AUDITING of Banks Final

AUDITING OF BANKS
A project
Submitted to:
Mr. Virgilio J. Seballe

CPA, MBA, CFSA, CIA, CISA
Faculty
As partial fulfillment for the requirements

of the course subject in
Bachelor of Science
In
Accountancy
Auditing 2, Applied Auditing
Submitted by:
Team Leader:
Rovel D. Lagonoy
Members:
Jerald Bho
Mark delos Santos
Gerald John Acoyong
Juliet Semodio
Table of Contents
I. Overview of the Industry
II. Audit Procedures in Bank
III. Test of Control and Substantive Test of Banks

A. Internal Control Questionnaire
B. Audit Programs
C. Working Papers
D. Flowcharts
IV. Audit Report

I. Overview of the Industry
A bank is a financial intermediary that accepts deposits and channels those deposits into
lending activities, either directly or through capital markets. A bank connects customers with
capital deficits to customers with capital surpluses. Banking is generally a highly regulated
industry, and government restrictions on financial activities by banks have varied over time and
location. Banks act as payment agents by conducting checking or current accounts for
customers, paying cheques drawn by customers on the bank, and collecting cheques deposited
to customers' current accounts. Banks also enable customer payments via other payment
methods such as telegraphic transfer, EFTPOS, and ATM. Banks borrow money by accepting
funds deposited on current accounts, by accepting term deposits, and by issuing debt securities
such as banknotes and bonds. Banks lend money by making advances to customers on current
accounts, by making installment loans, and by investing in marketable debt securities and other
forms of money lending. Banks provide almost all payment services, and a bank account is
considered indispensable by most businesses, individuals and governments. Non-banks that
provide payment services such as remittance companies are not normally considered an
adequate substitute for having a bank account. Banks borrow most funds from households and
non-financial businesses, and lend most funds to households and non-financial businesses, but
non-bank lenders provide a significant and in many cases adequate substitute for bank loans,
and money market funds, cash management trusts and other non-bank financial institutions in
many cases provide an adequate substitute to banks for lending savings to.
a) Regulation
Currently in most jurisdictions commercial banks are regulated by government entities and
require a special bank licence to operate. Usually the definition of the business of banking for
the purposes of regulation is extended to include acceptance of deposits, even if they are not
repayable to the customer's order—although money lending, by itself, is generally not included
in the definition. Unlike most other regulated industries, the regulator is typically also a
participant in the market, i.e. a government-owned (central) bank. Central banks also typically
have a monopoly on the business of issuing banknotes. However, in some countries this is not
the case. In the UK, for example, the Financial Services Authority licences banks, and some
commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those
issued by the Bank of England, the UK government's central bank. Banking law is based on a
contractual analysis of the relationship between the bank (defined above) and the customer—
defined as any entity for which the bank agrees to conduct an account.
The law implies rights and obligations into this relationship as follows:
1. The bank account balance is the financial position between the bank and the customer:
when the account is in credit, the bank owes the balance to the customer; when the
account is overdrawn, the customer owes the balance to the bank.
2. The bank agrees to pay the customer's cheques up to the amount standing to the credit
of the customer's account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account without a mandate from the
customer, e.g. a cheque drawn by the customer.
4. The bank agrees to promptly collect the cheques deposited to the customer's account as
the customer's agent, and to credit the proceeds to the customer's account.
5. The bank has a right to combine the customer's accounts, since each account is just an
aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer's account, to the extent that
the customer is indebted to the bank.
7. The bank must not disclose details of transactions through the customer's account—
unless the customer consents, there is a public duty to disclose, the bank's interests
require it, or the law demands it.
8. The bank must not close a customer's account without reasonable notice, since cheques
are outstanding in the ordinary course of business for several days.
These implied contractual terms may be modified by express agreement between the customer
and the bank. The statutes and regulations in force within a particular jurisdiction may also
modify the above terms and/or create new rights, obligations or limitations relevant to the
bank-customer relationship.
Some types of financial institution, such as building societies and credit unions, may be partly or
wholly exempt from bank licence requirements, and therefore regulated under separate rules.
The requirements for the issue of a bank licence vary between jurisdictions but typically
include:
1. Minimum capital
2. Minimum capital ratio
3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior
officers
4. Approval of the bank's business plan as being sufficiently prudent and plausible.
b) Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals and small
businesses; business banking, providing services to mid-market business; corporate banking,
directed at large business entities; private banking, providing wealth management services to
high net worth individuals and families; and investment banking, relating to activities on the
financial markets. Most banks are profit-making, private enterprises. However, some are owned
by government, or are non-profit organizations.
 Types of retail banks
 Commercial bank: the term used for a normal bank to distinguish it from an investment
bank. After the Great Depression, the U.S. Congress required that banks only engage in
banking activities, whereas investment banks were limited to capital market activities.
Since the two no longer have to be under separate ownership, some use the term
"commercial bank" to refer to a bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses.
 Community banks: locally operated financial institutions that empower employees to
make local decisions to serve their customers and the partners.
 Community development banks: regulated banks that provide financial services and
credit to under-served markets or populations.
 Postal savings banks: savings banks associated with national postal systems.
 Private banks: banks that manage the assets of high net worth individuals. Historically a
minimum of USD 1 million was required to open an account, however, over the last
years many private banks have lowered their entry hurdles to USD 250,000 for private
investors.[citation needed]
 Offshore banks: banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.
 Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even
18th century. Their original objective was to provide easily accessible savings products
to all strata of the population. In some countries, savings banks were created on public
initiative; in others, socially committed individuals created foundations to put in place
the necessary infrastructure. Nowadays, European savings banks have kept their focus
on retail banking: payments, savings products, credits and insurances for individuals or
small and medium-sized enterprises. Apart from this retail focus, they also differ from
commercial banks by their broadly decentralised distribution network, providing local
and regional outreach—and by their socially responsible approach to business and
society.
 Building societies and Landesbanks: institutions that conduct retail banking.
 Ethical banks: banks that prioritize the transparency of all operations and make only
what they consider to be socially-responsible investments.
 A Direct or Internet-Only bank is a banking operation without any physical bank
branches, conceived and implemented wholly with networked computers.
 Types of investment banks
 Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for
their own accounts, make markets, and advise corporations on capital market activities
such as mergers and acquisitions.
 Merchant banks were traditionally banks which engaged in trade finance. The modern
definition, however, refers to banks which provide capital to firms in the form of shares
rather than loans. Unlike venture capital firms, they tend not to invest in new
companies.
 Commercial Bank
A commercial bank is a type of financial intermediary and a type of bank. Commercial

banking is also known as business banking. It is a bank that provides checking accounts, savings
accounts, and money market accounts and that accepts time deposits. [1] After the
implementation of the Glass-Steagall Act, the U.S. Congress required that banks engage only in
banking activities, whereas investment banks were limited to capital market activities. As the
two no longer have to be under separate ownership under U.S. law, some use the term
"commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and
loans from corporations or large businesses. In some other jurisdictions, the strict separation of
investment and commercial banking never applied. Commercial banking may also be seen as
distinct from retail banking, which involves the provision of financial services direct to
consumers. Many banks offer both commercial and retail banking services.
Commercial bank has two possible meanings:
 Commercial bank is the term used for a normal bank to distinguish it from an
investment bank or retail bank.
This is what people normally call a "bank". The term "commercial" was used to distinguish it
from an investment bank. Since the two types of banks no longer have to be separate
companies, some have used the term "commercial bank" to refer to banks that focus mainly on
companies. In some English-speaking countries outside North America, the term "trading bank"
was and is used to denote a commercial bank. During the great depression and after the stock
market crash of 1929, the U.S. Congress passed the Glass-Steagall Act 1933-35 (Khambata
1996) requiring that commercial banks engage only in banking activities (accepting deposits and
making loans, as well as other fee based services), whereas investment banks were limited to
capital markets activities. This separation is no longer mandatory.
It raises funds by collecting deposits from businesses and consumers via checkable deposits,
savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It
also buys corporate bonds and government bonds. Its primary liabilities are deposits and
primary assets are loans and bonds.
 Commercial banking can also refer to a bank or a division of a bank that mostly deals
with deposits and loans from corporations or large businesses, as opposed to normal
individual members of the public (retail banking).
The name bank derives from the Italian word banco "desk/bench", used during the
Renaissance by Florentine bankers, who used to make their transactions above a desk covered
by a green tablecloth.[2] However, traces of banking activity can be found even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called macella on a long bench
called a bancu, from which the words banco and bank are derived. As a moneychanger, the
merchant at the bancu did not so much invest money as merely convert the foreign currency
into the only legal tender in Rome- that of the Imperial Mint. [3]
The role of commercial banks
Commercial banks engage in the following activities:
 processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or

other means
 issuing bank drafts and bank cheques
 accepting money on term deposit
 lending money by overdraft, installment loan, or other means
 providing documentary and standby letter of credit, guarantees, performance bonds,
securities underwriting commitments and other forms of off balance sheet exposures
 safekeeping of documents and other items in safe deposit boxes
 sale, distribution or brokerage, with or without advice, of insurance, unit trusts and
similar financial products as a “financial supermarket”
 cash management and treasury services
 merchant banking and private equity financing
 traditionally, large commercial banks also underwrite bonds, and make markets in
currency, interest rates, and credit-related securities, but today large commercial banks
usually have an investment bank arm that is involved in the mentioned activities.
Types of loans granted by commercial banks
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g., a car or
property) as collateral (i.e., security) for the loan.
Mortgage loan
A mortgage loan is a very common type of debt instrument, used to purchase real
estate. Under this arrangement, the money is used to purchase the property. Commercial
banks, however, are given security - a lien on the title to the house - until the mortgage is paid
off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess
the house and sell it, to recover sums owing to it.
In the past, commercial banks have not been greatly interested in real estate loans and
have placed only a relatively small percentage of assets in mortgages. As their name implies,
such financial institutions secured their earning primarily from commercial and consumer loans
and left the major task of home financing to others. However, due to changes in banking laws
and policies, commercial banks are increasingly active in home financing.
Changes in banking laws now allow commercial banks to make home mortgage loans on
a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions
follow two main practices. First, some of the banks maintain active and well-organized
departments whose primary function is to compete actively for real estate loans. In areas
lacking specialized real estate financial institutions, these banks become the source for
residential and farm mortgage loans. Second, the banks acquire mortgages by simply
purchasing them from mortgage bankers or dealers.
In addition, dealer service companies, which were originally used to obtain car loans for
permanent lenders such as commercial banks, wanted to broaden their activity beyond their
local area. In recent years, however, such companies have concentrated on acquiring mobile
home loans in volume for both commercial banks and savings and loan associations. Service
companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all
bank/service company agreements contain a credit insurance policy that protects the lender if
the consumer defaults.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the borrowers assets
(i.e., no collateral is involved). These may be available from financial institutions under many
different guises or marketing packages:
 bank overdrafts
 corporate bonds
 credit card debt
 credit facilities or lines of credit
 personal loans
 Other types of banks
 Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash interest
rate. They generally provide liquidity to the banking system and act as the lender of last
resort in event of a crisis.
 Islamic banks adhere to the concepts of Islamic law. This form of banking revolves
around several well-established principles based on Islamic canons. All banking activities
must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit
(markup) and fees on the financing facilities that it extends to customers.
c) Accounting for bank accounts
Bank statements are accounting records produced by banks under the various
accounting standards of the world. Under GAAP and MAIC there are two kinds of accounts:
debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets
and Expenses. This means you credit a credit account to increase its balance, and you debit a
credit account to decrease its balance.[11]
This also means you debit your savings account every time you deposit money into it (and the
account is normally in deficit), while you credit your credit card account every time you spend
money from it (and the account is normally in credit).
However, if you read your bank statement, it will say the opposite—that you credit your
account when you deposit money, and you debit it when you withdraw funds. If you have cash
in your account, you have a positive (or credit) balance; if you are overdrawn, you have a
negative (or deficit) balance.
The reason for this is that the bank, and not you, has produced the bank statement. Your
savings might be your assets, but the bank's liability, so they are credit accounts (which should
have a positive balance). Conversely, your loans are your liabilities but the bank's assets, so they
are debit accounts (which should also have a positive balance).
Where bank transactions, balances, credits and debits are discussed below, they are done so
from the viewpoint of the account holder—which is traditionally what most people are used to
seeing.
Company Profile of BPI
Bank Of The Philippine Islands - Company Profile, Information, Business Description, History,
Background Information on Bank Of The Philippine Islands
BPI Building, Ayala Avenue, Paseo De Roxas
Makati City, 1200
Philippines
Company Perspectives:
Through the years, BPI strove to deliver the highest standards of convenience banking through
the ingenuity of technology and creative management. As the recognized "most technologically
advanced bank", BPI introduced the first successful automated teller machine (ATM) service in
the Philippines. Among BPI's other firsts are: the issuance of the first debit card, the
introduction of cashless shopping with the Express Teller Card, the establishment of banking
kiosks, the Express Banking Centers, the launching of telephone banking with the Express
Phone, and the use of a Call Center. BPI has distinguished itself by catering to the ever-evolving
needs and lifestyles of the public.
History of Bank Of The Philippine Islands
Bank of the Philippine Islands (BPI) is that country's second-largest bank, trailing only
Metropolitan Bank & Trust. It is also the Philippines' oldest bank and one of the oldest of all
Asian banks. BPI offers a full range of commercial and retail financial services, including
corporate finance services, asset management, and brokerage and other financial consulting
services. BPI's retail network includes more than 700 branches throughout the Philippines, as
well as branches in New York, Hong Kong, and Tokyo. The bank also operates a network of
more than 1,200 automated teller machines and more than 8,500 retailer-based point-of-sale
machines. In 1999, BPI pioneered online banking in the Philippines with the launch of online
bank BPI Direct in 1999. In addition to its banking products and services, BPI has also developed
a strong non-life insurance operation, chiefly under subsidiary BPI/MS Insurance Corporation.
Listed on the Philippines Stock Exchange, BPI has long been majority controlled by Philippines
conglomerate Ayala Corporation.
Founding Asian Banking History in the 19th Century
The increasing trade between Spain and the Philippine Islands created a need for a banking
facility in the Spanish colony. A first attempt to establish a colonial bank came in 1828, when
King Ferdinand VII called for the creation of a public bank in the Philippines. Yet the actual
formation of the bank did not occur until the middle of the century, under the auspices of then
colonial governor Antonio de Urbiztondo y Eguia, who took up his post in 1850.
Urbiztondo established the bank the following year in the Royal Custom House in the fortress
town of Intramuros. The bank was named El Banco Español Filipino de Isabel 2 in honor of the
reigning queen of Spain. Joining the bank's policy board was Antonio de Ayala. The Ayala family
and the later Ayala Corporation were to remain intimately related with the bank and with the
Philippines' industrial development.
As the first and only public bank in the Philippines--and perhaps the first public bank in all of
Southeast Asia--El Banco Español Filipino de Isabel 2 was granted the authority to issue the first
paper money in the Philippines. That operation started in 1852, when the bank issued its first
pesos fuertes, or 'strong pesos.'
El Banco Español Filipino de Isabel 2 and its successors played a prominent role in financing the
development of the Philippines. This included financing for the country's first railroad, and,
later, its telephone network, its electric utilities, and the country's first steamship service.
In the meantime, the bank changed its name after Isabel II was dethroned in 1869, becoming
more simply El Banco Español Filipino. Nonetheless, the bank remained under the control of
Spain. The bank remained in its Intramuros site until nearly the end of the century. However,
the shift in Manila's industrial and commercial activity led the bank to move its offices in 1892
to the Binondo district across the Pasig River.
The development of the sugar industry in the Philippines had opened up new potential banking
markets, and the bank petitioned Spain for permission to expand its operations. In 1897, Banco
Español Filipino opened its first branch office, Iloilo. The outbreak of the Spanish-American War
the following year, however, changing the political situation in the Philippines.
The Philippines became a U.S. possession following the Treaty of Paris of 1898. No longer under
Spanish domination, Banco Español Filipino transformed itself into a purely Filipino institution.
While the change in the company's name--authorized in 1907--came only in 1912, it
nevertheless adopted the name of Bank of the Philippine Islands (BPI). The Spanish influence
remained strong, however, and the bank became popularly known as Banco de las Islas
Filipinas. Also in 1912, the bank opened its second branch office, in Zamboanga.
BPI continued its money-issuing function during this period, although it was no longer the
exclusive issuer of Philippine pesos. With the creation of the Central Bank of the Philippines in
1949, however, BPI lost its money-issuing privileges altogether. The now-independent country
began instituting a variety of banking reforms designed to stimulate the growth of the banking
system and the creation of new banks, particularly in rural areas. As part of that process, BPI
was converted to a private bank. In 1969, the bank's relationship with the Ayala family and
businesses strengthened after Ayala Corporation took a majority share in BPI. At that point, BPI
became the center of Ayala's banking and, later, insurance interests.
Under Ayala, BPI began an expansion campaign lasting into the next century that firmly
positioned it among the Philippines' top banks. Much of BPI's growth came through a stream of
acquisitions, starting in 1974 with its purchase of the Peoples Bank and Trust Company. That
acquisition significantly helped to build BPI's branch network.
Expansion and Diversification in the 1980s
In 1982, BPI began preparing for the deregulation of the Philippines' banking industry, which
enabled it to transform itself into an expanded commercial bank. As part of that effort, BPI
acquired Commercial Bank and Trust Company, which specialized in the middle market, in
1981. The growing bank then moved to enter the investment banking field with the purchase of
Ayala Investment and Development Corporation in 1982. BPI's relationship with Ayala also
enabled it to add an international component that year when it took over Ayala International
Finance, based in Hong Kong. BPI made two more significant purchases in 1982 when it
acquired Philsec, boosting its new investment banking wing, and Makati Leasing and Financing.
The latter purchase helped strengthen its own leasing arm, which was launched in 1980 and
made BPI the first Philippine bank to offer leasing facilities.
BPI by then had expanded its operations into the Philippines rural areas after acquiring People's
Development Bank, which also held a strong, agribusiness-based loan portfolio, in 1984. That
purchase enabled BPI to meet new government requirements stipulating that agribusiness
loans make up at least 20 percent of a bank's loan portfolio. The People's Development Bank
acquisition formed the basis of BPI's new subsidiary, BPI Agricultural Bank.
BPI continued its acquisition burst into the mid-1980s. In 1985, the company added Family
Bank, at the time a major mortgage and savings bank in the Philippines. Renamed BPI Family
Bank, the new subsidiary grew into one of the country's leading consumer lending banks. Also
in 1985, BPI stepped up its international component with the purchase of Asian International
Bank, based in New York. That office was later converted into a full BPI branch.
"Bancassurance" Leader in the New Century
Alongside its acquisition campaign, BPI displayed its penchant for playing the pioneer in various
banking areas during the 1980s and early 1990s. In 1981, the bank became the first in the
country to offer access via Automated Teller Machines (ATM). Two years later, BPI extended its
ATM network to include its Express Teller system, the first in the country to provide 24-hour
access to banking services. Then, in 1987, the bank introduced the Philippines first debit-card
system.
BPI's next technological innovation came in 1991 when it introduced its Express Banking
Centers. Typically located in shopping malls, BPI's Express Banking Centers operated as mini-
banks providing a more limited range of services than full-service banks. Nonetheless,
customers were able to open new accounts as well as apply for credit cards and home and car
loans.
If BPI had taken a break from external growth, its competitors had not, and by the middle of the
1990s the company had turned over its first-place spot to fast-growing Metropolitan & Trust
Corporation. BPI was then forced to content itself with a position in the top three, alongside
state-owned Philippine Nation Bank. Yet the opening of the Philippines banking sector to
foreign competition for the first time in the mid-1990s set off a new wave of consolidation
among the country's banking sector, which at the time counted 38 commercial banks and some
800 rural credit houses.
BPI once again began to grow through acquisition, starting in 1995 with the purchase of First
Cavite Savings. The following year, the company struck again, adding CityTrust Banking
Corporation. That bank, a specialist consumer services bank, had been ranked number 16 in
terms of assets among Philippine banks. The acquisition of CityTrust boosted BPI's branch
network to more than 400.
BPI remained relatively stable despite the crisis sweeping through the Asian financial
community. By the end of the decade, the bank had completed integrating its newly expanded
operations and had begun to make plans for a new growth spurt. In 1998, the bank launched a
24-hour call center providing a broad range of banking services over the telephone.
The following year, BPI began talks for a three-way merger with two other prominent Filipino
banks, FarEast Bank and Trust Company and Union Bank. After Union Bank pulled out of the
proposed merger, BPI and FarEast went it alone and in November 1999 FarEast agreed to be
acquired by BPI for $1.2 billion. The merged operation now claimed--if only temporarily--the
top spot in the Philippines' banking sector. The Far East merger also gave the company an
insurance subsidiary, FEB Mitsui Marine.
BPI entered new territory in 2000 when it became the first Filipino bank to launch its own
online bank, BPI Direct. In that year, too, the bank showed its pioneering mettle again when it
acquired FGU Insurance Corporation, Universal Reinsurance Corporation, Ayala Life Assurance,
Ayala Health Care and Ayala Plans. These acquisitions gave BPI the right to label itself as the
Philippines' first "bancassurance" company. In 2001, FGU merged with FEB Mitsui Marine,
creating BPI/MS Insurance Corporation.
As consumer lending slowed amid the difficult economic climate at the beginning of the 2000s,
BPI turned toward increasing its corporate lending operations, particularly to the small and
medium enterprise (SME) market. Insurance continued to play a central role in BPI's growth
strategy, particularly as the bank announced its intention to pursue more insurance acquisitions
at the end of 2002. As part of its focus on insurance products, BPI spun off its re-insurance
operations into a merger with Malayan Reinsurance Corporation, forming Universal Malayan
Reinsurance Corporation in August 2003.
By then, BPI had completed another significant purchase when it bought up DBS Bank
Philippines, which enabled the company's thrift banking component to claim the leadership
spot in the Philippines. BPI's banking arm now boasted more than 1,200 branch offices in
operation. The bank was also one of the most financially sound of all Philippine banks, posting
steady increases in its net earnings despite the Asian economic crisis that occurred in the early
2000s. After more than 150 years in existence, BPI remained a top player in the Philippines
banking market.
Principal Subsidiaries: Ayala Financial and Insurance Services Inc.; Ayala Health Care Inc.; Ayala
Life Assurance Inc.; Ayala Plans, Inc.; BPI Capital Corporation; BPI Computer Systems
Corporation; BPI Direct Savings Bank; BPI Express Remittance Corporation; BPI Family Savings
Bank; BPI Forex Corporation; BPI Foundation, Inc.; BPI International Finance, Ltd.; BPI
Investment Management, Inc.; BPI Leasing Corporation; BPI Operations Management
Corporation; BPI Securities Corporation; BPI/MS Insurance Corporation; Santiago Land
Development Corporation; Universal Reinsurance Corporation.
Principal Competitors: Citibank; Metropolitan Bank and Trust Co.; Equitable-PCI Bank; Land
Bank of the Philippines; Philippine National Bank; Rizal Commercial Banking Corporation;
Development Bank of the Philippines; Allied Banking Corporation; United Coconut Planters
Bank; China Banking Corporation; Union Bank of the Philippines.
Chronology
 Key Dates:
 1828: King Ferdinand VII of Spain issues a decree authorizing the formation of Bank in
the Philippines.
 1851: El Banco Español Filipino de Isabel 2 is established.
 1898: The bank becomes a Filipino institution after United States takes over the
Philippines from Spain.
 1912: The bank changes its name to Bank of the Philippine Islands (BPI).
 1969: Ayala Corporation acquires control of BPI.
 1974: BPI acquires Peoples Bank and Trust Company.
 1980: The bank begins leasing operations.
 1981: Commercial Bank and Trust Company is acquired, and the first ATMs are
introduced.
 1982: The company converts to expanded commercial bank status.
 1995: First Cavite Savings is acquired.
 1999: Far East Bank and Trust Company is acquired.
 2000: BPI Direct internet banking service is launched, and Ayala insurance companies
are acquired.
 2002: DBS Bank Philippines is acquired.
 2003: The company spins off re-insurance operations into Universal Malayan
Reinsurance Corporation.
Additional Details
 Public Company
 Incorporated: 1851 El Banco Español Filipino de Isabel 2
 Employees: 11,554
 Net Earnings: P 5.17 billion ($938 million)(2002)
 Stock Exchanges: Philippines
 Ticker Symbol: BPI
 NAIC: 522110 Commercial Banking
II. Audit Procedures in Bank
1. Audits are reviews conducted on a company's financial information by external auditors

from a public accounting firm or government agency. Because banks hold depositor
funds and provide loans or investment services for customers, bank audits are needed
to ensure the bank's solvency. Auditors provide external stakeholders with a positive or
negative opinion on a bank's accounting functions and bank policies. Audits are also
conducted on the bank's adherence to government regulations; government agencies
typically conduct these audits, since private accountants are not thoroughly trained to
audit government bank regulations.
 Internal Controls
2. Internal controls are the accounting policies and functions a bank follows when
processing transactions for customers. Audits test the strength of internal controls and
how well bank employees adhere to these controls. Paperwork generated by bank
transaction is also reviewed because of the requirements by state law and the Fair
Credit Reporting Act. Sensitive information is collected from customers, such as Social
Security numbers and driver's license numbers, which must be stored securely on bank
premises. Certain information produced by banks must be approved by managers or
executives, which is reviewed by auditors to ensure that no transactions occur without
proper approval.
Bank customers may request to review the auditor's opinion on the bank, giving them
insight into the bank's internal controls strength.
 Loan Portfolio
3. Another important audit process is the review of bank liabilities, which includes the
amounts lent to individuals, businesses and other banks from their reserves. Auditors
review the borrowers repayment ability on the loaned amounts, along with the loan
terms and evaluation methods used to determine the reasons for the loan. This
information is important because auditors must determine the possibility of loan
defaults, which will affect the fractional reserve requirements of the bank. Fractional
reserve amounts represent the amount of cash on-hand each bank must have as
required by the federal government. Failure to meet this requirement causes a review
of the bank's lending and banking procedures, causing customers to lose faith in the
bank.
 Asset Valuation
4. Bank assets are another crucial part of the auditor's plan when reviewing the bank's
procedures. Assets involve any investments the bank has made in equities or companies
as part of their operating procedures. Banks lend money to generate interest income,
which helps the bank to pay its operating costs and purchase other investments.
Auditors test these investments for risk and material miscalculations, which may lead
the bank to lose money on their investments. Losses limit the bank's ability to loan
money to borrowers, which is another area banks generate cash flow. Auditors report
investment large losses in their audit reports, as these losses signal the inability of the
bank to accurately recover losses on bad loans made to borrowers.
a) Circular Regulation in the Philippines
4 October 2004
BANGKO SENTRAL NG PILIPINAS
CIRCULAR NO. 456

Series of 2004
Pursuant to Monetary Board Resolution No. 1351 dated 16 September 2004, the Manual of
Regulations for Banks (MORB) and the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI)
are hereby amended, as follows:
Section 1. Subsecs. X141.3.c(9) and 4141Q.3.c(9) of the MORB and MORNBFI, respectively, are hereby
amended to read, as follows:
Subsecs. X141.3.c(9) and 4141Q.3.c(9) Specific duties and responsibilities of the board of
directors
"(9) To constitute the following committees:
(a) Audit committee. The audit committee shall be composed of members of the board of directors, at
least two (2) of whom shall be independent directors, INCLUDING THE CHAIRMAN, preferably with
accounting, AUDITING, OR RELATED FINANCIAL MANAGEMENT EXPERTISE OR experience. The
audit committee provides oversight of the institution's FINANCIAL REPORTING AND CONTROL AND
internal and external AUDIT FUNCTIONS. It shall be responsible for the setting up of the internal
audit department and for the appointment of the internal auditor as well as the independent
external auditor WHO SHALL BOTH REPORT DIRECTLY TO THE AUDIT COMMITTEE. It shall monitor
and evaluate the adequacy and effectiveness of the internal control system.
UPON SETTING UP THE AUDIT COMMITTEE, THE BOARD OF DIRECTORS SHALL DRAW UP A WRITTEN
CHARTER OR TERMS OF REFERENCE WHICH CLEARLY SETS OUT THE AUDIT COMMITTEE'S
AUTHORITY AND DUTIES, AS WELL AS THE REPORTING RELATIONSHIP WITH THE BOARD OF
DIRECTORS. THIS CHARTER SHALL BE APPROVED BY THE BOARD OF DIRECTORS AND REVIEWED
AND UPDATED PERIODICALLY.
THE AUDIT COMMITTEE SHALL HAVE EXPLICIT AUTHORITY TO INVESTIGATE ANY MATTER WITHIN
ITS TERMS OF REFERENCE, FULL ACCESS TO AND COOPERATION BY MANAGEMENT AND FULL
DISCRETION TO INVITE ANY DIRECTOR OR EXECUTIVE OFFICER TO ATTEND ITS MEETINGS, AND
ADEQUATE RESOURCES TO ENABLE IT TO EFFECTIVELY DISCHARGE ITS FUNCTIONS.
THE AUDIT COMMITTEE SHALL ENSURE THAT A REVIEW OF THE EFFECTIVENESS OF THE
INSTITUTION’S INTERNAL CONTROLS, INCLUDING FINANCIAL, OPERATIONAL AND COMPLIANCE
CONTROLS, AND RISK MANAGEMENT, IS CONDUCTED AT LEAST ANNUALLY.
(b) CORPORATE GOVERNANCE COMMITTEE. The CORPORATE GOVERNANCE committee SHALL ASSIST
THE BOARD OF DIRECTORS IN FULFILLING ITS CORPORATE GOVERNANCE RESPONSIBILITIES. It shall
review and evaluate the qualifications of all persons nominated to the board as well as those
nominated to other positions requiring appointment by the board of directors. THE COMMITTEE
shall be composed of at least three (3) members of the board of directors, TWO (2) OF WHOM
SHALL BE independent directors.
THE CORPORATE GOVERNANCE COMMITTEE SHALL HAVE A WRITTEN CHARTER THAT DESCRIBES
THE DUTIES AND RESPONSIBILITIES OF ITS MEMBERS. THIS CHARTER SHALL BE APPROVED BY THE
BOARD OF DIRECTORS AND REVIEWED AND UPDATED AT LEAST ANNUALLY.
THE COMMITTEE SHALL BE RESPONSIBLE FOR ENSURING THE BOARD’S EFFECTIVENESS AND DUE
OBSERVANCE OF CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES. IT SHALL OVERSEE THE
PERIODIC PERFORMANCE EVALUATION OF THE BOARD AND ITS COMMITEES AND EXECUTIVE
MANAGEMENT; AND SHALL ALSO CONDUCT AN ANNUAL SELF-EVALUATION OF ITS PERFORMANCE.
THE COMMITTEE SHALL ALSO DECIDE WHETHER OR NOT A DIRECTOR IS ABLE TO AND HAS BEEN
ADEQUATELY CARRYING OUT HIS/HER DUTIES AS DIRECTOR BEARING IN MIND THE DIRECTOR’S
CONTRIBUTION AND PERFORMANCE (E.G., COMPETENCE, CANDOR, ATTENDANCE, PREPAREDNESS
AND PARTICIPATION). INTERNAL GUIDELINES SHALL BE ADOPTED THAT ADDRESS THE COMPETING
TIME COMMITMENTS THAT ARE FACED WHEN DIRECTORS SERVE ON MULTIPLE BOARDS.
THE COMMITTEE SHALL MAKE RECOMMENDATIONS TO THE BOARD REGARDING THE CONTINUING
EDUCATION OF DIRECTORS, ASSIGNMENT TO BOARD COMMITTEES, SUCCESSION PLAN FOR THE
BOARD MEMBERS AND SENIOR OFFICERS, AND THEIR REMUNERATION COMMENSURATE WITH
CORPORATE AND INDIVIDUAL PERFORMANCE.
THE CORPORATE GOVERNANCE COMMITTEE SHALL DECIDE THE MANNER BY WHICH THE BOARD’S
PERFORMANCE MAY BE EVALUATED AND PROPOSE AN OBJECTIVE PERFORMANCE CRITERIA
APPROVED BY THE BOARD. SUCH PERFORMANCE INDICATORS SHALL ADDRESS HOW THE BOARD
HAS ENHANCED LONG TERM SHAREHOLDERS’ VALUE.
(c) RISK MANAGEMENT COMMITTEE. THE RISK MANAGEMENT COMMITTEE SHALL BE RESPONSIBLE
FOR THE DEVELOPMENT AND OVERSIGHT OF THE INSTITUTION'S RISK MANAGEMENT PROGRAM.
THE COMMITTEE SHALL BE COMPOSED OF AT LEAST THREE (3) MEMBERS OF THE BOARD OF
DIRECTORS who SHALL POSSESS A RANGE OF EXPERTISE AS WELL AS ADEQUATE KNOWLEDGE OF
THE INSTITUTION’S RISK EXPOSURES TO BE ABLE TO DEVELOP APPRORPIATE STRATEGIES FOR
PREVENTING LOSSES AND MINIMIZING THE IMPACT OF LOSSES WHEN THEY OCCUR. IT SHALL
OVERSEE THE SYSTEM OF LIMITS TO DISCRETIONARY AUTHORITY THAT THE BOARD DELEGATES TO
MANAGEMENT, ENSURE THAT THE SYSTEM REMAINS EFFECTIVE, THAT THE LIMITS ARE OBSERVED
AND THAT IMMEDIATE CORRECTIVE ACTIONS ARE TAKEN WHENEVER LIMITS ARE BREACHED.
THE RISK MANAGEMENT COMMITTEE SHALL HAVE A WRITTEN CHARTER THAT DEFINES THE DUTIES
AND RESPONSIBILITIES OF ITS MEMBERS. THE CHARTER SHALL BE APPROVED BY THE BOARD OF
DIRECTORS AND REVIEWED AND REFINED PERIODICALLY.
THE CORE RESPONSIBILITY OF THE RISK MANAGEMENT COMMITTEE ARE:
 IDENTIFY AND EVALUATE EXPOSURES - THE COMMITTEE SHALL ASSESS THE PROBABILITY OF
EACH RISK BECOMING REALITY AND SHALL ESTIMATE ITS POSSIBLE EFFECT AND COST. PRIORITY
AREAS OF CONCERN ARE THOSE RISKS THAT ARE THE MOST LIKELY TO OCCUR AND ARE COSTLY
WHEN THEY HAPPEN.
 DEVELOP RISK MANAGEMENT STRATEGIES - THE RISK MANAGEMENT COMMITTEE SHALL

DEVELOP A WRITTEN PLAN DEFINING THE STRATEGIES FOR MANAGING AND CONTROLLING THE
MAJOR RISKS. IT SHALL IDENTIFY PRACTICAL STRATEGIES TO REDUCE THE CHANCE OF HARM
AND FAILURE OR MINIMIZE LOSSES IF THE RISK BECOMES REAL.
 IMPLEMENT THE RISK MANAGEMENT PLAN- THE RISK MANAGEMENT COMMITTEE SHALL
COMMUNICATE THE RISK MANAGEMENT PLAN AND LOSS CONTROL PROCEDURES TO AFFECTED
PARTIES. THE COMMITTEE SHALL CONDUCT REGULAR DISCUSSIONS ON THE INSTITUTION'S
CURRENT RISK EXPOSURE BASED ON REGULAR MANAGEMENT REPORTS AND DIRECT
CONCERNED UNITS OR OFFICES ON HOW TO REDUCE THESE RISKS.
 REVIEW AND REVISE THE PLAN AS NEEDED - THE COMMITTEE SHALL EVALUATE THE RISK
MANAGEMENT PLAN TO ENSURE ITS CONTINUED RELEVANCY, COMPREHENSIVENESS, AND
EFFECTIVENESS. IT SHALL REVISIT STRATEGIES, LOOK FOR EMERGING OR CHANGING
EXPOSURES, AND STAY ABREAST OF DEVELOPMENTS THAT AFFECT THE LIKELIHOOD OF HARM
OR LOSS. THE COMMITTEE SHALL REPORT REGULARLY TO THE BOARD OF DIRECTORS THE
ENTITY'S OVER-ALL RISK EXPOSURE, ACTIONS TAKEN TO REDUCE THE RISKS, AND RECOMMEND
FURTHER ACTION OR PLANS AS NECESSARY".
This Circular shall take effect on 01 January 2005.

FOR THE MONETARY BOARD:
ARMANDO L. SURATOS
Officer-in-Charge
III. Test of Control and Substantive Test of Banks
A. Internal Control Questionnaire
Client:________________________________________________________ Audit Date:______________

Client Personnel Interview:__________________________________________________________________
Auditor:_______________________________________________________ Date Completed:_________
Reviewed By:__________________________________________________ Date Reviewed: _________
Type of Testing: Compliance
Cycle: Class of Transaction: LOANS
Questions Answers
YES NO NA REMARKS
1. Are the four functions (loan approval, disbursement,
collection, and posting) performed by different
employees?
2. Are new payment books mailed to borrowers by employees
who perform none of the functions referred to above?
3. Is there proper segregation of duties regarding the
recording, collecting and collateral custody functions?
4. Are the department's file cabinets under dual control?
If not, are the they locked and fireproof?
5. Is dual control maintained over negotiable collateral?
6. Is a log maintained documenting the access to the
negotiable collateral
7. Are customers required to acknowledge receipt of
released collateral in writing?
8. Do loan officers initial notes or applications to
establish responsibility for the approval of loans?
9. Are the notes and supporting documentation rechecked for
completeness by someone other that the officer approving
the loan?
10. Are disbursements of loan proceeds made only by official
check or a credit to the customers account?
11. Are periodic valuations (i.e. repricing and margining)
performed for loans secured by stocks, bonds, CD's, and
passbooks? If so, how often is this process performed?
12. Is there documentation to support this procedure?
13. Is there a procedure in place to ensure the insurance
for expired policies is renewed?
14. Is the bank protected by an auto single interest policy
in cases where insurance has expired or been canceled on
automobiles pledged as collateral?
15. When life insurance and/or credit disability insurance
coverage is refused by the insurance company is premium
plus appropriate finance charge on the premium refunded
to the customer?
16. On loans paid off by check, does the bank hold the loan
papers until it is assured the check has cleared?
17. Are all correcting entries supported by properly
authorized debit and credit tickets?
18. Is a reconciliation of principal and interest balances
on the trial balance for all departmental general ledger
and DDA accounts performed at least monthly?
19. Are all reconciling items adequately explained and
dated?
20. Are procedures in place which provide effective follow up
for missing or incomplete documentation?
21. Missing collateral?
22. Are there adequate controls to insure that customers
whose loans have been charged off are not extended
credit again?
23. Is it possible for a customer to overdraw against their
home equity or reserve checking lines of credit?
24. Are tellers instructed to review the payment coupon to
determine if the customer is past due and, if so,
collect the late charge at that time?
25. Is a follow up procedure for collections in effect?
26. Are past due loans listed at least monthly and reviewed
by directors and/or officers?
27. Is there a procedure in place that would preclude a
loan officer from charging off a loan the officer
approved?
28. Do late charge waivers require an officer's approval?

Class of Transaction: INTEREST
Cycle: INCOME
Questions Answers
N
YES O NA REMARKS
1. Are the advertisements accurate and representative of the bank’s
deposit contracts offered?
2. Are interest rates, if stated< stated in terms of annual percentage rate
of simple interest?
3. Are time and amount requirements that are necessary to obtain the
stated rates clear and conspicuous?
4. Is a notice concerning the penalties for early withdrawal stated clearly
and conspicuously?
A. Is it in writing and furnished prior to entering into a time deposit?
5. Is the term “profit” used in the advertisement?
6. Do the advertisements for deposits state that the bank is a member of
the FDIC?
7. Does the bank solicit deposits subject to interest rate ceilings by
offering premiums in the form of merchandise, credit or cash?
8. If the bank uses “in-house” developed advertising for deposits, are the
advertisements reviewed prior to publication?
A. Does a qualified individual review them for compliance with
regulatory requirements for advertising?
9. Are the official FDIC signs posted at each teller window and other
locations within the bank where deposits are received?

Class of Transaction:
Cycle: INTEREST EXPENSE
Questions Answers
YE N
S NO A REMARKS
1. Is the interest expense general ledger reconciled
on a daily basis by designated employee?
2. Is the reconciliation of interest expense general
ledger account reviewed by supervisory personnel?
3. Is any out of balance condition identified and resolved in a
timely manner?
4. Is designated employee responsible for the reconciliation of
the interest general ledger not involved in the issuing or
redemption of accounts?

Date Reviewed:
Reviewed By:__________________________________________________ _________
Cycle: INVESTMENT SECURITIES
Questions Answers
YES NO NA REMARKS
1. Are responsibilities for initiating, evaluating, and approving transactions
adequately segregated from those for detail accounting, general ledger, and other
related functions?
2. Are responsibilities for initiating transactions adequately segregated from those
for final approvals committing state resources?
3. Are responsibilities for monitoring investment market values and performance
adequately segregated from those for investment acquisition?
4. Are responsibilities for maintaining detail accounting records adequately
segregated from those for general ledger entries?
5. Are custodial responsibilities for securities or other documents evidencing
ownership or other rights assigned to an official with no accounting duties?
6. Do approval procedures include the following?
a.If applicable, procedures adequate to ensure only investments permitted by
law are acquired?
b.Formal establishment and periodic review of investment policy guidelines?
c.Integration of the investment program with the cash management program
and with expenditure requirements?
d. Established authority and responsibility for investment-opportunity
evaluation and purchase?
e.Periodic evaluation of the performance of the investment portfolio by
persons independent of investment portfolio management activities?
f. Do detail accounting procedures include the following?
7. Do detail accounting procedures include the following?
a. Maintenance of detail accounting records for investments?
b. Procedures to ensure transactions arising from investments are properly
processed, including income and amortization entries, if applicable?
c. Controls to ensure investment earnings are credited to the fund from which
resources for the investment were provided?
d. A periodic comparison between income received and the amount specified
by the terms of the security, or from publicly available investment information?
Audit
Client:________________________________________________________ Date:______________
Cycle: DEPOSITS
Questions Answers
YES NO NA REMARKS
1. Are demand deposit personnel prohibited from acting
as relief tellers?
2. Are deposit tickets and cancelled checks filed in
locking cabinets or vaults not accessible to tellers?
3. Is a daily listing of closed accounts prepared and
submitted to bank management?
4. Are listings mentioned in no. 3 above checked for
zero balances by someone other than tellers or
deposit services personnel?
5. Are statements of closed accounts mailed to
depositors immediately following the account closing
by someone other than a teller or deposit services
employee?
6. Are statements mailed or delivered to depositors
monthly with the exception of depositors who have
requested that their statements be received over the
counter?
7. Are over the counter statements delivered to someone
other than a deposit services employee or teller for
control and handling?
8. Is written authorization on file from customers who
want their statements held for pickup at the bank?
9. Are customers required to sign for statements when
picking them up?
10. Are all not picked up over the counter statements
mailed at least once each quarter?
11. Are employee deposit accounts properly identified
and reviewed periodically by an officer for unusual activity?
12. Are inactive accounts properly identified?
13. Are checking accounts reviewed regularly for the
purpose of transferring accounts that have become
inactive?
14. Are new accounts opened by employees who are not
tellers or deposit services personnel?
15. Is a daily list of new accounts produced and signature
cards reviewed and approved in writing by an officer?
16. Are there proper procedures in effect for stop payment
orders received?
17. Is a daily overdraft report generated?
18. Are checks and return items promptly charged to the
respective accounts?
19. Is there a system in place for follow up on unpaid
overdrafts?
20. Are deposit system records being reconciled to the
ledger control accounts on a daily or monthly basis?
21. Is the reserve supply or inventory of blank passbooks
kept under dual control?
22. Is there a numbering scheme utilized by all branches
for new deposits of all types?

Cycle: INTERBANK LOANS
Questions Answers
YE N
S NO A REMARKS
1. Has the bank developed written policies and procedures to evaluate and
control exposure to all correspondents?
2. Have the written policies and procedures been reviewed and approved
annually by the board of directors?
3. Do the written policies and procedures adequately address the bank’s
exposure(s) to a correspondent including:
a.Credit risk?
b.Liquidity risk?
c.Settlement risk? (See the Introduction)
4. Has the bank evaluated its intraday exposure adequately?
5. Does it have significant exposure to its correspondent because of
operational risks, such as extensive reliance on a correspondent for data
processing?
6. If so, has the bank addressed those risks (may be elsewhere in its
operational procedures)?
7. Do the written policies and procedures establish criteria for selecting a
correspondent or terminating that relationship?
8. Do the written policies and procedures require a periodic review of the
financial condition of a correspondent whenever the size and maturity of
exposure is considered significant relative to its financial condition? (See the
Introduction)
9. When exposure is considered significant, is the correspondent’s financial
condition reviewed periodically?
10. Does the periodic review of the correspondent’s financial condition include
its level of:
a.Capital?
b.Nonaccrual and past due loans and leases?
c.Earnings?
d.Other relative factors?
11. If a party other than bank management conducts the financial analysis of
or selects a correspondent, has the bank’s board of directors reviewed and
approved the general assessment or selection criteria used by that party?
12. If the financial condition of the correspondent, or the form or maturity of
exposure creates significant risk, do the written policies and procedures
establish internal limits or other procedures, such as monitoring to control
exposure?
13. Are the internal limits or controls described in question 11 appropriate for
the level of risk exposure?
14. If no internal limits have been established, is this appropriate based on the
financial condition of the correspondent and size, form, and maturity of
exposure, and, if so, why not?
15. When a bank has set internal limits for significant exposure to a
correspondent, has it established procedures or structured transactions with
the correspondent to ensure that the exposure ordinarily remains within
those limits?
16. If not, is actual exposure to a correspondent monitored to ensure that it
ordinarily remains within the bank’s established internal limits?
17. Are transactions and/or monitoring reports on exposure reviewed for
compliance with internal policies and procedures? If so, by whom and how
often?
18. Are these policies and procedures for deterioration appropriate and
realistic?

Class of Transaction: DUE
Cycle: FROM BANKS
Questions Answers
N
YES O NA REMARKS
1.The association receives bank statements:
a. Daily?
b. Monthly?
c. Quarterly?
2. Does the association reconcile bank accounts on a regular and timely basis?
How often?
3. Are there any unreconciled bank accounts? If so, which accounts?
4.Are there are any out of balance accounts? If so, which accounts?
5.Is the person who reconciles the bank statements independent of the
deposit and check writing process?
6.Do checks drawn on bank accounts need more than one signature? If so, is
this required only for checks above a predetermined amount?
7.Does a person who does not have signature authority periodically
reconcile unsigned checks to the shipping invoice? How often?
B. AUDIT PROGRAMS
Bank of the Philippine Islands

LOANS
December 31, 2006
WP
Asser /
AUDIT PROCEDURES tions REF DONE
BY DATE
1. Using the loan trial balance, select a sample of loans that were
opened since the prior audit date. The sample should encompass all
types of loans including autos, boats, mobile homes, unsecured loans,
recreational vehicles, motorcycles, stocks & bonds, single payment, etc. E

2. For each loan selected, perform the following:

A. The application should be completed and signed by the

borrower. The purpose of the loan should be clearly stated. C

B. Determine the security agreement, note, and
disclosure statement have been properly signed and dated by the P
borrower. Compare the description of the secured property to the title. P/D

C. Determine the approving officer did not exceed his V
lending limit when approving the loan. V/A

D. Determine how the loan proceeds were disbursed to
the customer. Trace the transaction. E

E. If the loan was made to a business, determine the
proper resolutions or agreements are on file. Note and investigate any /
discrepancies between the note and the resolution. V/A

F. Determine that loans were approved before the loans V
was closed and the funds were disbursed. V/A

G. Determine if the bank is listed as the first lien holder to the
secured property. R/O

H. Determine if the title has been recorded with the proper
government agency. P/D

V/A
I. Compare the description of the secured property to the security
agreement for accuracy.

J. Determine the insurance policy is current and coverage is
adequate. R/O

K. Compare the description of the secured property to the security
agreement for accuracy. R/O

L. Verify the UCC-1 was filed. C

M. Determine if it was properly signed and dated by the borrower. C

V/A
N. Compare the description of the secured property to the security
agreement for accuracy.

3. Mail positive confirmations on all loans selected in the review (not to
exceed 25). Confirm the collateral, principal outstanding, rate, payment,
and term as of the month-end date. R/O

4. Prepare a confirmation control listing workpaper summarizing all
relevant information. Explain any discrepancies noted in the information
confirmed. V/A

5. Determine the following documentation was included in the file and
that it had been properly completed: C

Application

Note

Credit report

Verification of income

Verification of employment

Copy of insurance policy listing bank as lienholder for any collateral

Collateral (i.e. title to auto)

Regulation Z disclosures (if applicable) P/D

Right of rescission disclosures (if applicable) P/D

Flood search (if applicable) P/D

Determine that the application was dated and initialed by the
approving officer. C

Determine the borrowers indicated on the note whether or not they R
request credit life insurance. R/O
Determine the collateral being held agrees with the collateral listed
on the note. V/A

6. Select a sample of paid off loans. Request a history report.
Recalculate the payoff amount and trace to the G/L for proper posting. E

C
7. Investigate any waived fees for authorization. This includes late fees,
extension fees, etc.

8. Examine trial balance for accounts with excessive numbers of
extensions and investigate. V/A

9. Inquire as to who accepts and processes consumer loan payments. E

10. Trace a sample of payments to ensure they are credited to the

correct account and posted timely. E

11. Obtain a copy of the past due report. Review the status of accounts
over 90 days past due with the loan officer. V/A

12. Document the collection procedures and verify the appropriate
collection efforts are being made. Verify that letters are mailed at
required intervals. E
13. Investigate any unusual trends in past dues and any concentration of
past dues by any one officer. E

14. Investigate any debits to income over $100 and any other unusual
items for authenticity. V/A

15. Select a sample of charged-off accounts and determine whether
proper approval was obtained for the charge-off. C

16. Ascertain that collection efforts are in effect until declared totally
uncollectible by management. C

17. List and review all non-accrual accounts. V/A

A. List reason, review with appropriate lending officer to determine
collection efforts, and verify authorization for non-accrual status. P/D

B. Ensure that these are properly reported to the Board of Directors and
Loan Committee. P/D

18. Select accounts that have been placed back on accrual and
determine compliance with bank policy and applicable regulations. R/O

19. Examine selected recent payments on non-accrual accounts and
determine appropriateness of entry to recognize interest or reduce
principal. P/D

20. Obtain a listing of changes made (monetary and non-monetary) and
verify proper approval. C
PERFORMED BY: REVIEWED BY:
Audit Assistant Audit Supervisor

INTERESTS
December 31, 2006
AUDIT OBJECTIVE:
OOversight and Organization Structure:

 Determine the extent and effectiveness of senior management and board
supervision of the bank’s interest rate risk activities and review the following:
 Bank’s objectives, strategies, and risk tolerance for interest rate risk.
 Instruments and portfolios used by the bank to manage its interest rate risk
exposure. Individuals or units responsible for measuring, managing, and
controlling the bank’s interest rate risk.
SCOPE: Discussions with management and review corresponding documentation.
Ass WP
erti /
AUDIT PROCEDURES ons REF DONE
D
A
T
BY E
Loan Portfolios:
E
Discuss with management the policies regarding loan pricing and maturities and the
development of new loan products or structures.
• Are there sufficient controls in place to monitor and control the taking of interest
rate positions through the bank’s loan activities. V/A
Determine how management uses assumptions and methods to assess the effective
maturities or repricing dates for loans with unspecified maturities (Credit Card
Loans). P/D
• Does the bank have a large volume of these types of loans or does it plan to within
the next 6 to 12 months? V/A
Determine if the bank has substantial volumes of medium or long-term fixed rate
loans. C
V/A
• How does the bank monitor and evaluate the actual or potential appreciation or
depreciation in those portfolios.
V/A
• Does management assess how appreciation or depreciation could affect the bank’s
earnings and capital.
Determine the volume and $$ value of mortgage products and other loans with
explicit caps relative to the balance sheet. V/A
• How does the bank monitor and evaluate the effect of those caps on the bank’s
future earnings. C
• What level of interest rates those caps would come into effect. C
Determine if the bank periodically assesses how a substantial increase in interest
rates may affect the credit performance of its loan portfolio. V/A
Does the bank incorporate and enforce prepayment penalties on medium or long- V/A
term fixed rate loans.
SCOPE: Discussions with management and review corresponding documentation.

Investment Portfolios:
Obtain a current investment trial balance
• Review all purchases and sales since DATE. E,C
• Determine the nature and maturity/repricing composition of the bank’s V/A
investment portfolio.
Determine the bank’s investment strategies with regard to interest rate risk
management. N/A
• Are there documented policies/procedures in place outlining the strategies. R/O
P/D
• Are the bank’s classification and accounting treatment for its investment holdings
appropriate given management’s strategies and actions.
Determine if the bank has substantial volumes of medium or long-term fixed rate
investments. V/A
P/D
• How does the bank monitor and evaluate the actual or potential appreciation or
depreciation in those investments.
P/D
• Does management assess how appreciation or depreciation could affect the
bank’s earnings and capital.
Determine whether the bank’s interest rate risk measurement systems can
adequately evaluate securities with embedded options, such as CMO’s, and
structured notes. V/A
SCOPE: Discussions with management and investment accounts as of DATE.

Deposit Accounts:
Determine whether management has analyzed the bank’s deposit base.
• Does the analysis consider the bank’s pricing policy as well as how competitors’ P/D
actions may affect the bank’s pricing policy.
 Determine whether management has estimated how the bank’s deposits will
react in different rate environments, including whether management has
considered: V/A
• Implicit or explicit floors or ceilings on deposit rates.
Determine whether management has analyzed trends in deposit accounts for:
• Stability of offering rates. V/A
• Increasing or declining balances. V/A
• Large depositor concentrations. V/A
• Seasonal and cyclical variations in deposit balances. V/A
Determine if management performs sensitivity analysis on deposit assumptions.
• Does management analyze how its interest rate exposure may change if those P/D
assumptions change or prove to be incorrect and what action, if any, would be
taken.
Determine reasonableness of the bank’s assumptions about the effective maturity
of the bank’s deposits. Evaluate to what extent the bank’s deposit base can offset
interest rate risk exposures. P/D
SCOPE: Discussions with management and investment accounts as of DATE.

Management Information Systems:
Determine whether the bank’s management information systems (MIS) provide
adequate and timely information for assessing the interest rate risk exposure in the
bank’s current balance sheet positions. Consider whether information is available
for all the bank’s material portfolios, lines of business, and operating units including: E
• Current outstanding balances, rates/coupons, and repricing indices. E
• Contractual maturities or repricing dates. V/A
• Contractual caps or floors on interest rates. P/D
• Scheduled amortizations and repayments. V/A
• Introductory “teaser” rates. V/A
Determine whether the bank’s method of aggregating data is sufficient for analysis
purposes given the nature and scope of the bank’s interest rate risk exposure(s). V/A
MORTGAGE TESTING – DETERMINE VALUE OF ASSETS FIRST
Determine whether the bank’s MIS provides sufficient historical, trend, and
customer information to help bank personnel formulate and evaluate assumptions
regarding customer behavior. Consider, where material, whether information is
available to analyze: C,E
• Loan prepayments. C,E
• Early deposit withdrawals. C,E
C,E
• Spread between administered rate products, such as prime based loans and non-
maturity deposit accounts, and market rates of interest.
SCOPE: Review supporting documentation and discussion with management.

Risk Measurement Systems:
Determine the type of interest rate risk measurement systems used by the bank and
evaluate the adequacy of those systems. Consider whether the measurement
system(s):
• Identify and measure the bank’s major sources of interest rate risk exposure. V/A
• Are commensurate with the size, nature, and complexity of the bank’s activities. P/D
• Provide estimates of the bank’s exposures in a timely and comprehensive manner. P/D


INTEREST EXPENSE
December 31, 2006
AUDIT OBJECTIVES:
To determine whether:
1. Interest expense (including amortization of debt discount and premium) represents all
interest incurred during the period and has been properly recorded.
2. Interest expense is properly described and classified and adequate disclosures with
respect to these amounts have been made.
AUDIT PROCEDURES:
WP Don
Asser Ref. e
Procedures By Date
tions Y/N
?
1) ANALYTICAL PROCEDURES—GENERAL
a. Compare the balance of each significant interest E

expense account with the comparable balance for E
the preceding period and with the budgeted
balance for the current period. Investigate
significant or unusual fluctuations.
V/
b. Predict interest expense for the period by category A
of borrowing by multiplying the average principal
amounts outstanding during the period by the
expected average interest rates. Compare the
predicted amounts with the recorded amounts and
investigate significant differences.
V/A
c. Calculate average effective interest rates for the
period by category of borrowing or by type of debt
instrument by dividing recorded interest expense
by the average principal amounts outstanding
during the period. Compare calculated interest
rates to expected interest rates based on
confirmation with third parties, examination of
debt agreements, etc. Investigate significant
differences.
2) DETAIL TESTS OF INTEREST EXPENSE C
a. Have the client prepare a schedule of interest

payments by debt instrument. Verify the clerical
accuracy of the schedule and test it as follows:
1. Determine whether the detail agrees in total to V/A

the recorded interest expense for the period.
Investigate significant or unusual reconciling
items.
2. Review the nature of the amounts included in P/D

interest expense for propriety.
3. Examine ( ) critical forms and documents to E

verify the amounts. Scope:( )
4. Cross-reference accrued interest payable at the E

end of the period to our testing of accrued
interest payable.
3) ANSWER INTERNAL CONTROL QUESTIONNAIRES
4) SUPERVISION, REVIEW AND CONCLUSIONS N/A
a) Conclude responsive to the audit objectives.
N/
A
b) Prepare points regarding internal controls and other
business matters.
c) Perform senior review and supervision. N/A
d) Clear senior review points.

N/A

INVESTMENT SECURITIES
December 31, 2006
I. OBJECTIVES
1. To determine if policies, procedures, practices, and internal controls regarding

investments are adequate; that officers/employees are operating in accordance with
established guidelines.
2. To ensure transactions are properly authorized, recorded, and executed at current
market prices; that securities, as recorded, are on hand or in possession of custodians
for the bank's account.
3. To determine that subsidiary records are reconciled on a regular basis and are in
agreement with G/L control accounts.
4. To determine that accrual of income, amortization of premiums, and accretion of

discounts are appropriate and accurate.
5. To determine compliance with laws, rulings, and regulations.
WP
Asser /
DA
BY TE
Balancing
1. Obtain subsystem reports and reconcilements for all investment accounts,
related income/expense accounts, and any suspense/clearing accounts, as of
our audit date; P/D
Foot reconcilements and verify mathematical accuracy; V/A
E
Trace subsystem totals from reconcilement to supporting subsystem
reports; E

Trace G/L totals from the reconcilement to the Daily Balance Sheet; E
Trace all reconciling items to clearance and investigate any old and unusual
items. P/D

2.Determine the bank's subscription of Federal Reserve Stock equals 6% of the
bank's capital and surplus, of which, 3% must be paid in. P/D
Recalculate dividend income and trace to G/L. V/A

Confirmations
3.Prepare and mail confirmation requests for securities held in safekeeping by E
correspondent banks and other custodians, as of audit date;
Compare securities safekeeping lists received from the
correspondents/agents to the bank's securities inventory report; E

Determine pledge status is properly noted; V/A

Investigate and clear all exceptions; V/A

Send second requests to safekeeping agents from whom no reply was
received. V/A

4.Examine/count any securities on hand and compare details to the securities
inventory report C
Account for all bond coupons, if any; E

Investigate any discrepancies. V/A

Tests of Security Transactions
5.Select a sample of investments purchased, since the previous audit, and
perform the following: E
Verify cost by examining invoices/advices; E

Trace purchases to entries in the G/L; E

E
Trace purchase transactions to approval in the Investment Committee or
BOD minutes.

V/A
6. For securities sold, verify that gains or losses were accurately computed and
recorded;
Verify sales price by examining invoices and broker's advices; V/A

Check computation of book value on settlement date; V/A

Calculate gain or loss and trace to G/L; V/A

Verify G/L has been properly relieved of the investment, accrued interest,
premium, discount, and any other related accounts; V/A

Trace sales transactions to approval in the Investment Committee or BOD
minutes. E

Premium Amortization/Discount Accretion
7. For investments purchased at a premium or discount, since the previous
audit, select a V/A
sample and test book value, by performing the following:
Determine method used to calculate and record amortization of premiums

and accretion of discounts; and V/A
Determine the gross amount of premium or discount at purchase date; P/D
Determine period to maturity or call date; C

DEPOSITS
December 31, 2006
I. OBJECTIVES
1. To determine if policies, procedures, practices, and internal controls regarding deposit

accounts are adequate; that officers/employees are operating in conformance with
2. To ensure that all deposit transactions are processed and properly recorded.
3. To determine that returned items and posting rejects are properly and timely processed.
4. To ensure that service charges/fees due for services and penalties rendered are properly
assessed and recorded.
5. To determine overdrafts are processed properly and in accordance with established bank
policies.
6. To determine required documentation is obtained prior to opening of deposit accounts;
that closed accounts are properly and timely closed.
7. To determine that dormant account transactions are bona fide, properly authorized, and
that controls are adequate to prevent unauthorized access to dormant accounts.
8. To determine that subsidiary records are reconciled on a regular basis and are in
agreement with G/L control accounts; that any outstanding items are properly re
searched and resolved in accordance with policy and procedures.
9. To determine that adequate separation of duties exists in entry-making and

reconcilement functions.
10. To determine that any clearing/suspense accounts used in the deposits processing
function are for legitimate purposes.
11. To ensure that accrued interest is properly computed and recorded
WP
Asser /
B
Y DATE
Balancing
1.Obtain G/L Daily Balance Sheet, Demand Control Summary Bank Totals Report,
and reconcilements for all Demand accounts, as of audit date, including
reconcilements of any DDA related suspense, Deposit and related accrued interest
payable liability unposteds, and clearing accounts, and: E
Foot reconcilements and verify mathematical accuracy; V/A
Trace system (subledger) totals from reconcilement to supporting
subledger report;
E
Trace G/L totals from the reconcilement to the Daily Balance Sheet; E
E
Trace all reconciling items to clearance and investigate any old and
unusual items.

Confirmations
2. Using appropriate sampling technique, prepare confirmations on selected
accounts; and V/A
Send second requests to customers from whom replies were not received
to the initial positive confirmation requests (10 days); P/D
Investigate and clear all exceptions; V/A
Summarize confirmation results; P/D
Where replies were not received to positive requests for confirmation,
perform alternative procedures, i.e., comparing customer's signature on the C,P/
checks to the signature card. D

Accrued Interest Payable Recalculation
3. Run query of interest bearing accounts, whose statements cycle on our test E
date, from all account types on the system. Select a sample and perform the
following:
E
Obtain and use copies of statements/account histories for each account
in our sample to perform testwork;
Recalculate accrued interest payable; V/A
Run report comparing interest paid on customer account with interest
expense posted to general ledger. C
Document and research any differences. C

Interest Expense Reasonableness Test
4.From FCNB rates Billboard, or other appropriate documentation, determine
number of rate changes YTD for each interest bearing account type and perform
the following: P/D
Compute the average rate YTD and multiply that rate by the average
outstanding deposits in each category for an estimate of anticipated interest
expense; V/A
Compare this amount to the actual balances and compute the difference; V/A
Conclude as to reasonableness of expense account balances, as of our C,P/
audit date. D

Analytical Review
V/A
5. Prepare a schedule and analyze changes in Demand Deposit balance sheet and
related income and expense accounts, for reasonableness;
Compare current balances, as of our audit date, to prior year balances; C
Compute differences and document reasons for significant variances from
prior year. C

INTERBANK LOANS
December 31, 2006
WP
Asser /
BY DATE
A. GENERAL

1. Review Prior Year Work papers. V/A

2. Review audit program and banking regulations. R/O

3. Review the bank’s loan policy manual. The loan policy should R/O
include:

a. Target Market. V/A

b. Loan portfolio diversification standards. V/A

c. Acceptable collateral types. V/A

d. Maximum loan maturity by type of property. V/A

V/A
e. Loan-to-value limits by type of property and minimum
equity
for construction projects.

V/A
f. Financial information requirements by type of loan.

g. Loan origination and approval procedures. V/A

h. Review and approval procedures for exception loans. R/O

i. Administration procedures: documentation,
disbursement, P/D
collateral, inspection, collection and loan review.

j. Real estate appraisal and evaluation guidelines. V/A

k. Reporting requirements to the Board. P/D

l. Prohibits commissions or gifts to loan officers for
procuring loans. R/O

R/O
m. Prohibits preferential credit to insiders and insiders of
correspondent banks

4. Identify primary G/L accounts involved in this cycle. V/A
Analyze in relation to prior year. Consider the need to
Apply other procedures.

5. Note whether the loan portfolio diversification guidelines of R/O
the policy have been exceeded.

6. Review the Board of Director Minutes. V/A

7. Review all loan-related committee meeting minutes for the past V/A
Year. Note any information that could affect the scope or timing
of fieldwork.

8. Review the Federal Commercial Bank Exam Report. V/A

DUE FROM BANKS
December 31, 2006
I. OBJECTIVES
1. To determine if policies, practices, procedures, and internal controls regarding Due From
Banks are adequate; that officers and employees are operating in conformance with the
2. To determine that all "due from" accounts are reasonably stated and represent funds on
deposit with other banks; that transactions are properly authorized and completed on a
timely basis.
3. To assure timely reconciliation of the due from bank accounts.

4. To assure compliance with charge-off policies for aged reconciling items; that proper
research and clearance is performed.
WP
/
Asser RE
AUDIT PROCEDURES tions F DONE
BY DATE
Balancing
1. Obtain Daily Balance Sheet, copies of correspon¬dent bank statements,
and reconcilements for all Due From Bank accounts, as of our audit date; E
Foot reconcilements and verify mathematical accuracy; E
Trace system (subledger) totals from reconcilement to

supporting subledger report; E
Trace G/L totals from the reconcilement to the Daily Balance
Sheet; E
Trace all reconciling items to clearance and investigate any old
and unusual E
items (Obtain and use copies of subsequent bank statements);
For aged reconciling items, if any, obtain explanations for items N/A
that have been open an unreasonable length of time, i.e., over 2 months,
and evaluate follow-up action taken to resolve open items for adequacy;
E
Document reconciling items that are exceptions to charge-off
policies and obtain management's reason for waiver.

Confirmations
C
2. Just prior to audit date, contact Controller Department and request

that statements for Due To Bank accounts be held for our attention.
Prepare positive confirmation requests and enclose with the statements.

3. Also, just prior to audit date, prepare and send Confirmation requests
to Due From correspondent banks requesting cut-off statements and/or
balance to our credit, as of our audit date; C

Check replies to confirmation requests. Investigate and clear any

exceptions;
Send second request to banks who have not replied to initial
requests.

Other
4. Obtain copies of the bank's reports of its Federal Reserve
requirements, for the 4 week period prior to audit date, and verify that
reports are accurate and complete. R/O

R/O
5. Review items and supporting documentation making up The Treasury
Tax and Loan account for propri¬ety and timely clearance.
Assertions Initials
C = Completeness
E = Existence
R/O = Rights and Obligations
V/A = Valuation and Allocation
P/D = Presentation and DIsclosure

Conclusion:
Base on our review of the financial statements of the Bank of the Philippine
Island audited by the famous Isla Lipana. In our opinion we believed the audited
fianacial statements of BPI accompaniying notes to financial Statements
presented fairly contains necessary and required information that is relevant and
in accordance with the Philipppine Financial Reporting Standard (PFRS) and in
compliance with the regulatory authorities such as compliance with BSP Banko
Sentral ng Pilipinas.

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AUDITING of Banks Final

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AUDITING OF BANKS

Mr. Virgilio J. Seballe

As partial fulfillment for the requirements

I. Overview of the Industry

II. Audit Procedures in Bank

III. Test of Control and Substantive Test of Banks

IV. Audit Report

 Types of investment banks

A commercial bank is a type of financial intermediary and a type of bank. Commercial

Commercial bank has two possible meanings:

The role of commercial banks

Commercial banks engage in the following activities:

 processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or

Types of loans granted by commercial banks

 Other types of banks

 Central banks are normally government-owned and charged with quasi-regulatory

Company Profile of BPI

History of Bank Of The Philippine Islands

Founding Asian Banking History in the 19th Century

Expansion and Diversification in the 1980s

"Bancassurance" Leader in the New Century

1. Audits are reviews conducted on a company's financial information by external auditors

BANGKO SENTRAL NG PILIPINAS

CIRCULAR NO. 456

"(9) To constitute the following committees:

THE CORE RESPONSIBILITY OF THE RISK MANAGEMENT COMMITTEE ARE:

 DEVELOP RISK MANAGEMENT STRATEGIES - THE RISK MANAGEMENT COMMITTEE SHALL

This Circular shall take effect on 01 January 2005.

A. Internal Control Questionnaire

Client:________________________________________________________ Audit Date:______________

Client:________________________________________________________ Audit Date:______________

Client:________________________________________________________ Audit Date:______________

Client:________________________________________________________ Audit Date:______________

Client:________________________________________________________ Audit Date:______________

Bank of the Philippine Islands

A. The application should be completed and signed by the

10. Trace a sample of payments to ensure they are credited to the

PERFORMED BY: REVIEWED BY:

Audit Assistant Audit Supervisor

Bank of the Philippine Islands

OOversight and Organization Structure:

SCOPE: Discussions with management and review corresponding documentation.

PERFORMED BY: REVIEWED BY:

Bank of the Philippine Islands

a. Compare the balance of each significant interest E

a. Have the client prepare a schedule of interest

1. Determine whether the detail agrees in total to V/A

2. Review the nature of the amounts included in P/D

3. Examine ( ) critical forms and documents to E

4. Cross-reference accrued interest payable at the E

3) ANSWER INTERNAL CONTROL QUESTIONNAIRES

4) SUPERVISION, REVIEW AND CONCLUSIONS N/A

a) Conclude responsive to the audit objectives.

c) Perform senior review and supervision. N/A

d) Clear senior review points.

Audit Assistant Audit Supervisor

Bank of the Philippine Islands

1. To determine if policies, procedures, practices, and internal controls regarding

4. To determine that accrual of income, amortization of premiums, and accretion of

5. To determine compliance with laws, rulings, and regulations.

Determine method used to calculate and record amortization of premiums

PERFORMED BY: REVIEWED BY:

Audit Assistant Audit Supervisor

Client:__________________________________________ Audit Date:

Client:__________________________________________ Audit Date:

Client:__________________________________________ Audit Date:

Client:__________________________________________ Audit Date:

Client:__________________________________________ Audit Date: