FRC publishes review of audit of banks’ loan loss provisions
News types: Corporate Reports
Published: 2 December 2014
Read or download the Audit Quality Thematic Review: The audit of loan loss provisions and related IT controls in banks and building societies (PDF)
Paul George, Executive Director Conduct at the FRC, said:
“I am pleased to note the improvements achieved by many audit teams outlined in this report. This reflects investment in sector specific procedures and focus by the firms in addressing concerns previously highlighted by the FRC. There is no room for complacency and we expect all audit firms to achieve consistently high quality.”
The FRC reviewed 13 audits of banks and building societies for its thematic review. Ten were classified as either good or requiring limited improvements, one required improvements and two required significant improvements.
The report highlights that firms have in the main demonstrated that, with appropriate focus and resources, good quality audits can be achieved. It is clear that firms with sufficient banking sector experience and access to up-to-date specialist knowledge in IT and other relevant areas, such as real estate valuation, are able to audit loan loss provisions to a good standard.
In the majority of audits reviewed the FRC raised issues about consistency in the quality of audit testing, encompassing controls, substantive and IT testing. In most cases the impact was not significant to the audit overall, but these issues demonstrate that auditors are not consistently applying a sufficient degree of challenge, and that such improvements are not being identified by internal quality control procedures.
The FRC’s report summarises a number of key messages for firms performing an audit of loan loss provisioning and related IT controls that it believes should contribute to an overall increase in audit quality:
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Be proactive in monitoring and enhancing bank audit quality, as well as being reactive to regulatory concerns and ensure that bank audit initiatives and procedures remain fit for purpose
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Revisit procedures to ensure that all regulatory and market risks are captured by risk assessment methodology and sector training, and consider or enhance the use of benchmarking and data analytics as effective audit tools in the audit of loan loss provisions
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Ensure audit teams apply an appropriate degree of challenge and professional scepticism in the audit of loan loss provisions, rather than seeking to corroborate management’s views
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Make sector training mandatory for partners and staff engaged in bank audits where this is not already the case and monitor attendance at, and effectiveness of, those training courses
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Fast track the integration of non-IT specialists into the audit team using lessons learned in integrating IT specialists into audit teams
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Perform root cause analysis to understand why current quality control processes did not identify weaknesses highlighted by our reviews.
The report also offers advice to audit committees to ensure the quality of financial reporting:
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Discuss with their auditors their proposed actions in response to this thematic review
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Understand the implications of the firm’s benchmarking and other data analytics on the quality and robustness of the audit of the financial statements
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Seek assurance annually that the sector expertise and competence levels of the audit team and the firm are appropriate in relation to the bank’s business activities
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Consider with the auditors the effectiveness of the bank’s relevant internal controls, and the extent to which the auditors review and are able to place reliance on them
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Ensure management is assessing the impact of current and emerging issues on a timely basis and that the auditor and the bank jointly understand how these issues affect the assessment of significant risk
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Consider the timing of planning with group auditors and check it is sufficiently early in the process to obtain appropriate and relevant information from group or other component auditors.
The banking sector will remain a priority area for the FRC’s routine audit inspection work. The FRC will also undertake follow-up work on audits where significant improvements are required as part of next year’s inspection cycle to ensure appropriate actions have been taken.