AUDIT OF SPECIALIZED INDUSTRY:

BANKING

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.

BASIC ACTIVITIES OF BANKS

• Deposit taking
• Borrowing
• Lending
• Settlement
• Trading and Treasury Operations
•
The financial system is composed of two general groups namely: Banks and Non-
Bank Financial Institutions.

 Banking institutions - are allowed to collect savings and time deposits to fund
loans and also perform the function of providing credit and payment services.
These include: universal banks, commercial banks, thrift or savings banks and
the rural and cooperative banks.
 Non-Bank Financial Institutions - are not allowed to collect deposits but may
encourage the general public to invest household savings in various financial
instruments. These are composed of insurance companies, pension fund
institutions, investment banks, financing companies, pawnshops and mutual fund
institutions.

Classification of BANKS
 Universal Banks (UBs).
 Commercial Banks (KBs)
 Thrift Banks (TBs)
 Savings and Mortgage Banks
 Stock Savings and Loan Associations
 Rural Banks (RBs)
 Cooperative Banks (Coop Banks)
 Islamic Banks (Ibs)
CHARACTERISTICS OF BANKS

 Custody of large amounts of monetary items, including cash and negotiable

instruments, whose physical security has to be safeguarded during transfer and
while being stored.
 Engaged in transactions that transcends multiple place or jurisdictions.
 Holding of assets that can rapidly change in value or whose value is often difficult
to determine.
 Derive significant amount of funding from short-term deposits.
 Fiduciary duties in respect of the assets they hold on behalf of other persons or
entities.

REGULATORY BODIES IN THE BANKING INDUSTRY

Bangko Sentral ng Pilipinas (BSP) – MAIN

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.

Securities and Exchange Commission (SEC)

Charged with supervision over corporate sector, capital market participants, securities
and investment instruments market and investing public.

Bureau of Treasury (BTR)

Assist in the formulation of policies on borrowing, investment and capital market

development.

Bureau of Internal Revenue (BIR)

Assessment and collection of taxes, fees and charges.

WHAT IS BANK AUDIT?

It is a formal process in which the services, systems, financial statements, and/or

procedures of a bank, credit union, or other financial institution is reviewed and
summarized in a report to ensure they are in compliance with laws and industry
standards.
WHO’S INCHARGED?

-Bank Auditor/s or Auditor/s which is/are accounting specialist.

-Note: Bank or credit union audits can be internal audits or external audits.

TYPES OF BANK AUDIT

Concurrent Audit
- It is a systematic examination of financial transactions on a regular basis to ensure
accuracy, authenticity, compliance with procedures and guidelines.

Internal Audit
- It provides evaluations of the effectiveness of the internal control system, daily bank
activities, and accounting systems.

External Audit
- An examination that is conducted by an independent accountant. This type of audit is
most commonly intended to result in a certification of the financial statements of an
entity.

Statutory Audit
- It is a legally required review of the accuracy of a company's or government's financial
statements and records.

IMPORTANCE OF BANK AUDIT

1. Gives the company an objective insight.

This makes us see how well the company operates and if it is checking all the
necessary boxes of being efficient, safe, accurate, and abiding by all regulations.

2. Ensures and improves efficiency of your operations and controls.

This will help the company to identify any areas in which they can improve their
efficiency and effectiveness.

3. Allows the company to assess risks and protect assets.

It helps to identify and evaluate any gaps in the environment, while also providing
space for a remediation plan to be done.

4. Allows for evaluation of controls

Fulfilling the company’s control.
5. Ensures that the organization is complying with the rules
Ultimate importance of the Bank Audit.
Audit Planning

According to Philippine Auditing Practice Statement 1006, the audit plan includes,
among other things:

• 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;
and considering the going concern assumption regarding the entity’s ability to continue
in operation for the foreseeable future, 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.

Understanding the nature of banking risks

The risks associated with banking activities may broadly be categorized as:

1. Country risk:
The risk of foreign customers and counterparties failing to settle their obligations
because of economic. political and social factors.

2. Credit risk:
The risk that a customer or counterparty will not settle an obligation for full value,
either when due or at any time

3. Currency risk:
The risk of loss arising from future movements in the exchange rates applicable
to foreign currency assets, liabilities, rights and obligations.

4. Fiduciary risk
The risk of loss arising from factors such as failure to maintain safe custody or
negligence in the management of assets on behalf of other parties.
5. Interest rate risk:
The risk that a movement in interest rates would have an adverse effect on the
value of assets and liabilities or would affect interest cash flows.

6. Legal and documentary risk:

The risk that contracts are documented incorrectly or are not legally enforceable
in the relevant jurisdiction in which the contracts are to be enforced or where the
counterparties operate.

7. Liquidity risk:
The risk of loss arising from the changes in the bank's ability to sell or dispose of
an asset.

8. Modeling risk:
The risk associated with the imperfections and subjectivity of valuation models
used to determine the values of assets or liabilities.

9. Operational risk:
The risk of direct or indirect loss resulting from inadequate or failed internal
processes, people and systems or from external events.

10. Price risk:

The risk of loss arising from adverse changes in market prices, including interest
rates, foreign exchange rates, equity and commodity prices and from movements
in the market prices of investments.

11. Regulatory risk:

The risk of loss arising from failure to comply with regulatory or legal
requirements in the relevant jurisdiction in which the bank operates. It also
includes any loss that could arise from changes in regulatory requirements.

12. Replacement risk:

(sometimes called performance risk) the risk of failure of a customer or
counterparty to perform the terms of a contract. This failure creates the need to
replace the failed transaction with another at the current market price. This may
result in a loss to the bank equivalent to the difference between the contract price
and the current market price.

13. Reputational risk:

The risk of losing business because of negative public opinion and consequential
damage to the bank's reputation arising from failure to properly manage some of
the above risks, or from involvement in improper or illegal activities by the bank
 or its senior management, such as money laundering or attempts to cover up
losses.
14. Settlement risk:
The risk that one side of a transaction will be settled without value being received
from the customer or counterparty. This will generally result in the loss to the
bank of the full principal amount.

15. Solvency risk:

The risk of loss arising from the possibility of the bank not having sufficient funds
to meet its obligations, or from the bank's inability to access capital markets to
raise required funds.

16. Transfer risk:

The risk of loss arising when a counterparty's obligation is not denominated in the
counterparty's home currency. The counterparty may be unable to obtain the
currency of the obligation irrespective of the counterparty's particular financial
condition.

Audit Risks in Banking Industry

The three components of audit risk are:

(a) Inherent risk (the risk that material misstatements occur);

(b) Control risk (the risk that the bank’s system of internal control does not prevent or
detect and correct such misstatements on a timely basis); and
(c) Detection risk (the risk that the auditor will not detect any remaining material
misstatements

Audit Procedures

Inspection
Consists of examining records, documents, or tangible assets

Inquiry and confirmation

Inquiry consists of seeking information of knowledgeable persons inside or outside the
entity. Confirmation consists of the response to an inquiry to corroborate information
contained in the accounting records.

Computation
Consists of checking the arithmetical accuracy of source documents and accounting
records or of performing independent calculations.
Analytical procedures
Consist of the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant
information or deviate from predicted amounts.