AuditFocusfor2025year-endauditsFinancialServicesSector

Inspection3October2025

AbouttheAccountingandFinancialReportingCouncil

TheAccountingandFinancialReportingCouncil(AFRC)isanindependentbodyestablishedundertheAccountingandFinancialReportingCouncilOrdinance.Asanindependentregulator,theAFRCleadstheaccountingprofessionbyupholdingprofessionalstandards,safeguardingthepublicinterest,andpromotingtheprofession’shealthydevelopment.

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Introduction

Importanceofthefinancialservicessectorandqualityaudits

Thefinancialservices(FS)sectorisoneofHongKong’skeypillarindustries,contributingto24.9%ofGrossDomesticProductin2023andreinforcingHongKong'spositionasaleadinginternationalfinancialcentre.Thissectorconsistsofvarioussub-sectors,includingBanking,Insurance,AssetandWealthManagementandBroker-dealers1Theyplayacriticalroleinfacilitatingcapitalflows,managingrisks,andprovidinginvestmentopportunities.Indoingso,theysupporteconomicgrowth,employment,fosterinvestorconfidence,andcontributetofinancialstability.

High-qualityauditsarethefoundationuponwhichtrustinfinancialreportingisbuilt.Theyenhancethereliabilityoffinancialstatementsandregulatorydisclosures,strengthenaccountability,andsafeguardthepublicinterest.IntheFSsector,theseresponsibilitiescarryaddedsignificance:thescale,complexity,andsystemicimportanceoffinancialinstitutionsdemandheightenedprofessionalscepticism,judgement,anddeeptechnicalexpertisetoeffectivelyaddresssector-specificrisks.

Marketandmacroeconomicdevelopments

Asauditorsheadintotheir2025year-endaudits,theyfaceanincreasinglycomplexlandscapeasmarketvolatility,fluctuatinginterestandexchangerates,andongoinggeopoliticaluncertaintiesandregulatoryshiftsarecreatinguncertaintiesforallkinds,includingfinancialinstitutions.Againstthisbackdrop,liquiditypressures,heightenedcreditrisk,valuationuncertainty,andtherapidgrowthofalternativeinvestmentsareincreasingtherisksofmaterialmisstatements—whetherduetoerrororfraud.

Purposeofthispublication

MarkettrendsandmacroeconomicdevelopmentvaryacrosstheFSsub-sectors.Drawingonourinspectionexperience,Section2ofthispublicationhighlightssector-specificrisksandauditconsiderationsrelevanttothe2025environment.

Auditingfinancialinstitutionspresentsuniquechallengesduetothecomplexityandscaleofthebusinessesinvolved,aswellasthespecialisedexpertiserequired.Inthisregard,firmsintendingtoprovideauditservicestosuchentitiesshouldcriticallyassesstheircompetenceandcapabilitiestodeliverhigh-qualityauditsbeforeacceptingaclientoranengagement.Section3ofthispublicationoutlinesconsiderationsforfirmstogaugetheirreadinesstoundertakeFSauditandassuranceengagementsandprovideguidanceonmeetingthehighexpectationsassociatedwiththissector.

RecognisingthesignificanceoftheseentitiestotheHongKongeconomy,theAFRCwillcontinuetoplaceastrongfocusonthissectortopromoteauditqualityandsafeguardtheinvestingpublic.

1AssetandWealthManagementsub-sectorsincludecollectiveinvestmentschemesinvariousforms,suchasfundsandretirementschemes(MPFschemes/ORSOschemes).Broker-dealerssub-sectorincludeslicensedcorporationsregulatedbytheSFCandinsurancebrokercompaniesregulatedbytheIA.

Tableofcontents

Page

Section1Keymacroeconomicandmarketdevelopment1

Section2Industry-specificfocusareas2

I.Banking3

II.Insurance4

III.Assetandwealthmanagement5

IV.Broker-dealers6

Section3Firm-specifickeyconsiderations7

I.CompetenceandcapabilitiesinspecificFSsectors7

II.Understandthebusiness,industry,andregulatoryenvironment8

III.Testofinternalcontrols8

IV.Accountingestimatesanduseofauditor’sexperts9

V.Regulatoryreporting9

Glossary10

Section1

1

Section1

Keymacroeconomicandmarketdevelopment

Challengingmarketandeconomicconditionscreateanenvironmentwherecompaniesmayexperienceextendedfinancialpressures,increasingtheirsusceptibilitytomanagementbiasorfraud.Thissectionhighlightskeyfactorsthatcanconsiderablyimpactfinancialinstitutions.

Geopoliticalandeconomicuncertainties

Ongoinggeopoliticalandeconomicuncertaintiesnotonlyshapebusinessandmarketsentimentofretailandinstitutionalcustomers,butalsodirectlyimpactfinancialinstitutionsthemselves,influencingcapitalflows,cross-borderinvestmentactivities,marketvolatility,andelevatingcredit,liquidity,andoperationalrisks.

Volatilityininterestratesandexchangerates

Volatilityininterestandexchangeratesposeschallengesforbanksandinsurersinmanagingbalancesheetexposures,aswellasforfundsandbroker-dealersinmaintainingstablereturns.InHongKong,thelinkedexchangeratesystemanchorsstability,however,continuedshiftsinUSmonetarypolicyexertssignificantpressureonfundingcostsandexchangeratemovements.

Liquiditypressures

Liquidityremainsakeyconcerndespitethegeneraldeclineininterestrates.The1-monthHIBOR,whichstoodat4.2%atthestartof2025,haseasedtoaround3.6%attheendofQ3

2025.Whilethisrepresentssomerelief,ratesremainelevated,andinstitutionsmustcarefullymanagethecostoffinancingandmaintainadequateliquiditybufferstomitigatepotentialstressontheirfundingandsolvencypositions.

Persistentheadwindsintheretailandrealestatesectors

HongKong’sretailsectorfacesweakdomesticconsumptionandashifttoonlineshopping,withprovisionaltotalretailsalesvaluesdown2.6%year-on-yearforthefirstsevenmonthsof2025.Thepropertymarkethasalsosoftened,withtheprovisionalpriceindicesforprivateofficesandretaildecreasingby9.1%and7.3%sinceDecember2024.Persistentsoftdemand,highinterestrates,anddeveloperleveragepressuresheightenrisksforfinancialinstitutions.Banksareexposedthroughloanbooks,insurersthroughinvestmentportfolios,andfundsthroughdirectholdings,raisingbroadercreditandmarketrisksconcernsacrossthefinancialecosystem.

Marketsentimentofalternativeinvestments

Growinginterestsinvirtualassetsandstablecoinsintroducesbothopportunitiesandrisksforfinancialinstitutions.Whileregulatorshaveadvancedframeworksforcustody,licensing,andinvestorprotection,concernsaroundvolatility,systemicexposure,andriskmanagementremainsignificant,particularlyforfundsandbroker-dealersengagingtheseproducts.

Section2

2

Section2

Industry-specificfocusareas

Thissectionoutlinesthekeyfocusareasforthefinancialservicessectorin

2025.Auditorsshouldpayparticularattentiontotherisksandconsiderationshighlighted1astheseareamplifiedbycurrentmarket1macroeconomic1andregulatorydevelopments.

Inperformingriskassessmentsfor2025audits,auditorsshouldevaluatehowevolvingconditionsmayinfluencefinancialreportingandcontrolenvironments.Keyconsiderationsinclude,butarenotlimitedto:thebroaderbusinessandregulatoryenvironmentanditsimpactonoperationsandperformance;management’sincentivesandpressuresthatmayaffectjudgements;areasinvolvingsignificantaccountingestimates;andtheimplicationsofthesefactorsforthedesignoftheauditapproach.

Businessandregulatoryenvironment

Considerrecentchangesintheclient’sbusinessanditsenvironment,includingbutnotlimitedto:·Businessperformanceandstrategy

·Newbusinessmodel/newproductofferings

·Changesinregulations

·ITsystemchanges/implementation/migration/integration

Management’sincentive

Considermanagementincentivesinfraudriskassessment,inparticular,potentialchangesduetomarketandregulatorydevelopment:

·KPIsoftheentity/management

·Howchangesinbusinessenvironmentmayimpacttheirincentives·Fraudriskindicators

Areasinvolvingsignificantaccountingestimates

Inherentrisksofsignificantaccountingestimatescanbeelevatedduetochangesinanentity’sbusiness,anditsbusinessenvironment.Auditorsshoulddulyconsider:

·Governanceandcontrolsinsignificantaccountingestimates

·Magnitudeofpotentialmisstatementsarisingfromestimationuncertainties

·Whetheractualresultsdeviatefromtheauditor’sindependentexpectationormarketpractice

Designanappropriateauditapproach

Takingtheaboveandotherimplicationsintoaccount,designanappropriateauditapproachthat:

·Adequatelyrespondtotherisksidentified,includingfraudrisks

·Sufficientlyandappropriatelyevaluatemanagementjudgementandaccounting

estimationsconsideredtohaveahigherdegreeofestimationuncertainty

Consideringtheimplicationsoftheabovefactors,auditorsshouldplaceparticularattentiontothefollowingkeyareasoffocusesforeachFSsub-sector.

3

Section2

I.Banking

Recoverabilityofloansandadvancestocustomers

Achallengingmacroeconomicenvironmentmayweakenborrowers’repaymentcapacityanddrivedeclinesincollateralvalues,increasinguncertaintyaroundassetrecoverability.Industriessuchasrealestateandretailarefacingheightenedchallengesanddifficulties,andforward-lookingassumptionsinvolvegreateruncertaintyundercurrentmacroeconomicconditions.ThesefactorsheightentheauditrisksassociatedwithExpectedCreditLosses(ECL)andreinforceitssignificanceasakeyauditfocusareain2025.

ECLmodel

Appropriatenessofmethodologyandmodel

EvaluationoftheECLmethodologyandmodeltypicallyrequiresexpertiseincreditrisk.Inparticular,thesegmentationoftheloanportfolio,themethodologiesappliedforPDandLGDmodelingamidevolvingcreditbehaviours,andtheheightenedchallengesinidentifyingrelevantmacroeconomicvariablesarisingfromshiftingcorrelationsbetweenthemacroeconomicenvironmentandthebank’screditexposures.

Appropriatenessofkeyassumptions

Giventheheighteneduncertaintyinthemacroeconomicoutlookandits

correlationwiththebank’sloanportfolio,auditorsshouldcriticallyevaluate:

·Theselectionofmacroeconomicvariablesandtheirrespectiveweighting·Theprobabilityweightingsassignedtoforward-lookingscenarios

Credit

review

Comprehensivenessintheidentificationofriskfactorsincreditreview

Identifyborrowerswithlessfavourableprospects,consideringbothborrowers’behavioursandexternalmarketinformation,amongothercriteria:

·Overduerepaymentandotherindicatorssignalingborrowers’financialdifficultiesorfinancialdistress

·Industries/sectorswithunfavourableoutlook

·Negativenews,forexample,downgradeofcreditagencies’rating

Appropriatenessofstagingapplication

Amidthechallengingeconomicenvironment,quantitativefactorsaloneareinsufficienttodeterminetheappropriatenessofstaging.Auditorsshould:

·Evaluatebothquantitativeandqualitativefactors,includingwhetherthecriteriaforSICRaremet

ValidatetheappropriatenessandassignmentofICR,takingintoaccounttheHKFRS9accountingframeworkandrelevantHKMAguidanceandmanuals

Reasonablenessofcashflowanalysis

Forcredit-impairedloans,recoveryistypicallythroughassetrealisationorborrowerrestructuring,bothofwhichrequiredetailedcashflowanalysis:

Q、

·Assessprobabilityofadoptedassetrecoveryscenarios

·Evaluatethetimingandsourceofexpectedcashflows

·Evaluatethereasonablenessofcollateralvaluation,consideringmarketinformation,FSVunderdistressedconditions,anddisposalcosts

Section24

II.Insurance

Valuationofinsurancecontractliabilities

Whiletheinsurancesectorhasremainedresilientamidrecentmarketvolatility,ongoingchangesinareassuchasunderwritingandclaimsmanagement,productofferings,andregulatoryrequirementswarrantauditors’attentioninauditsandregulatoryreportingfor2025.

Reservingmodel

Appropriatenessofmethodologyandmodel

Auditorstypicallyengageactuariesastheirexpertstoevaluatemethodologiesandmodelsinestimatinginsurancecontractsliabilities.Particularemphasisshouldbeplacedonthefollowingforthe2025audits:

Changesinmethodologyandmodel,whichcouldarisefrom:

·ImplementationofGL34,particularlyregardingsurplusdistributionmechanismsanddividendpolicies

·Neworrevisedreinsurancearrangements,reflectingthegrowingimportanceofriskmanagementunderHKRBC

·Introductionofnewproducts,suchasIULinthelifeinsurancemarket

·RevisionstoSAAdrivenbyinvestmentstrategyandportfoliomanagement

Relevance,appropriatenessandaccuracyofkeydata

Ensurethekeydata(e.g.,claims,lapse,investmentreturn)usedinassumption-settingadequatelyreflectbothpotentialmacroeconomicdevelopmentandentity-specificclaimsexperiencein2025,takingintoaccounthowthecurrenteconomicconditionsmaychangecustomerbehaviourandclaimsexperience.

Appropriatenessofkeyassumptions

Considertheneedforanauditor’sexpertinreviewingkeyassumptions.Forexample:

·Persistencyassumption:monitorandevaluatetheimpactofthewidereconomyonpolicyholderbehaviours(e.g.lapseandsurrenders)intheexperiencestudyandassumption-setting

ChallengemanagementforpossiblebiasintheprojectionofFCFandCSM(e.g.

futuremanagementactions,calibrationofLTIRandilliquiditypremium)

Challengemanagementonassumptionswhichdeviatefromexperiencestudyormarket-consistentpractice,payingadditionalattentiontofutureexpectationsonclaims,premiumrates,andinvestmentreturns

CompliancewithHKRBCregulatoryrequirements

AppropriatenessofvaluationmethodologyoncompliancewithregulatoryrequirementsandevaluatetheimpactofdifferencesbetweenHKFRS17andHKRBCreportingbases.

ValuationofTechnicalReservesandPCA,including:

·CompliancewithIA’sprescribedassumptionsandriskfactors

·Portfoliolook-through:Identificationandclassificationofunderlyingrisks·DeterminationofMatchingAdjustments(MA)

Section25

III.Assetandwealthmanagement

Valuationofinvestments

Interestandexchangeratesvolatility,andthegrowthofvirtualassetsheightenvaluationrisks.Realestateheadwindsandweakmarketsentimentleaveilliquidassetsespeciallyexposed,thusappropriatenessofvaluationmethodologiesandassumptionsisakeyauditfocus.

Valuationmodel

Appropriatenessofmethodologyandmodel

Marketdevelopmentsin2025amplifyestimationrisk,particularlyformodelsusedtovalueilliquidassetsorthosesensitivetomacroeconomicfactors,suchasinvestmentsinrealestate,privateequity,orprivatecreditinindustriesexperiencingdownturns.Theseconditionsincreaseestimationuncertainty,highlightingtheneedforspecialisedexpertise,andfirmsshouldensuretheyhaveadequateresourcestosupportthereasonablenessofmethodologiesandmodels.

Appropriatenessofkeyassumptions

Considertheneedofvaluationexpertinassessing:

·Choiceofcomparablecompanies/transactions

·Keyassumptions,includingdiscountrates,DLOM,growthratesandcashflowsRecenttransactionconsiderations:

·Considerifatransactionofthesameinvestmentindicatesthefairvalue

·Assessproximityoftransactiondateandwhetheritreflectsfairvalueatperiod-end

Feeallocation

Amidthecurrenteconomicuncertainty,managementmayfacepressuretoreducecosts,whichcouldincentiviseshiftingexcessiveexpensesontothefundsandinvestorsasmanagementfees.

Managementfees

Comprehensivenessinidentificationoffeestructure

Fundfeestructures,assetoutinvariousagreementsordocuments,directlyaffectinvestorcostsandmaycreateincentivesforcost-shifting.Engagementteamshouldensureallfeearrangementsareidentifiedandassesstheirimplicationsbyreviewing:

·Limitedpartnershipagreement,fundofferingdocuments,sidelettersandspecialarrangements

·Advisory/servicecontracts

Appropriatenessoffees

·Performriskassessmentwhereincentivesforoverchargingfeesarehigheranddesignappropriateauditresponses

·Identifydifferencesinfeestructurethatmayexistindifferentfundclasses

Retirementschemes-regulatoryupdates

AppropriatenessofFundExpenseRatio(FER)

TheeMPFplatformbecameeffectiveinJune2024,withoneofitsobjectivestocreateroomforMPFfeereductions.Consequently,theFERmustbedisclosedintheauditedfinancialstatementsofMPFschemesonboardedtoeMPF.AuditorsshouldthoroughlyunderstandtheregulatoryrequirementsanddesignappropriateprocedurestoensureFERaccuracy.

IV.Broker-dealers

Section26

盤

Revenuerecognition

TherecoveryinIPOsandthestockmarketsisexpectedtoincreaseplacingactivitiesandbrokingvolumesbylicensedcorporations.Auditorsshouldassessitspotentialimpactonrevenuerecognitionandensurerelatedinternalcontrolsovertransactionrecordingareoperatingeffectively.

Placingservices

Appropriatenessofrevenuerecognition

Evaluatewhethertheentityisaprincipaloragent

Obtaincontractsandevaluatewhetherperformanceobligationshavebeenfulfilledinrecognisingrevenue:

·Considercommitmentvsbest-effortbasis

·Assesshomogeneityofrevenuecontractsforauditsampling,giventhediversityofissuersandtheirspecificperformanceobligations

UseofIT

AdequacyofITdependencies

Giventhehightransactionvolumesandthewidespreaduseofweb-basedandmobileapplicationsforbrokingservices,auditorsshouldcriticallyevaluateITdependenciesforauditandassurancereporting:

Volumeoftransactions

·Thehigherthevolume,themoreunlikelythatanauditapproachwithoutrelianceonITcanprovidesufficientappropriateauditevidence

ExtentofdigitalchannelsmayindicatetheneedsofITdependencies

·Distributionchannelssuchaswebsitesandmobileapplicationswithfinancialreportingimpactshouldbethoroughlyassessed

Virtualassetsandrelatedactivities

Withthegrowthoflicensedvirtualassettradingplatforms(VATPs)andtheintroductionofthestablecoinregime,VA-relatedactivitiesareexpectedtogrow.Auditorsshouldcarefullyassessandevaluatetheassociatedrisksintheseengagements.

Assessmentoncompetenceandcapabilities

VATPrelatedactivities

GiventhecomplexityandrapidevolutionofVA-relatedactivities,auditsinthissectorrequirehighlyspecialisedexpertise,supportedbyappropriateaudittoolsandprograms,toeffectivelyaddresstheuniquerisksinherentinsuchbusinesses.

·AvailabilityofVAandITspecialistswithrelevantexperiencesandqualifications

·Availabilityofspecialisedaudittoolsandauditprograms

·Assessmentofthereliabilityofthird-partyblockchainexplorers

The2024AuditFocus,issuedinOctober2024,andtheCheckpoint–RemindersforAuditors’ReportingonLicensedCorporations(Checkpoint-LCs),issuedinMarch2025,highlightkeyconsiderationsforauditingVATPsandrelatedactivities.Auditorsshouldrefertothesepublicationsfordetailedguidance.

2024AuditFocus

Checkpoint

-LCs

Section37

Section3

Firm-specifickeyconsiderations

Asthefinancialservicessectorcontinuestooperateamidevolvingrisks,changingregulatoryexpectations,andheightenedmarketscrutiny,itiscriticalforauditfirmstoassesstheirreadinesstoundertakeFSauditandassuranceengagements.Fivekeyareashavebeenidentifiedthatwarrantparticularattention.

Auditsoffinancialinstitutionsaredistinguishedbytheirheightenedpublicinterestsignificance,reflectingthecriticalroletheseentitiesplayinthestabilityoffinancialmarketsandthebroadereconomy.Thescaleandcomplexityoftheiroperations,coupledwithincreasinglysophisticatedproducts,diversebusinessmodels,andrapidlyevolvingtechnology,demandspecialisedknowledgeandsector-specificexpertisefromauditfirms.Asregulatedentities,financialinstitutionsaresubjecttoheightenedregulatoryexpectations,makingitcriticalforauditorstoperformtheirworkproperlyinensuringtheauditsandassuranceengagementsmeethighstandardsofqualityandcompliance.

Inrecognitionofthesefactors,theAFRCwillcontinuetoplaceauditsofthefinancialservicessectorundergreaterscrutiny,withanemphasisonpromotingauditquality,enhancingmarketconfidence,andsafeguardingthepublicinterest.Thissectionhighlightskeyareasthatserveasindicatorsofauditfirms’readinesstoundertakefinancialservicesauditandassuranceengagementseffectivelyandconsistently.

01

CompetenceandcapabilitiesinspecificFSsectors

Duetothecomplexityandindustry-specificspecialtyinFSauditsandassurance,auditfirmsshouldpossesssufficientresourcestodeliveraqualityengagementperformance.

Beforeacceptanceofengagementsandthroughouttheaudit,auditfirmsshouldconsider:

Firm’sresourcesandtraininginspecificFSindustries

Experienceandexpertiseofengagementqualityreviewers,engagementpartners,andmanagersinspecificindustries,withsufficientinvolvementandoversightthroughouttheengagements,includingtheabilitytochallengemanagement’sassessmentsandengagementteam’sconclusions.

Availabilityofauditor’sexperts,suchasanactuary,avaluationspecialist,acreditriskexpert,avirtualassetsexpert,oranITauditor

Section38

02

Understandthebusiness,industry,

andregulatoryenvironment

Riskassessmentshouldbeperformedregularlytokeepabreastoftheentity’sbusiness,industryandregulatoryenvironment,includingthefollowingconsiderations:

Regulatorycomplianceasfinancialinstitutionsaresubjecttovariousregulatoryreporting,capital,liquidity,anddisclosurerequirements

Keyregulatorychangeswhichmayhavewiderauditandregulatoryreportingimplications

Multi-locationsimplicationsaslargerfinancialinstitutionsarelikelytohavepresenceacrossdifferentgeographicallocations,andsubjecttogroup-level&local-levelpolicies,processes,andcontrols

Year-on-yearchangesinbusinessstrategies,processesandcontrols

ITsystemsandapplicationsacrossbusinesscyclesandthefinancialreportingprocess

03

Testofinternalcontrols

DuetotherisksinvolvedandvolumeoftransactionsintheFSsector,substantiveproceduresaloneareunlikelytosufficientlyandappropriatelyaddresstheRoMMofkeyfinancialstatementslineitems.Auditorshould:

GITCsandITACs

Sufficientlytestthedesignandoperatingeffectivenessofcontrols

EUCcontrols

Manualandreviewcontrols

Examiningsignaturesofa“preparer”anda“reviewer”isnotsufficienttoconcludeoperatingeffectivenessofinternalcontrols.

Criticallyevaluatewhethertheobjectivesoftheinternalcontrolscorrespondtotheauditor’srelianceonspecificassertions

PerformreliabilitytestingofIPEusedbycontroloperators/ownersinoperatingthecontrols

CommonlyusedcontrolsinFS:

Managementreview

controls

commonlyusedinthereviewof

financialinformationand

accountingestimates

Useofserviceorganisations

ObtainISAE3402reportsto

evaluatetheeffectivenessof

controls

Reconciliations

commonlyusedindatainputsandoutputsbetweensystems

Section39

04

Accountingestimatesand

useofauditor’sexperts

Significantaccountingestimatessubjecttoestimationuncertaintyoftennecessitatetheinvolvementofauditor’sexperts.Auditorsshould:

Agreewiththeauditor’sexpertstheirscopeofwork,rolesandresponsibilities,andassesstheircompetenceandcapabilities

Ev