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Unit 12: Special Features of Audit

Preliminary Work Notes

(i) The auditor should acquire knowledge of the regulatory environment in which the bank
operates. Thus, the auditor should familiarise himself with the relevant provisions of
applicable law(s) and ascertain the scope of his duties and responsibilities in accordance
with such law(s). He should be well-acquainted with the provisions of the Banking
Regulation Act, 1949, as well as any other applicable law(s) e.g. Companies Act, 1956 in the
case of audit of a banking company particularly in so far as they relate to preparation and
presentation of financial statements and their audit.
(ii) The auditor should also acquire knowledge of the economic environment in which the
bank operates. Similarly the auditor needs to acquire good working knowledge of the
services offered by the bank. In acquiring such knowledge, the auditor needs to be aware
of the many variations in the basic deposit, loan and treasury services that are offered and
continue to be developed by banks in response to market conditions. To do so, the auditor
needs to understand the nature of services rendered through instruments such as letters of
credit, acceptances, forward contracts, and other similar instruments.
The auditor should also obtain an understanding of the accounting system of the bank and the
terminology used by the bank to describe various types of transactions and operations. Most
banks have well-designed accounting and procedures manual which can serve as an important
source of information on these aspects. Banks are extensively using information technology for
its operations. The advent of technology has added a risk parameter to the auditor’s process of
risk assessment.

Evaluation of Internal Control System

AAS-6, ‘Risk Assessment and Internal Control’, states that auditor’s procedure should be addressed
to keep the audit risk at an acceptably low level and also require the auditor to assess the
components of the audit risk. Internal control evaluation is an important element of audit
process. In the case of audit of banks, it assumes even greater importance due to the enormous
volume of transactions entered into by banks. Evaluation of design and operation of internal
control system enables the bank auditors to perform more effective audits. The auditor should,
therefore, study and evaluate the design and operation of internal controls. This would assist
him in determining the nature, timing and extent of substantive procedures in various areas,
depending upon whether the internal controls are adequate and observed in practice.

Preparation of Audit Programme for Substantive Testing and its Execution

Having familiarized himself the requirements of audit, the auditor should prepare an audit
programme for substantive testing which should adequately cover the scope of his work. In
framing the audit programme, due weightage should be given by the auditor to areas where, in
his view, there are weaknesses in the internal controls. The audit programme for the statutory
auditors would be different from that of the branch auditor. At the branch level, basic banking
operations are to be covered by the audit. On the other hand, the statutory auditors at the head
office level have to deal with consolidation of branch returns (both audited and unaudited),
verification of investments, items normally deal with at the head office (like provision for
gratuity, inter-office accounts, etc.). The scope of the work of the statutory auditors would also
involve dealing with various accounting aspects and disclosure requirements arising out of the
branch returns.

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Caution The auditor should ensure that the work is executed in accordance with the audit
programme by persons having the requisite skills and competence.

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