Characteristics of a bank :
Banks have certain characteristics distinguishing them from most other commercial enterprises e.g.,
Custody of large volumes of monetary items, including cash and negotiable instruments, whose physical security has to be ensured. This applies to
storage and the transfer of monetary items making banks vulnerable to misappropriation and fraud necessitating establishment of formal operating procedures, well-defined limits for individual discretion and rigorous systems of internal control.
Engagement in a large volume and variety of transactions in terms of number and value which necessarily requires complex accounting and
internal control systems and widespread use of Information Technology (IT).
Operation through a wide network of geographically dispersed branches and departments necessitating a greater decentralization of authority and dispersal of accounting and control functions, with consequent difficulties in maintaining uniform operating practices and accounting systems, particularly when the branch network transcends national boundaries.
Assumption of significant commitments without any transfer of funds. These items, called ‘off-balance sheet’ items, may at times not involve accounting entries and the failure to record such items may be difficult to detect.
Engagement in transactions that are initiated at one location, recorded at a different location and managed at yet another location.
Direct Initiation and completion of transactions by the customer without any intervention by the bank’s employees. For example, over the Internet or mobile or through automatic teller machines (ATMs).
Integration and linkages of national and international settlement systems could pose a systemic risk to the countries in which they operate.
Regulatory requirements by governmental authorities often influence accounting and auditing practices in the banking sector.
Special audit considerations arise in the audit of banks because of:
the particular nature of risks associated with the transactions undertaken;
the scale of banking operations and the resultant significant exposures which can arise within short period of time;
the extensive dependence on IT to process transactions;
the effect of the statutory and regulatory requirements;
the continuing development of new products and services and banking practices which may not be matched by the concurrent development of accounting principles and auditing practices.
Evolution of technology and providing services through Net Banking and Mobiles has exposed banks to huge operational and financial risk.
The auditor should consider the effect of the above factors in designing his audit approach. It is imperative for Branch Auditor and SCAs to have detailed knowledge of the products offered and risks associated with them, and appropriately address them in their audit plan to the extent they give rise to the risk of material misstatements in the financial statements.
In today’s environment, the banks use different applications to carry out different transactions which may include data flow from one application to other application; the auditor while designing his plans should also understand interface controls between the various applications.