Audit of Banks

 A bank audit is a formal process in which the services, systems, financial statements,
and/or procedures of a bank, credit union, or other financial institution is reviewed and
summarized in a report. Every financial service company must undergo audits regularly
in order to comply with legal and jurisdictional regulations, laws, and industry standards.

 Bank audits serve many purposes, but their main goal is to make sure a financial
institution is operating in line and above board with all industry and local regulations.
Bank auditors will take the time, and be afforded the resources, to pour over a bank's
financial activities, risk management processes, systems, and procedures to make sure
that all related information is complete, timely, and accurate.
Audited Financial Statements
Audited Financial Statements shall include the balance sheets, income statements,
statements of changes in equity, statements of cash flows and notes to financial statements which
shall include among other information, disclosure of the volume of past due loans as well as
loan-loss provisions. On the other hand, financial audit report shall refer to the Audited
Financial Statement and the opinion of the auditor.
The AFS of banks with subsidiaries shall be presented side by side on a solo basis (parent) and
on a consolidated basis (parent and subsidiaries).

Financial Audit
 Banks shall cause an annual financial audit by an external auditor acceptable to the
Bangko Sentral not later than thirty (30) calendar days after the close of the calendar
year or the fiscal year adopted by the bank.

 Report of such audit shall be submitted to the board of directors or country head, in
the case of foreign bank branches, and the appropriate supervising department of the
Bangko Sentral not later than 120 calendar days after the close of the calendar year or
the fiscal year adopted by the bank.

The report to the Bangko Sentral shall be accompanied by the:

 Certification by the external auditor on the:

(1) dates of start and termination of audit;
(2) date of submission of the financial audit report and certification under oath stating
that no material weakness or breach in the internal control and risk management systems
 was noted in the course of the audit of the bank to the board of directors or country head;
and

(3) the absence of any direct or indirect financial interest and other circumstances that
may impair the independence of the external auditor;

 Reconciliation Statement between the AFS and the balance sheet and income statement
for bank proper (regular and FCDU) and trust department submitted to the Bangko
Sentral including copies of adjusting entries on the reconciling items; and

 Other information that may be required by the Bangko Sentral.

 The external auditor shall be required by the bank to submit to the board of directors or
country head, a Letter of Comments indicating any material weakness or breach in the
institution’s internal control and risk management systems within thirty (30) calendar
days after submission of the financial audit report.

 If no material weakness or breach is noted to warrant the issuance of an LOC, a

certification under oath stating that no material weakness or breach in the internal control
and risk management systems was noted in the course of the audit of the bank shall be
submitted in its stead, together with the financial audit report.

Material Weakness
 Material weakness shall be defined as a significant control deficiency, or combination of
deficiencies, that results in more than a remote likelihood that a material misstatement of
the financial statements will not be detected or prevented by the entity’s internal control.
 A material weakness does not mean that a material misstatement has occurred or will
occur, but that it could occur.
 A control deficiency exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
 A significant deficiency is a control deficiency, or combination of control deficiencies,
that adversely affects the entity’s ability to initiate, authorize, record, process, or report
financial data reliably in accordance with generally accepted accounting principles.
 The phrase more than remote likelihood shall mean that future events are likely to occur
or are reasonably possible to occur.

Board of Directors
  The board of directors, in a regular or special meeting, shall consider and act on the
financial audit report and the certification under oath submitted in lieu of the LOC and shall
submit, within thirty (30) banking days after receipt of the reports, a copy of its
resolution to the appropriate supervising department of the Bangko Sentral. The
resolution shall show, among other things, the actions(s) taken on the reports and the names
of the directors present and absent.

 The board shall likewise consider and act on the LOC and shall submit, within thirty (30)
banking days after receipt thereof, a copy of its resolution together with said LOC to the
appropriate supervising department of the Bangko Sentral. The resolution shall show the
action(s) taken on the findings and recommendations and, the names of the directors
present and absent, among other things.

Country Head of Foreign Banks

 The country head of foreign banks with branches in the Philippines shall submit a report
on the action taken by management (head office, regional, or country, as the case may
be) on the financial audit report and the certification under oath submitted in lieu of the
LOC within thirty (30) banking days after receipt thereof.

 The country head shall likewise submit a report on the action taken by management on the
LOC within thirty (30) banking days after receipt thereof.

 The LOC shall be accompanied by the certification of the external auditor of the date of its
submission to the board of directors or country head, as the case may be.

Government-owned or controlled banks

 Government-owned or-controlled banks, including their subsidiaries and affiliates under

Bangko Sentral supervision, which are under the concurrent jurisdiction of the Commission
on Audit (COA) shall be exempt from the aforementioned annual financial audit by an
acceptable external auditor.

 Provided, that when warranted by supervisory concern such as material weakness/breach in

internal control and/or risk management systems, the Monetary Board may, upon
recommendation of the appropriate supervising department of the Bangko Sentral, require
the financial audit to be conducted by an external auditor acceptable to the Bangko Sentral,
at the expense of the institution concerned.
 Provided, further, That when circumstances such as, but not limited to loans from
multilateral FIs, privatization, or public listing warrant, the financial audit of the institution
concerned by an acceptable external auditor may also be allowed.
Banks under the concurrent jurisdiction of the Bangko Sentral and COA

 Banks under the concurrent jurisdiction of the Bangko Sentral and COA shall, however,
submit a copy of the annual audit report (AAR) of the COA to the appropriate
supervising department of the Bangko Sentral within forty (40) calendar days after receipt
of the AAR by the board of directors.

 The AAR shall be accompanied by the:

a. certification by the institution concerned on the date of receipt of the AAR by the
board of directors;

b. reconciliation statement between the AFS in the AAR and the balance sheet and
income statement of bank proper (regular and FCDU) and trust department submitted to the
Bangko Sentral, including copies of adjusting entries on the reconciling items; and

c. other information that may be required by the Bangko Sentral.

The board of directors of said institutions, in a regular or special meeting, shall

consider and act on the AAR, as well as on the comments and observations and shall
submit, within thirty (30) banking days after receipt of the report, a copy of its resolution to
the appropriate supervising department of the Bangko Sentral. The resolution shall show
the action(s) taken on the report, including on the comments and observations and the
names of the directors present and absent, among other things.

 The financial audit report required to be submitted shall in all respect be PFRS/PAS
compliant: Provided, that banks shall submit to the Bangko Sentral adjusting entries
reconciling the balances in the financial statements for prudential reporting with that in
the audited annual financial statements.

 The reports and certifications of institutions concerned, schedules and attachments

required under this Section shall be considered Category B reports, wherein
Delayed/Unsubmitted reports are subject to the penalties under Sec. 171 (Sanctions on
reports for non-compliance with the reporting standards).

Posting of Audited Financial Statements

Local banks shall post in conspicuous places in their head offices, all their branches and
other banking offices, as well as in their respective websites, their latest financial audit report.
The abovementioned documents shall also be posted by foreign bank branches in all their
banking offices in the Philippines.

Disclosure of external auditor’s adverse findings to the Bangko Sentral; Sanction

a. Findings to be disclosed. Banks shall require their external auditors to report to the Bangko
Sentral any matter adversely affecting the condition or soundness of the bank, such as, but not
limited to:
(1) Any serious irregularity, including those involving fraud or dishonesty, that may jeopardize
the interest of depositors and creditors;
(2) Losses incurred which substantially reduce the capital funds of the bank; and
(3) Inability of the auditor to confirm that the claims of creditors are still covered by the bank’s
assets.
 The disclosure of information by the external auditor to the Bangko Sentral shall not be
a ground for civil, criminal or disciplinary proceedings against the former.

 Bank management shall be present during discussions or at least be informed of the

adverse findings in order to preserve the concerns of the supervisory authority and
external auditors regarding the confidentiality of information.

b. Sanction. The auditing firm(s) shall be blacklisted by the Monetary Board for a period as the
Board may deem appropriate for their failure to perform their duty of reporting to the Bangko
Sentral any matter adversely affecting the condition or soundness of the bank. Banks shall not
be allowed to engage the services of the blacklisted auditing firm.
Disclosure requirement in the notes to the audited financial statements
Banks shall require their external auditors to include the following additional information in the
notes to financial statements:
a. Basic quantitative indicators of financial performance such as return on average equity,
return on average assets and net interest margin;
For purposes of computing the indicators, the following formulas shall be used:
1
Net Income ( ¿ Loss ) after Income Tax x 100
Return on Average Equity ( % )=
Average Total Capital Accounts
 ∑ of Total Capital Accountsas if the12−month ends
¿ the calendar∨fiscal year adopted by the bank
Where : Average Total Capital Accounts=
12
2
Net Income ( ¿ Loss ) after Income Tax x 100
Return on Average Equity ( % )=
Average Total Assets

∑ of Total Assets as if the 12−monthends

¿ the calendar∨fiscal year adopted by the bank
Where : Average Total Assets=
12
Net Income x 100
3 Net Interest Margin ( % ) =
Average Interest Earning Assets
Where : Net Interest Income=Total Interest Income−Total Interest Expense

∑ of Total Interest Earning Assets as if the 12−month ends

¿ thecalendar∨fiscal year adopted by the bank
Where : Average Interest Earning Assets=
12

b. Risk-based capital adequacy ratio under Section 34 of R.A. No. 8791 and applicable and
existing capital adequacy framework;
c. Concentration of credit as to industry/economic sector where concentration is said to exist
when total loan exposures to a particular industry/economic sector exceeds thirty percent (30%)
of total loan portfolio;
d. Breakdown of total loans as to secured and unsecured and breakdown of secured loans as to
type of security;
e. Total outstanding loans to bank’s DOSRI, percent of DOSRI loans to total loan portfolio,
percent of unsecured DOSRI loans to total DOSRI loans, percent of past due DOSRI loans to
total DOSRI loans and percent of non-performing DOSRI loans to total DOSRI loans;
f. Nature and amount of contingencies and commitments arising from off-balance sheet items
[include direct credit substitutes (e.g., export LCs confirmed, underwritten accounts unsold),
transaction-related contingencies (e.g., performance bonds, bid bonds, standby LCs), short-term
self-liquidating trade-related contingencies arising from the movement of goods (e.g.,
sight/usance domestic LCs, sight/usance import LCs), sale and repurchase agreements not
recognized in the balance sheet; interest and foreign exchange rate related items; and other
commitments];
g. Provisions and allowances for losses and how these are determined
h. Aggregate amount of secured liabilities and assets pledged as security; and
i. Accounting policies which shall include, but shall not be limited to, general accounting
principles, changes in accounting policies/practices, principles of consolidation, policies and
methods for determining when assets are impaired, recognizing income on impaired assets and
losses on non-performing credits, income recognition, valuation policies and accounting policies
on securitizations, foreign currency translations, loan fees, premiums and discounts, repurchase
agreements, premises/fixed assets, income taxes and derivatives.