Banks are the foundation of our economy. They handle a huge amount of deposits and savings of the public, so they have to be closely monitored and reviewed. A bank audit is one important process of this monitoring.
‘Audit’ or ‘Auditing’ refers to an activity that is carried out by any business entity on its own or to fulfill the compulsion laid under any law to evaluate the transactions, accounts, and documents of the business and to confirm its accuracy and legitimacy. This examination is conducted by internal or external auditors.
Introduction
Bank Audit can be divided into three categories:
- Concurrent Audit
- Internal Audit or Information Systems Audit
- Statutory Audit
Concurrent Audit
Meaning:
Concurrent audit refers to the examination or audit of the transaction at the time when it is actually taking place.
Features:
- Continuous audit – Concurrent audit is a continuous audit that takes place throughout the year.
- Monthly basis – Concurrent audit is carried out by external auditors (usually Chartered Accountants) every month.
- Evaluation of daily transactions – Concurrent audits evaluate and check the transactions that take place on a daily basis to ensure regularity.
Purpose:
- Smooth operational flow – Concurrent Audit ensures the smooth flow of work in bank branches and helps in rectifying mistakes immediately to prevent further irregularities.
- Fraud detection – Helps detect fraud at an early stage, leading to the protection of public funds.
Internal Audit or Information Systems Audit
Meaning:
Internal Auditing is conducted within the organization by an internal audit team to assess banking activities. This audit may focus on a specific area or cover every aspect of the branch, depending on the audit program and requirements.
Features:
- One-by-one visit – Internal auditors visit branches one by one at a scheduled time to conduct audits.
- Aspect-centric – May focus on specific aspects of banking operations or the entire branch, depending on the audit program.
- Conducted by the organization – Internal audit is carried out by the bank’s own audit team.
Purpose:
- Ensuring internal control – Internal audits help ensure smooth, accurate, and secure information flow within the organization.
- Evaluating banking software – Internal Control Audits assess the functionality, security, and accessibility of new banking software.
- Information Systems Audit – A growing field, this audit reviews computerized banking systems, core banking, ATMs, mobile banking, and internet banking.
Statutory Audit
Meaning:
Statutory Audit is a mandatory audit conducted by a Statutory Auditor as per legal requirements. In the case of banks, it is a compulsory audit as per RBI regulations. The RBI, in collaboration with the Institute of Chartered Accountants of India (ICAI), appoints Statutory Auditors.
Features:
- Conducted in March & April – Statutory Audit is performed at the end of the financial year.
- Concludes NPA – This audit determines Non-Performing Assets (NPA), which impacts the bank’s profit, balance sheet, and shareholder dividends.
- Appointment by RBI – RBI, along with ICAI, appoints Chartered Accountants as statutory auditors for banks.
Purpose:
- Review of loans & advances – Ensures compliance with RBI guidelines on loan disbursement.
- Adherence to regulatory norms – Checks compliance with PSL (Priority Sector Lending), SLR (Statutory Liquidity Ratio), CRR (Cash Reserve Ratio), and other statutory requirements.
Significance of Bank Audit
- Banks conduct millions of transactions daily, requiring voluminous documentation.
- Concurrent Audit helps detect irregularities quickly and ensures compliance.
- Internal Audit ensures information security, checks fraud prevention mechanisms, and evaluates banking software functionality.
- Statutory Audit focuses on regulatory compliance, loan disbursement, and adherence to financial regulations.
A well-structured Bank Audit process ensures smooth operations, prevents fraud, and strengthens the financial system.