Role of auditors of banks
Based on RBI appointment letter, the external auditors of the bank are required to provide a certification on the capital adequacy ratio computation. The auditor needs to understand more comprehensively the approach and mechanism adopted by the bank, and accordingly certify the computation. Considering the intricacies involved in the computation itself further supplemented by enhanced judgement factor, it would be prudent for the certifying auditor to obtain an adequate understanding of the Basel III norms as prescribed by RBI and also deploy more senior members of its staff to audit the capital adequacy computations.
Further, some banks may also avail services of their external auditors to review the quality of internal controls and systems, and assess the scope and adequacy of the internal audit function.
In the concept of Basel III, the capital computation is primarily aimed from central/head office perspective. Basel III is not only about capital adequacy but is also about creating a robust risk management structure. Hence, apart from the capital adequacy computation, the auditors should verify the robustness of the risk management structure embedded in the bank, across its branches. This risk management spreads across all the types of risk, i.e., credit risk, market risk and operational risk. Hence, the auditors also play a critical role in ensuring that the bank has adopted a consistent practice and as part of their attest function report on its appropriateness of risk management practice as well on the RWA.