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CA Intermediate · Auditing and Ethics · Audit of Banks

A statutory auditor of a bank finds that the bank has not complied with RBI guidelines on the minimum Capital to Risk-weighted Assets Ratio (CRAR) for the year, and the shortfall is material. Which is the most appropriate audit action?

The auditor should evaluate the material CRAR shortfall's effect on the financial statements and disclosures and report it appropriately, including in the audit report or to the RBI where required. Capital adequacy is a prudential requirement checked by the auditor, so ignoring it, withdrawing silently or manipulating records is incorrect.

  1. AIgnore it as capital adequacy is a regulatory matter outside audit
  2. BConsider the non-compliance's effect on the financial statements and the auditor's report, including disclosure and, where required, reporting to the RBI or in the audit reportCorrect
  3. CWithdraw from the engagement immediately without reporting
  4. DAsk the bank to reduce risk-weighted assets by adjusting records

Explanation

Capital adequacy is a disclosed prudential requirement and the auditor must assess its impact on the financial statements and on reporting, including disclosures and any required communication. Ignoring it is wrong, and abruptly withdrawing or advising manipulation of records breaches professional responsibility.

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