Internal Audit Function Must Ensure Adequate Coverage of Regulatory Matters

The Autoriti Monetari Brunei Darussalam (AMBD) has emphasized the importance of internal audit functions in banks to ensure adequate coverage of matters of regulatory interest.

Guidelines for Internal Audit Function in Banks

In its guidelines, the AMBD stressed that internal auditors must have the appropriate capability regarding matters of regulatory interest and undertake regular reviews of such areas based on the results of a robust risk assessment. The guidelines highlight the need for internal audit to review key risk functions, including:

• Risk Management: Internal auditors must include in their scope the organization and mandates of the risk management function, as well as the evaluation of risk appetite, escalation, and reporting of issues and decisions taken by the risk management function.

  • Integrity of risk management information systems is also a key area for review.

• Capital Adequacy and Liquidity: The guidelines emphasize the importance of internal audit in reviewing the bank’s system for identifying and measuring its regulatory capital and assessing the adequacy of its capital resources in relation to risk exposures and required minimum capital ratios.

  • Internal auditors must also review management’s process for stress testing capital levels, as well as the bank’s systems and processes for measuring and monitoring its liquidity positions.

• Regulatory and Internal Reporting: Internal auditors must regularly evaluate the effectiveness of the process by which the risk and reporting functions interact to produce timely, accurate, reliable, and relevant reports for both internal management and the AMBD.

  • This includes standardized reports that record the bank’s calculation of its capital resources, requirements, and ratios.

• Compliance: The guidelines stress the importance of internal audit in reviewing the scope of activities of the compliance function periodically. Compliance must cover:

  • Laws
  • Rules
  • Standards
  • Primary legislation
  • Market conventions
  • Codes of practice promoted by industry associations
  • Internal codes of conduct applicable to staff members

• Finance: Internal auditors must devote sufficient resources to evaluate the valuation control environment, availability, and reliability of information or evidence used in the valuation process, and the reliability of estimated fair values.

  • This includes reviewing independent price verification processes and testing the accuracy of financial data and reporting.

Conclusion

The AMBD’s guidelines emphasize the critical role of internal audit functions in ensuring that banks operate safely and soundly, and comply with regulatory requirements. Internal auditors must have the appropriate capability and undertake regular reviews of key risk functions to ensure adequate coverage of matters of regulatory interest.