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

PrincipalAgent 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 banks
board of directors and management, the banks
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 banks 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 Banks 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 Banks 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 banks 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