Appendix 6 - Banking Industry

Identifying and Assessing the Risks of Material Misstatement in the Financial Statements Examples of Risks of Material Misstatement – Appendix 6

©2010 Deloitte Global Services Limited A.6 –

Appendix 6 – Banking Industry

This appendix contains example risks applicable to the Banking industry for a selection of account balances and classes of transactions which have been prepared based on a short scenario which is presented at the start of each example. These examples may be used in conjunction with the examples in Appendix 1 Generic/Manufacturing Industry. The risks are not a comprehensive list of risks and should not be used as a complete listing of risks. Users of these examples should use them with care and should identify the risks of material misstatement in respect of their client’s Financial Statements and not use these examples as the defacto listing of Risks and Related Controls for their client. DTTL takes no responsibility for inappropriate use of these examples by Member Firms, Member Firm Engagement Teams or any other persons.

Account Balances and Classes of Transactions included within Appendix 6

Each example has a simple outline of the background to the account balance – it is critical that a thorough understanding of the entity and its environment, including the entity’s internal control is obtained to understand risks. This understanding establishes a frame of reference within which we plan the audit, exercise professional judgment, and identify and assess the risks of material misstatement. Without this understanding we are unlikely to be able to effectively identify the risks of material misstatement in the financial statements. Use of these examples does not remove the need for applying professional judgment in identifying risks of material misstatements.

6a ACCOUNT BALANCES Cash in bank A.6 – Page 2 Loans to customers A.6 – Page 3 Loans to financial institutions A.6 – Page 5 Securities and other financial assets at fair value A.6 – Page 6 Deposits from financial institutions A.6 – Page 8 Deposits from customers A.6 – Page 11 Other assets (Banking) A.6 – Page 14 Provisions and accruals A.6 – Page 16 Derivatives A.6 – Page 19 Impairment Losses A.6 – Page 22 Other Liabilities (Banking) A.6 – Page 25 Securities and other financial assets at amortized costs/cost A.6 – Page 26 Debt instruments issued A.6 – Page 28

6b CLASSES OF TRANSACTIONS Interest Income A.6 – Page 30 Interest expense A.6 – Page 33 Fee and commission income A.6 – Page 35 Fee and commission expense A.6 – Page 37

Identifying and Assessing the Risks of Material Misstatement in the Financial Statements Examples of Risks of Material Misstatement – Appendix 6a


Appendix 6a – Account Balances – Banking Industry: Banking Account Balance: CASH IN BANK Scenario: The entity has a number of bank accounts which include: current, deposit and foreign currency bank accounts. Bank reconciliations are performed on a monthly basis to reconcile the amount of cash per the bank statement to the general ledger.

Risks of Material Misstatement Assertion(s) Example Control(s) • Cash is overstated because

o Non-existent cash receipts have been recorded o Cash receipts have been recorded at an amount higher than

actual receipts o Cash disbursements have not been recorded o Cash on hand has been misappropriated/stolen

Existence • Cash is counted and reviewed by Head of subsidiaries on a daily basis. By the end of month, reports are sent to management for review and approval.

• Reconciliations from other banks are reviewed and approved by management on a monthly basis.

• Cash is understated because o Not all bank accounts have been recorded in the general

ledger o Cash existing in the bank account has not been recorded by

the entity.

Completeness • Every day cash accounts are reviewed and approved by Head of subsidiary. Any unusual items are investigated.

• Cash in other banks are reviewed every month by management.

• Bank reconciliations are reviewed and approved by management on a monthly basis.

• Cash is misstated because: o Bank accounts denominated in a foreign currency have been

translated using the incorrect exchange rate.

Valuation and allocation • Bank reconciliations are reviewed and approved by management on a monthly basis (including the appropriateness of the exchange rate used to convert bank accounts denominated in a foreign currency to the functional currency of the entity).

• Bank no longer has the right to some or all of the recorded cash balance

Rights and obligations • Cash count is reviewed by management to ensure that cash balances are properly recorded, classified and/or disclosed within the financial statements.

• Cash stated in the books (general ledger) does not reconcile to cash in the treasury

Valuation and allocation Existence Completeness

• Cash count is reviewed and approved by management on a monthly basis.



Industry: Banking Account Balance: LOANS TO CUSTOMERS Scenario: The entity is a bank that provides loans both to corporate and individual clients.

Risks of Material Misstatement Assertion(s) Example Control(s) • Loans are overstated because:

o Loan receivable was incorrectly recognized at period end before the loan was provided to customer

o Loan was repaid before period end and incorrectly recognized as loan receivable at period end

Existence

• Appropriate contractual documentation is verified before the loan is accounted for

• Regular reconciliation of all outstanding loans is performed

• Loans are misstated because: o Loan was not derecognized from the balance sheet despite de-

recognition criteria being met. o Loan was derecognized from balance sheet despite de-

recognition criteria not being met.

Rights and obligations • Accounting policies are properly documented and re-assessed on a regular basis, accounting policies for new products are set up before the new product is launched.

• Loans are understated because: o The bank participates in a syndicated loan but does not

recognize its share. o Loan provided to customer was not accounted for o Loan provided to customer before period end was not recorded

until after the period end

Completeness • Appropriate supporting documentation for syndicated loans is available

• Regular reconciliation of all outstanding loans is performed and independently reviewed and approved.

• Loans are misstated due to: o Received loan instalment payments being allocated to the

incorrect customers account

Valuation and allocation

• Banking system automatically matches received payments with customers accounts, payments that were not matched are investigated

• Loan statements are mailed periodically to customers • Loans are misstated because

o Loans denominated in foreign currencies are not translated using Valuation and Allocation

• Exchange rates used by the banking system are reviewed and approved



Risks of Material Misstatement Assertion(s) Example Control(s) appropriate exchange rate

o Fees and commissions related to loan origination are not appropriately included in the effective interest calculation

o Accrued interest is misstated because interest income is not calculated using the effective interest rate

• Four eyes principles is applied when entering loan data (e.g. currency, maturity, contractual interest rate) into the banking system

• Appropriate accounting methodology exists for all types of loans

• Interest income is automatically calculated by the banking system



Industry: Banking Account Balance: LOANS TO FINANCIAL INSTITUTIONS Scenario: The entity places its free resources in short term deposits with other financial institutions

Risks of Material Misstatement Assertion(s) Example Control(s) • Loans are overstated because:

o Loan is incorrectly recognized at period end before the loan was provided to financial institution

o Loan was repaid before period end and incorrectly recognized as receivable at period end

Existence

• The transaction cannot be accounted for without the counterparty confirmation

• All open transactions are reconciled on a regular basis

• Loans are misstated because o Loan was not derecognized from the balance sheet despite de-

recognition criteria being met o Loan was derecognized from balance sheet despite de-

recognition criteria not being met

Rights and obligations

• Appropriate accounting treatment is assessed and documented for all types of transactions

• Loans are understated because o Loans provided to financial institutions are not accounted for o Loan provided to financial institution before period end was

not recorded until after the period end

Completeness

• The transaction cannot be accounted for without the counterparty confirmation

• All open transaction are reconciled on a regular basis

• Loans are misstated because o Loans denominated in foreign currencies are not translated

using appropriate exchange rates o Accrued interest is misstated because interest income was not

calculated using effective interest rate

Valuation and Allocation

• Exchange rates used by the banking system are reviewed

• Interest income is automatically calculated by the banking system



Industry: Banking Account Balance: SECURITIES AND OTHER FINANCIAL ASSETS AT FAIR VALUE Scenario: The entity holds a financial instruments portfolio consisting of different type of securities such as shares, bonds, treasury and commercial bills... as well as different derivatives such as forwards, interest rate and cross currency swaps... Depending on its intentions and other criteria all securities and derivatives have been properly classified, in accordance with the accounting framework, as financial instruments at fair value through profit and loss or financial assets available for sale.

Risks of Material Misstatement Assertion(s) Example Control(s) • Securities and other financial assets stated in the general ledger do not

reconcile back to the securities and other financial assets register and/or the reconciliation contains invalid items resulting in securities and other financial assets being misstated.

Completeness Existence Valuation and allocation

• Appropriate personnel review to check that front-office systems and back-office systems are appropriately reconciled.

• Significant reconciling items, if any, are agreed to supporting documentation.

• Management reviews and approves the reconciliation between securities and other financial assets stated in the general ledger and the sub register.

• Securities and other financial assets recorded in the entity’s books are misstated because: o They are not valued correctly in accordance with the applicable

financial reporting framework.

Valuation and allocation • Appropriate personnel review transactions to ensure that they are recorded in accordance with the applicable financial reporting framework (including recognition of realized profit and loss) and local regulations.

• Management evaluates whether securities and other financial assets are valued in accordance with its policies and procedures and accounting policy.

• Securities and other financial assets recorded in the entity’s books are misstated because the terms, conditions and amounts of transactions are not correctly recorded.

Valuation and allocation • All authorized source documents supporting transactions and changes are compared to the back-office system to ensure that they are input properly.

• Securities and other financial assets recorded in the entity’s books are misstated because: o Transactions are not recorded, o Transactions are not recorded in the appropriate period

Completeness Existence

• Balances in the accounting system are reconciled to the back-office systems on a regular basis.

A reconciliation of balances (open trades, income etc.) between the front-office system and back-office account



Risks of Material Misstatement Assertion(s) Example Control(s) balances in the general ledger, is performed by

appropriate personnel.

• Securities and other financial assets recorded in the entity’s books are overstated because: o The Entity no longer holds or controls the rights to the securities

and other financial assets recorded at period end.

Rights and obligations • Entity periodically sends out custodian confirmation requests for the securities to confirm that securities and other financial assets it has recorded in its records still exist and that the entity still has rights to them.

• Securities and other financial assets are overstated because: o Items that have been disposed of are not removed from the

investments register.

Existence • Entity periodically sends out custodian confirmation requests for the securities to confirm that investments it has recorded in its records still exist and that the entity still has rights to them.

• Securities and other financial assets are understated because: o Securities and other financial assets acquisitions, for which the

entity takes ownership, are not recorded.

Completeness • On a monthly basis, management reviews and approves a listing showing the movement in the total balance broken down by individual items that make up the balance.

• Management reviews transactions before, at, and after period end to ensure that they are recorded in the appropriate period.

• Securities and other financial assets are misstated because: o The prices/exchange rates used for valuation and/or the valuation

techniques are incorrect.

Valuation and allocation • Market rates are obtained from approved sources (e.g. Reuters) and entered into the system.

• Appropriate personnel agree fair values per unit (for example share price) to independent sources.

• For items which don’t have a quoted market price in an active market or whose fair value is difficult to measure (for example CCS) management provides details on valuation methods and/or specialists confirm valuation of these hard to value items.

• Securities and other financial assets are overstated because: o Fees/Commissions have been incorrectly capitalized instead of

expensed.

Existence • All authorized source documents supporting transactions and changes are compared to the back-office system to ensure that they are input properly.

• An independent party reviews the reconciliations between front-office systems, back-office systems and accounting systems on a regular basis and ensures reconciling items are valid and correctly handled.



Industry: Banking Account Balance: DEPOSITS FROM FINANCIAL INSTITUITIONS Scenario: The entity has deposits from financial institutions which include both term and demand deposits from domestic and foreign institutions

Risks of Material Misstatement Assertion(s) Example Control(s) • Recorded deposits from financial institutions are understated because:

o Deposits have been received but not recorded in the general ledger/deposit register

o Deposits received prior to the period end are not recorded until after the period end

Existence Completeness Rights and obligations

• Deposit clearing and suspense accounts are reviewed and amounts are investigated and resolved in a timely manner.

• Deposit Registers, accrued interest and other related accounts are reconciled to corresponding general ledger control accounts on a timely basis. All reconciling items are investigated and resolved in a timely manner, and reconciliations are reviewed by appropriate management.

• Recorded deposits from financial institutions are understated because deposit repayments/redemption/maturities have been recorded but disbursements have not been made to the lender

Completeness Rights and obligations

• Payments to Interbank and some Corporate counterparties are processed against Standard Settlement Instructions or are verified to Customer Mandates. Interbank Deals have their counterparty confirmations checked prior to payment release.

• Recorded deposits from financial institutions are understated because recorded disbursements from or charges to deposit accounts are unauthorized/invalid, recorded twice in error or at inflated amounts

Existence Valuation and allocation

• Policies and procedures in place over prevention of unauthorized payments from deposit accounts which management reviews and updates regularly.


• Recorded deposits from financial institutions are misstated because: o Deposits were not derecognized from the balance sheet despite

de-recognition criteria being met o Deposits were derecognized from the balance sheet despite de-

recognition criteria not being met.

Rights and obligations • Accounting policies are properly documented and re-assessed on a regular basis.



Risks of Material Misstatement Assertion(s) Example Control(s) • Recorded deposits from financial institutions are misstated due to

inaccuracies in the input and/or processing of deposit transactions, adjustments or payments

Valuation and allocation • Additions, deletions and adjustments to the Deposit register are verified to Customer Mandates.

• Deposit Registers accrued interest and other related accounts are reconciled to corresponding general ledger control accounts on a timely basis. All reconciling items are investigated and resolved in a timely manner, and reconciliations are reviewed by appropriate management.


• Recorded deposits from financial institutions are misstated due to: o Deposits denominated in foreign currency are not re-stated at year-

end to the appropriate foreign exchange spot rate. o Deposits received in foreign currency are recorded as if received in

domestic currency

Valuation and allocation • The accounting system electronically retrieves currency exchange rates from an approved source or designated location, which is updated daily. Exchange rates used by the banking system are reviewed and approved.

• The operations group performs a daily FX comparison. Fluctuations exceeding a predefined threshold are analyzed for accuracy.

• Management periodically reviews recorded deposit activity based on knowledge of day-to-day activities. Any discrepancies are investigated and resolved timely.

• Deposit from financial institutions are misstated due to: o Inaccuracies in the calculation and allocation of accrued interest

expense. o Invalid interest amounts

Completeness Valuation and allocation

• Detailed records of deposits, accrued interest and other related accounts maintained are reconciled to corresponding general ledger control accounts on a timely basis, all reconciling items are investigated immediately and cleared, and reconciliations are reviewed by appropriate management.

• The deposit system is programmed to automatically calculate and accrue deposit interest based on the terms of the deposit agreements.

• Any changes made to deposit interest rates are compared to authorized source documents by someone independent of the process to ensure they were input



Risks of Material Misstatement Assertion(s) Example Control(s) accurately.

• Deposit interest expense and related ratios are reviewed by management, including comparison to the budgets. Any discrepancies are investigated and resolved timely.

• Demand deposits are classified as term deposits or term deposits are classified as demand deposits.

Classification and understandability





Industry: Banking Account Balance: DEPOSITS FROM CUSTOMERS Scenario: Deposits from customers include both term and demand deposits

Risks of Material Misstatement Assertion(s) Example Control(s) • Recorded deposits from customers are understated because:

o Deposits have been received but not recorded in the general ledger/deposit register

o Deposits received prior to the period end are not recorded until after the period end

Existence Completeness Rights and obligations



• Recorded deposits from customers are understated because deposit repayments/redemption/maturities have been recorded but disbursements have not been made to the customer

• The policies and procedures over prevention of unauthorized payments from deposit accounts should be documented and reviewed and updated regularly.

• Recorded deposits from customers are understated because recorded disbursements from or charges to deposit accounts are unauthorized/invalid, recorded twice in error or at inflated amounts


• Policies and procedures in place over prevention of unauthorized payments from deposit accounts which management reviews and updates regularly.


• Recorded deposits from customers are misstated due to inaccuracies in the input and/or processing of deposit transactions, adjustments or payments


• Additions, deletions and adjustments to the Deposit register are verified to Customer Mandates.

• Deposit Registers accrued interest and other related accounts are reconciled to corresponding general ledger control accounts on a timely basis. All reconciling items are investigated and resolved in a timely manner, and reconciliations are reviewed by appropriate



Risks of Material Misstatement Assertion(s) Example Control(s) management.


• Recorded deposits from customers are misstated due to: o Deposits denominated in foreign currency are not re-stated at

year-end to the appropriate foreign exchange spot rate. o Deposits received in foreign currency are recorded as if

received in domestic currency


• The accounting system electronically retrieves currency exchange rates from an approved source or designated location, which is updated daily. Exchange rates used by the banking system are reviewed and approved.

• The operations group performs a daily FX comparison. Fluctuations exceeding a predefined threshold are analyzed for accuracy.


• Deposit from customers are misstated due to: o Inaccuracies in the calculation and allocation of accrued interest

expense. o Invalid interest amounts




• Any changes made to deposit interest rates are compared to authorized source documents by someone independent of the process to ensure they were input accurately.

• Deposit interest expense and related ratios are reviewed by management, including comparison to the budgets. Any discrepancies are investigated and resolved timely.

• Customer deposits are recorded in the incorrect general ledger account Classification and understandability

• Detailed records of deposits, accrued interest and other related accounts maintained are reconciled to corresponding general ledger control accounts on a timely basis, all reconciling items are investigated



Risks of Material Misstatement Assertion(s) Example Control(s) immediately and cleared, and reconciliations are reviewed by appropriate management.




Industry: Banking Account Balance: OTHER ASSETS (BANKING) Scenario: Other assets are made up of the following:

1) Prepayments 2) Repossessed property 3) Accrued income (e.g., fees on payment transactions) 4) Deferred loan acquisition / origination costs

Risks of Material Misstatement Assertion(s) Example Control(s)

• Other assets are overstated because: o Asset related transactions that have occurred during the period are

recorded as other assets instead of expenses. o Amounts recorded in other assets relate to fictitious or unauthorized

transactions o Amounts recorded in other assets relate to unsupported suspense

account balances o Other assets previously correctly recorded no longer exist and their

disposal/adjustment has not been recorded (e.g., deferred cost relating to impaired or repaid loans)

Completeness Existence Rights and obligations

• Monthly reporting packages are reviewed and approved by management and any major deviations are investigated and resolved timely.

• Material other assets are reconciled to source documents and approved by management on a monthly basis.

• Asset-related transactions at, before or after year end of an accounting period are scrutinized and/or reconciled to ensure complete and consistent recording in the accounting period.

• Other assets are understated because asset-related transactions that have occurred during the period are recorded as expenses instead of other assets

Completeness Rights and obligations


• Other assets are misstated due to: o Transactions in other assets being recorded in the wrong period o Amounts recorded in other assets do not reconcile to source

documentation and/or the reconciliation contains invalid items o Errors in the amortization and allocation of deferred loan

acquisition/origination costs o Errors in the calculation and allocation of prepaid expenses

Existence Completeness Valuation and allocation


• Material other assets are reconciled to source documents and approved by management on a monthly basis.

• The accounting system automatically calculates amortization of loan acquisition/origination fees daily based on information contained in loan master files and transaction records. The system calculations are



Risks of Material Misstatement Assertion(s) Example Control(s) reviewed for reasonableness.

• Repossessed property following the foreclosure on loans that are in default are not correctly measured at the lower at the lower of its carrying amount and fair value less costs to sell resulting in other assets being overstated.

Valuation and allocation • Management reviews the listing of repossessed assets and evaluates whether these are valued in accordance with the entity’s policies and procedures and accounting policy.



Industry: Banking Account Balance: PROVISIONS AND ACCRUALS Scenario: Provisions include Other assets are made up of the following:

1) Provisions in respect of costs arising from the following: a. Contingent assets b. Contingent liabilities c. Contractual commitments, including guarantees

2) Provisions for certain legal claims Accrued expenses relates to goods and services received / rendered for which invoices were not received Note: Provisions for employee benefits not included – if required then it would be supplemented Interest expense accruals are excluded as presumed they are covered within Due to banks / Due to customers, etc…

Risks of Material Misstatement Assertion(s) Example Control(s) • Provisions are understated because a provision has not been recorded

Completeness • Management regularly communicates with legal counsel to obtain an update on any pending or threatened litigation and assesses whether or not such litigation could give rise to a provision which would need to be recorded in the general ledger or disclosed in the financial statements.

• Reports are produced detailing specific provisions and variances to budget. These reports are reviewed by management monthly. Any discrepancies and significant variances to budget and prior periods are investigated and resolved in a timely manner.

• Legal Department/Finance Director, Board of Directors sanction reduction or removal of the provisions made for contingent assets or contingent liabilities in line with delegated discretion and entity’s policies and procedures.

• Provisions are misstated because: Valuation and allocation • Management regularly communicates with legal counsel



Risks of Material Misstatement Assertion(s) Example Control(s) o estimates are incorrect due to: § Bias § Incorrect techniques being used in the calculation § Incorrect data being used in the calculation

o Restructuring provisions or provisions for legal cases not recognized in accordance with the applicable accounting policy

o Costs associated with contingent assets, contingent liabilities and contractual commitments, including guarantees not recognized in accordance with the applicable accounting policies and / or regulatory requirements

o Material effect of the time value of money is not considered and the related provisions is not the present value of the expenditures expected to be required to settle the obligation

to obtain an update on any pending or threatened litigation and assesses whether or not such litigation could give rise to a provision which would need to be recorded in the general ledger or disclosed in the financial statements. Management, in conjunction with legal counsel, will prepare an estimate of the provision.

• All accounting estimates are appropriately documented and reviewed and approved by management and, where appropriate, those charged with governance to ensure the provision has been recorded in accordance the applicable accounting policy and / or regulatory requirements.

• Experts are involved in making accounting estimates requiring specialized knowledge.

• Management regularly reviews provisions, and discounts the provisions, where the effect of the time value of money is material, using a pre-tax discount rate (or rates) that reflect(s) current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure.

• Provisions are misstated because not recognized in the appropriate period

Completeness Existence

• Management reviews contingent liabilities, and consider the need to record additional provision.

• Management considers the effects of subsequent events to provision and contingent liability.

• Provisions are overstated because it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

Rights and obligations Valuation

• Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

• Accrued expenses are overstated because they include item(s) that will not be charged to the entity.

Rights and obligations Valuation and allocation

• Management reviews recorded accrued expenses based on its knowledge of day-to-day activity.

• Accrued expenses are understated because some accrued expenses have been intentionally or unintentionally excluded (e.g., goods received or

Completeness • Management reviews recorded accrued expenses based on its knowledge of day-to-day activity.



Risks of Material Misstatement Assertion(s) Example Control(s) services rendered are not recorded prior to receipt of invoice, etc)

• Accrued expenses are overstated because: o Expenses that have been paid have not been removed from the

accrued expenses account balance o The accrued expenses account balance includes fictitious expenses

Existence • Management reviews recorded accrued expenses based on its knowledge of day-to-day activity.

• Accrued expenses are reconciled to the supporting detail and differences are resolved in a timely manner. Management, independent employees, or internal auditors perform direct tests of the recording and reconciliation.



Industry: Banking Account Balance: DERIVATIVES Scenario: The entity has the following types of derivatives: • Derivatives held for trading • Derivatives designated as effective hedges and therefore subject to Hedge Accounting

Risks of Material Misstatement Assertion(s) Example Control(s) • Derivatives are overstated because:

o The derivatives’ portfolio includes positions that have never existed o Derivatives that have been closed are not removed from the derivatives

portfolio o Derivatives acquired/sold subsequent to the period end are incorrectly

recorded before the period end

Existence Completeness

• The entity has detailed and documented investment and accounting policies related to the use of derivative instruments. Such policies detail: o The entity’s intended purpose for derivatives (i.e.,

hedging or speculative). o Roles and responsibilities of the individuals

involved with the derivatives o The authorization structure for transactions,

including the involvement of the Board of Directors and/or senior management.

o Valuation policies and procedures Changes to those policies are approved by the Board of Directors/Investment Committee/Risk Committee.

• On a monthly basis, management reviews and approves the derivatives portfolio report showing the movement in the total derivatives balance broken down by individual derivative instruments.

• Management reviews derivative transactions before, at, and after period end to ensure that they are recorded in the appropriate period.

• Management reviews investment transactions to determine whether they are conducted in compliance with investment policies and procedures and accounting policy.

• Derivative are understated because: o Open derivative contracts are not recorded or fair valued.


• On a monthly basis, management reviews and approves the derivatives portfolio report showing the movement



Risks of Material Misstatement Assertion(s) Example Control(s) o Derivative contracts are only recorded when actual cash settlement

occurs (i.e., on cash basis). o Derivatives contracts entered into prior to the period end are not

recorded until after the period end.

Rights and obligations in the total derivatives balance broken down by individual derivative instruments.

• Management periodically reviews the entity's investment policies and procedures and accounting policy for appropriateness and compliance with the applicable reporting framework.

• Management reviews investment transactions before, at, and after period end to ensure that they are recorded in the appropriate period.

• Entity’s internal audit periodically sends out counterparty confirmation requests for the securities to confirm that derivatives it has recorded still exist and that the entity still has rights to them.

• Derivatives recorded in the entity’s books are misstated because: o They are inaccurately recorded (e.g., Positions sold short are

recorded as if acquired long, notional amounts/strike prices are incorrectly input)

o Fictitious derivative deals are input into the derivatives trading system

o Fees and commission incurred on derivative positions are not accounted for correctly per the applicable accounting policy.

Existence Rights and obligations Valuation and allocation

• On a monthly basis, management reviews and approves the derivatives portfolio report showing the movement in the total derivatives balance broken down by individual derivative instruments.

• Systems access and profiles to input or authorize derivative deals are restricted. Detailed procedures governing Logical Access to derivatives trading systems are documented in the Systems Access Policy.


• Derivatives recorded in the entity’s books are misstated because: o Derivatives (including embedded derivatives) are not valued

correctly in terms of the applicable accounting policy. o Fair values of open derivatives are recorded in the wrong direction

(Out-of –money positions are recorded as in-the –money positions or vice versa, derivative assets are recorded as derivative liabilities or vice versa).

o Derivative transactions denominated in foreign currency are not translated at the appropriate foreign exchange spot rate

Valuation and allocation • Management evaluates whether derivatives are valued in accordance with its policies and procedures and accounting policy.


• The accounting system electronically retrieves currency exchange rates from an approved source or designated



Risks of Material Misstatement Assertion(s) Example Control(s) location, which is updated daily. Exchange rates used

by the banking system are reviewed and approved. • Derivatives classified as effective hedges and accounted for using hedge

accounting do not meet the criteria for an effective hedge. • Derivatives are classified as held for trading (speculative) when they are held

for hedging and meet the criteria for an effective hedge.


• The entity has a detailed and documented investment and accounting policies related to the use of derivative instruments. Such policies detail: o The entity’s intended purpose for derivatives (i.e.,

hedging or speculative) o Roles and responsibilities of the individuals

involved with the derivatives o The authorization structure for transactions,

including the involvement of the Board of Directors and/or senior management

o Valuation policies and procedures • Management periodically reviews the entity's

investment policies and procedures and accounting policy for appropriateness and compliance with the applicable reporting framework.

• Management/Risk Manager periodically assesses the effectiveness of hedging instruments to ensure that these are recorded in accordance with the applicable reporting framework.



Industry: Banking Account Balance: IMPAIRMENT LOSSES Scenario: The entity is a bank that provides loans both to corporate and individual clients. This guide focuses only on impairment losses on loans granted to customers/financial institutions assuming that such loans are carried at amortized cost less accumulated allowance for impairment.

Risks of Material Misstatement Assertion(s) Example Control(s) o Impairment losses are understated due to overly optimistic view on the

deteriorating economic conditions which impact the recoverability of loans (e.g., assumptions on refinancing, expected changes in interest rates, unemployment, GDP trends)

Valuation and allocation • The basis for determining fair values of doubtful loans is detailed and documented and the underlying elements of the determination (e.g., discount rates used in present value computations, market values, etc…) are appropriate and verifiable The bank documents its analysis and estimate of the provision for loan losses in sufficient detail for senior management, the Board, regulatory examiners and auditors to independently form conclusions about the overall adequacy of the provision.

• Monthly Impairment Provisions Reports are produced detailing specific provision and variances to budget. These reports are reviewed by management (e.g., Heads of Credit /Risk Manager) and/or the Credit Committee. Any discrepancies and significant variances to budget and prior periods are investigated and resolved timely.

• Each quarter, provisions are reviewed and approved by management (e.g., Finance Director and Director-Credit Risk).

• Impairment losses are understated due to: o Understatement of total exposure used in the calculation of

individual and collective impairment provisions (e.g., omission of accrued interest, other loan products granted to the defaulting customer).

o Non-assessment of all individual impairment loans or omission of


• Management (e.g., Head of Credit) reviews impairment calculations to ensure accuracy of data.

• The Credit Committee sanctions reduction / removal of the provisions in line with the entity’s policies and procedures.

• Individually assessed cases and revised cash flows



Risks of Material Misstatement Assertion(s) Example Control(s) individually impaired loans in the specific provisions

o Removal/reversal of impairment provisions on loans that are still impaired.

o Non-inclusions of all loans that not considered individually impaired in the assessment of incurred-but-not-reported (IBNR) impairment losses.

o Overstatement of expected future cash flows or the realizable values of collateral where defaults have occurred.

o Understatement of probabilities of default and/or probability of repossession given a default

o Omission of cost of default/recovery in the calculation of impairment losses.

o Impairment losses not being adjusted for expected (lifetime) losses.

are reviewed as frequently as necessary. Cash flows are reviewed and approved by management and Risk Managers expectations / assumptions are challenged where appropriate. The treatment of recovery costs are also reviewed as part of this process.

• Provisions (above specified thresholds) are validated and approved by the Credit Committee. During this process the Credit Committee may also challenge assumptions in the cash flow / recovery assumptions.

• The loan system is programmed to identify and report delinquent loans, and such reports are routinely reviewed to identify loans that may be impaired. (e.g., exception reports for excesses over limits, late repayments, etc...).

• All risk inputs and assumptions are reviewed and updated as appropriate (e.g., monthly, quarterly, annually, etc...) by management (e.g., Risk Manager) and/or the Credit Committee.

• Impairment losses are understated as provisions for impaired loans are not recorded in the loans ledger as they are recognized.

Completeness • Monthly Impairment Provisions Reports are produced detailing specific provision and variances to budget. These reports are reviewed by management (e.g., Heads of Credit/Risk Manager) and/or the Credit Committee. Any discrepancies and significant variances to budget and prior periods are investigated and resolved timely.

• Impairment losses are misstated due to: o Incorrect grading/classification of loans for purposes of calculating

collective impairment o Use of incorrect inputs (e.g., exposure amount, probability of

defaults, probability of repossession given default, expected future cash flows, exchange rates, etc…

o Expected future cash flows are not discounted or are discounted


• Changes in assumptions used and loan grades are approved by the Credit Committee and management (e.g., the Finance Director) before being executed.

• Provisions (above specified thresholds) are validated and approved by the Credit Committee. During this process the Credit Committee may also



Risks of Material Misstatement Assertion(s) Example Control(s) using inappropriate discount rate in determining present value. challenge assumptions in the cash flow / recovery

assumptions. • Impairment losses are overstated because:

o Recoveries made from customers have not been recorded within the loans /accumulated provisions ledger

o Recoveries made from an obligor being allocated to the incorrect customers account

o Loan derecognized from the balance sheet are still being included in the calculation of IBNR impairment losses or collective impairment.

Rights and obligations • Loans are monitored by the relationship managers in a manner appropriate for the institution's types of loans.

• The Credit Committee reviews / endorses / amends the proposed recovery strategies for troubled accounts and/or watch list where appropriate. Minutes and action points of the credit committee meetings are distributed to the Credit Committee members for follow up.

• Write-offs are approved at an appropriate level of management or the Board.

• Impairment provisions are recorded in the incorrect ledger account Classification and understandability

• Monthly Impairment Provisions Reports are produced detailing specific provision and variances to budget. These reports are reviewed by management (e.g., Heads of Credit /Risk Manager) and/or the Credit Committee. Any discrepancies and significant variances to budget and prior periods are investigated and resolved timely.



Industry: Banking Account Balance: OTHER LIABILITIES (BANKING) Scenario: Other liabilities include:

o Unclaimed payments o Deferred income o Sundry creditors


o Other liabilities are overstated because: o Amounts recorded in other liabilities relate to fictitious or

unauthorized transactions o Amounts recorded in other liabilities relate to unsupported suspense

account balances or fictitious transactions

Existence Rights and obligations

• Management reviews recorded other liabilities based on their knowledge of day-to-day activity of the entity.

• Material other liabilities are reconciled to the supporting detail and differences are resolved in a timely manner. Management, independent employees, or internal auditors perform direct tests of the recording and reconciliation.

o Other liabilities are understated because: o Transactions that have occurred during the period are recorded as

income instead of deferred income o Transactions that occurred during the period have been intentionally

or unintentionally excluded.


• Monthly reports are reviewed and approved by management and any major deviations are investigated and resolved in a timely manner.

• Management reviews recorded other liabilities based on their knowledge of day-to-day activity of the entity.

o Other liabilities are misstated due to: o Transactions being recorded in the wrong period o Amounts recorded in other liabilities do not reconcile to source

documentation and/or the reconciliation contains invalid items o Errors in the amortization and allocation of deferred loan origination

fees or other deferred income


• Transactions at, before or after year end of an accounting period are scrutinized and/or reconciled to ensure complete and consistent recording in the accounting period.

• The accounting system automatically calculates amortization of loan origination fees daily based on information contained in loan master files and transaction records. The system calculations are reviewed for reasonableness. Any discrepancies identified are resolved in a timely manner.



Industry: Banking Account Balance: SECURITIES AND OTHER FINANCIAL ASSETS AT AMORTIZED COST/COST Scenario: The entity holds a financial instruments portfolio consisting of different type of securities such as shares, bonds, treasury, commercial bills and other financial assets. Depending on its intentions and other criteria all securities have been properly classified, in accordance with the accounting framework, as other financial assets at amortized cost

Risks of Material Misstatement Assertion(s) Example Control(s) o Securities and other financial assets stated in the general ledger do not

reconcile back to the securities and other financial assets register and/or the reconciliation contains invalid items resulting in securities and other financial assets being misstated.

Completeness Existence Valuation and allocation

• Appropriate personnel review to ensure that front-office systems and back-office systems are appropriately reconciled.

• Significant reconciling items, if any, are agreed to supporting documentation.

• Management reviews and approves the reconciliation between securities and other financial assets stated in the general ledger and the sub register.

• Securities and other financial assets at amortized cost/cost are overstated because:

o Items that have been disposed of are not removed from the investments register.

o Amounts recorded in securities and other financial assets relate to fictitious or unauthorized transactions

o Securities and other financial assets acquired subsequent to the period end are incorrectly recorded before the period end


• On a monthly basis, management reviews and approves listing of securities and other financial assets. Any major deviations are investigated and resolved timely.

• Material securities and other financial assets are reconciled to source documents and approved by management on a monthly basis.

• Management reviews security transactions before, at, and after period end to ensure that they are recorded in the appropriate period.


• Securities and other financial assets are overstated because : o Provisions for impairments/irrecoverable amounts are not recorded

in the asset ledger o Securities and other financial assets at amortized cost/cost are not


• Management reviews and makes provisions for impaired/irrecoverable amounts. Such review includes comparison of the carrying value of securities and other financial assets against the estimated realizable values



Risks of Material Misstatement Assertion(s) Example Control(s) assessed for impairment. or current market prices of the securities.

• Management reviews and approves the provision for impairment.

• Securities and other financial assets recorded in the entity’s records are overstated because the entity does not hold or control the rights to securities and other financial assets at the balance sheet date

Rights and obligations • Entity periodically sends out custodian confirmation requests for the securities to confirm that securities and other financial assets it has recorded in its records still exist and that the entity still has rights to them.

• Securities and other financial assets are understated because acquisitions, for which the entity takes ownership, are not recorded.

Completeness • On a monthly basis, management reviews and approves a listing showing the movement in the total balance broken down by individual items that make up the balance.

• Management reviews transactions before, at, and after period end to ensure that they are recorded in the appropriate period.

• Securities and other financial assets are misstated because: o Transactions are initially recorded at the incorrect amount o Errors in application of effective interest rate method in the

calculation of amortized cost o The exchange rates used to retranslate amounts denominated in

foreign currencies are incorrect o Fees/Commissions incurred and directly attributed to the acquisition

of the securities and other financial assets have been incorrectly expensed instead of being included in the calculation of effective interest rate.

Valuation and allocation • All authorized source documents supporting transactions and changes are compared to the back-office system to ensure that they are input properly.

• Statements received from correspondent banks/counterparties are reconciled to the appropriate accounts in the entity’s subsidiary ledgers and differences are investigated.

• Exchange rates are obtained from approved sources (e.g., Reuters) and entered into the system.



Industry: Banking Account Balance: DEBT INSTRUMENTS ISSUED Scenario: Debt instruments issued include Commercial Paper, Corporate Bonds, Convertible Bonds, Preference Shares and Subordinated Notes

Risks of Material Misstatement Assertion(s) Example Control(s) o Debt instruments issued are overstated because

o Debt instruments issued subsequent to the period end are incorrectly recorded before the period end

o Redemptions or repayments are made but not recorded


• Bond/Note holdings are reconciled to statements received from lenders and differences are investigated and resolved in a timely manner.

• Debt instruments issued are overstated due to incorrect recognition in respect to facility agreement

Valuation and allocation • Management reviews the facility agreements and supplements for compliance with covenants attaching to the debt securities and to assess status of debt securities issued on a monthly basis.

• Debt instruments issued are misstated due to: o Inaccuracies in the input and/or processing of the amount and/or

terms of borrowings o Incorrect application of the effective interest method o Transaction costs (fees and commissions) directly attributed to the

issuance of the debt securities are expensed instead of being adjusted against the value of the debt instruments issued, on initial recognition

o Incorrect treatment for embedded derivatives with respect to convertible bonds

o Debt securities denominated in foreign currency are re-translated at incorrect rates or not retranslated at all.

Valuation and allocation • Additions, deletions and other changes to the loan register are compared to the loan agreement to ensure that they were input accurately.

• Management periodically reviews the entity's funding policies and procedures as well as accounting policy for appropriateness and compliance with the applicable reporting framework.

• Appropriate accounting methodology exists for transaction costs attributed to debt instruments issued.

• Exchange rates are obtained from approved sources (e.g., Reuters) and entered into the system.

• Recorded debt is understated because o Financing has been obtained but not recorded in the general

ledger/loan register o Debt instruments issued prior to the period end are not recorded

until after the period end o A redemption has been recorded but disbursement has not been

made to the lender o A disbursement is recorded twice in error or at an inflated amount

Completeness • Bond/Note holdings are reconciled to statements received from lenders and differences are investigated and resolved in a timely manner.

• The listing/register of debt securities issued is periodically reviewed by management for accuracy and ongoing pertinence.

• Payments to Corporate counterparties are processed against Standard Settlement instructions or are verified



Risks of Material Misstatement Assertion(s) Example Control(s) to Lender’s Mandates/agreements.

• Systems access and profiles to input or authorize debt security transactions are restricted. Detailed procedures governing Logical Access to the systems are contained in the Systems Access Policy.

• Debt Securities issued are misstated due to repayments/redemptions being recorded in the incorrect period or incorrect general ledger account


• Management anticipates scheduled redemptions which are reviewed to ensure that all payments are made and recorded accurately and timely.

• Debt Securities issued are overstated as items meeting the definition of equity are classified as liability


• Management periodically reviews the entity's funding policies and procedures as well as accounting policy for appropriateness and compliance with the applicable reporting framework.

Identifying and Assessing the Risks of Material Misstatement in the Financial Statements Examples of Risks of Material Misstatement – Appendix 6b


Industry: Banking Account Balance: INTEREST INCOME Scenario: Interest income earned by the entity mainly arises from the following:

i) Loans to customers (commercial loans, retail loans and mortgages loans); ii) Loans to or deposits placed with other financial institutions.


• Interest income is understated because: o Not all performing loans are charged interest o Performing loans are incorrectly designated to non-accrual

status

Completeness • Management periodically reviews interest income activity and loan interest income yields including comparison to the budgets. Any discrepancies are investigated and resolved timely.

• Nonaccrual designations, and restorations of accrual status, are approved by appropriate management.

• Listing of non-performing loans or delinquency reports are reviewed to ensure there is appropriate follow-up with delinquent borrowers to determine whether the loans should be placed on nonaccrual status.

• Interest income is misstated because changes to interest rates are not appropriately authorized and recorded within the system.

Occurrence

• Interest rates applicable to the various loan products are pre-set within the Bank’s System. Where the rates are negotiated, the agreed interest rate is set up front when the customer signs the facility documentation accepting the terms and conditions of the agreement.

• Any new rates offered to customers are approved by the Bank’s Interest Rate Committee prior to being recorded in the system.

• Where account relationship managers have discretion to negotiate interest terms for business overdrafts, business term loans and flexible business loans, such discretion is within specified interest and fee margins. Any deals which fall outside these margins require written approval from designated authorized personnel/committee.

• New changes to interest rates are submitted for input



Risks of Material Misstatement Assertion(s) Example Control(s) into the banking systems by authorized personnel. Once the changes have been made in the system by an independent person, a copy of the relevant interest tables is returned to the authorized personnel to verify the information has been loaded in the system correctly.

• Interest income is misstated because: o Interest income is calculated and charged incorrectly o Interest is not accrued using the effective rate o Transactions denominated in foreign currency are not translated

at the appropriate foreign exchange transaction rate

Accuracy Valuation and allocation

• The loan system is logically programmed to accurately calculate loan interest and allocate loan payments between principal and interest.

• The accounting system electronically retrieves currency exchange rates from an approved source or designated location, which is updated daily. The pricing system verifies that the currency exchange rate transmission is current day by checking the transmission’s date, time and record count.

• Interest income is misstated because transactions are recognized in the incorrect period.

Cutoff

• Interest transactions at, before or after year end of an accounting period are scrutinized and/or reconciled to ensure complete and consistent recording in the accounting period.

• Management periodically reviews interest income activity and loan interest income yields including comparison to the budgets. Any discrepancies are investigated and resolved timely.

• Interest income is overstated due to accrual of interest on non-performing loans or loans on non-accrual status:

Occurrence • Nonaccrual designations, and restorations of accrual status, are approved by appropriate management.

• Listing of non-performing loans or delinquency reports are reviewed to ensure there is appropriate follow-up with delinquent borrowers to determine whether the loans should be placed on nonaccrual.

• Interest income is misstated because: o Interest income transactions are inappropriately off set against

interest expense transactions o Interest income transactions are recorded in the incorrect

general ledger account

Classification • Management periodically reviews interest income activity and loan interest income yields including comparison to the budgets. Any discrepancies are investigated and resolved timely.

• Appropriate accounting policies exist for recording and classifying interest income transactions. Management



Risks of Material Misstatement Assertion(s) Example Control(s) reviews the interest income transactions to ensure the transactions are recorded in accordance with the established accounting policies.



Industry: Banking Account Balance: INTEREST EXPENSE Scenario: Interest expense incurred by the entity mainly results from the following:

i) Customer deposits ii) Loans and deposits from other financial institutions. iii) Other long term funding (e.g., corporate bonds, commercial papers, subordinated debt etc...)


• Interest expense is overstated because: o Transactions included in interest expense have not occurred o Amounts recorded in interest expense relate to fictitious or

unauthorized transactions.

Occurrence • Monthly reports (including comparison to the budgets) are reviewed and approved by management and any major deviations are investigated and resolved timely.

• Statements received from lenders are reconciled to the appropriate accounts in the entity’s subsidiary ledgers and differences are investigated and resolved timely.


• Interest expense transactions are tested on a sample basis by management to ensure the transactions have occurred.

• Interest expense is misstated because changes to interest rates are not appropriately authorized and recorded within the system.

Occurrence • Interest rates applicable to the various deposit accounts are pre-set within the Banking System. Where the rates are negotiated, the agreed interest rate is set up front when the customer/lender signs the facility documentation accepting the terms and conditions of the agreement.

• Any new rates offered to customers are approved by the Bank’s Interest Rate Committee prior to being recorded in the system.

• Where account relationship managers have discretion to



Risks of Material Misstatement Assertion(s) Example Control(s) negotiate interest terms for commercial customers, such discretion is within specified interest margins. Any deals which fall outside these margins require written approval from designated authorized personnel/committee.

• New changes to customer deposit interest rates are submitted for input into the banking systems by authorized personnel. Once the changes have been made in the system by an independent person a copy of the relevant interest tables is returned to the authorized personnel to verify the information has been loaded in the system correctly.

• Interest expense is misstated because: o Interest expense is recorded at the incorrect amount o Errors exist in the calculation o Interest expense is not accrued using the effective rate o Transactions denominated in foreign currency are not translated




• Statements received from lenders are reconciled to the appropriate accounts in the entity’s subsidiary ledgers and differences are investigated and resolved timely.


• Interest expense is misstated because transactions are recorded in the incorrect period.

Cutoff

• Interest transactions at, before or after year end of an accounting period are scrutinized and/or reconciled to ensure complete and consistent recording in the accounting period.

• Interest expense is misstated because: o Interest expense transactions are inappropriately off set against

interest income transactions o Interest expense transactions are recorded in the incorrect

general ledger account

Classification • Appropriate accounting policies exist for recording and classifying interest expense transactions. Management reviews the interest expense transactions to ensure the transactions are recorded in accordance with the established accounting policies.

• Monthly reports (including comparison to the budgets) are reviewed and approved by management and any major deviations are investigated and resolved timely.



Industry: Banking Account Balance: FEES AND COMMISSION INCOME Scenario: The entity’s fees and commission income is earned in respect of services rendered by the bank and include loan/facility arrangement fees, security fees, guarantee/indemnity fees, payment services, transaction fees, insurance brokerage fees, investment management fees etc...

Risks of Material Misstatement Assertion(s) Example Control(s) • Fee and commission income is understated because not all transactions

resulting in fees and commissions income are recorded in the system

Completeness • Fees/commissions are set up front when the customer signs the facility documentation accepting the terms and conditions of the agreement.

• Management reviews recorded fees and commissions based on their knowledge of day-to-day activity of the entity. These reviews include comparison of movements in recorded fee/commission income to the volume of fee generating activities (e.g., new loans/products originated during the period, money transfers, value of assets under management). Any major deviations are investigated and resolved timely.

• Monthly reports (including comparison to the budgets) are reviewed and approved by Management and any major deviations are investigated and resolved timely.

• Fee and commission income is misstated because changes to fee tariffs are not appropriately authorized and recorded within the system.

Occurrence

• Any new tariffs offered to customers are approved by appropriate personnel. Once the changes have been made in the system by an independent person, a copy of the relevant fee tariff tables is returned to the authorized personnel to verify the information has been loaded in the system correctly.

• Where account relationship managers have discretion to negotiate fee/commission terms for commercial customers, such discretion is within specified fee discounts. Any tariffs which fall outside these discounts require written approval from designated authorized personnel.

• Fee and commission income is misstated because: Accuracy • Fee/commission transactions are tested on a sample



Risks of Material Misstatement Assertion(s) Example Control(s) o Transactions are recorded at the incorrect amount o Transactions denominated in foreign currency are not translated



basis by management for correct recording. • The accounting system electronically retrieves currency

exchange rates from an approved source or designated location, which is updated daily. Exchange rates used by the banking system are reviewed and approved.

• Fee and commission income is misstated because income is recorded in the incorrect period.

Cutoff

• Fee/commission transactions at, before or after year end of an accounting period are scrutinized and/or reconciled to ensure complete and consistent recording in the accounting period.

• Fee income is overstated because loan origination fees are recognized in full as income instead of being appropriately included in the effective interest rate calculation (i.e., amortized over the life of the loan)

Valuation and allocation • Appropriate accounting policies exist for all loan origination or acquisition fees.

• The banking system automatically accretes loan origination fees based on information contained in loan master files and transaction records. The system calculations are reviewed for reasonableness. Any discrepancies are investigated and resolved timely.

• Fee income is overstated because: o Transactions included in fee and commission income have not

occurred o Amounts recorded in fee and commission income relate to

fictitious or unauthorized transactions.


• Fee and commission income is misstated because: o Fee and commission income transactions are inappropriately

off-set against fee and commission expenses o Fee and commission income transactions are recorded in the

incorrect general ledger account

Classification • Monthly reports (including comparison to the budgets) are reviewed and approved by management and any major deviations are investigated and resolved timely.

• Appropriate accounting policies exist for recording and classifying fees and commissions. Management reviews the fee and commission income transactions to ensure the transactions are recorded in accordance with the established accounting policies.



Industry: Banking Account Balance: FEES AND COMMISSION EXPENSE Scenario: The entity’s fees and commission expense is incurred in respect of services rendered to the entity by other financial institutions and includes fees incurred on hedging activities

Risks of Material Misstatement Assertion(s) Example Control(s) • Fee and commission expense is overstated because:

o Transactions included in fee and commission expense have not occurred

o Amounts recorded in fee and commission expense relate to fictitious or unauthorized transactions.


• Statements received from correspondent banks, lenders, counterparties in hedging activities and other financial institutions are reconciled to the appropriate accounts in the entity’s subsidiary ledgers and differences are investigated and resolved timely.

• Fee and commission expense is overstated because transactions which should have been included in the effective interest rate calculation are expensed in full when paid.

Occurrence • Appropriate accounting policies exist for fees/commissions. Management reviews fee and commission expense transactions to ensure the transactions are recorded with the established policies.

• The banking system automatically calculates amortization of loan acquisition/origination fees based on information contained in loan master files and transaction records. The system calculations are reviewed for reasonableness.

• Fee and commission expense is understated because: o Not all transactions resulting in fee and commission expense

are recorded in the system. o Transactions which should have been expensed in full are

capitalized

Completeness • Monthly reports (including comparison to the budgets) are reviewed and approved by management and any major deviations are investigated and resolved timely.

• Statements received from correspondent banks, lenders, counterparties in hedging activities and other financial institutions are reconciled to the appropriate accounts in the entity’s subsidiary ledgers and differences are investigated and resolved timely.

• Appropriate accounting policies exist for fees/commissions. Management reviews fee and



Risks of Material Misstatement Assertion(s) Example Control(s) commission expense transactions to ensure the transactions are recorded with the established policies.

• Fee and commission expense is misstated because: o Transactions are recorded at the incorrect amount o Errors exist in the calculation o Transactions denominated in foreign currency are not translated



• Statements received from correspondent banks, lenders, counterparties in hedging activities and other financial institutions are reconciled to the appropriate accounts in the entity’s subsidiary ledgers and differences are investigated.


• Management periodically reviews fee and commission expense activity including comparison to the budgets and loan activities. Any discrepancies are investigated and resolved timely.

• Fee and commission expense is misstated because income is charged in the incorrect period.

Cutoff

• Fee/commission transactions at, before or after year end of an accounting period are scrutinized and/or reconciled to ensure complete and consistent recording in the accounting period.

• Fee and commission expense is misstated because: o Fee and commission expense transactions are inappropriately

off-set against fee and commission income o Fee and commission expense transactions are recorded in the

incorrect general ledger account

Classification • Monthly reporting (including comparison to the budgets) are reviewed and approved by Management and any major deviations are investigated and resolved timely.

• Appropriate accounting policies exist for recording and classifying fees and commissions. Management reviews the fee and commission expense transactions to ensure the transactions are recorded in accordance with the established accounting policies.

Appendix 6 - Banking Industry

Documents

Transcript of Appendix 6 - Banking Industry