## Conducting a Bank Audit — Stage 1: Initial Considerations

### (i) Declaration of Indebtedness

RBI direction: Before appointing statutory central/branch auditors, banks must obtain a declaration of indebtedness from the proposed auditors.
Indebtedness means owing money to the bank in any form whatsoever.
Purpose: Ensures independence — an auditor indebted to the bank being audited has a potential conflict of interest.

### (ii) Restriction on Internal Assignments

RBI's position: Audit firms should not undertake a statutory audit assignment while they are also associated with internal assignments in the same bank.
Rationale: Performing internal audit and statutory audit of the same bank compromises independence — the statutory auditor would effectively be reviewing their own internal audit work.

### Significance for Independence

These initial steps operationalise the fundamental principle of auditor independence (as required by the Code of Ethics and SA 200). For bank audits specifically, RBI reinforces independence through these pre-appointment conditions.

⚠️ Common exam mistakes

Overlooking the declaration of indebtedness requirement — candidates sometimes list only technical audit procedures and miss this pre-appointment obligation.
Thinking the restriction on internal assignments applies only to the individual auditor — it applies to the entire audit firm.
Confusing 'indebtedness' with loans only — it covers any form of owing money to the bank (e.g., guarantees, overdue credit card balances, etc.).

Reference:

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Conducting a Bank Audit — Initial Considerations

⚠️ Common exam mistakes