When you hear the word “audit,” a few things might come to mind. The first thought might be that of the IRS looking into your personal or business taxes. Others might think of sitting in on a college class to see if it is a class they would like to take.
An audit is an official examination of an individual’s or organization’s accounts, typically by a third party. In this article, we’ll discuss one type of audit in particular: a bank audit.
What is a Bank Audit?
So, what is a bank audit exactly? A bank audit is a routine procedure that is executed with the purpose of ensuring that a financial institution is complying with the law and operating in an efficient, accurate, and ethical manner. To know more about bank audits, click here.
An external bank audit will be done by a bank auditor, which can be a third-party vendor or accounting specialist. Internal bank audits can be performed by the financial organization itself to be prepared for their next external bank audit and to keep a close eye on the operations, controls, and risk management.
On the other hand, an internal bank audit should be executed by an internal bank auditing committee or department that is specifically hired for the purpose of auditing to avoid any conflicts of interest. It is possible, however, for a financial institution to cross-train different departments to audit other departments.
Banks, credit unions, and other financial institutions are ruled by regulations put in place by the law to guard consumers against fraudulent activities or other dangers caused by a violation. The most important purpose of a bank audit is to make sure that a financial institution is, in fact, abiding by all rules, as well as to identify any potential risks of violation.
In recent years, technology has advanced to allow for the development of software to be used by financial institutions and their internal auditing departments to easily manage their internal bank auditing strategies and procedures. These software companies also often come with a team of experts ready to help with the following bank auditing strategies:
- Monitoring cyber security to prevent losses
- Analyzing the financial status, continuity plans, information security, and more of third-party vendors for the purpose of increasing knowledge
- Document collection for improving regulatory compliance (insurance, disaster recovery information, SSAE 18s, financials, certificates, and more)
- Reducing risks through the review of existing policies and procedures
- Comprehensive risk assessment
- Improving execution and efficiency by automating reports
Bank auditing must be done regularly to maintain compliance and keep up-to-date with the changes within the standards of the industry, laws, and changes in society that may cause or increase risk. One element of checking for compliance and risk includes a close examination of all transaction records, which includes bank wires, automated clearing house (ACH) transfers, loans, etc. This is done to ensure that the financial organization is operating in a timely and effective manner, as well as accurately reporting all transactions to completion. Control tests are often conducted to identify any incorrect or unauthorized reporting practices.
The following is a list of risks that are often seen by financial institutions:
- Operational risk
- Compliance risk
- Price
- Liquidity
- Strategic risk
- Credit risk
- Reputation risk
- IT and cyber risk
After a thorough evaluation of these risks (often done through a procedure known as a systematic risk assessment), corrective action will be suggested by the bank auditor to solve or eliminate the issues at hand. Again, conducting your own internal bank audit using software programs that offer high-impact reporting, cyber security monitoring, and proactive document collection can help you monitor these risks and solve them efficiently.
How to Handle a Bank Audit
An external bank audit can seem a little daunting to the management of a financial institution. However, it is a routine procedure that does not need to be feared or dreaded. The following is a list of steps to take when your next external bank audit is requested:
1. Review the request
The first obvious step is to review the bank audit request. Bank audits can come with different requirements, so be sure to carefully look over the request and note all of the specifics before devising a plan of action. If anything appears unclear, be sure to reach out to your bank audit rep to gain some clarity.
2. Consult with key team players
Next, be sure to discuss the request with all financial executives, accounting managers, and others who will need to be involved or are directly related to the source of information that has been requested. Brainstorm about how to move forward with the request and put together a plan to efficiently handle the audit.
3. Seek legal assistance if needed
This step should be considered if any confidentiality, employee, customer or criminal problems arise.
4. Gather and organize all necessary information
A bank audit will require a lot of documentation. It is recommended to create a central storage location for all of the necessary data to be kept and organized that is only accessible to specific personnel. Once all of the data is checked for validation, it can be organized into an information package to be submitted for review by the auditor.
Keep in mind that different types of audits may require more than just submitting the requested information. Process audits will require an on-site examination as well.
5. Obtain an audit-compliance letter for your own records
Once you have submitted all of the information that was requested, it is crucial to request an audit-compliance letter to show that your institution adhered to the audit request and to note any changes that were made due to the audit discoveries.
Conclusion
Bank audits are done to ensure that a financial institution is complying with industry regulations, laws, and their internal policies. These regulations are in place for the protection of consumers and to prevent risks. Consider using risk-management platforms that offer high-impact reporting to help you prepare for your next bank audit.
