“… Bank Audit is an Audit of Custodian of the wealth of the public so auditors have to be very vigilant while doing Bank Audit as expectation of stake holders including regulators have tremendously increased…”
Introduction
Statutory Bank branch audits serve as a crucial checkpoint in ensuring financial integrity, transparency, and compliance with regulatory norms. With evolving expectations from stakeholders and regulators, auditors must adapt to new methodologies and technological advancements to enhance audit quality and effectiveness. This guide aims to provide an in-depth understanding of bank audits, covering expectations, methodologies, and best practices.
Understanding the Expectation Gap in Auditing
The expectation gap in auditing can be categorized into three major components:
1. Knowledge Gap – What the public thinks auditors do and what auditors actually do.
The public’s perception of an auditor’s role often differs from reality. While auditors are responsible for ensuring fair financial reporting, they are not fraud investigators by default unless specifically required.
2. Performance Gap – Auditors do not do what auditing standards or regulations require
This arises when auditors do not fully comply with the regulatory and professional standards set forth by governing bodies such as the ICAI, RBI and SEBI.
3. Evolution Gap — Lack of technological advances
With rapid advancements in technology and banking processes, auditors must keep pace with digital banking, innovative structure finances, fintech innovations, and evolving compliance requirements.
Addressing these gaps requires auditors to adopt a proactive approach, improving their knowledge, compliance adherence, and application of modern tools.
The New Normal in Bank Audits – Passive watchdog approach to an active & analytical role.
1. From Watchdog to Barking Dog — Auditors must be more vigilant and proactive rather than passive observers.
2. Audit by Walking Around (ABWA) — Hands-on engagement in the audit process.
3. Audit Trail — Ensuring seamless tracking of financial transactions to prevent fraud and errors.
4. NOCLAR (Non-Compliance with Laws and Regulations) — Strengthening legal adherence.
5. Audit Quality Maturity Model (AQMM) — A self-evaluation tool assessing audit quality across 600 parameters.
6. Integration of Technology— Blockchain, Artificial Intelligence (Al), and Computer-Assisted Audit Tools (CAATs).
7. Increase in Intangible and Digital Transactions — A shift from conventional physical assets to digital banking.
8. Transition from Ticking Audit to Critical Thinking Audit — Encouraging analytical assessment over rote verification.
Audit Approach and Strategy — How to start Audit? – Moving away from transaction-checking to risk-based auditing
- Get understanding of CBS system, codes & audit related packages.
- Use Technology & Excel tools to do data analytics
- Get dump of ALL BALANCING and NPA REPORT
- To verify Credit Appraisal — Verify latest Sanctioned covenants, Transactions, ABS, Master data, CRILIC, CERSAI, External Rating Rationale, Observations of RBIA, etc.
- To verify NPA Classification & Correct realizable of Security Value
Verification of Contingent liabilities and IFC RCM Testing with samples. - Others — Parking & Sundry Accounts, Basel Parameters, Impact of legal cases, Analytical comparison of financials, Revenue leakages
Detailed Audit Planning and Execution
| Pre Audit Planning | Post Audit Planning |
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New concept of —
| SMA | For T/L – SMA 0, 1, & 2 For CC- SMA 1 & 2 | Classification of Agricultural Loans | Agricultural Loans other than specified in Annexure – 2, identification of NPA would be done on the same basis as nonagricultural advances which at present is 90 days norms. | |
| Running day end process of calendar date | Date of SMA / NPA shall reflect asset classification status of an account at the day end of that calendar date | |||
| ‘No overdue’ in case of upgradation of accounts | ‘No overdue’ (repayment of entire arrears of interest & principal) status with reference to all exposures of the bank (except restructured & non achievement of DCСo a/cs) as on the date of upgradation of the account. | Out of Order | For all CC / OD loan products (incl. non business purpose &/or which entail interest repayments as the only credits) Inclusive of the day for which day end process is being run. | |
| Appropriation of recovery in NPA accounts | Check accounting policy of the Bank. Mostly, recoveries in NPA accounts, except OTS or NCLTs or clear agreement for apportionment towards Principal, are appropriated towards Interest, Charges & balance towards Principal. | Out of Order | NPA Classification in case of Interest payment – Earlier Interest due & charged during any quarter not serviced fully within 90 days from the end of the quarter. Now, Interest payment in respect of TL, account will be classified as NPA if the interest applied at specified rests remain overdue for more than 90 days. (w.e.f. 31.03.2022) | |
| Out of Order | O/s. > DP for 90 days or O/s. < DP but no credits for 90 days or
O/s. < DP but credits not enough to cover Interest debited during previous 90 days |
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Must-Do’s for LFAR and Statutory Audit
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Sure-Shot MoCs in Audits – Key Areas to Focus on:
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Conclusion
The role of a bank branch auditor is evolving rapidly. With the integration of new technology, stringent regulatory expectations, and increasing complexities in banking transactions, auditors must continuously upgrade their skills and adopt a more analytical and risk-based approach. By focusing on quality, compliance, and due diligence, auditors can significantly contribute to strengthening the financial system and upholding public trust.
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CA. Ankit Danawala | FCA, B. Com, DISA (ICAI) | ankit@snkca.com
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