Bank Branch Audit Season
Published: Mar 03, 2020
THE Indian banking industry is the backbone of our financial system. The banking system is integral part of many government initiatives, policies and developmental schemes. Earlier banks used to carry out the activity of accepting deposits and giving loans but with passage of time banks have diversified into other financial activities and have launched various financial products. High level of competition and infusion of technology have enabled its diversification. Since banks play vital role in the economy, their regular, timely and correct audit becomes very critical. On account of their diverse activities, bank audit becomes very complex and this fact puts additional responsibility on the shoulders of bank auditors and makes their job highly specialized.
From next month, CAs are all set to commence bank branch audit. Before doing Bank branch audit, Auditors should be having complete knowledge of legal framework applicable to banking sector including Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and other relevant Acts, rules and regulations. Internal circulars and manuals of audited bank are very important for Auditors. The auditors should have proper understanding of latest version of guidelines notes on Bank Audit/ Bank branch audit, issued by ICAI. The Auditor must go through the same before planning audit of a particular bank. The Auditor has limited time frame to complete the bank branch audit.
In present day, banking system in India is facing lots of problems in terms of rising level of NPAs and reduction of net interest margin. As a result, banks are either sinking or are getting merged with other banks. These issues make the audit work all the more crucial. Often role of auditor and their work is questioned and doubts are raised on quality of the audit. In general, auditors do perform their duties with adequate skills but sometimes they are found caught in mess due to lack of planning. An auditor must have good plan before start of audit and should have proper documentation of work done and reports made. Hence planning of audit is very essential.
Bank Branch audit assumes great importance because the central statutory auditor relies on the work of Branch Auditor. Standards on auditing, SA 300 issued by ICAI provides for planning, timing and scope of the Audit of the Financial Statements.The guidance note on bank audit is issued by the Auditing and Assurance Standards Board (AASB) of ICAI every year with objective to provide updated and detailed guidance to members for doing bank audit. Stages of the Bank branch audit can be summarized as follows:
1. Appointment of auditor under Banking Regulation Act 1949 is made and intimated to auditor through letters. Particulars of branches and zone allotted are informed. SA 220 and SA 210 are complied
2. After appointment procedure and formalities are complied with, the Auditor should first get knowledge of the banking business, financial products in which bank deals and branch composition. The audit plan is created based on business mix of particular branch. Sample size must be finalized after discussion with branch manager. Audit team is selected keeping in mind the time available to complete the audit. Staff having previous experience of branch audit, good interpretation and analytical skills should be preferred. Before starting audit, team should deeply go through the recently published RBI circulars and closing circulars of bank. Auditors should ensure compliance with applicable quality control standards issued by ICAI (SAs and SQCs) and should accordingly and carefully plan the audit structure.
3. The whole audit plan should be summarized in one document called planning memorandum. This document should be prepared in such a manner that it will help in the peer review process of the audit firm.
4. Decide the time line to complete the audit. The Checklist should be prepared by audit firm to track progress of audit work. Checklist should cover all the areas of the bank branch audit. Before starting of audit, discuss broad audit program with the branch head/manager. Understand the software used and operating system of branch.
5. During an audit follow time line decided and checklist prepared. Issues arise while doing an audit should be clarified on the same date. Special supervision of senior in team is required for critical areas such as NPA verification, CRAR certification and fraud reporting.
6. Carefully review the whole audit process. Analyze data collected carefully. Prepare final query sheet for management of branch. After getting replies to queries made, prepare the draft audit report. Discuss the same with the branch head/manager. Prepare final audit report. Put stamp, signature and date of report. Generate UDIN for audit report and certificates.
In today's era, most of the banks use Core Banking System (CBS). It is a system in which a centrally created and shared database supports the banking application. This server is kept at a location called the data center. At the same time back up sites are maintained at a distant location in different zones. Connectivity in all bank branches are established with help of wireless network, VSAT or VPN over internet. The branch auditor need not be a technical expert of IT system or software used by the branch but he cannot ignore the fact that the technology used has changed the banking operations. So a basic understanding of CBS of bank is important for branch auditor.
Considering the CBS environment of bank it can be a good strategy of branch auditor to commence the audit with LFAR (long form audit report) and then financial statements. Exception reports generated by system can be the best source to find out any willful default.
While doing branch audit, Auditors always run the risk of fraud and misstatement of facts by auditee. Discovery and reporting of frauds is duty of auditors. Branch Auditor role is very important from angle of fraud. In event of any corporate scandals like Punjab National Bank scam or Infrastructure Leasing & Financial Services default, auditors are the ones who are blamed by investors and regulators for not reporting the ongoing fraud on time. But it is very important to understand that investors or regulators are in need of forward looking information, where as Auditors provide backward-looking information. They analyze a year old record and then submit their report. Probably, by then, it is too late to make decisions for stake holders. Till the time some new ways/techniques are not introduced to detect fraud on time, it's a hard truth that responsibility in on the shoulders of Auditors to detect and report fraud. For this Computer Aided Audit Tools (CAAT) are useful.