Understand the Bank’s Accounting Process
The accounting process produces financial and operational information for management’s use and it also contributes to the bank’s internal control. Thus, understanding of the accounting process is necessary to identify and assess the risks of material misstatement whether due to fraud or not, and to design and perform further audit procedures. In obtaining an understanding of the accounting process, the auditor may seek to identify the significant flow of the transactions and significant application systems that are relevant to the accounting process.
When obtaining an understanding of the accounting process, the auditors, ordinarily, focus only on such processes that relate to the effectiveness and efficiency of operations and compliance with laws and regulations and impact the financial statements or their audit procedures. While obtaining the understanding of the significant flow of the transactions, the auditor should also obtain an understanding of the process of recording and processing of journal entries, and should also make inquiries about inappropriate or unusual activity relating to the processing of journal entries and other adjustments.
The auditors should also document their understanding of the accounting process, including the significant flow of transactions, the relevant
computer processing environments or any other relevant information. Such documentation would ordinarily be either a narrative description, graphical representation (e.g., a flow chart), or a combination of the two. The following factors should be kept in mind while obtaining the understanding of the accounting process in case of banks:
The need to process high volumes of transactions accurately within a short time which is met through large scale use of IT.
The need to use electronic funds transfer or other telecommunication systems to transfer large sums of money.
The conduct of operations in many locations with a resultant geographic dispersion of transaction processing and internal controls.