on the relevant pay in day.
(f) The audit procedures should include
i. whether securities received n pool account have been transferred to client’s Demat Account within 48 hours.
ii. Reasons for holding a particular security in pool account for an unreasonable time.
iii. Ensuring that securities lying in pool account have not been used to settle member’s own trade obligations.
Audit Report:
(i) We have audited B/s & P&L a/c of ..........
(ii) Obtained all information & explanation
(iii) Proper books of a/c & records specified by securities contracts (regulation) rules are kept.
(iv) Broker complied with requirement of exchange . So for as they relate to maintenance of a/c & was regular in submitting req. information to S.E.
(v) In our opinion & to best of our information ... (true).
Matters to be considered by SEBI while granting registration to a prospective stockbroker:
1. Is eligible to be admitted.
2. Has necessary infrastructure.
3. Has past experience in business of securities.
4. Is not subjected to in disciplinary proceedings by stock exchange.
Hit or take orders
(i) These are a variations of market orders.
(ii) Faster order execution.
(iii) For the quantity specified, the system attaches the counter touchline price to it.
(iv) The order will be matched while all unexecuted orders of this type are automatically killed.
Bought out deals
(i) Companies may place its equity intended to be offered to be public with a sponsor member at a mutually agreed price through the Concept of Bought out deal.
(ii) Thus after buying out the total equity. Sponsor member would sell the shares of the company to the public through “offer for sale”.
(iii) It ensures faster availability of funds to the company for timely completion of its projects and also a listed status on a later date
1. In securities:
(a) To curb excessive volatility.
(b) May be 2%, 5%, 10% or 20% based upon categories of shares.
(c) It is calculated w.r.f closing price of previous trading day.
(d) For example, if on 13-06-2005 the closing rate of AFTEC INFOSYS is Rs. 100 the price band in case of 20% circuit breaker is 80 (Lower freeze)and 120 (upper freeze).
2. Market wide C.B.
(a) W.e.f 02-07-2001.
(b) 3 stages of index movement 10%, 15% and 20%
(c) It brings about trading halt in market nationwide (all markets)
(d) The % are calculated into absolute points of index variations on quarterly basis, based upon closing index of last day of trading in a quarter.
(e) So far only twice in Indian history
Depositories and Dematerialisation :
(a) NSDL & CDSL keep record of ownership of securities electronically in book entry form.
(b) Transfer of ownership of securities is done by simple account transfers.
Advantage :
(I) Liquidity of scripts (immediate transfer and register)
(II) Receive bonus and right as direct credit to A/c.
(III) Much lower risk of bad deliveries.
(IV) Saving of stamp duty.
(V) Saving of courier charges.
(VI) No physical certificates (no risk of getting them misplaced)
(VII) Reduction in brokerage.
(VIII) Easy settlement with clearing house.
Clearing and Settlement Mechanism
1. the securities pay-in obligations of members are downloaded by the clearing agency.
2. The members make available the required securities in their pool accounts with Depository Participants (DPs) by the prescribed pay-in time for securities.
3. The depository runs an electronic file to transfer the securities from the pool accounts of members with DPs to the DP account of the clearing agency.
4. The securities are transferred on the pay-out day by the depository from the DP account of the clearing agency to the DP accounts of members.
5. Select banks have been empanelled by clearing agency for electronic transfer of funds.
6. The members are informed electronically of their pay-in obligations of funds.
7. The members make available required funds in their accounts with clearing banks by prescribed pay-in day.
8. Same way, funds are transferred on the pay-out day by the clearing banks from the account of the clearing agency to the accounts of members
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