Central Bank of Libya Circular 1/2023: Guide to Audit Procedures for Banks Operating in Libya

Central Bank of Libya P.O. Box 1183 Telegram: Misrata - Tripoli - Libya Subscription: R.M / N 804 Circular No.: A.R.M.N (2023/ 1) Date: 06 Jumuada al-Akhir 1444 AH Corresponding to: 2023/01/01

To: Presidents of Bank Boards of Directors

Subject: "Guide to Audit Procedures for Final Accounts of Banks Operating in Libya"

Greetings...

Based on the provisions of Law No. (1) of 2005 concerning Banks and its amendments, and on the supervisory and regulatory role exercised by the Central Bank of Libya over banks operating in Libya in accordance with the provisions of the Law.

And within the framework of the Central Bank of Libya's commitment to the stability and safety of the financial conditions of the banking sector, and given the importance of the external auditor in achieving this essentially through reviewing the validity and credibility of financial data, and for the important role it plays in limiting risks and protecting the funds of depositors, investors, and dealers with banks.

And with reference to the decision of the Board of Directors of the Central Bank of Libya No. (15) of 2010, issued on 2010/04/19, regarding the conditions for registering legal accounting and audit offices, and the controls organizing their work, which was replaced by the periodic letter No. A.R.M.N (2010/112) issued on 2010/05/27.

And with reference to Circular A.R.M.N No. (2007/9) regarding the presentation of final accounts and the auditors' report to the Banking and Currency Supervision Department before presenting them to the General Assembly of the Bank.

And since we entrust to you the Guide to Audit Procedures for Final Accounts of Banks Operating in Libya, you are requested to fully comply with what is contained therein and put it into implementation.

Peace, mercy of God, and blessings be upon you...

Naji Muhammad Issa Director of Banking and Currency Supervision Department

Copy to: Mr. Governor Copy to: Mr. Deputy Director of Banking and Currency Supervision Department Copy to: Mr. Deputy Director of Banking and Currency Supervision Department and Large Deposit and Input Line Copy to: Mr. Deputy Director of Banking and Currency Supervision Department and Depositable Deposit Copy to: Mr. Deputy Director of Banking and Currency Supervision Department and Islamic Banking Copy to: Banking Supervision in Benghazi 2023 M. Al-Raish

www.cbl.gov.ly , swift code:CBLJLYLX , +218 21 444 1488 Fax , +218 21 333 3591 Phone

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Banking and Currency Supervision Department Central Bank of Libya CENTRAL BANK OF LIBYA

Guide to Audit Procedures for Final Accounts of Banks Operating in Libya

Banking and Currency Supervision Department

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Banking and Currency Supervision Department Contents

Page	Paragraph
3	1- Introduction
4	2- Mechanism for selecting and appointing the external auditor in banks
6	3- Standards required in the external auditor
7	4- Duties of the external auditor towards the Central Bank of Libya
10	5- Tasks and responsibilities of the audit committee within the work of the external auditor

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Banking and Currency Supervision Department Introduction:

Given the importance and safety of the stability of financial conditions, and the management of the Libyan banking sector, in which the importance of the role of the external auditor is reflected essentially in facilitating the effective performance of the supervisory authority's role based on accounts that have been reviewed properly, characterized by transparency and clarity, and based on the latest recognized international standards and guides. The role of the external auditor is also considered one of the basic pillars for strengthening and enhancing institutional governance, given its important role in activating risk management and protecting the funds of depositors, shareholders, and traders with banks.

And within the framework of the Central Bank of Libya's efforts to maintain the stability and safety of the financial conditions of banks in Libya and enhance the vital role of external auditors in confirming the validity and credibility of financial data and deepening aspects of trust in the banking sector.

And based on Law No. (1) of 2005 concerning Banks and its amendments (excerpt of Article (83), which states in the first paragraph "That all entities subject to the supervision and oversight of the Central Bank of Libya must entrust their accounts annually to legal auditors selected by the General Assembly of the Bank, from among the engineers registered in the special register maintained by the Central Bank of Libya, for a period of two years, renewable once only, and only after approval by the Governor."

Where the external auditors, who have been approved and mentioned in the previous paragraph, are required to do the following:

• Prepare a report on the bank's annual financial statements, including the means followed to verify the existence of assets and methods of valuation, how existing liabilities are estimated, and the extent to which the operations reviewed by each of them comply with the provisions of the Law.
• Each external auditor must submit financial reports separately from the other auditor.
• Prepare a semi-annual report on the bank's financial and administrative performance and its compliance with local and international banking standards.
• Send a copy of the two reports mentioned in the previous paragraph to the Central Bank of Libya.
• And based on Article (56) of Law No. 1 of 2005, paragraph second - 1, and in compliance with the disclosure requirements specified in international accounting standards and international reporting standards, and allowing with the requirements of the banks' articles of association as well as Circular A.R.M.N No. (2010/13) issued on 2010/09/29 regarding the guide.

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Banking and Currency Supervision Department

First: Mechanism for selecting and appointing the external auditor in banks

With due regard to the prevailing legislation related thereto, the external auditor for auditing the final accounts of the bank is nominated and appointed according to the following mechanism:

-1- The bank management shall inquire about legal auditors to audit the final accounts of the bank.

-2- The bank management shall prepare a report and refer it to the Audit Committee emanating from the Board of Directors, which includes a table of offers submitted by auditors to the bank management.

-3- The external auditor must hold a valid license to practice the audit profession issued by the Accountants Syndicate and be registered in the register of certified public accountants at the Central Bank of Libya.

-4- Must hold one of the professional certifications in the field of accounting and international auditing from one of the professional associations of certified public accountants recognized internationally in case of using international audit standards.

-5- Auditors must submit their proposals covered by the resume and necessary data, especially scientific and practical experience in the banking sector, to evaluate the audit, as well as their names and titles include:

a- Information about the branches of the audit firm or audit offices, and the number of professionals in them.

b- The number of professional hours for each member of the audit team.

c- The work plan related to preparing and submitting the audit report and financial data.

d- Fees and the basis for their calculation.

e- Other categories for the company or office other than accounting audit capabilities such as banking operations and management consulting.

f- The existence of a specialized team in electronic audit in the company or office with the ability to conduct electronic audit.

g- No conflict of interest or work relationships, if any, between the companies or offices or any of the members of the audit team and the bank or members of the Board of Directors or the executive management of the bank.

-6- The bank's audit committee, when selecting the external auditor's office, shall study all submitted offers, verify that the companies or offices meet the standards contained in these instructions, and direct the bank's board of directors to the best offer in terms of professional competence and quality of the audit process and fees.

-7- The audit committee must consider the proposed fees in light of the size of the work required, the size of the bank, and the risks and complexity of its operations. In all cases, the proposed fees must not be the main factor in the selection of the auditor. In case a reduction in audit fees is offered either by the bank or by the company or office, it must not lead to a reduction in the scope of the audit or a reduction in the level of audit quality for all bank activities and the resulting risks, and risks of material errors and the level of materiality.

-8- The bank's board of directors must inform the Central Bank of Libya in writing of the name of the external auditor's office nominated within a week of taking the nomination decision, and before the beginning of the financial year to be audited. The nomination decision must be issued at least thirty days before the date of the ordinary general assembly meeting. The bank's letter must include detailed information about the audit office and the members of the audit team, stating the value of the fees to be paid to the external auditor, and the bases on which this office was selected and its fees determined.

-9- The Central Bank of Libya has the right to object to the external auditor nominated if the requirements contained in these instructions are not met, or if it becomes apparent that there are established practices or errors that materially affect its reputation.

-10- With due regard to what is stated in the guide, the external auditor is appointed to audit the bank's accounts for a maximum of two financial years, renewable once. The appointment decision is not effective until approved by the Governor.

-11- The bank may appoint the same external auditor to audit the bank's accounts and its external participation, and its subsidiaries inside and outside Libya, provided this does not conflict with the prevailing legislation of the state where the branch or subsidiary operates, or if this is not possible, the Central Bank of Libya must be informed thereof immediately upon taking the appointment decision.

-12- If the bank delays in appointing an external auditor for a maximum of four months from the beginning of the financial year, the Central Bank of Libya may appoint an external auditor to audit the bank's accounts for fees determined by the Central Bank of Libya at the bank's expense.

-13- If the Central Bank of Libya deems it necessary to appoint an external auditor to audit and examine the bank's accounts, in addition to the external auditor appointed by the General Assembly of the Bank in accordance with the provisions of these instructions, the Central Bank of Libya shall determine the task entrusted to this external auditor, the duration of his work, and the value of the fees he will receive from the bank.

Banking and Currency Supervision Department

Second: Standards required in the external auditor

The external auditor is subject to standards that enable him to perform his tasks, which are as follows:

1- General Standards a- The external auditor must have the scientific and practical qualification and competence to perform the audit task. b- The external auditor must maintain independence in all matters related to the audit, and must perform any matter neutrally regarding the bank's operations.

2- Fieldwork Standards: a- The external auditor must plan the work appropriately and must supervise the members of the audit team correctly. b- The external auditor must study and present the internal control system, and evaluate the risks of material misstatement in the financial statements. c- The external auditor must obtain appropriate and sufficient evidence by performing audit procedures to provide a reasonable basis for the opinion on the financial statements.

4- Reporting Standards: a- The external auditor must state in his report whether the financial statements are presented in accordance with generally accepted accounting principles. b- The external auditor must specify in his report whether these principles have been applied consistently during the previous period. c- The external auditor must state that the financial statements adequately express the information they contain (appropriate disclosure), and any deviation must be mentioned if found. d- The external auditor must express an opinion on the financial statements as a whole, and must refrain from expressing an opinion if he is unable to do so due to a reservation on one of the financial items in the contractual accounts.

5- Responsibilities of the external auditor. The external auditor of the bank will be responsible to the following parties:

• The Central Bank of Libya
• The bank's Board of Directors
• Shareholders
• Depositors

He must provide a fair and updated opinion on whether the financial statements prepared by the bank's management truly and clearly express the financial position of the bank.

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Banking and Currency Supervision Department

Third: Duties of the external auditor towards the Central Bank of Libya

With due regard to the provisions of the Banking Law and the systems and instructions issued pursuant thereto, the external auditor is required to do the following:

1- Provide the Central Bank of Libya with copies of: a- A report stating his opinion on the annual and interim (semi-annual) financial statements reviewed in accordance with international audit standards, as well as their compatibility with local legislation related thereto, in addition to the standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions, for Islamic banks, at the level of bank branches and the bank. b- Any reports submitted by the bank's legal auditor within the framework of the audit task assigned to him, including notes on the results of the examination and audit of the bank's accounts and its subsidiaries, and the bank's response thereto, within thirty days from the date of submission. c- Any additional information or data requested by the Central Bank of Libya regarding the bank's status, falling within the scope of the audit work.

2- Inform the Central Bank of Libya immediately upon learning of: a- Any issues with a material negative impact on the bank's financial and administrative status, or any legal violations committed by members of the bank's Board of Directors or the Board of Directors of any of its subsidiaries, or any executive management, or upon learning of illegal operations in any of them, including operations suspected of money laundering, terrorist financing, or any operations expected to cause material loss to the bank or its subsidiaries. b- Any other issues that materially affect the bank's status, such as:

• Any material violations of the bank's founding contract, its articles of association, or its internal policy.
• Significant deficiencies in internal control operations.
• Strong doubts about the bank's ability to continue.
• Material negative changes in actual or potential risks that the bank may be exposed to.

3- External auditors of banks, in addition to the approved audit work they perform, must provide the Central Bank of Libya with the following: a- The external auditor must provide the Central Bank of Libya with all notes submitted to the bank, whether they have been responded to by the bank's management or not.

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Banking and Currency Supervision Department

-b- A report on violations and deviations from the laws and instructions organizing banking work, and the extent to which the bank adheres to the accepted accounting rules and the Central Bank of Libya's instructions, primarily regarding the following:

• Credit concentrations and the extent to which the bank complies with the individual limits for credit facility risks.
• Dealing with related parties (Board members - related institutions - major shareholders - units affiliated with the bank).
• Exposure to risks of all kinds.
• The accuracy of the bank's calculation of the capital adequacy ratio and liquidity ratio, and ensuring that it was calculated in accordance with the instructions issued by the Central Bank of Libya.

-4- A special report on the classification of debts, with the necessity of clearly expressing an opinion on the sufficiency or insufficiency of provisions for classified debts, and that they were prepared according to the instructions and circulars of the Central Bank of Libya, with an estimate of the provisions that must be formed if necessary.

-5- A report on the extent to which the bank adheres to forming provisions for some balances that require provisions, including by way of example:

• Provisions for foreign currency price declines.
• Provisions for claims raised against the bank.
• Provisions for treasury and cashier shortages and breach of trust.
• Any other provisions that the auditor deems necessary to form.

-6- A report on the extent to which the bank adheres to control systems, the external auditor's opinion and recommendation, and management's view on weakness points.

-7- A report on the extent to which the bank adheres to the anti-money laundering and counter-terrorist financing system.

-8- A report on banking financial operations by electronic means and what problems face those operations, if any.

-9- The external auditor must verify the following: -a- Verification of the bank's debit and credit account balances between the headquarters and its branches, and that claims (reconciliations) do not show any pending amounts. In case pending amounts appear, they must be reflected in the balance sheet and profit and loss account, and their impact on the final results on the bank's financial statements must be stated. -b- Verification of the validity of the bank's account balances with its correspondents, and that claims (reconciliations) do not show any pending amounts. In case there are pending amounts, they must be presented and measured in currency valuation and contractual accounts. c- Verification of the bank's account balances with other banks, whether they are liquid, free funds, and not subject to any commitments, and that claims do not show any pending amounts. It is necessary to indicate the size of restricted balances held at any bank, clarify the purpose of linking them and renewing them, as well as any pending amounts. -d- Verification that the bank's temporary account balances do not include any long-pending items or any unnatural items that hide the bank's exposure to risks that result in losses to the bank. e- Verification of the validity of calculating returns, profits, and investments, and that returns are not pending for a long period due to weak follow-up of their collection, which results in a decrease in the volume of revenues. f- Verification of the validity of off-balance sheet (contingent) liability balances, that they do not include any long-pending items or any unnatural items that hide the bank's exposure to risks that result in losses to the bank. g- Verification that the bank has not carried out creative accounting operations.

-10- External auditors must inform the Central Bank of Libya immediately about: -a- Any obstacles or pressures they face during the performance of their duties. b- Any violations that require immediate reporting in accordance with laws, systems, circulars, and periodic letters, and those that the external auditor believes that his financial duty imposes on him to inform the Central Bank of Libya about them as quickly as possible.

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Banking and Currency Supervision Department

Fourth: Tasks and responsibilities of the audit committee within the work of the external auditor

Without prejudice to the prevailing legislation related thereto, and within the framework of external audit, the audit committee in the bank performs the following tasks and responsibilities:

1- Ensure that the external auditor's offer covers the scope of work stipulated, in accordance with the provisions of Law No. (1) of 2005 concerning Banks and its amendments, and the instructions issued pursuant thereto, and related legislation, international and Islamic audit standards, and professional conduct standards.

2- Nominate the external auditor to the Board of Directors and recommend its fees, according to what has been agreed upon.

3- Follow up the work of the external auditor's office during the execution of the audit task and do the following: a- Monitor the effectiveness of the external auditor at all stages of the audit task by evaluating the adequacy and sufficiency of both audit methods, the level of materiality, and the material risks to be focused on, which have a potential impact on the financial status and result calculation for the bank. b- Verify the independence of the external audit office and team during the duration of the audit task. c- In case the external audit office is not assigned additional services outside the scope of account auditing, the audit committee is distinguished to study that and its impact on the independence of the audit office's work and provide the necessary recommendation to the bank's board of directors, with disclosure of these services in the bank's annual report. d- Verify the commitment of the audit office to the scope and work plan for the audit task and the reasons that led to any changes or deviations from it. e- Seek satisfaction by interviewing bank employees who have a connection with the audit process regarding the performance of the audit team. f- Follow up the extent to which the external auditor complies with submitting the required reports within their specified deadlines.

4- Reports related to the audit task: The audit committee must request the auditor to provide it with the following as a minimum: a- A report stating his opinion on the annual and quarterly financial statements, if any, prepared in accordance with international audit standards, and their compatibility with local legislation related thereto, international financial reporting standards, in addition to the standards issued by the Islamic Financial Accounting and Auditing Body for Islamic banks. b- A certificate stating the adequacy of provisions for depreciation of records, investments, and potential liabilities, and the extent to which the bank needs any other provisions, the accuracy of calculating returns and profits, the adequacy of general banking risk reserves, and any shortage in provisions in accordance with the relevant central bank instructions, and the requirements and international financial reporting standards in case of application, as well as the validity of calculating depreciation in the value of shares (if any).

5- Reports on some important matters, if any, such as: a- Obstacles faced by the audit team during the audit task, and the extent of cooperation of the executive management and supervisory departments with the audit team and their response to its requests. b- Material deviations by the executive management from authorities, or delegations granted to it, if any. c- Clarifications in financial reports that need improvement. d- Any other reports related to the audit task.

6- Invite the external auditor to attend audit committee meetings related to audit work (except meetings related to discussing the evaluation of the external auditor's effectiveness), and facilitate his attendance at other committee meetings related to audit work, if the audit committee deems it necessary.

7- Meet with the external auditor (without the presence of executive management) to discuss pending matters, issues arising between the bank's management and the audit team, and any other matters that concern the committee and help it perform its tasks.

The result ...

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