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[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.1 Governance and Auditing in a Public Interest Context Principles of Auditing: An Introduction to International Standards on Auditing - Ch 14 Appendix B Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.2 The Example of Bank Auditing and its Relation to Banking Supervision Principal–Agent 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.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.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 bank’s board of directors and management, the bank’s 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 bank’s external auditor
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.4 The Responsibilities of Bank’s 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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.5 Role of the Bank’s 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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.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 bank’s 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.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.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.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 14B.8 Thank You for Your Attention Any Questions?
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