1.

Provide a SUMMARY of understanding of the following for the Banking Industry:

a. Nature of operations (PSA 315 a22)

A22. Examples of matters that the auditor may consider when obtaining an understanding of
the nature of the identity include:

Business operations – such as:

 The banking industry earns money in a variety of ways. Banks accept deposits from
individuals and companies and pay interest on specific accounts. In turn, banks
accept deposits and either invest or lend cash to businesses and consumers .
Furthermore, some products or services, as well as the markets they serve, are
categorized. Credit cards, debit cards, and automated teller machines are the most
common products they provide.

 Banking operations are the activities and procedures that a bank employs to ensure
client satisfaction. Retail banking, which includes mortgages, loans, deposits, and
checking accounts, is the first banking business. Because the industry is so competitive,
banks provide their customers with straightforward and accessible services. The second
item on the list is business banking, which includes startup loans, collecting deposits,
and investing. Finally, investment banking is a very advanced branch of banking.
These organizations specialize in providing underwriting services (including equity and
debt), developing securities markets, trading stocks, and offering advisory services.

 It may be beneficial to have alliances and joint ventures in banking industry since they
can save costs and gain a more significant competitive edge. However, different
investors are working together, so, there is a high risk of imbalanced expertise, assets,
and investments. In this case, financial statements can be immaterial, especially if the
transactions and balances have not been appropriately identified.
 Geographic segmentation is the process of categorizing a target market based on its
geographical location. Depositors, banks, and borrowers all hamper the integration of
deposit and loan markets in the banking industry.

 Since banks involve money, there are plenty of regulations and risk areas for it. They
utilize vault cash for intangible inventory, which is cash held on hand in a depository
institution's vault to satisfy day-to-day business needs like cashing checks for clients. In
terms of bank, services comprise financial assistance programs banks and lending
institutions provide, such as credit, term loans, and overdraft services.

 In the bank, there is a category of customers. It comprises corporate customers,

individual clients, and different sorts of customers with whom the bank often
works. In terms of the suppliers, it includes depositors who are the primary source of the
capital, while the second is its employee, also known as the labor resource.

 Banks do business realignment, channel optimization, process costs, staff productivity,

and technology and automation in development. With regards to modernization, most
banks adopted mobile banking, which allows customers to send and transfer money
using their mobile phones. It is evident that as the world evolves, industries must adapt
to it.

 Related party transactions included in the banking industry according to BSP Circular no.
895 are all Directors, Officers, Stockholders and Related Interest (DOSRI); close family
members of the Bank’s Directors, Officers and Stockholders (DOS) who are relatives
within the 4th degree of consanguinity or affinity or by legal adoption, legitimate or
common law, provided that these persons have control, joint control or significant
influence on, bank’s subsidiaries as well as affiliates, any party (including their
subsidiaries, affiliates, and unique purpose firms) over whom the bank has direct or
indirect control, equivalent people in associated companies; and Any person/juridical
entity whose interests or influence may represent a possible conflict of interest with the
financial institution (FI).
 Financial reporting – such as:

 The Philippine Financial Reporting Standard 9 (Financial Instruments) is the

localization of International Financial Reporting Standard 9 (Financial Instruments),
which was released on July 24, 2014, by the International Accounting Standards Board.
In three stages, PFRS 9 replaces International Accounting Standards 39—Financial
Instruments: Recognition and Measurement. IFRS 9 focuses on the accounting of
financial instruments (debt, derivatives, and equities) and aims to develop a new
financial instruments standard.
 PFRS 7 which is Financial Instruments: Disclosure. This Standard requires entities to
include disclosures in their financial statements that allow users to evaluate: a) the
significance of financial instruments for the entity's financial position and performance;
and b) the nature and extent of risks arising from financial instruments to which the entity
is exposed during and at the end of the reporting period, as well as how the entity
manages those risks.

 PFRS 15, Revenue from Contracts with Customers, is a complicated Standard that
has considerably more prescriptive criteria than earlier PFRSs, and it may result in
significant modifications to revenue recognition procedures for some businesses. PFRS
15 demands substantial judgment in certain areas, while it is very prescriptive in others,
leaving little opportunity for discretion. The scope of PFRS 15 has been broadened to
include contract-related expenses, distinguishing between costs of getting a contract and
costs of executing a contract, and providing comprehensive guidance on when such
costs should be capitalized.

b. Industry, regulatory, and other external factors

Industry factor
 The transition to digital, especially mobile and internet banking is one of the
most prevalent trends in the banking sector. Customers are now able to transfer
and send money using this method, and the convenience of these improvements
satisfies them. This transition, however, has resulted in increased competition
from technological companies, as well as mergers of smaller banks and
startups.

 Aside from the transition to digital banking, companies are now focusing
on technology innovation such as AI-driven decision-making since banks have
been struggling to automate their business operations. Adopting AI in decision-
making will result in considerable time savings since judgments will be made in
real-time, particularly for retail loans, auto lending, and credit cards – sectors with a
large volume of transactions.

 In terms of seasonal trends in banking, retail and investment banks are subject to
this trend. In a diversified, global economy with broad, well-established capital
markets, the occurrence of considerable seasonal fluctuation in demand for capital,
the commodity in which a bank deals, may appear unexpected. Moreover, the shift
in interest rates is the driving element behind any changes in loan demand; as
interest rates decrease, loan demand rises. In contrast, if interest rates climb, so
will the demand for loans.

Regular factors

The following are the banking regulations and applicable laws in the Philippines:

1. The Philippine central bank, the BSP, operating through its Monetary Board,
is required by law to guarantee that local banks that are at least majority-
owned by Filipino nationals’ control 60% of the banking system's
resources or assets.
2. In addition, as previously indicated, the banking industry followed Philippine
Accounting Standards and Philippine Financial Reporting Standards
 (PFRS/PAS). In its Circular No. 494 dated September 20, 2005, the BSP
highlighted that, as a general rule, BSFIs must comply with the rules of
PFRS/PAS in compiling both their audited financial statements and financial
statements for prudential reporting.

3. SEC Memorandum Circular No. ____ Series of 2020, BASIS OF

PREPARATION OF AUDITED FINANCIAL STATEMENTS FOR BSFIs
whereas, the Bangko Sentral ng Pilipinas (BSP) issued a Memorandum
to all Banks1 allowing regulatory relief measures, as follows: Staggered
booking of allowance for credit losses over a maximum period of five
years; b)Reclassification of debt securities measured at fair value to
amortized cost category; c)Exclusion of eligible loans from past due and
non-performing classification until 31 December 2021; and d)Any other
regulatory relief that will issue for prudential reporting due to COVID-19
pandemic

4. The New Central Bank Act, Republic Act No. 11211, which is the BSP
charter, is relevant because it contains banking regulation requirements that
are consistent with the BSP's role as the principal overseer of banks in the
Philippines. The charter of the Philippine Deposit Insurance Corporation
(PDIC), the insurer of bank deposits, is also relevant.

5. The General Banking Law applies to both universal and commercial banks.
Section 71 states that the Thrift Banks Act, the Rural Banks Act, the
Philippine Cooperative Code, and the Charter of Al-Amanah Islamic
Investment Bank of the Philippines respectively will govern the organization,
ownership, capitalization, and powers of thrift banks (savings and mortgage
banks, stock savings and loan associations, and private development
banks), rural banks, cooperative banks, and Islamic banks, as well as the
general conduct of their businesses.
  In terms of environmental requirements, Bangko Sentral ng Pilipinas (BSP)
announced last May 26, 2021 that it will tighten its requirements for banks to
assess and disclose their climate-related risk. The new regulations would give
detailed expectations on the integration of climate change and other environmental
and social risks in bank's credit and operational risk management frameworks.
They will be issued as “second-phase regulations” to supplement the BSP's current
Sustainable Finance Framework.

Other factors

 GDP has an impact on the banking business. Bank loans to consumers and
investors raise people's living standards and significantly reduce the economic
downturn. However, as a result of Covid-19, employment levels have decreased. It
is estimated that up to one million people would lose their employment as a result of
the lockdown. Furthermore, the mandated community quarantine would result in
cumulative losses in gross value added of three billion Philippine pesos in each of
the country's main sectors.

 Interest rates are another element influencing the banking industry. Bank

profitability and interest rates are linked; higher interest rates benefit banks. When
interest rates rise, banks benefit by exploiting the discrepancy between the interest
rates they pay to clients and the interest rates they could receive by investing. The
Philippines' interest rate will reach 2.25 percent by the end of this quarter,
according to Trading Economics global macro models and expert estimates. Our
econometric models predict that the Philippines' interest rate will be about 2.50
percent in 2022.

2. At least 3 implications of item no. 1 in the conduct of audit, specify which part of the audit
process.
 The regular assessment of inherent and control risks is one of the implications
based on the facts provided above. Even while auditors want to know how to decrease
risk by utilizing substantive procedures, this is hard due to the bank's geographical
dispersion. Because it usually necessitates more decentralization of power and the
distribution of financial reporting and internal control responsibility. It complicates
maintaining standard operating procedures and information systems, particularly when
the branch network crosses national boundaries. Control issues may arise due to the
physical barrier between management and the people who handle transactions, and they
may be undetected and rectified.

References: https://www.bis.org/publ/bcbs06a.pdf

https://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-
00314.pdf

https://www.aub.com.ph/investorRelationsServlet?
fileDir=/aubph/InvestorRelations/publicDisclosures/corporateGovernanceReports/&fil
eName=Related%20Party%20Transactions%20Policy%20and%20Procedures
%20Sept,2019.pdf

https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3144&context=lcp

https://www.justia.com/banking-finance/banking/operations/

https://www.bsp.gov.ph/Pages/Regulations/GuidelinesOnTheEstablishmentOfBanks/
NewsReleasesOnAccountingStandardsGuidelines.aspx

https://www.investopedia.com/ask/answers/052915/banking-sector-subject-any-
seasonal-trends.asp

https://www.infosys.com/about/knowledge-institute/documents/banking-industry-
2020.pdf
http://www.businessworld.in/article/How-Is-The-Banking-Industry-Affecting-GDP-
Growth-/17-02-2020-184292/

https://www.sec.gov.ph/wp-content/uploads/2019/11/2011PFRS_December31.pdf

https://www.sec.gov.ph/mc-2020/mc-no-32-s-2020/