There’s an element of subjectivity in banking audits (The Hindu)

Mains Paper 3:Economy
Prelims level: Banking audits
Mains level: Subjectivity in banking audits

Context:

• 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 .....................................................................................

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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 per cent 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 .............................................................................................

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Conclusion:

• 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.

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Prelims Questions:

Q.1)With reference to the Line of Actual Control (LAC), consider the following statements:
1. It is the demarcation that separates Indian-controlled territory from Pakistan-controlled territory.
2. It is only a concept – it is not agreed upon by the two countries, neither delineated on a map or demarcated on the ground.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer........................

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Mains Questions:
Q.1)Do you think the use of artificial intelligence-led technique could make easier the tasks for the auditors? Comment.