Polytechnic University of the Philippines

COLLAGE OF ACCOUNTANCY AND FINANCE

Department of Accountancy
Academic Year 2021-2022

ACCO 30073

Auditing and Assurance: Specialized Industries

ASSIGNMENT
Assessment: Module 1: Banking and Other
Financial Institutions

Submitted by:

Mendez, Chester P.
BSA 3-3

May 2022
 AUDITING BANKING AND OTHER FINANCIAL
INSTITUTIONS

I. NATURE AND BACKGROUND OF THE BANKING AND OTHER

FINANCIAL INSTITUTIONS

Banks play a significant role in mobilizing savings to fuel

investments and growth. This role is particularly significant in the
Philippines where banks continue to dominate the financial markets.
Financing the needs of firms that want to increase productive capacity
by purchasing additional capital equipment, acquiring or leasing idle
property, building and expanding factories, and increasing inventory is
responsible for long-term economic growth and job creation. It is critical
that the banking and finance sectors continue to look for ways to
encourage households to save their unspent income in various financial
assets so that these resources can be used and transformed into loans
to finance the expansion of directly productive business ventures.

The financial system is divided into two categories:

CATEGORY EXAMPLES SOURCING OF

FUND
• Universal These institutions
banks, are permitted to
• Commercial collect savings and
banks, time deposits to fund
Banking Institutions • Thrift or loans, as well as to
Savings banks, provide credit and
and payment services.
• Rural and
Cooperative
banks

Large banks, particularly universal and commercial banks, are

permitted to engage in other forms of intermediation such as
investment banking and to offer other types of portfolio investment
instruments and insurance products.

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 CATEGORY EXAMPLES SOURCING OF
FUND
• Insurance Premium payments
companies, for term insurance
• Pension fund policies, regular
institutions, contributions to
• Investment pension funds,
banks, mutual fund
• Financing investments, or
Non-bank Financial companies, stock purchases in
Institutions • Pawnshops, financing companies
and and pawnshops are
• Mutual fund some of the ways
institutions non-bank financial
institutions can
raise funds to
finance lending and
investment
operations.

Nion-bank financial institutions are not permitted to accept

deposits, but they may encourage the general public to invest
household savings in a variety of financial instruments.

Other business segment in the banking industry include:

• Mobile banking or Branchless banking: a relatively new form of

service where banks or financial institutions allow their
customers to conduct financial transactions through their mobile
devices. Mobile banking can be carried out in collaboration with
telecom industry and is far away from the traditional brick-and-
mortar banking structure.
• Retail Wealth Management: Wealth management services and
Retail investment advisory is provided to young or new investors
showing interest in mutual fund units and other such financial
products.
• Microfinance: This is one of the fastest growing businesses not
only in the Philippines but is also attracting the whole world’s
admiration. As per the latest report of the Central bank, there are
more than 200 microfinance institutions working in the country,
that has lent around $250 million to 1 million borrowers.

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II. RELEVANT STATISTICS AND UPDATES OF THE BANKING AND
OTHER FINANCIAL INSTITUTIONS IN THE PHILIPPINES

The Philippine banking industry has always played an important role

in keeping the country's economy growing at a steady pace. The entire
banking sector is supervised by the Philippine Central Bank, Bangko
Sentral ng Pilipinas, while the overall industry is segmented and
varied as shown below as of the year 2017:
• 40 Commercial and Universal banks together hold around 90%
of the total market share of banking industry in the Philippines.
These banks claim a lion’s share of the total deposits available to
whole banking industry.
• There are 495 Rural and Co-operative banks in the Philippines
which are responsible for development of rural areas and their
economies by providing basic financial services to rural populace.
• Thrift banks in the Philippines are 57 in numbers. These banks
are further categorized into Private development banks, Savings
and mortgage banks, Loan associations, stock savings and
microfinance saving banks.
The number of banks in the Philippines for the years 2018, 2019, and
2020 are shown, according to their types, as follows:

Source: https://www.statista.com/statistics/1194941/philippines-number-of-banks-by-type/

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 In 2020, there were over 29 thousand financial institutions in the
Philippines, 13 thousand of which were banks. Across different bank
types, majority were universal and commercial banks. Among the
largest universal and commercial banks in the country in terms of
assets were BDO Unibank Inc., Metropolitan Bank and Trust Company,
and the Land Bank of the Philippines.
Despite the sharp decline in the Philippines' GDP caused by the global
coronavirus pandemic (COVID-19), the country's financial services
sector demonstrated resilience thanks to regulatory reforms
implemented following the Asian financial crisis in 1997. In 2020,
banking institutions' gross value added increased over the previous
year, while the ratio of nonperforming loans (NPL) increased but
remained below 4%. The Philippine banking system was expected to
continue implementing reforms needed to meet Filipinos' banking
needs while also boosting the economy.
On the other hand, despite consistent efforts to encourage citizens to
open a bank account, the share of adults with bank accounts remains
below 40%. One of the primary reasons for this was a lack of funds
required to open an account, a lack of need, and the absence of
documentary requirements such as valid identification. To address
this, the BSP promotes digital payments for both government subsidies
and salaries aggressively. Furthermore, digital payment methods for
paying bills and vendors were promoted in order to compel Filipinos to
open an account. As a result, online banking penetration was expected
to rise gradually in the coming years.

III. DIFFERENT AUDIT AND ACCOUNTING CONSIDERATIONS AND

TRENDS IN THE BANKING & OTHER FINANCIAL INSTITUTIIONS

Banking Laws
The following are the Republic Acts and its Implementing Rules
and Regulations from years 2012 – 2022.

R.A. No. Date Description

R.A. 10168 18 Jun An Act Defining the Crime of Financing of

2012 Terrorism, Providing Penalties Therefor and for
Other Purposes

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 R.A. 10574 24 May An Act Allowing the Infusion of Foreign Equity
2013 in the Capital of Rural Banks

R.A. 10641 15 An Act allowing the full entry of foreign banks

July in the Philippines, amending for the purpose
2015 Republic Act No. 772

Amendments to the IRR 03 Amendments to the IRR of RA 1000

of R.A. 10000 July
2018

R.A. 11127 30 Oct The National Payment Systems Act

2018

R.A. 11211 14 Feb An Act Amending Republic Act Number 7653,

2019 Otherwise Known As "The New Central Bank
Act", And for the Purposes

Amendments to the IRR 22 Feb Amendments to the IRR of the Republic Act
of R.A. 10000 2021 Number 10000

IRR of Article XIII, 26 Apr Joint Circular on the Establishment of the

Sections 32 and 34 of 2022 Shari’ah Supervisory Board in the Bangsamoro
R.A. 11054 Autonomous Region in Muslim Mindanao

Philippine Auditing Practice Statement 1006

The Auditing Standards and Practices Council (ASPC) provided the Philippine
Auditing Practice Statement (PAPS) 1006, which provide practical assistance to
auditors in implementing the Philippine Standards on Auditing (PSAs) or to
promote good practice.
Paragraph 7 of the said statement contains reasons why there arise special
audit considerations in the audits of banks:

• The particular nature of the risks associated with the transactions

undertaken by banks.
• The scale of banking operations and the resultant significant exposures
that may arise in a short period.

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• The extensive dependence on IT to process transactions.
• The effect of the regulations in the various jurisdictions in which they
operate.
• The continuing development of new products and banking practices that
may not be matched by the concurrent development of accounting
principles or internal controls.

The following are the audit assertions and its corresponding audit procedures
in performing audit of baking institutions:
Inspection
Inspection consists of examining records, documents, or tangible assets.
The auditor inspects in order to:

• be satisfied as to the physical existence of material negotiable assets

that the bank holds; and
• obtain the necessary understanding of the terms and conditions of
agreements (including master agreements) that are significant
individually or in the aggregate in order to:
o consider their enforceability; and
o assess the appropriateness of the accounting treatment they
have been given.
In carrying out inspection procedures, the auditor remains alert to the
possibility that some of the assets the bank holds may be held on behalf of
third parties rather than for the bank’s own benefit. The auditor considers
whether adequate internal controls exist for the proper segregation of such
assets from those that are the property of the bank and, where such assets
are held, considers the implications for the financial statements.
Inquiry and Confirmation
Inquiry consists of seeking information of knowledgeable persons inside or
outside the entity. Confirmation consists of the response to an inquiry to
corroborate information contained in the accounting records. The auditor
inquires and confirms in order to:

• obtain evidence of the operation of internal controls;

• obtain evidence of the recognition by the bank’s customers and
• counterparties of amounts, terms and conditions of certain
transactions; and
• obtain information not directly available from the bank’s accounting
records.

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 A bank has significant amounts of monetary assets and liabilities, and of
off-balance-sheet commitments. External confirmation may be an effective
method of determining the existence and completeness of the amounts of
assets and liabilities disclosed in the financial statements.
Computation
Computation consists of checking the arithmetical accuracy of source
documents and accounting records or of performing independent
calculations. In the context of the audit of a bank’s financial statements,
computation is a useful procedure for checking the consistent application of
valuation models.
Analytical Procedures
Analytical procedures consist of the analysis of significant ratios and trends
including the resulting investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate from predicted
amounts. PSA 520, “Analytical Procedures” provides guidance on the
auditor’s use of this technique.

Compliance with PFRS/PAS

The Bangko Sentral ng Pilipinas (BSP) pronounced its adoption of the
PFRS/PAS effective the annual financial statements beginning 1 January
2005 in its Memorandum to All Banks and Other BSP Supervised Financial
Institutions (BSFIs) dated 11 January 2005. The adoption of the new set of
standards is aimed at promoting fairness, transparency and accuracy in
financial reporting.
The BSP in its Circular No. 915 dated 05 July 2016 Deviations between
local and international accounting standards only apply to the preparation of
prudential reports to the BSP and these are, as follows:
a. Consolidated financial statements

Under PAS 27, all bank/quasi-bank subsidiaries, regardless of type,

are consolidated on a line-by-line basis. For prudential reporting
purposes, however, financial allied subsidiaries, except insurance
companies, are consolidated with the financial statements of the parent
bank/QB on a line-by-line basis. Non-financial allied subsidiaries and
insurance subsidiaries, on the other hand, are accounted for using the
equity method.

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b. Provisioning requirement In preparing general purpose financial
statements/audited financial statements, BSFIs adopt the provisions of
PFRS/PAS in booking provisions for credit losses.

For prudential reporting purposes, however, BSFIs are required to

adopt the expected credit loss model in measuring credit impairment in
accordance with the provisions of PFRS 9. BSFIs are also required to set
up general loan loss provision (GLLP) equivalent to 1 percent (1%) of all
outstanding Stage 1 on-balance sheet loans, except for accounts
considered as credit risk-free under existing regulations. BSFIs are not
required to provide a 1 percent (1%) GP on other credit exposures covered
by PFRS 9 such as off-balance sheet accounts and investments.

Allowance for credit losses for Stages 1, 2 and 3 accounts shall be

recognized in the profit or loss statement. In cases when the computed
allowance for credit losses on Stage 1 accounts is less than the 1 percent
GP required, the deficiency shall be recognized by appropriating the
Retained Earnings (RE) account. Deemed cost of real and other properties
acquired in settlement of loans (ROPA)

In computing the deemed cost of ROPA, BSFIs are required to value

the property at initial recognition based on the carrying amount of the
asset given up in the exchange; i.e., carrying amount of the loan, instead
of the fair value of the real and other property acquired.

c. Accrual of interest income on non-performing loans

Interest income is allowed to be recognized on non-performing

exposures for purposes of preparing the general-purpose financial
statements/audited financial statements.

For prudential reporting purposes, however, BSFIs are not allowed

to recognize interest income on non-performing exposures, except when
payment is received.

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IV. AUDIT AND FINANCIAL STATEMENTS OBSERVATIONS

BDO UNIBANK INCORPORATED

Background of the Company

BDO is a full-service universal bank in the Philippines. It provides a
complete array of industry-leading products and services including
Lending (corporate and consumer), Deposit-taking, Foreign Exchange,
Brokering, Trust and Investments, Credit Cards, Retail Cash Cards,
Corporate Cash Management and Remittances in the Philippines.
Through its local subsidiaries, the Bank offers Investment Banking,
Private Banking, Leasing and Finance, Rural Banking, Life Insurance,
Insurance Brokerage and Online and Non-Online Brokerage services.

BDO’s institutional strengths and value-added products and

services hold the key to its successful business relationships with
customers. On the front line, its branches remain at the forefront of
setting high standards as a sales and service-oriented, customer-
focused force. The Bank has the largest distribution network with over
1,500 operating branches and offices, and more than 4,400 ATMs
nationwide. BDO has 16 international offices (including full-service
branches in Hong Kong and Singapore) spread across Asia, Europe,
North America, and the Middle East.

The Bank also offers digital banking solutions to make banking

easier, faster, and more secure for its clients.

Through selective acquisitions and organic growth, BDO has

positioned itself for increased balance sheet strength and continuing
expansion into new markets. As of 30 September 2021, BDO is the
country’s largest bank in terms of consolidated resources, customer
loans, deposits, assets under management and capital, as well as
branch and ATM network nationwide.

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Audit Observations:

I. Opinion on the Audit of Consolidated Financial Statements

The auditor’s opinion states that the accompanying

consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Group as at
December 31, 2020 and 2019, and its consolidated financial
performance and its consolidated cash flows for each of the three
years in the period ended December 31, 2020 in accordance with
Philippine Financial Reporting Standards (PFRS).

II. Basis for Opinions

The auditors conducted their audits in accordance with

Philippine Standards on Auditing (PSA). They are independent of
the Group in accordance with the Code of Ethics for Professional
Accountants in the Philippines (Code of Ethics) together with the
ethical requirements that are relevant to their audits of the
consolidated financial statements in the Philippines, and they have
fulfilled their other ethical responsibilities in accordance with these
requirements and the Code of Ethics. They believe that the audit
evidence they have obtained is sufficient and appropriate to provide
a basis for their opinion.

III. Emphasis of Matter: Impact of Covid-19 on the Company’s

Business

The unprecedented impact of the COVID-19 pandemic and the

government’s stringent mobility/quarantine measures to contain
the virus have affected economic conditions and consequently, the
BDO Unibank Group’s and the Parent Bank’s business operations
in terms of the following:
• Scaled-down branch operations due to mobility/quarantine
restrictions;
• Business units operating at less than full capacity as
employees were unable to report for work;
• Limited sales activity for businesses requiring face-to-face
interaction due to social distancing;
• Additional costs to keep a safe and virus-free environment for
both customers and employees;

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 • Asset quality deterioration due to business disruption and
reduced incomes;
• Overall net impact is a decline in total net profit in 2020 by
36% and 35% for BDO
• Unibank Group and the Parent Bank, respectively, compared
to that of 2019.

The following, among others, were the actions undertaken by

BDO Unibank Group’s and the Parent Bank’s business to mitigate
such impact:
• Operated as many branches as allowed by the government
(consistent with quarantine guidelines) to provide continuing
banking service to clients amid mobility restrictions during
the Enhanced Community Quarantine (ECQ) from mid-March
2020 to end-May 2020. With the shift to General Community
Quarantine (GCQ) by June 2020, almost 100% of the Bank’s
branches had resumed operations, with banking hours
extended to 4pm effective October 2020;
• Availability of more than 4,400 Automated Teller Machines
(ATMs) and digital banking channels to provide alternative
access for clients. Fees were also waived on electronic and
similar forms of payment to encourage clients to use
alternative channels;
• Ensured cash availability in ATMs and branches through
armored cars and cash handling facilities working
continuously to mobilize cash across the country;
• Activated Business Continuity Plan to enable dual-site
processing capabilities or team redundancies in the event one
site becomes contaminated. Senior management likewise split
among several sites and skeletal crews maintained in Head
Office Units to support branches. By June, all Head Office
Units had returned to normal operations;

IV. Other Information

Management is responsible for the other information. The

other information comprises the information included in the Group’s
Securities and Exchange Commission (SEC) Form 20-IS (Definitive
Information Statement), SEC Form 17-A, and Annual Report for the
year ended December 31, 2020.

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 In connection with the audits of the consolidated financial
statements, the auditors’ responsibility is to read the other
information identified above when it becomes available and, in doing
so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge
obtained in the audits, or otherwise appears to be materially
misstated.

Financial Statements Observation

(Unique Accounts)

Statement of Financial Position

a. Due from Bangko Sentral ng Pilipinas – this refers to the balance

of the deposit account maintained with the BSP.

Mandatory reserves represent the balance of the deposit

accounts maintained with the BSP to meet reserve requirements and
to serve as clearing accounts for interbank claims.

b. Due from other Banks

Banks maintain deposits in other banks to facilitate the
transfer of funds. Those bank assets, known as “due from bank
deposits” or “correspondent bank balances,” are a part of the
primary, uninvested funds of every bank.

c. Deposit Liabilities – money that is received by a bank from people

or companies and that the bank will have to pay back in the future.

d. Insurance Contracts Liabilities – IFRS 4: An insurance contract

is a "contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event
(the insured event) adversely affects the policyholder.

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