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

Under legacy GAAP (pre-CECL), the ALLL is estimated using the incurred loss model, incorporating historical loss experience and qualitative adjustments.

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

Consistently recording provisions at the low end of an acceptable range is a red flag for earnings management, as it inflates reported income.

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

ASC 310-20 requires that net loan origination fees and costs be deferred and amortized as a yield adjustment over the life of the loan using the effective interest method.

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

Reclassification to HTM requires management to demonstrate genuine positive intent and ability to hold securities to maturity, which the auditor must evaluate.

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

Analytical review of interest expense relative to average deposit balances can reveal if deposits are understated because understated liabilities produce lower-than-expected interest expense.

(CBA) Certified Bank Auditor Practice Test

(CBA) Certified Bank Auditor Practice Test

CBA Financial Auditing and Reporting 2