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CA Intermediate · Auditing and Ethics · Audit of Banks

The auditor of Narmada Gramin Bank is evaluating the bank's reliance on its core banking system (CBS) for interest computation and NPA tagging. Which is the most appropriate audit response?

The auditor should understand and test the IT general and application controls over the core banking system, and extend substantive procedures where those controls prove ineffective. Relying blindly on system output or only on a management certificate is inadequate, and recomputing everything manually is impractical.

  1. ARely on system-generated reports without testing, since CBS output is automatically accurate
  2. BObtain an understanding of IT general controls and application controls, test them, and perform substantive procedures where controls are not effectiveCorrect
  3. CIgnore the CBS and recompute all interest manually for every account
  4. DAsk management to certify that the CBS works correctly and rely on that certificate alone

Explanation

Because bank operations are heavily IT dependent, the auditor must understand and test IT general and application controls (access, change management, interest and NPA parameters). Where controls are ineffective, substantive procedures are extended. Blind reliance or only a management certificate is insufficient, and full manual recomputation is impractical.

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