as a going concern. audit being the first external line of defence, its failure in supervised entities will adversely impact timely identification of major issues and risks. 17. the responsibility of risk management primarily rests with the supervised entities themselves ; however, audit too has a critical role to play at the systemic level by examining the appropriateness of existing frameworks for plugging the control gaps and providing assurance to the board and decision makers. audit failures and their impact on the entity / system 18. without generalising, it may be said that problems usually arise when the independence of auditors itself is compromised or the auditors lack competence in performing their role. compromising the independence of auditors could lead to moral hazard. as such, auditors are subjected to greater scrutiny and regulation so as to increase the reliability of their work. 19. one of the important roles of audit is to check the so called smart accounting practices, if any, followed by management to overstate profits or understate expenses / liabilities. let me give a few examples of such smart accounting practices that we have observed. 1. ind - as has been implemented for all listed companies ( other than banks ) in india including non - banking financial companies ( nbfcs ) having net worth of more than ₹250 crore. indas is a principle - based standard as against the previous accounting standards, which were more prescriptive. within ind - as, ind - as 109 with expected credit loss approach allows the 3 / 6 bis central bankers'speeches management to exercise discretion and judgement in determining the provisioning requirement for their financial assets. such flexibility and forward - looking nature of assessment, however, poses the ‘ model risk ’, i. e., the model may rely on incorrect assumptions and may be far away from representing the real - life scenarios. this has been observed in several cases. hence, auditors are expected to test the models used by the entities, challenge the management and validate the model outputs. 2. of late, several instances of related party transactions without following ‘ arms - length ’ principle and established transfer pricing mechanism have been observed. there have been instances of diversion of funds and / or transfer of profits to connected parties through various means – intra - group loans on favourable terms, over or under invoicing of transactions, asset transfers without fair valuation, etc. auditors need to identify and thoroughly scrutinise related or connected party transactions to ensure that there is no undue transfer of income

adoption of such technology tools for auditing cannot replace professional judgment. a holistic approach would, therefore, be always required while integrating technology tools in audit. audit of supervised entities of rbi 4 / 6 bis central bankers'speeches 23. let me now move to some of the steps taken by the reserve bank of india over the past few years to bring about improvement in the audit function in its supervised entities. ( i ) the reserve bank is clear that financial stability, among other things, depends on market confidence which stems from investor / stakeholder confidence. this, in turn, is influenced by the quality of financial reporting. our aim has been to ensure that banks make full and fair disclosure of all material information in their financial statements. some of these disclosures mandated by the rbi are as follows : disclosures on the composition of regulatory capital so that stakeholders understand the quality of capital ; details of the quality of advances with provisions held thereon, along with movement in nonperforming assets ( npas ) ; details of pending complaints, the major grounds for complaints and their disposal. ( ii ) in september 2020, rbi had revised the format for long form audit report ( lfar ) to increase its utility value by enhancing the coverage of the prudential supervisory requirements stated in the basel committee on banking supervision ( bcbs ) document on “ external audits of banks ”. ( iii ) the risk - based internal audit ( rbia ) system in scheduled commercial banks ( scbs ), which was introduced in 2002 was further strengthened in january 2021. this was followed by issuance of guidelines for large nbfcs and urban co - operative banks ( ucbs ) infebruary 2021 prescribing broad principles for such entities to gradually move towards the rbia system. ( iv ) in april 2021, the rbi has updated the guidelines for appointment of statutory auditors in commercial banks, ucbs and nbfcs putting in place ownership - neutral audit regulations for ensuring independence of auditors, avoiding conflict of interest in auditor appointments and improving the quality and standards of audit. 24. the rbi has also taken several measures to improve governance and risk management in banks and nbfcs. these include issuance of updated guidelines on corporate governance in scheduled commercial banks in april 2021. the role of chief risk officers ( cros ) in scbs has been strengthened and the requirement of cros in large nbfcs and ucbs has been mandated. steps have been taken to simplify the complex group