Slide 14B.

Governance and Auditing in a Public Interest

Context
Principles of Auditing: An Introduction to
International Standards on Auditing - Ch 14
Appendix B

Rick Stephan Hayes,

Roger Dassen, Arnold Schilder,
Philip Wallage

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.2

The Example of Bank Auditing and its Relation to Banking

Supervision

Principal–Agent Relationship.
Shareholders have appointed a board of directors
who govern a company on their behalf. The board
is responsible for arranging appropriate
management of the company and faithfully
reporting the results to the shareholders.
Information asymmetry between principals and
agents calls for the basic function of the auditor.
With banks everyone who has an interest in the
stability of the financial system (“public interest”)
are the principles
As everybody is a principal to an interrelated
complex of agents, the expectation that auditors
could reduce the information asymmetry
sufficiently is modified.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.3

International Auditing Practice Statement 1004

(IAPS 1004)

 Issued by Basel Committee on Banking Supervision

and International Auditing Practices Committee
Describes the roles and responsibilities of a bank’s
board of directors and management, the bank’s
internal and external auditors, and the banking
supervisors
Sets out the primary responsibility of the board of
directors and management.
Examines the essential features of the role of
external auditors and banking supervisors.
reviews the relationship between
the banking supervisor and the bank’s external
auditor
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.4

The Responsibilities of Bank’s Board of Directors and

Management

Those who are charged with the governance of the

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.5

Role of the Bank’s External Auditor and of the

Banking Supervisor

Characteristics that distinguish banks

Role of the banking supervisor
“key objective or prudential supervision is to
maintain stability and confidence in the financial
system, thereby reducing the risk of loss to
depositors and other creditors.”
Banking license
Lists the basic requirements for a banking license
ordinarily found in most systems
Capital base accord – adequate capital base
Bank risks credit risk, market risk, liquidity risk,
operational risk, legal risk, and reputational risk.
Supervisors’ efforts
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.6

Relationship Between Banking Supervisor and

External Auditor

 The supervisor monitors the present and future viability of

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.7

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 14B.8

Thank You for Your Attention

Any Questions?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007