A bank audit is done with the purpose of gaining objective insight into how your financial institution is operating and whether it is doing so in compliance with laws, industry standards, and your own policies. It is also done with the intention of mitigating risks and performing an in-depth inspection of a financial organization’s transactional records and reports to ensure that everything is being done ethically and accurately.
Banks, credit unions, and other financial service companies are required to participate in an external bank audit at least once a year. However, it is recommended to maintain your own internal bank auditing procedures in order to keep a close eye on how your business is operating and ensure that there are no problems and looming risks.
Bank audits are required to protect the consumer and their interests. Internal or external bank audits identify and prevent violation of the law that might lead to fraudulent activity or put the consumer at risk.
The following is a list of bank auditing procedures that a financial institution can expect upon the requirement of an external bank audit or when conducting their own internal auditing strategies.
1. Assessment of Practices to Ensure Efficiency and Accuracy
An examination of all transactional records, including ACH, transfers, etc. will be done during a bank audit to ensure that everything is being put on record accurately, in a timely manner, and to completion. Control tests and other evaluations will be conducted by a bank auditor or internal auditing committee to uncover any suspicious activity, mistakes or areas in need of improvement to achieve efficiency.
If there is any misleading data or information that might impact decision making or lead to a violation of the law, bank auditing procedures will reveal it. Bank auditing will ensure that all reports are accurate, legitimate, and all practices are ethical.
2. Risk Assessment and Management
Another sole purpose of a bank audit is to identify existing or potential risks. This is done by a thorough systematic risk assessment. Bank auditing procedures will prioritize risks, show gaps in the environment, and help management develop a plan to address the risks.
The following risks will be assessed:
- Operational Risk
- Compliance Risk
- Strategic Risk
- Reputation Risk
- Credit Risk
3. Ensure that Financial Institution is in compliance with the Law
A bank audit will conduct a complete evaluation of the controls and operations of a financial institution as well as a thorough examination of financial and regulatory reports. This is done with the intention of revealing if the business is in violation of the law. A financial institution is required by law to be in compliance to protect the consumer.
A close inspection of a bank’s reports and records will establish whether or not the company’s bank account’s monetary flow is being properly reported and prove whether there is anything suspicious going on. Furthermore, a bank audit will also ensure that the financial institution is up to date with any changes or additions to the law and industry standards. Bank auditors must ensure that a financial company is functioning in an ethical way.
How to Be Prepared for a Bank Audit
In recent years, technology and software have been developed to help financial institutions properly conduct their internal bank auditing procedures. There are also teams of experts to assist in handling a bank audit request.
The following are the steps to take when required to participate in an external bank audit.
1. Review the request.
Upon receiving a request for an external bank audit, be sure to carefully review it and make sure you understand everything that is required. Note any time restrictions or specific requirements. Reach out to your point of contact for clarification if necessary.
2. Discuss with key team members.
Brainstorm your strategy and what needs to be done with everyone that needs to be involved. This might include financial executives and accounting managers who are directly connected to the information needed to complete the request.
3. Bring on legal representation if necessary.
In certain instances, you may need to bring on trusted legal counsel. This is necessary if any customer, employee, confidentiality, or criminal problems arise.
4. Create safe storage for all documentation.
To make things more efficient and convenient for you and your team, set up a network storage space and physical site for all necessary documentation. Make sure that it is secure and that only certain personnel are able to access it.
5. Organize data.
An IT staff can help you gather all the important data related to your case from off-site locations or back-up drives.
6. Check the data for validation.
Be sure to cross-check all of the information with pertinent reports in your system to ensure accuracy and completion. You want to check bank statements, payment transaction reports, or the general ledger. Use as many validation methods as possible.
7. Create an information package.
Once all of the information you need is gathered and validated, combine it into an information package. It is wise to add a summary letter of all of your supporting documentation, findings, and legal responses that might’ve been included in the request.
8. Submit your information package.
This step will depend on the type of audit that was requested. Keep in mind – a process audit will require an on-site walk-through examination. If it isn’t a process audit, the information can be transmitted through a third-party auditing company or your audit representative.
9. Request an audit-compliance letter for your own records.
Upon completion of submitting your audit information package, be sure to request an audit-compliance letter from your bank audit contact. This will prove that you observed and complied with the audit request and divulges any changes that were made due to the audit findings.
Bank audits are a complex, but necessary procedure that financial institutions must comply with in order to abide by the laws and regulations, and protect their customers. If you want to be prepared for your next bank audit request, you should take advantage of the software that is available to assist financial institutions with their bank auditing framework and procedures.