BCBS Sets Out Expectations for External Bank Audits of ECL Estimates

The supplemental note deals with the audit of the ECL accounting estimate within the overall financial statement audit. It elaborates on the 2014 guidance. While the 2014 guidance remains relevant, the changes brought about by ECL frameworks mean that further guidance is required. The 2014 guidance is structured around five key themes relevant to the quality of auditing the ECL estimate. The key themes for audit quality are professional skepticism and management bias, assessment of risks of material misstatement, internal control, use of experts, and audit evidence. The key components of the ECL estimate are forecasts and forward-looking information, macroeconomic scenarios and weighting, models, significant increase in credit risk criteria, and disclosure. BCBS expects that an external auditor will consider these components, among others, throughout the different stages of its audit of the ECL estimate and related disclosures, as these components are where the accounting and audit may be particularly challenging. According to the expectations set out by BCBS, an external auditor is expected to:

• Promote an environment conducive to exercising professional skepticism in the audit of ECL by planning, staffing, and managing the audit engagement appropriately
• Exercise, and provide evidence that they exercised, a high degree of professional skepticism at all stages of the audit of ECL.
• Focus on understanding banks’ lending business models, risk appetite and exposures, credit risk management practices, business segments, and geographical location, when identifying and assessing the risks of material misstatement related to the audit of ECL
• Test the operating effectiveness of internal controls on which the external auditor plans to rely, as substantive procedures alone usually cannot provide sufficient appropriate audit evidence that the ECL estimate is free of material misstatement
• Evaluate internal controls over the ECL estimate sufficiently early in the audit process to ensure that an effective audit approach can be undertaken, including cases where the controls tested are ineffective
• Make use of specialized skills, which will require the use of an auditor’s experts to audit ECL effectively
• Determine that any experts used have the competence to carry out the work asked of them and that the external auditor will ensure the work has been properly scoped and evaluated, to contribute to the external auditor’s assessment of the reasonableness of the ECL estimate and related disclosures
• Obtain sufficient appropriate audit evidence about whether the ECL estimate and related disclosures in the financial statements are reasonable in the context of the applicable ECL framework
• Obtain more persuasive evidence to support the audit of the ECL estimate and related disclosures because of the significant risks of material misstatement

Related Links

• Notification
• Supplemental Guidelines (PDF)

Keywords: International, Banking, Accounting, ECL, External Audit, Internal Control, Credit Risk, Disclosures, Governance, IFRS 9, Financial Instruments, BCBS