Luận văn thạc sỹ: Improving the internal credit audit system in Petrolimex Group Commercial joint stock Bank

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In recent years, the trend of liberalization and globalization of economy has brought Vietnam economy both opportunities and challenges requiring the government and authorities put more efforts. In the field of Finance & Banking, we have built crucial basis for a financial monetary economy, technology modernization and bank operations to create the market mechanism. The institutions for bank operations have been improved and the operating mechanism of monetary policy has been innovated basically. Moreover, regulations and international standards of bank operations have been applied, so the credit quality has been improved significantly. However, in the period of integration, the opening of the financial market increases the number of wealthy foreign banks with high technology and management quality entering into Vietnam market, pressure of competition for commercial banks in Vietnam also increases along with the loosened regulations for foreign financial institutions. At that time, with the small size, low management quality, low technology and labor skills, the commercial banks will not catch up with foreign commercial banks and lose the game if they do not innovate. Besides, occurring risks of banks; especially the credit risks, have not been managed and controlled strictly, which can lead to a big loss. At the moment, the risk of bankruptcy of banks can appear at any time if they do not focus on enhancing the efficiency of risk management in their business activities. With the reasons above, ensuring the sustainability and consistency of the development is the most important target in management and operation of Vietnam commercial banks. One of necessary strategic solutions is to reorganize and upgrade the control system, internal audit of each commercial bank. In the small scope, among activities of bank, the credit activities need focusing on because it is the main source of finance for the banks, however, containing a lot of risks. Recognizing the importance of internal auditing of credit activities in the time working at Petrolimex, I choose the topic for the Master thesis: “Improving the internal credit audit system in Petrolimex Group Commercial joint stock Bank” TABLE OF CONTENT ACKNOWLEDGEMENT ABSTRACT CHAPTER I: OVERVIEW OF RESEARCH 1.1 Necessary of research……………………………………………………………… 1.2 Problematic of research: 1.3 Research objectives: 1.4 The questions are posed in the study: 1.5 Object of research: 3 CHAPTER II: THEORETICAL FRAMEWORK .4 2.1 Some concepts and theories of internal audit 2.1.1 Internal audit definition 2.1.2 Some theories of internal audit in commercial bank 2.1.3The function of internal audit .9 2.1.4 Basic principles of internal audit activity 11 2.1.5 Content of internal audit 12 CHAPTER 3: RESEARCH METHODS AND ORGANISATION 13 3.1 Research method 16 3.1.1 Data collection method 17 3.1.2 Data analysis method: 19 3.2 Internal Audit credit activity at PG Bank 3.2.1.The objective of the audit credit activitiess .19 3.2.2 Requirements of internal audit credit activities 19 3.2.3 Scope of audit credit activities 20 3.2.4 The main audit methods 20 3.2.5 Content audit credit activities 20 Part A Audit at the audited units 20 A1 Risk assessment related to credit activities 21 A2 Assessing the performance of the audit statute 21 A3 Quality assessment activities of the credit control system in the unit audited 22 A4 Perform audit procedures, regulations 22 Part B Check to compare directly with borrowers .28 B1 Debt validation 28 B2 Check the use of loan 28 B3 Check the status of assets to ensure debt 29 B4 Inspection of the project and repayment of the business (clients are business loans) 30 3.2.6 Prepare and submit audit report .31 3.2.5.1 Establish an audit report: 33 3.2.5.2 Send an audit report: 34 3.2.7 Follow up audit 35 3.2.8 Form audit credit operations 35 CHAPTER 4: CONCLUSIONS AND RECOMMENDATIONS 36 4.1 Conclusions and recommendations 36 4.1.1Advantages………………………………………………………………………… 36 4.1.2.Shortcomings……………………………………………………………………… 37 4.2 Suggestion to complete internal credit audit work .38 4.2.1 Completing internal audit apparatus…………………………………………… .38 4.2.2 Examining the quality of internal audit work…………………………………… 39 4.2.3 Improving working conditions for internal auditors……………………………… 40 4.2.4 Combination of internal and external auditing…………………………………… 41 4.2.5 The informatics department should be audited………………………………… 41 4.3 Recommendations………………………………………………………………… 42 4.3.1 For the Government……………………………………………………………… 45 4.3.2 For the State Bank of Vietnam…………………………………………………… 46 Appendix……………………………………………………………………………… 47 References……………………………………………………………………………… 61 ACKNOWLEDGMENT During studying and completing this thesis, I have received guidance, great assistance from teachers, friends and classmates With deep respect and gratitude, I would like to express sincere thanks to: Faculty of International Training - Vietnam University of Commerce have created all favorable conditions to help me in my education background and completing thesis All teachers of Vietnam University of Commerce and other foreign experts from IAE de LYON,specialy Doctor Vu Manh Chien who were very helpful and have taught, encouraged, created favorable conditions for me during the course to date of thesis Despite great efforts with all enthusiasm for this thesis, but my thesis still has mistake So I hope to receive sympathy and suggestions of all teachers in the marking council ABSTRACT In recent years, the trend of liberalization and globalization of economy has brought Vietnam economy both opportunities and challenges requiring the government and authorities put more efforts In the field of Finance & Banking, we have built crucial basis for a financial monetary economy, technology modernization and bank operations to create the market mechanism The institutions for bank operations have been improved and the operating mechanism of monetary policy has been innovated basically Moreover, regulations and international standards of bank operations have been applied, so the credit quality has been improved significantly However, in the period of integration, the opening of the financial market increases the number of wealthy foreign banks with high technology and management quality entering into Vietnam market, pressure of competition for commercial banks in Vietnam also increases along with the loosened regulations for foreign financial institutions At that time, with the small size, low management quality, low technology and labor skills, the commercial banks will not catch up with foreign commercial banks and lose the game if they not innovate Besides, occurring risks of banks; especially the credit risks, have not been managed and controlled strictly, which can lead to a big loss At the moment, the risk of bankruptcy of banks can appear at any time if they not focus on enhancing the efficiency of risk management in their business activities With the reasons above, ensuring the sustainability and consistency of the development is the most important target in management and operation of Vietnam commercial banks One of necessary strategic solutions is to reorganize and upgrade the control system, internal audit of each commercial bank In the small scope, among activities of bank, the credit activities need focusing on because it is the main source of finance for the banks, however, containing a lot of risks Recognizing the importance of internal auditing of credit activities in the time working at Petrolimex, I choose the topic for the Master thesis: “Improving the internal credit audit system in Petrolimex Group Commercial joint stock Bank” CHAPTER I: OVERVIEW OF RESEARCH 1.1 Necessity of research The increasing of society's demands day by day, with fierce competition in the market requires commercial banks to diversify its product portfolio to increase revenue for banks, and distributed risk But among the products that banks providing the credit operation is the basic activity and plays a decisive role with existence of each bank This shows very clearly the scale of credit operations accounted for the largest proportion of total bank assets (about 70%) and brings 80% of revenues for banks However, credit also contains many business risks Credit risk is the potential losses that banks incur when making loans to customers, the losses associated with the customer who does not repay the full credit when due Credit risk is various and complex It depends on the customer (financial status, responsibility with debts) and bank (ability of management, risk prediction), and this is also the risk most common in the banking activities Therefore, to deal with these risks, the requirement is that the commercial banks have to set up a complex control system, and pay special attention to the work of internal audit to credit operations used to monitor individual credit as soon as it arises until the end, and the entire process of monitoring the implementation of credit granted as consideration for loan disbursement, loan monitoring And this also demonstrates the actual loss and disruption that the commercial banks have to suffer from the loss of internal control systems to ensure safe and efficient operation Hence, the internal audit did not fully accomplish the task; the banks are faced with uncontrolled risks Especially, credit risk and consequences of these risks are very unpredictable Thus, the perfection and development of internal audit work in general and internal auditing credit activities in particular are essential requirements set for commercial banks to ensure safety in the business of the bank, while improving the efficiency of capital use and improving the quality of bank credit 1.2 Problematic of research: From those reasons I mentioned above, I choose the research project: “Improving the internal credit audit sytem in Petrolimex group commercial joint stock bank” 1.3 Research objectives: Research objectives are to clarify the theory of internal audit work in enterprises in general, banks in particular and the actual situation of internal credit audit works in Petrolimex group commercial joint stock bank 1.4 The questions are posed in the study: What is the theory of internal audit work in banks in general and in PG Bank in particular? Is internal credit audit of Petrolimex group commercial joint stock bank reliable? Is organization of internal audit work in Petrolimex group commercial joint stock bank? In compliance with basic principles? What are shortcomings? Specifically as follows: How the internal credit audit look like? Organizational structure of internal auditing like? The internal credit audit process is closely organized? Organized testing, quality control, internal credit audit? 1.5 Object of research: Petrolimex group commercial joint stock bank 1.6 Scope of research Although internal audit is an essential tool for all types of organizations, the topic only focuses on internal credit audit work organization in Petrolimex group commercial joint stock bank 1.7 Research methodology: Illustration of the method mainly in research materials, surveys, interviews, observations combined with the actual method, methods of analysis, synthesis, comparison, evaluation, directly investigation as a basis to organize the internal credit audit in Petrolimex group commercial joint stock bank 1.8 Contribution of research The topic helps clarify the perception of internal audit work in general and internal credit audit work organization in Petrolimex group commercial joint stock bank in particular Assessment of the situation of internal credit audit work in Petrolimex group commercial joint stock bank is to synthesis and makes some proposals for improvement of internal credit audit work in Petrolimex group commercial joint stock bank 1.9 Structure of thesis Besides thanks, contents, list of diagrams and references, structure of thesis include four chapters Specifically: Chapter 1: Overview research on internal audit Chapter 2: Some basic theory on the organization of internal audit work Chapter 3: Research Methodology and organisation of internal credit audit at Petrolimex group Commercial Joint Stock bank Chapter 4: Conclusions, discussions and recommendations to improve the internal credit audit system at Petrolimex group Commercial Joint Stock bank CHAPTER II: THEORETICAL FRAMEWORK 2.1 Some concepts and theories of internal audit 2.1.1 Internal audit definition Internal audit has come a long way over the last two or three decades In the past, internal audit was seen as a mechanism to double – check the many thousands of financial transactions that were posted to the accounts each week In the 1950s and 60s, it pretty much consisted of basic tests of the accounts with a view to isolated errors and irregularities Huge standardized audit work programs would be prepared that determined the steps that had to be taken to verify figures in the main accounting ledger and feeder systems In contrast, today’s internal auditor facilitates the development of suitable controls as part of a wider risk strategy as well as providing assurances on the reliability of these controls The move from detailed low-level checks of huge volumes of mainly financial transactions to high-level input into corporate risk strategies has been tremendous Other industries also expanded their internal audit programs, and in 1941 the Institute of Internal Auditors was born to herald a distinctive a discipline quite apart from public accounting The definition of internal auditing began to evolve In Latin ‘auditor’ literally means ‘listener’ Nowadays, not that much has changed in the essential elements of auditing if we follow the definition from Arens and Loebbecke (1997, 2): “Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria Auditing should be done by a competent independent person” Furthermore, internal auditing in the Standards for the Professional Practice is defined in this way: “Internal auditing is an independent appraisal function established within an organization to examine and evaluate its activation as a service to the organization.” Auditing Standard ASA 610 Considering the Work of Internal Audit, issued by the Auditing and Assurance Standards Board (AUASB) defines internal audit as follows: Internal audit” means an appraisal activity established within an entity as a service to the entity Its functions include, amongst other things, monitoring internal control” The objective of internal audit to assist members of the organization carries out their responsibilities effectively It equips them how to analyze, evaluate, suggestions, recommendations and information concerning activities reviewed The objective of internal audit framework also gives effective control at reasonable cost - Loyal to the nature of the audit, independence in internal audit is given top priority Internal auditors are independent when they can perform their work in a free and objective manner In reality, as they are members of an organization, the meeting of this requirement can be more difficult than State auditors and independent auditors Therefore, this independence is only relative In fact, all cases, scope, progress and effectiveness of internal audit work should not be limited by any things If so, internal auditors can get the desired results To this end, internal auditors should have equal status and necessary independence  To ensure the independence, first of all, internal auditors conduct a review of any findings related to the organization Based on surveys, initial research, their professional skills, they consider and assess activities of the organization Results obtained from the review and assessment will form a basis for them to clarify and give consultations for the next operations  Result of internal audit is a great support for members of organizations such as the Board of Management, Board of Directors, shareholders, and all staffs Therefore, the scope of the work is very widespread and it affects all activities of the organization It is the reason why internal audit is established as a division of the organization According to the professional guidance of the Institute Internal Auditors (IIA), public sector governance encompasses the policies and procedures used to direct an organization’s activities to provide reasonable assurance that objectives are met and that operations are carried out in an ethical and accountable manner In addition, the Institute of Internal Auditors (IIA) has developed the globally accepted definition of ‘internal auditing’ as follow: “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization It helps an agency accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes” According to this definition, an internal audit function could be viewed as a first line defense” against inadequate organizational governance and financial reporting With appropriate support the Board of Directors’ and Audit Committee (if any), the internal audit staff is in the best position to gather intelligence on appropriate accounting practices, inadequate internal controls, and infective corporate governance The scope of internal audit activity embraces the wider concepts of corporate governance and risk – recognizing that control exists in an organization to manage risk and promote effective governance The remainder of the IIA’s definition of internal auditing covers a number of important terms that apply to the profession  The term independent is used for auditing that is free of restrictions that could significant limit the scope and effectiveness of any internal auditor review or the later reporting of resultant findings and conclusions  The word appraisal confirms the need for an evaluation that is the thrust of internal auditors as they develop their conclusions - The term established confirms that an internal audit is formal, definitive function in the modern enterprise  The phrase examine and evaluate describe the active roles of internal audit work that applies to all of the activities of the modern enterprise  The word service recalls that the help and assistance to the audit committee, management, and other members of the enterprise are the end products of all internal audit work  The phrase to the organization confirms that internal audit’s total service scope pertains to the entire enterprise, including all personnel, the board of directors and their audit committee, stockholders, and the owners For the banking and credit institution in Vietnam, aaccording to No.37/2006/QDNHNN, Decision of the governor of the State bank of Vietnam on the issuance of the Regulation on internal audit of credit institutions, defined ““Internal audit” is an act of           ... a discipline quite apart from public accounting The definition of internal auditing began to evolve In Latin ‘auditor’ literally means ‘listener’ Nowadays, not that much has changed in the essential
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