Improvement seen in audit of banks' loan loss provisions
The Financial Reporting Council's (FRC) thematic review, launched in December 2013 following concerns expressed in its 2013 Audit Quality Inspection report, finds improvements in the sector. The review notes, however, that further improvement is necessary.
The review states: "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."
The FRC's report summarises key messages for auditors regarding bank and building society audits, including:
- Proactively monitor and enhance bank audit quality.
- Review procedures for capturing risks using risk assessment methodology and sector training, and consider or enhance the use of benchmarking and data.
- Ensure audit teams apply an appropriate degree of challenge and professional scepticism in the audit of loan loss provisions.
- Make sector training mandatory for partners and staff engaged in bank audits.
- "Fast track" the integration of non-IT specialists into the audit team.
- Perform root cause analysis to understand why current quality control processes did not identify weaknesses highlighted by the FRC's reviews.
Lessons to be learnt
The report also advises that audit committees discuss the lessons of the thematic review with their auditors, and that they understand and seek assurance regarding:
- Benchmarking the audit's effectiveness.
- The sector expertise and competence of the audit team.
- The effectiveness of the bank's internal controls.
- The timing and appropriateness of planning with group auditors.
The banking sector will remain a priority area for the routine audit inspection work, the FRC says, and it will undertake follow-up work on audits where significant improvements are required as part of next year's inspection cycle.