You are the statutory auditor of ABC Bank Ltd., a scheduled commercial bank having 350 branches across India. During the audit for the year ended…

In the given case of ABC Bank Ltd., there is a substantial increase in operating expenses disproportionate to growth in income, along with system changes and decentralised authorisation. Accordingly, the auditor needs to design audit procedures addressing both control and substantive aspects. The auditor should: study and evaluate the system of internal control relating to expenses, including authorisation procedures in order to determine the nature, timing and extent of his other audit procedures. (Considering that branch managers have discretionary powers and the bank has migrated to a centralised expense system, special attention should be given to approval hierarchies, maker-checker controls, system-based authorization limits, and monitoring controls.)examine whether there are any divergent trends in respect of major items of expenses. (In the present case, abnormal increase in staff welfare expenses, IT maintenance charges and rent requires detailed trend analysis branch-wise and region-wise to identify unusual patterns.)perform substantive analytical procedures in respect of these expenses. e.g. assess the reasonableness of expenses by working out their ratio to total operating expenses and comparing it with the corresponding figures for previous years. (The auditor may also compare expense ratios with industry averages of other scheduled commercial banks and correlate expenses with number of branches, employee strength and business volume.)verify expenses with reference to supporting documents and check the calculations wherever required. (Particular emphasis should be placed on high-value payments, year-end provisions, related party transactions and expenses incurred at branches where internal audit observations were adverse.) In view of the significant increase in operating expenses and control weaknesses indicated by internal audit reports, the auditor should adopt a risk-based approach combining evaluation of internal controls, analytical procedures and detailed substantive testing. If adequate audit evidence is obtained and no material misstatements are found, the auditor may conclude that operating expenses are fairly stated. However, any material weakness in internal controls or unexplained abnormal trends may require appropriate reporting in the audit report or Long Form Audit Report (LFAR), as applicable to banks.