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A Hand Book On Statutory Bank Branch Audit - Rajkumar S. Adukia

Audit Procedures in bank

 

The auditor may perform the following procedures in bank audit: 

  1. Inspection and observation

  2. Inquiry and confirmation;

  3. Computation; and

  4. Analytical procedures.

They are discussed in detail  in the following paragraphs.

  1. Inspection and observation

Inspection consists of examining records, documents, or tangible assets. The auditor inspects in order to:

  • Consider their enforceability; and

  • Assess the appropriateness of the accounting treatment they have been given.

Examples of areas where inspection is used as an audit procedure are:

  • Asset sales and repurchases

  • Guarantees.

In carrying out inspection procedures, the auditor remains alert to the possibility that some of the assets the bank holds may be held on behalf of third parties rather than for the bank’s own benefit. The auditor considers whether adequate internal controls exist for the proper segregation of such assets from those that are the property of the bank and, where such assets are held, considers the implications for the financial statements.

  1. Inquiry and Confirmation

Inquiry consists of seeking information of knowledgeable persons inside or outside the entity.  Confirmation consists of the response to an inquiry to corroborate information contained in the accounting records. The auditor inquires and confirms in order to:

A bank has significant amounts of monetary assets and liabilities, and of off balance- sheet commitments. External confirmation may an effective method of determining the existence and completeness of the amounts of assets and liabilities disclosed in the financial statements.

 

Examples of areas for which the auditor may use confirmation are:

  • Outstanding derivative transactions;

  • Nostro and vostro account holders;

  • Securities held by third parties;

  • Loan accounts;

  • Deposit accounts;

  • Guarantees; and

  • Letters of credit.

  1. Computation

Computation consists of checking the arithmetical accuracy of source documents and accounting records or of performing independent calculations. In the context of the audit of a bank’s financial statements, computation is a useful procedure for checking the consistent application of valuation models.

  1. Analytical Procedures

Analytical procedures consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts.

 

A bank invariably has individual assets (for example, loans and, possibly, investments) that are of such a size that the auditor considers them individually. However, for most items, analytical procedures may be effective for the following reasons.

A useful starting point in considering appropriate analytical procedures is to consider what information and performance or risk indicators management use in monitoring the bank’s activities.

Examples of the most frequently used ratios in the banking industry.

There are a large number of financial ratios that are used to analyze a bank’s financial condition and performance. While these ratios vary somewhat between banks, their basic purpose tends to remain the same, that is, to provide measures of performance in relation to prior years, to budget and to other banks. The auditor considers the ratios obtained by one bank in the context of similar ratios achieved by other banks for which the auditor has, or may obtain, sufficient information.

 

These ratios generally fall into the following categories:

Many other, more detailed ratios are ordinarily prepared by management to assist in the analysis of the condition and performance of the bank and its various categories of assets and liabilities, departments and market segments.

  1. Asset quality ratios:

  1. Liquidity ratios:

  1. Earnings ratios:

  1. Capital adequacy ratios:

  1. Market risk:

  1. Funding risk:

Other Pages from This e-book

HISTORY OF BANKING | TYPES OF BANKS AND BANKING ACTIVITIES | GLOSSARY OF TERMS USED IN BANKS | Bank audit process  | PROVISIONS RELATING TO AUDITOR | LETTERS SEEKING INFORMATION | LAWS APPLICABLE TO BANK | ACCOUNTING SYSTEM IN BANKS | Banking Softwares | GENERAL INTERNAL CONTROL IN BANKS | INTERNAL CONTROLS IN AN EDP ENVIRONMENT | Asset Classification Income Recognition and Provisioning | FOREIGN EXCHANGE TRANSACTIONS | SALIENT FEATURES OF JILANI, GHOSH |  COMMITTEES AND LFAR | Audit Planning  | Audit Procedures in bank | CHECKLISTS | DOCUMENTS TO BE TAKEN FROM MANAGEMENT | MANAGEMENT REPRESENTATION LETTERS | BANK BRANCH AUDIT REPORTS | DISCLOSURES MANDATED BY RBI IN NOTES TO ACCOUNTS | ANNEXURE A | ANNEXURE B | ANNEXURE C | ANNEXURE D | ANNEXURE E | About the Author




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