Chapter 11: Bank Audit And Inspection (JAIIB – Paper 3)

1. Which of the following is the main objective of a bank audit?

• A. To increase bank profits
• B. To monitor employee performance
• C. To ensure accuracy of accounts and compliance with laws
• D. To expand branch network

The primary objective of a bank audit is to verify the correctness of financial records, ensure compliance with statutory and regulatory requirements, and assess internal controls.

2. Who appoints the statutory auditor of a nationalized bank in India?

• A. Board of Directors of the bank
• B. Reserve Bank of India in consultation with the Government of India
• C. Shareholders in Annual General Meeting
• D. Audit Committee of the Bank

For nationalized banks, statutory auditors are appointed by RBI in consultation with the Government of India. This ensures independence and transparency.

3. Internal audit in banks is primarily concerned with:

• A. Certifying annual accounts
• B. Approving branch expansion
• C. Setting interest rates on loans
• D. Examining adequacy of internal controls and risk management

Internal audit is a management tool to review internal controls, ensure compliance with bank policies, and assess the effectiveness of risk management practices.

4. A branch auditor notices continuous cash shortages during surprise inspections. What should be the immediate action?

• A. Report the matter to higher management and recommend investigation
• B. Ignore as small cash differences are common
• C. Compensate shortage from petty cash
• D. Wait till year-end audit

Continuous cash shortages indicate possible fraud or control weakness. The auditor must report immediately to higher authorities for corrective action.

5. The main objective of Risk-Based Internal Audit (RBIA) in banks is:

• A. To reduce branch expenses
• B. To improve customer service
• C. To assess and mitigate risks in key business areas
• D. To finalize statutory accounts

RBIA focuses on identifying and assessing risks in different business areas and ensuring that risk management systems are effective.

6. As per RBI guidelines, Risk-Based Internal Audit should primarily be aligned with:

• A. The bank’s risk management framework
• B. Employee appraisal system
• C. Profit and loss statements
• D. Marketing policies

RBI requires RBIA to be integrated with the overall risk management system of the bank, ensuring better governance and early detection of risks.

7. Which of the following risks is NOT a focus area of Risk-Based Internal Audit?

• A. Credit risk
• B. Operational risk
• C. Market risk
• D. Personal lifestyle risk of employees

RBIA focuses on risks that directly affect the bank’s operations, such as credit, market, and operational risks. Employee personal lifestyle is not part of RBIA.

8. A bank branch with high Non-Performing Assets (NPAs) will receive what type of audit attention under RBIA?

• A. Reduced audit frequency
• B. Higher audit priority with detailed scrutiny
• C. No audit required
• D. Same as branches with low risk

In RBIA, high-risk branches (e.g., with high NPAs or weak controls) are audited more frequently and in greater depth compared to low-risk branches.

9. Concurrent audit in banks is primarily aimed at:

• A. Early detection and prevention of irregularities
• B. Preparing annual financial statements
• C. Conducting tax audits
• D. Supervising employee recruitment

Concurrent audit is a systematic and timely examination of financial transactions on an ongoing basis to prevent frauds and ensure compliance.

10. Which of the following transactions is most likely to be checked during a concurrent audit?

• A. Depreciation on fixed assets
• B. Preparation of annual balance sheet
• C. Large value cash transactions
• D. Recruitment policies

Concurrent audit focuses on real-time checking of high-value and sensitive transactions such as large cash deposits, advances, and forex dealings.

11. The main difference between internal audit and statutory audit is that:

• A. Internal audit is conducted annually, statutory audit monthly
• B. Internal audit is a management tool, while statutory audit is mandated by law
• C. Internal audit is done by RBI, statutory audit by bank staff
• D. Internal audit checks only deposits, statutory audit checks loans

Internal audit is an internal control function carried out for management’s benefit, whereas statutory audit is a legal requirement conducted by external auditors.

12. Who appoints the statutory auditors of Public Sector Banks in India?

• A. Bank’s Board of Directors
• B. Shareholders
• C. Audit Committee of the Bank
• D. RBI in consultation with Government of India

For Public Sector Banks, statutory auditors are appointed by the RBI in consultation with the Government of India, ensuring independence and accountability.

13. The primary objective of inspection in banks is to:

• A. Increase the bank’s profitability
• B. Conduct marketing surveys
• C. Ensure compliance with internal policies and regulatory guidelines
• D. Reduce employee salaries

Inspections in banks are carried out to ensure adherence to internal policies, RBI guidelines, and regulatory requirements.

14. Which department of RBI is responsible for conducting inspection of commercial banks?

• A. Department of Supervision
• B. Department of Currency Management
• C. Monetary Policy Department
• D. Department of Statistics

RBI’s Department of Supervision conducts inspection of commercial banks to ensure soundness and compliance with banking regulations.

15. The CAMELS model used in bank inspections evaluates:

• A. Employee performance
• B. Customer satisfaction
• C. Marketing efficiency
• D. Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Systems

CAMELS framework assesses a bank’s overall health by evaluating six parameters: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Systems & controls.

16. Surprise inspections of bank branches are mainly carried out to:

• A. Motivate employees
• B. Detect irregularities and verify compliance without prior notice
• C. Conduct training programs
• D. Improve customer service standards

Surprise inspections help detect frauds, irregularities, and deviations from prescribed procedures, since staff have no chance to prepare in advance.

17. The primary role of audit in banks is to:

• A. Approve new branches
• B. Ensure accuracy of accounts and adherence to regulatory guidelines
• C. Fix interest rates
• D. Conduct marketing campaigns

Audit ensures that bank accounts are correct, internal controls are effective, and the bank complies with statutory and regulatory requirements.

18. One of the key roles of inspection in banks is to:

• A. Increase profitability
• B. Hire new staff
• C. Identify operational weaknesses and recommend corrective measures
• D. Approve loans automatically

Inspections focus on reviewing bank operations to detect deficiencies, fraud, or non-compliance and suggest remedial actions to management.

19. Which of the following best describes the combined role of audit and inspection in banks?

• A. Marketing and sales promotion
• B. Recruitment and training of staff
• C. Expansion of branch network
• D. Safeguarding assets, ensuring regulatory compliance, and improving operational efficiency

Audit and inspection together help in protecting bank assets, verifying compliance with laws and guidelines, and identifying areas for operational improvement.

20. Which of the following is a management benefit derived from audit and inspection reports?

• A. Identification of risk areas and guidance for corrective action
• B. Employee promotions
• C. Advertising strategies
• D. Interest rate decisions

Audit and inspection reports highlight operational weaknesses, frauds, or compliance lapses, helping management take corrective measures and mitigate risks.