Financial Auditing and Reporting Flashcards
7 cards from real CBA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Auditing and Reporting flashcards as text
When auditing a bank's mortgage servicing rights (MSRs), which valuation input most significantly affects the fair value estimate?
Answer: Prepayment speed assumptions based on current interest rate environment
Prepayment speed assumptions are the most sensitive input in MSR valuation because faster prepayments shorten the servicing period and reduce the asset's value.
A bank auditor is testing the adequacy of disclosures related to concentrations of credit risk. Which standard governs this requirement?
Answer: ASC 825 — Financial Instruments (GAAP disclosure requirements)
ASC 825-10-50 requires disclosure of significant concentrations of credit risk arising from financial instruments, including the methodology for determining concentrations.
In auditing a bank's consolidated financial statements, which variable interest entity (VIE) scenario requires consolidation by the bank?
Answer: The bank is the primary beneficiary that absorbs the majority of a VIE's expected losses
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.
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?
Answer: The instrument contains a call option exercisable by the bank within the first five years
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.
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:
Answer: A Type II subsequent event requiring disclosure but no balance sheet adjustment
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.
Which report format is most appropriate when a bank's management engages a CPA firm to report on the design and operating effectiveness of controls at a bank's third-party data processor?
Answer: A SOC 1 Type 2 report covering controls relevant to user entities' financial reporting
A SOC 1 Type 2 report evaluates controls at a service organization that are relevant to user entities' internal control over financial reporting, which is what banks need for their data processors.
When auditing a bank's earnings per share (EPS) disclosures, which item requires the most careful consideration in the diluted EPS calculation?
Answer: Convertible subordinated debt where conversion would be antidilutive to EPS
Antidilutive securities — those that would increase EPS if included — must be excluded from the diluted EPS calculation under ASC 260.