An overview of IAPS 1004 and IAPS 1006 and

related local guidance

SOUTH AFRICAN RESERVE BANK
BANK SUPERVISION DEPARTMENT
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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
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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
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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
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Audit opinion on financial statements
Does not provide assurance on future viability of
the bank
Is not an opinion on the effectiveness of bank
management
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 banks
ability to continue as a going concern
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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 auditors competence
Tasks should be complementary to normal audit work
Protection of confidentiality
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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 banks 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
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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
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Effects of a risk-weighted regulatory capital
framework
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
work
Off-site analytical review of regulatory reporting
On-site inspection of internal control systems
On-site review of quality of banks assets and
assessment of banking risks
Assessment of adequacy of risk management practices;
loan loss provisions; and prudential ratios
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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
funds)
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SAAS 700: Auditors 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
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Factors which may lead to qualification where the effect is
material to fair presentation:
Limitation on the scope of the auditors 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
returns
Qualified opinion
Effect of above is not so material or pervasive/fundamental to require
adverse opinion or disclaimer
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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
resubmission
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
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Agreed upon procedures:
Ensure that a reconciliation has been prepared by the bank
each month
Sample testing of year-end liquid asset holdings for
encumbrances
Inspect documents of title for prima facie evidence that they are
unencumbered
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
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Required to report on:
An annual process undertaken by the board of directors
Process assesses whether the banks corporate governance arrangements,
including the management of risk, achieves the boards 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
process
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
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Reporting requirement under Section 63(1)(b) - awareness of
any matter which may:
Endanger the banks 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
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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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