UNIVERSITY OF SANTO TOMAS

Alfredo M. Velayo – College of Accountancy

España, Manila

ACC 5118 – AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

TECHNICAL MEMORANDUM ON BANKING INDUSTRY

BDO Unibank, Inc.

Submitted by:
CATAPANG, Bryan Alson R.
DANTES, Vince Aldrin M.
DE GUZMAN, Dan Angelo C.
GALAPON, Gilliane O.
GUMPAL, Lara May Anne V.
ILAO, Ma. Catherine I.
LAVILLA, Arrence Ghayle M.
LEONORAS, Lea Sharmaine T.
LIBAN, Joanna Gaile
MALONJAO, Beatrice Gabrielle Q.
MENDOZA, Bea Nadine S.
PULHIN, Pamela F.
RAMONES, Ma. Stephanie D.
SOLIMAN, James Vincent L.
4A4

Submitted to:
Mr. Almario G. Parco, Jr., CPA, MBA
November 30, 2023
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

INTRODUCTION

The banking sector is vital in the Philippines because it is essential to financial stability

and economic growth. Banks operate as financial intermediaries between savers and borrowers,

allowing capital to circulate freely throughout the economy. Additionally, it supports capital

formation by lending money for various economic endeavors that foster business development

and expansion, which raises output and creates job possibilities. Furthermore, banks have

provided dependable and effective payment methods that have facilitated the interchange of

transactions. Moreover, banks have played a significant role in financial inclusion, risk

management through various financial products, and monetary policy transmission. They have

also facilitated international trade by offering foreign currency services. To sum up, the banking

sector is a vital component of the nation's economic structure, enabling investment and growth,

offering crucial financial services, and advancing the stability and advancement of the economy

as a whole.

Auditing in the Philippine banking industry plays a vital role in promoting transparency,

regulatory compliance, risk management, and overall financial stability. This accountability is

essential, especially for stakeholders, to have the assurance that financial reports presented to

them are accurate. In addition, one factor that supports the banking industry's stability is effective

risk management. The risk management evaluations assist in identifying and reducing possible

risks, such as those related to credit, markets, operations, and compliance. In the banking sector,

auditors are also essential in identifying and stopping fraudulent activity. Their analysis of
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

internal controls and financial transactions aids in detecting anomalies and guarantees the

accuracy of financial reporting. It also promotes investor confidence, strengthens the credibility

of financial institutions, and helps the banking industry and the economy grow sustainably.

The objectives of this paper are to:

● Understand the banking industry.

● Identify the different factors that affect the banking industry.

● Discuss the complexities of the banking industry's business risks and accounting issues.

● Discuss the audit procedures in the banking industry.

This paper revolves around the analysis of the BDO Unibank, Inc. company, which was

incorporated in the Philippines in 1967 to engage in the banking business. Commercial banking,

investment banking, private banking, insurance, and other banking services are just a few of the

many banking services that BDO now provides. Traditional loan and deposit products, treasury,

asset management, real estate management, leasing and financing, remittance, trade services,

retail cash cards, credit card services, stock brokerage, life insurance and insurance brokerage,

and others are among these services. BDO operates mainly in the Philippines, with 1,197 local

and two foreign branches as of 2022.

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

AGENDA

The following agendas will be the focus of the case study:

● Determine the market, regulatory, economic, and technological factors of BDO;

● Assess the risks present in the banking industry and in BDO;

● Detect accounting issues and identify key auditing procedures; and

● Develop effective strategies most suitable for the BDO.

MARKET FACTORS

In the banking industry, several market factors are taken into consideration, which affects

the dynamics of the industry and the players and firms that belong in the industry. These factors

can vary from the economic environment to regulatory policies and technological advancements

that are taking place. The banking industry is commonly affected by interest rates, both central

bank rates, which influence the cost of funds for banks, and market interest rates, which are

fluctuations that impact the profitability of lending and the returns on investments. Aside from

that, the industry also considers customer behavior, credit markets, market competition, and

inflation rates. The banking industry is a huge contributor to the Philippine economy, as it

garnered over 1 Trillion pesos in 2022. The banking system in the country is expected to change

and develop as necessary reforms are set to be implemented in order to satisfy the banking needs

of Filipinos (statista.com, n.d.). The banking industry is huge as the Banko Sentral ng Pilipinas

(BSP) or the country’s central bank handles and regulates several classifications of banks like

universal, commercial, thrift, rural, cooperative, and Islamic banks. Among the largest universal

and commercial banks in the Philippines include BDO Unibank, Land Bank of the Philippines,
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

and Metropolitan Bank and Trust Company.

BDO Unibank Group primarily operates in the Philippines with certain branches located

in Hong Kong and Singapore, real estate and holding companies in Europe, and several

remittance subsidiaries in Asia, Europe, Canada, and the USA. These foreign operations

accounted for about 3.6% of BDO Unibank Group’s total revenues in the years 2020 to 2022,

1.4% in 2022, 1.2% in 2021, and 1.0% in 2020. BDO vies to continue its outstanding results as it

records a revenue of P57.1 billion in 2022, which is a P14.3 billion revenue increase from the

previously recorded P42.8 billion revenue in 2021. These results can be attributed to various

factors such as an increase in gross customer loan non-interest income, a positive operating

leverage, improved asset quality and dipping non-performing loan, expanded total capital, and a

decent Capital Adequacy Ratio (CAR) and Common Equity Tier (CET1) ratio valued above

regulatory minimum levels. Despite macroeconomic challenges that the industry is facing with

persistent inflation, foreign exchange instability, and interest rate volatility, BDO continues to

perceive a good financial outcome with its established business franchise and strong balance

sheet. The firm aims to surmount possible near-term risks as well as capitalizing on structural

growth opportunities in order to obtain long-term sustainable growth.

It is also evident that trends and changes have occurred in the banking industry as it

adapts to the dynamic developments that are happening and that have emerged globally. The

most visible trend is the digital transformation of banking where customers are now able to

experience online and mobile banking, emphasized on digital channels for banking services.
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

Other than that, there is also Fintech integration where there is collaboration or competition with

fintech companies to enhance digital offerings, and digital payments which includes mobile

wallets and contactless payments. There are other several trends that currently exist in the

industry, we now have open banking which allows API integration and partnerships in the

industry, better and improved customer experience through personalization based on individual

customer preferences and now with the utilization of chatbots and AI, RegTech or regulatory

technology which opened the doors for compliance automation and increased focus on data

protection. In addition, we also now have Blockchain and cryptocurrencies, Artificial

Intelligence which can provide credit scoring models for a more accurate risk assessment, fraud

detection and prevention through the utilization of machine learning algorithms, and even

promoting sustainability by having green finance which focuses on environmentally sustainable

financial products and investments and ESG (Environmental, Social, Governance) Integration by

considering ESG factors in decision-making processes. Lastly, customers are now able to

experience resilience planning advancements in the industry as it is apparent in every firm’s

pandemic response and continuity plans in response to global events and risk management, as

well as subscription-based banking, and hyper-personalization through data analytics in order to

provide hyper-personalized financial advice and solutions to its customers.

REGULATORY FACTORS

As a banking institution, BDO Unibank Group’s operations are regulated and supervised

by the Bangko Sentral ng Pilipinas (BSP). In this regard, BDO Unibank Group is required to

comply with the rules and regulations of the BSP such as those relating to maintenance of
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

reserve requirements on deposit liabilities and deposit substitutes and those relating to the

adoption and use of safe and sound banking practices, among others, as promulgated by the BSP.

In addition, BDO Unibank Group is subject to the provisions of Republic Act (R.A.) No. 8791,

the General Banking Law of 2000, and other related banking laws.

Pursuant to applicable BSP regulations, the BDO Unibank Group is required to maintain

reserves against deposit liabilities which are based on certain percentages of deposits. The

required reserves against deposit liabilities shall be kept in the form of deposits placed in the

BDO Unibank Group demand deposit accounts with the BSP.

In considering each possible related party relationship, attention is directed to the substance of

the relationship and not merely on the legal form. The BDO Unibank Group established policies

and procedures on related party transactions in accordance with the regulations of the BSP and

the Securities and Exchange Commission (SEC). All material related party transactions, which

exceed the established materiality thresholds, must undergo prior review from the board-level

Related Party Transactions Committee before endorsing the same to the BOD for approval.

BDO Unibank Group is also subject to several regulatory requirements by the Bureau of

Internal Revenue (BIR). The Bureau issued Revenue Regulations (RR) No. 15-2010 on

November 25, 2010, which required certain tax information to be disclosed as part of the notes to

the financial statements. The supplementary information is, however, not a required part of the

basic financial statements prepared in accordance with PFRS; it is neither a required disclosure

under the Philippine SEC rules and regulations covering form and content of financial statements

under the revised Securities Regulation Code Rule 68. The Parent Bank presented this tax
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

information required by the BIR as a supplementary schedule filed separately from the basic

financial statements.

ECONOMIC FACTORS

The banking industry is highly influenced by the changing economic environment where

it operates. Thus, it is crucial to identify these economic factors because these impact the

business operations, profitability, and overall performance. These are some of the economic

variables influencing the banking sector in the Philippines.

Interest Rates. The policy rates that the Central Bank of the Philippines sets, Bangko

Sentral ng Pilipinas (BSP), directly impact interest rates in the country. Bank borrowing costs

can increase with higher interest rates, while their interest income can decrease with lower rates.

Government Policies. Changes in regulatory policies set by the government and the BSP

influence the banking industry. While stricter regulations might increase compliance costs,

deregulations may lead to an increased competitive landscape.

Political Stability. Politics highly influence the economic activity and stability of the

country. Political stability is vital for a robust banking environment. Political upheaval impacts

investor confidence and can cause capital flight and higher bank risk.
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

Global Economic Conditions. Banking industries are interconnected globally.

Consequently, a financial crisis or economic downturn in one region of the world has

repercussions for the banking sector as a whole.

Inflation. Inflation in the country decreases the purchasing power of money, affecting the

true value of loans and deposits. Thus, this impacts the stability and profitability of the bank.

Economic Growth. The growing economy in the Philippines increases demand for loans

and borrowings, benefitting the banks. On the other hand, a slowing economy lowers the demand

for loans and raises the proportion of non-performing loans.

Remittances. Remittances from overseas Filipino workers are essential to the

development of the Philippine economy. Changes in the remittance level will impact the deposits

and spending patterns.

Foreign Exchange Rates. Banking companies that have regular international

transactions are exposed to currency risks. Fluctuations in the exchange rates impact the value of

assets and liabilities in different currencies.

Natural Disasters. The banking sector is impacted by the Philippines' susceptibility to

natural catastrophes. The intensity of these occurrences affects economic activity, which in turn

involves loan repayments.

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

Understanding and monitoring these economic factors are crucial for the decision-making

process of the banking industry. This will help them manage risks and adapt to the dynamic of

the economic environment.

In relation to BDO Unibank, Inc., the recent economic activities during 2022, such as the

Russia-Ukraine conflict and the continuing impact of the COVID-19 pandemic, did not have a

material effect on the company's operation and performance. However, they recognized that

prolonged such events will eventually affect economic activity, resulting in slower growth and

consumption. With this, BDO continuously monitors the development of local and global

economic activities.

TECHNOLOGY IN BANKS

Technological developments have made information processing and transmission easier

for the banking sector. Information technology contributed to transforming product range,

product development, and service channels of banking services (Campanella, 2017). In addition

to that Giovanis et al. (2019) stated that, through self-service technology, such as ATMs, internet

banking, and mobile banking, clients can easily access banking services without the need for the

assistance of a bank employee.

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

Automated Teller Machines (ATMs)

Automated Teller Machines (ATMs) were first introduced in the Philippines in the

1980s, since then, it has become one of the most common customer delivery methods in both

urban and rural areas of the country. According to Bangko Sentral ng Pilipinas, as of the last

quarter of 2022, there are 23,419 ATMs nationwide, around 4,600 of which are BDO ATMs.

ATMs usually require customers to have a bank-issued ATM card to access its services.

For BDO clients, they could use their BDO cards for their transactions in any BDO ATMs in the

country, as well as, withdraw and check their account balances at ATMs in select 7/11 branches.

In a study conducted by Depusoy, Romuar, & Nartea (2020), it was found that ATMs is

the top target of perpetrators. Several cases of ATM fraud, namely skimming and the like, have

been reported in recent years; therefore, installing CCTV and 24-hour monitoring is necessary.

Moreover, some ATMs experience failed transactions due to the failure of ATM software or

machines out of cash for dispensing.

Internet and Mobile Banking

Internet and Mobile banking make use of a mobile device or an individual’s personal

computer to carry out financial transactions through the use of the Internet. In mobile banking,

an application is required to be installed, whether the client uses Android or iOS, to access the

bank's services. In addition to that, mobile banking could also be in the form of short message

services or SMS. Internet banking, on the other hand, is banking through a web browser and an
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

internet connection. (Corporate Financial Institute, 2023)

Both internet and mobile banking rely on technology to provide online or remote banking

services to their clients. Using mobile phones, which almost everyone has access to, Filipinos

could have an ideal channel for financial transactions. Datta et al. (2020) stated that customers

who are in a remote location from the physical bank could use their smartphones or laptops to

avail of banking services like fund transfer, payments, etc.

For BDO, the applications BDO Online and BDO Pay - the everyday e-wallet, are what

their clients could utilize for their mobile banking needs. In BDO Online, customers can manage

their accounts and check account balances, and many more, while the BDO Pay app allows them

to link their accounts to pay bills and other payment transactions hassle-free.

Importance of Data Security in Banking

In the banking industry, the trust of each client to the respective banks is given, and with

this trust comes the responsibility of the banks to handle their money and information diligently.

The assurance of clients that the banks would keep their information private is essential;

therefore, in the banking industry, data security is vital. For the client, their personal information

and money are at risk when data from banks are not properly secured.

Customer Information Confidentiality

Customers trust banks with both their financial and personal data, such as account
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

numbers, PIN codes, and transaction details, including sensitive and valuable information. With

this, the bank is required to implement technological safeguards and proper employee training to

protect this information. Moreover, maintaining a trustworthy image to its customers could

definitely benefit the brand image of the bank.

Financial Fraud Prevention

Secure data prevents unauthorized access to sensitive financial data; through these, the

bank could assure their clients that the risk of fraudulent transactions is reduced. This also

ensures that access controls and monitoring systems are in place; therefore, even employees

cannot use customer information for fraudulent transactions.

Prevent Banking Threats

Through proactive data security measures, like staying vigilant to potential threats and

updating of security measures regularly, the risk of online banking threats, such as phishing and

pharming, are prevented even before they occur.

SUMMARY

The banking industry in the Philippines is an important element for financial stability and

economic growth. Acting as intermediaries between savers and borrowers, banks facilitate the

flow of capital, support business development, and contribute to job creation. They provide

essential payment methods, promote financial inclusion, and play a vital role in risk management

and monetary policy transmission. The banking industry is integral to the nation's economic
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

structure, fostering investment and growth while ensuring financial stability. Auditing in the

Philippine banking industry is equally vital, promoting transparency, regulatory compliance, and

effective risk management.

The case study will center on four key agendas related to BDO Unibank Group: first, a

comprehensive analysis of market, regulatory, economic, and technological factors influencing

the bank; second, an evaluation of risks inherent in both the banking industry as a whole and

within BDO specifically; third, the identification of accounting issues and the formulation of

essential auditing procedures; and fourth, the development of strategic initiatives tailored to

enhance the effectiveness of BDO Unibank Group.

Key considerations include interest rates, customer behavior, credit markets, competition,

and inflation rates. In the Philippines, the banking sector, regulated by the Bangko Sentral ng

Pilipinas (BSP), plays a significant role in the economy. BDO Unibank Group, a major player in

the industry, operates not only domestically but also in foreign markets.Despite macroeconomic

challenges, BDO has demonstrated strong financial results, attributed to factors like increased

non-interest income, positive operating leverage, improved asset quality, and strategic capital

management.

BDO Unibank Group, a prominent banking institution in the Philippines, operates within

the Bangko Sentral ng Pilipinas (BSP) regulatory framework. Adherence to BSP regulations,

including reserve requirements and safe banking practices, is mandatory. The Philippine banking
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

industry is profoundly influenced by diverse economic factors such as Central Bank interest

rates, government policies, political stability, global economic conditions, inflation, economic

growth, remittances, foreign exchange rates, and natural disasters. These factors shape business

operations, profitability, and overall performance. While recent economic events like the Russia-

Ukraine conflict and the ongoing COVID-19 pandemic have not materially impacted BDO’s

operations, the bank maintains vigilance, acknowledging the potential long-term effects on

economic activity, leading to slower growth and consumption. A comprehensive understanding

and continuous monitoring of these economic factors are imperative for informed decision-

making and effective risk management in the banking industry.

Moreover, the banking sector has undergone significant transformation due to

technological advancements, revolutionizing product offerings and service channels. Information

technology has facilitated self-service options like ATMs, internet banking, and mobile banking,

granting clients convenient access independent of bank staff. Data security is paramount in

banking, ensuring client trust and safeguarding personal and financial information. Banks,

including BDO Unibank, must employ technological safeguards, conduct employee training, and

implement measures to prevent financial fraud and online threats such as phishing and pharming.
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

BUSINESS RISKS

Operational risks

Operational risk within the banking sector encompasses the potential for financial losses

arising from various sources, including internal processes, systems, personnel, and external

events. This category is pervasive, affecting the day-to-day operations of financial institutions,

including industry leaders like BDO Unibank, Inc. Various facets of operational risk demand

sharp attention, highlighting the critical need for solid risk management strategies.

Among these risks, human factors play a significant role. This spans from inadvertent

mistakes to deliberate fraudulent activities, whether perpetrated by internal staff or external

actors. The complexities of internal processes and systems pose additional challenges, including

the susceptibility to inefficiencies, breakdowns, and inadequate controls, potentially leading to

financial losses and operational disruptions.

Moreover, the persistent evolution of technology raises a layer of complexity and risk.

The banking industry, including BDO Unibank, Inc., faces the constant threat of cybersecurity

breaches. These encompass vulnerabilities to technical failures, disruptions in information

systems, hacking attempts, data breaches, and the danger of ransomware attacks.

Financial risks

Financial risks within the banking industry stem from exposure to diverse factors that can

harm a bank's financial health and stability. Among these risks are credit, market, and liquidity
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

risks. Under the scope of credit risks, there exists a constant concern that borrowers might

default on their loans, potentially resulting in financial losses for the bank. Additionally, default

and concentration risks emerge, where excessive exposure to a particular industry or a cluster of

interconnected borrowers heightens the risk of losses should that sector undergo economic

downturns.

For market risks, the fluctuation of interest and foreign exchange rates becomes a

significant variable. These changes can impact a bank's net interest income, while international

transactions face exposure to currency fluctuations that can influence the value of assets and

liabilities.

Liquidity risks, on the other hand, depend on the company's capacity to fulfill its

financial obligations and sustain its operations. This reliance on future performance and financial

results is influenced by challenges in selling financial instruments without causing substantial

price changes. Furthermore, the availability of funds plays a vital role in navigating liquidity

risks, emphasizing the importance of managing financial resources effectively.

Compliance risks

Compliance risks in the banking sector encompass the possibility of a bank contravening

laws, regulations, or industry standards, leading to legal repercussions, financial penalties,

reputational harm, and ruined customer trust. Navigating the dynamic landscape of regulatory

changes poses a formidable challenge, and lapses in compliance, whether due to ignorance or
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

delayed implementation, can incur significant penalties. These risks manifest in various forms,

including failing to adhere to multiple laws and regulations. This extensive framework covers

critical fields such as anti-money laundering (AML), data protection, and consumer protection,

highlighting the intricate and multifaceted nature of compliance obligations in the banking

industry.

Effect on Audit Process

Operational Risk:

Auditors analyze internal controls associated with operational processes to prevent errors or

fraudulent activities that could jeopardize the reliability of financial information. It is imperative

to consider the risk of material misstatement, focusing on issues such as transaction errors or

disruptions in critical business processes.

Financial Risk:

The identification and evaluation of the risk of material misstatement in financial statements are

essential. An examination of financial reporting procedures, accounting policies, and the quality

of financial information is required to address potential risks, including inappropriate estimates

or valuation practices.

Compliance Risk:

Auditors examine the entity's adherence to pertinent laws and regulations that impact financial

statements. Non-compliance could necessitate adjustments to financial statements or disclosures,

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

potentially prompting auditors to modify their opinion or report on compliance issues.

RISK OF MATERIAL MISSTATEMENT

The financial statements of BDO Unibank Group have disclosed three key audit matters

for 2022. These are Valuation of Loans and Other Receivables, Valuation of Financial

Instruments, and Carrying Value of Goodwill and Other Intangible Assets with Indefinite Useful

Lives. Financial reports have also been transparent on how these matters were addressed in audit.

Valuation of Loans and Other Receivables

Audit procedures to address the risk of material misstatement relating to the adequacy of

allowance for impairment of loans and other receivables, which was considered to be a

significant risk, included:

● testing the design and operating effectiveness of relevant general and application controls

across the processes, as assisted by the auditor’s own Information Technology specialists,

over the loan classification into stages, and the calculation and recognition of the

allowance for impairment;

● evaluating appropriateness of the BDO Unibank Group’s and the Parent Bank’s credit

policy and loan impairment process as approved by the Board of Directors;

● on a sample basis, evaluating the appropriateness of the credit risk ratings of loans to

assess appropriateness of credit risk monitoring;

● assessing the appropriateness of the BDO Unibank Group’s and the Parent Bank’s design

of the ECL impairment model;

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

● evaluating the inputs and assumptions, as well as the formulas used in the development of

the ECL models for each of the loan portfolios. This includes assessing the completeness

and appropriateness of the formula and inputs used in determining the probability of

default, loss given default and exposure at default;

● for forward-looking information used, evaluating whether the forecasted macro-economic

factors, which include gross domestic product growth, unemployment rates and core

inflation rates were appropriate. In addition, assessing the level of significance of

correlation of selected macro-economic factors to the default rates as well as the impact

of these variables to the ECL;

● assessing the borrowers’ repayment abilities by examining payment history for selected

loan accounts; and,

● on selected non-performing loan accounts, evaluating the management’s forecast of

recoverable cash flows based on agreed restructuring agreement, actual payment pattern

after the restructuring, valuation of collaterals and estimates of recovery from other

sources of collection.

Valuation of Financial Instruments

Audit procedures, included among others, the following:

● testing of design and operating effectiveness of relevant controls over the valuation

process including the valuation method and assumption used by the BDO Unibank Group

and the Parent Bank on the financial instruments, particularly the measurement of

derivative financial instruments as assisted by our own Information and Technology

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

specialists.

● evaluating whether fair value prices used were appropriate by testing the inputs against

reliable market sources;

● recomputing the fair values based on the inputs and compared with the market values

reported by the BDO Unibank Group and the Parent Bank; and,

● reviewing the appropriateness of the method used in fair market valuation.

Carrying Value of Goodwill and Other Intangible Assets with Indefinite Useful Lives

Audit procedures to address the risk of material misstatement relating to impairment of

goodwill and other intangible assets with indefinite useful lives included, among others,

evaluating the appropriateness of assumptions and methodologies used by the management, in

particular, those relating to the forecasted statement of financial position and statement of

income as well as the discount and growth rates used. The auditors of BDO Unibank have

involved their Firm valuation specialist to assist in evaluating the appropriateness of assumptions

used in estimating the recoverable amount of CGUs. In addition, they recalculated the value-in-

use of the CGUs and compared it with the carrying amount. They also reviewed the BDO

Unibank Group’s disclosures about those assumptions to which the outcome of the impairment

test is most sensitive; specifically, those that have the most significant effect on the

determination of the recoverable amount of goodwill and other intangible assets with indefinite

useful lives. Furthermore, the audit of the financial statements of BDO Network as of and for the

year ended December 31, 2022 did not identify events or conditions that may cast significant

doubt on BDO Network’s ability to continue as a going concern.

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

SUMMARY

Significant business risks within the banking sector include the potential for financial

losses, which can arise from different internal and external factors. Moreover, there is a risk of

misstatement, fraud, inadequacy, and inefficiencies, which can further lead to operational

disruptions and difficulties. Technology can also pose a challenge in the banking industry, due to

its complexity, accuracy, and security. BDO therefore has the risk of cybersecurity breaches,

technical failures, hacking, data breaches, and more.

Exposure to diverse market and liquidity factors can also affect a bank’s financial health

and stability. Some of the risks that affect the banking industry are fluctuation of interest, foreign

exchange rates, and currency fluctuations. The company must also consider its capacity to meet

its financial obligations and sustain its operations. This measures how they effectively use their

financial resources to fund their day-to-day activities.

There are also risks involved from the adherence of pertinent laws and regulations for the

banking industry. Non-compliance to these regulations will result in penalties. Anti-money

laundering (AML), data protection, and consumer protection are also some of the laws

highlighted that the banking industry must comply with.

Aside from the business risks, the risk of material misstatement were discussed above.

The three key audit matters accentuated by the BDO in their 2022 financial statements were the
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

audit procedures to address the risk of material misstatement relating to the adequacy of

allowance for impairment of loans and other receivables, the valuation of financial instruments,

and the impairment of goodwill and other intangible assets with indefinite useful lives.

REVENUE RECOGNITION

BDO recognizes revenue only when there is completion of a performance obligation by

transferring control of the promised services to the customer. Moreover, service fees and

commissions earned from various banking services, and gains on sale of properties are accounted

for in accordance with PFRS 15. Specifically, BDO accounts for various revenues as explained

below:

a. Service charges, fees and commissions. These are generally recognized over a period of

time as the service is being provided. Various criterias and conditions are also applied

based on its specific source of income.

b. Asset management services. These can include trust and fiduciary services. They are

also recognized ratably over the period the service is being provided.

c. Other Income. Some examples of other income earned by BDO are trading and

securities gains (losses), gain or loss from assets sold or exchanged, and recovery on

charged-off assets. These accounts are recognized when the ownership of the assets is

transferred to the buyer and/or income or loss from these assets are reasonably assured or

collected.
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

ASSET VALUATION

In an audit of companies under the banking industry, asset valuation is a crucial aspect of

ensuring financial transparency, regulatory compliance, and the overall health of financial

institutions. In the case of BDO, their asset is primarily composed of trading investment

securities and loans and other receivables. Hence, proper valuation of these assets shall be given

high importance during the course of the audit to ensure that these matters were addressed in

forming an opinion for the audit of their financial statements. While it is different for each

banking company, auditors shall consider the following matter in every audit:

Valuation of Financial Instruments

Since the BDO holds a variety of financial instruments such as derivatives, securities and

other financial products, auditors must ensure the accuracy of the methods used to value these

instruments. This includes verifying the assumptions and estimates used, testing the inputs and

evaluating the mathematical models.

In computing the fair valuation of the financial instruments, BDO cites reference from

external sources and readily available market value. Audit issues may arise when there is no

readily available information to derive the market value of a certain financial instrument. While

for some instrument, estimates and other models with observable data were used by the

management.

Auditors must perform testing of design and operating effectiveness of controls in place
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

over the valuation process of the company with an emphasis on the measurement of derivative

financial instruments. In addition, recomputation of fair values and comparing it with the market

values are also deemed important. Lastly, reviewing the appropriateness of the method used for

fair market valuation and ensuring that it complies with measurement standards.

Valuation of Loans and Other Receivables

Auditors must evaluate the processes used by the bank to value its loan portfolio. This

includes assessing the methodologies for estimating credit risk, discount rates, and collateral

values. Auditors may also review the impairment testing for loans

The BDO is required to recognize allowance for impairment on the loans and other

receivables using the credit loss model in accordance with PFRS 9. It is considered as the most

significant asset of the BDO which accounts for 66% of the total asset of the company. With this,

the impairment remains to be a matter of significance as it requires management judgment and

estimates.

In response to this issue, management shall likewise perform a test of design and

evaluating the appropriateness of the credit risk ratings of loans and the company’s impairment

model being used. Moreover, it is important to assess the borrower’s repayment ability and for

non-performing loan accounts, evaluate the management’s forecast of recoverable cash flows.

Addressing these audit issues requires a thorough understanding of the banking industry,
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

relevant accounting standards, and regulatory requirements. Auditors play a crucial role in

providing assurance to stakeholders regarding the accuracy and reliability of a bank's reported

asset values. In essence, the audit of asset valuation in the banking sector demands a nuanced

approach, considering the unique composition of each institution's asset portfolio. The auditor's

role in ensuring the accuracy, reliability, and compliance of valuation methods is paramount for

maintaining financial transparency, regulatory adherence, and the overall health of financial

institutions like BDO.

SUMMARY

The accounting issues highlighted primarily revolve around revenue recognition and asset

valuation within BDO, a financial institution. Concerning revenue recognition, BDO follows

specific principles outlined in PFRS 15, recognizing service charges, fees, commissions, and

asset management services over time as the services are provided. Asset valuation, a critical

aspect of auditing financial institutions, involves assessing the accuracy of valuation methods for

various financial instruments and loans. For BDO, this includes verifying market values of

financial instruments, testing assumptions used in valuation models, and evaluating loan

portfolio methodologies as loans represent a substantial portion of their assets. Auditors must

scrutinize the bank's processes for credit risk estimation, impairment testing, and management's

judgment in determining allowance for impairments. Addressing these issues demands a

comprehensive understanding of banking, accounting standards, and regulatory requirements.

Auditors' role is pivotal in ensuring the accuracy, reliability, and compliance of valuation

methods, crucial for maintaining transparency, regulatory adherence, and the overall financial
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
España, Manila

health of institutions like BDO.

TAX EXEMPTION

Banks, like BDO (Banco de Oro), operate within a framework of tax regulations and

exemptions set by the Bureau of Internal Revenue (BIR) and other pertinent government bodies

in the Philippines. The National Internal Revenue Code (NIRC) of the country delineates specific

exemptions and taxation guidelines for various income streams pertinent to financial institutions.

Under the provisions of the NIRC, certain types of income are granted exemptions from

taxation. For instance, banks may enjoy an exemption from income tax concerning earnings

associated with government securities, including interest income from government bonds,

Treasury bills, and other similar instruments. Moreover, exemptions extend to specific scenarios

such as the payment of interest on Philippine currency bank deposit accounts and the yield or

interest earnings generated from foreign currency deposits under specific conditions.

Within the scope of the NIRC, Section 109 (1)(V) provides explicit exemptions pertinent

to the Value-Added Tax (VAT). Notably, services rendered by banks, non-bank financial

intermediaries engaged in quasi-banking activities, and similar non-bank financial intermediaries

fall under this exemption. However, while these financial services are exempt from VAT, they

remain subject to percentage taxes calculated based on the gross sales, receipts, or income

generated from these exempt services. Therefore, despite the VAT exemption, financial services

retain an obligation to specific percentage taxes linked to their overall earnings.

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
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Furthermore, Offshore Banking Units (OBUs) and Foreign Currency Deposit Units

(FCDUs) receive tax exemptions under certain conditions. Republic Act No. 9294 outlines

provisions pertinent to OBUs and FCDUs. These include exemptions from all taxes, except

specified net income, for depository banks involved in foreign currency transactions with

nonresidents, offshore banking units, local commercial banks, and other entities within the

expanded foreign currency deposit system. Additionally, interest income from foreign currency

loans granted by these depository banks to residents, excluding offshore banking units or similar

depository banks, is subject to a final tax rate of 10%. Moreover, any income earned by

nonresidents, whether individuals or corporations, from dealings with depository banks within

the expanded system is exempt from income tax.

Despite existing exemptions, propositions have emerged seeking to nullify the tax

exemption granted to FCDUs and OBUs in their transactions with non-residents and similar

entities. Notably, House Bill (HB) No. 8252, known as the Capital Income and Financial

Intermediary Taxation Act of 2019, aims to reform the taxation landscape regarding capital

income and financial services in the Philippines. Under this proposed legislation, income

garnered by FCDUs and OBUs from foreign currency loans and transactions with non-residents

and other FCDUs and OBUs would be subject to a 10% final tax based on the income amount.

These proposed alterations aim to streamline operations, promote fairness, enhance efficiency,

and establish a revenue-neutral tax structure within the financial sector.

 UNIVERSITY OF SANTO TOMAS
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TAX LIABILITIES

On March 26, 2021, R.A. No. 11534, CREATE Act, as amended, was signed into law and

was effective beginning July 1, 2020. Hence, the major changes considered by BDO are the

reduction of regular corporate income tax (RCIT) from 30% to 25%, the reduction of minimum

corporate income tax (MCIT) from 2% to 1% beginning July 1, 2020 until June 30, 2023, and the

reduction of the allowable deduction of interest expense from 33% to 20%. Moreover, BDO is a

full-service bank in the Philippines; hence, it is subject to Gross Receipts Tax (GRT) imposed on

banks, non-bank financial intermediaries, and finance companies. GRT is levied on the BDO

Unibank Group’s lending income, which includes interest, commission, and discount arising

from instruments with maturity of five years or less and other income. The tax is computed at the

prescribed rates of either 7%, 5%, or 1% of the related income.

In the case of BDO, the tax expense recognized in the statement of income comprises the

sum of current tax and deferred tax not recognized in other comprehensive income or directly in

equity, if any. Current tax assets or liabilities comprise those claims from, or obligations to, fiscal

authorities relating to the current or prior reporting period, that are uncollected or unpaid at the

end of the reporting period. They are calculated according to the tax rates and tax laws applicable

to the fiscal periods to which they relate, based on the taxable profit for the period. All changes

to current tax assets or liabilities are recognized as a component of tax expense in profit or loss.

On the other hand, deferred tax is accounted for using the liability method on temporary

differences at the end of the reporting period between the tax base of assets and liabilities and
 UNIVERSITY OF SANTO TOMAS
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their carrying amounts for financial reporting purposes. Under the liability method, with certain

exceptions, deferred tax liabilities are recognized for all taxable temporary differences and

deferred tax assets are recognized for all deductible temporary differences and the carryforward

of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will

be available against which the deferred tax asset can be utilized.

Auditors must ensure that the financial statements accurately reflect the company's tax

liabilities. This involves examining the accounting treatment of current and deferred taxes in

accordance with accounting standards. Auditors also must verify whether the company has

complied with applicable tax laws and regulations because non-compliance can result in

additional tax liabilities, penalties, and interest. Auditors must also evaluate the likelihood of

realizing deferred tax assets, which arise when a company has overpaid taxes in the past or has

tax credits that can be used to offset future tax liabilities. The realization of these assets depends

on the company's ability to generate sufficient taxable income in the future. Lastly, auditors must

be aware of the changing laws because these can significantly impact a company's tax liabilities.

Overall, auditors must carefully examine how tax liabilities are accounted for and disclosed

because these can directly impact the financial statements.

TEST OF CONTROLS

Test of controls is a crucial component of an auditor's job because it involves evaluating

the entity's internal controls to see if they are sufficient to identify and possibly even prevent

risks of material misstatements. Auditors use test of control procedures to identify any hidden
 UNIVERSITY OF SANTO TOMAS
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irregularities and determine whether the company's controls are operating effectively because the

management may be unable to detect those anomalies. If not, the auditor will need to run further

tests while conducting the audit. Therefore, if a company's internal controls are operationally

effective, further substantive testing would not be necessary, saving the company money and

time. Banking’s test of controls is focused on five processes, mainly credit, financial reporting,

investment, lending, and treasury.

In the credit process, some of the tests include the review of the integrity of data inputs

for ECL calculation as well as checking the approval of loan risk ratings. With the assistance of a

specialist, we can also observe the approval of policy and methodologies for the allowance for

loan losses and do a system configuration for allowance for loan losses. For the financial

reporting process, we also check the IT applications controls. This includes the authorization of

journal entries, management review of manual journal entries, and the segregation of duties in

journal processing. On the other hand, the test for the investment process includes the approval

of investment transactions and review of the classification of investments, as well as the review

of investments sub-ledger data input. Additionally, for the lending process, we review and check

the approval of new loans and do a system configuration for interest income and fee income

calculations. Lastly, for the treasury process, we analyze if the control is performed daily and the

match advice matches the details in the supporting documents.

Internal controls that are particularly important to an audit are tested so that audit

procedures can be developed, not just to provide an opinion on the effectiveness of the firm’s
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
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internal control system. The auditor must use professional judgment when determining any risks

associated with fraud or error while developing audit processes and gathering enough data to

form the basis of an opinion.

SUBSTANTIVE TESTING

Banks are in custody of big amounts of monetary items and engage in large volume and

variety of transactions which makes their accounting system and internal control complex.

Banks rely on borrowed funds or debt to operate which makes them more vulnerable to adverse

economic events and business failure. The emergence of e-commerce and e-banking made an

impact on banking institutions as this made banking more vulnerable to misappropriation and

fraud. Banks also operate in geographically dispersed branches and departments which makes

centralization difficult. These are some of the reasons why auditing for banking institutions is

challenging and complicated. Substantive testing is a process that evaluates the accuracy and

completeness of the information contained in a firm’s financial statements or other documents.

Its primary objective is to provide reasonable assurance regarding the accuracy and reliability of

the data processed by outsourcing companies.

One of the key benefits of substantive testing in the banking industry is its ability to

identify errors or anomalies in transaction processing. By conducting substantive testing,

banking companies can ensure compliance with government bodies like the Bangko Sentral ng

Pilipinas (BSP) and the different regulatory requirements. Banking companies often deal with

sensitive information and must adhere to strict legal and regulatory frameworks. As mentioned
 UNIVERSITY OF SANTO TOMAS
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above, the nature of the banking industry makes them vulnerable to fraud. Thus, conducting

substantive testing helps banking institutions to detect and prevent fraud and financial crimes.

Despite the rigorous controls and security measures implemented by banking companies,

there is always a risk of fraudulent activities occurring within the banking transaction – may it be

in recording, storage, and the like. By conducting substantive testing, auditors can identify any

irregularities or suspicious patterns that may indicate fraudulent activities such as unauthorized

data access and data manipulation. Substantive testing can also help minimize and uncover the

risks associated with banking activities such as geographical risk, credit risk, currency risk,

fiduciary risk, interest rate risk, liquidity risk, operational risk, transfer risk and legal and

documentary risk. The following are the relevant procedures:

Relevant Procedures How does it provide audit evidence?

Substantive Testing for Revenue

1. Verification of Supporting The management will provide supporting documents

Documents and the auditor will confirm if the reflected amounts are

in line with the balances from the documents. With the

help of this procedure, the auditor is able to ensure that

the right amount of revenue was reported. Further

information regarding the overall revenue of the

company is also checked.

 UNIVERSITY OF SANTO TOMAS
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2. Testing Revenue Recognition Auditor will exert effort to understand the company’s

Methods nature and its revenue recognition policy. The auditor

will determine if the revenue recognition method is

effective. These procedures are vital in order to ensure

the accuracy and proper presentation of revenue.

3. Revenue Cut-off Test In this test, the auditor will validate whether

transactions recorded are included in the period audited

or not. This procedure ensures that there are no

misstatements in the financial statements that are

related to timing issues.

4. Inspect for Possible Revenue The auditor will examine documents which support

Fraud assertions regarding revenue to identify and determine

if the management purposely used them so that revenue

could be easily manipulated.

Substantive Testing for Expenses

1. Expense Verification This is to confirm the amount of cash outflows of the

company by examining invoices and payment records

to verify the legitimacy of expenses incurred by BDO.

This procedure helps to determine any unrecorded

 UNIVERSITY OF SANTO TOMAS
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liabilities, unauthorized disbursement vouchers and

confirm expenses related to third-party service

providers.

2. Expense Allocation This is to review the allocation of expenses between

departments or cost centers to ensure that they are

allocated appropriately and consistently. This procedure

prevents the understatement or overstatement of

expenses.

3. Expense Policy Compliance This is to review the account balances by comparing

historical expenses and budgets, and evaluate whether

BDO adheres to its expense policies and procedures.

Substantive Testing for Assets

1. General Procedure To ensure verifiability, completeness, and accuracy, the

auditor should first obtain a detailed listing of the

specific asset accounts and plot the balance to the

general ledger accounts. This procedure includes

assessing the completeness and appropriateness of the

formulas and inputs used in determining the balances.

2. Test for Existence or To verify the balances of financial assets like cash,
 UNIVERSITY OF SANTO TOMAS
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Confirmation accounts receivable, intangibles, deposits, and others,

auditors may verify the existence of financial assets by

submitting confirmation requests and letters to third

parties, including other banks and clients. This helps

guarantee the accuracy and existence of the amounts

presented in the financial statements.

3. Test for Additions and Disposals It is important to test for additions and disposals at the

reporting period to ensure that there are no duplications,

missing transactions, and outdated balances. This also

helps to verify whether the accounts are in the correct

accounting period and if the transaction amounts are

correct and existing at year-end. Lastly, this will help in

evaluating the management’s forecast of recoverable

cash flows based on agreed restructuring agreement,

actual payment pattern after the restructuring, valuation

of collaterals and estimates of recovery from other

sources of collection.

4. Test for Valuation and To provide reasonable assurance that the amounts in the

Amortizatio financial statements are correct and are in compliance

n with the correct valuation methods and amortization

 UNIVERSITY OF SANTO TOMAS
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models, a test for valuation and amortization is done.

This will also help to test the design and operating

effectiveness of BDO’s controls over valuation

processing and the assumptions used. This will help

evaluate whether the fair value prices used were

appropriate by testing the inputs against reliable market

sources.

5. Tests for Rights and Obligations This is for the auditors to confirm that no liens or other

encumbrances need to be declared in the financial

statements and that the company’s obligations are

complete, existing, and legitimate. This will help in

determining the onerous contracts, provisions, and

contingent assets at the end of the reporting period.

Substantive Testing for Liabilities

1. Confirmation This procedure confirms the existence and accuracy of

liabilities with third parties. The verification of

existence and condition of liabilities will establish a

system that will reliably track its liabilities. Thus,

mitigating the risk of misplaced or unrecorded

liabilities.
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
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2. Vouching This procedure is necessary to make sure that recorded

transactions are accurate. This will help in detecting

errors and frauds, determining the authenticity of

transactions, finding unrecorded transactions, and

ensuring the genuineness of the transactions. This also

enables businesses to meet compliance and regulatory

obligations.

3. Review of Supporting This is the examination of contracts, legal agreements,

Documents and other supporting documents to confirm the nature

and terms of liabilities. Reviewing these documents will

enable the auditor to determine the accurateness and

completeness of the recognition of liability and its

measurement that is reported in the financial

statements.

COMPLIANCE TESTING

Testing for regulatory compliance is of utmost importance for several reasons. Following

the law and its restrictions is required by law. Fines, legal action, and reputational harm to the

company may arise from noncompliance. An organization faces serious risks when it violates

regulations, including dangers to its finances, operations, and reputation.

 UNIVERSITY OF SANTO TOMAS
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Contractual obligations are enforceable by law, and testing makes sure that parties keep

their end of the agreement. This is necessary to preserve the integrity of contracts and gives rise

to legal enforcement in the event that disagreements emerge. Mutual trust is fostered when

parties fulfill their contractual obligations consistently. Sustaining positive, long-term

commercial relationships requires this trust. Testing enables parties to rapidly resolve disputes by

referring to the contractual terms in the event of a dispute. Dispute resolution procedures may be

included in contracts, and following these conditions could speed up the resolution of disputes.

Accounting principles may be used incorrectly if pertinent rules, regulations, or

contractual obligations are not followed. This may result in inaccurate revenue recognition,

improper expense classification, or inaccurate asset and liability assessment in financial

reporting. Investors, creditors, and other stakeholders may be misled by these errors and end up

making decisions based on inaccurate or lacking information.

Lastly, compliance testing helps manage an organization's reputation by making sure it

runs morally and responsibly. Establishing a dedication to adhering to regulations fosters

confidence among clients, financiers, and other interested parties, improving the company's

standing.

SUMMARY

The essential auditing procedures for bank organizations include tests of controls,

substantive testing, and compliance testing. Banking tests of controls focus on five indispensable
 UNIVERSITY OF SANTO TOMAS
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processes in banks: the credit, financial reporting, investment, lending, and treasury processes,

which focus on analyzing their accuracy. Banks also use substantive testing to identify errors or

anomalies in transaction processing. By conducting substantive testing, banking companies can

ensure compliance with government bodies like the Bangko Sentral ng Pilipinas (BSP) and the

different regulatory requirements. The substantive testing done on banks will focus on their

revenue, expenses, assets, and liability. Lastly, banks also put regulatory compliance at the

utmost importance since noncompliance can negatively affect their operations. By confirming

that procedures and controls are in place to satisfy regulatory requirements, compliance testing

assists in identifying and reducing these risks.

 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
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CONCLUSION

Like many countries, the Philippines has been experiencing a digital transformation in its

banking sector. Banks have been investing in digital technologies to enhance customer

experiences, streamline operations, and offer innovative digital services. With this, the audit of

companies under this industry has become more complex over time. Thus, auditors shall have a

thorough understanding of the unique risks and complexities associated with financial

institutions and be able to create audit plans and procedures in response to these challenges. The

intricacies involved have the potential to impact the accuracy of a company's financial

statements. A crucial area for auditors to prioritize is the incorporation of advanced technology

in the industry. This necessitates the auditor to possess technological proficiency to ensure the

efficiency of the implemented audit procedures.

BDO Unibank continues to be a key player in the Philippine banking industry, with a

strong market presence and a reputation for financial stability. The company continually exert

efforts to adapt to the fast-accelerating technology within the sector and to cater to the ever-

changing needs of its customers. Throughout the years, they have successfully expanded their

market reach and with this, an accurate and reliable financial statement is necessary to guide its

users in making sound economic decisions.

It is crucial for a company to place controls to mitigate any known risks to the company

to prevent material misstatements and prevent from providing financial information to external

users that is not reliable. In conclusion, BDO, being under a specialized industry, shall be
 UNIVERSITY OF SANTO TOMAS
Alfredo M. Velayo – College of Accountancy
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effective in reporting their business transactions and financial endeavors, while the auditors

auditing the industry shall be cautious in each step of the audit process, maintaining the

professional judgment and skepticism all throughout the engagement.

RECOMMENDATION

Given the broad scope and complexity of the banking industry, auditors shall be vigilant

and careful when auditing their financial statements. Key audit matters are those matters that

were of most significance in the audit of the financial statements. Numerous factors shall be

considered when taking into account the integrity and fairness of the representations made by the

management, thus to address such matters, the recommendations of the group are:

● Application of critical management judgment and use of accurate and comprehensive

estimates for loans and other receivables

● Application of accurate, correct and representative fair value valuation methods for

financial instruments.

● Application of better methods in determining the carrying value of goodwill and other

intangible assets with indefinite useful lives

● Application of accurate measurement and timing of revenue, alongside reliance on

estimates and judgments

● Testing of design and operating effectiveness of relevant controls over valuation

processes

● Testing of design and operating effectiveness of relevant general and application controls

for loans, loans impairment process, and credit risk monitoring

 UNIVERSITY OF SANTO TOMAS
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● Evaluation of the appropriateness of assumptions and methodologies used by the

management with those relating to forecasted values, as well as discount and growth rates
 UNIVERSITY OF SANTO TOMAS
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Alfredo M. Velayo – College of Accountancy
España, Manila

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Overview