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Understanding the Bank and its Environment

Understanding the Bank and its Environment

It is the auditor’s responsibility to identify and assess risk of material misstatement in financial statements and assertion levels, through
understanding, the entity, its environment and its internal control system. This would help him in designing and implementing various audit procedures as response to such assessed risk areas and reduce the risk to acceptable low levels.

Standard on Auditing (SA) 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”lays down that the auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement in the financial statements whether due to fraud or error, and sufficient to design and perform audit procedures.

In performing audit of a bank, the auditor should have or obtain knowledge of the business sufficient to enable him to identify and understand the events, transactions and practices that, in the auditor’s judgment, may have a significant effect on the financial statements or on the examination or comments in the audit report. Such knowledge is used by the auditor in assessing inherent and control risks and in determining the nature, timing and extent of audit procedures. Understanding the bank and its environment is a continuous and cumulative process of gathering and assessing the information and relating the resulting knowledge to audit evidence and information at all stages of the audit.

The auditor can obtain knowledge of the bank from a number of sources namely:

 Discussion with management of the bank.

 Discussion with internal/concurrent/other audit personnel and review of their audit reports.

 Discussion with peers (other auditors) and with legal and other advisors who  have provided services to the bank or within the industry.

 Discussion with knowledgeable people outside the bank (for example, industry economists, industry regulators, customers and suppliers).

 RBI guidelines and other regulatory pronouncements.

 Documents produced by the bank (for example, minutes of meetings, annual reports, etc.).

 RBI inspection reports.

 General reading and keeping abreast with the latest developments in the Industry and general economic scenario.

 In case of audit of foreign branches, knowledge of the local laws and trade practices of the geographical location of bank would also be used.

Understanding the business and using this information appropriately assists the auditor in assessing risks and identifying problems, planning and performing the audit effectively and efficiently, evaluating audit evidence, and providing better services to the bank.

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