Banking · Three-tier Audit Structure in Banks
Gama Bank uses a three-tier audit structure: (i) Concurrent Audit (CA), (ii) Internal Audit (IA), and (iii) Statutory Audit (SA). The CA identified significant procedural lapses in the sanctioning of a large corporate loan portfolio, which were immediately reported. The IA confirmed the control weaknesses. The SA team is now reviewing the financial statements. Considering the RBI's requirements and the Auditing Standards, what is the most significant step the Statutory Auditor (SA) must take concerning the findings of the CA and IA, and what is its potential impact on the audit report?
- 1The SA must defer the audit until the bank's management resolves all lapses mentioned in the CA and IA reports, as the SA cannot rely on their work.
- 2The SA must qualify the audit report based solely on the procedural lapses identified by the CA and IA, irrespective of the final financial position.
- 3The SA must treat the CA and IA findings as part of the internal controls evaluation, specifically examining whether the identified procedural lapses have led to any material misstatements in the financial statements (e.g., inadequate provisioning, wrong income recognition).✓
- 4The SA must ignore the CA and IA reports as they are internal documents, focusing solely on the year-end account balances and external compliance.
Correct answer
The SA must treat the CA and IA findings as part of the internal controls evaluation, specifically examining whether the identified procedural lapses have led to any material misstatements in the financial statements (e.g., inadequate provisioning, wrong income recognition).
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