Auditing in Banking and other Financial Institutions

• Banking and finance sector

  Primarily responsible for the mobilization of domestic savings and the conversion of these funds into directly productive investments
• Banks


  • Perform the function of safekeeping money and valuables and extending loans, credit and payment services in the form of checking accounts, money orders, cashier's checks as well as the issuance of debit and credit cards
  • Large banks (particularly the universal and commercial banks) are also allowed to engage in other intermediation activities such as investment banking and may offer other forms of portfolio investment instruments and insurance products
• Types of banks in the Philippines

  • Universal and commercial banking
  • Rural and cooperative banking
  • Thrift banking
• Universal and commercial banks that accepted domestic deposits and offered checking account services had dominated the Philippines' banking industry, with its total deposits valued at approximately 12 trillion Philippine pesos
• Financial institutions in the Philippines

  • Banks
  • Non-bank financial institutions
• Non-bank financial institutions


  Composed of insurance companies, pension fund institutions, investment banks, financing companies, pawnshops and mutual fund institutions. They are not allowed to collect deposits but may encourage the general public to invest household savings, in various financial instruments
• The Bangko Sentral ng Pilipinas (BSP) is the independent central monetary authority of the Philippines that has regulatory and supervisory power over banks and non-bank financial institutions
• Non-bank financial institutions such as insurance companies and investment houses are overseen by the Insurance Commission and Securities and Exchange Commission, respectively
• The role of financial intermediation in the Philippine economy continues to expand and is expected to create greater prospects for employment over the next several years
• As of October 2020, the value of loans granted by universal and commercial banks in the Philippines amounted to nearly 9.7 trillion Philippine pesos
• As of 2019, the ratio of bank nonperforming loans to total gross loans in the Philippines was almost two percent and has significantly decreased over the past years
• The Bangko Sentral ng Pilipinas (BSP) issued the implementing rules and regulation for the Bayanihan Act RA No. 11469 which requires all lenders under BSP supervision to grant a 30-day grace period or extension for the payment of loans due within the enhanced community quarantine (ECQ) period, without imposing additional interest, penalties or charges on their borrowers
• Factors that contribute significantly to operational risk in banking

  • The need to process high volumes of transactions accurately within a short time
  • The need to use electronic funds transfer (EFT) or other telecommunications systems to transfer ownership of large sums of money
  • The conduct of operations in many locations with a resultant geographic dispersion of transaction processing and internal controls
  • The need to monitor and manage significant exposures that can arise over short time-frames
• Effective risk management system in a bank

  • Oversight and involvement in the control process by those charged with governance
  • Identification, measurement and monitoring of risks
  • Control activities
  • Monitoring Activities
  • Reliable Information Systems
• Considerations in developing an overall audit plan for a bank

  • The complexity of the transactions undertaken by the bank and the documentation in respect thereof
  • The extent to which any core activities are provided by service organizations
  • Contingent liabilities and off-balance sheet items
  • Regulatory considerations
  • The extent of IT and other systems used by the bank
  • The expected assessments of inherent and control risks
  • The work of internal auditing
  • The assessment of audit risk
  • The assessment of materiality
  • Management's representations
  • The involvement of other auditors
  • The geographic spread of the bank's operations and the co-ordination of work between different audit teams
  • The existence of related party transactions
  • Going concern considerations
• When the bank is required to prepare a single set of financial statements that comply with both regulatory accounting principles (RAP) and generally accepted accounting principles (GAAP), the auditor may express a totally unqualified opinion only if the financial statements have been prepared in accordance with both frameworks
• When the bank is required to comply with RAP instead of GAAP, the auditor considers the need to refer to this fact in an emphasis of matter paragraph
• The audit profession must rise to the challenge, embrace the key audit trends for 2015, and raise the standard of auditing to meet the higher level of Banking Governance now required