During the past 18 months a statewide recession has taken a particularly heavy toll on the...

During the past 18 months a statewide recession has taken a particularly heavy toll on the economy of a medium-sized community. Due to the difficult financial times, the manager of one of the community's leading banks has become concerned about the value of assets pledged as collateral for business loans that originated and serviced through his bank. Should the borrower default, the bank manager is worried that the collateral may not fully support the loan amount. This would force the bank to foreclose on the loan and seize the collateral. The bank manager has requested than an internal auditor from corporate headquarters run an analysis to determine whether all loans are:

- supported by sufficient collateral,

-property aged with regards to current payments, and

- Accurately categorized as current or non-current.

Question 1

Develop audit procedures that the internal auditor should employ to accomplish this task and explain why.

Expert Solution

The following audit procedures should be adopted:

To see the loans given on secuirity are fully secured - letter of acknowledgmnet should be obtained regarding the value of security from the borrower.
If auditor has doubts about the value of security he can obtain certificate from the registered valuer regarding the value of the security.
He can inspect the securuty on samble basis, in case there's reasonable assurance regarding the value.
He can perform physical inspection and valuation of securities,

For e.g. he can get the stock audit report

Demat papers or physical shares

Periodic valuation of shares to ensure margin is maintained

He should ensure that proper documentation is done for all the security
Details of all the securities should be kept as currnt and non current, perform substantive audit procedures to check the same.
To ensure all the non current securities are classified correctly check the same on sample basis.
Auditor should verify all the large advances, i.e. more than 5% of the total aggregate advances, since this is where the risk lies.

ekkarill92 answered 2 years ago

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