Inherent Risk Factors - Bendigo Bank - Case Study Example

BENDIGO.BANK.CASE.STUDY ASSIGNMENT TWO What is the inherent risk? Why is it an inherent risk? What evidence is needed to asses an inherent risk, Identify what you consider are the inherent risk factors which would impact on the audit of the BB. Inherent risk Inherent risks, (Grant, 2006), are areas of concern in the financial statement that are likely to contain errors. They will therefore have a great impact on the auditors report. The sophisticated growth of financial technology is making banking activities at Bendigo more diverse and complex (Grant, 2006). However, Bendigo Bank endeavors to measure the various types of risks from a centralized perspective and restrain the total volume of risk within the limits of its capital (Richard, 2009). Lending operations for example is an inherent risk. This is because of possible loan losses. But by taking the risk Bendigo Bank is able to charge a premium for the lending operation and thus earns a profit. Evidence which asses an Inherent Risk. Bendigo Bank had been reluctant in positioning compliance with the law, rules and social norms as an important management issue. Hence had no Annual Compliance Programs, containing specific plans, for its compliance system. As a result there was little or no awareness of the importance of compliance among its management and staff. Craig (2007). The internal Inspection Department also seems to have been reluctant in conducting internal examinations, (Craig, 2007), in the bank’s departments and offices. Hence a weak internal supervisory system that maximize the Bank’s inherent risks. Moreover the decisions of the Executive Committee remains unexamined thus risks such as contracts with customers and products that are not applicable with the law are inevitable. Beyond these activities, Bendigo Bank has no streamlined clarity on rewards or punishment regarding compliance (Richard, 2009).it is yet to be seen weather the Bank will organize training programs for its management and employees. Inherent Risk Factors 1Credit Risk. In the recent times Bendigo Bank has not been able to recover loans and other exposure owing to the deterioration of the business and counterparties in the business (David, 2007). The Bank’s customers have been experiencing deterioration in financial condition, making it impossible to recover principal and interest on loans, securities and other monetary claims outstanding. Impact on the Audit. It would be difficult to maintain reliable and sound banking operations. At this points its credit management capabilities and soundness of its assets is too low. Evidence to the Auditor: Completeness Assertion; The Auditor shall asses the transactions and events that should have been recorded, versus what was recorded. This will include checks, write-offs and any additions to reserves. Extensive Medium: The EFT Code (Q 26) should be amended to cover situations when the subscribing institution is unable to, fails to, give the disputed resolution body a copy of the record within a certain time frame. 2Market risks Inherent in the Bank’s dealing operation Possibility that the bank has been incurring losses due to movement in the interest rates (David, 2007). This arose as a result of fluctuations in the market interest rates, current exchange rates, stock prices and other market indicators. It is an inherent risk in the market transaction that may lead to losses when counter parts fail to meet their obligations. This risks the Banking Accounts, including deposits and loans as well as fluctuations in stocks held by the bank as long term Investments. (David, 2007). Impact on the Audit Limits access to treasury operations such as sections responsible for executing trade as well as sections responsible for processing market transactions (David, 2007). Volumes of Bank’s market operation assigned to the auditor become difficult to analyze. A clear report of the profit and losses can’t be arrived at. Simply because units that are in charge of monitoring the operations are weak or incompetent. Evidence to the Auditor: Observation; The Auditor shall observe the market data for a period of one month. This will include a confidence level, single-sided, 99%. This will take place in a period of 10 business days. The Auditor shall take into account correlation among the price fluctuations of financial instrument. The Auditor will also observe the counting of inventories by the entity’s personnel and observe the performance of control activities, with strict examinations of the conduct and management of market-related operations. This will provide the Auditor with evidence about the market performance but it is limited to the time the observation took place. It will reflect the total volume of risks in the trading transactions involving financial instrument that are subject to market price accounting foreign exchange transaction. Evidence Medium: “no fault “amount on $150 (Q38). The current “no fault “amount should be increased to allow a percentage of the loss, rather than the $150 amount. 3. Liquidity Risks. Bendigo Bank has suffered greatly due to the Bank being in short of funds to meet its obligations. This is according to Craig (2007). In the recent times the bank has had decline in its credit worthiness. Bendigo Bank has had an extreme gap between its maturities for fund use and funding. It has had to pay prohibitively high interest to borrow funds to carry out its operations. This has come about as a result of the Banks failure to periodically examine the structure of funds sources and uses as well as implements measures needed to improve this structure. In addition the as per what Craig, (2007) uncovered, units in charge of managing the Bank’s cash flow, failed to give information on time concerning funds gap, the market environment as well as other matter related to liquidity Risks. Impact on the Audit In the event of this sudden change, without a clear Bank’s contingency Plan, to respond flexibly and quickly according to the seriousness of the emergency, it would be difficult to implement measures need to improve this situation. Evidence to the Auditor: Accuracy and valuation as well as Analytical Procedures. The Auditor shall asses the financial as well as other relevant information to see that they are represented fairy and at appropriate amounts. It will involve studying the of plausible relations among both financial and non financial data. This will encompass the investigation of identified fluctuations and other relationships that are inconsistence with other relevant information or deviate significantly from predicted amounts. Evidence Medium: Monitoring Compliance with the EFT Code (Q66) needs to be simplified. Bendigo Bank suggest that quarterly reporting, on the basis of a simpler version of the survey would be a better approach. It would allow a non compliance issue to be identified and addressed in a much quicker time frame. 4. Operations Risk. This are errors, unethical conduct and other circumstances in conduct of operations that Bendigo Bank has had in handling customers’ transactions, (Gant, 2006). It has been to the fact that many new financial services based on sophisticated financial technology, have been developed leading to a tread towards greater complexity and potential magnitude of operations risk. This has lead to great losses. Most cases have involved disparities between actual cash and cash balances and customers complaint concerning transactions. This has ruined the customer’s trust in Bendigo Bank services since accurate and rapid fulfillment of transactions requested by customers were never realized (Gant, 2006). And as banking activities become more diverse, proper management of these activities to lessen and minimize these risks seems far from being established. Impact to the Audit It would be difficult to provide specific guidance. This is because systems upgrade is poor and supervision of the branch operations has been minimal. Never the less, the Bank must work towards introducing a system for measuring and managing operations risk. Evidence to the Auditor: Inspection of Records or Documents. The Auditor shall examine the records or documents, whether internal or external, in paper form or electronic form or other media to measure the cash flow. This provides the Auditor with varying degrees of reliability, depending on the nature and source and effectiveness of controls over their production. Evidence Medium: Customers should only be able to dispute transaction within a specified time period (Q 27). Customers should be able to check their transactions in a timely manner. Bendigo Bank suggests a time frame of two months. 5. Computer systems Risk. These are circumstances related to computer systems such as errors and unethical conducts (David, 2007). Bendigo Bank has incurred great losses due to damages owing to malfunctions of computer systems. This has had an impact on him management as well as the society at large. Nothing much seems to be happening in regards to specific measures for the management of systems, nor periodic monitoring, based on fundamental policies for Bank wide management systems. No security policies seem to be in place according to David (2007). This would otherwise clarify the appropriate level of security required. Nor is there a contingency plan for responding to emergencies and other unforeseen events appropriately when they occurred. Impact to the Audit Regarding to this issue, the bank has to position this as a matter of highest priority and implement a full program of countermeasure if it has to continue its operations and customer services without interruption. The Auditor is not able to access the entire necessary information asset. Bendigo Bank has to go a notch higher and install a multiple telecommunications lines for on-line operations and back up computer centers to prevent systems failure and prepare for possible natural disasters. Evidence to the Auditor: Inspection of Tangible Assets; The Auditor shall carry out physical examination of assets. This should provide reliable Audit evidence with respect to existence of their malfunctions or their sophisticated financial use. The Auditor shall carry out examinations to verify operations problems in Bank’s offices or operations centers. Evidence Medium: Reliance on user’s name or birth date (Q 31). Bendigo Bank places a strong reliance on name and birth date when asking the customer how they have come to identify their own pin, this verify the incorrect transactions. 6. Legal Risks Bendigo Bank has incurred losses in owing to legal uncertainties and other problems related to contracts, (Richard, 2009). The bank seem reluctant with compliance to law, rules and other social norms. No Annual Compliance Program, containing its specific plans for its Compliance system seems to be in place. Thus nothing much is being done to create awareness of importance of compliance among its management and staff. Thus the Inspection Department conducts little or no examination of the decisions of the executive committee. Impact to the Audit The Auditor can only advise the Bank accordingly. The first major step Bendigo Bank can take would be to clarify rewards and punishments related to compliance and expand training programs for management and employees. Secondly, work towards enhancing further Compliance functions. Evidence to the Auditor: Confirmation; The Auditor shall acquire a representation of information or an existing condition directly from the staff and the customers. The Auditor may request confirmation of the terms of agreements or transactions an entity has with a customer. This will verify if compliance to the law has been met with regards to modification of the agreement and if so what relevant details are available and what conditions were ignored. Evidence Medium: Definition of Compliant (Q 20). Currently it is difficult to separate “card scheme” compliance and EFT Code Complaints. A clear definition of “compliant” needs to be included in the EFT Code, to verify if compliance to the law has been met with regards to modification of the agreement. 7. Reputational Risk. Bendigo Bank has greatly not been spared this. It is mostly observable from the way The Customer Relations Office handles customers. It is expected with all due respect that customers would receive comprehensive hospitality once in the Banking hall. This should be seen to extend to the services and packages Bendigo Bank offers. Surprisingly, nothing much of the same on the contrary is bestowed at the Bendigo Bank (Richard, 2009). Impact on the Audit The bulk lies with The Customer Relation Office. This is the face of Bendigo Bank. If the customers have to see change and have faith in the Bank, it has to be communicated by The Customer Relation Office as well as the Investor Relations Office. Evidence to the Auditor: Enquiry; The Auditor shall seek information both financially and non-financial directly from the customers. The enquiries should range form formal written such as questionnaires, to informal oral enquiries such as interviewing customers in the banking hall or outside the Bank, preferably in the streets. The response should provide the Auditor with information previously possessed or one or one with corroborative Audit evidence. The Auditor will then get to know the management’s history as perceived by the customers. Evidence Medium: Mistaken payments (Q 41). The current situation in terms of liability for mistakes is unsatisfactory. The Bank must make appropriate solutions to improve its reputation. 8. Accounting Selection This is an on-line service. One will choose the accounts one wish to view on the internet. Interest that has been paid to or from ones account in the last financial year will be available, the total financial institution duty, total income debited to the account, interest credited to the account, total amount of federal debt tax, total amount of withholding tax as well as total amount of non resident tax. Accounts that are no longer ones signatory will not appear on the accounts selection. Features will only enable you to print only the relevant information. Impact on the Audit The under taking opens loopholes for accounting mistakes, the customers will leave it to up to the bank to do their online requirements such as payment of bills. Bendigo Bank will have to stand hassles from customers. Evidence to the Auditor: Recalculations and Analytical Procedures. The Auditor shall check the mathematical accuracy of the documents and records. This will have to be through the use of information technology. These encompass the checking of the accuracy of the summarization of the electronic files posted on the internet. The Auditor shall identify fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. Evidence Medium: Reliability for unauthorized transactions (Q 29). Authentication should be mandated when customers follow security precautions. Bendigo Bank should consider mandating security tokens for all new internet banking customers. 9. Financial Crisis In the past few months Bendigo Bank has not been spared the turmoil in the financial market on a global perspective leading to some credit events that affect the bank in many ways. Impact on the Audit The Auditor ought to look into the Bank charging criteria, to look for loopholes through which the bank might want to recover the lost opportunity. This can be done through increased interest rates, standing charges, ATM balances etc. Evidence to the Auditor: Observation of the total volume of risks in trading transactions involving financial instruments that is subject to the market price accounting foreign exchange transactions. This will verify the results of operation involving profits or loss reported reported daily on the stock market. Evidence Medium: Scope of Part A of EFT Code (Q 9). Need to be updated to include specific list of the type of transactions that are covered under the code. 10. Reduction in the level of profit imputed on the declining economy. The efforts of Bendigo Bank to stay on business have definitely impacted negatively on the Bank. It has led to a declaration of a 15% final divided based on each share for the period 2008/09. Impact on the Audit The Auditor has to must reconcile all transaction books to reveal the cost associated with the global recession, against possible financial make-ups by the management to cover the 15% below the mark. Evidence to the Auditor: Inspection of Record and Documents as well as Assertions; The Auditor shall strictly examine the records and documents, weather internal or external, in paper or electronic form, or other media , to get evidence of the varying degrees of reliability. The Auditor will measure accuracy and completeness of the records to ascertain all transactions and events that should have been recorded have been recorded and amounts and other data relating to recorded transactions and events have been recorded properly. Evidence Medium: discrepancy in amount received and amount transferred (Q 17). The clause should be revised to allow identity and correct discrepancy between amounts recorded to measure accuracy and completeness. Bibliography Bendigo Bank website (http://www.bendigobank.com.au/public/about_us/types_of_banking/types_of_banking.asp) Craig, M, 2007 Australian Financial Accounting, Australia, McGraw-Hill David, M. 2007, What Numbers Mean, Australia, McGraw-Hill. Grant, E, 2006, Auditing and Assurance Services in Australia, NY, McGraw-Hill. Richard, B, 2009, Australian Economy through Bank Practices. NY, McGraw-Hill. Read More