RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of July 14, 2005 No. 22/2

About the Provision "About the Minimum Requirements to External Audit of the Banks and Financial Credit Institutes Licensed by National Bank of the Kyrgyz Republic"

Board of National Bank of the Kyrgyz Republic for the purpose of strengthening of public supervision and ensuring reliability of the financial reporting of the banks and other financial credit institutes licensed by NBKR based on the Law of the Kyrgyz Republic "About modification and amendments in some legal acts of the Kyrgyz Republic" of 14.12.2004, having considered the project of the Provision "About the Minimum Requirements to External Audit of the Banks and Other Financial Credit Institutes Licensed by National Bank of the Kyrgyz Republic", decides:

1. Approve the Provision "About the Minimum Requirements to External Audit of the Banks and Other Financial Credit Institutes Licensed by National Bank of the Kyrgyz Republic" it (is applied).

2. To management of methodology of supervision and licensing together with Legal department to carry out state registration of this resolution in the Ministry of Justice of the Kyrgyz Republic in accordance with the established procedure.

3. This resolution becomes effective after 15 calendar days from the date of official publication after state registration in the Ministry of Justice of the Kyrgyz Republic.

4. From coming into force of this resolution to declare invalid Provisional regulations "About the minimum requirements to external audit of the banks and financial credit institutes licensed by National Bank of the Kyrgyz Republic", NBKR approved by the resolution of Government of 5.02.2003 No. 3/3, registration number MU of the KR No. 22-03 of 11.03.03.

5. To impose control of execution of this resolution on Omurzakova G. M., the Vice-chairman of National Bank of the Kyrgyz Republic.

Approved by the Resolution of Board of National Bank of the Kyrgyz Republic of July 14, 2005 No. 22/2

Regulations on the minimum requirements to external audit of the banks and other financial credit institutes licensed by National Bank of the Kyrgyz Republic

This Provision is developed according to the Laws of the Kyrgyz Republic "About banks and banking activity in the Kyrgyz Republic", "About auditor activities", "About financial accounting" and establishes the minimum requirements (criteria) for audit of the banks including performing activities according to the Islamic principles of banking and financing, and other financial credit institutes (specialized financial credit institute JSC Finance Company of Credit Unions and microfinance companies) licensed by National Bank of the Kyrgyz Republic (further - banks).

This Provision extends to National bank of development of the Kyrgyz Republic in the part which is not contradicting the Law of the Kyrgyz Republic "About National bank of development of the Kyrgyz Republic".

I. The used determinations

For the purposes of this provision the following determinations are used:

External audit of bank - independent check of financial accounting and the financial reporting of bank by the external auditor of bank for the purpose of expression of opinion on reliability of the financial reporting and compliance of financial accounting to the established standards.

The external auditor of bank - the independent auditing organization formed according to requirements of the legislation of the Kyrgyz Republic.

Requirements to audit include requirements which the bank shall expose to auditing organization, its state, the involved auditors (physical persons and legal entity), audit inspection (at any stage), to audit opinion, according to the legislation of the Kyrgyz Republic and this Provision.

The letter to management - the written address the external auditor of bank to the customer of external audit of bank with information on shortcomings of accounting records, systems of financial accounting and internal control which can lead to mistakes in accounting records, and the corresponding recommendations about correction of the revealed shortcomings.

Independence of the external auditor of bank - capability of the external auditor of bank to be effective independently, irrespective of someone's influence on results of its conclusions, conclusions and in the conditions excluding any foreign impact on opinion expression by the external auditor of bank.

The explanatory note (disclosures) to the financial reporting of bank - the document, which:

- provides information on the basis of preparation of the financial reporting of bank and specific accounting policy chosen and applied to accounting of essential transactions and events;

- opens information required by International accounting standards the standards approved by the Organization of financial accounting and audit for Islamic financial institutions (1), but not provided somewhere else in the financial reporting of bank;

- provides the additional information which is not provided in the most financial reporting of bank, but necessary for its objective representation.

Terms Officials of bank, Insiders and affiliates, Considerable subsidiary company of bank or bank holding company, Islamic bank, the bank having "Islamic window", the Islamic principles of banking and financing, Sharia council - have the values determined by the Law of the Kyrgyz Republic "About banks and banking activity in the Kyrgyz Republic".

II. Independence of the external auditor of bank

2.1. The external auditor of bank shall remain independent, objective, avoid situations which give the grounds to consider that there is conflict of interest.

2.2. In case of determination of independence of auditing organization all available information on availability of the relations falling under determination insider and/or affiliation shall be taken into account. The auditing organization cannot be acknowledged independent of bank or from any his insider and the affiliate if actually auditing organization independent is not according to requirements of the legislation of the Kyrgyz Republic and this provision.

2.3. When carrying out external audit of bank the external auditor of bank shall observe the restrictions established by the Law of the Kyrgyz Republic "About auditor activities".

2.4. The auditing organization or auditors participating in audit of bank, or the involved auditors participating in audit of bank are not considered independent of bank if they are or were within two last years:

2.4.1. Insider, board member, Sharia council, Board, Committee on audit of bank or any affiliate of this bank;

2.4.2. The business partner (doing the business) any insider, the board member, Sharia council, Board, the member of the committee on audit of bank or any affiliate of bank;

2.4.3. Shareholder of bank or any affiliate of bank;

2.4.4. The participant of any straight line or the indirect transaction, or agreement (including the relations under agreements of credit/loan or availability of other similar arrangements, interests in joint ventures, mutual investment, and also receipt of any remuneration) with bank, the affiliate of bank, any affiliate of the insider of bank who can adversely affect objectivity and independence of auditing organization.

2.5. The bank shall not attract auditing organization as the external auditor of bank if the circumstances calling in question independence of the external auditor of bank take place including if the relations in case of which auditing organization, or any of her auditors, in essence, are part of executive officials of bank take place or are persons under control to management of bank.

III. Requirements to external audit of bank

3.1. External audit of bank shall be booked according to the procedure, established by the legislation of the Kyrgyz Republic, international standards of audit recognized in the Kyrgyz Republic and also according to this Provision.

In the relations performed according to the Islamic principles of banking and financing the Audit standards for Islamic financial institutions developed by the Organization for financial accounting and audit for Islamic financial institutions can be applied.

3.2. Only the auditing organization can be the external auditor of bank.

3.3. The banks, bank holding company (mother company), considerable subsidiary companies of bank or bank holding company representing the audited group are exposed to annual audit by the independent auditing organization (external auditor) having the license for carrying out audit inspection according to the legislation of the Kyrgyz Republic on auditor activities and meeting requirements of this provision. Banks shall book audit of information system of times in three years.

3.4. The purpose of carrying out external audit of bank differs from the purposes of internal audit of bank and the inspection check of bank performed by state body of banking supervision.

The purpose of external audit of bank is expression of opinion concerning compliance of the financial reporting of bank in all essential aspects to the established principles of accounts presentation.

3.4.1. When studying essential aspects, at least, it is necessary:

(1) to Consider compliance of accounting and classification of assets of bank to the legislation of the Kyrgyz Republic, normative requirements of National Bank, accounting policy and procedures of bank and to the commonly accepted regulations of reasonable banking practice. For these purposes the external auditor of bank should perform all exhaustive procedures necessary for receipt of information as regards:

a) credit policy and quality of credit risk management are provided through proper activities of Credit committee of bank; there are procedures of consideration of the credit request; collection of necessary and sufficient information about the borrower is provided; control (monitoring) of timeliness of repayment of the loan, including insiders and affiliates is exercised; necessary justification of prolongation of loans is provided; proper statement and carrying out claim work is provided;

b) classification of credit portfolio and other assets, including off-balance obligations is made, and necessary allocations to reserve on covering of potential losses and losses are performed;

c) adequate accounting and assessment of other property of bank, including pledges is performed;

d) timely account balances of loan debt and to the accounts of "ENT specialist" and "nostro" bank prove to be true, compliance of accounting of deposits to the established structure of deposits and other borrowings is provided;

e) adequate accounting and the reporting under types of professional activity in the security market is performed, and also when implementing trust management.

(2) to Consider compliance of accounting and disclosure of transactions with insiders and affiliates to relevant requirements. For these purposes the external auditor of bank should perform all exhaustive procedures necessary for receipt of information as regards:

a) insiders and affiliates and transactions with insiders and affiliates are established;

b) there is corresponding permission and policy on implementation of transactions with insiders and affiliates, including proper reflection and disclosure of conditions of carrying out these transactions in the financial reporting of bank;

c) there are indisputable proofs that receivables as a result of transactions with insiders and affiliates will be timely extinguished;

d) in case of operation analysis with insiders and affiliates the commonly accepted precautionary measures in banking practice are observed (such as assessment of the credits, acceptance of pledges, etc.).

(3) to Estimate adequacy of internal control system of bank by receipt of information on the following aspects:

a) adequacy of management structure of bank to types and to amounts of the transactions which are carried out by bank (participation of governing bodies in decision making, distribution of obligations between heads, availability of regulations on structural divisions and job descriptions);

b) the organization of control of reflection of all transactions in financial accounting and behind preparation of the authentic reporting;

c) the organization of work of internal control in bank;

d) organization of control of activities of subsidiary companies and bank branches;

e) the organization of risk management in bank;

e) accomplishment of recommendations of the previous audit inspection in the form of development new or enhancement of the operating internal procedures of bank, and also on improvement of internal control system of bank.

(4) to Consider compliance of transactions and procedures of carrying out transactions of bank for implementation of payments and calculations to the legislation of the Kyrgyz Republic and normative requirements of National Bank. For these purposes the external auditor of bank needs to perform concerning in what degree it is observed and provided:

a) compliance of paper payment documents to their electronic analogs;

b) timeliness of carrying out payments;

c) observance of confidentiality terms and safety during the carrying out electronic payments and work with personal keys of authorized persons of bank, observance of rules of their storage and use;

d) timeliness and correctness of transfer of funds for customer accounts and write-offs of funds from customer accounts;

e) timeliness of acceptance and information transfer when carrying out electronic payments;

e) observance of stipulated by the legislation storage duration of the Kyrgyz Republic of the proceeding and entering electronic payment documents;

g) fulfillment of requirements on filling of details of payment documents.

(5) to Fulfill the external auditor of bank in full requirements of International Standards of Audit, Audit standards for Islamic financial institutions (2) concerning responsibility of the external auditor of bank on consideration of fraud and mistakes during financial records audit of bank.

(6) to Perform the analysis and assessment of conformity of the information systems (IS) of bank to requirements:

a) regulatory legal acts of National Bank, regarding information security of bank;

b) internal politicians/procedures of the information systems of bank approved by management of bank.

3.4.2. When carrying out external audit of IS at least it is necessary:

a) study internal regulating documents on ensuring information security regarding their sufficiency and compliance to requirements of the legislation of the Kyrgyz Republic, standards and regulatory legal acts of National Bank;

b) study strategic documents of bank, business plans, politicians and procedures for risk management of IS for the purpose of assessment of their adequacy, sufficiency and relevance;

c) estimate quality management system of IT processes and oeprational risk management system;

d) estimate system of providing going concern of IS and plans of recovery of IS in case of emergency situation;

e) estimate the level of safety of network, operating systems, appendices and databases, personnel and physical safety;

e) consider degree of security of information systems in branches;

g) estimate management system access and casts in the automated systems;

h) estimate the level of awareness of bank staff at information security fields;

i) consider questions of observance of requirements of the legislation for intellectual property rights and use of licensed software products.

3.5. For the purpose of ensuring disclosure of essential aspects the external auditor of bank holds consultations with the staff of service of internal audit of bank for receipt of information on internal control system of bank, and also information on the revealed problems of bank by service of internal audit of bank. The external auditor of bank shall have access to all materials and reports of service of internal audit of bank.

3.6. Banks independently, in case of observance of requirements of the legislation of the Kyrgyz Republic, organize the choice of auditing organization for carrying out external audit of bank and notify on it National Bank in accordance with the established procedure.

3.7. The choice of the external auditor of bank, negotiation with auditing organization concerning the fee, terms, conditions of carrying out external audit of bank and representation of the external auditor of bank for consideration of General meeting of shareholders of bank is performed by the Board of directors of bank. Procedures of the choice of the external auditor of bank shall be complete before holding General meeting of shareholders of bank. The external auditor of bank is elected (is appointed) General meeting of shareholders of bank.

In case of the conclusion of the contract for carrying out audit inspection requirements of this provision shall be considered.

3.8. In case of development of procedures of the choice of the external auditor of bank, the Board of directors of bank needs to consider the following:

3.8.1. The auditing organization chosen for audit of bank or bank holding company shall:

- have the corresponding license for the right of implementation of auditor activities in the territory of the Kyrgyz Republic, and also have experience of auditor activities at least three years;

- be independent of bank;

- have experience of audit of financial credit institutes according to international standards of audit and international accounting standards, and also according to the standards approved by the Organization of financial accounting and audit for Islamic financial institutions (2);

- have the regular or involved auditors.

It is necessary to consider offers at least three auditing organizations for the choice of the most acceptable auditing organization from the point of view of quality of external audit of bank. During external audit there shall be invariable list of the auditors performing external audit of bank.

In case of appointment of the external auditor as bank, the choice shall be determined not only reasons of minimization of costs for services of the external auditor.

3.8.2. The regular or involved auditors of auditing organization shall have:

- qualification according to requirements of the legislation for audit and this provision;

- three years' experience of audit of financial credit institutes;

- experience of audit of financial credit institutes according to international standards of audit and international accounting standards, and also according to the standards approved by the Organization of financial accounting and audit for Islamic financial institutions (2);

- knowledge in the field of banking.

(4) in case of carrying out audit according to the standards approved by the Organization of financial accounting and audit for Islamic financial institutions.

3.8.3. The regular or involved auditors of information systems of audit company shall have:

- qualification certificate (CISA, CISM, etc.);

- experience of audit of information systems financial credit institutes.

3.9. The term of rotation of the external auditor of bank (i.e. the term during which the bank can use services of the same auditing organization) constitutes no more than 5 years. The term of rotation is determined at the rate of five consecutive years to date when General meeting of shareholders of bank make the decision on election (appointment) of the external auditor of bank.

3.9.1. The bank which is part of the international holding company can file petition in National Bank for change of term of rotation if for the international holding company which includes bank the term of rotation of the external auditor is stipulated by the legislation countries of incorporation, excellent from established by this Provision.

3.10. The contract for carrying out external audit shall include the requirements stated in Item 3.4.1. this provision.

3.11. In selection process of the external auditor of bank, it is necessary to demand from auditing organization to provide to the board of directors of bank certificates (proof) of availability of the conditions noted in 3.8.2 this provision and also:

a) the list of financial credit institutes and other organizations which external audit was performed by this auditing organization for the last three years;

b) the offers including the planned scale of audit inspection, the period which will be studied during audit inspection, the schedule of carrying out external audit of bank, and also reports which are planned to be prepared.

3.12. The board of directors of bank within three working days shall notify National Bank in writing:

a) about the choice (appointment) of the external auditor of bank or bank holding company after decision making by General meeting of shareholders of bank.

In this notification it shall be specified about license availability (license number, the date of receipt, effective period by whom it is issued), legal address, including phones of auditing organization, First name, middle initial, last name the head of auditing organization;

b) about change of the external auditor of bank and its reasons if change of the external auditor of bank happened during external audit of bank.

3.13. The external auditor shall inform management of bank on the facts of violation of the law elicited during conducting check and having direct impact on the audited financial reporting in writing.

The external auditor of bank within two working days with provision of the relevant documents in writing informs bank:

a) about the decision to refuse implementation of external audit of bank during audit inspection of bank;

b) about detection of the transaction and/or circumstances based on which the National Bank can apply measures according to the Law of the Kyrgyz Republic "About preservation, liquidation and bankruptcy of banks";

c) about disclosure of fraud or the fraudulent scheme or about detection of the transactions falling under signs of the transaction connected with legalization (washing) of the criminal income and financing of terrorist or extremist activities;

d) about refusal of bank to give any information in National Bank at the request of the external auditor;

e) about identification of violations or shortcomings which can lead to essential substantial damages in bank or at the affiliate of bank according to international standards of audit, Audit standards for Islamic financial institutions (2);

e) in other cases, stipulated by the legislation the Kyrgyz Republic.

Information of the external auditor is drawn up as external mail of bank and is registered bank according to procedures of bank for registration of external incoming correspondence.

(5) in case of carrying out audit according to the standards approved by the Organization of financial accounting and audit for Islamic financial institutions.

3.14. The management of bank informed by the external auditor of bank of the facts of violation of the law or of refusal in the implementation of external audit and other cases noted in subitem 3. 13, 5.4, shall inform National Bank, with provision of the copy of the letter to the external auditor of bank, within two working days after receipt of such information. In case of failure to provide this information to National Bank from management of bank in the specified time, the external auditor of bank directly reports to National Bank about the elicited facts within four working days after date of provision of this information to management of bank.

3.15. The National Bank has the right not to accept the conclusion of the external auditor of bank and to require carrying out repeated audit of bank or the affiliate if circumstances which include are found:

3.15.1. Identification of the facts of concealment of information which is according to article 11 of the Law of the Kyrgyz Republic "About auditor activities in the Kyrgyz Republic" the basis for conclusions about restrictions when carrying out audit;

3.15.2. Implementation by auditing organization of the activities which are not provided by the license;

3.15.3. Withdrawal of the qualification certificate of the auditor authorized body;

3.15.4. Lack of independence of the external auditor of bank;

3.15.5. Non-compliance and/or ignorance by the external auditor of necessary standards, practice of audit, financial accounting and banking;

3.15.6. Identification in activities of auditing organization of the facts of discrepancy to the legislation of the Kyrgyz Republic and to this Provision.

In case of detection of the above-stated circumstances, the National Bank will send the adequate notice to the bank address. The bank shall book repeated external audit of bank according to requirements of the legislation of the Kyrgyz Republic and this provision. Repeated audit is performed for bank account and/or its affiliates.

3.16. Audit of bank or bank holding company is carried out on the consolidated basis and individually in each company. Audit of considerable non-bank subsidiary companies of bank holding company or considerable non-bank subsidiary companies of bank is carried out on individual basis. Audit of all persons entering into the audited group shall be performed by one auditing organization.

The National Bank can exclude this requirement for the statement of bank and its affiliate (affiliates) if the bank and the affiliate are provided by proofs and the National Bank recognizes availability of the following circumstances:

a) by one auditing organization because of the high cost of audit able to lead impossibility of carrying out audit for all faces of the audited group to negative effects for financial condition of bank, or absence of auditing organization which could complete audit of each face of the audited group during necessary time or perform proper audit concerning each face of the audited group;

b) the bank or its affiliate took all measures for execution of the requirements specified in paragraph one of this Item;

c) provision to National Bank of permission to implementation by different auditing organizations of audit of different faces of the audited group will not cause adverse effect on results of audit of bank of any affiliate of bank or banking group in general.

The National Bank cannot exclude the requirement about audit of all persons entering into the audited group, one auditing organization until all auditing organizations which presumably will book audit of the different persons entering into the audited group do not agree in writing about provision each other of access to their working documents and audit opinion relating to audit of bank and its affiliates, to exchange of information during audit and implementation of interaction between them concerning content of their audit opinions.

IV. Requirements to bank about provision of the conclusion/report of the external auditor

4.1. The bank shall provide to National Bank no later than 105 days from the termination of financial year and within ten days after receipt by bank or the affiliate of bank of the conclusion of the external auditor of bank in time:

- the copy of audit opinion of the external auditor of bank certified by the external auditor of bank in accordance with the established procedure with appendix of the financial reporting of bank, including the Explanatory note (disclosures) to the financial reporting of bank and the letter to management of bank.

4.2. Banks publish the annual financial reporting in mass media of republican and local value after its confirmation by the external auditor of bank within 120 days after the termination of financial year according to the procedure and in the form established in regulatory legal acts of National Bank.

Banks represent to National Bank of the copy of editions in which the annual financial reporting of bank confirmed with the external auditor of bank within 3 days after the publication was published.

4.2-1. The bank shall notify the authorized state body regulating auditor activities on carrying out statutory audit and the publication of the financial reporting complete with audit opinion (report) in mass media.

The notification shall be directed in time, no later than ten days from the date of the publication of the financial reporting.

4.3. The National Bank will demand that bank, the bank holding company or subsidiary company corrected the shortcomings which led to audit opinion with clauses or to any other adverse opinion of the auditor of rather financial reporting of bank, any its subsidiary company, bank holding company or any considerable subsidiary company of bank holding company.

The National Bank has the right to apply to management of bank, board members, members of the committee on audit of bank, to the controlling shareholders and/or to the bank any measures established by the bank law, up to revocation of license if the revealed shortcomings are not corrected during the period of time established by National Bank.

V. Final provisions

5.1. The National Bank has the right to consider, receive copies of any documents connected with external audit of bank.

The bank shall provide copies of any documents connected with any audit inspection upon the demand of National Bank.

5.2. The National Bank according to the procedure, established by the legislation of the Kyrgyz Republic, can provide to the external auditor of bank the necessary information relating to questions of external audit of bank.

5.3. External audit of banks does not cancel and does not replace implementation of banking supervision behind activities of banks from National Bank.

The independent auditing organization and/or the individual auditor on contractual basis for accomplishment, in case of need, can be involved in inspection check of activities of banks and their branches by National Bank of the Kyrgyz Republic:

- the overview of the methods used by bank for creation of regulating reports;

- estimates of adequacy of management and internal control system;

- estimates of internal control system (including service of internal audit);

- estimates of following to the principles of International accounting standards, to the standards approved by the Organization of financial accounting and audit for Islamic financial institutions;

- assessments of conformity of activities of bank to requirements of the legislation of the Kyrgyz Republic and regulations of National Bank and other;

- estimates of risk management system of IS as categories of operational risk.

5.3.1. According to the legislation of the Kyrgyz Republic the National Bank has the right to demand from bank of carrying out unplanned audit. At the same time, services of auditing organization are paid by bank.

The purposes, tasks and term of audit inspection are discussed by National Bank, bank and auditing organization and drawn up by the protocol which is signed by three parties. The auditing organization meeting requirements of the legislation of the Kyrgyz Republic including regulatory legal acts of National Bank can carry out audit inspection.

The bank has the right to appeal the decision of National Bank on carrying out unplanned audit according to the procedure and the terms established by the legislation of the Kyrgyz Republic including regulatory legal acts of National Bank. At the same time appeal by bank of this decision of National Bank does not stop its execution.

5.4. Officials of bank shall:

- create to the external auditor of bank conditions for timely and complete carrying out audit inspection, provide all documentation necessary for its carrying out, and also make on its request explanations and explanations in oral and written form;

- to quickly eliminate all violations revealed by audit inspection, including on conducting financial accounting, creation of the financial reporting, in internal control system of bank.

5.5. It is forbidden to officials and employees of banks:

- make impact on the external auditor with the purpose to change, proved and supported by the documents and calculations, conclusions by results of external audit of bank;

- take any actions for the purpose of restriction of circle of the questions which are subject to examination when carrying out external audit of bank;

- limit access for the external auditor of bank to documents, the reporting, bank employees, and also to premises of bank if it is necessary for the purposes of carrying out external audit of bank.

In case of the specified events, the external auditor of bank should report directly in writing about them in National Bank with provision of the copy to the Board of directors of bank.

________________________

(1) the Explanatory note (disclosures) to the financial reporting of Islamic bank opens information required by the standards approved by the Organization of financial accounting and audit for Islamic financial institutions.

(2) in case of carrying out audit according to the standards approved by the Organization of financial accounting and audit for Islamic financial institutions.

(3) Voided according to the Resolution of Board of National Bank of the Kyrgyz Republic of 25.05.2016 No. 20/6

(4) Voided according to the Resolution of Board of National Bank of the Kyrgyz Republic of 25.05.2016 No. 20/6

(5) Voided according to the Resolution of Board of National Bank of the Kyrgyz Republic of 25.05.2016 No. 20/6

 

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