CBA Financial Auditing and Reporting 2

Question 1

When auditing a bank's allowance for loan and lease losses (ALLL), which methodology is most consistent with GAAP?

Accepted Answer

Incurred loss model based on historical loss rates and qualitative factors

Answer

Specific identification only for non-performing loans

Answer

Expected loss model projecting lifetime credit losses at origination

Answer

Mark-to-market valuation of all loans quarterly

Question 2

A bank's auditor identifies that management consistently records loan loss provisions at the low end of an acceptable range. This pattern most likely indicates:

Accepted Answer

Potential earnings management through manipulation of the provision

Answer

Conservative accounting practices reducing earnings volatility

Answer

Compliance with regulatory minimum capital requirements

Answer

Appropriate application of the materiality principle

Question 3

Which financial statement disclosure is required for banks under ASC 310-20 regarding loan origination fees and costs?

Accepted Answer

Deferral and amortization over the loan's life using the effective interest method

Answer

Immediate recognition of all fees as revenue at loan closing

Answer

Straight-line amortization over the contractual loan term

Answer

Expensing of origination costs as incurred with fees deferred separately

Question 4

During an audit of investment securities, an auditor finds that a bank reclassified securities from available-for-sale (AFS) to held-to-maturity (HTM). What is the primary audit concern?

Accepted Answer

Whether the bank has the positive intent and ability to hold the securities to maturity

Answer

Whether the reclassification increases the bank's reported capital ratios

Answer

Whether unrealized gains were appropriately recognized at reclassification

Answer

Whether the reclassification was approved by the board of directors

Question 5

Which audit procedure is most effective for detecting unrecorded deposit liabilities at a bank?

Accepted Answer

Reviewing interest expense recorded for reasonableness relative to average deposits

Answer

Confirming large deposit balances with customers directly

Answer

Tracing deposits from the general ledger to supporting documentation

Answer

Comparing current year deposit totals to prior year for unusual fluctuations

Question 6

Under FASB ASC 825, a bank elects the fair value option for certain financial instruments. Which statement is correct regarding audit implications?

Accepted Answer

The auditor must evaluate the bank's valuation techniques and key assumptions

Answer

Fair value changes are recognized in other comprehensive income only

Answer

The election is irrevocable and applies to all financial instruments in the same category

Answer

Fair value option elections reduce the complexity of financial statement audits

Question 7

A bank's external auditor issues a qualified opinion due to a scope limitation. What does this mean for bank examiners reviewing the audit report?

Accepted Answer

The auditor was unable to obtain sufficient evidence about a specific area of the financial statements

Answer

The bank's financial statements contain a material misstatement that management refuses to correct

Answer

The bank failed to comply with all applicable banking regulations during the audit period

Answer

Management disagreed with the auditor's proposed adjustments but the statements are otherwise fairly presented