Regulation on Minimum Requirements for External Audit of Microfinance Organizations in the Kyrgyz Republic

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Creation date: 2023-12-21

Approved

by the resolution of the Board of the National Bank of the Kyrgyz Republic of June 28, 2006 No. 19/4

REGULATION

on the minimum requirements for conducting external audits of microfinance organizations in the Kyrgyz Republic

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of April 25, 2012 No. 18/9, October 14, 2015 No. 62/2, June 15, 2017 No. 2017-P-12/25-12, August 15, 2018 No. 2018-P-33/33-8, September 28, 2021 No. 2021-P-33/53-10, December 21, 2022 No. 2022-P-12/81-7, December 8, 2023 No. 2023-P-12/76-1)

This Regulation "On the minimum requirements for conducting external audits of microfinance organizations in the Kyrgyz Republic" (hereinafter - the Regulation) is developed in accordance with the Laws of the Kyrgyz Republic "On Microfinance Organizations in the Kyrgyz Republic", "On Audit Activity" and "On Accounting" and establishes minimum requirements for conducting external audits of the annual financial statements of microfinance organizations, including those carrying out operations in accordance with Islamic principles of banking and financing, taking into account the specifics of the terminology used, and holding a certificate of the National Bank to conduct activities as a microfinance organization.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2)

1. Basic concepts used in this Regulation

1.1. External audit - an independent verification of the activities of a microfinance organization carried out on the basis of a contract between the microfinance organization and an external auditor, aimed at increasing the level of confidence of users in the reliability of financial statements in all their material aspects in accordance with international financial reporting standards and other information, and requirements established by the legislation of the Kyrgyz Republic.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of September 28, 2021 No. 2021-P-33/53-10)

1.2. External auditor - a person who is an individual auditor or an audit organization in accordance with the Law of the Kyrgyz Republic "On Audit Activity".

1.3. Independence of the external auditor - the ability of the external auditor to act independently, free from any influence on the results of his conclusions, opinions, and under conditions that exclude any external influence on the expression of opinion by the external auditor.

1.4. Officials - persons included in the governing bodies of a microfinance organization, as well as persons vested with powers and bearing responsibility for financial and credit operations.

1.5. Affiliated persons - the meaning is defined in paragraph 5 of Article 1 of the Law of the Kyrgyz Republic "On Microfinance Organizations in the Kyrgyz Republic".

2. Requirements for conducting external audits of microfinance companies

(Chapter lost force in accordance with the resolution of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2)

3. Rules for conducting external audits by microcredit companies and microcredit agencies

3.1. Microcredit companies and microcredit agencies (hereinafter - MCC/MCA) conduct external audits of their activities in accordance with the Law of the Kyrgyz Republic "On Microfinance Organizations in the Kyrgyz Republic".

MCA may conduct external audits of their activities.

MCC must conduct external audits of their activities on an annual basis if one of the following criteria is met:

• presence of borrowed funds from creditors, including from financial and credit organizations;
• the average annual value of the loan portfolio is 20 (twenty) million som and above;
• the number of borrowers is 5000 (five thousand) and above.

MCCs that do not have these criteria conduct external audits of their activities once every two years.

When conducting external audits, MCCs/MCAs must be guided by the requirements for audit activity established by the legislation of the Kyrgyz Republic, international audit standards, and this Regulation.

When conducting external audits of MCCs/MCAs carrying out operations in accordance with Islamic principles of banking and financing, Standards for Auditing Islamic Financial Institutions developed by the Accounting and Auditing Organization for Islamic Financial Institutions may be applied.

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2, June 15, 2017 No. 2017-P-12/25-12)

3.2. MCCs transforming into microfinance companies must conduct an independent external audit in accordance with the Regulation "On Minimum Requirements for External Audits of Banks and Other Financial and Credit Organizations Licensed by the National Bank of the Kyrgyz Republic", approved by the resolution of the Board of the National Bank of June 15, 2017 No. 2017-P-12/25-2-(NPA).

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2, June 15, 2017 No. 2017-P-12/25-12, September 28, 2021 No. 2021-P-33/53-10)

3.3. External audits of MCCs/MCAs are conducted by an audit organization or an individual auditor who has the right to conduct audit activities in accordance with the legislation of the Kyrgyz Republic.

3.4. Requirements for the external auditor:

• have a corresponding license/auditor certificate for the right to conduct audit activities on the territory of the Kyrgyz Republic;
• be independent, objective, avoid situations that give grounds to believe that a conflict of interest exists.

In the event that the external audit is conducted by an individual auditor, in addition to the above requirements, it is necessary to have three years of audit experience in financial and credit organizations in accordance with international audit standards and international financial reporting standards.

Staff or hired auditors of the audit organization selected for the audit of MCCs/MCAs must meet the following requirements:

• compliance with qualification requirements established by the authorized body in accordance with the legislation of the Kyrgyz Republic;
• presence of three years of audit experience in financial and credit organizations in accordance with international audit standards and international financial reporting standards.

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2, June 15, 2017 No. 2017-P-12/25-12)

3.5. MCCs/MCAs must develop procedures for interaction with the external auditor conducting the audit of the organization, including the procedure for selecting and approving the candidate for the external auditor, determining the scope and schedule of the audit, the procedure for providing documents, explanations, and confirmations requested by the external auditor and necessary for the audit, the procedure for interaction of officials and employees of the organization with the external auditor, and the procedure for providing the external auditor with an audit opinion and a letter to the management of MCCs/MCAs.

3.6. Within 10 working days after concluding a contract with an external auditor for the external audit of the annual financial statements of MCCs/MCAs, they must send information in writing to the National Bank about the choice of the external auditor, indicating:

• Full name of the individual auditor/name of the audit organization with the full name of the head;
• details of the license of the individual auditor/audit organization (license number, date of issue, validity period, issuing authority);
• legal address and telephone number of the individual auditor/audit organization.

In the event of a change of external auditor, MCCs/MCAs must report the reasons for the change of auditor to the National Bank (in Chuy region and the city of Bishkek - to the central apparatus, in other regions - to the regional departments of the National Bank) within 10 working days from the date of the decision.

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of April 25, 2012 No. 18/9, December 8, 2023 No. 2023-P-12/76-1)

3.7. The contract for the audit of the annual financial statements of MCCs/MCAs should reflect the purpose and scope of the audit, the period that will be studied during the audit, the reports that are planned to be prepared and the deadlines for their submission to the management of MCCs/MCAs.

3.8. The scope of the external audit of MCCs/MCAs includes the following main aspects:

• compliance of accounting and reflection of operations in financial statements with requirements established by the legislation of the Kyrgyz Republic;
• organization of microcredit activities: presence of credit policy; procedure for considering credit applications; proper maintenance of credit files (dossiers) of borrowers; monitoring of the condition and quality of assets; procedure for asset classification and assessment of the adequacy of reserves to cover potential losses and expenses;
• organization of internal control: procedure for making decisions on credit and financial operations; presence and compliance with regulations on structural subdivisions and job descriptions; control over the reflection of operations in accounting and preparation of reliable reports; control over the activities of branches and representative offices;
• compliance of internal procedures and policies with the legislation of the Kyrgyz Republic;
• compliance with the requirements of the legislation of the Kyrgyz Republic, including regulatory legal acts of the National Bank;
• assessment of the quality of risk management.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2)

3.9. Upon completion of the external audit, the external auditor provides the MCC/MCA with an audit opinion, formatted in accordance with the requirements established by the legislation of the Kyrgyz Republic and international audit standards, a letter to the management of MCCs/MCAs, recommendations that must be included in the audit program, as well as any reports stipulated in the contract for conducting the external audit.

The National Bank has the right not to accept the external auditor's opinion on the MCC/MCA and demand a repeat audit of the MCC/MCA with the involvement of another audit organization if circumstances are discovered that include:

• discovery of facts of concealing information that, in accordance with Article 11 of the Law of the Kyrgyz Republic "On Audit Activity", is a basis for conclusions on restrictions in conducting the audit;
• deprivation (revocation) of the qualification certificate/license of the external auditor by the authorized body;
• discovery in the activities of the external auditor of facts of non-compliance with the legislation of the Kyrgyz Republic and paragraph 3.4 of this Regulation.

Upon discovery of the above circumstances, the National Bank will send a corresponding requirement for conducting a repeat audit with established deadlines and reasoned reasons to the address of the MCC/MCA. The MCC/MCA is obliged to conduct a repeat external audit in accordance with the requirements of the legislation of the Kyrgyz Republic and this Regulation. The repeat audit is carried out at the expense of the funds of the MCC/MCA.

MCCs/MCAs are not entitled to attract an audit organization or auditors to conduct the audit of the next financial year if the previous audit opinion of this audit organization or auditor was not accepted or was recognized by the National Bank as not complying with the requirements of the legislation of the Kyrgyz Republic and/or international audit standards.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of December 21, 2022 No. 2022-P-12/81-7)

3.10. The letter to the management of MCCs/MCAs discloses significant deficiencies and non-compliance in accounting and financial statements of the organization, in the internal control system, in the organization of microcredit activities, in the management of MCCs/MCAs, violations of the legislation of the Kyrgyz Republic, as well as recommendations for correcting identified significant deficiencies and non-compliance.

3.11. Within 30 days from the moment of receipt of the external auditor's opinion, but no later than April 30 of the year following the reporting year (period), MCCs/MCAs must provide a copy of the audit opinion to the National Bank (in Chuy region and the city of Bishkek - to the central apparatus, in other regions - to the regional departments and representative office of the National Bank), certified by the external auditor in the established manner, together with the financial statements of MCCs/MCAs, including the letter to the management of MCCs/MCAs.

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2, December 8, 2023 No. 2023-P-12/76-1)

3.12. MCCs conducting external audits of their activities on an annual basis are obliged to publish reports in accordance with the regulatory legal acts of the National Bank on requirements for the formation, publication, and submission to the National Bank of the Kyrgyz Republic of financial statements of non-bank financial and credit organizations.

MCCs not specified in the first paragraph of this paragraph may publish annual financial statements in the media of republican and local significance after their confirmation by an external auditor, unless otherwise provided by the legislation of the Kyrgyz Republic.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of September 28, 2021 No. 2021-P-33/53-10)

3.13. Publication of MCA reports with the participation of state bodies or having subsidiary (dependent) legal entities that carry out credit and financial activities is carried out in accordance with the regulatory legal acts of the National Bank on requirements for the formation, publication, and submission to the National Bank of financial statements of non-bank financial and credit organizations of the Kyrgyz Republic.

MCAs not specified in the first paragraph of this paragraph may publish annual financial statements in the media of republican and local significance after their confirmation by an external auditor, unless otherwise provided by the legislation of the Kyrgyz Republic.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of September 28, 2021 No. 2021-P-33/53-10)

Note:

(Lost force in accordance with the resolution of the Board of the National Bank of the Kyrgyz Republic of October 14, 2015 No. 62/2)

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