Financial Auditing and Reporting Flashcards

Which analytical procedure would best help an auditor assess the reasonableness of a bank's net interest margin (NIM)?

Answer: Benchmarking the bank's NIM against peer institutions and prior period trends

Comparing NIM to peer institutions and historical trends provides context for evaluating whether the reported margin is reasonable given the rate environment and asset mix.

When evaluating a bank's reported other real estate owned (OREO), the auditor's primary concern regarding measurement is:

Answer: Whether OREO is carried at the lower of cost or fair value less estimated selling costs

OREO must be recorded at the lower of the loan's carrying amount or the property's fair value less costs to sell at the time of foreclosure.

A bank enters into interest rate swap agreements designated as fair value hedges. Under ASC 815, the audit of hedge effectiveness requires the auditor to verify:

Answer: That documentation of hedging relationships was in place at hedge inception

ASC 815 requires formal hedge documentation to exist at inception, including identification of the hedged item, hedging instrument, risk being hedged, and effectiveness assessment method.

During an audit of a bank holding company, the auditor discovers an intercompany loan between the parent and a subsidiary at a below-market interest rate. The primary audit concern is:

Answer: Whether the transaction requires related party disclosure and arm's length consideration

Below-market intercompany loans require disclosure as related party transactions, and auditors must assess whether they were conducted on arm's-length terms.

An auditor is reviewing a bank's deferred tax assets (DTAs). Which condition would most likely require a valuation allowance against the DTA?

Answer: The bank has a history of operating losses and limited future taxable income projections

A valuation allowance is required when it is more likely than not that some or all of the DTA will not be realized, which is indicated by a history of losses and uncertain future profitability.

Which assertion is most at risk when auditing a bank's accrued interest receivable balance?

Answer: Valuation — whether accruals on non-accrual loans have been reversed appropriately

Non-accrual loans should have interest accruals reversed; failure to do so overstates income and receivables, making valuation the primary risk for accrued interest.

Under the Sarbanes-Oxley Act Section 404, which responsibility falls on management of a publicly traded bank?

Answer: Assessing and reporting on the effectiveness of internal control over financial reporting

SOX Section 404(a) requires management of public companies to assess and report on the effectiveness of ICFR, with the external auditor attesting to that assessment for large accelerated filers.