Banks form the backbone of the economy as they manage a large volume of public deposits and savings. Given this critical responsibility, they require regular monitoring and review, and one of the most important tools for this is bank auditing.
An audit, or auditing, is a process conducted by a business entity—either voluntarily or to comply with legal requirements—to examine its transactions, accounts, and records. The goal is to verify accuracy, legitimacy, and adherence to regulations. Audits can be performed by internal or external auditors.
Bank audits are generally classified into three main categories:
Concurrent Audit
Internal Audit / Information Systems Audit
Statutory Audit
Definition:
A concurrent audit involves reviewing transactions as they occur, rather than after the fact.
Key Features:
Continuous Audit: Conducted throughout the year.
Monthly Basis: Usually performed monthly by external auditors, often Chartered Accountants.
Daily Transaction Evaluation: Ensures that daily banking activities follow rules and remain accurate.
Purpose:
Concurrent audits help bank branches operate smoothly and detect errors immediately to prevent cascading effects. They are particularly effective in identifying fraud at the earliest stage, protecting public funds.
Definition:
Internal auditing is conducted by a team within the bank itself to meet its internal audit requirements. It may focus on specific areas or cover all operations, depending on the audit plan.
Key Features:
Branch Visits: Internal auditors visit branches individually according to the audit schedule.
Aspect-Centric: Can focus on a particular aspect of operations or cover the full spectrum of the branch’s activities.
Conducted Internally: Performed by the bank’s own staff.
Purpose:
Internal audits ensure smooth, secure, and accurate flow of information within the bank. They also verify the effectiveness, accessibility, and security of new banking software and digital systems. With the rise of core banking, ATMs, internet banking, and mobile banking, regular information systems audits have become increasingly important.
Definition:
A statutory audit is mandated by law, requiring banks to undergo annual audits. The Reserve Bank of India (RBI) appoints statutory auditors in collaboration with the Institute of Chartered Accountants of India (ICAI).
Key Features:
Timing: Conducted annually at the financial year-end, typically in March or April.
Non-Performing Assets (NPA) Verification: Statutory audits confirm NPAs, which affect profits, balance sheets, and shareholder dividends.
RBI Appointed: Auditors are selected jointly by RBI and ICAI.
Purpose:
Statutory audits focus on:
Loans and advances
Compliance with Priority Sector Lending (PSL) norms
Maintenance of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
Adherence to other RBI regulations and statutory requirements
Banks process thousands of transactions daily, generating voluminous documentation. A concurrent audit helps detect irregularities and correct them immediately, preventing problems from accumulating until the year-end audit. These audits monitor:
Daily cash balance limits
KYC compliance
Loan documentation and disbursement rules
Prevention of income leakage
Internal audits, including information systems audits, ensure digital banking systems like ATMs, mobile banking, and online banking are secure and functioning effectively.
While concurrent and internal audits maintain day-to-day operational integrity, statutory audits ensure compliance with laws, regulations, and financial reporting standards.
Bank audits are essential to ensure fair, transparent, and legally compliant banking practices. Both internal and external audits play a vital role in protecting public funds, improving operational efficiency, and maintaining the credibility of the banking system.
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