Risk based internal audit in banks-a suggested scoring model

Traditional transactions based internal audit in banks focuses on accuracy & reliability of accounting records, financial reports, timeliness of control reports, adherence to legal & regulatory requirements etc. With the introduction of Risk Based Internal Audit (RBIA) in banks by Reserve Bank of India (RBI) in 2002, the traditional internal audit has to be phased out. RBIA looks into systems and practices in banks in assessing, managing and controlling risks. RBIA is expected to allocate supervisory resources and paying supervisory attention in accordance with the risk profile of each bank. It is disheartening to note that the recent failures of Punjab and Maharashtra Cooperative (PMC) Bank and IL&FS have shaken the confidence in urban cooperative banks UCBs) and non-banking finance companies (NBFCs) respectively. Similarly, commercial banks also witness the increasing number of irregularities/frauds. Therefore, RBI has recently asked commercial banks to strengthen RBIA by addressing issues relating to their organizational preparedness on one hand and UCBs and NBFCs have to introduce the same on the other. Since the core component of RBIA is risk assessment, the article attempts to suggest a scoring model besides discussing concept, process and RBI guidelines for the benefit of officers in commercial banks, UCBs and NBFCs.