1000.doc

IAPSs

INTERNATIONAL AUDITING PRACTICE STATEMENT 1000 INTER-BANK CONFIRMATION PROCEDURES

IntroductionThe Need for ConfirmationUse of Confirmation RequestsPreparation and Dispatch of Requests and Receipt of RepliesContent of Confirmation RequestsGlossaryCollateralContingent LiabilitiesEncumbranceOffsetOptionsRepurchase (or Resale) AgreementSafe CustodyLine of Credit/Standby Facility

The purpose of this International Auditing Practice Statement (IAPS) is to provide assistance on inter-bank confirmation procedures to the external independent auditor and also to bank management, such as internal auditors or inspectors. The guidance contained in this IAPS should contribute to the effectiveness of inter-bank confirmation procedures and to the efficiency of processing replies.

INTERNATIONAL AUDITING PRACTICE STATEMENT 1004 THE RELATIONSHIP BETWEEN BANKING SUPERVISORS AND BANKS’ EXTERNAL AUDITORS

This IAPS:(a) Sets out the primary responsibility of the board of directors and management (paragraphs 8–13); (b) Examines the essential features of the role of external auditors (paragraphs 14–27); (c) Examines the essential features of the role of banking supervisors (paragraphs 28–45); (d) Reviews the relationship between the banking supervisor and the bank’s external auditor (paragraphs 46 55); and (e) Describes additional ways in which external auditors and the accountancy profession can contribute to the supervisory process (paragraphs 56–70).

The Responsibility of the Bank’s Board of Directors and the ManagementThe primary responsibility for the conduct of the business of a bank is vested in the board of directors and the management appointed by it. The Role of the Bank’s External AuditorThe objective of an audit of a bank’s financial statements by an external auditor is to enable an independent auditor to express an opinion as to whether the bank’s financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The Role of the Banking Supervisor

of 6

IAPSs

The key objective of prudential supervision is to maintain stability and confidence in the financial system, thereby reducing the risk of loss to depositors and other creditors. In addition, supervision also is often directed toward verifying compliance with laws and regulations governing banks and their activities. However, in this Statement the focus is on the prudential aspect of the banking supervisor’s role.The Relationship Between the Banking Supervisor and the External AuditorIn many respects the banking supervisor and the external auditor have complementary concerns regarding the same matters though the focus of their concerns is different. There are many areas where the work of the banking supervisor and of the external auditor can be useful to each other. Communications from auditors to management and other reports submitted by auditors can provide supervisors with valuable insight into various aspects of the bank’s operations. Similarly, external auditors may obtain helpful insights from information originating from the banking supervisor.Additional Requests for the External Auditor to Contribute to the Supervisory ProcessA supervisor’s request to an external auditor to assist in specific supervisory tasks should be made in the context of a well-defined framework that is set forth in applicable law or a contractual agreement between the bank and the supervisorThe Need for a Continuing Dialogue Between Banking Supervisors and the Accountancy Profession

INTERNATIONAL AUDITING PRACTICE STATEMENT 1006AUDITS OF THE FINANCIAL STATEMENTS OF BANKS

IntroductionPractical assistance to auditors and to promote good practice in applying International Standards on Auditing (ISAs) to the audit of banks’ financial statements.Characteristics of banks.(List)Special considerations for banks.(List)Audit Objectivesexpress an opinionAgreeing the Terms of the EngagementIn addition to the general factors set out in ISA 210, the auditor considers including comments on the following when issuing an engagement letter: specialized accounting, report, special communication, access to be granted to bank supervisor.Planning the AuditIntroductionObtaining a Knowledge of the BusinessUnderstanding the Nature of Banking Risks\

Country risk: Credit risk: Currency risk: Fiduciary risk: Interest rate risk: Legal and documentary risk: Liquidity risk: Modeling risk:

Operational risk: Price risk: Regulatory risk: Replacement risk: Reputational risk: Settlement risk: Solvency risk: Transfer risk:

Concentration of a bank’s exposureOperational risk factors (list)Understanding the Risk Management Process

of 6

IAPSs

Development of an Overall Audit PlanParticular attention to (list):The Complexity of Transactions UndertakenThe Extent to Which any Core Activities are Provided by Service OrganizationsContingent Liabilities and Off-Balance Sheet ItemsRegulatory ConsiderationsThe Extent of IT and Other SystemsExpected Assessment of Inherent and Control RisksThe Work of Internal AuditingAudit RiskMaterialityManagement’s RepresentationsInvolvement of Other AuditorsCo-ordinating the Work to be PerformedRelated Party TransactionsGoing Concern Considerations

Internal Control IntroductionBasel Committee on Banking Supervision has issued a policy paper, “Framework for Internal Control Systems in Banking Organisations”Identifying, Documenting and 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 Financial Statements in Accordance with an Identified 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 DifferencesExamples of Controls Appendix 2[Typical control questions for

(a) Treasury and trading operations; and (b) Loans and advances. ]

Inherent Limitations of Internal ControlConsidering the Influence of Environmental Factors

Performing Substantive Procedures IntroductionAudit Procedures

(a) Inspection. (b) Observation. (c) Inquiry and confirmation. (d) Computation. (e) Analytical procedures.

Specific Procedures in Respect of Particular Items in the Financial Statements BALANCES WITH OTHER BANKS MONEY MARKET INSTRUMENTS

of 6

IAPSs

SECURITIES HELD FOR TRADING PURPOSES OTHER FINANCIAL ASSETS INTEREST INCOME AND INTEREST EXPENSE PROVISIONS FOR LOAN LOSSES FEE AND COMMISSION INCOME PROVISION FOR TAXES ON INCOME RELATED PARTY TRANSACTIONS FIDUCIARY ACTIVITIES NOTES TO THE FINANCIAL STATEMENTS

Reporting on the Financial StatementsAdheres to any specific formats and terminology specified by the law, the regulatory authorities, professional bodies and industry practiceAppendix 1: Risks and Issues in Respect of Fraud and Illegal ActsAppendix 3: Examples of Financial Information, Ratios and Indicators Commonly Used in the Analysis of a Bank’s Financial Condition and Performance These ratios generally fall into the following categories:• Asset quality.• Liquidity.• Earnings.• Capital adequacy.• Market risk.• Funding risk.Appendix 4: Risks and Issues in Securities Underwriting and Securities BrokerageAppendix 5: Risks and Issues in Private Banking and Asset Management

INTERNATIONAL AUDITING PRACTICE STATEMENT 1010 THE CONSIDERATION OF ENVIRONMENTAL MATTERS IN THE AUDIT OF FINANCIAL STATEMENTSEnvironmental matters can be complex and may therefore require additional consideration by auditors. This Statement provides practical assistance to auditors.The Auditor’s Main Considerations With Respect to Environmental MattersTo conclude that an entity operates in compliance with existing environmental laws or regulations ordinarily requires the technical skills of environmental experts, which the auditor cannot be expected to possess. Refer ISA 250.Environmental Matters and Their Impact on the Financial Statements“environmental matters” are definedGuidance on the Application of ISA 310, 400, 250Inherent RiskAccounting and Internal Control SystemsControl EnvironmentControl ProceduresControl RiskSubstantive ProceduresUsing the Work of an ExpertEnvironmental ExpertsEnvironmental Audit (can be used as work of an expert)Internal Audit

of 6

IAPSs

Management RepresentationsReporting

Appendix 1Obtaining Knowledge of the Business From an Environmental Point of View— Illustrative QuestionsAppendix 2Substantive Procedures to Detect a Material Misstatement Due to Environmental Matters

INTERNATIONAL AUDITING PRACTICE STATEMENT 1012AUDITING DERIVATIVE FINANCIAL INSTRUMENTS

This IAPS focuses on auditing derivatives held by end users, including banks and other financial sector entities when they are the end users.

Derivative Instruments and Activities“Derivatives” is a generic term used to categorize a wide variety of financial instruments whose value “depends on” or is “derived from” an underlying rate or price, such as interest rates, exchange rates, equity prices, or commodity prices.Responsibilities of Management and Those Charged With GovernanceThe Auditor’s ResponsibilityThe Need for Special Skill and Knowledge (Specialized skills under ISA 220 or Use of Expert)Knowledge of the BusinessGeneral Economic FactorsThe IndustryThe EntityKey Financial Risks Market risk Credit risk Settlement risk Solvency risk Legal riskAssertions to AddressRisk Assessment and Internal ControlInherent RiskEconomics and business purpose of the entity’s derivative activitiesDerivative activities range from positions where the primary aim is to reduce or eliminate risk (hedging), to positions where the primary aim is to maximize profits (speculating)The complexity of a derivative’s features.Whether the transaction giving rise to the derivative involved the exchange of cashAn entity’s experience with theWhether the derivative is an embedded feature of an agreement.Whether external factors affect the assertionWhether the derivative is traded on national exchanges or across bordersAccounting ConsiderationsAccounting System ConsiderationsControl EnvironmentControl Objectives and ProceduresThe Role of Internal AuditingService OrganizationsControl RiskTests of ControlsSubstantive Procedures

of 6

IAPSs

MaterialityTypes of Substantive ProceduresAnalytical ProceduresEvaluating Audit Evidence

Substantive Procedures Related to Assertions Existence and OccurrenceRights and ObligationsCompletenessValuation and MeasurementPresentation and DisclosureAdditional Considerations About Hedging ActivitiesManagement RepresentationsCommunications With Management and Those Charged With GovernanceGlossary of Terms

PRACTICE STATEMENT 1013ELECTRONIC COMMERCE⎯EFFECT ON THE AUDIT OF FINANCIAL STATEMENTSWhere an entity engages in commercial activity that takes place by means of connected computers over a public network, such as the Internet (e-commerce)Skills and Knowledge (for planning, performing and evaluation)Knowledge of the Business

The entity’s business activities and industry (paragraphs 10-12);

• The entity’s e-commerce strategy (paragraph 13);

• The extent of the entity’s e-commerce activities (paragraphs 14-16); and

• The entity’s outsourcing arrangements (paragraphs 17-18). Risk IdentificationLegal and Regulatory IssuesInternal Control ConsiderationsSecurityTransaction IntegrityProcess AlignmentThe Effect of Electronic Records on Audit Evidence

of 6

1000.doc

Documents

Transcript of 1000.doc