CBA Financial Auditing and Reporting 5

Question 1

When auditing a bank's mortgage servicing rights (MSRs), which valuation input most significantly affects the fair value estimate?

Accepted Answer

Prepayment speed assumptions based on current interest rate environment

Answer

Prepayment speed assumptions are the most sensitive input in MSR valuation because faster prepayments shorten the servicing period and reduce the asset's value.

Question 2

A bank auditor is testing the adequacy of disclosures related to concentrations of credit risk. Which standard governs this requirement?

Accepted Answer

ASC 825 — Financial Instruments (GAAP disclosure requirements)

Answer

ASC 825-10-50 requires disclosure of significant concentrations of credit risk arising from financial instruments, including the methodology for determining concentrations.

Question 3

In auditing a bank's consolidated financial statements, which variable interest entity (VIE) scenario requires consolidation by the bank?

Accepted Answer

The bank is the primary beneficiary that absorbs the majority of a VIE's expected losses

Answer

Under ASC 810, a VIE must be consolidated by the entity that is the primary beneficiary — the one with power over the VIE's activities and obligation to absorb losses or right to receive benefits.

Question 4

During an audit of regulatory capital disclosures, an auditor finds that a bank has included certain instruments as Tier 2 capital. Which characteristic would disqualify an instrument from Tier 2 capital under Basel III?

Accepted Answer

The instrument contains a call option exercisable by the bank within the first five years

Answer

Tier 2 capital instruments must not contain incentives to redeem early; a call option exercisable within the first five years creates an effective maturity that disqualifies the instrument.

Question 5

An auditor discovers that a bank did not disclose a subsequent event — a major borrower filing for bankruptcy two weeks after the balance sheet date but before the audit report was issued. This is best characterized as:

Accepted Answer

A Type II subsequent event requiring disclosure but no balance sheet adjustment

Answer

A borrower bankruptcy after the balance sheet date is a Type II (non-recognized) subsequent event that provides evidence of conditions arising after year-end, requiring disclosure but not adjustment.

(CBA) Certified Bank Auditor Practice Test

(CBA) Certified Bank Auditor Practice Test

CBA Financial Auditing and Reporting 5