Guidance on external audits of banks issued by the Basel Committee
31 March 2014
The Basel Committee on Banking Supervision has today published supervisory guidance on External audits of banks. The document enhances and supersedes the previous Committee guidance published in 2002 on The relationship between banking supervisors and banks' external auditors and in 2008 on External audit quality and banking supervision.
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.
The Committee's new guidance also elaborates on certain areas identified by the International Auditing and Assurance Standards Board (IAASB) in the context of its document Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality (published in February 2014).
In parallel to the release of the consultative version of the revised guidance in March 2013, the Committee wrote a letter to the IAASB on areas where it believes the International Standards on Auditing could be enhanced. The Committee is pleased to note that some of these areas are included in the IAASB's proposed strategy for 2015-19 and its proposed 2015-16 work programme (published in December 2013).
Commenting on today's publications, Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said, "The Committee's guidance on external audit provides both banks and their audit committees as well as external auditors and supervisors with a framework to genuinely enhance the quality of banks' audits, each within their area of responsibility. The Committee also remains supportive of the IAASB's efforts in enhancing audit quality, and in particular of its intention to give special consideration to issues relevant to the audit of financial institutions."