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Paps 1006

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116 views5 pages

Paps 1006

Uploaded by

Levy Joy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Philippine Auditing Practice

Statement 1006
The Philippine Auditing Practice Statement (PAPS) 1006, issued by the
Auditing Standards and Practices Council, aims to provide guidance tailored
for auditors conducting audits of financial statements of banks. Following is
an overview of critical aspects outlined in this document, enhancing
understanding and retention of the auditing principles as they apply
specifically to the banking sector.

Introduction

PAPS 1006 is modeled after the International Auditing Practice Statement


1006 (IAPS 1006) and offers practical guidance aimed at improving auditing
practices in compliance with Philippine Standards on Auditing (PSAs). It
emphasizes that auditors must exercise professional judgment depending on
each bank's unique circumstances. The complexity of financial activities and
internal controls in banks necessitates a tailored approach to auditing.

Core Structure of the Statement


Purpose: To assist auditors in implementing PSAs effectively within the
banking context.
Definition of a Bank: Defined as an institution taking deposits and
lending, recognized by the Bangko Sentral ng Pilipinas (BSP).
Scope: Covers audits of standalone financial statements and significant
banking activities, including consolidated financial reports.

Audit Objectives

The primary objective of banking audits reflects in the auditor's opinion on


whether the financial statements comply with relevant accounting principles
in the Philippines. The auditor must also ensure appropriate disclosure
regarding the financial reporting framework applicable if preparing for
external reporting.

Engagement Terms and Audit Planning

Agreeing on Engagement Terms

Engagement letters must clearly delineate responsibilities, scope, objectives,


and any specific accounting principles that apply, thereby providing clarity
and guidance.

Planning the Audit


The planning phase includes:
Gaining a thorough understanding of the bank's operations and
governance structures.
Assessing inherent and control risks associated with the bank's
operations.
Setting a comprehensive audit plan considering the bank's complexity,
transaction volumes, and compliance with regulatory requirements.

Internal Control Framework

Recognizing the inherent limitations of internal controls is crucial. Various


inherent risks arise in banking, including vulnerability to fraud and
operational inefficiencies. Auditors must evaluate the effectiveness of
internal controls by identifying, documenting, and testing procedures that
manage risk.

Elements of Internal Control:


Transaction authorizations follow explicit policies.
Prompt recording and correct accounts for all transactions are essential.
Access to assets should be restricted based on management's
authorization.
Regular comparisons between recorded and actual assets help identify
discrepancies.

Substantive Audit Procedures

Based on the risk assessment, auditors perform substantive tests to validate


financial statement assertions, particularly focusing on:
Existence of assets and liabilities through inspection and confirmation.
Rights and obligations regarding the ownership of assets.
Valuation accuracy in accordance with applicable accounting standards.
Fraud Risks and Internal Controls

Fraud in the banking sector often involves both internal and external threats,
including money laundering and unauthorized transactions. Auditors must
focus on identifying risk factors that might indicate potential fraud.

Common Fraud Risks:


Check fraud and unauthorized transactions.
Misappropriation of customer assets.
Failures in key internal control functions like verification and approvals.

Reporting on Financial Statements

When reporting financial statements, auditors must adhere to specific


formats suggested by regulatory bodies and ensure conformity across
branches, especially if operations extend internationally.

Appendices and Additional Guidance

The statement includes several appendices providing detailed examples of


internal control considerations, substantive procedures, fraud risk factors,
and common financial ratios relevant to the banking sector. These
appendices serve as practical tools for auditors in assessing bank
operations and achieving compliance with PAPS.

Conclusion
PAPS 1006 is essential for guiding auditors through the complexities unique
to auditing banks. Its structured approach ensures comprehensive coverage
of audit objectives, engagement terms, internal control systems, substantive
procedures, and reporting standards. Continuous reference to this standard
will aid auditors in maintaining high-quality audit practices in the evolving
landscape of the banking industry.

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