# Initial Considerations by the Statutory Auditor

Before beginning bank audit fieldwork, several initial considerations must be addressed:

## 1. Declaration of Indebtedness

Before appointing SCAs, banks must obtain a declaration of indebtedness from the auditor — i.e., the auditor declares they are not indebted to the bank beyond permitted limits.

## 2. Internal Assignments in Banks by Statutory Auditors

Audit firms should NOT undertake statutory audit assignment while they are associated with internal assignments in the bank during the same year (e.g., concurrent audits). This preserves independence.

## 3. Planning - SA 300, SA 210, SA 220

The statutory auditor must plan in accordance with:

SA 300 — Planning an Audit of Financial Statements
SA 210 — Agreeing the Terms of Audit Engagements
SA 220 — Quality Control for an Audit of Financial Statements

## 4. Communication with Previous Auditor

The new auditor should obtain a No Objection Certificate (NOC) from the previous auditor.

## 5. Terms of Audit Engagement (SA 210)

Formalise the engagement letter with clear terms.

## 6. Initial Engagements (SA 510)

For first-time audits, refer to SA 510 — Initial Audit Engagements (Opening Balances).

## 7. Assessment of Engagement Risk

Assess the overall risk associated with the engagement before accepting it.

## 8. Establish Engagement Team

The team should have the requisite competence and capabilities.

## 9. Understanding the Bank and its Environment - SA 315

SA 315 — Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.

## Risk Management Process at Banks

An effective risk management system in a bank generally requires:

### 1. Oversight & Involvement of TCWG

TCWG should approve written risk management policies.
Policies should be consistent with the bank's business objectives and strategies.

### 2. Identification, Measurement & Monitoring of Risks

Risks that could significantly impact achievement of bank's goals should be identified, measured and monitored.

### 3. Control Activities

The bank must have appropriate controls to mitigate its risks.
This includes effective segregation of duties.

### 4. Monitoring Activities

Risk management models should be regularly assessed and updated.

### 5. Reliable Information System (IS)

Banks require reliable IS that provides adequate financial, operational and compliance information on a timely and consistent basis.

## Professional Skepticism & Anti-Money Laundering

The auditor must maintain professional skepticism to recognise the possibility of misstatements due to fraud.
RBI has framed guidelines on Prevention of Money Laundering and Know Your Customer (KYC) norms.

## BASEL III Framework

Basel norms are international banking regulations issued by the:

Basel Committee on Banking Supervision and
Financial Stability Board.

## Reliance on / Review of Other Reports

The auditor should take into account adverse comments on advances appearing in:

1. Previous year's audit reports

2. Latest internal inspection reports of bank officials

3. RBI's latest inspection report

4. Concurrent/Internal audit report

5. Report on verification of security

6. Any other internal reports specifically related to a particular account

7. Manager's charge-handing-over report when the incumbent (branch manager) is changed.

Worked example

### Example 1

Example — Independence:

ABC & Co is conducting the concurrent audit of a branch of PNB. Can they also be appointed as the Statutory Auditor of PNB this year?

Answer: No. Audit firms should not undertake statutory audit while associated with internal assignments in the bank during the same year — this includes concurrent audits.

### Example 2

Example — Reliance on other reports:

While auditing a branch, the auditor notes that RBI's latest inspection report raised concerns about a ₹50 crore advance to a particular borrower.

Answer: The auditor must take this into account while testing that advance, including verifying current status, recovery, classification (Standard/NPA), and provisioning.

⚠️ Common exam mistakes

Forgetting that concurrent audit and statutory audit cannot be combined for the same year.
Listing only the engagement letter as 'initial consideration' — the list is much broader (indebtedness declaration, NOC, SA 510, etc.).
Confusing Basel norms (international) with RBI norms (domestic).

Reference: — Standards on Auditing (SA 210, SA 220, SA 240, SA 250, SA 300, SA 315, SA 510)

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Conducting Bank Audit - Initial Considerations & Risk Management

Worked example

⚠️ Common exam mistakes