CLIFFORD NEW MATERIALS

• Banking Industry


  • Part of the financial system of a country
  • Highly regulated and most complicated to audit
  • Center of the financial system
  • Key to the stability of the financial system
• Bank


  A financial institution whose principal activity is the taking of deposits and borrowing for lending and investing
• General Banking Law of 2000 (R.A. 8791), banks" refers to entities licensed by the BSP that are engaged in the lending of funds obtained from deposits.
• Type of Banks


  • Thrift banks
  • Rural banks
  • Universal banks
  • Cooperative banks
  • Commercial banks
  • Islamic banks
• Type of Banks in the Philippines

  • Thrift banks
  • Rural banks
  • Cooperative banks
  • Islamic banks
• Thrift Banks


  • Savings and mortgage, private development, stock savings and loan association, and microfinance thrift banks
  • Accumulates and invests savings of depositors
  • Provides short-term working capital
• Rural Banks


  • Privately owned and managed
  • Most popular in rural areas
  • Promote and expand rural economies
  • Help farmers through the stages of production
  • Commonly in far-flung areas away from Universal Banks/Commercial Banks
• Cooperative Banks


  • Same as rural banks, differentiated only by ownership
  • Organized/owned by cooperatives or federation of cooperatives
• Islamic Banks

  • Adhere to Islamic law - Shariah
  • Sharing of profit/loss
  • Prohibition of collection/payment
• Typical Operations of a Bank

  • Lending operations (corporate, consumer, credit card, agricultural, SME, personal, etc.)
  • Branch banking (deposit taking)
  • Treasury operations (investments, funding)
  • Remedial & asset management (foreclosure and disposal)
  • Transaction banking (cash management, electronic banking, remittances)
  • Trust operations
  • Private banking (investment, financial and estate advisory services)
  • Investment banking (underwriting and financial advisory)
• Bank Operations by Type of Bank

  • 1 - 5 Rural and Cooperative banks
  • 1 - 6 Thrift banks
  • 1 - 8 Universal banks/Commercial Banks
• Distinguishing Characteristics of Banks

  • Custody of large amounts of Monetary items
  • Different jurisdiction
  • Very high leverage
  • Rapid change of assets value
  • Public trust
  • Fiduciary duties
  • Use of IT
  • Less personnel intervention
  • Highly regulated
  • Part of national/international system
  • Complexity
• Audit Objectives of the Banks Financial Statements (IAPS 1006)


  • Enable the auditor to express an opinion on the bank's Financial Statements prepared with the applicable financial reporting framework
  • In accordance with PSAs, enable the auditor to express an opinion on the bank's Financial Statements prepared in accordance with accounting principles generally accepted in the Philippines
  • The auditor considers whether the Financial Statements contain appropriate disclosures about the financial reporting framework used, when Financial Statements of a bank prepared specifically for use in a country other than the Philippines
• Agreeing the Terms of the Engagement

  The engagement letter documents and confirms the auditor's acceptance of the appointment, the objective and scope of the audit, the extent of the auditor's responsibilities to the client and the form of any reports
• Skills Required


  • Sufficient expertise relevant to the audit of the bank's business activities
  • Expertise in the IT systems and communication networks the bank uses
  • Adequacy of resources or inter-firm arrangements to carry out the work necessary at the number of domestic and international locations of the bank at which audit procedures may be required
• Audit Planning


  • Obtaining a sufficient knowledge of the entity's business and governance structure, and a sufficient understanding of the accounting and internal control systems, including risk management and internal audit functions
  • Considering the expected assessments of inherent and control risks, being the risk that material misstatements occur (inherent risk) and the risk that the bank's system of internal control does not prevent or detect and correct such misstatements on a timely basis (control risk)
  • Determining the nature, timing and extent of the audit procedures to be performed
  • Considering the going concern assumption - entity's ability to continue in operation, which will be the period used by management in making its assessment under generally accepted accounting principles in the Philippines. This period will ordinarily be for a period of at least one year after the balance sheet date
• Special Audit Considerations


  • The particular nature of the risks associated with the transactions undertaken by banks
  • The scale of banking operations and the significant exposures that may arise in a short period
  • The extensive dependence on IT to process transactions
  • The effect of the regulations in the various jurisdictions in which they operate
  • The continuing development of new products and banking practices that may not be matched by the concurrent development of accounting principles or internal controls
• Obtaining Knowledge


  • Understand the bank's corporate governance structure
  • The economic and regulatory environment prevailing for the principal countries in which the bank operates
  • The market conditions existing in each of the significant sectors in which the bank operates
• Nature of Banking Risks

  • Banking risks increase with the degree of concentration of a bank's exposure to any one customer, industry, geographic area or country
  • Most transactions involve more than one of the risks identified above. Furthermore, the individual risks set out above may be correlated with one another, for a bank's liquidity position. The auditor therefore considers these and other risk correlations when analyzing the risks to which a bank is exposed
• Factors that contribute significantly to operational risk

  • 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
• Fraud


  • Frauds may include fraudulent financial reporting without the motive of personal gain, or the misappropriation of the bank's assets for personal gain that may or may not involve the falsification of records
  • Alternatively, fraud may be perpetrated on a bank without the knowledge or complicity of the bank's employees
• Policies, Procedures, & Controls to Deter And To Recognize And Report Money Laundering Activities

  • Obtain customer identification (know your client)
  • Staff screening
  • Know the purpose for which an account is to be used
  • Maintenance of transaction records
  • Reporting to the authorities of suspicious transactions or of all transactions of a particular type, for example, cash transactions over a certain amount
  • Education of staff to assist them in identifying suspicious transactions
• Falsification of records


  Fraud perpetrated on a bank without the knowledge or complicity of the bank's employees
• ISA 240


  The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements
• Areas of a bank's operations susceptible to fraudulent activities

  • Lending
  • Deposit-taking
  • Dealing functions
• Policies, procedures, and controls to deter and to recognize and report money laundering activities

  • Obtain customer identification (know your client)
  • Staff screening
  • Know the purpose for which an account is to be used
  • Maintenance of transaction records
  • Reporting to the authorities of suspicious transactions or of all transactions of a particular type, for example, cash transactions over a certain amount
  • Education of staff to assist them in identifying suspicious transactions
• Understanding the risk management process

  1. Oversight & Involvement in the control process by those charged with governance

  2. Identification, Measurement, and Monitoring of Risks

  3. Control Activities

  4. Monitoring Activities

  5. Reliable Information Systems
• Development of overall audit plan

  • 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
• Expected assessments of Inherent and Control Risks

  • Extensive use of IT and EFT systems, which means that much of the audit evidence is available only in electronic form and is produced by the entity's own IT systems
  • High volume of transactions entered into by banks, which makes reliance on substantive procedures alone impracticable
  • Geographic dispersion of banks' operations, which makes obtaining sufficient coverage extremely difficult
  • Difficulty in devising effective substantive procedures to audit complex trading transactions
• In most situations the auditor will not be able to reduce audit risk to an acceptably low level unless management has instituted an internal control system that allows the auditor to be able to assess the level of inherent and control risks as less than high - with the sufficiently appropriate audit evidence to support the assessment
• Basel Committee on Banking Supervision


  Issued a policy paper, "Framework for Internal Control Systems in Banking Organizations" (September 1998)
• Framework for Internal Control Systems in Banking Organizations


  • Provides banking supervisors with a framework for evaluating banks' internal control systems
  • May be used during supervisory discussions with individual banking organizations
  • Auditors of banks' financial statements may find a knowledge of this framework useful in understanding the various elements of a bank's internal control system
• Identifying, documenting, & testing control procedures

  • Transactions are executed in accordance with management's general or specific authorization
  • All transactions and other events are promptly recorded at the correct amount, in the appropriate accounts and in the proper accounting period so as to permit preparation of FSs in accordance with the applicable financial reporting framework
  • Access to assets is permitted only in accordance with management's authorization
  • Recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken regarding any differences
• The assessed levels of inherent and control risks cannot be sufficiently low to eliminate the need for the auditor to perform any substantive procedures
• Irrespective of the assessed levels of inherent and control risks, the auditor performs some substantive procedures for material account balances and classes of transaction
• Considering the influence of environmental factors

  • Organizational structure of the bank and the manner in which it provides for the delegation of authority and responsibilities
  • Quality of management supervision
  • Extent and effectiveness of internal auditing
  • Extent and effectiveness of the risk management and compliance systems
  • Skills, competence, and integrity of key personnel
  • Nature and extent of inspection by supervisory authorities
• Assertions embodied in the financial statements

  • Existence
  • Rights and obligations
  • Occurrence
  • Completeness
  • Valuation
  • Measurement
  • Presentation and disclosure
• Audit procedures


  • Inspection
  • Observation
  • Inquiry & Confirmation
  • Computation
  • Analytical Procedures
• Inspection


  Examining records, documents, or tangible assets. Auditor inspects to be satisfied of the physical existence of material negotiable assets that bank holds and to obtain necessary understanding of the terms & conditions of agreements (master agreements) that are significant individually/aggregate to consider their enforceability and assess the appropriateness of accounting treatment they have given
• Observation


  The auditor observes from a distance and notes any irregularities in how they perform their duties. The observation method is particularly necessary when performing audits on activities that are not easily quantifiable and where it is difficult to measure the results using other methods