Internal Audit for stock brokers, trading members & clearing members

Dated: December 14, 2009

N O T I C E

Sub: Internal Audit for stock brokers / trading members / clearing members

This has reference to the Exchange notices dated 29^th October 2008, 6^th April 2009 and 24^th June 2009 regarding the direction for mandatory internal audit of their complete internal audit on half yearly basis by independent qualified Chartered Accountants or Company Secretaries or Cost and Management Accountants who are in practice and who do not have any conflict of interest.

Trading Members of the Exchange are hereby advised to submit their Internal Audit Report for the half-year period from April 01, 2009 to September 30, 2009 on or before December 31, 2009.

With a view to make Internal Audit more effective, guidelines for Internal Audit have been revised based on inputs from SEBI and other national exchange. The additional areas to be covered includes verification of provisions related to Prevention of Money Laundering Act, Investor Grievance handling mechanism, Power of Attorney received from Investors, status of compliances of last internal audit/Inspection Reports etc. The format of certificate for internal audit is given in Annexure I and revised guidelines and format for internal audit report are given in Annexure II. The Annexure I and Annexure II are available in web site of the Exchange at www.cse-india.com. Members may kindly refer the Annexures and download the same from Internet.

Based on review of Internal Audit Reports submitted by members for the half year ended on March 2009 the following common aspects have been observed:

Some of the reports do not indicate instance wise details of the observations/ violations observed during the internal audit
None of the reports do not indicate the sample size or the adequacy of the sample size drawn with regard to total population.
The comments of the management on deficiencies and irregularities are not incorporated in some of the reports.
The compliance or current status of the findings of earlier inspections of the Exchange and / or SEBI has not been commented upon in some of the reports.
The investor grievance redressal process has not been adequately covered.
The evidences of the violations observed during internal audit have not been given in some of the reports.

In view of the above the members are required to ensure that Internal Audit report for the half year ended on September 30, 2009, adequately address the above concerns and ensure that internal audit also covers additional aspects that have been added to the guidelines as stated in Annexure II and it is in accordance with the revised guidelines.

The quality of internal audit reports received from members shall be monitored and appropriate steps shall be taken if the reports do not meet minimum expected quality levels.

All trading members are advised to ensure compliance with the above requirements.

Trading Members are advised to submit the Audit Reports to the Surveillance Department of the Exchange on 4th Floor of the Exchange at 7, Lyons Range, Kolkata.

In case of any queries / clarification, the members may contact Manager Surveillance and DGM Surveillance.

DGM Surveillance

Annexure I

CERTIFICATE FOR INTERNAL AUDIT

We have examined the relevant books of accounts, records and documents maintained by M/s. _______________, (name of the trading/clearing member) bearing SEBI registration number ______________________) a member of the Calcutta Stock Exchange Limited for the following segments to fulfill the internal audit requirement as prescribed by SEBI vide Circulars dated 22 August 2008 & 21 October 2008 for the half year ended_____________________.

Segment

(Cash Segment/Derivatives Segment / Debt Segment /Currency Derivatives/Securities Lending & Borrowing segment)

Activity (Trading/Clearing/Trading and Clearing)

SEBI registration number

The purpose of this Audit is to examine that the processes, procedures followed and the operations carried out by the Trading Member/Clearing Member are as per the applicable Acts, Rules, Regulations, Bye-laws and Circulars prescribed by SEBI and the stock exchange.

We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of this Internal Audit. In our opinion proper books of accounts, records and documents, as per the regulatory requirement have been maintained by the member, so far as it appears from examination of the books.

We have conducted the audit within the framework provided by SEBI/Stock Exchange for the purpose of this Internal Audit.

To the best of our knowledge and belief and according to the information and explanations given to us, no material fraud / non-compliance /violation by the Member is observed during the course of this Audit.

Based on the scrutiny of relevant books of accounts, records and documents , we certify that the Member has complied with the relevant provisions of SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, Securities Contracts (Regulation) Rules 1957, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and various circulars of SEBI. The Member has complied with the Rules, Bye laws, Regulations of CSE and various circulars issued by the Stock Exchange and the Clearing Corporation.

We declare that we do not have any direct / indirect interest in or relationship with the member or its share holders / directors / partners / proprietors / management and also confirm that we do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the said member.

In our opinion and to the best of our information and according to the explanations given to us by the proprietor/partner (s)/director (s)/ compliance officer, the Report provided by us as per the Annexure and subject to our observations, which covers the entire scope of the Audit, is true and correct.

__________________

Company Secretary / Cost and Management Accountant / Chartered Accountant

(Seal & Signature)

(Name of the Proprietor / Partner)

Membership no. / CP. No.

Place:-

Date:-

Annexure - II


Guidelines and format of Internal Audit Report specifying the minimum scope to be covered.
1. Client registration and documentation
	Particulars	Comments	Remarks of internal auditor	Minimum Sample Size to be checked & in case of observations, specify the number of instances with amount
Execution of Know Your Client(KYC), Member Constituent Agreement(MCA)/Tripartite Agreement(TPA) and Risk Disclosure Document (RDD) – checks and balances in place				25 clients or 100% whichever is lower
	Whether KYC, MCA/TPA, RDD are executed in the prescribed formats and the same is executed before execution of trades for the client ?	Yes No




	Whether UCC is allotted to the client & the same is uploaded to the Exchange with PAN?	Yes No

	Whether all fields in KYC including client’s financial details are filled in properly?	Yes No

	Whether proper proof of identity, PAN and proof of address are taken with KYC form?	Yes No
	Whether any contravening clauses are included in MCA/TPA?	Yes No

Verification of formats of KYC, MCA/TPA and RDD and attachments including proof of identity and address, as prescribed by CSE/ SEBI				25 clients or 100% whichever is lower

	Whether in person verification of clients is done by the employees of the trading member only?	Yes No


	Whether date of verification, name and signature of the official who has done in-person verification and the member’s stamp incorporated in the client registration form?	Yes No
Verification that Contradictory clauses are not mentioned in KYC, MCA,TPA and RDD				25 clients or 100% whichever is lower
	Whether copies of all the documents executed by client are given to the respective clients?	Yes No		25 clients or 100% whichever is lower
Systems and procedures put in place by member for verification of PAN before opening account
Procedure followed by the member for informing UCC to the clients & uploading to the Exchange	Whether change in address, bank account or demat account is carried out on receipt of written request along with documentary proof from the respective client?	Yes No		25 clients or 100% whichever is lower
Mechanism to ensure financial details of clients
Procedure adopted for in person verification of clients	Whether client details including financial details are reviewed periodically and updated?	Yes No		25 clients or 100% whichever is lower
Procedure adopted by relationship managers, if any, for procuring new clients
Delivery of copies of client registration documents to the clients
Storage of client registration documents and retrieval mechanism
Procedure adopted for obtaining clients’ consent for electronic contract notes
Periodic review of client related information and updation of the same in system
Verification of RDD/KYC/MCA/TPA of different types of clients
Acquaintance procedure for new clients
Applicable SEBI Circulars
SEBI circular no. SMDRP/Policy/Cir-39/2001 dated July 18, 2001
SEBI circular no. SEBI/MIRSD/DPS-1/Cir-31/2004, dated August 26, 2004 & Regulation-7 D
SEBI circular no. MRD/DoP/SE/Cir- 35/2004 dated October 26, 2004
SEBI circular no. MRD/DoP/Cir- 05/2007 dated April 27, 2007
MIRSD/DPS-III / 130466 / 2008 dated July 02, 2008

2. Order management and risk management systems
Procedure adopted for receipt of orders from clients	Whether checks are in place to ensure that no unauthorized orders are executed from any of the terminals?	Yes No		Audit Period

	Whether control reports like orders executed away from market price, client-wise / scrip-wise / terminal-wise volumes / exposures are generated to monitor any manipulation or unwarranted activity?	Yes No		5 days

	In case of dormant accounts, are there any checks in place to ensure that incase the account is reactivated whether it is operated by the respective client only?	Yes No		5 days

	Whether initial and other margins are collected from respective clients in the prescribed form of funds, fixed deposit receipts, bank guarantees and approved securities with appropriate haircut?	Yes No		5 days

	Whether the member has a proper system for reporting the correct client margin collection in Derivatives segment?	Yes No		5 days

	Verify whether the margin reported by the member to the Exchange in Derivates segment is actually collected and available in the books of accounts of the member. In case of any irregularity observed, mention the instances wherein wrong reporting of margin collected from clients/trading members was observed.	Yes No		5 days

	Whether Risk Management System (RMS) includes policy on margin collection from clients/trading member and the RMS is documented?	Yes No		Audit Period

	Whether proper systems are in place to ensure timely collection for pay-in from the respective client as per settlement schedule?	Yes No		One Day

	Whether proper monitoring mechanism is in place to review long outstanding debit balances in clients’ account and recovery of the same? Give agewise analysis of debts outstanding for more than 30 days and the recovery pattern for the same	Yes No		Audit period


	Whether member has reported details of client funding, if any, to the exchange within prescribed time limit?	Yes No		Uploaded files

	What are the sources of funds in case client funding is observed?	Yes No

Mechanism for order management and execution	Whether all institutional trades are routed through custodians by following Straight Through Processing ?	Yes No		Logs of five dates for which trades have been verified
Mechanism for order management and execution
Procedure adopted for setting Limits at client level / Terminal level/Dealer level	What are the reasons for institutional trades not being routed through custodians? Whether any specific pattern is observed for the same?	Yes No
Policy on Margin collection mechanism and the modes of margin money
	Whether member has obtained prior approval from the exchange before providing terminal to the clients under DMA facility?	Yes No		Check the approval letter

	Whether member has complied with regulatory requirements related to. DMA?	Yes No		2 cases

Procedure adopted for reporting of client margin collection to clearing house



Review of process adopted for monitoring/recovery of long outstanding debit balances

Procedure adopted for calculation and reporting client funding

Procedure for monitoring institutional trades not routed through custodians


Procedure adopted for providing Direct Market Access (DMA) facility
Applicable SEBI Circulars
SEBI circular no. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005
SEBI circular no. MRD/DoP/SE/Cir- 17/2005 dated September 02, 2005

3. Contract notes, Client margin details and Statement of accounts
Procedure adopted for issuance of contract notes		Yes No		5 days
	Whether contract note are sent within 24 hours of execution of trades

	Margin details are sent daily to respective clients			5 days

	Proof of delivery / dispatch is maintained?			5 days

	Whether contract notes bear running serial no: initiated at the beginning of each financial year ?			First contract note of the year Apr – Mar 10

	Whether all prescribed details including name and signature of authorised signatory, dealing office details and brokerage are contained in contract note?			One day

	In case contract notes and margin details are sent in electronic form, whether log is maintained?			5 days
Verification of format of contract notes issued
	Whether trail of bounced mails is maintained and physical delivery is ensured in case of bounced mails?	Yes No		5 days

Verification of copy of contract note with Proof of dispatch/register of despatch/logs maintained	Whether member has complied with regulatory requirements related to. Electronic contract notes (ECN)?	Yes No		5 days


	Whether complete statement of accounts for funds and securities are issued on a quarterly basis to clients, with error reporting clause? Whether proof of sending the same is maintained?	Yes No		Quarterly statement for the quarter ended June 30, 2009

Adherence to electronic contract note norms, if applicable



Procedure adopted for sending statement of accounts
Contents & periodicity of statement of accounts of funds and securities

Procedure adopted for sending margin details to clients


Procedure for maintaining acknowledgement/proof of delivery of contract notes/statement of accounts/margin details to the clients



Applicable SEBI Circulars
Clause B(2) of Code of conduct for Stock Brokers specified under Regulation 7
SMD-1/23341 dated November 18, 1993
SMD (B)/104/22775/93 dated October 29, 1993
SMD/MDP/CIR/043/96 dated August 5, 1996
SEBI/DNPD/143542 /Cir-43/08 dated November 06, 2008


4. Dealing with clients’ funds and securities
Verification of details of cash receipts from / payments to clients, if any, observed during the audit period are to be given (mentioning any specific branch involved).
	Whether cash dealings with clients are done by branches / sub brokers?	Yes No		5 days

	Whether banker’s cheque / demand draft are accompanied with written request from the respective client?	Yes No		5 days

	Whether pay-in or pay-out is received from or delivered to respective clients only?	Yes No		5 days

	Whether client’s funds / securities are transferred to respective clients within one working day of payout from Exchange ?	Yes No		5 days


	Whether any instance of misutilisation of clients’ funds or securities is observed? If yes, give complete details of such instances	Yes No		5 days

	Whether any instances were observed wherein pay-in / pay out was received from / made to account other than the respective client account? Whether there are any systems in place to ensure compliance in this regard by the member?	Yes No		5 days

	Whether collaterals of clients were pledged with banks / other entities for raising funds? If yes, details of such instances observed are to be given.	Yes No		Audit Period

	Whether funds raised by pledging client securities were utilised for respective client only? List of instances to be provided in case of non-utilisation of proceeds for respective client?	Yes No		Audit Period

Verification of internal controls adopted by the member while accepting banker’s cheque / demand draft from clients	Whether bank book and register of securities are in alignment with bank statements and transaction statements provided by banks and depositories?	Yes No		Bank reconciliation and beneficiary reconciliation as on end of audit period i.e 30-Sep-2009


	Whether dividend and other corporate benefits received on behalf of clients is paid/credited/passed on to the respective clients account ?	Yes No		Audit period
Procedure for ensuring that receipts and payment of funds/securities are from/to respective client only


Periodic Reconciliation of books of accounts

	Whether Overdraft facility is taken in Client Bank Account ?	Yes No

Verification of following books of accounts/records
- Register of Securities
- Bank Statements
- Depository accounts maintained by member
- Client ledgers
- Cash Book
- Bank Book
- Details of records of client securities pledged, if any.
- Underlying for any overdraft/loan account.
Applicable SEBI Circulars
SEBI circular no. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003
Code of conduct for Stock Brokers specified under Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations, 1992.
SEBI circular no. MRD/DoP/SE/Cir-11/2008 dated April 17, 2008

5. Banking and Demat account operations
Procedure for segregation of own and clients’ funds and securities (in separate accounts)
	Whether member maintains separate bank account for client funds and own funds. Also whether member maintains separate beneficiary account for clients securities and own securities?	Yes No		Audit Period


	Whether clients funds and securities are segregated from own funds and securities?	Yes No		Audit Period
Internal controls for use of client bank and client beneficiary accounts only for authorized purposes.
Verification of client’s bank account and constituent beneficiary accounts	Are there any instances of use of constituent beneficiary account or client bank account for other than authorized purposes ? In case of any irregularity observed, mention the instances in detail.	Yes No		Audit Period
Applicable SEBI Circulars
SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993.


6. Terminal operations and systems
Procedure and policy adopted by member before allotment of trading terminals
	Whether terminals are provided by the member in its head office, branch office or the office of sub broker?	Yes No		100%

	Whether any unauthorized terminal is observed to be allotted? If yes, give complete details.	Yes No		100%

	Whether periodic audit of systems and software is conducted by certified system auditor?	Yes No		Latest system audit report

	Whether terminals are operated by approved persons/approved users with valid BCFM certification?	Yes No		100%

	Whether correct User name, login id, terminal location are reported to the Exchange?	Yes No		100%

	Whether internal controls are in place to ensure that the certification of approved users has not expired?	Yes No		100%

	Whether prior permission is obtained by member for providing IML? Whether member has complied with applicable provision of IML?	Yes No		Check the approval letter

	Whether updated version of software is used?	Yes No
Verification of terminals and its users, at the audit place.
	Whether back up facilities are in place and followed?	Yes No

	Whether broker has got his system audit done & submitted the system audit report to the Exchange within prescribed time limit?	Yes No
Verification of certification of the approved users.
	Whether sufficient system for data security is in place?	Yes No		Latest system audit report

Due diligence adopted for password security
Procedure in place for audit of systems and software


Periodic updating of version and back up mechanism
Periodic updating of version and back up mechanism
System adopted for data storage, security and access


Applicable SEBI Circulars
SEBI circular no. SMDRP/Policy/Cir-49/2001 dated October 22, 2001
SEBI/MRD/SE/15958/2003 August 22, 2003


7. Management of branches / sub brokers and internal control
System and Policy followed for opening / closing of branch	Whether survey is conducted by the member for opening / closing of branches?	Yes No		Audit Period

	In case of closure, whether advance notice of the same is sent to clients? Proof of the same.

	Whether there is monitoring mechanism to identify sudden increase / decrease in client level turnover from any specific branch?

	Whether periodic inspection of branch / sub broker is conducted and reports are maintained? What is the follow-up mechanism?

	Whether unregistered intermediation is observed?
Procedure adopted to inform the same to clients				All branches closed during the period
	Whether the member has shared commission/brokerage with entities with whom trading members are forbidden to do business / another trading member / employee in the employment of another trading member?	Yes No

Periodicity and procedure adopted for inspection of branches / sub brokers	Whether internal controls exists and are sufficient to cover the risks at the members end?	Yes No		Audit period


	Whether Stock broker indemnity policy with standard cover/clauses has been taken ?	Yes No		Audit period
Reporting mechanism and mode of informing the inspection observations to branches / sub brokers





Follow up action plan
Policy of fixing of roles and responsibilities of officials in head office, branches and sub-brokers office






Process laid out so as to prevent unregistered intermediation


Documentation of Internal controls and Comments on Internal controls in place



Verification of Stock broker indemnity insurance policy				Latest insurance policy
Verification of Stock broker indemnity insurance policy
Sharing of commission/brokerage
Sharing of commission/brokerage
Applicable SEBI Circulars
Section 12 of SEBI Act
SEBI circular no. SMD/SED/RCG/270/96 dated January 19, 1996
SEBI circular no. SMD/Policy/CIR-3/98 dated January 16, 1998
SEBI circular no. Sub-Brok/Cir/02/2001 dated January 15, 2001
Regulation 18B of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992
SEBI circular no. SMD/POLICY/CIRCULAR/3- 97 dated March 31, 1997.
8. Investor grievance handling
Mechanism to monitor complaints lodged with branches/Sub brokers				Audit Period
	No. and value of investor complaints

	Received during the half year

	Resolved during the half year

	Pending as on September 30, 2009.

	Give breakup of the pending investor complaints from branch/Headoffice/sub broker

	Comment on investor grievance handling mechanism of the member.

	Summary on nature of complaints received and action taken by the member

	What is the duration of the longest pending investor complaint ?

Maintenance of complaints register	Whether specific action plan is framed by the member in respect of long pending complaints?	Yes No		Audit Period
Redressal mechanism for complaints registered against the member
	Whether designated email id for investor grievance is created and informed to the investors?	Yes No		Audit Period
Comment on complaints pending for long period
Verification of investor grievance register and email id


Internal control for verification of complaints received through the designated email –id


Applicable SEBI Circulars
SEBI circular no. MRD/DoP/Dep/SE/Cir-22/06 dated December 18, 2006


9. Maintenance of Books of Accounts
Prescribed books of accounts, registers and records are maintained Exchange wise, with the required details and for the stipulated period as per regulatory requirement				Audit period
	Whether prescribed books of accounts, registers and records are maintained Exchange wise, with the required details and for the stipulated period as per regulatory requirement?	Yes No

	Whether register of securities is maintained client wise-scrip wise?	Yes No

	Whether exchange wise separate books of accounts are maintained?	Yes No

	Whether member has dealt with suspended//defaulter/expelled members and entities prohibited from accessing market ?	Yes No

	Whether prior approval has been obtained by member for change in shareholding/directors/constitution?

	Whether prior approval has been obtained in case the member has dealt with another member of the Exchange?	Yes No

	Whether member has intimated the Exchange in case they have dealt with member of another stock exchange?	Yes No

	Whether advertisements are issued after prior permission of the Exchange?	Yes No

	Whether member maintains and updates client master in its back office?	Yes No

	Whether financial reports of the member has been analysed? Comments on the same.	Yes No
Verification of books of accounts and other records
Verification of books of accounts and other records
Ledger Scrutiny
Internal controls on the process for taking approval of the Exchange

Analysis of financial reports
Applicable SEBI Circulars
Rule 15 of Securities Contract Regulation Rules 1957
Regulation 17(1) & 18 of SEBI (Stock Broker Sub-broker) Regulation 1992
Rule 4 (c) of SEBI (Stock Brokers and Sub Brokers) Rules, 1992
Clause C(4) & C (5) of Regulation 7
SEBI Circular No. SMDRP/Policy/Cir-49/2001 dated October 22, 2001
SEBI circular no. MIRSD/MSS/Cir- 30/ 13289/03 dated July 09, 2003
SEBI circular no. SEBI/MIRSD/Cir-06/2004 dated January 13, 2004
SEBI circular no. MIRSD-DR 1/SRP/Cir- 43/28408/04 dated December 15, 2004
SEBI circular no. SEBI/MRD/SE/Cir-15/2005 dated August 4, 2005
10. Systems & Procedures pertaining to Prevention of Money Laundering Act, PMLA, 2002
Refer to provisions of PMLA Act 2002 , for checking whether all the important provisions are included and implemented	Whether sufficient information is obtained in order to identify persons who beneficially own or control securities account ?	Yes No		Audit period

	What is the process adopted by member to verify the identity of the customer and/or the person on whose behalf a transaction is being conducted ?

Customer acceptance policy and customer due diligence measures
	Whether risk profiling of the clients has been done as per the written down policy of the trading member?	Yes No

	What is the enhanced due diligence process adopted by the member for High risk clients ?

	Whether ongoing due diligence and scrutiny is being conducted for the clients ?

	Whether it has been ensured that no account is opened where the member is unable to apply appropriate clients due diligence measures/KYC Policies ?

	Whether details of appointment of Principal Officer and change in Principal officer, if any, is intimated to FIU-India?

	Whether member has adopted and implemented written guidelines prescribed under PMLA, 2002 and intimated the same to FIU?

	Whether member has adequate system to generate alerts for suspicious transactions?	Yes No		Check for any one day to see alerts have been generated in accordance with written policy of the member and check the disposal of the same


	Whether member has adequate systems in place to scrutinize the alerts and arrive at suspicious transactions?	Yes No

	Whether member has appropriate procedures for reporting of suspicious transactions to FIU	Yes No

	Total no of alerts generated during the half year

	No. of STRs filed by the member			Audit period


	As per provisions of Prevention of Money Laundering Act, 2002 whether record of transactions, it's nature and it's value are maintained?	Yes No		Audit period

	Whether members of the staff are adequately trained in AML and CFT( Combatting Financing of Terrorism) procedures ?	Yes No		Audit period

Walk through of the process
Walk through of the process
Process of generation and monitoring alerts
System in place that allows continuous monitoring of transactions



Process for identifying STR (Suspicious Transaction Report) and reporting the same to FIU-India




Processes for verification of alerts with KYC details
Processes for verification of alerts with KYC details
Applicable SEBI Circulars
SEBI circular no. ISD/CIR/RR/AML/1/06 dated January 18, 2006
SEBI circular no. ISD/CIR/RR/AML/2/06 dated March 20, 2006
SEBI circular no. ISD/AML/CIR-1/2008 dated December 19, 2008
SEBI letter no. ISD/SR/AK/AML/150847/2009 dated January 15, 2009





11. Transfer of trades
Procedure and system adopted for transfer of trades in the back office	Whether any trades were transferred from one client code to another client code or from client code to pro or vice-versa in the back office of the member?	Yes No		10 days
Verification of trade files downloaded by the Exchange with sauda register/back-office file of member (based on which contract notes are generated)
	Whether any pattern was observed in case transfer of trades carried out at member’s back office?	Yes No		10 days


Internal controls for transfer of trades

SEBI circular no. SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003
Exchange Notice No.20030329-1 dated March 29, 2003

12. Margin Trading				Audit period
12. Margin Trading
Verification of agreements	Whether member has obtained specific approval from the exchange, in case he is providing margin trading facility to his clients?	Yes No
Records of funding	Whether member has complied with regulatory requirements related to margin trading?	Yes No

SEBI circular no. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004
Exchange Notice No.20040402-31 dated April 02, 2004

13. Proprietary Trading
13. Proprietary Trading
Verification of ids enabled for pro	If member is doing pro trading, whether member has disclosed this information to his clients?	Yes No		Audit period
Verification of ids enabled for pro		Yes No
Process for approval of Exchange	If member is doing pro trading from multiple locations, whether member has obtained prior approval from the Exchange in this regard?	Yes No		Audit period
Process for approval of Exchange		Yes No
Applicable SEBI Circulars
SEBI circular no. SEBI/MRD/SE/Cir-32/2003/27/08 dated August 27, 2003
SEBI letter no. SEBI/MRD/SE/Cir-42/2003 dated November 19, 2003


14. Internet Trading
Process of approval from Exchange
	Whether member has obtained specific approval from the exchange, in case he is providing internet trading facility to his clients?	Yes No		Audit period

Verification of internet agreements
Procedure followed for user id and password	Whether member has complied with regulatory requirements related to internet trading?	Yes No		Audit period
Procedure followed for user id and password		Yes No		Audit period
Internal controls for internet trading	Whether broker has got his system audit done & submitted the system audit report to the Exchange within prescribed time limit?	Yes No		Audit period
Internal controls for internet trading		Yes No		Audit period
Applicable SEBI Circulars
SEBI Circular no. SMDRP/POLICY/CIR-06/2000 dated January 31, 2000


15. Execution of Power of Attorney (POA )
Process adopted for execution of POA	Whether the trading member has obtained POA from any of his clients	Yes No
	If Yes mention no of clients from whom the member has obtained POA
Internal control adopted by the member to ensure that POA is not misutilised.	Whether the POA executed with the client is exclusive and does not allow the client to operate the bank and DP accounts on his own?
	Whether POA is given for the limited purpose of movement of funds & securities for meeting payin obligations/ margin obligations of the respective client?
	Whether the POA is in the name of the member or is it in the name of any of its employees or representatives or sub-brokers?
	What are the internal controls adopted by the member to ensure that POA is not misutilised.?


16. Operations of Professional Clearing member/ Members clearing trades of other trading members
Verification of execution of trading -clearing member (TM-CM) agreements/Custodial Participant agreements	Whether TM-CM agreements are executed in prescribed formats with trading member?	Yes No		25 members or 100% whichever is lower
		Yes No		25 members or 100% whichever is lower
Verification of issuance of statement of accounts to trading members/custodial participants	Whether Clearing member custodial participant agreements are executed in prescribed formats ?	Yes No		25 members or 100% whichever is lower
		Yes No		25 members or 100% whichever is lower
	Whether statement of accounts has been sent to trading member/custodial participants/?	Yes No		5 days
		Yes No
	Whether clearing members had collected appropriate and adequate margins in prescribed forms from respective trading members?	Yes No
		Yes No
	Whether Margin collection reported to Exchange is in accordance with margins actually collected from trading member ?	Yes No
		Yes No
	Whether exposure allowed to trading members were based on requisite margins available with the clearing member?	Yes No
		Yes No
	Whether interest is charged to the trading member? If yes, what is the basis of interest with complete details like percentage of interest, periodicity of interest charged	Yes No
		Yes No

17. Securities Lending & Borrowing Scheme
Process of approval from Exchange	Whether member has obtained specific approval from the exchange?	Yes No		Audit Period
Process of approval from Exchange		Yes No
Verification of SLBS agreement	Whether member has complied with regulatory requirements related to SLBS ?	Yes No		Audit Period
Verification of SLBS agreement
SEBI circular no. MRD/DoP/SE/Dep/Cir- 14 /2007 dated the December 20, 2007
SEBI circular no. MRD/DoP/SE/Cir- 31 /2008 dated October 31, 2008
Exchange notice no. 20071224-10 dated December 24, 2007
Exchange notice no. 20080128-3 January 28, 2008
Exchange notice no. 20080130-38 dated January 30, 2008
Exchange notice no. 20080417-23 dated April 17, 2008
Exchange notice no. 20081223-15 dated December 23, 2008

18. Compliance status of last inspection carried out by SEBI/Exchanges/Internal Auditor

Whether member has complied with the qualifications/violations made in last SEBI inspection report		Yes No

Whether member has complied with the qualifications/violations made in last Exchange inspection report		Yes No

Whether member has complied with the qualifications/violations made in last Internal Audit report		Yes No

Give status of compliance against each qualifications/violations observed in last inspection report of SEBI/Exchange/Internal Auditor		Yes No


19. Whether comments on any other area? (Give details of the comments) (Give comments if any )

Points to be noted

The guidelines prescribed hereunder do not limit the scope of the internal audit. The points mentioned are only indicative in nature and not exhaustive. It however, does not limit the scope of the internal audit. This has been prepared based on the regulatory requirement (as per relevant acts, rules, regulations and circulars) which keep on developing from time to time. The auditors should peruse them and update the scope of the audit.

The report shall also include the following.
1. Management comments
a) In case of any non compliances/findings/observations/qualifications by the auditor the management responses should be given to the Exchange against each point.
b) The trading member to mention the date on which the report has been presented to the Board/Management/Audit Committee/Proprietor for their approval and corrective and preventive actions taken by the management for addressing deficiencies along with the timeliness of when the agreed suggestions would be implemented should be reported to the Exchange.
c) In case of receipt of internal audit reports without management comments the same shall be treated as non submissions.
2. If any major significant deviations and deviations of recurring nature are observed, the same should be reported separately in the covering page of the audit report. If auditors observations are in the nature of a deviation or a recommendation, the member’s response should be sought and recorded in the report.
3. Comments by auditor on the status of compliance in respect of deviations reported in the last audit report.
4. Improvements brought about in the operations between the last audit and the current audit.
5. In case the member has been inspected in the relevant half year by the Exchange / SEBI, comments by the auditor on whether the member has complied with the observations made in Exchange / SEBI inspection report are to be included in the audit report.
6. A statement by the auditor that the provisions of SCRA 1956, SEBI Act 1992, SEBI (Stock Brokers and Sub-brokers) Regulations 1992, SCRR 1957, Rules, Bye laws, Regulations, circulars of SEBI, agreements, Bye laws of Exchange/Clearing House, date security and insurance have been covered in the audit.
7. Auditor shall specifically declare about direct / indirect interest in or relationship with the member or its share holders / directors / partners / proprietors / management if any and also confirm that they do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the said member.
8. Membership number allotted by the affiliated professional body should be quoted at the bottom of the report as provided in the format.
9. In case any violations/qualifications/observations are observed by the auditor the same shall be submitted as annexure and should be quantified specifying the no. of instances, value etc. and the evidences should be enclosed with the Internal Audit Report
10. Sample size indicated in the format above is minimum sample size. The auditor may increase the sample size as it may deem fit. It is desirable that the sample selected is representative sample of the population.
11. The internal audit report should be submitted to the Exchange as per the report format specified above.
12. In case internal audit report submitted is incomplete i.e.only certificate is submitted without audit report, same would be treated as non submission of internal audit report.