BIS: Basel Committee's guidance on external audits of banks

31 March 2014

The Basel Committee on Banking Supervision has published supervisory guidance on external audits of banks. The document describes supervisory expectations regarding audit quality and how that relates to the work of the external auditor and of the audit Committee in a bank.

The evolution of bank practices, the introduction of new standards and regulations over the last 10 years and the recent financial crisis warranted a thorough revision of the Committee's supervisory guidance on banks' external audits. The guidance sets out the Committee's guidelines regarding an audit committee's responsibilities in overseeing the external audit function and the prudential supervisor's engagement with the external auditors of banks. It also sets out the Committee's expectations and recommendations relevant to external audits of banks that banking supervisors believe will enhance the quality of these audits. While the previous documents provided guidance on how the relationship between bank auditors and supervisors could be strengthened to mutual advantage, the new guidance focuses primarily on factors that contribute to enhancing audit quality at banks. In particular:

• it reinforces the key role a board's audit committee plays in promoting quality bank audits through effective communication with the external auditor and robust oversight of the external audit process. As such, the document provides a framework to assist audit committees in the governance and oversight of the external audit function;
• it highlights areas of common interest between the external auditor and banking supervisors and how the two can effectively interact via a strong, two-way dialogue, thereby contributing to both audit quality and financial stability; and
• it describes the Committee's expectations and recommendations on how internationally accepted auditing standards should be tailored to an audit in response to risks and issues specific to banks. This includes the external auditor's knowledge and competence in banking-related matters, and the identification of areas of banking where professional scepticism is particularly important for a high-quality audit. The Committee also makes recommendations that go beyond current professional standards and highlights key areas where significant risks of material misstatement in banks' financial statements often arise.

Implementation of the principles and the explanatory guidance is expected to improve the quality of bank audits and enhance the effectiveness of prudential supervision which is an important element of financial stability.

This document sets out supervisory expectations of how:

1. audit committees can contribute to audit quality in their oversight of the external audit function;
2. external auditors can discharge their responsibilities more effectively;
3. an effective relationship between the external auditor and the supervisor, which allows greater mutual understanding about the respective roles and responsibilities of supervisors and external auditors, can lead to regular communication of mutually useful information; and
4. regular and effective dialogue between the banking supervisory authorities and relevant audit oversight bodies can enhance the quality of bank audits.

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