A bank audit is a process carried out by an auditor appointed by the RBI and ICAI to verify the financial statements of the banking institutions and to determine whether or not the banking concerns are adhering to the applicable legal, compliance, and regulatory framework.
Following is a list of the regulatory frameworks under which banks must conduct their business:
The banking industry is one that is constantly growing. In order to accurately understand the financial condition of the banks, it is necessary to implement proper and effective auditing procedures, for which the following procedure is used:
After receiving an indebtedness declaration from a particular firm or auditor, RBI and Indian Institute of Chartered Accountants of India (ICAI) jointly examine and select an auditor or audit firm for the bank’s audit.
In the year they are appointed as a bank auditor, the audit firm or an auditor cannot be assigned with any other statutory audit. The firm must establish the engagement terms outlining the length of the audit term before starting the audit. However, in accordance with the ICAI Act of 1949, the auditor is required to obtain the prior auditor of the bank’s consent in writing before becoming engaged.
The new auditor will then review the initial opening balance, and if he discovers any material misstatements or errors that have an impact on the financial statements, he may express his point of view by including a qualified or adverse report in his audit report.
The engagement team is then formed to manage the risks and complexities of bank operations after the difficult task of assessing engagement risk has been completed. The auditor then works to comprehend the organization’s internal controls and working environment in order to determine the audit’s foundation.
Following that, the management of the bank takes into account the accounting, risk management, and risk identification processes as well as control and financial activities. Finally, after carefully examining all the pertinent materials, an auditor drafts an audit report outlining his assessment of the bank’s financial situation and any gaps in the Act’s mentioned regulations.
Concurrent Audit
The daily volume of transactions that banks deal with necessitates a continuous examination of those transactions in order to assess the accuracy of the financial statement. An external auditor, known as a concurrent auditor, is chosen by the bank to carry out such an audit. This auditor conducts a monthly audit of the transaction.
A concurrent audit’s primary goal is to verify that the bank’s internal systems, practices, and policies are being followed. Continuous concurrent auditing is always done to check whether the banks are adhering to the proper rules, such as proper documentation, proper cash verification, NPA classification, etc.
Internal Audit
In addition to the concurrent audit, banks also conduct an internal audit for which they hire an internal auditor to conduct routine checks on the bank’s financial operations all year long.
With the rapid expansion of computerised banking functions, one of the most prominent areas of internal audit is information system audit. It is crucial to monitor these systems at regular intervals to assess their functionality.
In order to easily identify errors without assistance from bank employees, who occasionally try to divert the auditor from obfuscating their mistakes, the auditor should also have a basic understanding of banking software.
Statutory Audit
Statutory Audit is made up of the word statute, which is another word for regulation. Thus, it is clear that the statutory audit is a required audit as defined by the Banking Regulation Act of 1949. Under Statutory Audit, ICAI and RBI jointly assign each bank to an auditor who is typically a practising chartered accountant. From the end of March to the first or second week of April, this auditor conducts year-end audits in each branch that the ICAI has given the bank.
Cash verification, tax-related matters, and loan account verification are a few significant aspects that should be included in a statutory audit. The auditor then creates an audit report outlining his assessment of a financial statement for which he has been given a deadline by which to conduct the audit and submit his report.