The Bangko Sentral ng Pilipinas (BSP), in its Memorandum No. M-2014-011, has issued a set of guidelines for external audit firms that handle assessments of financial institutions.
The memorandum, which outlines the guiding principles for an effective external audit function, will be used by the BSP in assessing the effectiveness of the oversight of the financial institutions’ board of directors and the quality of the external audit function.
The Role of the Financial Institutions’ (FIs) External Auditor
According to the BSP, the external auditor should:
1. Form an opinion on whether financial statements are prepared in accordance with the applicable financial reporting framework based on an evaluation of the conclusions drawn from the audit evident obtained. In forming the said opinion, the external auditor should identify and assess the risks of material misstatement in the FIs’ financial statement.
2. Ensure that financial statements, as a whole, are free from material misstatement, whether due to fraud or error. If material error or fraud is discovered, the external auditor shall immediately inform the Audit Committee and report such material error or fraud to the BSP.
3. Evaluate whether the financial statements disclose the accounting policies applied, the accounting estimates are reasonable and methodologies and valuation practices are appropriate and consistent with the applicable financial reporting framework.
4. Understand that FIs have characteristics that distinguish them from other businesses, which the external auditor should consider when assessing the level of inherent risk.
5. Assess the internal audit function, as it will be relevant in determining the nature, timing and extent of the external audit procedures.
6. Use professional judgment in assessing risks, deciding the nature of audit procedures and evaluating the results of the procedures.
7. Practice professional skepticism throughout the planning and performance of the audit.
8. Maintain a two-way communication with those in-charge of the governance of the FIs, and document discussions with the FIs’ board of directors and audit committee.
9. Charge only reasonable audit fees, considering the expected hours needed to complete the work, complexity of the activities and the structure of the company, level of internal audit assistance, level of fees charged by other audit firms and the quality of audit services.
A copy of the memo is available for download through this link: http://www.bsp.gov.ph/