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Audit and Accounting Guide: Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies
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Audit and Accounting Guide: Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies
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Audit and Accounting Guide Depository and Lending Institutions, 2nd Edition
1Industry Overview—Banks and Savings Institutions
1Industry Overview—Banks and Savings Institutions
Description of Business
Regulation and Oversight
Regulatory Background
Deposit Insurance Fund
The Dodd-Frank Act
Regulatory Capital Matters
Capital Adequacy
Prompt Corrective Action
Annual Independent Audits and Reporting Requirements
Additional Regulatory Requirements Concerning the Sarbanes-Oxley Act, Corporate Governance, and Services Outsourced to External Auditors
Other Reporting Considerations
2Industry Overview—Credit Unions
Description of Business
The Board of Directors
The Supervisory Committee
The Credit Committee
Charters, Bylaws, and Minutes
Financial Structure
Credit Union System
Corporate Credit Unions
Regulation and Oversight
Government Supervision
NCUA
Regulatory Capital Matters
Natural Person Credit Unions
Corporate Credit Unions
Annual Audits
Other Reporting Considerations
3Industry Overview—Finance Companies
Description of Business
Debt Financing
Regulation and Oversight
4Industry Overview—Mortgage Companies
Description of Business
Regulation and Oversight
Reporting Considerations
HUD Programs
Asset Servicing for Investors
5Audit Considerations and Certain Financial Reporting Matters
Overview
An Audit of Financial Statements
Audit Risk
Terms of Engagement
Audit Planning
Materiality
Performance Materiality
Use of Assertions in Assessment of Risks of Material Misstatement
Risk Assessment Procedures
Risk Assessment Procedures and Related Activities
Understanding the Entity and Its Environment, Including the Entity’s Internal Control
Risk Assessment and the Design of Further Audit Procedures
Identifying and Assessing the Risks of Material Misstatement
Designing and Performing Further Audit Procedures
Evaluation of Misstatements Identified During the Audit
Audit Documentation
Timely Preparation of Audit Documentation
Documentation of the Audit Procedures Performed and Audit Evidence Obtained
Assembly and Retention of the Final Audit File
Using the Work of an Auditor’s Specialist
Using the Work of a Management’s Specialist
Processing of Transactions by Service Organizations
Consideration of Fraud in a Financial Statement Audit
Professional Skepticism
Discussion Among the Engagement Team
Risk Assessment Procedures and Related Activities
Identification and Assessment of the Risks of Material Misstatement Due to Fraud
Responses to the Assessed Risks of Material Misstatement Due to Fraud
Evaluation of Audit Evidence
Auditor Unable to Continue the Engagement
Communications to Management and With Those Charged With Governance
Communications to Regulatory and Enforcement Authorities
Documentation
Compliance With Laws and Regulations
Responsibility for Compliance With Laws and Regulations
The Auditor’s Consideration of Compliance With Laws and Regulations
Going-Concern Considerations
Evaluating Whether Substantial Doubt Exists
Written Representations
Consideration of the Effects on the Auditor’s Report
Documentation
Written Representations
Written Representations as Audit Evidence
Management From Whom Written Representations Are Requested
Written Representations About Management’s Responsibilities and Other Written Representations
Date of, and Period(s) Covered by, Written Representations
Form of Written Representations
Doubt About the Reliability of Written Representations and Requested Written Representations Not Provided
Information Other Than Financial Statements
Certain Financial Reporting Matters
Disclosures of Certain Significant Risks and Uncertainties
Segment Reporting
Regulation and Supervision of Depository Institutions
Introduction
Rule Making
Examinations
Enforcement
Planning
Detection of Errors and Fraud
Evaluation of Contingent Liabilities and Related Disclosures
Going-Concern Considerations
Regulatory Reporting Matters—Interpretation and Reporting Related to GAAP
Auditor and Examiner Relationship
6Cash and Cash Equivalents
Introduction
CIPC and Cash Equivalents
Deposits With Other Financial Institutions
Balances With Federal Reserve Banks and FHLBs
Federal Funds Sold
Cash on Hand
Accounting and Financial Reporting
Definition of Cash and Cash Equivalents
Classification of Cash Flows
Acquisition and Sales of Certain Securities and Loans
Gross and Net Cash Flows
Cash Receipts and Payments Related to Hedging Activities
Financial Statement Presentation and Disclosure
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
7Investments in Debt and Equity Securities
Introduction
U.S. Government and Agency Obligations
Municipal Obligations
Asset-Backed Securities
Other Structured Credit Products
Issues of International Organizations and Foreign Governments
Other Securities
Transfers of Securities
Regulatory Matters
Bank Accounting Advisory Series
Accounting and Financial Reporting
Introduction
OTTI
Unrealized Gains and Losses
Premiums and Discounts
Interest Income
Consolidation
Special Areas
Transfers and Servicing of Securities
Troubled Debt Restructurings
Loans and Debt Securities Acquired With Deteriorated Credit Quality
Financial Statement Presentation and Disclosure
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
8Loans
Introduction
The Lending Process
Credit Strategy
Credit Risk
Lending Policies and Procedures
Types of Lending
Commercial, Industrial, and Agricultural Loans
Consumer Loans
Residential Real Estate Loans
Lease Financing
Trade Financing
CRE and Construction Loans
Foreign Loans
Loans Involving More Than One Lender
Regulatory Matters
Real Estate Lending Standards
Retail Credit Loans and Residential Mortgage Loans
Troubled Debt Restructurings
Credit Card Lending
Nontraditional Mortgage Products
Correspondent Concentration Risks
Leveraged Lending
Income Recognition on Problem Loans
Credit Union Lending Restrictions
Lending Statutes
Uniform Commercial Code
Bank Accounting Advisory Series
Accounting and Financial Reporting
Interest Income, Delinquency Fees, Prepayment Fees, and Rebates
Loan Fees, Costs, Discounts, and Premiums
TDRs
Real Estate Investments
Lease Financing
Foreign Loans
Commitments
Financial Statement Presentation and Disclosure
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
9Credit Losses
Introduction
Management's Methodology
Loan Reviews
Loans Individually Evaluated for Impairment
Loans Collectively Evaluated for Impairment
Estimating Overall Credit Losses
Regulatory Matters
Credit Unions
Accounting and Financial Reporting
Sources of Applicable Guidance
Allowance for Loan Losses
Loss Contingencies
Financial Statement Presentation and Disclosure of Loan Impairment and Allowance for Credit Losses
Auditing
Objectives
Planning and Risk Assessment
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
10Transfers and Servicing and Variable Interest Entities
Introduction
Asset-Backed Securitizations
Loan Participations and Loan Syndications
Loan Servicing
Regulatory Matters
Accounting and Financial Reporting
Mortgage Loans and MBSs Held for Sale
Transfers and Servicing of Financial Assets
Sale of Financial Assets
Transfers of Loans With Recourse
Servicing Assets and Liabilities
Secured Borrowings and Collateral
Loans Not Previously HFS
Financial Statement Presentation
Financial Statement Disclosure
VIEs
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
11Real Estate Investments, Real Estate Owned, and Other Foreclosed Assets
Introduction
Foreclosed Assets
Real Estate Investments
Regulatory Matters
Accounting and Financial Reporting
Foreclosed Assets
Accounting and Reporting for Long-Lived Assets to Be Disposed of by Sale
Accounting and Reporting for Long-Lived Assets to Be Held and Used
Real Estate Investments
Sale of Real Estate Assets
Development Costs
Allocation of Income and Equity Among Parties to a Joint Venture
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
12Other Assets, Other Liabilities, and Other Investments
Introduction
Premises and Equipment, Net
FHLB or FRB Stock
Identifiable Intangibles
Goodwill
Customers' Liabilities on Acceptances
Other Miscellaneous Items
Regulatory Matters
Accounting and Financial Reporting
Premises and Equipment, Net
FHLB or FRB Stock
Goodwill and Other Intangible Assets
Exit or Disposal Activities
Asset Retirement Obligations
Customers' Liabilities on Acceptances
Mortgage Servicing Advances
Impairment of Long-Lived Assets
NCUSIF Deposit
Other Investments
Contributed Assets
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
13Deposits
Introduction
Demand Deposits
Savings Deposits
Time Deposits
Brokered Deposits
Dormant Accounts
Closed Accounts
Other Deposit Services
The Payments Function and Services
Regulatory Matters
Limitations on Brokered Deposits
Classification of Deposits of Credit Unions
Accounting and Financial Reporting
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
14Federal Funds and Repurchase Agreements
Introduction
Federal Funds Purchased
Repos
Regulatory Matters
Accounting and Financial Reporting
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
15Debt
Introduction
Long Term Debt
Short Term Debt
Regulatory Matters
Accounting and Financial Reporting
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
16Income Taxes
Introduction
Banks and Savings Institutions
Other
Credit Union
Regulatory Matters
Accounting and Financial Reporting
Deferred Tax Assets and Liabilities
Temporary Differences
Financial Statement Presentation and Disclosure
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Substantive Tests
17Equity and Disclosures Regarding Capital Matters
Introduction
Banks and Savings Institutions
Introduction
Equity
Holding Company Equity and Regulatory Capital
Disclosures for Banks and Savings Institutions
Disclosure for Holding Companies
Illustrative Disclosures for Banks and Savings Institutions (The example disclosures that follow are for illustrative purposes only)
Credit Unions
Introduction
Members’ Equity
New Credit Unions and Low Income Designated Credit Unions
Disclosures for Natural Person Credit Unions
Illustrative Disclosures for Natural Person Credit Unions
Corporate Credit Unions
Introduction
Equity
Disclosures for Corporate Credit Unions
Illustrative Disclosures for Corporate Credit Unions
Mortgage Companies and Mortgage Banking Activities
Introduction
Disclosure for Mortgage Companies and Mortgage Banking Activities
Illustrative Disclosures for Mortgage Companies and Mortgage Banking Activities
Regulatory Capital Matters for All Entities
Regulatory Capital Disclosures for Branches of Foreign Institutions
Regulatory Capital Disclosures for Trust Operations
Auditing
Banks, Savings Institutions, and Credit Unions
Mortgage Companies and Activities
18Derivative Instruments: Futures, Forwards, Options, Swaps, and Other Derivative Instruments
Introduction
Risks Inherent in Derivatives
Types of Derivatives
Uses of Derivatives to Alter Risk
Variations on Basic Derivatives
Regulatory Matters
Accounting and Financial Reporting
Financial Statement Disclosures
Auditing Considerations
19Business Combinations
Introduction
Regulatory Matters
Accounting and Financial Reporting
Purchase of a Loan or Group of Loans
Loans and Debt Securities Acquired With Deteriorated Credit Quality
Special Considerations in Applying the Acquisition Method to Combinations of Mutual Entities
Impairment and Disposal Accounting for Certain Acquired Long Term Customer Relationship Intangible Assets
Branch Acquisitions
Auditing Considerations
20Fair Value
Introduction
Accounting and Financial Reporting
Definition of Fair Value
Valuation Techniques
Present Value Techniques
The Fair Value Hierarchy
Measuring the Fair Value of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
Measuring Fair Value When the Volume or Level of Activity for an Asset or a Liability Has Significantly Decreased
Using Quoted Prices Provided by Third Parties
Disclosures
Fair Value Option
Auditing Considerations
21Trust and Asset Management Activities
Introduction
Personal Trusts
Corporate Trusts
Employee Benefit Trusts
Common or Collective Trust Funds
Regulatory Matters
Accounting and Financial Reporting
Auditing
Objectives
Planning
Internal Control Over Financial Reporting and Possible Tests of Controls
Financial Reporting Controls of the Trust
Substantive Tests Related to Financial Statement Audits
Substantive Procedures Related to the Trust
Audits of Unit Investment Trusts
22Insurance Activities
Introduction
Types of Insurance Coverage
Credit Life
Credit Accident and Health
Property and Liability
Writing Policies
Commissions
Regulatory Matters
Accounting
Premium Income
Acquisition Costs
Investment Portfolios
State Laws
Commissions
Consolidation Policy
Financial Statement Presentation
Auditing
23Reporting Considerations
Introduction
Forming an Opinion on the Financial Statements
Reports
Unmodified Opinion
EOM and Other-Matter Paragraphs Added to the Independent Auditor's Report
Modified Opinions
Financial Statements Prepared in Accordance With a Special Purpose Framework
Members' Shares Reported as Equity
Communication of Internal Control Related Matters
Reports on Supervisory Committee Audits
Example Report on the Application of Agreed-Upon Procedures Performed in Connection With a Supervisory Committee Audit
Example Reports on the FDIC Loss Sharing Purchase and Assumption Transactions
Small Business Lending Fund Auditor Certification Guidance
Appendix A — Illustrative Unqualified PCAOB Reports
AFDI Act Reporting Requirements
AFDI Act Reporting Requirements
BRegulatory Reporting Matters—Interpretation and Reporting Related to U.S. GAAP
CInformation Sources
DOverview of Statements on Quality Control Standards
EThe New Revenue Recognition Standard: FASB ASC 606
FThe New Leases Standard: FASB ASU No. 2016-02
GAccounting for Financial Instruments
HSchedule of Changes Made to the Text From the Previous Edition
EULA
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