0 INTRODUCTION:National Microfinance Bank Plc(NMB) is one of the largest commercial banks in Tanzania, providing bankingservices to individuals, small to medium sized corporate clients, as well aslarge businesses. It was established under the National Microfinance BankLimited Incorporation Act of 1997, following the break-up of the old NationalBank of Commerce, by an Act of parliament .Three new entities were created atthe time, namely: NBC Holding Limited, National Bank of Commerce (1997) Limitedand National Microfinance Bank Limited. Initially NMB could only providepayment services as well as offer savings account, with limited lendingcapabilities, before becoming a fully-fledged universal retail bank.In 2005, the Government of the United Republic of Tanzaniaprivatized the bank when it sold part of its shareholding (49%) to a consortiumled by the Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (‘RabobankGroup’).
Subsequently, there was further divestiture in 2008 when the TanzanianGovernment off loaded another 21% of its shareholding to the Tanzanian publicthrough an initial Public Offering(IPO).The listing of the bank’s stock on theDar es Salaam Stock Exchange has led to a diversified ownership structure. TheBank is incorporated in Tanzania under the Companies Act, 2002 as a publiclimited liability company.1.1 Vision StatementTo be the preferred financial services partner in Tanzania.1.2 Mission StatementThroughinnovative distribution and its extensive branch network, the Bank offersaffordable, customer focused financial services to the Tanzanian community, inorder to realize sustainable benefits for all its stakeholders.
1.3 Core ValuesThe bank has over3,000 employees coming together from all walks of life, offering various expertisesto bring forth the best customer experience through the product offerings andservices. Like any group of people brought together to achieve a common goal inunity, NMB employees share a set of core values namely Eagerness, CustomerFocus, Ownership, Team Work, Integrity and Compliance that guide, bind anddrive them. Those values, they firmly believe are fundamental in not definingwho they are but what they do and in what manner should they serve.2.0 CORE ACTIVITIESThebank is authorized to perform and carry out banking business in Tanzania as abank. The bank is regulated by the central bank of Tanzania (BOT) and issubject to the provisions of the Banking and Financial Institutions Act, 2006and its regulations.The bank’s coreactivities involves accepting customers’ deposit through various types of bankaccount , providing credits facilities to the different type of customers andoffering other commercial banking services.
The bank’s lending productsincludes Salaried Workers’ Loans, Personal Loans, Pensioners Loans, Out GrowersLoans, Corporate Loans, Post Import Loans, Loans to SMEs and Overdraft for bothcorporate and SMEs customers. The bank’s deposit products includes; PersonalAccounts, Junior Savings, Bonus Savings, Wisdom Account, Business Accounts,Kilimo Accounts, Student Accounts, Chap Chap Accounts, Call Deposits, ChipukiziAccounts and Fixed Deposit Accounts. Other products and services include Letterof Credit (LC), Guarantees, Internet Banking and Mobile Banking. 3.
0 DEFINITION OF KEY TERMS:3.1ANALYTICAL PROCEDURESAccording to the ISA 520, Analytical procedures indicate evaluationsof financial information made by a study of plausible relationships among bothfinancial and non-financial data. Analytical procedures also encompass theinvestigation of identified fluctuations and relationships that areinconsistent with other relevant information or deviate significantly frompredicted amounts (ISA 520). Analytical procedures consist of the analysisof significant ratios and trends including the resulting investigation offluctuations and relationships that are inconsistent with other relevantinformation or deviate from predictable amounts. It entails the use ofcomparisons and the relationships to determine whether account balances orother data appear reasonable. Such procedures allow the auditors to look atthings in overview and answer the questions in order to obtain reasonableassurance that the financial statements are free from material misstatement.
Analytical procedures are used to determine relationships among financialinformation that would be expected to conform to predictable patterns based onentity’s experience, such as gross margin percentages, and between financialand non-financial information such as the relationship between payroll costsand the number of employees.3.2ANALYTICAL REVIEW It is the process of planning, executing and drawing conclusions fromanalytical procedures. In the planning stage, the purpose of analytical reviewis to highlight risk areas to narrow the focus of planning the nature, timingand extent of auditing procedures. In the overall review stage, the objectiveof analytical procedures is to assess the conclusions reached and evaluate theoverall financial statement presentation.
It may be used to detect materialmisstatements that other test can overlook, such as fraud or understatementerrors. 3.3TYPES OF ANALYTICAL PROCEDURES:3.3.1 TREND ANALYSIS:It is the type ofanalytical procedure analysis of changes in an account balance over time.3.3.2 RATIO ANALYSIS:Ratio analysis is the comparison ofrelationship between financial statements accounts, the comparison of anaccount with non-financial data, or the comparison of relationships betweenfirms in an industry.
Ratioanalysis is a tool that was developed to perform quantitative analysis onnumbers found on financial statements. Ratios help link the three financialstatements together and offer figures that are comparable between companies andacross industries and sectors. Ratio analysis is one of the most widely usedfundamental analysis techniques (Dean, 2000).3.3.3 REASONABLENESSTESTING:It is the analysis of account balances or changes in account balances anaccounting period in terms of their reasonableness in the light of expectedrelationships between accounts.3.
3.4 DATA MINING:It is a set of computer- assisted techniques that use sophisticatedstatistical analysis, including artificial intelligence techniques to relate assessment of therisk of material misstatement at the assertion level.4.0 ANALYTICAL REVIEW AND DISCUSSION ON THE FINANCIALSTATEMENTS FOR THREE YEARS 2014-2016 AS PER ISA 520The Financial statements of National Microfinance Bank Plc (NMB) reviewed were from 2014 to year 2016.Thefinancial statements of the bank are prepared in accordance with the financialreporting framework. The analytical procedure used was ratio analysis. Theanalysis was based on key performance indicators of ratios such as earningsratios, liquidity ratios, capital adequacy ratios and assets quality ratios.
The Board of Directors confirms that applicable accounting standards have been followedand that the financial statements have been prepared on a going concern basis.The Board of Directors has reasonable expectation that the Bank has adequate resourcesto continue in operational existence for the foreseeable future.4.1PROFITABILITY/ EARNINGS RATIOSThe earnings of the bank are good.
Although the return on equity ispositive for the entire period of three years, but it has been slightlydeteriorated from year 2014 through 2016. This implies that the interest rateof the bank decreased or increases in operating cost. Also the return on assetswere maintained at the rate of 4% in year 2014 and 2013 but in 2016 the returnon assets slightly decrease to 3%. This was due to decrease in total assets ofthe bank. The cost to income ratio was also slightly increasing throughout therecently three years, this implies that the bank has high operating costcompared to income, this is very sensitive area for an auditor to concentratebecause it will safeguard the bank’s ability to continue as a going concern sothat it can continue to provide returns for shareholders and benefits for otherstakeholders.
Despite the business challenges we faced the Bank managed todeliver a good performance. The Bank’s balance sheet expanded 18% on year fromTZS 3,882 billion in 2014 to TZS 4,580 billion in 2015 and 8% on year from TZS4,580 billion in 2015 to TZS 4,951 billion in 2016. Total loans and advancesgrew 24% from TZS 2,007 billion in 2014 to TZS 2,482 billion in 2015 and 13% toTZS 2,794 billion in 2016 driven largely by growth in our Salary Worker Loanportfolio. Customer deposits grew 19% from TZS 3,007 billion in 2014 to TZS 3,568billion in 2015 and 5% to TZS 3,737 billion in 2016. The fallen in deposits in2016 is largely affected by decreasing in Fixed-term deposits and fallen intrust account balances from Mobile Network Operators (MNOs). The quality of theloan book has deteriorated, with the NPL ratio increasing from 2.4% in 2015 to4.8% in 2016.
The Bank’s equity also remained robust, with the Total Shareholders’Equity increased by 15% in 2016. However, despite of the strong equity of thebank but the Return on Equity has been deteriorated by 1.8% in 2016 due to theslightly increase of profit after tax. During the year 2016 the profit aftertax were slightly increase by 2.
1% which is very low compare to the percentageincrease in shareholders’ funds. This implies that the company failed tomaintain its equity in order to increase returns. But an auditor should be verycareful on the assessment of the risk of fraud on equity such as retainedearning profit (loss) account and other capital accounts. 4.2CAPITAL ADEQUACY/MANAGEMENT RATIOS:The management ratios deal with the management of capital requirementsset by BOT in order to maintain a strong capital base to support thedevelopment of the business. The capital adequacy as a percentage of riskweighted assets decreased by 5% through both years from 2014 to 2016. Thecapital of the firm seems to fluctuate due to the issue of share to the publicand increase in capital expenditure by expanding its business by opening newbranches.
During the year 2016, NMB opened 13 new branches and installed 75 newATMs. This is consistent with their goal of continuing to expand their network.The branches and ATMs will allow them to better serve their customersthroughout the country. Another highlight was the launch of NMB’s MasterCard debitcard. Their partnership with MasterCard will allow their customers to payeasily and securely by card, domestically, internationally and online. The Bankexpects to generate additional transaction fees by opening up ATM network,which is currently “closed”, to non-NMB customers with Visa and MasterCardacquiring.
The external auditor should take care on thestability of the capital structure of the bank so that reserve the customerbalances, to comply with the capital requirements set by BOT, to safeguard thebank’s ability to continue as a going concern so that it can continue toprovide returns for shareholders and benefits for other stakeholders and tomaintain a strong capital base to support the development of the business.4.3 ASSETS QUALITY RATIOS:The ratioof non-performing loans to gross loan has increased from 2.6% in year 2014 to 4.8%in year 2016. This implies that the loans defaulter increased from gross loans.
Gross loans to customer’s deposits remain stable for two years but increased to76% in year 2016 from 71% in year 2015, this implies that the customers’ depositsdecreased to the extent of 7% per annum. The external auditor should be verycarefully on the reasons of decreasing to customer deposits because it willcause disaster to the bank. The total assets growths decreased by 56% from 18%in 2015 to 8% in 2016. This implies that the assets of the bank were impairedand some of it are disposed or depreciated.(a) The International Standard onAuditing (ISA 315) deals with theauditor’s responsibility to identify and assess the risks of materialmisstatement in the financial statements, through understanding the entity andits environment, including the entity’s internal control. The objective of theauditor is to identify and assess the risks of material misstatement, whetherdue to fraud or error, at the financial statement and assertion levels, throughunderstanding the entity and its environment, including the entity’s internalcontrol, thereby providing a basis for designing and implementing responses tothe assessed risks of material misstatement. An audit involves performing procedures toobtain audit evidence about the amounts and disclosures in the financialstatements. The procedures selected depend on the auditor’s judgment, includingthe assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error.
In making those risk assessments,the auditor considers internal control relevant to the entity’s preparation andfair presentation of the financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the entity’s internal control.An audit also includes evaluating the appropriateness of accounting policiesused and the reasonableness of accounting estimates made by the directors, aswell as evaluating the overall presentation of the financial statements.5.0 THE BUSINESS RISK EVALUATION MEMORANDUM: The principal risks that may significantly affect the Bank’s strategiesand development are mainly operational, fraud and financial risks. Below arethe descriptions of the fraud, operational and financial risks facing by thebank:5.
1 Credit riskThe bank takes on exposures to credit risk, which is the risk thatcounterparty will cause a financial loss to the bank by failing to discharge anobligation. Credit risk is the most important risk for the bank’s business.Management therefore, carefully manages its exposure to credit risk. Creditexposures arise principally in lending activities that lead to loans andadvances, and investment activities that bring debt securities and other billsinto the Bank’s asset portfolio. There is also credit risk in off-balance sheetfinancial instruments, such as loan commitments. The credit risk management andcontrol are centralized in the credit risk management team of the bank andreported to the board of directors and heads of department regularly.
5.2 Market riskThe bank takes on exposure to market risks, which is the risk that thefair value of future cash flows of a financial instrument will fluctuatebecause of changes in market prices. Market risks arise from open positions ininterest rate and currency, all of which are exposed to general and specificmarket movements and changes in the level of volatility of market rates orprices such as interest rates, credit spreads, and foreign exchange rates. Thebank separates exposures to market risk into either trading or non-tradingportfolios.
The market risks arising from trading and non-trading activities areconcentrated in the bank’s treasury department and monitored regularly. Regularreports are submitted to the bank’s Asset and Liability Committee (ALCO) andheads of department. 5.3 Foreign exchange riskThe bank takes on exposure to the effects of fluctuations in theprevailing foreign currency exchange rates on its financial position and cashflows. ALCO sets limits on the level of exposure by currency and in aggregatefor both overnight and intra-day positions, which are monitored daily. 5.4 Interest rate riskCash flow interest rate risk is the risk that the future cash flows of afinancial instrument will fluctuate because of changes in market interestrates.
Fair value interest rate risk is the risk that the value of financialinstrument will fluctuate because of changes in market interest rates.Fair value interest rate risk is the risk that the value of a financialinstrument will fluctuate because of changes in market interest rates. The Banktakes on exposure to the effects of fluctuations in the prevailing levels ofmarket interest rates on both its fair value and cash flow risks. Interestmargins may increase as a result of such changes but may reduce losses in theevent that unexpected movements arise. The Bank’s Asset and Liability Committee(ALCO) sets limits on the level of mismatch of interest rate reprising that maybe undertaken, which is monitored regularly by the Bank. 5.
5 Fraud riskThere is a general increase in fraudulent transactions in the bankingindustry in Tanzania. The bank has experienced an increase in fraud cases byway of ATM card skimming and cybercrime. The number and value of fraud caseswas however very low and the bank was able to implement both remedial andpreventive measures.5.
6 Operational riskThis is a risk resulting from the Bank’s activities not being conductedin accordance with formally recognized procedures including non compliance withKnow Your Customer (KYC) principle and account opening procedures. Managementensures that the bank complies with KYC and other internal procedures.5.7 Financial riskThe bank’s activities expose it to a variety of financial risks andthose activities involve the analysis, evaluation, acceptance and management ofsome degree of risk or combination of risks. 5.8 Country riskThis is the of foreign customers and counterparties failing to settletheir obligations because of economic, political and social factors of thecounterparties’ home country and external to the customer or counter party.
Thisrisk was automatically facing National MicrofinanceBank Plc.The external auditor should be aware with the country risk. Currently the bankcontinues to perform well in all its departments. As the Bank continues toscale up its operations, it ensures that the resultant commercial andoperational risks are mitigated through enforcement of appropriate policies andprocedures.
The Bank’s activities expose it to a variety of financial risksincluding credit, liquidity, market and strategic risks. The Bank’s overallrisk management policies are set out by the Board of Directors and implementedby the management. These policies involve analysis, evaluation, acceptance andmanagement of some degrees of risks or a combination of risks.
5.9 Currency riskIt is the risk of loss arising from future movements in the exchangerates applicable to foreign currency assets, liabilities, rights andobligations. The bank should hedge its foreign currency transactions by usinghedging techniques such as forward contracts, futures, options and swaps.5.10 Legal and documental riskThis is the risk that contracts are documented incorrectly or are notlegally enforceable in the relevant jurisdiction in which the contracts are tobe enforced or where the counterparties operate. This can include the risk thatassets will turn out to be worth less or liabilities will turn out to begreater than expected because of inadequate or incorrect legal advice ordocumentation. In addition, existing laws may fail to resolve legal issuesinvolving a bank, a court case involving a particular bank may have wider implicationsfor the banking business and involve costs to it and may or all other banks,and laws affecting banks or other commercial enterprises may change.
Banks areparticularly susceptible to legal risks when entering into new types oftransactions and when the legal right of counterparty to enter into atransaction is not established.1 –6.0 RISK MANAGEMENT AND INTERNAL CONTROLThe Board accepts final responsibility for the risk management andinternal control systems of the Bank. It is the task of the directors to ensurethat adequate internal financial and operational control systems are developedand maintained on an ongoing basis in order to provide reasonable assuranceregarding to the effectiveness and efficiency of operations, the safeguardingof the Bank’s assets, compliance with applicablelaws and regulations, the reliability of accounting records, businesssustainability under normal as well as adverse conditions; and responsible behaviortowards all stakeholders.The efficiency of any internal control system is dependent on the strictobservance of prescribed measures. There is always a risk of non-compliance ofsuch measures by staff.
Whilst no system of internal control can provideabsolute assurance against misstatement or losses, the bank’s system isdesigned to provide the Board with reasonable assurance that the procedures inplace are operating effectively. The Board assessed the internal controlsystems throughout the financial year ended 31 December 2016 and is of theopinion that they met accepted criteria. The Board monitors risk and internalcontrol effectiveness through the Board Audit, and Credit Risk and ComplianceCommittees.
According to ISA 570, Going Concern Assumption; under the going concernassumption, an entity is viewed as continuing in business for the foreseeablefuture. General purpose financial statements are prepared on a going concernbasis, unless management either intends to liquidate the entity or to ceaseoperations, or has no realistic alternative but to do so. Special purposefinancial statements may or may not be prepared in accordance with a financialreporting framework for which the going concern basis is relevant for example,the going concern basis is not relevant for some financial statements preparedon a tax basis in particular jurisdictions. When the use of the going concernassumption is appropriate, assets and liabilities are recorded on the basisthat the entity will be able to realize its assets and discharge itsliabilities in the normal course of business. The Board of Directors has reasonableexpectation that the Bank has adequate resources to continue in operationalexistence for the foreseeable future. But an externalauditor should consider the external environment and the risk function providesindependent oversight and control on the bank’s operational, credit, market,compliance and other risks.
An auditor should be committed to continuallyre-evaluating and enhancing risk management policies and practices in order tohelp the bank to exist for the foreseeable future. 7.0 CONCLUSIONSThe analytical procedures permit the auditors to come out with thestrong overview in planning stage of auditing and answer the questions in orderto obtain reasonable assurance that the financial statements are free frommaterial misstatement. The procedures selected depend on the auditor’sjudgment, including the assessment of the risks of material misstatement of thefinancial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the financial statements in order todesign audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness of the entity’sinternal control.
An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accounting estimates made bythe directors, as well as evaluating the overall presentation of the financialstatements.