Cimb Bank Case Study

The Entity and its Environment

In order to assess the inherent risk of CIMB Bank Berhard, auditors should obtain an understanding of the entity and its business environment. CIMB Bank Berhad is an international commercial bank incorporated in Kuala Lumpur, Malaysia. The bank’s primary function is to provide banking and other financial services to its customers. CIMB bank’s customer base range from individuals, Small and Medium Enterprises (SMEs) to mid-sized corporations internationally and locally. Core business that generates income for the bank include:

• Accepting savings, current, and fixed deposit accounts

• Provides property, personal, car, and corporate loans

• Provide a full range of transactional banking facilities and knowledge-based

However, the estimation of collectability of loans could be subjective and requires management’s judgment. As cited by CIMB Bank Berhad (2015), management makes judgment on the future and other critical factors in terms of the estimation of the amount and time of cash flows in allowance for impairment of loans, advances and financing despite guided by the relevant BNM guidelines and accounting standards. From an auditing perspective, the problem with management judgment is the high likelihood of fraud to occur because the accounts are susceptible to manipulation by management. Management of the bank could manipulate the accounts by understating the amount of allowances for impairment losses on loans and overstating the profit. Furthermore, uncollectible loans are written off from the related allowance for loan impairment (CIMB Bank Berhad, 2015). Again, there is a high degree of subjectivity that exist in deciding which loans are uncollectible and how much should be written-off. As stated in the notes to the financial statements, CIMB Bank Berhad (2015) will yet to consider loans, advances and financing that are less than 90 days past due to be impaired unless there are

“The Group and the Bank use interest rate swaps and cross-currency interest rate swaps to hedge against interest rate risk and foreign exchange risk of loans, senior bonds issued, subordinated obligations, negotiable instruments of deposits issued, bills and acceptances payable and bonds” (CIMB Bank Berhad, p. 128, 2015). The complexity in the features of various types of derivatives could create risk of potential misstatement due to difficulties in identifying whether important aspects of a transaction are missing or inaccurately recorded and whether a valuation of these financial instruments is done appropriately. The value disclosed in regards of trading derivatives are the fair values (CIMB Bank Berhad, 2015). On the other hand, the value disclosed in regards of hedging derivatives are the contractual undiscounted cash flows (CIMB Bank Berhad, 2015). Due to the complexity of the derivatives, an incorrect classification of the types of derivatives could occur. Incorrect classification of the derivatives would lead to wrong accounting treatment on those derivatives. Errors in recording the transactions or inappropriate valuation will affect the fair value of financial liabilities causing a risk of potential misstatement in the balance sheet of CIMB bank. The complexity inherent in auditing certain financial instruments indicates that