Governance and Auditing in a Public Interest Context Principles of Auditing: An Introduction to International Standards on Auditing - Ch 14 Appendix B

1
Governance and Auditing in a Public Interest
ContextPrinciples of Auditing An Introduction
to International Standards on Auditing - Ch 14
Appendix B

• Rick Stephan Hayes,
• Roger Dassen, Arnold Schilder,
• Philip Wallage

2
The Example of Bank Auditing and its Relation to
Banking Supervision

• PrincipalAgent Relationship.
• Shareholders have appointed a board of directors
  who govern a company on their behalf. The board
  is responsible for arranging appropriate
  management of the company and faithfully
  reporting the results to the shareholders.
• Information asymmetry between principals and
  agents calls for the basic function of the
  auditor.
• With banks everyone who has an interest in the
  stability of the financial system (public
  interest) are the principles
• As everybody is a principal to an interrelated
  complex of agents, the expectation that auditors
  could reduce the information asymmetry
  sufficiently is modified.

3
International Auditing Practice Statement 1004
(IAPS 1004)

• Issued by Basel Committee on Banking Supervision
  and International Auditing Practices Committee
• Describes the roles and responsibilities of a
  banks board of directors and management, the
  banks internal and external auditors, and the
  banking supervisors
• Sets out the primary responsibility of the board
  of directors and management.
• Examines the essential features of the role of
  external auditors and banking supervisors.
• reviews the relationship between
• the banking supervisor and the banks external
  auditor

4
The Responsibilities of Banks Board of Directors
and Management

• Those who are charged with the governance of the
  bank should insure
• those entrusted with banking tasks have
  sufficient expertise and integrity
• adequate policies, practices and procedures
  related to the different activities of the bank
  are established and complied with
• appropriate management information systems
• appropriate risk management policies and
  procedures
• statutory and regulatory directives, including
  directives regarding solvency and liquidity, are
  observed
• the interests not only of the shareholders but
  also of the depositors and other creditors are
  adequately protected

5
Role of the Banks External Auditor and of the
Banking Supervisor

• Characteristics that distinguish banks
• Role of the banking supervisor
• key objective or prudential supervision is to
  maintain stability and confidence in the
  financial system, thereby reducing the risk of
  loss to depositors and other creditors.
• Banking license
• Lists the basic requirements for a banking
  license ordinarily found in most systems
• Capital base accord adequate capital base
• Bank risks credit risk, market risk, liquidity
  risk, operational risk, legal risk, and
  reputational risk.
• Supervisors efforts

6
Relationship Between Banking Supervisor and
External Auditor

• The supervisor monitors the present and future
  viability of banks and uses their financial
  statements in assessing their condition and
  performance. The external auditor is primarily
  concerned with reporting on the banks financial
  statements.
• The supervisor is concerned with the maintenance
  of a sound system of internal control and the
  external auditor is concerned with the assessment
  of internal control.
• Both must be satisfied that there are adequate
  records, banking supervisor to determine
  profitability and the external auditor with
  material misstatements.

7
Governance Communications

• Audit matters that need reporting include only
  those matters that have come to the attention of
  the auditor as a result of the performance of the
  audit.
• Certain audit matters of governance interest are
  likely to be of interest to banking supervisors,
  particularly where those matters may require
  urgent action by the supervisor.
• When required by the supervisory, legal, or
  regulatory framework, or by a formal agreement or
  protocol, auditors communicate directly to the
  banking supervisor
• The auditor considers communicating such matters
  to the banking supervisor when management or
  those charged with governance do not do so.

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Thank You for Your Attention

• Any Questions?