Audit of financial institutions is an area where sampling theory of statistics cannot be relied upon/applied
Audit of financial statements of the institution by external auditors is considered to be a highly effective component of a control system.
• Banks in India, being ‘systemically important’ institutions and of ‘public interest’, are subjected to robust control systems by the RBI and the government.
• The number of branches that need to be audited depends upon guidelines issued by the RBI.
• The appointment process starts as early in the month of November every year, by submission of database of eligible auditors to the RBI and banks by the ICAI. Compilation and submission takes place on a systematic and transparent basis.
Element of subjectivity
Banks’ management assign branches to eligible auditors with/without consultation with the central statutory auditors of the respective banks, as the case may be.
• Central statutory auditors of banks are the ones who take the onus of getting the audits completed on ‘time line’ for the bank as a whole.
• Assignment of ‘number of branches’ and ‘location of branches’ to individual chartered accountants involves ‘subjectivity’.
• This process may be subjected to artificial intelligence-led technique, so that the subjectivity is minimised, if it cannot be altogether avoided.
• Subjectivity results in allocation of branches that are in ‘diametric’ locations falling at the frontiers of the bank’s respective regional office.
• Some chartered accountants feel that even possession of and deployment of more than required manpower is sometimes overcome by the challenges posed by logistic issues.
Auditing vs constraints
Audit of financial institutions is an area where sampling theory of statistics cannot be relied upon/applied. In order to satisfy ‘herself/himself’, in the least scenario:
(a) the auditor must cover 100 percent of the fresh loans sanctioned during the year;
• (b) compliance with respect to disbursements in respect of loans sanctioned in the earlier years must be verified in full;
• (c) deficiencies pointed out by other control mechanisms such as concurrent audit, own inspection, RBI inspection, etc., in respect of other loan accounts and deposits need to be tracked and compliance ensured;
• (d) an auditor must diligently ensure compliance with AML requirements; and
• (e) a handful of other ‘procedural related’ audit checks and compliance checks must be carried out to be true to oneself.
Statutory audit of a medium sized private limited company would consume at least 15-21 days, with a fairly sized effective audit team.
Key performance indicator
However, due to the schedule that is being chalked out by the bank’s head office, regional office and in turn by the central statutory auditors, the branch managers, as a part of their key performance indicator, are mandated to get the audits completed in 4-5 days.
• Some managers still do not bother about such ‘KPIs, which is a boon as far as the ‘philosophy of auditing’ is concerned.
• As ‘tight schedule’ creeps in the minds of some chartered accountants, few auditors plan and tend to complete the audits much earlier, despite the emphasis by the office bearers of the councils of the ICAI during seminars and training programmes on the quality rather than the ‘speed’.
• Such historical ‘speed’/turnaround time is considered as the benchmark by some bank branches.
In the interests of the national economy, subjectivity surrounding allocation of branches and expected ‘turnaround time’ are factors to be focussed upon.
• One could appreciate the need by reckoning with the ‘mounting’ NPAs of the banking industry.
Q.1) Do you think the use of artificial intelligence-led technique could make easier the tasks for the auditors? Comment.
Mains Paper 3: Economy
Prelims level: Banking audits
Mains level: Subjectivity in banking audits