AUDIT OF BANKS

TYPES OF AVAILABLE BANK CHARTERS IN

THE PHILIPPINES:
UNIVERSAL BANKS
COMMERCIAL BANKS
THRIFT BANKS
RURAL BANKS
COOPERATIVE BANKS
• Rural Banks and Cooperative Banks have the same powers and may:

 Extend loans to farmers, fishermen, cooperatives, and certain other persons and merchants.

 Take savings and time deposits.

 Take current / checking accounts, if the bank has net assets of PHP5 million or more.

 Offer NOW (negotiable order of withdrawal) accounts.

 Act as a trustee over the estates of farmers and merchants.

 Take municipal, city or provincial deposits from the municipality, city or province where the
bank is located.
• Thrift Banks have all the powers enumerated above, and in addition may:

 Grant all secured and unsecured loans

 Invest in bonds, commercial paper, and other fixed income securities

 Issue domestic letters of credit

 Extend credit facilities to private and government employees

 Rediscount paper with the Land Bank of the Philippines (LBP), Development Bank of the
Philippines (DBP), and other government-owned or-controlled corporations

 Accept foreign currency deposits

 Purchase, hold and convey real estate

• Commercial Banks may, in addition to the above:

 Buy and sell foreign exchange and bullion

 Receive in custody funds, documents and valuable objects

 Act as a broker or agent to buy and sell securities for customers

 Act as an advisor or administrator of investment management accounts

 Rent out safety deposit boxes

 Engage in quasi-banking functions

• Universal Banks are the most powerful and can also:

 Exercise all the legal powers of an investment house, including underwriting

 Invest in non-allied enterprises

 Own up to 100% of the equity of a Thrift Bank, Rural Bank, or Allied enterprise

 Own up to 100% of the voting stock of -one- other Universal or Commercial Bank (if publicly-
listed)
 CAPITAL REQUIREMENTS
THE VARIOUS CHARTERS REQUIRE DIFFERENT AMOUNTS OF MINIMUM CAPITAL, AS FOLLOWS:

Type of Bank PHP mil.

a. Universal Banks 4,950.0
b. Commercial Banks 2,400.0
c. Thrift Banks
- With head office within Metro Manila 325.0
- With head office outside Metro Manila 52.0
d. Rural Banks
- within Metro Manila 26.0
- Cities of Cebu and Davao 13.0
- In 1 st , 2 nd & 3 rd class cities and 1 st class municipalities 6.5
- In 4 th , 5 th & 6 th class cities and in 2 nd , 3 rd & 4 th class municipalities 3.9
- In 5 th & 6 th class municipalities 2.6
 ENGAGEMENT OVERVIEW

PREENGAGEMENT AUDIT INTERNAL

SUBSTANTIVE ISSUE
PROCEDURES PLANNING CONTROL
PROCEDURES REPORT
CONSIDERATION
PRE-ENGAGEMENT ARRANGEMENTS

• Client selection and retention

• Communication between predecessor
and successor auditors
• Engagement letters
• Staff assignment
• Time budget
IMPORTANCE OF AUDIT PLANNING

• Helps ensure that appropriate attention is devoted to important

areas of the audit
• Helps identify potential problems
• Assists in proper assignment and coordination of audit work
• Helps ensure that the audit is conducted effectively and
efficiently
AUDIT PLANNING ACTIVITIES

• Understand the entity and its environment including the

entity’s internal control
• Develop an overall audit strategy and detailed approach
(Risk, Materiality and Analytical Procedures)
• Audit Planning Documentation.
UNDERSTANDING THE
ENTITY
1. INDUSTRY, REGULATORY AND OTHER EXTERNAL FACTORS,
INCLUDING THE APPLICABLE FINANCIAL REPORTING
FRAMEWORK
2. NATURE OF THE ENTITY, INCLUDING THE SELECTION AND
APPLICATION OF ACCOUNTING POLICIES
3.MEASUREMENT AND REVIEW OF THE ENTITY’S PERFORMANCE
4. INTERNAL CONTROL
AUDIT RISK MODEL (ARM)

• Audit risk (AR) is the risk (likelihood) that the auditor may unknowingly
fail to modify the opinion on financial statements that are materially
misstated (e.g., an unqualified opinion on misstated financial statements.)
• The AUDIT RISK MODEL decomposes overall audit risk into three
components: inherent risk (IR), control risk (CR), and detection risk (DR):
AR = IR x CR x DR
INHERENT, CONTROL AND DETECTION RISK
Internal
Controls
Events, Accounting
Information Financial
Transactions Substantive Statements
System Procedures

INHERENT RISK
The likelihood that, CONTROL RISK DETECTION RISK AUDIT RISK
in the absence of The likelihood that an error The likelihood that The likelihood that
internal controls, or fraud will not get caught by the an error or fraud an error or fraud will occur,
an error or fraud client’s internal controls. will not be caught and not get caught
will enter the accounting by the auditor’s by either the internal controls
information system procedures. or auditor’s procedures.
DETECTION RISK AND THE NATURE, TIMING, AND EXTENT OF AUDIT PROCEDURES
INTERNAL CONTROL
CONSIDERATION
INTERNAL CONTROL CONSIDERATION

Phase 1: Understand and Document

Understand the Client’s Internal Control
Document the Internal Control understanding
Internal Control questionnaire
Narrative
Accounting and Control System Flowcharts
Phase 2: Assess Control Risk (Preliminary)
Phase 3: Testing and Reassessment
Perform Test of Controls Audit Procedures
Re-Assess Control Risk
TRADE-OFF BETWEEN TESTING OF
CONTROLS AND SUBSTANTIVE TESTING
More Efficient More Effective

Substantive Testing

Testing of Controls

Interim Year-end
AUDIT EVIDENCE- DEFINED

• “Audit evidence” is all the information used by

the auditor in arriving at the conclusions on
which the audit opinion is based.
CLASSIFICATION OF AUDIT PROCEDURES

• Procedures designed to obtain an understanding of the

entity and its environment

• Procedures designed to test the operating effectiveness of

controls

• Procedures designed to detect material misstatements

SPECIFIC AUDIT PROCEDURES
• Cash
Assertions Audit Objectives
I. Existence To determine whether cash exists
at the year end and cash related
transactions occur within the year
II.Rights and Obligations To determine if cash is recorded
and presented at the proper
amount
III. Presentation and disclosures To determine whether cash is
presented in accordance with
applicable Financial reporting
standards
Audit procedures
1. Obtain an analysis of cash
balance and reconcile to the
general ledger
2. Confirm bank balances as of
statement of financial position
date
Review bank statements and bank
replies to confirmation letters.
Evaluate proper financial
statement presentation and
disclosure of cash
• INVESMENTS

Assertions Audit Objectives Audit procedures

I. Existence To determine whether
investments in securities
physically exists at the year
end.
1. Obtain or prepare a listing of
investments owned by the
company and related
revenue accounts and
reconcile it to the general
ledger
2. Inspect securities on hand.

II.Completene To determine that investments are 1.In addition to audit procedures

ss all included in the statement of above, vouch selected purchases
financial position and sales transaction of securities
during the year.
LOANS RECEIVABLE
Assertions Audit Objectives
I. Existence To determine whether
receivables exists at the year
end.
II.Valuation and allocation To determine whether
  receivables are recorded and
presented at proper amounts in
accordance with PFRS
Audit procedures
1. 1. Obtain schedule of aged
receivables schedule and
reconcile it to ledgers.
2. 2. Confirm receivables with
debtors.
1 Review the collectability of
receivables and determine the
adequacy of allowance for
doubtful account.
2. Recalculate interest income
from loans receivable.
.