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CA Intermediate · Auditing and Ethics · Audit of Banks

CA Anil is the statutory auditor of a bank and, while auditing the bank's loan portfolio, finds that 38 of 120 sampled accounts, representing a significant portion, are loans where the sanction proceeds were used for a purpose different from that stated. Management says the pattern is isolated and requires no further work. The relevant branch auditors have flagged similar concerns. What should Anil do?

Anil should extend his procedures, assess the end-use monitoring weakness as a control deficiency, communicate with those charged with governance, and consider the impact on his opinion and fraud reporting duties. Management's representation alone is not adequate evidence, and excluding exceptions from the sample would bias the results.

  1. AAccept management's representation since it was in writing and close the sample
  2. BExtend audit procedures, evaluate whether the end-use monitoring is a control deficiency, communicate with those charged with governance, and consider the effect on the opinion and on reporting any suspected fraud as required by lawCorrect
  3. CRemove the 38 accounts from the sample and project the error rate from the remaining accounts
  4. DReport the matter only to the branch managers concerned

Explanation

A high exception rate indicates a possible control deficiency and possible fraud risk, so the auditor must extend procedures rather than rely on management representations. Matters must be communicated to those charged with governance, and reporting obligations on suspected fraud under the Companies Act considered. Removing exceptions biases the sample, and informing branch managers alone is inadequate.

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