Thesis: talk about a few key points in the audit of China's bank accounting statements

China's accession to the WTO, the opening of the banking industry has a two-way nature. On the one hand, there will be more foreign banks to set up branches to expand their business; on the other hand, there will be more domestic banks "go out", to set up institutions outside the country, the development of business. With this, China's bank auditing business should also be further opened to the outside world. Internationally renowned accounting firms can come to China to carry out bank auditing business; China's accounting firms can also go abroad to audit Chinese banks. China's bank audit market has great potential for development, faces opportunities and challenges, and bank auditing needs to be strengthened and improved accordingly. To this end, the author of the main points of the audit of bank accounting statements to talk about a few views.

One, properly determine the level of importance

Banks are different from the general company, its business services, special products, with greater inherent risks. CPAs should take into account the characteristics of the banking business when preparing audit plans and performing audit tasks, and properly determine the level of importance, such as total assets, business income and total profits, respectively, to determine the level of importance of the relevant projects.

When determining the materiality level of the bank audit plan, attention should be paid to the bank's different risk asset weights. The asset with the smallest and zero weight is cash on hand at the bank; the next is money deposited with the central bank; the largest weight is credit loans or overdrafts to general businesses and individuals, with a risk weight of 100 percent. Bank funds deposited with non-bank financial institutions or banks with more politically volatile countries are more risky and have higher weights. The total volume of bank transactions does not have much impact on the level of materiality. Currently, most of the banks in China earn about 80-90% of their total income from interest, and interest expenses account for the major part of all expenses. Banks' profit and loss mainly arises from interest income and interest expense. However, the size of the spread cannot determine the bank's profit and loss, and the loss of doubtful debts is the bloody mouth that eats up the bank's profit. Some banks are engaged in foreign exchange and debt margin trading. The amount of money deposited with the correspondent bank is not large in the on-balance sheet records, but the number of contracts and the volume of transactions are large, and the possible losses incurred by them are also large. Banks have different business strategies with different levels of materiality. Banks operate in different varieties, its importance level is not the same. Such as the Bank of China's foreign exchange business is a relatively large proportion of its exchange rate risk and the possibility of foreign exchange position gap is relatively large, but its foreign branches, more favorable conditions for risk diversification, the degree of foreign exchange risk may be smaller than other banks.

Determining the bank audit program, you can assign a relatively low level of importance to the bank's cash. Because of the inherent sensitivity of cash and the bank's cash to implement more effective internal controls (such as two-person management of the bank, cross-checking, cash diary records and access to the system, etc.), the possibility of cash errors is relatively small, so the bank's cash inventory is generally not required to take a full inventory, only a sample of the supervision of the inventory. Bank cashier department of the cash checking register and cash diary checking, that is, you can determine the cash with or without misstatement, with lower audit costs, to get a higher audit reliability. However, a relatively high level of importance should be assigned to off-balance-sheet operations because a large number of off-balance-sheet operations of the bank, especially bank guarantees, credit lines and forward foreign exchange trading, may result in huge losses, and attention should be paid to collecting sufficient evidence and focusing on their risks.

Appropriately determining the level of materiality facilitates the identification of misstatements in which the bank has seriously violated regulatory regulations. Banks' business activities are subject to the strict constraints of financial regulatory regulations (e.g., banks must meet the minimum standard of 8% capital adequacy ratio, maintain an appropriate balance sheet ratio and deposit/loan ratio, etc.), and small misstatements and auditing discrepancies, though quantitatively immaterial, may be qualitatively important. This is because their correction or disclosure is relevant to the bank's compliance with regulatory statutes and facilitates the detection of problems by the bank's supervisory authorities.

Two, the focus areas of the audit

Currently, China's banks are operating in a separate industry, with a narrower scope of business and a single type of operation. Bank accounting statements of the asset side of the main items are loans, loans accounted for about 70% of the total assets; liabilities side of the project is mainly deposits, deposits accounted for about 80% of the liabilities. CPAs on the bank accounting statements audit focus areas are mainly the following areas.

(I) Asset quality

This is a matter of life and death for banks. The banking supervisory authorities pay special attention to the quality of bank assets. The focus of asset quality is on loan quality. The evaluation of bank loan quality depends on a set of scientific and reasonable risk judgment, classification and analysis system. The International Auditing Bulletin No. 6 issued by the International Federation of Accountants (IFAC) International Auditing Practices Committee (IASC) in February 1990 clearly states that auditors should consider the bank loan quality classification system in the audit process. Bank Auditing, published by the American Institute of Certified Public Accountants (AICPA), also suggests that "for the purpose of determining the scope of work of a registered audit, the accountant should consider the management's loan classification system". China currently evaluates the quality of bank loans primarily on the basis of the General Principles of Lending (GPL), which categorizes loans as normal, overdue, doubtful and bad debts, with the latter three items totaling bank non-performing loans. The division of non-performing loans by banks is characterized by the division of time, which is more intuitive, but cannot truly reflect the quality of loans. Internationally, many countries use the "five-level classification" (i.e., loan risk classification) to categorize the quality of bank loans, and classify loans as normal, concern, subprime, doubtful and loss, with the last three categories as non-performing bank loans. The premise of the five-tier classification method is that banks are able to receive true and legitimate accounting statements and related information from borrowers on a regular basis. Its core lies in the bank's ability to assess the borrower's repayment ability, taking the borrower's normal operating income as the primary source of loan repayment and the guarantee of the loan as a secondary source of repayment. Through continuous monitoring and analysis of the borrower's cash flow, financial strength, collateral value, repayment record, and willingness to repay, the bank will determine the likelihood of the borrower's timely and full repayment of the loan principal and interest and the extent to which the loan may incur a loss, and will take appropriate management measures in accordance with the risk profile of the loan. However, most of the borrowers in China report incomplete, untrue and non-compliant accounting statements, which makes it difficult for banks to analyze and assess accordingly. The technical operational requirements of the five-level classification method are relatively high and have a significant impact on the rate at which banks can draw down provisions for doubtful debts. The People's Bank of China has decided to formally implement loan risk classification management in all types of banks in China since January 1, 2002 onwards.

Regular and rigorous evaluation of loan quality is the responsibility of bank management, but the CPA evaluation of the bank's asset quality is in line with the prudent principles of practice and is a necessary part of the audit. CPAs should pay special attention to the soundness and credibility of the bank's internal control system for loan management, adopt a combination of analytical and substantive tests to evaluate the quality of the bank's assets, write letters on large loans and non-performing loans, and request the bank's management to provide the inspection report from the bank's supervisory authority, and refer to the bank's supervisory authority's opinion on the evaluation of the quality of the bank's loans.

(ii) Pay attention to the withdrawal of all bank provisions, especially the provision for doubtful debts

The occurrence of doubtful debts in bank loans is inevitable. The bank's bad debts should be controlled within the recognized level of the industry, especially within the bank's risk tolerance. Banks should not only be able to recognize the hidden risk factors in their lending business activities, but also take certain precautions against the consequences resulting from the risks. The loan reserve system is an effective method of preventing and resolving risks. Whether or not a bank makes full provision for doubtful debts has a significant impact on the safety, soundness and profitability of the bank. The Financial System of Financial and Insurance Enterprises issued by the Ministry of Finance in 1993 stipulates that banks should withdraw the allowance for doubtful debts according to the difference of 1% of the lending, and the allowance for bad debts can be withdrawn according to the ratio of 3 per thousand, or can be reported to the relevant departments for approval to write off the allowance according to the actual situation. in May 2001, the Ministry of Finance notified that the allowance for doubtful debts, the allowance for bad debts, and the allowance for investment risks of the financial enterprises (including the commercial banks) were unified as the allowance for doubtful debts, and banks should determine the allowance for doubtful debts according to the risk size of the assets. The banks should determine the percentage of provision for doubtful debts based on the risk of the assets, with the maximum being 100% of the closing balance of the assets from which the provision for doubtful debts is drawn, and the minimum being 1%. The PBOC has also drafted the Guidelines on Provisioning for Loan Losses, which require banks to make special provisions for loans in the categories of concern, substandard, doubtful and loss at reference rates of 2%, 20%, 50% and 100% respectively, in accordance with the results of the five levels of classification in addition to the general provisions; and the banks may also make a certain rate of special provisions based on the country-specific risks of the loans.

IFAC noted that auditors should pay attention to and evaluate the reasonableness and adequacy of the allowance for doubtful debts. Internationally, CPAs usually state the bank's major accounting policies, approved by the board of directors, for making various allowances for doubtful and bad debts in the notes to the accounts of the audit report issued by the CPA.

(C) Pay attention to the compliance of bank liabilities

Most of the bank's liabilities are social liabilities, of which the most important items are deposits, followed by external borrowings, and the splitting of correspondent and joint bank transactions. UK law requires bank liabilities to be "eligible". Our country emphasizes that bank deposits must be "compliant". Since bank deposits in China involve thousands of households, the CPA believes that the response rate of the letter is very low and ineffective, and is concerned about violating the principle of confidentiality of the bank for the deposit customers, therefore, there is almost no letter of verification of the bank's deposits of large amounts, and has not taken other alternative ways to verify. Therefore, based on the characteristics of the composition of bank liabilities, CPAs should conduct analytical tests on the amount of bank liability variables to determine the bank's ability to pay deposits. In the current situation of world economic integration and globalization of banking business, it is necessary to pay attention to the foreign "non-resident deposits" absorbed by some banks may not be recorded in the balance sheet; pay attention to the abnormal situation of "offshore business" recorded by some banks outside the table; pay attention to the possible occurrence of "money laundering". The "money laundering" phenomenon, to prevent the negligence of the bank's liabilities are not compliant with the business risks and legal risks.

(4) Pay attention to the recognition of bank income

Bank income has a great impact on the authenticity of profits. Bank shareholders, management, the public and regulatory authorities attach great importance to the profitability of banks. The recognition of bank income should be implemented in accordance with the Financial System of Financial and Insurance Enterprises and other regulations. In recent years, the operating environment of banks has changed considerably and revenues have shown greater uncertainty. Some of the provisions in the financial system can no longer adapt to the development of the economic situation and the changes in business operations, which directly leads to overcounting of income and overestimation of assets on the bank's accounting books; and even some banks' false income and expenditure, false profit and loss, which aggravates the bank's operating risks. CPAs should use professional judgment to recognize the bank's income prudently based on the credibility of the bank's internal control. Analytical review can be conducted by measuring the approximate income based on the average balance of the bank's loans, the interest rate bracket and the proportion of short-term and medium- and long-term loans; verifying the compliance of the bank's loan interest income by sampling the interest calculations of large loans and non-performing loans; testing the accuracy of the bank's computer system for the calculation of the interest; and paying special attention to the bank's continuing to withdraw interest income that should not be accrued.

(E) Focus on off-balance-sheet business and related matters

Off-balance-sheet business of banks can be briefly categorized into two main types: traditional and innovative. Accounting for off-balance sheet business is characterized by: (1) traditional business set up corresponding accounts, occurring at the same time, the same amount, and eliminated at the same time; (2) innovative business accounting is more complex, most of the spot transactions occurring in the accounting in the table, and unexpired transactions recorded off-balance sheet, such as options transactions, forward foreign exchange trading. A large number of off-balance sheet business accounting is an important feature that distinguishes banks from general enterprises. Off-balance sheet business not only hides huge risks, but also may cause incomplete bank accounting information. Most of the off-balance-sheet business of the branches of Chinese banks is traditional business, and there may be a large number of innovative businesses in the head office, and there may be a relatively large number of financial innovative businesses in overseas branches.

Audit of off-balance-sheet business of a bank can be done by checking the accounts, correspondence and contracts between the bank and its upper and lower banks and correspondent banks to find clues and reveal that the bank has omitted or failed to report its off-balance-sheet business. Internationally, CPAs will explain off-balance sheet risks, contingent liabilities, unfulfilled financial contracts, capital and lease commitments in the notes to the audit report, and attach "unaudited supplementary information" to the audit report, which includes: capital adequacy and liquidity ratios; itemized information, such as distribution of the bank's assets, business areas, and the main scope of retail or wholesale business; loan classification; Non-performing loans; risk management measures, etc.

Third, pay attention to the reality of the problem, to prevent the audit risk

China's bank grassroots branches (sub-branches) to use the inter-bank current account, take up the exchange difference for off-the-books operation is more prominent. CPAs should follow the requirements of Practice Bulletin No. 7 and No. 8, take active measures to confirm by correspondence, and use professional judgment to analyze the ratio of the bank's average balance of credit of interbank transactions to the bank's interest expenses on interbank transactions, and to check the bank's interbank statements and the other bank's letters and telegrams inquiring about the outstanding interbank transactions, so as to avoid the joint and several liabilities and the auditing risks due to the fraud of the bank's management authorities. Certified public accountants in the name of the bank issued a letter of inquiry, should be required to be correspondent bank in a timely and accurate letter back to confirm; domestic interbank current account correspondence should be required to the other bank back to the letter stamped with the interbank current query special seal and write the interbank line number; foreign agent bank correspondence can be required to the other bank back to the letter with the right to sign the signature of the person who signed the letter. Because the bank has a fixed place of business, a fixed communication network, a relatively stable department and a clear division of labor, a more perfect internal control system, so the correspondence between banks can use the bank's ready-made communication tools and normal channels within the bank. If the bank to be corresponded to is to encumber the telegram, telex or graphic fax back to the letter, after verifying the secret key (Testkey) or verify the seal can be used, but try to request the other party to send the original through the post office to verify the original. Society for Worldwide Inter-Bank Financial Telecommunications (Society for Worldwide Inter-Bank Financial Telecommunications) is a non-profit communication system for the international banking industry, referred to as SWIFT, which is a system of fixed-format messages with the functions of automatic transfer, automatic verification and automatic clearing. SWIFT reconciles the current incidence and balance of member banks on a daily basis, pen by pen. The author believes that the SWIFT format can replace the reply letter of the bank correspondent bank inquiry.

International generally do not require a separate accounting statement audit of bank branches; bank corporate accounting statements must be audited by a certified public accountant, and the certified public accountant issued an audit report. However, the People's Bank of China requires that the annual accounting statements of foreign bank branches established in China must also be audited by Chinese CPAs. CPAs should prevent some foreign bank branches from taking advantage of the different accounting years and accounting policies between China and other countries to artificially adjust the statement items and amounts, disguise financial risks and evade financial supervision. For auditing the accounting statements of multinational banks, it is more important to be prudent and careful, and to learn from the profound lessons of Bank of Credit and Commerce International (BCCI) and Bank of Bahrain (Barlin), so as to avoid creating audit risks. Because of the relatively large amount of bank business, many branches, widely distributed geographically, and most rely on electronic computer network operation, bank accounting statement audit completely rely on the strength of a CPA firm is impossible, therefore, must make full use of the bank's internal auditors and other certified public accountants, the control system of the electronic computer should also be hired to experts to test and evaluate. In order to make full use of the work of bank internal auditors, it should first be examined to determine whether the bank has established a sound and credible internal control system and whether the system has been effectively implemented; and to analyze and judge the level of competence of the bank internal auditors. However, the use of other certified public accountants and experts should be discussed with the bank in advance and reported to the bank's supervisory authorities.