Banking - Audit Process

 

Audit Process

It is well said that well planned is half work done and one should know destination to plan well. Objective of planning in bank audit is effective audit, timely completion of audit assignment and simultaneous coverage of allied assignment and an audit report on audit findings at the end of an audit. In audit planning do the following things

 

Bank Audit Process

 

14.1 Pre-commencement work

The following points have to be considered before commencing the audit

(A)         Receipt of appointment letter

compliance u/s. 226 (3) of Companies Act, 1956 with regard to qualifications and disqualifications of auditors

(B)         S 226(3) - None of the following persons shall be qualified for appointment as auditor of a company-

(a)          A body corporate

(b)          An officer or employee of the company

(c)           A person who is a partner, or who is in the employment, of an officer or employee of the company;

(d)          A person who is indebted to the company for an amount exceeding one-thousand rupees, or who has given any guarantee or provided any  security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

(e)           A person holding any security of that company after a period of one year from the date of the companies (Amendment) Act, 2000

 

(C)         Internal Auditor can not be statutory auditor for the same financial year

(D)         The nature of audit work has to be ascertained as to whether it is Concurrent Audit, Stock Audit, Revenue Audit, Credit Risk Auditor or any other Assignments of any branch of that bank

(E)         Decision for Acceptance or Rejection of Assignment has to be communicated to the concerned authority

(F)         It should be ensured that minimum fees are set as per RBI circular.

(G)         The Objective and Scope of Work has to be considered with specific considerations to time available for conducting audit - AAS2 deals with

Objective and Scope of the audit of financial statements

(H)         Before accepting the audit assignment, the availability /outsourcing of staff for conducting bank audit has to be considered. In doing so the auditor should follow the guidance given in AAS10 which deals with using the work of another auditor.

(I)           The Previous Auditor  must be communicated(Clause 8 of First Schedule of Chartered Accountants Act, 1949)

(J)          Engagement Letter under AAS 26 has to be issued

(K)         There must be a Communication with joint auditor as per AAS12

(L)         A list of accounting standard applicable to the branch must be prepared.

(M)        Copy of all circulars of RBI applicable to branch have to be obtained and kept ready for reference

(N)         Attending branch audit seminars could enhance the auditor’s knowledge on bank audits

(O)         Banking terminology and schemes should be well understood

(P)         A reading of Guidance note on audit of banks by ICAI would provide valuable guidance.

14.2 Understanding the business of bank branch

The next step is in understanding the business of the branch with specific reference to 

(Q)         Type of constitution

(R)         Applicable Laws

(1)                                  Banking Regulation Act, 1949

(2)                                  Reserve Bank of India, 1934

(3)                                  Multi state co-operative Act, 2002

(4)                                  Relevant state co-operative Act

(5)                                  Companies Act, 1956

(6)                                  Circulars/Guidelines issued by RBI

(7)                                  Circulars/Guidelines issued by Head office of bank

(8)                                  Service Tax Provisions

(9)                                  TDS Provisions under Income Tax Act

(10)                          Prevention of Money Laundering Act, 2002

(11)                          Banking cash transaction tax

(S)          Type/Nature of transactions

(T)         Quantum of Transactions under various heads as detailed below:

(U)         Computerization System – software used by the branch

(V)         Security aspect of software, output of software, interlinking between various reports

(W)        Internal Control – Risk Assessment

(X)         Risk Management – Back up system 

In understanding the branch, the following AAS would be relevant

AAS 6                            Risk Assessments and Internal control

AAS 20                         Knowledge of the business

AAS 21                         Consideration of Laws and Regulations in an   audit of financial statement

AAS 23                         Related parties

AAS 24                         Audit considerations relating to entities using service organizations

AAS 29                         Auditing in CIS environment

14.3 Audit planning

(A)         While drafting the audit programme, the type of reports to be submitted has to be considered. There are four types of reports.

(1)                                  Unqualified Report

(2)                                  Qualified Report

(3)                                  Disclaimer of Opinion

(4)                                  Adverse Report

(B)          Various types of reports include:

(a)           Jilani Committee Report

(b)           Ghosh Committee Report

(c)            Special Reports as applicable (Prime Minister Rojgar Yojana Scheme Report etc.)

(d)           Long Form Audit Report

(e)           Tax Audit Report

(f)            Main Report (sec.30(3) of Banking Regulation Act, 1949)

(C)         Auditor should plan his work based on the client’s business to enable him to conduct an effective audit in an efficient and timely manner as per AAS 8

Specimen Audit Plan

Name of Auditee:

Financial Year:

Type of Audit: Statutory /Current/

Person in charge            Memb. No.                         Signature:         Experience

Team Members:

Name                                                   Qualifications                   Experience

1.

2.

(D)         The auditor should design and select an audit sample, perform audit procedures thereon, and evaluate sample results so as to provide sufficient appropriate audit evidence AS PER AAS 15

Audit sampling                              

(E)           The audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in accordance with Auditing and Assurance standards as per AAS 17

Various reports like concurrent audit report, revenue audit report, head office management report, RBI Inspection report, Stock audit report etc have to be obtained from  the branch and verification of the same is to be included in the audit programme.

Verification of Reports

 

 

 

Reports of  Stock Audit

(G)           The auditor should evaluate the internal audit function and accordingly adopt less extensive procedures than otherwise required as per AAS 7 - Relying upon the work of an Internal Auditor

(H)           Auditor must obtain representation from management as per AAS 11

14.4 Substantive audit procedures:

(A)           Auditor should have proper working papers that will enable him to substantiate his results as per AAS 3

For e.g. the following could be obtained

 

BA-5

(B)           Following AAS will be applicable in audit procedures:

 

 

The audit procedures would include

(1)                                Inspection

(2)                                Observation

(3)                                Inquiry & confirmation AAS 30

(4)                                Computation

(5)                                Analytical Procedures AAS 14

14.5 Reporting:

Normally before the final report auditors observations are incorporated in the books of accounts and modified financial statements are prepared while in case of banks the time report is sent by auditors there is compilation at regional and zonal level hence there is another statement called Memorandum of Changes (MOC).  The main report must state about this and also shall mention whether MOC is nil or contains observation.

As per AAS 27, the engagement letter should describe the form in which any communication on audit matters of governance interest will be made

At the time of reporting, the following points have to be kept in mind:

(1)          Financial statements to be approved by  management

(2)          Before the report is submitted, all queries are  to be solved satisfactorily

(3)          Address the report to the main report  (sec.228 (3(c)) of the companies act,1956)

(4)          Take acknowledgement of submission of report.

(5)          Submit the professional fees bill (after charging service tax) to the relevant authorities as mentioned in the allotment letter.

(6)          Collect the payment.