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

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									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



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