An overview of IAPS 1004 and IAPS 1006 and related local guidance

Document Sample
An overview of IAPS 1004 and IAPS 1006 and related local guidance Powered By Docstoc
					An overview of IAPS 1004 and IAPS 1006 and
           related local guidance


                         • Supervisory framework

                         • Overview of IAPS 1004 & 1006
                            – Relationship between bank supervisors &
                              external auditors
                            – Audits of the financial statements of banks

                         • Aspects of SAICA guidance
                            –   Reporting under Regulation 45
                            –   Resubmissions
                            –   Reconciliation of DI 100 & DI 900
                            –   Corporate governance
                            –   Reporting on internal controls

                         • Update on IAS 30 project

        Core Principles for Effective Banking Supervision:

        • Principle 16
          Combination of on-site and off-site supervision

        • Principle 19
          Independent validation of supervisory information

        • Principle 21
          Annual financial statements fairly reflect financial position
          and profitability

        •    Circular 15/2001 : Expansion of scope of on-site bank examinations

        •    Significant reliance on reports issued by external auditors

        • Main purpose is to enhance mutual understanding
                   – Roles and responsibilities of banking supervisors and external auditors
                   – Responsibility of the board of directors and its management for the
                     conduct of the business of the bank

        • Role of external auditor
                   – Report on the financial statements of the bank
                   – Assist the Supervisor in special assignments

        • Role of Supervisor
                   – Maintain stability and confidence in the financial system
                   – Reducing risk of loss to depositors and creditors

        • Relationship between Supervisor and external auditor

                               Based on the Basel Core Principles
                         • Audit opinion on financial statements
                            – Does not provide assurance on future viability of
                              the bank
                            – Is not an opinion on the effectiveness of bank
                            – Takes cognisance of distinguishing characteristics
                              of a bank (specific risks)
                            – Places reliance on the work of internal auditors
                            – Is provided in the context of materiality
                            – May not detect all material misstatements,
                              particularly if involving fraud

                         • Legal obligation to report to the Supervisor
                           awareness of any matter affecting bank’s
                           ability to continue as a going concern

        • Complementary concerns:
              – Going concern
              – Internal controls

        • Financial statements are not prepared for purposes of
          meeting Supervisory needs

        • Specific assignments should be set out in law or contract:
              –   Responsibility for providing information rests with bank management
              –   All information flows though bank (maintain external audit relationship)
              –   Conflicts of interest
              –   Supervisor needs to describe standards for measuring bank performance
              –   Tasks should be within auditor’s competence
              –   Tasks should be complementary to normal audit work
              –   Protection of confidentiality

        • The purpose of this Statement is to
              – provide practical assistance to bank auditors
              – promote good practice in applying International Standards on Auditing

        • Not an exhaustive listing of the procedures and practices to
          be used in a bank audit, or a minimum requirement
              – does not provide an auditor with sufficient background knowledge to
                undertake the audit of a bank´s financial statements

        • Does not address regulatory reporting

        • Only addresses basic activities of deposit taking, borrowing,
          lending, settlement, trading and treasury operations
              – Highlights risks unique to those activities
              – Lists typical internal controls, tests of control and substantive audit
                procedures for treasury & trading operations and lending activities
        • Characteristics unique to banks, eg:
              – Nature of the risks associated with the transactions undertaken by banks
              – The scale of banking operations and the resultant significant exposures that
                may arise in a short period
              – Extensive dependence on IT for transaction processing & complex calculations
              – Effect of the regulations in the various jurisdictions in which they operate
              – Continuing development of new products and banking practices
                (may precede development of accounting principles or internal controls)

        • Possible impacts
              – Need for specialist skills
              – Understand corporate governance processes and structures, including risk
                management systems
              – Consideration of specific banking risks
              – Test of controls approach, including reliance on internal audit

                         • Effects of a risk-weighted regulatory capital
                            – Perceived risk determines level and types of business
                              undertaken by banks
                            – Risk of fraudulent miscategorisation or incorrect risk
                              weighting by management

                         • Access to supervisor communications with
                           bank management on results of supervisory
                            – Off-site analytical review of regulatory reporting
                            – On-site inspection of internal control systems
                            – On-site review of quality of bank’s assets and
                              assessment of banking risks
                            – Assessment of adequacy of risk management practices;
                              loan loss provisions; and prudential ratios
        • AC 000: “Information is material if its omission or
          misstatement could influence the economic decisions of
          users taken on the basis of annual financial statements”

        • Similar definition in Regulation 42(4)

        • Matters for consideration:
              – Key disclosures (capital adequacy; financial risk disclosures; gross and net
                interest margins; cost/income ratio)
              – Relative size of on- and off-balance sheet items
              – Compliance with prescribed regulatory limits (eg. liquid asset & reserving
                requirements; limit on FX NOP;LER; minimum qualifying capital & reserve

        • SAAS 700: Auditor’s report on financial statements sets out
          basis for modification
              –   Qualification
              –   Matter of emphasis
              –   Example formats set out in the SAICA Guide
              –   Guide seeks to clarify what each modification means

        • Unqualified opinion
              – No errors or instances of non-compliance noted which have a material
                effect on fair presentation

        • Emphasis of matter
              –   Significant matters that do not materially affect fair presentation
              –   Matters of interpretation where the Regulations are not clear
              –   Instances of non-compliance already reported by the bank
              –   No effect on the audit opinion
        • Factors which may lead to qualification where the effect is
          material to fair presentation:
              – Limitation on the scope of the auditor’s work
              – Disagreement with management regarding compliance with the Regulations

        • Disclaimer of opinion
              – Effect of a limitation of scope is so material and pervasive/fundamental that
                the auditor cannot obtain sufficient appropriate audit evidence

        • Adverse opinion
              – Effect of a disagreement is so material and pervasive/fundamental that a
                qualification will not disclose the misleading/incomplete nature of the DI

        • Qualified opinion
              – Effect of above is not so material or pervasive/fundamental to require
                adverse opinion or disclaimer

        • Regulation 45(8)(b) requires the auditor to obtain copies of
          the DI returns from the SARB for purposes of audit
              – SARB places an “electronic audit lock” on the financial year

        • Bank allowed to resubmit DI 100 & 200 within 90 days after
          the year end

        • Process for resubmissions
              – SARB will require a letter from the external auditors supporting the
              – Enables SARB to determine how resubmissions affect the Reg 45 reports
              – SARB may require additional audit work on the resubmissions

        • Guide includes suggested format of report on review of
          resubmitted DI returns

        Agreed upon procedures:

        • Ensure that a reconciliation has been prepared by the bank
          each month

        • Sample testing of year-end liquid asset holdings for
              – Inspect documents of title for prima facie evidence that they are
              – Obtain confirmations from custodians that assets exhibit prima facie
                evidence of being unencumbered

        • Specific management representation regarding encumbrance

        • Inspection of DI 020 returns in respect of each director and
          executive officer appointed during the financial year
        • Required to report on:
              – An annual process undertaken by the board of directors
              – Process assesses whether the bank’s corporate governance arrangements,
                including the management of risk, achieves the board’s objectives

        • Setting of objectives and implementation of the process are
          the responsibilities of the board of directors

        • Review opinion
              – Review findings of the board of directors regarding its assessment of the
              – Report on whether these are inconsistent with audit evidence obtained
                during the audit of the financial statements

        • No objective assessment criteria currently specified by SARB

        • Reporting requirement under Section 63(1)(b) - awareness of
          any matter which may:
              –   Endanger the bank’s ability to continue as a going concern
              –   Impair the protection of depositors’ funds
              –   Be contrary to the principles of sound management
              –   Amount to inadequate maintenance of internal controls

        • Regulation 45(3) requires the auditor to report specifically on
          any significant internal control weaknesses identified
          regarding the following core banking activities:
              –   Granting of loans
              –   Making of investments
              –   Ongoing management of loan and investment portfolios
              –   Loan loss provisions and reserves

        • Based on normal audit procedures for financial statements
        • Likely to be incorporated into IAS 32 (Financial Instruments:
          Presentation and Disclosure)

        • Apply to all entities with financial activities

        • Framework of high-level disclosure principles and minimum
          quantitative disclosure requirements
              – Significant financial risk exposures and how they are managed
              – Measurement “through the eyes of management”

        • Minimum disclosures may include:
              –   Credit quality and analysis of impaired assets
              –   Ageing of past due but unimpaired assets
              –   Liquidity analysis based on contractual maturity of liabilities
              –   Analysis of sensitivity to each significant market risk



Shared By: