SUMMARY OF STATEMENT OF AUDITING PRACTICE (SAP) 1006 -

AUDITS OF THE FINANCIAL STATEMENTS OF BANKS (PART 15 OF 23)

 

Balances With Other Banks

Existence
 

The auditor considers third party confirmations of the balance. Where the balances held with other banks are the result of large volumes of transactions, the receipt of confirmations from those other banks is likely to provide more cogent evidence as to the existence of the transactions and of the resultant inter-bank balances than is the testing of the related internal controls. Guidance on inter-bank confirmation procedures, including terminology and the content of confirmation requests, can be found in the SAP 1000, “Inter-Bank Confirmation Procedures.”

Valuation
 

The auditor considers whether to assess the collectability of the deposit in light of the credit-worthiness of the depository bank. The procedures required in such an assessment are similar to those used in the audit of loan valuation, discussed later.

Presentation and Disclosure
 

The auditor considers whether the balances with other banks as at the date of the financial statements represent bona fide commercial transactions or whether any significant variation from normal or expected levels reflects transactions entered into primarily to give a misleading impression of the financial position of the bank or to improve liquidity and asset ratios (often known as “window-dressing”).

 

Where window-dressing occurs in a magnitude which may distort the true and fair view of the financial statements, the auditor requests management to adjust the balances shown in the financial statements, or make additional disclosure in the notes. If management fails to do so, the auditor considers whether to modify the audit report.

Money Market Instruments
 

Existence
 

The auditor considers the need for physical inspection or confirmation with external custodians and the reconciliation of the related amounts with the accounting records.

Rights and Obligations
 

The auditor considers the feasibility of checking for receipt of the related income as a means of establishing ownership. The auditor pays particular attention to establishing the ownership of instruments held in bearer form. The auditor also considers whether there are any encumbrances on the title to the instruments.

The auditor tests for the existence of sale and forward repurchase agreements for evidence of unrecorded liabilities and losses.

Valuation
 

The auditor considers the appropriateness of the valuation techniques employed in light of the creditworthiness of the issuer.

Measurement
 

The auditor considers whether there is a need to test for the proper accrual of income earned on money market instruments, which in some cases is through the amortisation of a purchase discount.

The auditor also considers whether:

• the relationship between the types of securities owned and the related income is reasonable; and

• all significant gains and losses from sales and revaluations have been reported in accordance with the financial reporting framework (for example, where gains and losses on trading securities are treated differently from those on investment securities).

For parts 16 to 23, please visit Technical Highlights.