Role of Audit and inspection explained

Audits and inspections are both important activities that help ensure compliance with regulations and protocols, and they can be used in a variety of contexts, including safety, finances, and data security.

The difference between Audits and inspections is that auditing is used to methodical examination of a facility’s accurate compliance with procedures and processes, to identify risks. A bank inspection is a process that monitors bank branches to ensure they are operating safely and soundly and are following all relevant laws, rules, and regulations. Structurally, inspections are more about direct observation and verification. Audits are broader in scope, examining entire systems, processes, or departments. Thus, the role of Audits can be used to assess the accuracy of financial statements and identify risks, and the role of an inspection is to focus on identifying issues.

The audit is classified into many different types and levels of assurance according to the objectives, scopes, purposes, and procedures of how auditing is performed. There are many types of audits including financial audits, operational audits, Forensic Audits, Legal Audit, Statutory Audit, Revenue Audit, Credit Audits, Compliance audits, Stock audits, and so on. Risk-based internal audits in banks: The primary focus of risk-based internal audits should be to provide reasonable assurance to the Board and top management about the adequacy and effectiveness of the risk management and control framework in the banks’ operations. Accordingly, every bank has to put in place a risk-based internal audit policy developed under a Board-approved internal audit policy that focuses on risk identification, prioritization of audit areas, and allocation of audit resources by risk assessment instead of full-scale transaction testing.

Here are some important types of audits carried out in commercial banks

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Legal Audit: The scope of the legal audit by the banks is different from the legal audit of other sectors. RBI vide its circular No.2012-13/524 /DBS.FrMC.BC.No.7/23.04.001/2012-13 dated Jul 07, 2013, directed the banks that they should also subject the title deeds and other documents in respect of all credit exposures of Rs.5 crore and above to periodic legal audit and re-verification of title deeds with relevant authorities as part of regular audit exercise till the loan stands fully repaid.

Stock Audit: Every bank has a ‘stock audit policy’ under which all its branches shall arrange a ‘stock audit’ of the accounts that are enjoying working capital facilities beyond certain limits. According to the stock audit policy of the banks, the external auditors appointed by the bank shall inspect assets charged to the bank once or twice a year as desired by the bank. This is in addition to a routine stock inspection carried out by the concerned branch.

Revenue Audit: The revenue audit of bank branches is the audit of items governing the income & expenditure of banks. The audit is conducted to verify the accuracy, and relevance of expenditure incurred & Incomes earned by the banks according to applicable latest notification and circulars.

Concurrent Audit: Concurrent Audit is an internal audit function. It aims at reducing the gap between the occurrence of a transaction and its examination which helps in preventing fraud.

Statutory audit of banks: Statutory Audit is a type of audit carried out by charted accountants who are mandated by a Law or a Statute to ensure the books of accounts presented to different regulators and the public are true and fair. Such audit is mandatory for certain criteria prescribed by different statutes like the Reserve Bank of India, Income Tax, Companies Act, 2013, or any other statute governing the organization.

Credit Audit: We might have come across numerous instances of parties indulging in various types of frauds and forgeries to cheat banks and avail finance. Banks can avoid most such instances by sticking to the principles of KYC (Know Your Customer) in letter and spirit. An auditor should look into the loan transaction covering the process of sanction, documentation, and operation of the loan account. Such credit audit can bring out the lacunas, if any, in the processing and sanctioning of loans as well as the problems in documentation and monitoring of loan accounts.

Investment / Treasury Audit: Banks are required to follow specific guidelines issued by RBI on the investments to be made by the banks including the CRR & SLR requirements. For the above purpose, many banks appoint auditors to check that the Investment policy is correctly followed and all the investments are done according to the RBI directives. These reports are required to be submitted at predetermined frequencies.

Snap Audit: In certain inevitable situations, banks may appoint an auditor to conduct a Snap Audit to check and verify certain specific aspects within the bank or branches and report to the top management on specified matters or issues or matters in respect of certain borrowers.

IT Audit (Information System Audit): The system Auditors assess and check the information security structure, and integrity of the system so that the output that the system produces is reliable.

Compliance Audit: In the banking sector there are many kinds of regulations to be followed by the bankers and comply with. As per RBI directions, commercial banks are required to set up a complaint review (assessment) or compliance audit to make sure that they comply with the laws and regulations set. The bank may assign its internal audit function to review whether the entity’s internal policies and procedures comply and are effectively followed.

RBI Inspection of bank branches: RBI conducts on-site inspection and off-site surveillance of banks. On-site inspection of banks is carried out on an annual basis. Besides the head office and controlling offices, certain specified branches are covered under inspection to ensure a minimum coverage of advances. The primary objective of off-site surveillance is to monitor the financial health of banks between two on-site inspections, identifying banks that show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action.

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