Audits of Banks, Savings Institutions, Credit Unions and Other Financial Institutions

• Chapter 0 - Overview
  • Learning Objectives
• Chapter 1 - Modern Depository and Lending Institutions
  • Learning Objectives
  • Introduction
  • Authoritative Literature
  • Organization of the Chapter
  • The Influence of Risk Management on Depository and Lending Institutions
  • The Business of Banks and Savings Institutions
  • The Business of Credit Unions
  • The Business of Finance Companies
  • The Business of Mortgage Companies and Mortgage Servicing Companies
  • Services Provided by CPAs and Consultants
  • Questions
• Chapter 2 - Regulatory and Governmental Supervision
  • Learning Objectives
  • Introduction
  • Governmental Supervision
  • Regulatory Structure
  • Legal Factors Effecting Depository and Lending Institutions
  • Services Provided by CPAs and Consultants
  • Questions
• Chapter 3 - General Audit Considerations and Reporting Issues
  • Learning Objectives
  • Introduction
  • Organization of the Chapter
  • Planning and Scope of Services
    • Engagement Letter and Appointment as Independent Auditor
    • Using the Work of a Specialist
  • Risk Assessment Procedures
    • Preliminary Audit Risk Assessment
    • Preparing a Detailed, Written Audit Plan
    • Understanding the Entity, Depository, and Lending Business, and Its Internal Controls
  • Analytical Procedures
  • Understanding the Business, Entity, and the Environment
  • Specific Risk Matrix
  • Audit Documentation
  • Consideration of Fraud
  • Financial Reporting Requirements
    • Members’ Shares Reported as Equity
    • Special Reporting Procedures When Performing Agreed-Upon Procedures
    • Other Financial Reporting Matters
  • Audit Sharing with Regulators and Supervisory Entities
  • Services Offered by CPAs and Consultants
  • Questions
• Chapter 4 - Loan Receivables
  • Learning Objectives
  • Introduction
  • Organization of the Chapter
  • How Financial Institutions Sort Their Loans
  • The Lending Process by Type of Loan
  • The Role of Credit Scoring by Type of Loan
  • Loan Internal Controls and Testing Procedures
    • Factors That Contribute to Increased Loan Risk and Material Misstatements
    • Loan Receivables Internal Controls and Testing
    • Loan File Reviews as Part of Internal Control Testing
  • Sampling Considerations for Best Substantive Tests
    • Authoritative and Non-Authoritative Guidance
    • Sampling Methodology for Substantive Tests of Loan Receivables
    • Documentation of Confirmation Results
  • Specific Regulatory Guidance
  • Services Offered by CPAs and Consultants
  • Questions
• Chapter 5 - Credit Losses
  • Learning Objectives
  • Introduction
  • Organization of the Chapter
  • Methodology for Establishing Credit Losses by Financial Institutions
    • Dividing the Loan Portfolio into Segments
    • Two Looks at the Segmented Loans
    • Estimating Credit Losses for the Similar Characteristic Loan Segment
    • Estimating Credit Losses for the Classified Loan Segment
    • Estimating Credit Losses for the Separate Stratification Loan Segment
    • Estimating Credit Losses for the Off-Balance Loan Segment
    • Estimating Credit Losses for the Special Loan Segment
    • Estimating General Credit Losses for the Overall Loan Segment
  • Methodology for Establishing Credit Losses by Type of Loan
    • Selection of Loans for Review
    • Adequacy of Client Credit Loss Procedures Relative to Independent Audits
    • Step 1: Review the Credit Policy and Procedures
    • Step 2: Compare the Loan File Contents with the Credit Policy and Procedures Statement
    • Documentation of the Loan File Reviews
    • Purpose of the Loan File Review Documentation Relative to the Allowance for Credit Losses
    • Legal Obligation
    • Loan Authorization
    • Borrower Performance
    • Special Loan Reviews for Small Business Administration (SBA) Loans
    • Personal Guarantees
    • Review of Collateral
    • The Path to an Analysis of Estimated Credit Loss
  • Specific Regulatory Guidance
    • Credit Union Credit Losses
    • Mortgage Banking Credit Losses
  • Accounting and Financial Reporting on Credit Losses
    • Estimating Losses Using the Expected Cash Flows Method
    • Estimated Credit Losses Using Aggregate Collection Experience
  • Review of Loans and Specific Credit Losses
  • Transfers of Loans and Mortgage Banking Activities
  • Special Consideration for Credit Union Audits
  • Acquisition, Development, and Construction (ADC) Loans
  • Case Study on Auditing the Allowance for Loan Losses
    • Specific Allowances
  • Frequently Asked Questions about Auditing Credit Losses
  • Services Provided by CPAs and Consultants
  • Questions
• Chapter 6 - Cash, Investments, Intangibles, Foreclosed and Real Estate Investments, and Deposits
  • Learning Objectives
  • Introduction
  • Organization of the Chapter
  • Audits of Cash, Due from Banks, and Federal Funds
    • Types of Cash and Cash Equivalent Accounts
    • The Check Clearing Process and Accounting
  • Accounting and Auditing for Investment Securities
    • Types of Investments
    • Authorization of the Investments Allowed by the Regulators
    • Accounting for Investment Securities under FASB ASC 320 (FASB No. 115)
    • Auditing the Classification of Securities
    • Auditing the Fair Value of Securities
  • Accounting and Auditing of Hedging Instruments
    • GAAP for Derivative Instruments
    • Common Derivatives
    • Measurement of Derivatives following FASB ASC 815 (FASB No. 133)
    • Important Conclusion
  • Accounting and Auditing of Intangibles
    • Accounting for Goodwill and Other Intangible Assets
    • Impairment of Goodwill and Audit Procedures
    • Core Deposits
    • Loan Receivable Servicing Rights
  • Accounting and Auditing of Repurchase and Reverse Repurchase Instruments
    • Dollar Repurchase and Reverse Repurchase Agreements
  • Accounting and Auditing of Troubled Debt, Foreclosures, and Real Estate Investments
    • Troubled Debt Accounting and Auditing
    • Modification of Loan Terms
    • Assets Received in Troubled Debt Restructurings
    • Auditing Procedures for Troubled Debt Restructurings
    • Accounting and Auditing of Real Estate Foreclosures
  • Accounting and Auditing of Deposits
    • Checking Accounts
    • Savings Accounts
    • Certificates of Deposit
    • Other Deposit Accounts
    • Accounting for Deposits
    • Auditing Deposits
  • Frequently Asked Questions
    • Investments, Derivative Instruments, Foreclosed, and Real Estate Investments
    • Intangibles
    • Deposits
  • Examples of Audit Issues Encountered
  • Services Provided by CPAs and Consultants
• Chapter 7 - Equity and Capital Disclosures Regarding Capital
  • Learning Objectives
  • Introduction
  • Organization of the Chapter
  • Equity Considerations by Financial Institutions
    • Equity Definitions
    • Holding Company Equity
    • Equity Auditing Recommendations
  • Disclosures by Financial Institutions
    • Special Disclosures
    • Disclosures for Banks and Savings Institutions
    • Disclosures for Holding Companies
    • Capital Account Audit Procedures for Disclosures
  • Capital Ratios for Banks and Savings Institutions
    • Computation of the Risk-Based Capital Ratios
    • Bank, Savings, and Credit Union Capital Categories
    • CAMELS Rating
    • Capital Audit Procedures for Capital Ratios, Capital Categories, and CAMELS Ratings
    • Credit Union Activities and Definitions
    • Mortgage Banking Activities and Mortgage Companies
    • Capital Disclosures for Special Entities
    • Depository and Lending Institution Audit Requirements
    • Conclusions
  • Frequently Asked Questions about Equity and Equity Disclosure Auditing
  • Services Provided by CPAs and Consultants
  • Questions
• Chapter 8 - Income Taxes
  • Learning Objectives
  • Introduction
  • Organization of the Chapter
  • Income Tax Definitions
  • Income Tax Accounting
    • Specific Bank and Savings Institution Internal Revenue Code Sections
    • Specific Financial Reporting of Income Taxes
    • Financial Statement Disclosures from FASB ASC 740 (FASB 109 and APB 23)
    • State-Chartered Credit Union Income Tax Matters
    • Financial Statement Disclosures from FIN 48 (included in FASB ASC 740)
  • Income Tax Auditing
    • Planning
    • Audit of Internal Controls
    • Other Accounting Standards That May Impact the Tax Assets and Liabilities
  • Implications of International Reporting Standards on Income Tax Accounting
  • Frequently Asked Questions about Income Taxes
  • Services Provided by CPAs and Consultants
  • Questions
• Chapter 9 - The Need for Ethical Behavior
  • Learning Objectives
  • Introduction
  • What Is Business Ethics?
  • Where Does the Definition of Modern Ethics Come From?
    • The School of Ethical Universalism
    • The School of Ethical Relativism
    • The Compromise – the Social Contracts Theory
    • Types of Professionals and Business Ethics and Morality
    • What are the Drivers of Unethical and Immoral Professional and Business Behavior?
    • What Approaches Are Available to Promote Ethical Conduct?
  • Services Provided by CPAs and Consultants
• Chapter 10 - Latest Developments

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Chapter 0 - Overview

Learning Objectives

• Learn the current metrics that create value.

• Learn the regulatory structure and laws for the industry.

• Learn how to apply efficient audit procedures for specific financial statement accounts.

• Assess the effects of the most important accounting pronouncements.

• Learn, by role play and simulation, how depository and lending institutions make critical business decisions.

• Learn how to apply auditing literature pronouncements such as sampling and confirmation techniques for financial statement accounts such as loans receivable and deposit accounts.

• Learn about additional audit procedures and references necessary for certain balance sheet items, such as material investments held by brokers and other third parties.

• Learn and consider the expected role of the Board of Directors and Audit and Risk Committee concerning risk management and risk management planning.

• Learn how ethics and ethical practice is a signature of the CPA's practice in depository and lending institution audits.

• Learn the most important aspects of income taxes for depository and lending institution audits.

• Be apprised of the most current developments affecting depository and lending institutions.

Chapter 1 - Modern Depository and Lending Institutions

Learning Objectives

• Learn about the uniqueness of depository and lending institutions' practices and business methods.

• How and why depository and lending institutions concentrate on risk management.

• Learn about the business similarities and differences among banks and savings institutions, credit unions, finance companies, mortgage companies, and mortgage servicing companies.

• Consider services provided by CPAs and consultants.

Introduction

Depository and Lending Institutions are ambidextrous. In one hand they collect money for a price (liability interest) and with the other hand deliver money to borrowers for a price (interest). Since the money in the two hands is infrequently equal, the institutions manage the difference or "spread" by analytical tools such as Asset/Liability financial models.

This program is dedicated to demonstrating how your audit staff, consulting staff, and tax staff can learn the accounting, tax, and auditing fundamentals of modern depository and lending institutions. The course is complete with practical worksheets and insights such as the applicable metrics that create value for depository and lending institutions. These institutions are specialized and are one of, if not the most, regulated industries in the world. Numerous references to best practice audits allow the auditor and consultants the opportunity to plan efficient and effective audits and reports.

Authoritative Literature

A summary of the most current auditing and accounting for depository and lending institutions is found in a companion audit guide: Depository and Lending Institutions (Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies and Mortgage Servicers), AICPA Audit and Accounting Series, 2007. The author recommends you consider this guide for your library or personal use.

Organization of the Chapter

• The influence of risk management on Depository and Lending Institutions

• The business of banks and savings institutions

• The business of credit unions

• The business of finance companies

• The business of mortgage companies and mortgage servicing companies

• Services provided by CPAs and consultants

The Influence of Risk Management on Depository and Lending Institutions

The link between ability to raise capital through deposits and providing needed capital to businesses and individuals is referred to as "intermediation." Another word for intermediation is "facilitation," since the depository and lending institutions greatly help to make the transfer of wealth between providers of capital and users of capital more efficient. Government regulators recognize this important function and alternatively provide special privileges and protections and demand specific risk management requirements.

The complex requirements to maximize profits, maintain adequate capital, obtain competitive advantage over rivals, deal with technological advances, and meeting changes in regulatory policies all comprise a significant risk to depository and lending institutions. How can the institutions respond to, and manage, these risks?

Management of the risks includes several modern techniques:

• Reducing dependence on competitive pricing of deposits for purpose of raising lending capital by charging fees and other income flows from special financing transactions. Risks include customer rejection of the fees and transaction income flows and increased regulatory oversight.

• Developing more complex techniques for managing the balance sheet to optimize the risks assumed in the business. New asset liability financial models help to make better forecasts and improve decision-making.

• Installing advanced technology methods to monitor the risks of making complex transactions such as hedging instruments and the sale of securities.

• Reducing the risks of regulatory pressure for adequate capital levels and the adequacy of reserves by assigning specific management responsibilities to minimize the risks.

In summary, the demands for adequate risk management for depository and lending institutions have caused fundamental changes to the industry and the nature of regulatory requirements. Specific descriptions of risk management will be in chapters to follow.

The Business of Banks and Savings Institutions

The original and still true purpose of banks and savings institutions is to organize the collection of deposits and also lending to business and consumers. The entrance of new competitors such as investment companies, brokers and dealers in securities, investment bankers, private equity firms, insurance companies, and financial arms of commercial entities such as developers has added a new dimension to maintain and attract customers. New lines of business that are close to the traditional banking and savings institution core businesses such as credit card issuance and processing, insurance products, and more complex nontraditional lending are present and extend the diversity of banks and savings institutions.

Banks and savings institutions face many risks in the modern business environment:

• Quality risk on loans and other assets (real estate owned and securitized loans as examples).

• Interest rate risk on loans and deposits. Re-pricing on maturity and competitive actions are part of this risk.

• Processing risk is a constant concern since the high volume of transactions may accentuate errors.

• Liquidity risk against unforeseen events such as excessive loan defaults or customer withdrawal of deposits can subject the institutions to a liquidity crisis.

• Fiduciary risk is constant for banks and savings institutions as a legal matter because of the trust accepted to customers.

• Counterparty risk is the risk that the party that re-insures quality and interest rate risks to lower these risks can default (witness Bear Stearns in 2008).

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