BCBS published the supplemental guidelines to the 2014 guidance on external audits of banks, following the implementation of expected credit loss (ECL) accounting frameworks in various jurisdictions. The implementation of these frameworks have brought about significant changes for banks and their external auditors. The guidelines set out expectations of BCBS for the audit of the financial statements of a bank, specifically in relation to the audit of ECL estimates, to help the audit committee effectively discharge its external audit responsibilities. In addition to elaborating on these expectations in the context of the key components of ECL, the guidelines set out questions that an audit committee may ask the external auditor.
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
Keywords: International, Banking, Accounting, ECL, External Audit, Internal Control, Credit Risk, Disclosures, Governance, IFRS 9, Financial Instruments, BCBS
Previous ArticleSARB Circular on Exposures Secured by Residential Mortgage Bonds
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
The Financial Accounting Standards Board (FASB) is seeking comments, until November 03, 2022, on the proposed technical and other conforming improvements for the 2023 GAAP Financial Reporting Taxonomy.
The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.
Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)