FS assertions: accuracy, cut-off, classification, allocation, completeness, occurrence,
valuation, existence, rights & obligations
Audit risks and procedures
The principal source of credit risk for xxx Bank is loans and advances. As it is a subjective
area we must consider ISA 540, Auditing Accounting Estimates and Related Disclosures, and
conduct our audit in relation to this standard.
Loans and advances
Audit risks Audit procedures
- Given large no. of loan balances aim to place a degree
of reliance on internal controls to reduce the amount of
substantive testing
- Obtain process documentation to ensure that there are
systems in place to identify SICR before forbearance is
Impairment allowance not offered
correctly calculated leading - Identify loans where forbearance has been offered to
to: significant increase in ensure appropriate impairment is recognised
credit risk not identified in a - Confirm receipt of coupon payments to date to bank
timely manner to enable statement
recognition of LEL, expected - Revise any new info that comes to light after the y/e
credit losses understated - Obtain reports from ratings agency to understand
because inaccurate reasons for downgrade and review FS to assess the
measurements of PD, EAD, ability to meet any revised payment terms
LGD are used. - Examine a sample of loans and advances which have
not been identified by mgt as impaired and consider
Audit risk reasons: whether impairment is required
- Area of judgement - If there were exceptions to this substantive testing,
regarding timing and assess the population of loans as a whole and perform
amount further detailed testing
- Large size of loans and - Ensure that forward-looking info such as
adv as a proportion of macroeconomic data is included in the models for SICR
total assets means this - Inspect loan documentation to understand the loan
is a key calculation security and obtain valuation of this to determine LGD
which may lead to - Enquiries to mgt regarding the credit assessment
material misstatements procedures and processes they have to ensure models
- Subjective grouping of remain appropriate (ask if any changes to the models).
homogeneous loans Assess their robustness.
and modelling - Identify whether mortgaged that have been assessed
- Should accurately as individually significant have been removed from
reflect current portfolio prior to collective assessment
economic conditions - Examine board minutes, credit committee minutes and
- Management bias may credit watch list for discussions of any other loans with
lead to material possible default
mistatements - Assess and test the design an operating effectiveness
over impairment data and calculations
- Evaluate the scenarios used by the bank to assess
different outcomes. Compare to bank’s historical
, experience, industry benchmarks of using a base line
expectation, upside and downside potential
- Assess the probabilities attached to these scenarios for
reasonableness using external forecasts and
knowledge of the industry
- Examine the rationale for any mgt overlays such as
adjustments to the outcomes of models
- Review the bank’s disclosures for explanations of the
scenarios, whether assumptions appear reasonable
and disclosures are clear and not misleading
Clients’ forecasts are - Examine the due diligence performed on the client’s
overstated loan application to ensure that it meets the underwriting
standards approved by the credit committees
- Obtain actual results and compare to see if significantly
different than forecasts and if so consider impairments
Forbearance policies - Obtain and evaluate the forbearance policy statement
inconsistently / - Obtain a breakdown of the portfolio on which
inappropriately applied forbearance has been applied and ensure policy has
(higher LEL than recognized) been applied consistently
- Obtain renegotiation of loan correspondence between
the two parties to confirm the redemption amount and
date
- Inspect loan documentation to understand loan security
and obtain valuation of the security held
- Maintain client on the watchlist to ensure further
delinquency is identified on a timely basis
- Ensure that there is a separate disclosure on forborne
loans and the FS disclosures are transparent to credit
quality
FX loans may be misstated - Recalculate closing balances for FX loans, using the
due to incorrect application of exchange rates from a reliable third-party source
IAS 21 - Calculate P/L impact of FX revaluation and request a
FS adjustment if material
Regular reviews of loan - Obtain most recent valuations of loan security, consider
security valuation may be the competence of the valuer and reasonableness of
more difficult if located the valuation
overseas - For assets valued in FX, re-perform translation using
reliable third-party rates
Expansion of lending into - Request the credit risk assessment procedures for
overseas markets may these new geographical regions
result in inadequate credit - Discuss a sample of loans with the relevant Credit
risk management procedures Controller to understand whether balances should be
and breaches of legal and impaired
regulatory requirements - Evaluate economic data in the bank’s lending locations
for indicators of impairment
- Discuss with the bank’s legal team to understand
specific overseas legal issues, particularly around
foreclosure of loans and seizing of assets pledged as
collateral
, - If the auditor has a presence in those overseas
markets, enquire of any specific legal requirements
which the bank must adhere to
Analytical procedures
The gross risk of the loan - Compare the imp allowance coverage ratio across
portfolio has increased different stages of loans to assess whether the bank
because lower collateralized has reduced the gross risk of the portfolio by disposing
loans have increased in of defaulted assets
value - Compare the aggregate expected losses and RWA
between current and prior year to assess whether the
gross risk within the portfolio has increased
Financial assets are - Verify that a sample of financial assets are correctly
misclassified between the classified with respect to valuation inputs
levels of hierarchy under
IFRS 13
Valuation of assets is - Verify a sample of valuations for each category of asset
overstated due to valuation hierarchy
inappropriate inputs - For level 1 verify that appropriate market price for an
identical instrument in the principal liquid market has
been used. Ensure that consistent methodology is
applied
- For level 2 valuation inputs confirm observable inputs
against external data
- In respect of level 3 inputs analyse the unobservable
valuation inputs for reasonableness
Valuation is overstated due - Establish a range of probable outcomes for a sample of
to mgt bias in estimates for level 3 instruments and consider whether the valuation
level 3 inputs of such inputs indicates mgt bias
Valuation models are invalid - Verify that the model used is appropriate to that type of
instrument and that the model has mathematical
integrity
- Review the results of the bank’s back testing of
valuation models used
- Consider the use of an auditor’s expert to evaluate
valuation models in accordance with ISA 620, Using the
Work of an Auditor’s Expert, in relation to derivatives
due to the highly specialised nature of such valuation
techniques, particularly in respect of Level 3 exotic
options.
Changes in valuation models - Verify rationale behind a sample of model changes for
adopted to increase valuation reasonableness
Controls testing
Lack of robust underwriting - Review the risk appetite and risk tolerance framework
framework and for completeness assess whether the underwriting
standards meet those
Absence of a clear and - Ascertain and evaluate firm’s forb policy statement
articulate forbearance policy - For completeness, obtain a breakdown of the portfolio
on which forb has been applied and check whether it
has been applied consistently in line with policy
valuation, existence, rights & obligations
Audit risks and procedures
The principal source of credit risk for xxx Bank is loans and advances. As it is a subjective
area we must consider ISA 540, Auditing Accounting Estimates and Related Disclosures, and
conduct our audit in relation to this standard.
Loans and advances
Audit risks Audit procedures
- Given large no. of loan balances aim to place a degree
of reliance on internal controls to reduce the amount of
substantive testing
- Obtain process documentation to ensure that there are
systems in place to identify SICR before forbearance is
Impairment allowance not offered
correctly calculated leading - Identify loans where forbearance has been offered to
to: significant increase in ensure appropriate impairment is recognised
credit risk not identified in a - Confirm receipt of coupon payments to date to bank
timely manner to enable statement
recognition of LEL, expected - Revise any new info that comes to light after the y/e
credit losses understated - Obtain reports from ratings agency to understand
because inaccurate reasons for downgrade and review FS to assess the
measurements of PD, EAD, ability to meet any revised payment terms
LGD are used. - Examine a sample of loans and advances which have
not been identified by mgt as impaired and consider
Audit risk reasons: whether impairment is required
- Area of judgement - If there were exceptions to this substantive testing,
regarding timing and assess the population of loans as a whole and perform
amount further detailed testing
- Large size of loans and - Ensure that forward-looking info such as
adv as a proportion of macroeconomic data is included in the models for SICR
total assets means this - Inspect loan documentation to understand the loan
is a key calculation security and obtain valuation of this to determine LGD
which may lead to - Enquiries to mgt regarding the credit assessment
material misstatements procedures and processes they have to ensure models
- Subjective grouping of remain appropriate (ask if any changes to the models).
homogeneous loans Assess their robustness.
and modelling - Identify whether mortgaged that have been assessed
- Should accurately as individually significant have been removed from
reflect current portfolio prior to collective assessment
economic conditions - Examine board minutes, credit committee minutes and
- Management bias may credit watch list for discussions of any other loans with
lead to material possible default
mistatements - Assess and test the design an operating effectiveness
over impairment data and calculations
- Evaluate the scenarios used by the bank to assess
different outcomes. Compare to bank’s historical
, experience, industry benchmarks of using a base line
expectation, upside and downside potential
- Assess the probabilities attached to these scenarios for
reasonableness using external forecasts and
knowledge of the industry
- Examine the rationale for any mgt overlays such as
adjustments to the outcomes of models
- Review the bank’s disclosures for explanations of the
scenarios, whether assumptions appear reasonable
and disclosures are clear and not misleading
Clients’ forecasts are - Examine the due diligence performed on the client’s
overstated loan application to ensure that it meets the underwriting
standards approved by the credit committees
- Obtain actual results and compare to see if significantly
different than forecasts and if so consider impairments
Forbearance policies - Obtain and evaluate the forbearance policy statement
inconsistently / - Obtain a breakdown of the portfolio on which
inappropriately applied forbearance has been applied and ensure policy has
(higher LEL than recognized) been applied consistently
- Obtain renegotiation of loan correspondence between
the two parties to confirm the redemption amount and
date
- Inspect loan documentation to understand loan security
and obtain valuation of the security held
- Maintain client on the watchlist to ensure further
delinquency is identified on a timely basis
- Ensure that there is a separate disclosure on forborne
loans and the FS disclosures are transparent to credit
quality
FX loans may be misstated - Recalculate closing balances for FX loans, using the
due to incorrect application of exchange rates from a reliable third-party source
IAS 21 - Calculate P/L impact of FX revaluation and request a
FS adjustment if material
Regular reviews of loan - Obtain most recent valuations of loan security, consider
security valuation may be the competence of the valuer and reasonableness of
more difficult if located the valuation
overseas - For assets valued in FX, re-perform translation using
reliable third-party rates
Expansion of lending into - Request the credit risk assessment procedures for
overseas markets may these new geographical regions
result in inadequate credit - Discuss a sample of loans with the relevant Credit
risk management procedures Controller to understand whether balances should be
and breaches of legal and impaired
regulatory requirements - Evaluate economic data in the bank’s lending locations
for indicators of impairment
- Discuss with the bank’s legal team to understand
specific overseas legal issues, particularly around
foreclosure of loans and seizing of assets pledged as
collateral
, - If the auditor has a presence in those overseas
markets, enquire of any specific legal requirements
which the bank must adhere to
Analytical procedures
The gross risk of the loan - Compare the imp allowance coverage ratio across
portfolio has increased different stages of loans to assess whether the bank
because lower collateralized has reduced the gross risk of the portfolio by disposing
loans have increased in of defaulted assets
value - Compare the aggregate expected losses and RWA
between current and prior year to assess whether the
gross risk within the portfolio has increased
Financial assets are - Verify that a sample of financial assets are correctly
misclassified between the classified with respect to valuation inputs
levels of hierarchy under
IFRS 13
Valuation of assets is - Verify a sample of valuations for each category of asset
overstated due to valuation hierarchy
inappropriate inputs - For level 1 verify that appropriate market price for an
identical instrument in the principal liquid market has
been used. Ensure that consistent methodology is
applied
- For level 2 valuation inputs confirm observable inputs
against external data
- In respect of level 3 inputs analyse the unobservable
valuation inputs for reasonableness
Valuation is overstated due - Establish a range of probable outcomes for a sample of
to mgt bias in estimates for level 3 instruments and consider whether the valuation
level 3 inputs of such inputs indicates mgt bias
Valuation models are invalid - Verify that the model used is appropriate to that type of
instrument and that the model has mathematical
integrity
- Review the results of the bank’s back testing of
valuation models used
- Consider the use of an auditor’s expert to evaluate
valuation models in accordance with ISA 620, Using the
Work of an Auditor’s Expert, in relation to derivatives
due to the highly specialised nature of such valuation
techniques, particularly in respect of Level 3 exotic
options.
Changes in valuation models - Verify rationale behind a sample of model changes for
adopted to increase valuation reasonableness
Controls testing
Lack of robust underwriting - Review the risk appetite and risk tolerance framework
framework and for completeness assess whether the underwriting
standards meet those
Absence of a clear and - Ascertain and evaluate firm’s forb policy statement
articulate forbearance policy - For completeness, obtain a breakdown of the portfolio
on which forb has been applied and check whether it
has been applied consistently in line with policy
