UNIVERSITY OF SANTO TOMAS

UST-Alfredo M. Velayo College of Accountancy

España, Manila

Module 5: Audit of Banks

Philippine National Bank (PNB)

Presented to the
University of Santo Tomas
Alfredo M. Velayo College of Accountancy

In partial fulfillment of the requirements for

ACC5118 (Auditing and Assurance: Specialized Industries)
Bachelor of Science in Accountancy

Submitted by:
Adami, Justine Maye
Aristorenas, Lanz Austin B.
Ariza, Bianca Rose S.
Ballesteros, Anna Angela P.
Bolor, Chynie Aira S.
Bumanglag, Sita Andrea D.
Candela, Rejelyn L.
Cruz, Martina Colin A.
Go, Eunice Faye V.
Guinto, Lynelle Jianne A.
Macam, Justin Waite E.
Macapagal, George Darryl D.C.
Nofre, J Matthew M.
Soriano, Gillian F.
(Group 2)

Submitted to:
Inst. Almario G. Parco, Jr., CPA, MBA
INTRODUCTION

A financial institution is an organizational entity that transfers monetary funds or

financial assets between different recipients. A bank is one of the most common examples of a
financial institution. Regardless of their business setting, banks oversee the movement of funds
between individuals and enterprises. In a more precise context, a bank provides deposit accounts
that serve as secure repositories for its clients to safeguard their funds (Lake & Strohm, 2022).
Banks allocate a slim proportion of capital to finance their operations, unlike typical business
practices. As banking involves the process of borrowing and lending, banks utilize money
deposited by their clients to provide loans for others (Selgin, 2023). Consequently, these loans
will accumulate interest payments, which will form part of their profit generation, alongside the
service fees they collect from clients.

Banks are categorized into various types, including commercial, universal, rural, thrift,
cooperative, Islamic, investment, and now, with the rise of digital banks. Generally, all banks
serve the same primary purpose of providing financial services. However, with its various
classifications, one may understand that some of these bank categories are centric on providing
consumer needs while others may focus more on trading and investments.

As an institution known for its comprehensive services, banks are generally regulated by
departments initiated by their respective governments. For instance, in the United States, these
financial institutions are subject to state or national supervision (Barone, 2023). In the
Philippines, banks are regulated by the Bangko Sentral ng Pilipinas (BSP). BSP's primary goal is
to promote and preserve the country's price stability and solid financial system (Bangko Sentral
ng Pilipinas, n.d.). The department is the central authority for overseeing the regulation of
money, banking, and credit.

Considering the crucial role of banks in every economy and the innate complexity of their
operations, there is a need for a meticulously-designed audit process. Bank audits are
characterized by unique features that differentiate them from other industries. These
distinguishing aspects encompass the specific characteristics of banking operations, the banking
sector's regulatory framework, and the significance of upholding public trust in the overall
financial system.

This paper aims to present an audit of the Philippine National Bank (PNB). PNB is
recognized as the premiere universal bank in the Philippines. It also stands as one of the foremost
privately owned commercial banks. PNB was established in 1916 through the government's
initiative and transitioned into a privately owned entity in 2007. The institution has helped
facilitate economic growth by implementing an agricultural modernization program and
providing trade financing assistance for the nation's agricultural exports; this has positioned PNB
as a leading entity in the sector over the years (Philippine National Bank, 2023).
AGENDA
With the innately distinct nature of banking operations, audit procedures for entities like
the Philippine National Bank are designed following the specific requirements unique to the said
industry. As such, this paper shall present a comprehensive audit of PNB considering the definite
operational factors specific to banking.

By understanding the external factors affecting the entity, the auditors can better
comprehend the overall operations of PNB, perform appropriate procedures, and come up with
accurate audit results. Hence, relevant market, regulatory, economic, and technological factors
that influence the present condition of the banking industry will be identified.

Moreover, conducting a risk assessment is an essential and crucial component of the audit
procedure. The process entails identifying and assessing the risks linked to an organization's
financial statements and internal controls. Thus, business risks and risks of material misstatement
are emphasized. By assessing the business risks associated with PNB, the group can determine
different operational, financial, and compliance concerns and elucidate their impact on the audit
process. Risks of material misstatements, such as inherent, control, and detection risks, will also
be addressed.

The discussion will also cover accounting issues such as PNB's revenue recognition and
asset valuation policies. Since banks generally differ from other businesses in their operations,
these accounting issues relative to the entity may be atypical and require further emphasis.
Furthermore, this paper will discuss PNB's taxes, specifically its liabilities and relative
exemptions.

Finally, three critical features of auditing procedures are to be performed:

● Test of controls. By assessing the controls implemented by PNB, auditors could

expand on the significance of assessing internal controls and elucidate how
segregating roles can alleviate risks.

● Substantive procedures will be conducted. In obtaining appropriate evidence on

management assertions, the group will focus on financial information relevant to
PNB's credit process, financial reporting, investment, lending, and treasury
practices.

● Compliance Testing. It is also necessary to perform the said procedure to ensure

that the entity conforms with relevant laws and regulations applicable to its
activities.

In the audited financial statements of the Philippine National Bank for the period ended
December 31, 2022, the entity received an unqualified opinion from its external auditor, SyCip,
Gorres, Velayo & Co., indicating that they complied with the Philippine Financial Reporting
Standards (PFRS). The external auditors affirmed that their financial statements were free from
material misstatements.

INDUSTRY BRIEFING
Market Factors

Established in 1916 by the Philippine government and fully privatized in 2007, Philippine
National Bank (PNB) stands as the country's first universal bank and among the largest privately-
owned commercial banks. PNB has played a significant role in economic development, leading
with initiatives like agricultural modernization and backing the nation's agricultural exports
through trade finance. PNB has pioneered several financial innovations, including introducing
services like Bank on Wheels, computerized and ATM banking, mobile money changing,
domestic traveler’s checks, and electronic payment systems. It also spearheaded the OFW
remittance business, becoming a significant player in this industry.

The bank's core activities encompass a broad spectrum of banking services, from deposit-
taking, lending, and trade finance to foreign exchange dealings, remittance servicing, asset
management, and comprehensive retail banking and trust services. PNB has a strong global
presence, supported by a vast network comprising more than 630 branches within the country
and 1,600 ATMs nationwide, alongside more than 70 overseas branches, representative offices,
remittance centers, and subsidiaries across Asia, Europe, the Middle East, and North America.

The Philippine banking sector has consistently played a significant role in driving the
country's economic growth. Oversight of the entire banking industry falls under the purview of
the Bangko Sentral ng Pilipinas, the Central Bank of the Philippines. Approximately 45
Commercial and Universal banks collectively control around 90% of the total market share
within the Philippine banking industry.

In 2017, 40 commercial and universal banks dominated the sector, wielding a substantial
influence over the total deposits in the industry. These banks provide various services, from
wholesale, retail, and corporate banking to treasury management, trade facilitation, underwriting,
and investment advisory. According to Banko Sentral ng Pilipinas, some of the top commercial
and universal banks in the Philippines - ranked based on their available assets as of June 30,
2023 - are BDO Unibank Inc, Land Bank, Bank of the Philippine Islands, Metropolitan Bank,
China Banking Corporation, Rizal Comm’l Banking Corp, and PNB as the 7th.

The Philippine banking system (PBS) continued its strong performance, showing
consistent growth in assets, deposits, and profits while maintaining stable capital, liquidity
buffers, and adequate provisions for credit losses. In BSP’s Report on the Recent Trends in the
Philippine Financial System as of the end of May 2023, total assets of the banking system
increased by 9.3% year-on-year, reaching Php 22.8 trillion, surpassing the 6.8% growth rate
recorded in May 2022. The growth in assets was primarily fueled by deposit generation.
Universal and commercial banks (UKBs) held the largest share of the total assets at 93.9% (Php
21.4 trillion), followed by thrift banks (TBs) at 4.2% (Php 942.7 billion), rural and cooperative
banks (RCBs) at 1.6% (Php 367.3 billion), and digital banks (DBs) at 0.3% (Php 75.9 billion).

Depending on the state of the economy, the BSP adjusts its policy rates to support the
ongoing situation. During its monetary policy meeting on May 18, 2023, the Monetary Board
opted to maintain the key policy interest rate at 6.25 percent. This decision is rooted in the
observed deceleration of inflation and revised lower inflation forecasts. Given these
circumstances, the BSP deems it suitable to uphold the current policy interest rate. Consequently,
this decision implies that the upward trajectory of banks' interest rates may halt, stabilizing the
borrowing cost for households and businesses. In the case of changes in interest rates due to
external factors, the bank might earn more from loans but also pay higher interest on deposits,
impacting profitability. Apart from this, financial statements are further impacted by regulatory
changes. Regulation changes could have an impact on banks' reporting requirements, disclosures,
and costs.

Furthermore, market rivalry can reduce margins, impact revenue sources, and require
tactical adjustments. Changes in technology and customer preferences for digital banking can
impact revenue generation strategies and operating expenses. Banks must comprehend and
successfully manage these market factors in order to preserve their financial stability and adjust
to a constantly changing environment.

Regulatory Factors

The Bangko Sentral ng Pilipinas (BSP) serves as the principal monetary authority
responsible for overseeing the regulation of currency, banking, and credit in the Philippines. As
an autonomous government-owned corporation, the BSP's primary function is to oversee and
regulate the banking operations of financial companies, non-bank institutions engaged in quasi-
banking activities, and other entities with similar functions. The BSP's core aim is to foster and
safeguard the monetary stability and convertibility of the Philippine peso.

Under the supervision of the Monetary Board, the Bangko Sentral ng Pilipinas (BSP)
formulates the rules and regulations to exercise its regulatory authority effectively. As stipulated
by the New Central Bank Act, the BSP carries out various functions, which mainly involve
issuing mandates governing the operation of banks like the Philippine National Bank (PNB) and
other financial institutions. BSP promulgates rules on capital adequacy, risk management,
corporate governance, and the different facets of banking operations. Moreover, BSP also
assumes the responsibility of overseeing the bank's adherence to prudential regulations,
conducting regular examinations, and implementing corrective measures when deemed necessary
to ensure the banking industry's stability.

Additionally, the Philippine Deposit Insurance Corporation (PDIC) also plays a crucial
role in the regulations of banks in the country as it has the authority to conduct examinations on
banks with the prior approval of the Monetary Board and within the parameters stipulated by the
law. All banks, including the Philippine National Bank (PNB), are obligated to insure deposit
liabilities with the PDIC up to a maximum amount of Php 500,000 or its foreign equivalent.

As the Bangko Sentral ng Pilipinas aims to promote a secure and robust banking system
in the country, the licensing procedure for permissible activities of banks has been strengthened
to align it with the international standards and best practices, such as the "Core Principles for
Effective Supervision" issued by the Basel Committee on Banking Supervision. The refined
policy guidelines contain the expectations and criteria set by the Bangko Sentral regarding the
issuance of licenses and authorities, as well as its prerogative to reject applications that do not
meet the specified criteria. BSP's licensing policy is designed to guarantee that licenses and
authorities are exclusively granted to banks that adhere to the required standards.

In accordance with Section 111 (Licensing) of the Manual of Regulations for Banks
(MORB), the prudential criteria outlined in the section serve as the criteria for determining the
eligibility of banks seeking licenses and/or authorities from the Bangko Sentral ng Pilipinas. The
fulfillment of the following minimum conditions is imperative:

a. Applicant domestic banks must have a CAMELS composite rating of at least “3” and a
“Management” rating of not lower than “3”, branches of foreign banks must have a
ROCA rating of at least “3”, and BSFIs must have a RAS rating of at least “Acceptable”.
Whenever applicable, ratings equivalent to cited minimum rating grade requirements
under appropriate rating systems (i.e., IT Rating Systems, Trust Rating Systems, among
others) shall apply for certain licenses and/or authorities;
b. Applicants have no major supervisory concerns in governance, risk management systems,
and internal controls and compliance system, and characterize/ demonstrate the
following:

1. Governance

Applicants for a certain designation or recognition are required to exhibit a

commitment to good corporate governance tailored to their size, risk profile, and
operational complexity. The board of directors and management must provide
appropriate oversight and support. This involves adherence to sound management
practices, including active oversight, satisfactory performance, establishment of
suitable policies and controls, maintenance of an independent internal audit and
compliance program, and effective risk monitoring systems. Engaging in
activities considered unsafe or unsound is prohibited. Any identified weaknesses
or violations should not significantly jeopardize the institution's safety and
soundness, must be manageable, and should be actively addressed. The
assessment of corporate governance quality is based on the Guidelines in
Assessing the Quality of Corporate Governance in banks.
 2. Risk Management System and Internal Controls

Applicants are required to establish a board-approved comprehensive risk

management system that can identify, measure, evaluate, report, and control or
mitigate all significant risks in a timely manner. This system must also assess the
adequacy of capital concerning the institution's risk profile and market conditions.
The sophistication of the risk management system should align with the
complexity of the risks being managed. Key features include clear responsibility
delineation, robust risk measurement systems, appropriate risk limits, effective
internal controls, and efficient risk reporting mechanisms.

Furthermore, applicants need to implement an effective system of internal

controls tailored to their risk profile. This system should cover organizational
structure, accounting policies, checks and balances, safeguarding of assets, and
internal audit and compliance functions. The quality and effectiveness of internal
control systems will be assessed based on established standards, principles, and
the regulatory expectations outlined by the Bangko Sentral.

3. Compliance System

Applicants are required to establish a compliance system tailored to their size, risk
profile, and operational complexity. This system should be designed to identify and
mitigate business risks that could harm the institution's franchise value. Sound
compliance policies and procedures, outlined in a Compliance Policy Manual, must be in
place and effectively implemented. Additionally, robust compliance monitoring, testing,
and review processes are necessary to ensure the bank operates in accordance with
banking laws, rules, regulations, and other relevant legal frameworks such as securities
laws. The banks should not have a history of significant non-compliance with prudential
requirements, including SBL, DOSRI limits, and capital adequacy ratio requirements.

c. Applicants have complied with directives and/or are not subject of specific directives
and/or enforcement actions by the Bangko Sentral.

Banks that have been granted licenses or authorities must continuously adhere to the
specified standards and requirements even after the license has been granted to them as any
deviation or non-compliance may result in the revocation of the license.

In the case of the Philippine National Bank (PNB), it has established its Regulatory
Compliance Risk Division (RCRD), whose primary responsibility is to ensure compliance with
banking laws, rules, regulations, and guidelines issued by the various bank regulators.
Particularly, the division oversees the continuous dissemination of regulatory issuances to
various units through the appointed Compliance Office Designates. Furthermore, the RCRD also
consistently conducts awareness training on Regulatory Compliance Risk for employees,
ensuring they remain updated and well-versed in the latest regulations issued by the BSP and
other regulatory bodies.

Economic Factors

Several economic factors significantly influence the banking industry in the Philippines.
One crucial factor is the fluctuation in interest rates, overseen by the Bangko Sentral ng Pilipinas
(BSP). The BSP's policies directly impact the cost of borrowing for Philippine banks,
subsequently affecting their lending and investment activities. Higher interest rates can elevate
borrowing costs, potentially impacting banks' profitability. Moreover, shifts in market interest
rates may also impact the net interest margin, which is a crucial factor in determining the
profitability of banks.

The volatility of prices and inflation pose another challenge to the banking industry since
these factors diminish the purchasing power of the Philippine currency, necessitating banks to
closely monitor and regulate interest rates to mitigate adverse effects and maintain profitability.
Movements in foreign exchange rates also play a pivotal role in shaping the banking landscape,
as fluctuations in exchange rates can impact the value of assets and liabilities denominated in
currencies other than the peso. This dynamic can result in gains or losses in foreign exchange
transactions, affecting the profitability of banks, especially those engaged in international
transactions.

Moreover, demographic trends, such as modernization and population growth,

significantly influence the demand for various banking services and products. For instance, the
provision of housing loan services may rise in tandem with population growth or an increasingly
urbanized economy.

Indeed, the overall economic growth of the Philippines is the biggest determinant for the
banking industry. A continually burgeoning economy generally correlates with an increased
demand for loans and other financial services. As the economy grows and develops, the banking
industry continues to facilitate the financial needs of companies and individuals, which
contributes to the overall economic vitality of the country.

Technology in Banks

Technology plays a big role when it comes to helping out banking institutions in
expanding their operational capabilities. Platforms and methods that are technologically
enhanced are then used by banks to fully maximize the transaction handling with clients and
other stakeholders.
 The modernization of financial institutions has been significantly shaped by the
introduction of internet banking and mobile applications, offering improved accessibility and
simplicity for users managing their finances through mobile devices. These platforms facilitate
services such as bill payments, cash transfers, and balance checks, contributing to a more user-
friendly and efficient banking experience.

In contrast, Automated Teller Machines (ATMs) provide a conventional and readily

available method for standard banking services, including cash withdrawals, deposits, and
account inquiries. With the ability to operate 24/7, ATMs serve as a vital alternative to online and
mobile banking, ensuring customers can access banking services in physical locations.

Additionally, the integration of data analytics and business intelligence has become
instrumental in tracking banking operations, reporting trends, and gaining insights into client
transactions. This technology aids in risk mitigation, enhances decision-making processes, and
enables banks to improve services based on a thorough analysis of customer behavior.

Core banking systems, comprising extensive software platforms, further contribute to

operational efficiency by managing essential activities like account administration, transaction
processing, and payment handling.

Finally, open banking APIs empower customers to easily access their financial
information while allowing banks to share data with third-party service providers, fostering
innovation and competition in the industry. Collectively, these technological advancements
continue to reshape the banking landscape, offering a more streamlined, accessible, and
innovative financial experience for consumers.

SUMMARY OF INDUSTRY FACTORS

The Bangko Sentral ng Pilipinas (BSP), which is in charge of the Philippine banking
industry, is essential to the country's economic development. PNB, which is rated seventh among
leading banks, helps to sustain the sector's steady expansion.

The BSP modifies policy rates in response to changes in the economy. Anticipating
steady borrowing costs, it kept the key policy interest rate at 6.25% in May 2023. The
profitability and operations of banks are impacted by external variables, technology
advancements, and regulatory changes, which call for strategic adjustments.

The BSP and the Philippine Deposit Insurance Corporation (PDIC) are responsible for
regulatory monitoring, which guarantees adherence to international best practices and standards.
To maintain regulatory compliance, PNB set up a Regulatory Compliance Risk Division.
 Economic issues that have a substantial impact on the banking business include inflation,
interest rates, and demographic developments. A growing economy is associated with a rise in
the need for financial services.

Technology is essential to banking operations; mobile apps, ATMs, online banking, data
analytics, and open banking APIs all improve accessibility, productivity, and innovation in the
sector. The banking industry is changing due to these technological improvements, making it
easier to use and more efficient.

BUSINESS RISKS

I.Identification of Business Risks

Financial Risks

a. Credit Risk
The banking sector is exposed to the risk that customers or counterparties might fail to
settle their contractual obligations under loans and advances when due. This risk
emerges from lending activities, including loans to individuals, companies, and other
banks, as well as investments and off-balance sheet commitments. Specifically, risk
arises from loans when a borrower fails to repay the principal and interest as agreed. In
addition, risk also arises if banks do not conduct a thorough credit assessment,
consequently lending to individuals or counterparties who are not creditworthy. These
both can result in financial loss for the companies in the industry. To manage these
risks, banks employ several strategies such as credit application review, setting credit
limits, credit rating assessments, collateral management, continuous loan portfolio
monitoring, and evaluation of non-performing loans. Moreover, regular reviews of the
sufficiency of valuation reserves and participation in formulating and revising credit
policies underline PNB's commitment to prudent credit risk management.

b. Liquidity Risk
Banks are vulnerable to risks of potential loss stemming from changes in their ability to
meet their short-term financial obligations due to an imbalance between their liquid
assets and liabilities. Liquidity risk can arise from deposit liabilities and bills payable.
Since most banks rely heavily on deposits from customers as a major source of funds,
they may face liquidity risks if a large number of depositors decide to withdraw their
funds simultaneously. Withdrawals may exceed the available liquid assets, posing an
imbalance between its liquid assets and liabilities. These risks can be addressed through
financial ratios, Asset and Liability Management (ALM) strategies, day-to-day
monitoring of cash flows, and the support of PNB's market and Asset Liability Division
to the Asset and Liability Committee (ALCO). PNB employs tools like the liquidity
risk dashboard to regularly report to ALCO and the Risk Oversight Committee (ROC),
ensuring a balanced approach to managing liquidity while securing optimal returns on
 assets and cost-effective funding. Additionally, PNB conducts risk analyses for both
new and existing treasury investments to evaluate their impact on the bank's overall
liquidity.

c. Market Risk
The exposure of banks to market risks adversely affects their revenues and assets due to
changes in market prices. These risks primarily arise from investments and dues from
other banks, which result in interest rate risks, foreign exchange risks, and equity price
risks. Companies in the banking industry are vulnerable to interest rate risk since they
often hold fixed-income securities with variable interest rates. As interest rates change,
the value of securities also changes, which may lead to potential losses for banks.
Moreover, foreign exchange risks are also present as banks can choose to invest in
securities denominated in foreign currencies, making them exposed to fluctuations in
foreign exchange rates. Equity price risks also exist since there can be changes in equity
prices, which can lead to gains or losses on these investments. Nonetheless, banks still
manage these risks through sensitivity analyses, daily preparation of Historical Value at
Risk (VaR) reports, monitoring of Stop Loss reports, stress testing, and annual limits
setting. Moreover, PNB assesses the reasonability and relevance of trading risk limits,
submits documentation for VaR, backtesting for model validation, and ensures
compliance with set limits across various instruments, thus mitigating the adverse
effects of market price changes on revenue and assets.

Operational Risks

Several risks are associated with the operations of banking institutions that could
impair their provision of accurate and timely information. These risks are, in nature, of
exposure to their internal procedures, people, and systems. Philippine National Bank (PNB)
is likewise vulnerable to these risks. In general, the operation risks faced by banking
institutions can be further categorized for improved understanding. First, fraud, whether
internal or external, is an operation risk faced by banks. It has several implications, such as
financial loss when substantial money is involved in fraudulent activities. Further, it can
damage the institution's reputation as their existing and potential clients may lose trust in
their ability to safeguard the entrusted assets. This negative reputation and publicity will
adversely affect the bank's operations and can have a long-term impact.

Another operational risk common to the industry is damage to physical assets.

Although the Philippine National Bank incorporates digital banking like most banks today,
physical asset damage still significantly impacts their operations. Branches are crucial
touchpoints for the customers of traditional banks. If any damages are done to these
branches, customers of the affected areas will be affected through interrupted service
accommodation, leading to customer inconvenience and dissatisfaction. Moreover, these can
lead to an operation halt if severe damages exist. The branches affected may be forced to
transition to an alternative operation dynamic, which can be costly and impact productivity.
Ultimately, this can result in a financial loss due to repair costs, inefficiencies, and loss of
customer confidence.

Further, system failures are one of the substantial risks faced by banking companies
as most of the operations these days are automated and are independent of the productivity of
its employed systems. System failures within banking operations, stemming from technical
glitches, hardware malfunctions, or software errors, create disruptive scenarios. These
disruptions manifest in transactional delays, hindrances in customer service access, and a
notable impediment to the bank's regular functions. Furthermore, such system failures often
pose the grave risk of data breaches, exposing confidential customer data to unauthorized
access. This breach of sensitive information compromises customer trust and triggers
regulatory investigations, potentially resulting in legal repercussions and substantial financial
losses for the bank.

Lastly, the business practices or processes also lead to several operational

implications. Inefficient processes within banks often result in operational bottlenecks,
driving up costs, introducing errors, and ultimately undermining productivity. This
inefficiency directly impacts customer service by causing delays, transaction errors, and a
generally diminished quality of service. Concurrently, the heavy reliance on technology
within banking systems amplifies the risks associated with system failures, cyber-attacks,
data breaches, and IT outages. These technological vulnerabilities can bring operations to a
standstill, jeopardizing service delivery and potentially compromising sensitive customer
data, leading to severe reputational damage and financial losses for the bank.

Legal and Regulatory Risks

All of the banks in the Philippines are heavily regulated by the Bangko Sentral ng
Pilipinas (BSP), and PNB is not an exception. As the primary monetary authority in the
country, it oversees the banks’ compliance to its mandates and regulations. These includes
complying with the prudential criteria, undergoing regular examinations and corrective
measures if needed, and meeting the minimum leverage, liquidity, and other capital adequacy
requirements. With the approval of the Monetary Board, the bank is also under scrutiny of
the Philippine Deposit Insurance Corporation (PDIC) regarding its deposit liabilities.

In an effort to ensure the stability of the banking industry, BSP has strengthened its
guidelines and licensing procedures through the New Central Bank Act, the Manual of
Regulations for Banks (MORB), as well as the adoption of the "Core Principles for Effective
Supervision" which was issued by the Basel Committee on Banking Supervision. The
 complexity of the banking industry compels PNB to ensure that its numerous transactions are
in accordance with these stringent standards and protocols. Because of this, the bank is
subject to compliance risks that may pose detrimental effects on its operations and financial
reports. To alleviate these risks, PNB has established its Regulatory Compliance Risk
Division (RCRD) which has the superior responsibility to ensure the institution’s compliance
with the laws, regulations, and guidelines on banking industry.

II.Risks of Material Misstatements

Inherent Risks

The banking sector, including PNB, is exposed to a variety of inherent risks, as shown
in the business risks enumerated above. The inherent risks in the banking sector stem from
the likelihood of material misstatements occurring in financial statements. Banking activities
inherently carry high levels of risk, as exemplified by credit exposure fluctuations in
securities transactions, potential liquidity challenges from non-payment or settlement
failures, and the complexities of the banking environment, leading to the risk of inadequate
risk management strategies. Factors such as extensive use of IT systems, high transaction
volumes, and the intricacies of auditing complex trading transactions contribute to challenges
in reducing audit risk to an acceptable level through substantive procedures alone.
Furthermore, the reliance on management judgment for key financial statement elements,
such as loan loss provisions and provisions for risks like liquidity and modeling, introduces
greater inherent risk, necessitating heightened professional judgment by auditors. PNB,
focused on financial instruments, manages inherent risks through an ongoing process of
identification, measurement, and monitoring, vital for sustaining the group's profitability. The
effectiveness of internal controls becomes pivotal for auditors to assess and manage inherent
and control risks adequately, ensuring that sufficient and appropriate audit evidence is
obtained.

Control Risks

Control risks are risks associated with the misstatements that could occur in
management's assertion that are not prevented or detected by the company's internal control.
These misstatements may be due to error or fraud and could be material individually or in
aggregation with other misstatements. These risks are due to the significant internal control
failures implemented by the management. The company's management is tasked to design,
implement, and maintain an adequate system of controls to cater to the ever-changing
dynamic of business processes. Relevant to the industry, banking institutions must update and
adapt more appropriate controls related to the updates and changes in transaction processing,
system checks, and other areas of concern subject to frequent modifications. The auditors'
duty is to identify and assess these internal controls in identifying the relevant audit
 procedures and resources required in the engagement. When control risks are elevated,
auditors pivot towards more extensive substantive procedures to offset potential
shortcomings within internal controls. This shift demands increased time and resources
devoted to the audit process, affecting timelines and overall costs. As control risks heighten,
auditors tend to rely more on substantive testing rather than assessing the efficiency of
internal controls. It emphasizes detailed testing of individual transactions and account
balances, intensifying the scrutiny of specific elements, thereby elongating the audit process
due to the meticulous nature of these examinations.

Detection Risks
Upon examining the data, auditors of the Bank Industry may overlook misstatements
that could compromise the reliability of the financial statements. These risks can be caused
by errors or fraud. This is why elaborate and meticulous auditing procedures are to be done
in order to mitigate such detection risks. As a company in a specialized industry, PNB is
notably prone to complex and unique transactions compared to those in other industries. With
this, it is incumbent upon the auditors of the financial institutions to exercise due diligence
and maintain competence in the whole audit process.

SUMMARY OF BUSINESS RISKS

s
An adequate and in-depth Risk Assessment is necessary to have a comprehensive
understanding of the entity’s environment. This, in turn, will help guarantee the fairness and
reliability of the audit’s report. Moreover, the assessment of business risks enables a more
extensive perspective on what the company shall improve in terms of achieving its objectives,
maintaining its reputation, and continually complying with mandates and regulations.

ACCOUNTING ISSUES
Revenue Recognition

Banks, such as the Philippine National Bank, play an essential role in the country's
economic landscape by offering diverse financial services tailored to meet the needs of
individuals, businesses, and the broader community. For over a decade, PNB has been enhancing
the lives of Filipinos by offering wise and safe financial tools and solutions. Currently, PNB has
more than 600 local and 70 foreign branches and offices, allowing the company to maximize its
service and revenue. (PNB, n.d.). Beyond traditional services such as savings accounts, loans,
and time deposits, PNB has embraced digital transformation, offering online and mobile banking
as well as innovative payment solutions to meet the evolving needs of a connected society. With
a focus on investment and wealth management, PNB offers diverse financial products, including
mutual funds and advisory services, contributing to the Philippine's overall economic growth and
well-being.
 Based on the 2022 SEC17-A OF PNB, revenue is recorded at a rate representing the
amount to which PNB anticipates being entitled in return for the services rendered only upon
transferring those services to the customer. PNB evaluates its revenue arrangements based on
predetermined standards to ascertain whether it functions as an agent or principal. Except for
brokerage transactions, PNB has determined that it is operating as a principal in each of its
revenue arrangements.

Moreover, the interest recognition practices of PNB for financial assets at fair value
through profit or loss (FVTPL) and held-for-trading investments are based on the contractual
rate. In contrast, the interest on financial instruments measured at amortized cost and fair value
through other comprehensive income (FVOCI) is recognized using the effective interest rate
(EIR) method. The EIR calculates the amortized cost of a financial asset or liability and allocates
interest income or expense. PNB considers contractual terms, prepayment options, and any
relevant fees or costs in determining the EIR. Additionally, income from direct financing leases
and receivables follows the effective interest method, with unearned discounts, including
transaction and finance fees, amortized over the term of the note or lease.

PNB also earns fee and commission income from services that are provided over a certain
time, such as investment fund fees, custodian fees, fiduciary fees, credit-related fees, trust fees,
portfolio and other management fees, and advisory fees. Additionally, PNB earns from credit
card revenues, trading and investment securities gains, gain on the sale or exchange of assets,
rental income, dividend income, insurance premiums and commissions on reinsurance.

Because of the nature of the operations of banks and the vast array of financial services
they offer, several inherent complexities in revenue recognition could significantly affect the
auditing process. Some of the critical complexities present in banks, such as PNB, are listed
below:

1. Fair Value Measurement - Philippine National Bank holds a diverse portfolio of

financial instruments, including trading and investment securities. The fair value measurement of
these assets, subject to market fluctuations, introduces volatility in reported revenue.
Determining fair values in illiquid markets or for complex financial instruments requires
sophisticated modeling techniques.

2. Interest Income Recognition - One of the most significant components of revenue for
PNB is the interest income, which is derived from loans, securities, and other interest-bearing
assets. The calculation of effective interest rates, considering factors such as prepayments, credit
risk, and variable interest rates, introduces complexity. Accurate determination of interest
income requires ongoing assessment and adjustments.

3. Multi-Element Contracts - A common feature in PNB transactions is the inclusion of

multiple services or goods in a single agreement. Careful estimation and judgment are needed to
recognize revenue as services are rendered and allocate revenue to each component based on
standalone selling prices.

4. Dynamic Market Conditions - The interest rates, market dynamics, and consumer
behavior all fluctuate in the Philippine's economic environment. These dynamic factors can
affect the amount and timing of PNB's revenue recognition, which calls for an ongoing review
and modification of financial reporting procedures.

5. Credit Risk and Impairment - Evaluating credit risk related to loans and other
financial instruments is challenging for PNB. Complex modeling and assumptions are required
to recognize impaired assets and compute allowances for credit losses. The amount and timing of
revenue recognition can be affected by shifts in creditworthiness and the state of the economy.

These complexities in the revenue recognition of PNB pose significant challenges for the
auditors, increasing audit risk and demanding specialized knowledge of intricate financial
instruments and regulatory compliance. Internal control testing becomes crucial, particularly in
the context of complex financial instruments, necessitating a continuous monitoring of regulatory
changes and an increased reliance on IT auditing for accurate financial information processing.
In response to these challenges, auditors employ enhanced fraud detection measures and conduct
thorough risk assessments to ensure the accuracy and reliability of financial reporting in the
dynamic and complex landscape of the banking sector.

Asset Valuation

In auditing banks in the Philippines, the valuation of assets is a critical aspect that
demands careful scrutiny. This process involves assessing various financial instruments,
including loans, investment securities, and non-financial assets. Ensuring compliance with
accounting standards and regulatory requirements is paramount to providing stakeholders with
reliable financial information.

The Auditing Standards and Practices Council has stated the following financial asset
valuation procedures under the general audit procedures of the audit of the financial statements
of banks:

1. Off-balance sheet financial instruments are typically valued at market or fair value,
except for hedging instruments. Financial models may determine fair value when market
prices are unavailable. Disclosure of potential risks, such as credit risk equivalent and
replacement value, may be required.

2. The auditor evaluates valuation models, including their controls, and ensures that contract
details, rates, and assumptions are properly entered. Given the recent development of
these instruments, auditors scrutinize their valuations.
 3. Auditors must assess the need for and adequacy of provisions against financial
instruments, including liquidity risk provisions, modeling risk provisions, and reserves
for operational risk. The complexity of certain financial instruments may necessitate
specialized expertise. When auditors lack the professional competence to perform the
required audit procedures, they should seek guidance from appropriate experts.

4. Another aspect that merits particular attention from auditors is transactions conducted at
rates that deviate from prevailing market rates. These transactions often carry the risk of
concealed losses or fraudulent activities. Consequently, banks typically implement
mechanisms capable of identifying transactions that fall outside the bounds of market
conditions. Auditors gather adequate and appropriate audit evidence to assess the
reliability of the function tasked with this responsibility. Additionally, auditors consider
examining a sample of the identified transactions to gain further insights.

The Philippine National Bank (PNB) strongly emphasizes precision and transparency in
measuring and accounting for its nonfinancial assets, a pivotal aspect of its financial reporting
framework. The valuation of nonfinancial assets is significant in portraying the bank's financial
health. PNB is committed to upholding rigorous accounting principles and standards, ensuring
the valuation methods align seamlessly with industry best practices. This dedication to accuracy
and transparency underscores the bank's commitment to providing stakeholders with a
comprehensive and reliable depiction of the value of its nonfinancial assets within its financial
statements. The following are the significant accounting policies associated with PNB’s
nonfinancial assets:

● Property, Plant, and Equipment

The initial cost of property and equipment includes the purchase price, import duties,
taxes, and any costs directly related to getting the asset to its working condition and
location for its intended use. Land is carried at cost minus any impairment losses.
Depreciable assets, such as buildings, furniture, and equipment, are carried at cost minus
accumulated depreciation, amortization, and impairment losses.

● Investment Properties and Chattel Mortgage Properties

Investment and chattel mortgage properties are initially measured at cost but may be
revalued at fair value if acquired through an exchange transaction. After initial
recognition, these properties are carried at cost less accumulated depreciation and any
impairment in value. Assets are transferred to or out of investment properties based on
changes in use.

● Intangible assets
The Group measures intangible assets acquired separately at cost and through a business
combination at fair value. Internally generated intangibles, except for capitalized
development costs, are not capitalized and are expensed as incurred. Software costs are
capitalized based on the cost to acquire and bring them to use. Customer relationship
intangibles (CRI) and core deposits intangibles (CDI) are initially measured at fair value.
Intangibles with finite lives are subsequently measured at cost less accumulated
amortization and impairment losses.
 ● Goodwill
Goodwill acquired in a business combination is initially recorded at cost. For investments
in associates, the Group includes goodwill in the carrying value of the investments.
Goodwill is not amortized but is assessed for impairment annually or more frequently if
events or circumstances suggest that its carrying value may be impaired.

TAXATION POLICIES

Tax Exemptions

Like other banking institutions, PNB is bound by a number of tax laws that are enforced
by the Philippine government. Both PNB and those looking to get insight into its financial
operations must comprehend the tax exemptions that apply to the bank. The purpose of this
discussion is to give a general review of PNB's tax exemptions as well as any specific
regulations or incentives that might have an impact on the bank's tax liabilities.

General Tax Exemptions for Banking Institutions in the Philippines:

● Income Tax Exemption: Banking institutions may be excluded from paying income tax
on several forms of income.
● VAT Exemption: Value-Added Tax may not apply to transactions involving banking
services.
● DST Exemption: The Documentary Stamp Tax may not apply to certain financial
transactions.
● Interbank Transaction Tax Exemption: Certain bank-to-bank transactions may be
excluded from certain taxes.
● Tax Incentives for Priority Sectors: Special tax incentives may be available for banking
operations that assist priority sectors such as microfinance or agriculture.
● Tax Exemption on Dividends: Certain taxes may not apply to dividends that financial
institutions receive.
● Tax Exemption on Foreign Exchange Transactions: There may be particular tax
exemptions available for some foreign exchange transactions.
● Tax Exemption for Socialist Housing Financing: There may be tax exemptions
available to banks that finance socialist housing.

Specific Tax Exemptions for PNB (as stated in their audited FS):

The Group and the Parent Company recognized gain on loss of control over PNB Holdings of
P17 billion and P17.1 billion in the consolidated and parent company financial statements,
respectively. On December 21, 2021, the Parent Company was able to secure a ruling from the
Bureau of Internal Revenue (BIR) that the transfer of properties to PNB Holdings is not subject
to tax, except for documentary stamps tax (DST). Further, on March 10, 2022, the Parent
Company was able to secure another ruling from the BIR that the property dividends distribution
is exempt from tax, except for DST.
Moreover, FCDU offshore income (income from non-residents) is tax-exempt while gross
onshore income (income from residents) is subject to 10.00% income tax. In addition, interest
income on deposit placements with other FCDUs and offshore banking units (OBUs) is taxed at
15.00%. Income derived by the FCDU from foreign currency-denominated transactions with
non-residents, OBUs, local commercial banks including branches of foreign banks, is tax-exempt
while interest income on foreign currency loans from residents other than OBUs or other
depository banks under the expanded system is subject to 10.00% income tax.

In summary, it is essential to grasp the tax exemptions that apply to the Philippine
National Bank (PNB) in order to fully appreciate the financial environment surrounding this
prestigious institution. As the regulatory environment evolves, staying aware of the latest tax
laws and exemptions becomes important for both the bank and those navigating its fiscal
intricacies. PNB functions within a framework that includes possible deviations impacted by
certain policies or incentives, just like other financial organizations.

Tax Liabilities

Philippine National Bank (PNB) has evolved into one of the country's premier financial
institutions, playing a pivotal role in the development of the Philippine banking industry. Over
the years, PNB has expanded its reach both domestically and internationally, providing a wide
array of banking and financial services to individuals, businesses, and government entities. In the
complex landscape of the financial sector, taxation plays a crucial role in shaping the economic
responsibilities of banking institutions. As with any financial entity, PNB is subject to a
multitude of tax regulations and liabilities that contribute to the broader fiscal framework of the
country.

The following outlines the tax liabilities of PNB, encompassing various obligations:

Taxes and Licenses. This category includes all other taxes, both local and national, such as gross
receipts taxes, documentary stamp taxes, real estate taxes, licenses, and permit fees, which are
recognized when incurred.
● Gross Receipts Tax: This refers to a tax assessed on the total gross revenue or receipts
earned by the bank from its business operations. Distinct from income tax, it is often
levied on the total amount of money a business earns before deducting any expenses. For
the year ended December 31, 2022, PNB reported a gross receipts tax of PHP
2,341,737,766.
● Documentary Stamp Taxes: This type of tax is imposed on certain documents and
transactions, commonly applied to various financial instruments, contracts, and legal
papers. Notably, on December 21, 2021, the Parent Company obtained a BIR ruling
exempting the transfer of properties to PNB Holdings from tax, except for documentary
stamp tax (DST). Similarly, on March 10, 2022, another BIR ruling exempted property
dividends distribution from tax, except for DST. The 2022 DST of PNB is reported to be
PHP 3,600,000,000.
 ● Real Estate Tax: Applicable to the bank's ownership or possession of land, buildings,
and other real estate assets, this tax is typically assessed based on the property's assessed
value. PNB reported PHP 39,108,997 for its real estate tax in the last reporting period.
● Local Tax and Other Taxes: PNB reported PHP 173,742,331 and PHP 278,632,255 for
tax liabilities imposed by local governments and other taxes (i.e., licenses and permit
fees), respectively.

Withholding Taxes. This category includes taxes that are deducted or withheld at the source
before certain payments are made and other final taxes.

● Withholding taxes on compensation and benefits: This withhold tax pertains to where
PNB deducts a portion of their employee’s salary on behalf of the government to ensure
that their employees pay their taxes during the year. In 2022, PNB remitted a total of
972,704,187 pesos of withholding tax related to compensation and benefits.
● Final income taxes withheld on interest on deposits and yield on deposit substitutes:
This withheld tax pertains to the tax withheld related to income earned through bank
savings, time deposits, and deposit substitutes. In 2022, PNB remitted a total of
621,327,643 related to income from interests.
● Expanded withholding taxes: This withhold tax pertains to the percentage withheld by
PNB from the payment to other parties. The amount withheld will be eventually remitted
to the government on behalf of the payee to ensure that the government collects taxes on
certain types of income. In 2022, PNB remitted 186,839,828 pesos pertaining to this
withholding tax.
● Withholding taxes on the amount withdrawn from the decedent’s deposit account:
This withholding tax pertains to the tax imposed on the amount withdrawn from a
deceased person’s account. This is to help concerning parties to withdraw the funds
immediately without worrying about the estate tax. In 2022, PNB remitted 32,970,113 of
withholding tax pertaining to amounts withdrawn from the decedent’s deposit account.
● VAT withholding taxes: This withholding tax is acquired through withholding a certain
percentage of payment on transactions between VAT registered suppliers. This is to
enhance the collection of VAT and ensure its compliance. PNB remitted 6,047,534 of
VAT withholding tax in 2022.
● Other final taxes: PNB remitted a total of 99,850,992 of other final taxes withheld in
2022.

Implications on Audit

The effects of tax laws in financial institutions, like the Philippine National Bank, is a
complex and comprehensive concept as it deals with the multitude of different transactions that
needs to be accurately recorded and reported. Auditing such companies requires the auditor to be
meticulous and exercise their professional judgment as tax in financial institutions can come
from various transactions like loans, investments, and their gains and losses. Additionally,
auditors must be updated on recent changes in tax laws as it can affect the way the company
presents itself.
 ● To assure the accuracy of the Financial Statements. Identifying all applicable tax
liabilities will enable the auditors to evaluate the accuracy and completeness of the
financial statements. As the tax liabilities will form part in the calculation of the income
for the current period and its liabilities.
● To ensure that the company followed the appropriate Tax Policies. Aside from
identifying all applicable tax liabilities, auditors will also need to inspect if the
management applied the correct rates in computing their taxes.
● To assess the company's internal control. Discovering misappropriation or
miscalculation of tax liabilities can help auditors assess the reliability of the internal
controls and those charged with governance on the creation of the financial statements.
● To assure the sufficiency of audit procedures. Discovering or identifying the presence
of new tax liability will make auditors carry additional audit procedures to properly
evaluate the financial statements with consideration to changes brought about by the new
information.

AUDITING PROCEDURES

Test of Controls
The susceptibility of financial institutions to data manipulation, coupled with the rising
prevalence of software-related fraud, highlights the critical role of audits in ensuring security and
integrity. Auditing Standard No. 5 states that the objective of the tests of controls in an audit of
internal control is to obtain evidence about the effectiveness of controls to support the auditor's
opinion on the company's internal control over financial reporting. Furthermore, Hall (2022)
emphasizes that test of controls is necessary if substantive procedures can’t properly address a
risk of material misstatement
Audit procedures that apply to any industry also apply to an entity operating in the Bank
Industry, such as Philippine National Bank (PNB). As presented in the annual report of PNB and
introduced by Basel Committee on Bank Supervision, the following are audit procedures which
can be performed in addition to the regular internal audit procedures performed by an internal
auditor:
A. Enterprise Information & Cyber Security
Banks handle lots of clients and transactions which in turn equates to a responsibility to
secure the private information garnered from these. PNB, through their enterprise
information and cyber security group, disseminates email advisories, publicizes
awareness content, and conducts training. Auditors may have to understand the process of
how banks manage and process information pertaining to transactions and client details,
and how security and privacy controls are implemented to ensure that the bank is capable
of ensuring the effectiveness of its security measures.
B. Fraud Prevention Controls
Banks often have fraud cases and concerns due to security controls being bypassed.
Security controls of banks may consist of one-time-pins (OTP), touch IDs, SMS & email
alerts, authority limitations, and branch personnel rotations. Auditors have to thoroughly
 check the effectiveness of such security controls systems to ensure that fraud cases can be
prevented and the risk of being exposed to fraud is mitigated.
C. Transaction Monitoring
Ensuring the security, verification and accuracy of transactions are a priority when it
comes to banking. Auditors will have to note the transaction monitoring systems of banks
in order to ensure that each transaction is recorded properly. An example would be a bank
deposit will have to be accompanied by a ticket to ensure the existence or occurrence of
the said transaction.
D. Finance

In a bank, the finance function ensures the accuracy and reliability of financial
information. Key aspects such as calculations, profit and loss valuation, and reserves
impact the level of a bank’s capital resources. Therefore, it is crucial that these controls
undergo periodic internal audit reviews, utilizing resources and expertise to effectively
evaluate bank practices. Internal audit teams should employ their resources and
knowledge to assess the control environment, availability, and reliability of information,
as well as the evidence used in the valuation process and the reliability of estimated fair
values.

E. Regulatory and Internal Reporting

Internal auditors should regularly evaluate the effectiveness of the process by which the
risk and reporting functions interact to produce timely, accurate, reliable, and relevant
reports for both internal management and the supervisor. This encompasses standardized
reports that document the bank's computation of its capital resources, requirements, and
ratios. Additionally, it may involve public disclosures designed to enhance transparency
and market discipline, such as reporting regulatory issues in the bank's public statements.

Substantive Procedures

Abbreviations Financial Statement Assertions

A Accuracy
C Completeness
CO Cut-Off
E Existence
O Occurrence
Cl Classification
 P Presentation
RO Rights and Obligations
VA Valuation and Allocation

Credit Process

Assertions
Audit Procedure Description
A C CO E O Cl P RO VA
To ensure that the ✔ ✔ ✔
Reconciliation of the
amount of impairment
allowance for
losses are properly
impairment losses in
recorded and check for
the sub-ledger
possible unrecorded
reconciliation
losses
To verify that the ✔ ✔ ✔ ✔
changes regarding the
allowance for
Roll-forward
impairment losses are
procedure of the
properly recorded and
allowance for
that all movements in
impairment losses
the allowance are all
considered in the roll-
forward procedure
To ensure that the data ✔ ✔
imputed in the creation
Completeness and of the company’s
accuracy testing of financial statements
data inputs accurately represents
the current position of
the company.
To obtain evidence and ✔ ✔ ✔
verify the accuracy and
Recalculation of
completeness of
impairment losses
financial statement
amounts.
To assess the ✔ ✔ ✔ ✔
Testing of
reasonableness and
management overlays
objectivity of the
 adjustments to the
model-generated
outputs for estimating
credit losses made by
management.

To ensure that
management overlays
are accurately and
completely reflected in
the financial
statements.

To verify that the

overlays are
appropriately applied to
the credit loss
calculations.
To verify the existence ✔ ✔ ✔
and valuation of the
bank loan’s portfolio
Independent credit
by independently
review
assessing the
creditworthiness of
borrowers

Financial Reporting

Assertions
Audit Procedure Description
A C CO E O Cl P RO VA
To verify the accuracy ✔ ✔ ✔ ✔
and validity of
transactions recorded in
the financial statements
Vouching journal of PNB, auditors
entry adjustments to examine supporting
relevant documents by selecting
documentation a sample of journal
entry adjustments made
during the financial
reporting period and
tracing these selected
 JEs back to
authorization forms,
deposit slips, loan
contracts, or other
relevant
documentation. By
doing this procedure,
the risk of material
misstatement in the
financial statements of
PNB is reduced.
To ensure that the post- ✔ ✔ ✔ ✔
closing entries are
appropriate and
accurately reflect the
financial position, the
auditors of PNB look
into the supporting
documentation for each
post-closing entry and
trace the entry to the
general ledger. For
example, they may
Testing of
examine loan accruals
post-closing entries
by looking at the loan
agreements, loan
schedules, and interest
rate calculations. They
may also look into the
entries involving
accounts with fraud
risk, those posted
outside banking days,
and those that were
made by the same
maker and approver.
To directly confirm the ✔ ✔ ✔ ✔ ✔ ✔
existence and
occurrence of revenue
Testing of Revenue transactions, to confirm
Accounts all revenue transactions
are complete and that
no material revenue is
missing from the
 financial statements, to
provide evidence
regarding the accuracy
of revenue recognition,
to ensure that revenue
is recognized in the
appropriate period
supporting the accuracy
of financial statements,
and to confirm that
revenue is
appropriately
categorized in the
financial statements.
To provide evidence ✔ ✔ ✔ ✔ ✔ ✔
that expenses recorded
in the financial
statements exist,
occurred, and are
supported by
appropriate
documentation, to
confirm that all
expenses are complete
and that no material
expenses are missing
from the financial
Testing of Expense
statement, to provide
Accounts
evidence regarding the
accuracy of expense
recognition, to ensure
that expenses are
recognized in the
appropriate period,
supporting the accuracy
of financial statements,
and to confirm that
expenses are
appropriately
categorized in the
financial statements.
To provide direct ✔ ✔ ✔ ✔ ✔ ✔
Testing of Asset
evidence of the
Accounts
existence and
 occurrence of assets, to
confirm that all assets
are complete and that
no material assets are
missing from the
financial statements, to
provide evidence
regarding the accuracy
of asset valuation and
depreciation expense
recognition, to assess
the reasonableness of
asset values recorded
on the financial
statements, and to
confirm that the
company has the legal
rights to its assets and
that there are no
undisclosed
obligations.
To directly confirm the ✔ ✔ ✔ ✔ ✔ ✔
existence and
occurrence of
liabilities, to confirm
that all liabilities are
complete and that no
material liabilities are
missing from the
financial statement, to
provides evidence
regarding the accuracy
Testing of Liability of liability balances
Accounts and the recognition of
interest expenses, to
ensure that liabilities
are recognized in the
appropriate period,
supporting the accuracy
of financial statements,
and to confirm that
liabilities are
appropriately
categorized in the
financial statements.
Investment

Assertions
Audit Procedure Description
A C CO E O Cl P RO VA
The process of ✔ ✔
investment sub ledger
reconciliation involves
a thorough assessment
and alignment of the
complex documents
hidden in the
investments sub-ledger
with external sources,
like brokerage
statements, general
ledger accounts, and
financial statements.

It ensures accurate
financial reporting by
Sub-ledger
meticulously verifying
Reconciliation of
transactions, including
Investments
sales, purchases,
dividends, and interest
income. Finding
inconsistencies in this
careful matching is
common. It involves
more than just fixing
mistakes; it also entails
keeping thorough
records that
demonstrate the steps
taken, the
modifications made,
and the methods used
to reconcile
differences.

When employing ✔ ✔ ✔ ✔ ✔
methods of
confirmation, physical
 examination, or other
substantiating evidence
for securities, the
auditor aims to validate
key elements such as
existence, ownership,
valuation, and the
accurate presentation
and disclosure of
investments.

Confirmation involves
direct communication
Confirmation, with third parties,
Physical usually custodians, to
Examination, or verify various details
Other Substantiating like the type, quantity,
Evidence for and ownership of
Securities securities. Physical
examination
encompasses the direct
examination of tangible
securities, such as
certificates, to assert
their existence.
Moreover, other
substantiating evidence
for securities may be
sought from sources
such as pricing services
or external appraisers
to validate information.
These methods
collectively contribute
to the accuracy of the
assessment and
information the auditor
reports, where any
determined
discrepancies trigger
further examination.
Appropriating ✔ ✔ ✔ ✔
Verifying
investments
Classification of
classification is about
Investments
ensuring that
 investments are
categorized
appropriately to reflect
their nature, purpose,
and impact on the
financial statements.

For stakeholders to
fully understand the
risk exposure and
portfolio composition
of a company,
investment
classification is
essential. Different
investments carry
varied risks and
rewards, aiding
informed
decision-making on
returns, volatility, and
liquidity.
To ensure the precision ✔ ✔ ✔ ✔
of reported fair values
in the financial
statements, the process
involves understanding
the entity’s valuation
methodology, verifying
market prices through
external sources,
Valuation of assessing the fair value
Investments based on hierarchy classification,
the Prevailing Quoted confirming the
Market Price existence of
investments, and
evaluating internal
controls over valuation
processes. Moreover,
auditors may also test
any adjustments made
to quoted market prices
to ensure their
appropriateness and
compliance with
 accounting standards.
Businesses can use a ✔ ✔ ✔
variety of valuation
models to determine
the value of these
assets and make
well-informed
decisions about
whether to purchase,
hold, or sell
investments.

Some valuation models

are the discounted cash
flow (DCF) model, net
asset value (NAV)
model, and the price-
earnings (P/E) ratio.
Different
Valuation Models - valuation models
Valuation of possess strengths and
Investments limitations, with their
suitability dependent
on the specific
investment type and
influenced by factors
like market conditions
and available data.

Thorough validation of
valuation models
through substantive
testing is crucial for
accurate investment
valuations in financial
statements. It assures
stakeholders of
reliability, enhancing
financial reporting
credibility.
The substantive testing ✔ ✔ ✔ ✔
Impairment of for impairment of
Investments
investments shall
 include understanding
impairment indicators,
reviewing assessment
methodologies, and
testing the
appropriateness of used
valuation models.
Assessing the
reliability of fair value
measurements also
involves the
consideration of market
conditions and
economic factors that
could impact
investments.
Furthermore, the
documentation of
procedures, evidence,
and conclusions is also
carefully done to
ensure adherence to
accounting standards
and valid reflection of
the economic value of
impaired investments
in the financial
statements.

In order to confirm that ✔ ✔ ✔ ✔

gains or losses
recorded in a
company's financial
statements are accurate,
Recompute realized
this process entails
gains and losses from
going over transactions
disposal of
pertaining to the sale or
investments
disposal of
investments. It
evaluates the financial
statements'
dependability and
 correctness, confirming
whether the stated
gains or losses on
investment disposals
match the actual sums
received from those
transactions. It also
made sure that the real
proceeds from the sale
or disposal of
investments are
correctly reflected in
the computations of
realized gains or losses.
The process of ✔ ✔ ✔ ✔ ✔
selecting predictive
analytical procedures in
examining the interest
income of trading
securities begins with
the careful
implementation of
methodologies, such as
the analysis of
historical trends and
Analytical industry benchmarks.
Examination of These methods become
Trading Securities the basis for
Interest Income formulating
expectations for
interest income. The
auditor compares these
expectations with the
actual reported interest
income, delving into
potential variances and
evaluating the
reliability of the
underlying data.
Furthermore, the
analytical examination
 also incorporates a
comprehensive
consideration of risk
factors that could
impact interest income,
including changes in
interest rates and
market conditions.

In the recomputation of ✔ ✔ ✔ ✔ ✔
interest income from
financial instruments at
AC and FVOCI, the
process begins with
understanding the
entity’s classification
and accounting
policies, where a
sample of financial
instruments
encompassing both AC
and FVOCI categories
are selected. The
Recomputation of recomputation of
interest income from interest income
financial instruments
at AC and FVOCI follows, focusing on
the effective interest
rate method for AC
instruments and an
evaluation of fair value
changes for FVOCI
instruments.
Subsequently, the
recomputed interest
income is compared
with the amounts
recorded in the
financial statements to
ensure the precision of
reported amounts.
Lending

Assertions
Audit Procedure Description
A C CO E O Cl P RO VA
The reconciliation of ✔ ✔
loans in a sub-ledger is
an essential step in the
substantive audit
procedures. It entails
comparing and
verifying balances
documented in the sub-
ledger with their
counterparts in the
general ledger.
Generally, the
sub-ledger comprises
comprehensive loan
data, including
interests, schedules,
Reconciliation of
and other pertinent
Loans in the
particulars.
sub-ledger
Through ensuring that
this substantive
procedure is
performed, auditors
play a crucial role in
verifying the reliability
and adherence to
appropriate accounting
principles of financial
statements.
Subsequently,
stakeholder confidence
in the accuracy and
completeness of
financial information is
maintained.
Confirmation and Confirmation and ✔ ✔ ✔
document inspection inspection of corporate
for corporate loans loan documents are
 frequently employed as
mutually supportive
processes. When
auditors perform
confirmation, external
parties are involved.
Meanwhile, document
inspection focuses
more on examining the
entity's readily
available documents.
In inspecting retail loan ✔ ✔
documents, auditors
must meticulously
examine all the
relevant documentation
on every retail loan.
Through the said audit
Document inspection
procedure, auditors can
for retail loans
verify the terms
accompanying the
loans and whether such
conditions are
appropriately
documented in the
books.
The loan interest ✔ ✔ ✔
income of the banking
institutions is evaluated
through analytical
procedures where the
reported interest
income is assessed for
accuracy and
Loans interest income reasonableness based
analytical procedure on the institution's loan
portfolio. It may
include activities such
as ratio analysis,
wherein various
financial ratios are
considered to
understand the loan
portfolio's profitability
 performance.
The recalculation of ✔ ✔ ✔ ✔
accrued interest income
encompasses verifying
the accuracy of
recognized yet
unreceived interest
income, wherein
auditors apply specified
terms from loan
Recalculation of agreements to compute
accrued interest interest on outstanding
income balances and
independently
cross-verify these
calculations against
recorded figures for
sampled loans or
interest-bearing assets
to ensure alignment
with the financial
statements.
In assessing the ✔ ✔
revenue recognition of
loan fee income,
auditors thoroughly
examine how fees
linked to loans are
recognized and
accounted for, starting
with a comprehensive
review of the
Assessment of
company's accounting
revenue recognition
policies. It involves
of loan fee income
scrutinizing the specific
criteria and principles
guiding fee
recognition, assessing
the terms and
conditions outlined in
loan agreements, and
ensuring consistent
application of
recognition methods
 across similar loan
types in alignment with
pertinent accounting
standards.

Treasury

Assertions
Audit Procedure Description
A C CO E O Cl P RO VA
To validate the ✔ ✔ ✔ ✔
recorded interbank
loans and receivables.
This involves sending
confirmation requests
to counterpart financial
institutions, with the
auditor meticulously
Confirmation reply assessing and
assessment and monitoring the replies
monitoring of received. This is to
Interbank Loans and ensure the reliability of
Receivables the bank's financial
statements by verifying
the legitimacy of
interbank transactions
and identifying any
discrepancies or
irregularities that may
require further
investigation.
To verify the accuracy, ✔ ✔ ✔ ✔
existence, and
completeness of funds
due from the Bangko
Sentral ng Pilipinas
Confirmation reply
(BSP). Through this,
assessment and
the auditor aims to
monitoring of Due
ensure the reliability of
from BSP
the bank's financial
statements by
confirming the
legitimacy of these
funds and promptly
 addressing any
discrepancies or
irregularities in the
confirmation replies.
The primary goal is to
enhance the overall
accuracy and
transparency of the
bank's treasury
accounts.
In validating the ✔ ✔ ✔ ✔
accuracy and existence
of the Net Due to
Home Office and Other
Branches to be reported
in PNB’s Statement of
Financial Position, it is
necessary to request for
confirmation replies
from parties involved.
Confirmation reply
This Current Liability
assessment and
line item entails netting
monitoring of Due to
the amount due from
and from Head Office
home office and other
and Other Branches
branches with the
amount due to home
office and other
branches. Thus, there is
a need to monitor and
assess whether the
computations are
correct to determine if
such obligation does
exist.
An additional way of ✔ ✔ ✔
preventing and
detecting fraud is to
reconcile the book
Bank reconciliation at balances with the bank
period-end balances especially
since a bank’s treasury
process is heavily
associated with bank
procedures—deposits,
 withdrawals, lending
and borrowing. This
substantive procedure
assures the accuracy,
existence, and
completeness of the
accounts involved.

COMPLIANCE TESTING

Compliance testing for the Philippine National Bank (PNB) involves assessing and
verifying the bank's adherence to regulatory requirements, industry standards, and internal
policies set by the Bangko Sentral ng Pilipinas (BSP) and other relevant authorities in the
Philippines. PNB is fully committed to its compliance, ethics, and governance programs. The
bank adheres to existing and new Anti-Money Laundering (AML) Laws, customer due diligence,
taxation laws, the Data Privacy Act, and other financial regulations, rules, and implementing
guidelines issued by both Philippine and foreign regulators. The bank has also updated policies
and procedures embracing the compliance framework, the corporate governance guidelines, and
the AML Risk Rating System issued by Bangko Sentral ng Pilipinas and foreign regulators on
AML/CFT and FATCA laws and regulations. Compliance testing is crucial for financial
institutions like PNB to mitigate risks, maintain the integrity of financial markets, protect
customers, and uphold the banking system's stability.

The PNB, as a financial institution, its Board, and Senior Management are committed to a
compliance enterprise framework guided by the principle that:

“Compliance and good corporate governance is embedded in the corporate culture as

deeply as the desired corporate goals of achieving the revenue targets and expense management
and in the process preserve the franchise value of the bank”

Repercussions of Non-Compliance

In the banking industry, like Philippine National Bank (PNB), the repercussions
of non-compliance can be severe and wide-ranging. Failure to adhere to regulatory
requirements, including those set by the Bangko Sentral ng Pilipinas (BSP) and other
relevant authorities, can result in legal consequences, financial penalties, and damage to
the bank's reputation. Non-compliance may lead to regulatory investigations and audits,
potentially resulting in fines or sanctions. Moreover, operational disruptions could occur
as the bank may need to implement corrective measures and invest resources to address
compliance deficiencies. Reputation damage is another significant consequence, as
customers and stakeholders may lose trust in the institution, affecting its market standing.
In extreme cases, repeated non-compliance could even lead to the revocation of the
 bank's operating license. Therefore, the banking industry places a high premium on
compliance to maintain integrity, financial stability, and public trust.

To avoid these repercussions, the Philippine National Bank (PNB) is committed to

strong compliance policies and procedures, aligning with regulatory standards set by
entities like the Bangko Sentral ng Pilipinas (BSP). The bank invests in advanced
technology solutions, such as compliance management systems, to enhance monitoring
capabilities and detect potential breaches. Additionally, regular risk assessments are
conducted to identify and address compliance-related risks. PNB maintains open
communication with regulatory bodies and fosters an ethical culture within the
organization. This proactive approach demonstrates a commitment to upholding ethical
standards and regulatory requirements.

CONCLUSION

As a leading commercial bank in the Philippines, PNB has played a pivotal role in our
country's economic development. However, PNB's prestige also entails a significant
responsibility to uphold its stakeholders and the public's trust. Given that the entity dominates its
industry, it is sensitive to various risks, including business and risks of material misstatements.
These risks, when unattended, may increase the likelihood of instigating unfaithful
representation of financial information.

Moreover, despite being an established brand, PNB may still be subjected to issues
concerning its practice of accounting and taxation policies, considering that the banking industry
has unique operational activities. To mitigate repercussions, it is necessary to meticulously
design an audit procedure appropriate to the distinct business nature of PNB.

Recommendations
With the innate risks associated with the very nature of banking, PNB must take extra
measures to ensure that its financial statements faithfully represent its condition to protect the
best interests of its stakeholders. As such, it is recommended to:

● Maintain and, if necessary, further enhance its appropriately-designed

internal controls. With PNB's longevity, it has proven through time that its
internal controls are efficient. Nonetheless, the entity must continuously monitor
its operations to ensure that the efficiency and effectiveness of its controls are
maintained and further enhanced.

● Continuously ensure that the management is well-informed about taxation

and PFRS amendments. The entity should ascertain that the management,
especially the team assigned to prepare the financial statements, are updated with
amendments to policies and standards for continuous adherence to laws and
regulations.
 ● Warrant periodic monitoring and review. The organization should implement
regular monitoring and review procedures to guarantee control efficacy and detect
developing risks.

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